Annual Report
Item 6 Management's Discussion and Analysis or Plan of Operations
Introduction
The following discussion is intended to facilitate an understanding of our business and results of operations and includes forward-looking statements that reflect our plans, estimates and beliefs. It should be read in conjunction with our audited consolidated financial statements and the accompanying notes to the consolidated financial statements included herein. Our actual results could differ materially from those discussed in these forward-looking statements.
The Company has never earned a profit, and has incurred an accumulated deficit of $12,030,172 as of September 30, 2008. As of September 30, 2006, the Company had raised $1,240,000 in equity. The Company has used these funds to purchase or place deposits on three oil and gas fields to begin its operations as an oil and gas exploration and production company. Revenues derived from the planned production and sale of oil will be based on the evaluation and development of fields. If our development plan is successful, it is estimated it will take approximately one year to reach production levels to sufficiently capitalize the Company on an ongoing basis. During this initial ramp up period, the Company believes it will need to raise additional funds to fully develop its fields, purchase equipment and meet general administrative expenses. The Company may seek both debt and equity financing. The Company currently has in excess of [ seventy] wells located on the three fields located in Texas. Each of the wells will need to be reworked to establish production at a cost of approximately $7,000 to $10,000 per well. Initial production from each well is estimated to be between two to five barrels per day. Once initial production has been established the Company intends to begin a water flood program that injects water into the oil producing zone through injector wells. The water then forces the oil towards the producing well and, if successful, may increase production of each well up to an estimated four to seven barrels per day per well. If the Company is able to produce its wells upon the re-completion the Company revenues will exceed current operating expenses if 40 barrels of oil is produced and the price of oil remains above $55.00 per barrel. The Company's success is dependent on if and how quickly it can reach these levels of production. The Company plans to use all revenues for general corporate purposes as well as, future expansion of its current oil producing properties and the acquisition of other oil and gas properties. There is no certainty that the Company can achieve profitable levels of production or that it will be able to raise additional capital through any means.
Results of Operations
Year Ended September 30, 2008 Compared With Year Ended September 30, 2007
Revenues from Operations- Revenues for the year ended September 30, 2008 and September 30, 2007 were $9,308 and zero respectively. On December 5, 2004, the Company began to structure itself into an oil and gas production and exploration company. The Company has acquired three oil and gas leases in the counties of Eastland and Callahan, Texas and has begun development of oil and gas. The company received its first revenues from oil and gas operations in March, 2008. In the next fiscal year, it is the Company's intent to increase production by placing additional wells into operation. Since it ceased its former business operations, the Company has devoted its efforts to research prospective leases and business combinations and secure financing.
Expenses from Continuing Operations - The Company incurred operating expenses of $768,531 for the fiscal year ended September 30, 2008; a decrease of $3,018,668 compared to $3,787,199 for the fiscal year ended September 30, 2007. The decrease in operating expenses is primarily related to stock-based compensation decreasing by $1,871,603 to $190,000 for the year ended September 30, 2008 from $2,061,603 for the year ended September 30, 2007. The stock based compensation in 2007 resulted from investor relations efforts by the Company to secure additional financing. During the year ended September 30, 2008, the Company introduced a cost reduction initiative which resulted in cost decreases in all major expense areas. As a result of the initiative, expense reductions were realized in the following expense categories: personnel compensation, $396,651; Outside Consultants, $231,525; Legal Fees, $162,119 and Investor Relations, $188,500.
Net Loss - For the fiscal year ended September 30, 2008 the Company incurred a loss of $676,123 compared to a loss of $4,085,033 for the fiscal year ended September 30, 2007, a decrease of $3,408,910. The major reason for the Company having the loss reduction during the fiscal year ended September 30, 2008 can be attributed to a decrease in stock-based compensation versus the prior year. Also, contributing to the lower expenses in the current fiscal year, was a cost reduction initiative in all major expense categories introduced by the Company in 2008. The Company's interest expense also decreased to $116,698 in 2008 from $290,834 in 2007. During 2008 the Company reached agreement on a prior year legal claim raised by The Investor Relation Group Inc (TIRGI); as a result of the settlement with TIRGI, the company reversed prior year estimated claim cost resulting in a favorable net variance of $204,000.
