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EX-31.1 - Glen Rose Petroleum CORP | v172893_ex31-1.htm |
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K/A
Mark
One:
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x Annual report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the Fiscal Year Ended March 31, 2009
or
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o Transition report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the Transition Period from ____________to_____________.
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Commission
File Number 0-9997
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Glen
Rose Petroleum Corporation
(Exact
name of registrant as specified in its charter)
Delaware
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87-0372864
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(State
of Incorporation)
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(IRS
Employer Identification No.)
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22762
Westheimer Parkway
Suite
515
Katy,
Texas 77450
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(Address
of principal executive offices)
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(832) 437-4026
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(Registrant’s
telephone number, including area
code)
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Securities
registered pursuant to Section 12(b) of the Act: Common Stock, $0.001 par
value
Name
of each exchange
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Title of each class
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on which
registered
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Common
Stock, $0.001 par value
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Nasdaq
Capital Market
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x
No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act
(check one):
Large accelerated filer ¨
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Accelerated filer ¨
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Non-accelerated filer ¨ (Do not check if smaller reporting company)
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Smaller reporting company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes ¨ No x
As of
March 31, 2009, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was $446,390 based on the closing price as
reported on the Nasdaq Capital Market.
Number of
Shares of Common Stock outstanding as of March 31, 2009 was
10,816,200.
As
of July 9, 2009, the Company’s shares had a closing bid price of $.16 and a
total market capitalization of $ 1,730,592.
EXPLANATORY
NOTE
This
Amendment No. 1 on Form 10-K/A amends the Company's Annual Report on Form 10-KSB
for the year ended March 31, 2009, filed with the Securities and Exchange
Commission ("SEC") on July 13, 2009 (the "Original Annual Report"). This
amendment revises our financial statements and certifications in response to a
comment letter from the SEC dated October 6, 2009.
Specifically, the financial statements
have been amended in this Amended Form 10-K as follows:
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1)
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The
Critical Accounting Policies and Estimates in Item 6, the Management
Discussion and Analysis have been revised to reference the ceiling test in
the calculation of depletion and to revise the description of impairment
of properties.
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2)
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The
audit opinion has a city and state where the audit opinion was
issued;
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3)
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We
have revised our balance sheets to combine the carrying value of our
unimproved and improved properties. We have further revised the disclosure
pertaining to our oil and gas properties to break out the costs of our
proven properties ad unproven properties. The carrying costs of our proven
properties include the cost of our 103 well bores and the lease of the 502
acres on which the wells situate. The carrying costs of our unproven
properties pertain to the lease cost of our 10,000 acres of undeveloped
land. We have also revised our disclosure to indicate that the
carrying costs of our unproven properties are not subject to
depletion;
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4)
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We
have revised our accounting policy relating to the ceiling test
requirement under Rule 4-10(c)(4);
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5)
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We
have revised our disclosures relating to the write down of the carrying
value of improved properties to our completed ceiling test
limitation;
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2
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6)
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We
have revised our disclosure pertaining to our long-term assets
to indicate that we exclude oil and gas properties as being part of our
long-term assets that are subject to the requirements of
SFAS-144;
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7)
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We
have revised our disclosure to indicate that the impairment loss relating
to oil and gas properties pertains to the amount of the carrying costs of
our oil and gas properties that were in excess of our ceiling test
limitation as calculated on March 31, 2009;
and
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8)
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We
have revised Note 15 to reorder the columns pertaining to the disclosure
of our standardized measure of discounted future net cash
flows.
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Except as
described above, no attempt has been made in this Amendment to modify or update
other disclosures presented in the Original Annual Report. This Amendment does
not reflect events occurring after the filing of the Original Annual Report, or
modify or update those disclosures, including the exhibits to the Original
Annual Report, affected by subsequent events. Accordingly, this Amendment should
be read in conjunction with our filings with the SEC subsequent to the filing of
the Original Annual Report, including any amendments to those
filings.
ITEM 6.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
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Management’s
discussion and analysis of results of operations and financial condition is
based upon our consolidated financial statements. These statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. These principles require management to make certain
estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate these estimates based on
historical experience and various other assumptions that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
OVERVIEW
We are an
independent producer of natural gas and crude oil based in Dallas, Texas. We
produce from properties we lease in Texas, the Wardlaw lease in Edwards County,
Texas. We currently have 103 wellbores, 90 of which are capable of production,
and 44 are currently producing. Our plan has been to develop these properties by
reworking many of the existing wells and drilling additional wells. However, the
revenues we earned did not provide us with enough money to implement our
development plans.
During
the 2009 fiscal year, the sale price of oil produced by our properties in Texas
fell from $89.36 a barrel, to $33.15 a barrel. The closing price was $79.09 a
barrel as of March 31, 2008, versus $35.96, as of March 31, 2009. Production
costs during the 2009 fiscal year decreased from $135.87 a barrel during the
2008 fiscal year to $41.29 a barrel, because we were able to increase average
daily production, while keeping our field expenses constant.
Except as
otherwise discussed in this Annual Report, there are no trends, and events or
uncertainties in the oil industry and financial community are reasonably likely
to have, a material impact on our short-term or long-term liquidity, as well as
our net sales or revenues from continuing operations.
During
the next fiscal year, our plan is to continue redevelopment of our properties if
we are successful in finding other funding sources or, alternatively, we will
seek investors or buyers.
3
Going
Concern Status
Our
financial statements have been prepared on a going concern basis which
contemplates the realization of assets and the liquidation of liabilities in the
ordinary course of business. We have incurred substantial losses from operations
and we have a working capital deficit which raises substantial doubt about our
ability to continue as a going concern. We sustained a net loss of $2,181,974
for the fiscal year ended March 31, 2009 and, as of the same period, we had a
working capital deficit of $2,702,752. We must obtain financing in order to
develop our properties and alleviate the doubt about our ability to continue as
a going concern.
Critical
Accounting Policies and Estimates
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. The reported financial
results and disclosures were determined using the significant accounting
policies, practices and estimates described below.
Oil
and Gas Properties
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. The reported financial
results and disclosures were determined using the significant accounting
policies, practices and estimates described below.
Oil and Gas
Properties
Proved Reserves - Proved
reserves are defined by the Securities and Exchange Commission as those volumes
of crude oil; condensate, natural gas liquids and natural gas that geological
and engineering data demonstrate with reasonable certainty are recoverable from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are volumes expected to be recovered through existing wells
with existing equipment and operating methods. Although our engineers are
knowledgeable of and follow the guidelines for reserves established by the
Securities and Exchange Commission, the estimation of reserves requires
engineers to make a significant number of assumptions based on professional
judgment. Reserve estimates have been updated at least annually and consider
recent production levels and other technical information about each well.
Estimated reserves are often subject to future revision, which could be
substantial, based on the availability of additional information including:
reservoir performance, new geological and geophysical data, additional drilling,
technological advancements, price changes and other economic factors. Changes in
oil and gas prices can lead to a decision to start-up or shut-in production,
which can lead to revisions to reserve quantities. Reserve revisions in turn
cause adjustments in the depletion rates utilized by the Company. The Company
cannot predict what reserve revisions may be required in future
periods.
Depletion
is calculated based on reserve quantity estimates and the carrying costs of
producing properties. As the estimated reserves are adjusted, the depletion
expense for a property will change, assuming no change in production volumes or
the costs capitalized. Estimated reserves are used as the basis for calculating
the expected future cash flows from a property, which are used in our ceiling
test to determine whether that property costs may be impaired. Reserves are also
used to estimate the supplemental disclosure of the standardized measure of
discounted future net cash flows relating to oil and gas producing activities
and reserve quantities disclosure in Footnote 15 to the consolidated financial
statements. Changes in the estimated reserves are considered changes in
estimates for accounting purposes and are reflected on a prospective
basis.
4
We employ
the full cost method of accounting for our oil and gas production assets, which
are located in the southwestern United States. Under the full cost method, all
costs associated with the acquisition, exploration and development of oil and
gas properties are capitalized and accumulated in cost centers on a
country-by-country basis. The sum of net capitalized costs and estimated future
development and dismantlement costs for each cost center is depleted on the
equivalent unit-of-production basis using proved oil and gas reserves as
determined by independent petroleum engineers.
Net
capitalized costs are limited to the lower of unamortized cost net of related
deferred tax or the cost center ceiling. The cost center ceiling is defined as
the sum of (i) estimated future net revenues, discounted at 10% per annum, from
proved reserves, based on un-escalated year-end prices and costs; (ii) the cost
of properties not being amortized; (iii) the lower of cost or market value of
unproved properties included in the costs being amortized; less (iv) income tax
effects related to differences between the book and tax basis of the oil and gas
properties.
The
ceiling test is affected by a decrease in net cash flow from reserves due to
higher operating or finding costs or reduction in market prices for natural gas
and crude oil. These changes can reduce the amount of economically producible
reserves. If the cost center ceiling falls below the capitalized cost for the
cost center, we would be required to report an impairment of the cost center’s
oil and gas assets at the reporting date.
Impairment of Properties - We
will continue to monitor our other long-lived assets in the consolidated balance
sheet to ensure they are fairly presented. We must evaluate these assets
for potential impairment when circumstances indicate that the carrying value of
an asset could exceed its fair value.
Revenue Recognition - Oil and
gas production revenues are recognized at the point of sale. Production not sold
at the end of the fiscal year is included as inventory.
Income Taxes - Included in our
net deferred tax assets are approximately $16.4 million of future tax benefits
from prior unused tax losses. Realization of these tax assets depends on
sufficient future taxable income before the benefits expire. We are unsure if we
will have sufficient future taxable income to utilize the loss carry-forward
benefits before they expire. Therefore, we have provided an allowance for the
full amount of the net deferred tax asset. Moreover, our recent change of
majority ownership significantly reduced our ability to carry forward our net
operating losses.
Accounting Estimates -
Management uses estimates and assumptions in preparing financial statements in
accordance with accounting principles generally accepted in the United States of
America. Those estimates and assumptions affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. In particular, there is significant judgment
required to estimate oil and gas reserves, impairment of unproved properties and
asset retirement obligations. Actual results could vary significantly from the
results that are obtained by using management’s estimates.
OFF-BALANCE
SHEET ARRANGEMENTS
It is
customary for oil and gas companies to seek partners in developing their assets.
In doing so, you dilute your ownership but share the risk and capital expense of
development. Consequently, Petroleum has accepted a partner in a portion of the
development of its Wardlaw Lease in Edwards County, Texas.
5
On May
27, 2008, Petroleum signed a letter of intent (‘LOI’), to sell for $2.5 million
a 50% interest in 2,560 acres (25%) of its Wardlaw Field to Wind Hydrogen
Limited (‘WHL’), a publicly-listed company on the Australian Stock Exchange
(‘ASX’). The Wardlaw lease is a 10,502 gross acre field located in Edwards
County, Texas. In addition, WHL at closing purchased two options to
expand the venture for 2,560 acres each. The Participation Agreement required
that WHL pay 100% of the drilling costs, up to $2.5 million, for a 50% working
interest in the first 2,546 acres (Phase 1). After funding $1.5 million and
participating in the drilling of three wells,
The
definitive agreement for this transaction was signed on July 22,
2008. Petroleum has received $1.5 million toward the
participation financing of Phase 1, along with option payments of $150,000 each
for Phases 2 and 3. In addition to the participation and option
monies received, Petroleum has recorded $305,979 of non-refundable
Administrative and General Expense reimbursements, which are allotted for in the
agreement to be reimbursed from WHL.
As of
December 31, 2008, WHL had failed to fund the $1,000,000 cash call issued by
Petroleum on November 7, 2008. This failure is a material breach under the
Participation Agreement, and Petroleum plans that WHL will no longer provide
additional funding and the Participation Agreement has been
terminated.
The
purpose of the Participation Agreement was, in part, to increase the Company’s
capital resources available for developmental activities. The Participation
Agreement had an impact on the Company’s financial statements for the year
ending March 31, 2009 through showing a $1,516,968 advance on the Participation
Agreement in the Statement of Cash Flows, Cash Flows from Investing
Activities. Because the Participation Agreement is terminated, we do not
anticipate that the Participation Agreement will have a material impact on our
future financial statements.
RESULTS
OF OPERATIONS
The
following selected financial data for the two years ended March 31, 2009 and
March 31, 2008 is derived from our consolidated financial statements. The data
is qualified in its entirety and should be read in conjunction with the
consolidated financial statements and related notes contained elsewhere
herein.
6
Year
Ended
March
31,
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Year
Ended
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2009
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March
31, 2008
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Income
Data:
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Revenues
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$ | 122,279 | $ | 62,025 | ||||||||
Income
Profit (Loss)
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$ | (2,181,974 | ) | (3,251,650 | ) | |||||||
Income
Profit (Loss)
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Per
Share
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$ | (0.21 | ) | $ | (0.46 | ) | ||||||
Weighted
Average
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Number
of Shares
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10,431,234 | 7,111,758 | ||||||||||
Balance
Sheet Data:
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Working
Capital (deficit)
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$ | ((2,702,752 | ) | $ | $ | (2,714,405 | ) | |||||
Total
Assets
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$ | 6,249,381 | $ | $ | 6,074,484 | |||||||
Current
Liabilities
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$ | 2,948,077 | $ | $ | 2,870,071 | |||||||
Long-Term
Debt
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$ | 116,961 | $ | $ | 87,918 | |||||||
Shareholders’
Equity
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$ | 3,184,342 | $ | $ | 3,116,495 |
Combined
Results
Our
revenues for the 2009 fiscal year were $122,279, an increase of $60,254 or
approximately 97%, as compared to revenues of $62,025 for the 2008 fiscal
year.
Total
operating expenses of $2,303,828 reflects a decrease of $1,254,916, or
approximately 35%, for the 2009 fiscal year as compared to operating expenses of
$3,558,744 for the 2008 fiscal year. The significant operating expenses reported
for the 2009 fiscal year resulted from the recognition the expense portion of
warrants and stock options. General and administrative expenses decreased by
$326,116, or approximately 24%, from $1,334,095 in the 2008 fiscal year to
$1,007,979 in the 2009 fiscal year. We also incurred a warrants and stock
options expense of $1,017,489 during the fiscal year ended March 31, 2009.
Interest expense was $3,201 in the 2009 fiscal year, as compared to $70,117 in
the 2008 fiscal year.
Our net
loss for the 2009 fiscal year was $2,181,974 a decrease of $1,069,676 or
approximately 33%, as compared to a net loss of $3,251,650 for the 2008 fiscal
year
Oil
and Gas Activity
Oil and
gas sales during the 2009 fiscal year were $122,279, an increase of $60,254 or
approximately 97%, as compared to sales of $62,025 during the 2008 fiscal year.
Recent volatility in crude oil prices has caused substantial variations in unit
prices and our revenues may vary considerably base on crude oil unit
prices.
Receivables
from a single oil and gas customer comprised 61% of our trade receivable balance
at March 31, 2009. No allowance for doubtful accounts has been included in our
financial statements since recorded amounts are determined to be fully
collectible, based on management’s review of customer accounts, historical
experience and other pertinent factors. During the fiscal year ended March 31,
2009, we recorded oil and gas sales to only one customer. However, buyers of
crude oil are plentiful and can be easily replaced.
7
Production
and operating expenses were $94,541 during the 2009 fiscal year as compared to
$72,166 in production and operating expenses during the 2008 fiscal year, an
increase of $22,375 or approximately 31%. Depreciation and depletion expense for
the 2009 fiscal year was $58,466 as compared to depreciation and depletion
expense of $1,868 for the 2008 fiscal year, an increase of $56,598. Demand for
oil field service providers may vary substantially with the unit price of gas
and crude oil which would have a corresponding effect on the price of oil field
goods and services.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
Our sales
revenues have not been adequate to support our operations
Our
current assets increased by $89,659 or approximately 58%, from $155,666 at March
31, 2008 to $245,325 at March 31, 2009. Current liabilities increased from
$2,870,071 at March 31, 2008, to $2,948,077 at March 31, 2009, an increase of
$78,006 or approximately 3%. The increase in current liabilities was due to
increases in accounts payable balances. Working capital was a deficit of
$2,702,752 at March 31, 2009 as compared to the March 31, 2008 deficit of
$2,714,405, a decrease of $11,654 or less than 1%. The decrease deficit was due
primarily to the addition of property, plant and equipment.
Total
assets were $6,249,381 at March 31, 2009, an increase of $174,897 as compared to
$6,074,484 for the 2008 fiscal year.
Capital
Resources
Our
business plan for the next fiscal year entails redevelopment activities on the
Wardlaw properties which may result in a capital expenditure greater than $1
million, in addition to the WHL venture discussed below. Petroleum will not be
able to generate this necessary amount internally. Petroleum will rely on
additional equity financing, bank debt financing, as well as off balance sheet
joint ventures.
Petroleum
will not be making any commitment of capital resources until it has secured the
capital resources necessary to make such a commitment.
We also
have current accounts payables to oil and gas trade creditors. Our ability to
conduct developmental activities will be hindered until we pay those oil and gas
trade creditors. We may need to raise new capital to pay those trade
creditors.
Cash
Flow
Our
operations used $237,421 of cash in the 2009 fiscal year as compared to
$2,172,016 used in the 2008 fiscal year. The cash flow deficits are due to the
operating losses incurred.
Cash of
$525,981 was used in investing activities during the 2009 fiscal year and cash
of $59,348 was used in investing activities for the 2008 fiscal year. Cash of
$1,876,191 was used for capital expenditures for our oil and gas properties and
for the purchase of equipment. During the 2008 fiscal year, cash flows used in
investing activities related primarily to capital expenditures for our oil and
gas properties.
In the
2009 fiscal year, cash of $716,500 was provided by financing
activities.
At March
31, 2009 we had cash of $18,867.
8
Subsequent
Events
The
Company entered into a new independent consulting engagement with Barry Pierce,
whereby he will provide accounting services to the Company on a month to month
basis, and will not be designated as an officer. His prior one year consulting
agreement was fulfilled on March 23, 2009.
The
Company has received a portion of the remaining balance of the January 2009 BVL
Sub Debt financing, $105,000.
The
Company has collected $ 77,743.25 from its loan to Bowie Operating Company, LLC,
and the balance is expected in ninety days.
The
Company and Petroleum have retained counsel to assist in the restructuring of
its vendor payables.
The
Company and Petroleum are in negotiations with several investors about purchase
an equity interest in the Company, or purchasing a partial interest in the
Wardlaw field. However,
there is no assurance of further financing, and the Company would not be cash
flow positive from operations without further assistance. Consequently, without
further outside capital the Company and Petroleum would not be viable as a going
concern.
Non-Compliance
with Nasdaq Rules
NASDAQ
informed Glen Rose Petroleum Corporation in a letter dated September 22, 2008,
that it was in violation of NASDAQ Marketplace Rule 4310(c)(4) in
that the closing bid price for our common stock was below $1.00 for 30
consecutive days. The NASDAQ letter stated that Glen Rose Petroleum
Corporation will have 180 calendar days (until March 23, 2008) to regain
compliance with Rule 4310(c)(4) by demonstrating a closing bid price of $1.00 or
more for at least ten and up to twenty consecutive business days.
The
NASDAQ letter further stated that if Glen Rose Petroleum Corporation cannot
demonstrate compliance with Rule 4310(c)(4) by March 23, 2008, the NASDAQ Staff
will determine whether it meet the NASDAQ Capital Markets initial listing
criteria except for the bid price requirement. If the Corporation
meets the initial listing criteria, it may be granted an additional 180 day
compliance period. If Glen Rose Petroleum Corporation is not eligible
for the additional compliance period, NASDAQ staff will provide it with a
delisting notice which may be appealed to the NASDAQ Listing Qualifications
Panel.
Subsequently,
NASDAQ temporarily suspended the compliance dates related to bid price
deficiencies for all NASDAQ-listed companies. On December 19, 2008, it
announced that it was suspending bid price qualification until April 20,
2009. On March 23, 2009, NASDAQ announced that it was further extending
this suspension until July 19, 2009. Consequently, the 88 days between
September 22, 2008 and December 19, 2008, count against the listing compliance
time period, but not the period between December 19, 2008 and July 19,
2009. Thus, the deadline for the initial 180 day compliance period
referenced in the NASDAQ listing deficiency notice letter is now October 19,
2009 with an additional 180 days available for compliance if Glen Rose
Corporation meets the initial NASDAQ listing requirements other than bid
price.
9
FACTORS
AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
Risks
Related to Our Business
We
do not earn enough money to support our operations. We may be unable to continue
our business.
UHC
Petroleum Corporation does not earn enough money from our oil and gas sales to
pay its operating expenses. Due to our substantial losses and our working
capital deficit, Petroleum may be unable to continue as a going concern. If
Petroleum does not obtain financing, it will be required to severely curtail, or
to completely cease operations.
Jonathon
P. Reuben, CPA, our independent auditor, has included in its report on our
financial statements a paragraph stating that that we may be unable to continue
as a going concern.
We have
experienced net losses and negative cash flows from operations. We sustained a
net loss of $2,181,974 and a working capital deficit of $2,702,752 for the
fiscal year ended March 31, 2009. We have an accumulated deficit of $48,432,770.
We sold all of our proved reserves in 2007 and we currently do not have
significant revenue producing assets. In addition, we have limited capital
resources. All of these factors raise substantial doubt about our ability to
continue as a going concern. The financial statements included in this report do
not include any adjustments that might result from the outcome of these
uncertainties. As noted in an explanatory paragraph in the report of Jonathon R.
Reuben CPA, our independent certified public accountants, on our consolidated
financial statements for the year ended March 31, 2009 these conditions
have raised substantial doubt about our ability to continue as a going
concern.
We
must estimate our proved oil and gas reserves and the estimated future net cash
flows from the reserves. These estimates may prove to be
inaccurate.
This Form
10-K contains estimates of our proved oil and gas reserves and the estimated
future net cash flows from such reserves. These estimates are based upon various
assumptions, including assumptions required by the Securities and Exchange
Commission relating to oil and gas prices, drilling and operating expenses,
capital expenditures, taxes and availability of funds. The process of estimating
oil and natural gas reserves is complex. This process requires significant
decisions and assumptions in the evaluation of available geological,
geophysical, engineering and economic data for each reservoir and is therefore
inherently imprecise. Additionally, our interpretations of the rules governing
the estimation of proved reserves could differ from the interpretation of staff
members of regulatory authorities resulting in estimates that could be
challenged by these authorities.
Actual
future production, oil and natural gas prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable oil and gas
reserves will most likely vary from those estimated. Any significant variance
could materially affect the estimated quantities and present value of reserves
set forth in this Annual Report and the information incorporated by reference.
Our properties may also be susceptible to hydrocarbon drainage from production
by other operators on adjacent properties. In addition, we may adjust estimates
of proved reserves to reflect production history, results of exploration and
development, prevailing oil and natural gas prices and other factors, many of
which are beyond our control.
10
Our
business plan anticipates that we will be able to develop our oil and gas
properties. The cost to develop our oil properties is significant, and, to date,
we have been unable to do so due to our lack of funds. Unless we can develop our
oil properties, our revenues and results of operations will be adversely
affected.
We
believe that our properties have significant reserves of oil; however, we have
not had the funds to fully exploit these resources. The costs associated with
the development of oil and gas properties, including engineering studies,
equipment purchase or leasing and personnel costs, are significant. In order to
become profitable we must enhance our oil production, which means that we must
drill and/or recomplete more wells. In order to accomplish this, we must find
additional sources of capital.
Even
if we fully develop our oil properties, we may not be profitable. Our inability
to operate profitably will adversely affect our business.
We have
assumed that once we fully develop our oil properties we will be profitable.
However, even if we were able to fully develop our properties, there is no
guarantee that we would achieve profitability. Our reserves may prove to be
lower than expected, production levels may be lower than expected, the costs to
exploit the oil may be higher than expected, new regulations may adversely
impact our ability to exploit these resources and the market price for crude oil
may be lower than current prices.
We also
face competition from other oil companies in all aspects of our business,
including obtaining oil leases, marketing oil, and obtaining goods, services and
labor to exploit our resources. Many of our competitors have substantially
larger financial and other resources than we have, and we may not be able to
successfully compete against them. Competition is also presented by alternative
fuel sources, which may be more efficient and less costly and may result in our
products becoming less desirable.
Any of
these factors could prevent us from attaining profitability.
The
development and exploitation of oil properties is subject to many risks that are
beyond our control. The occurrence of any of these events could have a material
adverse effect on our business and results of operations.
Our crude
oil drilling and production activities are subject to numerous risks, many of
which are beyond our control. These risks include the following:
·
|
that
no commercially productive crude oil reservoirs will be
found;
|
·
|
that
crude oil drilling and production activities may be shortened, delayed or
canceled; and
|
·
|
that
our ability to develop, produce and market our reserves may be limited by
title problems, weather conditions, compliance with governmental
requirements, and mechanical difficulties or shortages or delays in the
delivery of drilling rigs and other
equipment.
|
We cannot
assure you that the new wells we drill, or the wells that are currently in
existence, will be productive or that we will recover all or any portion of our
investment in them. Drilling for crude oil and natural gas may be unprofitable.
Dry holes and wells that are productive but do not produce sufficient net
revenues after drilling, operating and other costs are
unprofitable.
Our
industry also experiences numerous operating risks. These operating risks
include the risk of fire, explosions, blow-outs, pipe failure, abnormally
pressured formations and environmental hazards. Environmental hazards include
oil spills, natural gas leaks, ruptures or discharges of toxic gases. If any of
these industry operating risks occur, we could sustain substantial losses.