Net Operating Loss Carry forward for Tax Purposes
The Company has tax net operating loss carry forwards totaling approximately $3,800,000, expiring in 2018 through 2028. Approximately $1,200,000 of net operating losses was incurred prior to December 12, 2002 at which date MA&N acquired 51% of the Company and are consequently subject to certain limitation described in section 382 of the Internal Revenue Code. The Company estimates that, due to the limitations and expiration dates, only $424,000 of the net operating losses incurred prior to December 12, 2002 will be available to offset future taxable income. . There can be no assurance that these deferred tax assets can ever be used. A deferred tax asset can be used only if there is future taxable income, as to which there can be no assurance in the case of the Company. (See NOTE 5 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.)
Liquidity
At September 30, 2008 the company had a cash balance of $3,588 and accounts receivable of $1,281. As of September 30, 2007 the company had a no cash or cash equivalent or prepaid current assets. This is a result of work that has been completed in the oil & gas fields and the purchase of the fields. Property and equipment increased to $1,097,783 in 2008 from $617,038 in 2007, an increase of $480,745 or 78%. In addition, other assets increased to $50,000 from $5,000 in 2007. The investment in the oil and gas fields has caused the Company a liquidity crisis. The Company has been able to borrow money from William Shrewsbury and Mark S. Neuhaus primarily to resolve the Company's liquidity needs. The Company completed its testing required by the Texas Railroad Commission as of December 28, 2007. This will allow the Company to start to production on the oil wells on the Parks lease. (See" Oil and Gas Leases" under Item 2 Description of Properties) While the Company anticipates generating greater revenue beginning in the second quarter of 2009 the amount of production will not be sufficient to meet all of the Company's liquidity needs
Historically the Company has lacked liquidity, a result of insufficient financing alternatives available to the Company and the lack of a business strategy that produced significant revenues. Since MA&N took a controlling interest in the Company in December 2002, Mr. Neuhaus has claimed that he provided loans for operating purposes to the Company in the amount of $1,199,886 for operating purposes as of September 30, 2008. Mr. Shrewsbury has also provided the company with a short term loan of $170,000 as well as advances in the amount of $198,970. As of September 30, 2008, the Company has a recorded liability of $62,719 owed to Dexter & Dexter, Attorneys at Law for attorneys' fees and the sum of $101,077 to Jose Fuentes as payment for service.
During the 2007 fiscal year Mark Neuhaus caused the Company to issue him a note for $1,199,885 for advances he made on behalf of the Company and which the Company disputes. This disputed obligation is set forth in a convertible promissory note which pays interest at 8% per annum effective September 28, 2007. The conversion price for common stock is twenty-eight cents per share. The note is for two years and provides that it may be converted at any time during that period. See Note 4 to the Notes to Consolidated Financial Statements for information concerning the settlement agreement entered into in November 11, 2008 with Mr. Mrs. Neuhaus. The agreement is contingent on the closing of a third party transaction. If the condition is satisfied the convertible note, other disputed debt to Mr. Neuhaus and 4,500,000 shares of the common stock of the company will be cancelled in exchange for a general release of Mr. and Mrs. Neuhaus. There can be no assurance that the Company will be able to satisfy the condition. If not, the agreement will be void.
Based on current expectations, the Company will need to find additional sources of financing to meet our general corporate needs as well as the large capital requirements necessary for the production of the oil and gas in the wells we currently own and lease, and the acquisition of additional oil and gas producing properties.
The Company currently requires operating capital of approximately $75,000 per month to meet current obligations. At this time the Company has no material revenue and is unable to meet its current obligations. In the past the Company has been able to raise capital from its shareholders/officers through stock-based compensation and advances. The Company will require the officers of the Company to continue to receive stock-based compensation and the Company will need to borrow or raise sufficient equity capitalization to meet its current obligations. In addition the Company will need to raise approximately $500,000 in working capital to complete the refurbishment and development of the leases it currently owns. If the Company is unable to raise sufficient capital to refurbish and develop its fields, it will need to find working interest partners to assist in the development of its oil and gas leases. The Company's primary challenge is to generate higher revenue from its oil and gas leases.