Substantial losses also may result from injury or loss of life, severe damage to
or destruction of property, clean-up responsibilities, regulatory investigation
and penalties and suspension of operations.
11
Any of
these events could adversely affect our business.
We
may not have enough insurance to cover all of the risks we face. If our
insurance coverage is inadequate to pay a claim, we would be responsible for
payment. The requirement that we pay a significant claim would materially,
adversely impact our financial condition and results of operations.
In
accordance with customary industry practices, we maintain insurance coverage
against some, but not all, potential losses in order to protect against the
risks we face. We may elect not to carry insurance if our management believes
that the cost of available insurance is excessive relative to the risks
presented. In addition, we cannot insure fully against pollution and
environmental risks. The occurrence of an event not fully covered by insurance
which we may be required to pay could have a material adverse effect on our
financial condition and results of operations.
Oil
and natural gas prices are highly volatile in general and low prices negatively
affect our financial results.
Our
revenue, profitability, cash flow, future growth and ability to borrow funds or
obtain additional capital, as well as the carrying value of our properties, are
substantially dependent upon prevailing prices of oil and natural gas.
Historically, the markets for oil and natural gas have been volatile, and such
markets are likely to continue to be volatile in the future. Prices are subject
to wide fluctuation in response to relatively minor changes in the supply of and
demand for oil and natural gas, market uncertainty and a variety of additional
factors that are beyond our control. These factors include the level of consumer
product demand, weather conditions, domestic and foreign governmental
regulations, the price and availability of alternative fuels, political
conditions, the foreign supply of oil and natural gas, the price of foreign
imports and overall economic conditions. While we attempt to mitigate price
volatility when we can by acquiring “puts” to protect our prices, we cannot
assure you that such transactions will reduce the risk or minimize the effect of
any decline in oil or natural gas prices. Any substantial or extended decline in
the prices of or demand for oil or natural gas would have a material adverse
effect on our financial condition and results of operations.
Government
regulation and liability for environmental matters may adversely affect our
business and results of operations.
Oil and
natural gas operations are subject to various federal, state and local
government regulations, which may be changed from time to time. Matters subject
to regulation include discharge permits for drilling operations, drilling bonds,
reports concerning operations, the spacing of wells, unitization and pooling of
properties and taxation. From time to time, regulatory agencies have imposed
price controls and limitations on production by restricting the rate of flow of
oil and natural gas wells below actual production capacity in order to conserve
supplies of oil and natural gas. There are federal, state and local laws and
regulations primarily relating to protection of human health and the environment
applicable to the development, production, handling, storage, transportation and
disposal of oil and natural gas, by-products thereof and other substances and
materials produced or used in connection with oil and natural gas operations.
Furthermore, we may be liable for environmental damages caused by previous
owners of property we purchase or lease. As a result, we may incur substantial
liabilities to third parties or governmental entities. We are also subject to
changing and extensive tax laws, the effects of which cannot be predicted. While
the regulations governing our industry have not had a material adverse effect on
our operations to date, the implementation of new laws or regulations, or the
modification of existing laws or regulations, could have a material adverse
effect on us.
12
We
may not be able to replace production with new reserves.
In
general, the volume of production from oil and gas properties declines as
reserves are depleted. The decline rates depend on reservoir characteristics.
Our aggregate reserves will decline as they are produced unless we acquire
properties with proved reserves or conduct successful development and
exploration drilling activities. Our future natural gas and oil production is
highly dependent upon our level of success in finding or acquiring additional
reserves.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date:
February 2, 2010
|
GLEN
ROSE PETROLEUM CORPORATION
|
|
By:
|
/s/ Andrew
Taylor-Kimmins
|
|
Andrew
Taylor-Kimmins
|
||
President
and Chief Financial Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated below on this 1st day of February 2010.
SIGNATURE,
TITLE
/s/ Andrew Taylor-Kimmins
|
|
Andrew
Taylor-Kimmins
|
|
President, Secretary, and Chief Financial Officer (Principal Accounting Officer) and Director
|
/s/ Ted Williams
|
Ted
Williams
|
Director
|
/s/ Paul K. Hickey
|
Paul
K. Hickey
|
Director
|
13
INDEX
TO FINANCIAL STATEMENTS
PAGE
|
|
Report
of Independent Registered Public Accounting Firms
|
F-1
|
Consolidated
Balance Sheets at March 31, 2009 and 2008
|
F-3
|
Consolidated
Statements of Operations for the Years Ended March 31, 2009 and
2008
|
F-5
|
Consolidated
Statements of Changes in Shareholders’ Equity for the Years Ended
March 31, 2009 and 2008
|
F-6
|
Consolidated
Statements of Cash Flows for the Years Ended March 31, 2009 and
2008
|
F-7
|
Notes
to Consolidated Financial Statements
|
F-8
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders
Glen Rose
Petroleum Corporation
Dallas,
Texas
We have
audited the accompanying consolidated balance sheet of Glen Rose Petroleum
Corporation and subsidiaries (the “Company”) as of March 31, 2008, and the
related consolidated statements of operations, changes in shareholders’ equity
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company as
of March 31, 2008, and the consolidated results of its operations and its
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
We were
not engaged to examine management’s assertion about the effectiveness of the
Company’s internal control over financial reporting as of March 31, 2008
included in the accompanying Form 10-K and, accordingly, we do not express an
opinion thereon.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has limited capital resources and no significant revenue
producing assets which combine to raise substantial doubt about its ability to
continue as a going concern. Management’s plans in regard to these matters are
also discussed in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/
HEIN & ASSOCIATES LLP
Dallas,
Texas
July 11,
2008
F-1
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders
Glen Rose
Petroleum Corporation
Dallas,
Texas
We have
audited the accompanying consolidated balance sheet of Glen Rose Petroleum
Corporation and subsidiaries (the “Company”) as of March 31, 2009, and the
related consolidated statements of operations, changes in shareholders’ equity
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company as
of March 31, 2009, and the consolidated results of its operations and its
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
We were
not engaged to examine management’s assertion about the effectiveness of the
Company’s internal control over financial reporting as of March 31, 2009
included in the accompanying Form 10-K and, accordingly, we do not express an
opinion thereon.
The
accompanying financial statement has been prepared assuming that the Company
will continue as a going concern. As shown in the financial statements, the
Company has negative working capital, incurred significant losses, and has an
accumulated deficit of $48,432,770 as of March 31, 2009. As discussed in Note 2,
these conditions raise substantial doubt about the Company’s ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty..
/s/ Jonathon P. Reuben
CPA,
An
Accountancy Corporation
Torrance,
California
July 10,
2009
F-2
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS AT MARCH 31, 2009 AND 2008
ASSETS
MARCH
31,
|
||||||||
2009
|
2008
|
|||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$
|
18,867
|
$
|
65,769
|
||||
Accounts
receivable, no allowance considered necessary
|
10,273
|
2,081
|
||||||
Receivable
from taxing authority
|
6,697
|
-
|
||||||
Notes
receivable related parties – short term
|
176,640
|
-
|
||||||
Inventory
|
10,221
|
79,241
|
||||||
Prepaid
expenses
|
22,627
|
8,575
|
||||||
Total
current assets
|
245,325
|
155,666
|
||||||
OIL AND GAS PROPERTIES,
full cost method
|
5,798,856
|
5,915,184
|
||||||
PROPERTY AND EQUIPMENT,
at cost:
|
||||||||
Field
equipment
|
171,670
|
-
|
||||||
Computer
equipment
|
14,206
|
2,699
|
||||||
Vehicles
|
41,281
|
6,752
|
||||||
227,157
|
9,451
|
|||||||
Less
Accumulated Depreciation
|
(21,957
|
) |
(5,817
|
) | ||||
205,200
|
3,634
|
|||||||
Total
assets
|
$
|
6,249,381
|
$
|
6,074,484
|
-
Continued -
F-3
LIABILITIES AND
SHAREHOLDERS’ EQUITY
MARCH
31,
|
||||||||
2009
|
2008
|
|||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$
|
629,173
|
$
|
364,819
|
||||
Accounts
payable — related parties
|
140,267
|
13,732
|
||||||
Accrued
expenses
|
-
|
343,750
|
||||||
Note
payable — related party
|
30,867
|
-
|
||||||
Accrued
put option liability
|
2,147,770
|
2,147,770
|
||||||
Total
current liabilities
|
2,948,077
|
2,870,071
|
||||||
LONG-TERM
LIABILITIES:
|
||||||||
Asset
retirement obligation
|
-
|
87,918
|
||||||
Note
payable – related party
|
116,962
|
-
|
||||||
Total
liabilities
|
3,065,039
|
2,957,989
|
||||||
Commitments
and Contingencies (Notes 6, 7, and 13)
|
||||||||
SHAREHOLDERS’
EQUITY:
|
||||||||
Preferred
stock, $.0001 par value; 5,000,000 shares authorized, none issued or
outstanding
|
-
|
-
|
||||||
Common
stock, $.001 par value; 125,000,000 shares authorized; 10,816,200 issued
and outstanding at March 31, 2009 and 9,424,214 issued and
outstanding at March 31, 2008
|
10,816
|
9,424
|
||||||
Common
stock subscription receivable - related party
|
(50,000)
|
-
|
||||||
Additional
paid-in capital
|
51,656,296
|
49,357,867
|
||||||
Accumulated
deficit
|
(48,432,770
|
) |
(46,250,796
|
) | ||||
Total
shareholders’ equity
|
3,184,342
|
3,116,495
|
||||||
Total
liabilities and shareholders’ equity
|
$
|
6,249,381
|
$
|
6,074,484
|
See
accompanying notes to these consolidated financial
statements
F-4
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
|
||||||||
MARCH
31,
|
||||||||
2009
|
2008
|
|||||||
OPERATING
REVENUES –
|
||||||||
Oil
and gas sales
|
$
|
122,279
|
$
|
62,025
|
||||
Total
operating revenues
|
122,279
|
62,025
|
||||||
OPERATING
COSTS AND EXPENSES:
|
||||||||
Production
and operating
|
94,541
|
72,166
|
||||||
Impairment:
Unproved Properties
|
125,353
|
-
|
||||||
Depreciation
and depletion
|
58,466
|
1,868
|
||||||
Accretion
of asset retirement obligation
|
-
|
4,976
|
||||||
General
and administrative
|
1,007,979
|
1,334,095
|
||||||
Bad
debt expense
|
-
|
258,814
|
||||||
Warrants
expense
|
-
|
1,156,049
|
||||||
Stock
based compensation
|
1,017,489
|
476,857
|
||||||
Put
option expense
|
-
|
253,919
|
||||||
Total
operating costs and expenses
|
2,303,828
|
3,558,744
|
||||||
LOSS
FROM OPERATIONS
|
(2,181,549
|
) |
(3,496,719
|
) | ||||
OTHER
INCOME (EXPENSE):
|
||||||||
Loss
on cancellation of indebtedness
|
(4,856
|
) |
-
|
|||||
Gain
on sale of investments
|
-
|
303,155
|
||||||
Gain
(loss) on sale of property and equipment
|
(749
|
) |
12,031
|
|||||
Interest
income
|
8,381
|
-
|
||||||
Interest
expense
|
(3,201
|
) |
(70,117
|
) | ||||
Total
other income (expense)
|
(425
|
) |
245,069
|
|||||
NET
LOSS
|
$
|
(2,181,974
|
) |
$
|
(3,251,650
|
) | ||
LOSS
PER COMMON SHARE:
|
||||||||
Basic
and diluted
|
$
|
(0.21
|
)
|
$
|
(0.46
|
) | ||
Weighted
average number of shares outstanding, basic and diluted
|
10,431,234
|
7,111,758
|
See
accompanying notes to these consolidated financial
statements
F-5
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDER EQUITY
FOR
YEARS ENDED MARCH 31, 2009 AND 2008
Additional
|
||||||||||||||||||||||||
Common
Stock
|
Subscription
|
Paid-in
|
Accumulated
|
|||||||||||||||||||||
Shares
|
Amount
|
Receivable
|
Capital
|
Deficit
|
Totals
|
|||||||||||||||||||
BALANCE,
March 31, 2007
|
6,446,758 | $ | 6,447 | $ | — | $ | 43,796,676 | $ | (42,999,146 | ) | $ | 803,977 | ||||||||||||
Compensation
recognized on stock option grants
|
— | — | — | 358,504 | — | 358,504 | ||||||||||||||||||
Issuance
of stock for conversion of debt
|
498,606 | 499 | — | 434,708 | — | 435,207 | ||||||||||||||||||
Issuance
of common stock for cash
|
1,238,038 | 1,238 | — | 802,994 | — | 804,232 | ||||||||||||||||||
Issuance
of common stock for conversion of put option
|
1,111,113 | 1,111 | — | 910,002 | — | 911,113 | ||||||||||||||||||
Issuance
of common stock for services
|
129,699 | 129 | — | 118,225 | — | 118,354 | ||||||||||||||||||
Related
party forgiveness of debt
|
— | — | — | 1,780,709 | — | 1,780,709 | ||||||||||||||||||
Warrants
issued for service
|
— | — | — | 1,156,049 | — | 1,156,049 | ||||||||||||||||||
Net
loss
|
— | — | — | — | (3,251,650 | ) | (3,251,650 | ) | ||||||||||||||||
BALANCE,
March 31, 2008
|
9,424,214 | $ | 9,424 | $ | — | $ | 49,357,867 | $ | (46,250,796 | ) | $ | 3,116,495 | ||||||||||||
Compensation
recognized on stock option grants
|
— | — | — | 913,607 | — | 913,607 | ||||||||||||||||||
Issuance
of stock for conversion of debt
|
353,810 | 353 | — | 318,228 | — | 318,581 | ||||||||||||||||||
Issuance
of common stock for cash
|
700,000 | 700 | — | 569,300 | — | 570,000 | ||||||||||||||||||
Issuance
of common stock for services
|
275,676 | 276 | — | 103,606 | — | 103,882 | ||||||||||||||||||
Issuance
of common stock for cancellation of options
|
62,500 | 63 | — | 343,688 | — | 343,751 | ||||||||||||||||||
Issuance
of common stock for note
|
— | — | (50,000 | ) | 50,000 | — | — | |||||||||||||||||
Net
loss
|
— | — | — | — | (2,181,974 | ) | (2,181,974 | ) | ||||||||||||||||
BALANCE,
March 31, 2009
|
10,816,200 | $ | 10,816 | $ | (50,000 | ) | $ | 51,656,296 | $ | (48,432,770 | ) | $ | 3,184,342 |
See
accompanying notes to these consolidated financial statements
F-6
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CASH FLOWS
FOR
YEAR ENDED MARCH 31, 2009
FOR THE YEARS ENDED
|
||||||||
MARCH 31,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
||||||
Net
loss
|
$ | (2,181,974 | ) | $ | (3,251,650 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Impairment
loss
|
125,353 | - | ||||||
Depreciation,
depletion and amortization
|
58,466 | 1,868 | ||||||
Loss
on sale of oil and gas assets
|
749 | - | ||||||
Gain
on sale of investments
|
- | (303,155 | ) | |||||
Gain
on sale of property and equipment
|
- | (12,301 | ) | |||||
Put
option expense
|
- | 253,919 | ||||||
Stock
compensation expense
|
1,017,489 | 1,514,553 | ||||||
Accretion
of asset retirement obligation
|
- | 4,976 | ||||||
Loss
on forgiveness of debt
|
4,856 | |||||||
Changes
in assets and liabilities:
|
||||||||
Trade
and other receivables
|
(14,889 | ) | 468,589 | |||||
Short
term notes receivable
|
(8,381 | ) | - | |||||
Inventory
|
69,020 | (47,824 | ) | |||||
Prepaid
expenses
|
(14,052 | ) | 26,334 | |||||
Accounts
payable and accrued expenses
|
579,407 | (827,325 | ) | |||||
Accounts
payable related party
|
126,535 | - | ||||||
Net
cash used in operating activities
|
(237,421 | ) | (2,172,016 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Additions
to oil and gas properties
|
(1,602,339 | ) | (50,597 | ) | ||||
Proceeds
from sale of property, plant and equipment
|
1,500 | - | ||||||
Disposal
of property, plant and equipment
|
- | (8,751 | ) | |||||
Advances
on joint participation agreement
|
1,516,968 | - | ||||||
Additions
to equipment
|
(273,852 | ) | - | |||||
Advances
on related party loans
|
(183,258 | ) | - | |||||
Repayment
on related party loans
|
15,000 | - | ||||||
Net
cash used in investing activities
|
(525,981 | ) | (59,348 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from borrowings – related parties
|
146,500 | 153,218 | ||||||
Issuance
of common stock
|
570,000 | 804,232 | ||||||
Payments
on notes payable – related parties
|
- | (331,989 | ) | |||||
Net
cash provided by financing activities
|
716,500 | 625,461 | ||||||
NET
DECREASE IN CASH
|
(46,902 | ) | (1,605,903 | ) | ||||
CASH, beginning of
year
|
65,769 | 1,671,672 | ||||||
CASH, end of
year
|
$ | 18,867 | $ | 65,769 | ||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||
Cash
paid during the year for:
|
||||||||
Interest
|
$ | 3,201 | $ | 70,117 | ||||
Taxes
|
$ | - | $ | - | ||||
SUPPLEMENTAL
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
||||||||
Investment
exchanged for notes payable and accrued interest, related
party
|
$ | - | $ | 2,130,155 | ||||
Stock
issued for conversion of debt and put option
|
$ | 313,726 | $ | 1,346,320 | ||||
Issuance
of common stock for cancellation of options
|
$ | 343,750 | $ | - | ||||
Related
party forgiveness of debt
|
$ | - | $ | 1,780,709 |
See
accompanying notes to these consolidated financial statements
F-7
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
and Presentation
The
consolidated financial statements include the accounts of Glen Rose Petroleum
Corporation (the “Company”, “we” or “our”) and its wholly owned subsidiaries,
Glen Rose Petroleum Services, UHC Petroleum Corporation, UHC Petroleum Services
Corporation, UHC New Mexico Corporation and National Heritage Sales
Corporation.
The name
of the Company was changed from United Heritage Corporation to Glen Rose
Petroleum Corporation in May, 2008.
Concurrent
with the name change, the Company entered into a statutory merger whereby it
moved its state of incorporation from Utah to Delaware and United Heritage
Corporation, the Utah Corporation, merged into the newly formed Delaware
Corporation, Glen Rose Petroleum Corporation.
All
significant intercompany transactions and balances were eliminated in
consolidation.
Nature of
Operations
Glen Rose
Petroleum Corporation owns contiguous oil and gas properties located in Edwards
County, Texas. The Company began production of the Texas properties during the
year ended March 31, 2000. The Company sold a significant portion of its
oil and gas properties in 2007. The Company continues to operate its remaining
contiguous oil and gas properties located in Edwards County, Texas and does not
operate oil and gas properties in any other fields or areas.
Revenue
Recognition
Oil and
gas production revenues are recognized at the point of sale. Production not sold
at the end of the fiscal year is included as inventory in the accompanying
consolidated financial statements.
Inventory
Inventory
consists of oil in tanks, which is valued at the lower of the cost to produce
the oil or the current available sales price.
Oil and Gas
Properties
The
Company uses the full cost method of accounting under which all costs incurred
in the acquisition, exploration and development of oil and natural gas reserves,
including costs related to unsuccessful wells and estimated future site
restoration and abandonment, are capitalized until such time as the aggregate of
such costs net of accumulated depletion and oil and natural gas related deferred
income taxes, on a country-by-country basis, equals the sum of 1) the
discounted present value (at 10%), using prices as of the end of each reporting
period on a constant basis, of the Company’s estimated future net cash flows
from estimated production of proved oil and natural gas reserves as determined
by independent petroleum consultants, less estimated future expenditures to be
incurred in developing and producing the proved reserves but excluding future
cash outflows associated with settling asset retirement obligations accrued on
the balance sheet; plus 2) the cost of major development projects and
unproven properties not subject to depletion, if any; plus 3) the lower of
cost or estimated fair value of unproven properties included in costs subject to
depletion; less 4) related income tax effects. If net capitalized
costs exceed this limit, the excess is expensed unless subsequent market price
changes eliminate or reduce the indicated write-down in accordance with U.S. SEC
Staff Accounting Bulletin (“SAB”) Topic 12D. Depletion is computed using
the units-of-production method whereby capitalized costs, net of estimated
salvage values, plus estimated future costs to develop proved reserves and
satisfy asset retirement obligations, are amortized over the total estimated
proved reserves on a country-by-country basis. Investments in major development
projects are not depleted until either proved reserves are associated with the
projects or impairment has been determined.
Under the
above indicated ceiling test, the Company determined that as of March 31, 2009,
its carrying cost of its oil and gas properties exceeded the ceiling test limit
and charged $125,353 to operations as an impairment expense. The Company
determined its oil and gas properties were not impaired for the year ended March
31, 2008.
F-8
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Property and
Equipment
Property
and equipment are stated at cost, less accumulated depreciation. Depreciation is
provided over the estimated useful lives of the assets primarily by the
straight-line method as follows:
Equipment
|
3-14
years
|
|
Vehicles
|
3-5
years
|
Gains
and losses resulting from sales and dispositions of property and equipment are
included in current operations. Maintenance and repairs are charged to
operations as incurred. Depreciation expense for the year ended March 31, 2009
and 2008 amounted $16,590 and $1,868, respectively.
Earnings (Loss) per Common
Share
The
Company adopted the provisions of SFAS No. 128, Earnings Per Share
(“EPS”). SFAS No. 128 provides for the calculation of basic and
diluted earnings per share. Basic EPS includes no dilution and
is computed by dividing income or loss available to common shareholders by the
weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution of securities
that could share in the earnings or losses of the entity. For the
years ended March 31, 2009 and 2008 basic and diluted loss per share are the
same since the calculation of diluted per share amounts would result in an
anti-dilutive calculation that is not permitted and therefore not
included. The Company’s diluted loss per share would include options
and warrants exercisable into 24,021,420 shares of common stock and debt
convertible into 615,589 shares of common stock. At March 31, 2008,
the Company had potentially dilutive options and warrants totaling 23,701,420
shares.
Cash Flows
Presentation
For
purposes of the consolidated statement of cash flows, the Company considers all
highly liquid investments purchased with original maturities of three months or
less to be cash equivalents.
Use of
Estimates
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Estimates of oil and gas reserves, the asset retirement obligation and
impairment on unproved properties are inherently imprecise and may change
materially in the near term.
Financial
Instruments
Financial
instruments consist of cash and cash equivalents, accounts receivable, accounts
payable and notes payable. Recorded values of cash, receivables and payables
approximate fair values due to short maturities of the instruments.
Issuance of Stock for
Non-Cash Consideration
All
issuances of the Company's stock for non-cash consideration have been assigned a
per share amount equaling either the market value of the shares issued or the
value of consideration received, whichever is more readily determinable. The
majority of the non-cash consideration received pertains to services rendered by
consultants and others and has been valued at the market value of the shares on
the dates issued.
The
Company's accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of EITF 96-18,
Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services and EITF 00-18, Accounting Recognition for Certain
Transactions Involving Equity Instruments Granted to Other Than
Employees. The measurement date for the fair value of the
equity instruments issued is determined at the earlier of (i) the date at which
a commitment for performance by the consultant or vendor is reached or (ii) the
date at which the consultant or vendor's performance is complete. In
the case of equity instruments issued to consultants, the fair value of the
equity instrument is recognized over the term of the consulting
agreement. In accordance with EITF 00-18, an asset acquired in
exchange for the issuance of fully vested, nonforfeitable equity instruments
should not be presented or classified as an offset to equity on the grantor's
balance sheet once the equity instrument is granted for accounting
purposes. Accordingly, the Company records the fair value of the
fully vested non-forfeitable common stock issued for future consulting services
as prepaid services in its consolidated balance sheet.
F-9
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Share-Based
Compensation
We
measure and record compensation expense for all share-based payment awards to
consultants, employees and directors based on estimated fair values.
Additionally, compensation costs for share-based awards are recognized over the
requisite service period based on the grant-date fair value.
Long-Lived
Assets
Long-lived
assets to be held and used by the Company, other than oil and gas
properties, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company periodically evaluates the recoverability of its
long-lived assets based on estimated future cash flows and the estimated fair
liquidation value of such long-lived assets, and provides for impairment if such
undiscounted cash flows are insufficient to recover the carrying amount of the
long-lived assets.
Income
Taxes
Provisions
for income taxes are based on taxes payable or refundable for the current year
and deferred taxes on temporary differences between the amount of taxable income
and pretax financial income and between the tax bases of assets and liabilities
and their reported amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently enacted income
tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled as prescribed in FASB
Statement No. 109, Accounting for Income
Taxes. As changes in tax laws or rate are enacted, deferred tax assets
and liabilities are adjusted through the provision for income
taxes.
RECENTLY ADOPTED ACCOUNTING
PRONOUNCEMENTS
FASB issued Staff Position
No. 142-3 - In April 2008, the FASB issued Staff Position
No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP
142-3”). FSP 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under FASB Statement of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible Assets”. FSP 142-3 is
effective for the Company in the first quarter of 2009. The adoption of FSP
142-3 has not had a significant impact on our financial statements.
FASB issued Staff Position
No. EITF 03-6-1 - In June 2008, the FASB issued Staff Position
No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities” (“EITF 03-6-1”). EITF 03-6-1
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting, and therefore, need to be included in
the earnings allocation in calculating earnings per share under the two-class
method described in FASB Statement of Financial Accounting Standards
No. 128, “Earnings per Share.” EITF 03-6-1 requires companies to treat
unvested share-based payment awards that have non-forfeitable rights to dividend
or dividend equivalents as a separate class of securities in calculating
earnings per share. EITF 03-6-1 is effective for fiscal years beginning after
December 15, 2008. EITF 03-6-1 is effective for the Company in the first
quarter of 2009. The adoption of EITF 03-6-1 has not had a significant impact on
our financial statements
SFAS No. 157 - The
Company adopted in the first quarter of fiscal 2009, the Statement of Financial
Accounting Standards No. 157, Fair Value Measurements, (“SFAS
No. 157”) for all financial assets and financial liabilities and for all
non-financial assets and non-financial liabilities recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually).
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value, and enhances fair value measurement disclosure. The effect on the
Company’s periodic fair value measurements for financial and non-financial
assets and liabilities was not material.
F-10
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
October 2008, the Financial Accounting Standards Board (“FASB”) issued
Financial Staff Position 157-3, Determining the Fair Value of a Financial Asset
When the Market for That Asset Is Not Active, (“FSP 157-3”). FSP 157-3 clarifies
the application of SFAS No. 157 in a market that is not active, and
addresses application issues such as the use of internal assumptions when
relevant observable data does not exist, the use of observable market
information when the market is not active, and the use of market quotes when
assessing the relevance of observable and unobservable data. FSP 157-3 is
effective for all periods presented in accordance with SFAS No. 157. The
adoption of FSP 157-3 did not have a significant impact on our financial
statements or the fair values of our financial assets and
liabilities.
In
December 2008, the FASB issued Financial Staff Position (“FSP”) Financial
Accounting Standard No. 140-4 and FASB Interpretation 46(R)-8, Disclosures
by Public Entities (Enterprises) about Transfers of Financial Assets and
Interests in Variable Interest Entities (“FSP FAS 140-4” and “FIN
46(R)-8”). The document increases disclosure requirements for public companies
and is effective for reporting periods (interim and annual) that end after
December 15, 2008. FSP FAS 140-4 and FIN 46(R)-8 became effective
for us on December 31, 2008. The adoption of FSP FAS 140-4 and
FIN 46(R)-8 did not have a significant impact on our financial
statements.
In
December 2007, the Financial Accounting Standards Board issued Emerging Issues
Task Force (EITF) Issue No. 07-1, Accounting for Collaborative
Arrangements, which applies to collaborative arrangements that are conducted by
the participants without the creation of a separate legal entity for the
arrangement and clarifies, among other things, how to determine whether a
collaborative arrangement is within the scope of this issue. EITF Issue
No. 07-1 is effective for financial statements issued for fiscal years
beginning after December 15, 2008. The adoption of EITF Issue No. 07-1
did not have a significant impact on our financial statements.
In
December 2007, SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements — an Amendment of ARB No. 51, was
issued. SFAS No. 160 amends ARB 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. Among other requirements, this
statement requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling
interest. It also requires disclosure, on the face of the consolidated income
statement, of the amounts of consolidated net income attributable to the parent
and to the noncontrolling interest. SFAS No. 160 is effective for financial
statements issued for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2008. The effect of adopting SFAS
No. 160 is not currently expected to have an effect on our consolidated
financial position, results of operations, or cash flows.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which provides entities with an
option to report selected financial assets and liabilities at fair value. SFAS
No. 159 also establishes presentation and disclosure requirements designed
to facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. This Statement is
effective as of the beginning of the first fiscal year that begins after
November 15, 2007 and thus applies to the Company’s fiscal year ending
March 31, 2009. The adoption of SFAS No. 159 did not have a significant impact
on our financial statements.
In
March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivatives Instruments and Hedging Activities, an Amendment of FASB Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities (“FAS
161”). FAS 161 changes the disclosure requirements for derivative instruments
and hedging activities. Entities are required to provide enhanced disclosures
stating how and why an entity uses derivative instruments; how derivative
instruments and related hedged items are accounted for under SFAS No. 133
and its related interpretations; and how derivative instruments and related
hedged items affect an entity’s financial position, financial performance and
cash flows. FAS 161 require that objectives for using derivative instruments be
disclosed in terms of underlying risk and accounting designation. FAS 161 are
effective for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged. FAS 161 also encourage, but do not
require, comparative disclosures for earlier periods at initial adoption The
adoption of SFAS No 161 has not had a significant impact on our financial
statements
F-11
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations ("SFAS No. 141R"). Among other things, SFAS No. 141R
establishes principles and requirements for how the acquirer in a business
combination (i) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquired business, (ii) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase,
and (iii) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141R is effective for fiscal years beginning
on or after December 15, 2008, with early adoption prohibited. This
standard will change our accounting treatment for business combinations on a
prospective basis.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year
presentation. Such reclassifications had no impact on the reported prior year
net loss.
2. GOING
CONCERN
The
Company’s financial statements have been prepared on a going concern basis which
contemplates the realization of assets and the liquidation of liabilities in the
ordinary course of business. The Company has incurred substantial losses from
operations and it has a working capital deficit which raises substantial doubt
about its ability to continue as a going concern. The Company sustained a net
loss of $2,181,974 for the fiscal year ended March 31, 2009 and it had a
working capital deficit of $2,702,752 at March 31, 2009. The Company is
currently looking for financing to provide the needed funds for operations.
However, the Company can provide no assurance that it will be able to obtain the
financing it needs to develop its properties and alleviate doubt about its
ability to continue as a going concern.
3.
NOTE RECEIVABLE–
RELATED PARTY
Bowie
Operating Company LLC
During
the year ended March 31, 2009, the Company advanced Bowie $157,401 of which
$15,000 was repaid. The advances are assessed interest at rate of 18% per annum.
The advances are evidenced by a secured promissory note that is due on
demand after September 1, 2009. Interest accruing on the note and charged to
operations during the year ended March 31, 2009 was $7,138. The balance of the
note as of March 31, 2009 was $149,539. Bowie is managed by the Company’s
President.
Buccaneer
Energy Corporation
During
the year ended March 31, 2009, Glen Rose Petroleum Corporation advanced
Buccaneer totaling $25,858 to pay for Buccaneer’s accounting services. The
advances are assessed interest at rate of 18% per annum. The advances are
evidenced by an unsecured promissory note that is due on demand after December
31, 2009. Interest accruing on the note and charged to operations during the
year ended March 31, 2009 was $1,243. The balance of the note as of March 31,
2009 was $27,101. Buccaneer also is managed by the Company’s
President.
4. ASSET RETIREMENT
OBLIGATIONS
The FASB
issued SFAS No. 143,
Accounting for Asset Retirement Obligations, which is effective for
fiscal years beginning after June 15, 2002. This statement, adopted by the
Company as of April 1, 2003, establishes accounting and reporting standards
for the legal obligations associated with the retirement of tangible long-lived
assets that result from the acquisition, construction or development and the
normal operation of long-lived assets. It requires that the fair value of the
liability for asset retirement obligations be recognized in the period in which
it is incurred. Upon initial recognition of the asset retirement liability, an
asset retirement cost is capitalized by increasing the carrying amount of the
long-lived asset by the same amount as the liability. In periods subsequent to
initial measurement, the asset retirement cost is allocated to expense using a
systematic method over the asset’s useful life. Changes in the liability for the
asset retirement obligation are recognized for (a) the passage of time and
(b) revisions to either the timing or the amount of the original estimate
of undiscounted cash flows.
F-12
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A
reconciliation of the changes in the estimated asset retirement obligation
follows:
2009
|
2008
|
|||||||
Beginning
asset retirement obligations
|
$
|
87,918
|
$
|
82,942
|
||||
Additional
liability incurred
|
-
|
-
|
||||||
Liabilities
assumed by others
|
-
|
-
|
||||||
Accretion
expense
|
4,976
|
|||||||
Asset
retirement costs incurred
|
(87,918
|
) | ||||||
Ending
asset retirement obligation
|
$
|
-
|
87,918
|
During
the years ended March 31, 2009 and 2008, asset retirement costs expense of
$0 and $4,976, respectively, was recognized and is reported in the consolidated
statements of operations. During 2009, the Company determined that it
no longer was subject to any legal obligation associated with the retirement of
its long-term assets and therefore it charged off its asset retirement
obligation.
5.
INVENTORY
Inventory
consists of the following:
March 31
|
||||||||
2009
|
2008
|
|||||||
Oil
in tanks
|
$ | 10,220 | $ | 79,241 |
6. NOTES PAYABLE, RELATED
PARTIES
Lothian
Oil, Inc.
During
the year ended March 31, 2008, Lothian, a former majority shareholder of the
Company, forgave a debt totaling $1,780,709 that was credited to
equity.
Blackwood
Ventures LLC
During
the year ended March 31, 2009, Blackwood Ventures LLC has made advances to the
Company totaling $116,000. The advances are assessed interest at an annual rate
of 8%. Accrued interest is payable quarterly commencing on April 1, 2009. In
lieu of receiving cash, Blackwood has the right to receive sharers of the
Company’s common stock as payment for accrued interest at a conversion price of
5% over the bid price on the date of payment. The advances are evidenced by a
debenture which is convertible into common stock of the Company at price per
share of $ 0.19. The debenture matures on September 30,
2010. Accrued interest on the Note for the year ended March 31, 2009
amounted to $962, which was charged to operations. The balance of the note as of
March 31, 2009 was $116,962. Blackwood is the Company’s majority
shareholder.
Buccaneer
Energy Corporation
During
the year ended March 31, 2009, Buccaneer advanced $30,500 to UHC Petroleum
Corporation. The advances are evidenced by an unsecured promissory note that is
due on demand after December 31, 2009. Interest accruing on the note and charged
to operations during the year ended March 31, 2009 was $367. The balance of the
note as of March 31, 2009 was $30,867. As indicated, Buccaneer is managed by the
Company’s President.
F-13
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
7. ACCRUED PUT OPTION
LIABILITY
The
holders of our Put Option liability are prior employees, officers and directors
of United Heritage Corporation. These individuals had accrued this compensation
in prior years. To record this obligation, we entered into option agreements
dated May 30, 2003 and May 24, 2004 under our 2000 Stock Option Plan
to purchase shares of $.001 par value stock of United Heritage Corporation at a
price of $1.50 per share as adjusted for reverse stock splits. As a result of
the proposed merger with Lothian Oil, Inc., these option agreements were
modified via amendment on or about February 16, 2006, to grant the
Purchaser a put option to require United Heritage Corporation to purchase said
options for a price of $4.00 per share less the purchase price, as adjusted by
reverse stock splits, of $1.50 per share by making demand between April 1,
2008 and April 10, 2008 (“Put Option”). The Put Holders demanded their
rights in the required period and this obligation of the Company was recognized
as a liability.
8. MAJOR
CUSTOMERS
During
the years ended March 31, 2009 and 2008, the Company’s only operations
pertained to its oil and gas producing activities in which it sold its
production to one customer.
9. UNREGISTERED SALE OF EQUITY
SECURITIES
Private
Placement
On
November 28, 2007 the Company completed the sale and issuance of units
having a total gross value of $600,000 in a private placement to accredited
investors. Each unit was comprised of (i) 32,000 shares of the Company’s common
stock, par value $0.001 per share, and (ii) a 5 year callable warrant
to purchase up to 52,253 shares of the Company’s common stock, subject to
certain vesting requirements, at an exercise price of $1.40 per share. The
warrants were not exercisable until the Company obtained shareholder approval of
their issuance. The Company sold and issued a total of 21 units at a price of
$24,000 per unit, for net cash proceeds of approximately $504,000. The Company
also converted debt in the amount of $96,000 owed to Blackwood, its largest
shareholder, into 4 units. No underwriting discounts or commissions were paid in
connection with the November Offering. The Company is obligated to register the
shares underlying the warrants, subject to compliance with Rule 415
promulgated under the Securities Act of 1933, as amended.
On
March 11, 2008, Blackwood Ventures, LLC purchased an additional 566,038
shares of our common stock at $.53 per share resulting in proceeds received by
the company of $300,000.
On May
23, 2008, by the way of a 14C our shareholders’ approved a private placement in
accredited investors in which a total of 550,000 shares of our common stock at a
price of $0.75 per share were issued for gross proceeds of
$412,500. The Company also approved the issuance of a subscription
receivable to Joseph Langston, its CFO and President, in which a total of 66,667
shares of our common stock at a price of $0.75 per share were issued for a
$50,000 long term subscription receivable.
On June
12, 2008, Wind Hydrogen, Ltd. purchased 150,000 shares at $0.75 per share for
$112,500 of the $500,000 private placement. In addition, Wind Hydrogen, Ltd.
purchased 150,000 shares at $1.05 per share for $157,500, which the Board
approved on June 30.
Issuance of Common Stock for
Conversion of Debt
On
December 19, 2007, the Company entered into an Agreement to Convert Debt
with Richardson & Patel, LLP pursuant to which Richardson & Patel LLP
agreed to accept (i) 296,856 shares of our common stock and (ii) a
warrant for the purchase of 222,642 shares of our common stock in full payment
of $237,485 in legal services previously rendered. The warrant has an exercise
price of $1.40 per share; a term of seven years and a cashless exercise
provision, at the holders’ election, such that fewer than 222,642 shares may be
issued upon full exercise. The warrant was valued at $103,015. The debt was
converted at the rate of $0.80 per share before considering the value of the
warrant. On December 18, 2007, the closing price of our common stock was
$0.92. The transaction resulted in a loss on conversion of
$35,262.
F-14
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
December 19, 2007, the Company entered into an Agreement to Convert Debt
with Blackwood Ventures LLC, our largest shareholder, pursuant to which
Blackwood Ventures LLC agreed to accept (i) 48,750 shares of our common
stock, representing a price of $0.80 per share, and (ii) a warrant to
purchase 36,563 shares of our common stock at an exercise price of $1.40 per
share in return for the cancellation of $39,000 of debt owed by us to Blackwood
resulting from its prior discharge of certain of our accounts payable. The
warrant will have a term of seven years and was valued at $16,917. On
December 18, 2007, the last trading day immediately prior to the execution
of the Agreement to Convert Debt, the last sale price of our common stock was
$0.92. The transaction resulted in a loss on conversion of $5,850.
On June
30, 2008 the Board approved the offer by Richardson Patel to convert $215,738 of
indebtedness due them for past legal services into common stock. The Company
issued 253,810 shares of its common stock in consideration for the cancellation
and recognized a $22,844 loss on the conversion that was charged to
operations.
On
September 18, 2008, the Company issued 100,000 shares of its common stock to
Porter LeVay in consideration for the cancellation of $97,988 of indebtedness
due them for past public relation services. The Company recognized a
$17,988 gain on the cancellation of the debt that was credited to
operation.
Issuance of Common Stock for
Cancellation of Options
On
September 25, 2008, the Company agreed to issue 62,500 restricted common shares
to its former CEO, Scott Wilson, in exchange for the cancellation of 500,000
stock options and mutual releases of claims. On the original grant,
the Company recorded the option value of $343,750 as accrued compensation. Upon
the issuance of the shares and cancellation of the grant, the Company reclassed
the $343,750 to equity.
Issuance of Common Stock for
Conversion of Put Option
On
January 15, 2008 the Company entered into an agreement to cancel an
$833,335 option put held by Walter G. Mize (“Mize”), Consideration for the
cancellation included 1,111,113 shares of the Company’s common stock and a stock
warrant to purchase 555,556 shares of the Company’s common stock at an exercise
price of $1.50 per share. The warrant expires in three years and was valued at
$88,220. The per share market price of the common stock at the time of
conversion was $0.82. The transaction resulted in a loss on conversion of
$77,778.
Stock and Warrants Issued
for Service
During
the year ended March 31, 2008 as part of Joseph F. Langston’s consideration for
services as a Company officer and director, he received 30,000 shares valued at
$36,600.
Mr. Langston’s
long term consulting agreement, entered into on December 18, 2007, provides
for an annual salary of $60,000 per year and a $60,000 bonus paid in shares. The
bonus resulted in the issuance of 65,217 common shares valued at $53,478. In
addition to this basic compensation, Mr. Langston receives up to 1,200,000 stock
purchase warrants which are earned based on net production in the Wardlaw Field
measured on an average daily basis by month determination and 300,000 warrants
based on the successful closing of a Company financing of $1 million or
more. The warrants have not been earned and no expense has been recognized as of
March 31, 2008 and 2009.
Applewood
Energy plc represents the services to be provided by Paul Watson, the Company
Chairman and Chief Executive Officer. Similar to Mr. Langston, Applewood
received a consulting agreement on November 27, 2007, providing for an
annual salary of $60,000 per year and a $60,000 bonus paid in shares. The bonus
resulted in the issuance of 34,482 common shares valued at $28,276.
Mr. Watson is a geologist and engineering professional with direct
oversight of field operations. Consequently, in addition to this basic
compensation, Applewood receives up to 1,600,000 stock purchase warrants which
are earned based on net production in the Wardlaw Field measured on an average
daily basis by month determination. The warrants have not been earned and no
expense has been recognized as of March 31, 2008 and 2009.
F-15
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
November 28, 2007 we entered into, a 12 month consulting agreement
with DK True Energy Development Ltd. and RTP Secure Energy Corp. These
Consultants are to provide us services that include reservoir, geological, and
engineering analysis. These Consultants agreed to accept warrants to purchase up
to a total of 9,000,000 shares of our common stock at an exercise price of $1.05
per share, exercisable after December 31, 2007 and only on a cashless basis
in place of cash compensation. The number of shares that would be issued is
determined by multiplying the difference between the fair market value of the
common stock and the warrant exercise price times the number of shares to be
purchased and divide the product by the fair market value of the common stock.
The fair market value of the common stock is computed by taking the average of
the closing bid and asked prices of the common stock quoted in the
Over-The-Counter Market or the last reported sale price of the common stock or
the closing price quoted on the Nasdaq Capital Market or on any exchange on
which the common stock is listed for the 30 trading days prior to the date of
the company’s receipt of the warrant. The warrants will have a 5 year term.
DK True Energy Development Ltd. will have the right to purchase 5,250,000 shares
of our common stock and RTP Secure Energy will have the right to purchase
3,750,000 shares of our common stock. Blackwood Ventures LLC, has executed a
voting agreement to approve the Consultants’ warrants. The right to purchase
1,147,500 shares of our common stock will vest 20 days following the date
the information statement was sent to our shareholders; the right to purchase
2,452,500 shares of common stock will vest when we announce that we are
implementing a development program based on the results of a pilot program
completed for the Wardlaw field; and the right to purchase 5,400,000 shares of
our common stock will vest at the rate of 675,000 shares when we produce an
average of 250 barrels of oil per day over 30 days (“bopd30av”), 500
bopd30av, 750 bopd30av, 1,000 bopd30av, 1,250 bopd30av, 1,500 bopd30av, 1750
bopd30av and 2,000 bopd30av. The warrant will be fully vested when production
reaches 2,000 bopd30av. This warrant issuance resulted in an expense of $395,346
during the year ended March 31, 2008.
On
January 15, 2008, the Company entered into a consulting agreement with
Blackwood Capital Ltd. effective September 1, 2007, for a term of one year,
which can be terminated by either party on 45 days notice, for cash
compensation of $15,000 per month, plus expense reimbursement. In addition, the
Company issued a warrant for the purchase of 1,500,000 shares of our common
stock at an exercise price of $1.05 per share. The term of the warrant is four
years and the warrant has a cashless exercise provision, at the holder’s
election, such that fewer than 1,500,000 shares may be issued upon full
exercise. On January 15, 2008, the closing price of our common stock was
$0.82. The issuance of this warrant required the expense of
$552,550.
On June
30, 2008, the Company amended its Directors’ compensation plan. At
the end of each month, each director has the option of receiving $5,000 in the
form of shares of the Company’s common stock or stock options to purchase 5,000
shares of the Company’s common stock. The price per share assigned to each
issuance is equal to the closing average bid price of the Company’s common stock
for the previous quarter. The previous agreement provided for the
grant of 5,000 stock purchase options per month, with the price to be calculated
on the average closing bid price for the month. In addition to the option grant
indicated above, the Company also granted its President options to purchase
500,000 shares of the Company’s common stock at a price per share of $0.99.
These 500,000 options fully vested on December 31, 2008.
During
the year ended March 31, 2009, the Company issued 275,676 shares of common stock
to certain Board of Directors as compensation for their services
rendered. The shares were valued at $103,882 which was charged to
operations.
During
the year ended March 31, 2009, the Company granted options to purchase 620,000
shares of common stock to certain directors and officers as compensation for
their services. The options were valued at $688,227, which was
charged to operations. The exercise prices of these options range from
$0.39 per share to $0.99 per share. In addition, during the year ended March 31,
2009, the Company granted options to certain consultants to purchase 200,000
shares of the Company’s common stock. The options were valued at
$225,380.
F-16
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK-BASED
COMPENSATION
Stock Option
Plans
In
January 2008, our board of directors approved and adopted the United
Heritage Corporation 2008 Equity Incentive Plan (the “Plan”). We have reserved
5,000,000 shares of common stock for awards that will be granted from the Plan.
The awards are subject to adjustment in the event of stock dividends,
recapitalizations, stock splits, reverse stock splits, subdivisions,
combinations, reclassifications or similar changes in our capital structure. The
Plan became effective upon adoption by the board, and, unless earlier terminated
in accordance with the terms and provisions thereof, will remain in effect for a
period of ten years from the date of adoption.
Directors
of the Company adopted the 1998 Stock Option Plan effective July 1, 1998.
This Plan and its subsequent amendment set aside 66,667 shares of the authorized
but unissued common stock of the Company for issuance under the Plan. Options
may be granted to directors, officers, consultants, and/or employees of the
Company and/or its subsidiaries. Options granted under the Plan are exercisable
over a period to be determined when granted, but may be affected by the
termination of employment. As a result of a grant in January 2006 to the
Company’s chief executive officer, discussed in more detail below, options to
purchase 66,667 shares are outstanding under this plan.
Directors
of the Company adopted the 2000 Stock Option Plan effective June 5, 2000.
This Plan set aside 1,666,667 shares of the authorized but unissued common stock
of the Company for issuance under the Plan. Options may be granted to directors,
officers, consultants, advisors, and/or employees of the Company and/or its
subsidiaries. Options granted under the Plan must be exercised within the number
of years determined by the Stock Option Committee and allowed in the Stock
Option Agreement. The Stock Option Agreement may provide that a period of time
must elapse after the date of grant before the options are exercisable. The
options may not be exercised as to less than 100 shares at any one
time.
On
January 3, 2006, the Company granted options to purchase 500,000 shares to
the Company’s chief executive officer for and in consideration of services
provided to the Company. The options were issued with an exercise price of $1.05
per share for a term of three years with one-third of the options being
exercisable immediately and one-third exercisable in each of the following two
years. In September 2008, these options were cancelled in consideration for
issuing 500,000 shares of the Company’s common stock. Upon the original issuance
of the options, the Company recorded $343,750 as accrued compensation. The
accrued compensation was reclassed to equity upon the issuance
of the 500,000 shares.
During
the year ended March 31, 2008, the Company granted options to purchase 170,000
shares of common stock to certain directors and officers as compensation for
their services. The options were valued at $44,137, which was charged
to operations. The exercise prices of these options range from $0.63 per share
to $1.71 per share. The options expire three years from date of
grant.
The
Company granted options to purchase 5,000 shares to the Company’s Directors at
the end of each month during the month ended April 30, 2008 for and in
consideration of services provided to the Company. The options to
purchase 25,000 shares of common stock were issued at a weighted average
exercise price of $0.78 per share for a term of three years. The Company
recognized compensation expense of $8,310 on the issuance of these stock
options.
The
Company granted options to purchase 5,000 shares to the Company’s Directors at
the end of each month during the month ended May 31, 2008 for and in
consideration of services provided to the Company. The options to
purchase 25,000 shares of common stock were issued at a weighted average
exercise price of $0.85 per share for a term of three years. The Company
recognized compensation expense of $20,081 on the issuance of these stock
options.
The
Company granted options to purchase 5,000 shares to the Company’s Directors at
the end of each month during the month ended June 30, 2008 for and in
consideration of services provided to the Company. The options to
purchase 25,000 shares of common stock were issued at a weighted average
exercise price of $1.35 per share for a term of three years. The Company
recognized compensation expense of $28,573 on the issuance of these stock
options.
On June
30, 2008, the Board of Directors awarded Mr. Langston 500,000 stock purchase
options, vesting over six months with each priced as of the closing average bid
price for the quarter ended June 30, 2008. The Company recognized compensation
expense of $630,774 on the issuance of these stock options.
F-17
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On June
30, 2008 the Board of Directors approved the hiring of Bill Hopper as Vice
President of Operations. His employment agreement included 100,000
stock purchase options priced as of May 1, 2008, and vested in one year. The
Company recognized compensation expense of $88,526 on the issuance of these
stock options.
On June
30, 2008 the Board approved the independent consulting agreement of Barry Pierce
and the hiring of him as Controller with a one year contract, this agreement
included 100,000 stock purchase options to purchase 100,000 shares of common
stock at $1.00 per share, fully vested after one year. The Company recognized
compensation expense of $125,788 on the issuance of these stock
options.
Director’s
compensation was amended on June 30, 2008. Under the revised plan,
each director can choose each month to receive either $5,000 in the form of the
Company’s common stock or stock options to purchase 5,000 shares of common
stock. The option price is equal to the Company’s closing average bid price for
the previous ended quarter. The previous agreement provided for 5,000
stock purchase options per month, with the price to be calculated on the average
closing bid price for the month.
The
Company granted options to purchase 5,000 shares to the Company’s Directors at
the end of each month during the quarter ended March 31, 2009 for and in
consideration of services provided to the Company. The options to
purchase 15,000 shares of common stock were issued at a weighted average
exercise price of $0.39 per share for a term of three years. The Company
recognized compensation expense of $2,221 on the issuance of these stock
options.
The
Black-Scholes option-pricing model was used to estimate the option fair values.
The option-pricing model requires a number of assumptions, of which the most
significant are the risk free rate, the expected stock price volatility, the
expected pre-vesting forfeiture rate and the expected option term (the amount of
time from the grant date until the options are exercised or expire). The
risk-free rate for periods within the contractual life of the option is based on
the U.S. Treasury yield curve in effect at the time of grant. Expected
volatility was calculated based upon actual historical stock price movements
over the most recent periods ending March 31, 2009. The expected option
term was calculated based on the vesting period and the polling of the option
holder. The expected forfeiture rate is based on historical experience and
expectations about future forfeitures.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model that uses the assumptions noted in the
following table.
Weighted
average Black-Scholes fair value
|
||||||||
assumptions:
|
2009
|
2008
|
||||||
Risk
free rate
|
2.58
|
%
|
2.48
|
% | ||||
Expected
life
|
3
yrs
|
3
yrs
|
||||||
Expected
volatility
|
103
|
%
|
84
|
% | ||||
Expected
dividend yield
|
0.0
|
%
|
0.0
|
% |
F-18
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following is an option activity summary under the plans for the years ending
March 31, 2008 and 2009.
Weighted
|
||||||||||||||||||||
Weighted
|
Average
|
|||||||||||||||||||
Weighted
|
Average
|
Grant
|
||||||||||||||||||
Average
|
Remaining
|
Aggregate
|
Fair
|
|||||||||||||||||
Number of
|
Exercise
|
Contractual
|
Intrinsic
|
Value
|
||||||||||||||||
Stock Options
|
Price
|
Life (years)
|
Value
|
Date
|
||||||||||||||||
Outstanding,
March 31, 2007
|
1,725,000
|
$
|
1.40
|
4.08
|
$
|
*
|
||||||||||||||
Granted
|
170,000
|
$
|
1.03
|
—
|
$
|
0.25
|
||||||||||||||
Exercised
|
—
|
—
|
—
|
|||||||||||||||||
Forfeited
or Expired
|
—
|
—
|
—
|
|||||||||||||||||
Outstanding,
March 31, 2008
|
1,895,000
|
$
|
1.37
|
3.07
|
$
|
*
|
||||||||||||||
Granted
|
820,000
|
$
|
0.35
|
—
|
$
|
1.17
|
||||||||||||||
Exercised
|
—
|
—
|
—
|
|||||||||||||||||
Forfeited
or expired
|
(500,000
|
) |
$
|
(1.05
|
) |
—
|
||||||||||||||
Outstanding,
March 31, 2009
|
2,215,000
|
$
|
1.30
|
1.06
|
$
|
*
|
||||||||||||||
Exercisable,
March 31, 2009
|
2,115,000
|
$
|
1.31
|
1.05
|
$
|
*
|
*
|
As
of March 31, 2008 and 2009, there is no intrinsic value associated
with the outstanding or exercisable options as the Company’s stock price
is lower than the exercise price of the
options.
|
No
options were exercised in the year ended March 31, 2009. No options
remained unvested as of March 31, 2009.
The
Company recognized $476,857 and $913,607 compensation expense on the granting of
options in the years ended March 31, 2008 and 2009.
F-19
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table summarizes information for options outstanding as of
March 31, 2009:
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||||||||
Weighted
|
Weighted
|
Weighted
|
Weighted
|
|||||||||||||||||||||||
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||||
Remaining
|
Exercise
|
Exercise
|
Remaining
|
|||||||||||||||||||||||
Exercise Price
|
Number
|
Life-Years
|
Price
|
Number
|
Price
|
Life-Years
|
||||||||||||||||||||
$ | < 1.00 |
920,000
|
2.18
|
$
|
0.93
|
820,000
|
$
|
0.9493
|
2.17
|
|||||||||||||||||
1.35 |
25,000
|
2.25
|
1.35
|
25,000
|
1.35
|
2.25
|
||||||||||||||||||||
1.45 |
20,000
|
1.92
|
1.45
|
20,000
|
1.45
|
1.92
|
||||||||||||||||||||
1.50 |
1,185,000
|
0.17
|
1.50
|
1,185,000
|
1.50
|
0.17
|
||||||||||||||||||||
1.71 |
25,000
|
1.92
|
1.71
|
25,000
|
1.71
|
1.92
|
||||||||||||||||||||
2.91 |
40,000
|
0.17
|
2.91
|
40,000
|
2.91
|
0.17
|
||||||||||||||||||||
$ | <1.00-$2.91 |
2,215,00000
|
1.06
|
$
|
1.30
|
2,115,000
|
$
|
1.32
|
1.01
|
Weighted
|
||||||||
Average
|
||||||||
Number of
|
Grant Date
|
|||||||
Shares
|
Fair Value
|
|||||||
Nonvested,
April 1, 2008
|
180,000
|
|||||||
Granted
|
170,000
|
$
|
0.25
|
|||||
Vested
|
(350,000
|
) | ||||||
Expired/forfeited
|
—
|
|||||||
Nonvested,
March 31, 2008
|
—
|
|||||||
Granted
|
700,000
|
$
|
0.97
|
|||||
Vested
|
(600,000
|
) | ||||||
Expired/forfeited
|
—
|
|||||||
Nonvested,
March 31, 2008
|
100,000
|
$
|
0.82
|
The stock
options described in Note 10 related to the options with $1.50 and $2.91
exercise prices were modified to extend the expiration date to March 31,
2009, add a put feature where the option holder can put the option back to the
Company for the difference between $4.00 per share and the purchase price
between April 1, 2008 and April 10, 2008 and add a call feature
whereby the Company can call the option for the difference between $7.50 and the
purchase price. Since the put feature does not subject the holder to the normal
risks of share ownership, the options are classified as liability awards and
recorded at fair value. A liability and corresponding expense of $2,727,186 has
been recorded in the accompanying financial statements as of March 31,
2007. The liability was $2,147,770 at March 31, 2008 and 2009. An
additional expense of $253,919 was incurred during the year end March 31,
2008 related to the accrued put options.
On
January 15, 2008, the Company entered into an agreement to convert an
$833,335 option put right held by Walter G. Mize (“Mize”) into 1,111,113 shares
of the Company’s common stock and a three-year warrant to purchase 555,556
shares of the Company’s common stock at an exercise price of $1.50 per share
(the “Mize Agreement”).
Stock Warrants
The
Company entered into stock warrant agreements effective January 12, 2004.
Pursuant to the agreements, the Company issued 500,000 warrants to purchase
common stock $2.25 (250,000 warrants) and $3.00 (250,000 warrants) in connection
with a private placement. The stock purchase price and warrant numbers as stated
are adjusted for the December 2005 reverse stock split. Warrants issued
under the agreements must be exercised by March 15, 2014.
F-20
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As
referenced in previous financial statements, the Company entered into stock
warrant agreements effective April 2004 in connection with the offering of
convertible promissory notes relating to a proposed merger. That merger never
occurred and no promissory notes or warrants were issued, or obligated to be
issued, in connection with this offering.
The
Company granted 50,234 warrants were issued for legal services exercisable at
$1.50 per share to satisfy liabilities in fiscal 2006.
Warrants
were issued in fiscal 2008 for private placements, consulting agreements,
conversion of debt and put conversion. The warrants have an average term of
5.2 years. The following schedule summarizes these warrants.
|
1)
|
Private
placement warrants for the purchase of 1,306,325 shares with an exercise
price of $1.40 per share;
|
|
2)
|
Consulting
agreement warrants for the purchase of 14,600,000 shares with an average
exercise price of $1.40 per share;
|
|
3)
|
Debt
conversion agreement warrants for the purchase of 259,205 shares with an
average exercise price of $1.40 per
share;
|
|
4)
|
Put
conversion agreement warrants for the purchase of 555,556 shares with an
average exercise price of $1.50 per
share;
|
The
following schedule summarizes pertinent information with regard to the stock
warrants for the years ended March 31:
2009
|
2008
|
|||||||||||||||
Weighted
|
Weighted
|
|||||||||||||||
Average
|
Average
|
|||||||||||||||
Shares
|
Exercise
|
Shares
|
Exercise
|
|||||||||||||
Outstanding
|
Price
|
Outstanding
|
Price
|
|||||||||||||
Beginning
of year:
|
21,806,420
|
$
|
1.80
|
5,085,334
|
$
|
3.08
|
||||||||||
Granted
|
—
|
—
|
16,721,086
|
1.41
|
||||||||||||
Exercised
|
—
|
—
|
—
|
—
|
||||||||||||
Forfeited
|
—
|
—
|
—
|
—
|
||||||||||||
Expired
|
—
|
—
|
—
|
—
|
||||||||||||
End
of year
|
21,806,420
|
$
|
1.80
|
21,806,420
|
$
|
1.80
|
||||||||||
Exercisable
|
21,806,420
|
$
|
1.80
|
21,806,420
|
$
|
1.80
|
The
following table summarizes information for warrants outstanding as of
March 31, 2009:
Warrants Outstanding
|
Warrants Exercisable
|
|||||||||||||||||||||
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||
Average
|
Average
|
Average
|
||||||||||||||||||||
Exercise
Price
|
Remaining
|
Exercise
|
Exercise
|
|||||||||||||||||||
Range
|
Number
|
Life-Years
|
Price
|
Number
|
Price
|
|||||||||||||||||
$ | 1.05 - $2.20 |
14,121,086
|
3.63
|
$
|
1.23
|
4,746,086
|
$
|
1.22
|
||||||||||||||
$ | 2.25 - $3.00 |
4,778,667
|
4.23
|
$
|
2.49
|
2,178,667
|
$
|
2.62
|
||||||||||||||
$ | 3.15 - $3.75 |
2,906,667
|
1.72
|
$
|
3.42
|
2,906,667
|
$
|
3.42
|
||||||||||||||
$ | 1.05 - $3.75 |
21,806,420
|
3.51
|
$
|
1.80
|
9,831,420
|
$
|
2.18
|
F-21
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
During
the year ended March 31, 2008, the Company recorded expenses for services
rendered related to warrants issued under the agreements in the amount
$1,156,049. During the year ended March 31, 2009, the Company
did not record any expenses for services rendered related to warrants issued
under the agreements.
11. INCOME
TAXES
Deferred
income tax assets and liabilities are computed annually for differences between
financial statement and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
The
Company has no federal tax provision due to its operating losses.
The
effective tax rate on the net loss before income taxes differs from the U.S.
statutory rate as follows:
2009
|
2008
|
|||||||
U.S.
statutory rate
|
34
|
%
|
34
|
%
|
||||
Related
party forgiveness of debt
|
—
|
(19
|
)%
|
|||||
Valuation
allowance
|
(34
|
)%
|
(13
|
)%
|
||||
Other
|
—
|
(2
|
)%
|
|||||
Effective
tax rate
|
—
|
—
|
At
March 31, the deferred tax asset and liability balances are as
follows:
2009
|
2008
|
|||||||
Deferred
tax asset:
|
||||||||
Net
operating loss
|
$
|
1,052,895
|
$
|
5,587,522
|
||||
Accrued
put option
|
-
|
730,242
|
||||||
Stock
option expense
|
1,017,489
|
121,891
|
||||||
Long-term
assets
|
106,834
|
|||||||
Accrued
expenses
|
-
|
146,767
|
||||||
2,177,218
|
6,586,422
|
|||||||
Deferred
tax liability – difference in basis long -term assets
|
-
|
(555,586
|
) | |||||
Net
deferred tax asset
|
2,.177,218
|
6,030,836
|
||||||
Valuation
allowance
|
(2,177,218
|
)
|
(6,030,836
|
)
|
||||
Deferred
tax asset (liability)
|
$
|
—
|
$
|
—
|
The net
change in the valuation allowance for 2009 was a decrease of $4,977,941 and 2008
had an increase of $431,483. The deferred tax asset is due primarily to the net
operating loss carryover and the accrued put option expense.
The
Company has a net operating loss carryover of approximately $16,400,000
available to offset future income for income tax reporting purposes, which will
expire between 2007 and 2029, if not previously utilized. However, due to a
change in majority ownership in 2007 and 2008, the Company’s ability to use the
carryover net operating loss may be substantially limited or eliminated pursuant
to Internal Revenue Code Section 382.
F-22
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
We
adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes, on
April 1, 2007. We had no material unrecognized income tax assets or
liabilities at the date of adoption or during the twelve months ended
March 31, 2009.
Our
policy regarding income tax interest and penalties is to expense those items as
general and administrative expense but to identify them for tax purposes. During
the twelve months ended March 31, 2009, there were no income tax interest
and penalty items in the income statement, or as a liability on the balance
sheet. We file income tax returns in the U.S. federal jurisdiction and various
state jurisdictions. With few exceptions, we are no longer subject to U.S.
federal or state income tax examination by tax authorities for years before
2004. We are not currently involved in any income tax examinations.
12. STOCK BONUS
PLAN
The
Company has a stock bonus plan, which provides incentive compensation for its
directors, officers, and key employees. The Company has reserved 30,000
shares of common stock for issuance under the plan. As of March 31,
2007, 27,800 shares had been issued and remain outstanding in accordance with
the plan. No shares were issued under the plan in 2008 or 2009.
13.
CONTINGENCIES
The
Company is involved in various claims incidental to the conduct of our business.
Based on consultation with legal counsel, we do not believe that any
claims, either individually or in the aggregate, to which the Company is a party
will have a material adverse effect on our financial condition or results of
operations.
14. FAIR
VALUE
The
Company adopted Statement of Financial Accounting Standard No. 157, Fair Value
Measurements (“SFAS 157”), to measure the fair value of certain of its financial
assets required to be measured on a recurring basis. The adoption of SFAS 157
did not impact the Company’s consolidated financial position or results of
operations. SFAS 157 establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements). SFAS
157 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants on the measurement date. A fair value measurement assumes that the
transaction to sell the asset or transfer the liability occurs in the principal
market for the asset or liability. The three levels of the fair value hierarchy
under SFAS 157 are described below:
Level
1. Valuations based on quoted prices in active markets for identical assets
or liabilities that an entity has the ability to access.
The
Company’s Level 1 assets include cash, accounts payable and accrued expenses.
Due to the short term maturity of these liabilities, the Company valued them at
net book value.
Level
2. Valuations based on quoted prices for similar assets or liabilities,
quoted prices for identical assets or liabilities in markets that are not
active, or other inputs that are observable or can be corroborated by observable
data for substantially the full term of the assets or liabilities.
The
Company has no Level 2 assets or liabilities.
Level 3.
Valuations based on inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities.
The
Company’s Level 3 assets include notes receivable and notes
payable. Due to the short term maturities, the Company valued the
respective notes at the face value.
F-23
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The table
below presents a reconciliation for all assets and liabilities measured at fair
value on a recurring basis.
March 31,
2009
Fair
Value Measurements
Level 1
|
Level 2
|
Level 3
|
Fair Value
|
|||||||||||||
Assets
|
||||||||||||||||
Cash
|
$ | 18,867 | $ | - | $ | - | $ | 18,867 | ||||||||
Accounts
receivable
|
$ | 10,273 | $ | - | $ | - | $ | 10,273 | ||||||||
Notes
receivable
|
$ | - | $ | - | $ | 176,640 | $ | 176,640 | ||||||||
Liabilities
|
||||||||||||||||
Accounts
payable and accrued expenses
|
$ | 769,440 | $ | - |
$
|
$ | 769,440 | |||||||||
Notes
payable
|
$ | - | $ | - | $ | 147,829 | $ | 147,829 |
Notes Receivable
|
Notes Payable
|
|||||||
Balance
– March 31, 2008
|
$ | - | $ | - | ||||
Increase
in receivable/payable
|
$ | 176,640 | $ | 147,829 | ||||
Balance
– March 31, 2009
|
$ | 176,640 | $ | 147,829 |
15
OIL AND GAS
OPERATIONS
Capitalized
costs related to oil and gas producing activities and related accumulated
depletion, depreciation and amortization at March 31 are as
follows:
2009
|
2008
|
|||||||
Capitalized
costs of oil and gas properties
|
|
|
||||||
Proved
|
$ | 4,840,732 | $ | - | ||||
Unproved
|
1,000,000 | 5,915,184 | ||||||
5,840,732 | 5,915,184 | |||||||
Less:
accumulated depletion, depreciation and amortization
|
(41,876 | ) | - | |||||
$ | 5,798,856 | $ | 5,915,184 |
Proved
costs pertain to our 103 wells that are located on approximately 502 acres.
Unproved costs of approximately $1,000,000 pertain to land lease costs of
approximately 10,000 acres and are not subject to depletion.
Depletion expense on our proved properties for the year ended March 31, 2009
totaled $41,876 (approximately $.006 per unit of production). All of
our leased acreage is located in Edwards County, Texas, known as the Wardlaw
Field.
F-24
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On July
23, 2008, the Company entered into a Participation Agreement with WHL Energy
Limited. Under the terms of the agreement, the Company agreed to assign a 50%
interest in certain leaseholds referred to as the Phase I Development in
exchange for $2,500,000. Upon the execution of the agreement, WHL also paid
$300,000 towards options to participate in the Phase II and Phase III
development programs. Under the agreement, the $2,500,000 was paid in phases.
WHL had the right not to pay the final $1,000,000 installment that was due in
November 2008 and thereby terminate the agreement. During the
year ended March 31, 2009, the Company received a total of $1,800,000 of which
$287,241 was applied against the agreed upon monthly non allocable general and
administrative reimbursement, $53,447 was allocated against equipment purchases
and $1,459,312 was allocated to the cost of the development of the Company’s oil
and gas properties. WHL elected not to pay the $1,000,000 final installment for
Phase I and thereby terminated the agreement.
F-25
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Costs
incurred in oil and gas producing activities were as follows:
2009
|
2008
|
|||||||
Property
acquisitions:
|
||||||||
Proved
|
$
|
-
|
$
|
-
|
||||
Unproved
|
-
|
-
|
||||||
Exploration
|
-
|
|||||||
Development
|
138,819
|
*
|
-
|
|||||
$
|
138,819
|
$
|
-
|
* net of
$1,459,612 reimbursement under the WHL participation agreement.
Results
of operations of oil and gas producing activities for the years ended
March 31 are as follows:
2009
|
2008
|
|||||||
Revenues
from oil and gas activities:
|
||||||||
Sales
to unaffiliated parties
|
$ | 122,279 | $ | 62,025 | ||||
Expenses:
|
||||||||
Production
and operating
|
94,541 | 72,166 | ||||||
Depreciation,
depletion and accretion
|
55,102 | 6,844 | ||||||
General
and administrative
|
110,783 | 391,245 | ||||||
Impairment
of proved reserves
|
125,353 | — | ||||||
Loss
on sale of oil and gas assets
|
— | — | ||||||
Total
expenses
|
385,779 | 470,255 | ||||||
Pretax
loss from producing activities
|
(263,500 | ) | (408,230 | ) | ||||
Income
tax expense
|
— | — | ||||||
Results
of oil and gas producing activities
|
$ | (263,500 | ) | $ | (408,230 | ) |
SUPPLEMENTARY FINANCIAL
INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
Proved
Reserves
Independent
petroleum engineers have estimated the Company’s proved oil and gas reserves,
all of which are located in Edwards County, Texas. Proved reserves are the
estimated quantities that geologic and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves are
the quantities expected to be recovered through existing wells with existing
equipment and operating methods. Due to the inherent uncertainties and the
limited nature of reservoir data, such estimates are subject to change as
additional information becomes available.
F-26
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
reserves actually recovered and the timing of production of these reserves may
be substantially different from the original estimate. Revisions result
primarily from new information obtained from development drilling and production
history and from changes in economic factors.
Oil (Bbls)
|
Gas (Mcf)
|
|||||||
March 31,
2007
|
-
|
-
|
||||||
Extensions,
additions and discoveries
|
-
|
-
|
||||||
Revisions
of previous estimates
|
528,017
|
-
|
||||||
Oil
and gas asset sales
|
-
|
-
|
||||||
Production
|
(1,255)
|
-
|
||||||
Balance,
March 31, 2008
|
526,762
|
-
|
||||||
Extensions,
additions and discoveries
|
78,714
|
357,657
|
||||||
Revisions
of previous estimates
|
-
|
-
|
||||||
Oil
and gas asset sales
|
-
|
|||||||
Production
|
(2,885)
|
-
|
||||||
Balance,
March 31, 2009
|
602,591
|
357,657
|
||||||
Proved
Developed Reserves:
|
||||||||
Balance,
March 31, 2008
|
526,762
|
-
|
||||||
Balance,
March 31, 2009
|
602,591
|
357,657
|
The
Company did not commission a reserve report for March 31, 2007 and thus reported
zero reserves in its Form 10-K for the period ending March 31, 2007, despite
also reporting 44 wells capable of producing as of March 31,
2007. The Company commissioned a reserve report for March 31,
2008. This was the primary cause of the revision of previous reserve
estimates for March 31, 2007.
During
the year ending March 31, 2009, the Company conducted developmental activities
on its Edwards County, Texas properties and commissioned a reserve report as of
March 31, 2009. This caused the revision of previous estimates for
March 31, 2009.
Standardized
Measure
The
standardized measure of discounted future net cash flows (“standardized
measure”) and changes in such cash flows are prepared using assumptions required
by the Financial Accounting Standards Board. Such assumptions include the use of
year-end prices for oil and gas and year-end costs for estimated future
development and production expenditures to produce year-end estimated proved
reserves. Discounted future net cash flows are calculated using a 10% rate.
Estimated future income taxes are calculated by applying year-end statutory
rates to future pre-tax net cash flows, less the tax basis of related assets and
applicable tax credits.
The
standardized measure does not represent management’s estimate of the Company’s
future cash flows or the value of proved oil and gas reserves. Probable and
possible reserves, which may become proved in the future, are excluded from the
calculations. Furthermore, year-end prices used to determine the standardized
measure of discounted cash flows, are influenced by seasonal demand and other
factors and may not be the most representative in estimating future revenues or
reserve data.
F-27
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Standardized
Measure of Discounted Future Net Cash Flows Relating to Proved Reserves for its
sole oil and gas properties located in Edwards County, Texas.
Years
ended March 31
|
||||||||
2009
|
2008
|
|||||||
Future
cash inflows (a)
|
$ | 22,308,530 | $ | 50,304,485 | ||||
Future
costs: (a)
|
||||||||
Production
Cost
|
(6,178,624 | ) | (14,117,866 | ) | ||||
Development
Cost
|
(1,444,500 | ) | (2,002,500 | ) | ||||
Future
income tax expense (a)
|
(4,993,038 | ) | (11,078,515 | ) | ||||
Future
net cash flows
|
9,692,368 | 23,105,604 | ||||||
10%
annual discount for estimated timing of cash flows
|
(3,447,329 | ) | (10,134,869 | ) | ||||
Standardized
measure of discounted future net cash flows related to proved
reserves
|
$ | 6,245,039 | $ | 12,970,735 |
a) Future
net cash flows were computed using year-end prices and costs, and year-end
statutory tax rates that relate to existing proved oil and gas reserves in which
the Company has mineral interest.
Changes
in Standardized Measure of Discounted Future Net Cash Flows
2009
|
2008
|
|||||||
Balance
Beginning of Year
|
$ | 12,970,735 | $ | — | ||||
Sales
of oil and gas, net of production costs
|
— | 10,141 | ||||||
Net
changes in prices and production and development costs
|
(20,056,713 | ) | 50,437 | |||||
Net
change in future development costs
|
558,000 | — | ||||||
Purchase
of minerals in place
|
— | — | ||||||
Extensions
and discoveries
|
— | — | ||||||
Revision
of previous quantity estimates
|
— | 21,220,510 | ||||||
Net
change in income taxes
|
6,085,477 | (7,027,825 | ) | |||||
Accretion
of discount
|
6,687,540 | — | ||||||
Sales
of reserves
|
— | — | ||||||
Other
|
— | (1,282,528 | ) | |||||
Balance
end of year
|
$ | 6,245,039 | $ | 12,970,735 |
The major
decrease in future net cash flows between 2008 and 2009 pertains to the number
of marginal wells that were projected to be drilled in 2008 that were not
included in 2009 due to the actual decrease in the price per barrel of
oil.
16. SUBSEQUENT
EVENTS
The
Company entered into a new independent consulting engagement with Barry Pierce,
whereby he will provide accounting services to the Company on a month to month
basis, and will not be designated as an officer. His prior one year
consulting agreement was fulfilled on March 23, 2009.
The
Company received $105,000 from Blackwood Ventures, LLC. This $105,000 has been
consolidated into the convertible debenture due Blackwood (See Note
6).
F-28