Attached files
file | filename |
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EX-21 - SUBSIDIARIES OF REGISTRANT - Mesa Energy Holdings, Inc. | v181110_ex21.htm |
EX-32.1 - S-OX 906 CERTIFICATE OF CHIEF EXECUTIVE OFFICER - Mesa Energy Holdings, Inc. | v181110_ex32-1.htm |
EX-31.2 - S-OX 302 CERTIFICATE OF PRINCIPAL FINANCIAL OFFICER - Mesa Energy Holdings, Inc. | v181110_ex31-2.htm |
EX-31.1 - S-OX 302 CERTIFICATE OF PRINCIPAL EXECUTIVE OFFICER - Mesa Energy Holdings, Inc. | v181110_ex31-1.htm |
EX-32.2 - S-OX 906 CERTIFICATE OF ACTING CHIEF FINANCIAL OFFICER - Mesa Energy Holdings, Inc. | v181110_ex32-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
fiscal year ended: December 31, 2009
or
o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from _______________ to _______________
Commission
file number: 333-149338
Mesa
Energy Holdings, Inc.
|
(Exact
name of registrant as specified in its
charter)
|
Delaware
|
98-0506246
|
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification
No.)
|
5220
Spring Valley Road, Suite 525, Dallas, TX
|
75254
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code (972)
490-9595
Securities
registered under Section 12(b) of the Act: None
Securities
registered under Section 12(g) of the Act: None
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 15(d) of the Exchange 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 Exchange Act 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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). 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, an
accelerated filer, or a smaller reporting company. See the
definitions of the “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer ¨
|
Accelerated
Filer ¨
|
Non-Accelerated
Filer ¨ (Do not check if a smaller
reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
On June
30, 2009, the last business day of the registrant’s most recently completed
second fiscal quarter, 14,070,000 shares of its common stock, par
value $0.0001 per share (its only class of voting or non-voting common equity),
were held by non-affiliates of the registrant. The aggregate market
value of such shares was approximately $25,125, based on the price at which the
registrant’s common stock was last sold at such time (i.e. approximately $0.0017857
per share on April 5, 2008). For purposes of making this calculation,
shares beneficially owned at such time by each executive officer and director of
the registrant and by each beneficial owner of greater than 10% of the voting
stock of the registrant have been excluded because such persons may be deemed to
be affiliates of the registrant. This determination of affiliate
status is not necessarily a conclusive determination for other
purposes.
As of
April 12, 2010, there were 40,574,611 shares of the registrant's common stock,
par value $0.0001, issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
TABLE
OF CONTENTS
Item
Number and Caption
|
Page
|
||
Forward-Looking Statements
|
3
|
||
PART I
|
4
|
||
1.
|
Business
|
4
|
|
1A.
|
Risk Factors
|
30
|
|
1B.
|
Unresolved Staff Comments
|
47
|
|
2.
|
Properties
|
48
|
|
3.
|
Legal Proceedings
|
48
|
|
4.
|
Submission of Matters to a Vote of Security
Holders
|
49
|
|
PART II
|
50
|
||
5.
|
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
|
50
|
|
6.
|
Selected Financial Data
|
52
|
|
7.
|
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
|
53
|
|
7A.
|
Quantitative and Qualitative Disclosures About
Market Risk
|
64
|
|
8.
|
Financial Statements and Supplementary
Data
|
64
|
|
9.
|
Changes in and Disagreements with Accountants on
Accounting, and Financial Disclosure
|
64
|
|
9A(T)
|
Controls and Procedures
|
64
|
|
9B.
|
Other Information
|
67
|
|
PART III
|
67
|
||
10.
|
Directors, Executive Officers, and Corporate
Governance
|
67
|
|
11.
|
Executive Compensation
|
71
|
|
12.
|
Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
|
75
|
|
13.
|
Certain Relationships and Related Transactions,
and Director Independence
|
78
|
|
14.
|
Principal Accounting Fees and
Services
|
79
|
|
PART IV
|
80
|
||
15.
|
Exhibits, Financial Statement
Schedules
|
80
|
2
FORWARD-LOOKING
STATEMENTS
Various
statements in this Annual Report, including those that express a belief,
expectation or intention, as well as those that are not statements of historical
fact, are “forward-looking statements” within the meaning of the United States
Private Securities Litigation Reform Act of 1995. The forward-looking
statements may include projections and estimates concerning the timing and
success of specific projects, revenues, income and capital spending. We
generally identify forward-looking statements with the words “believe,”
“intend,” “expect,” “seek,” “may,” “should,” “anticipate,” “could,” “estimate,”
“plan,” “predict,” “project” or their negatives, and other similar expressions.
These statements are likely to address our growth strategy, financial results
and exploration and development programs, among other things.
Forward-looking
statements are subject to risks and uncertainties that may change at any time,
and, therefore, our actual results may differ materially from those that we
expected. The forward-looking statements contained in this Annual Report are
largely based on our expectations, which reflect many estimates and assumptions
made by our management. These estimates and assumptions reflect our best
judgment based on currently known market conditions and other factors. Although
we believe such estimates and assumptions are reasonable, we caution that it is
very difficult to predict the impact of known factors and it is impossible for
us to anticipate all factors that could affect our actual results. In addition,
management’s assumptions about future events may prove to be
inaccurate. Management cautions all readers that the forward-looking
statements contained in this Annual Report are not guarantees of future
performance, and we cannot assure any reader that such statements will be
realized or the forward looking events and circumstances will
occur. Actual results may differ materially from those anticipated or
implied in the forward-looking statements due to the factors described in the
“Risk Factors” section and elsewhere in this Annual Report. All
forward-looking statements are based upon information available to us on the
date of this Annual Report. We undertake no obligation to update or revise any
forward-looking statements as a result of new information, future events or
otherwise, except as otherwise required by law.
In this
Annual Report, unless the context requires otherwise, references to the
“Company,” “Mesa,” “we,” “our” and “us,” for periods prior to the closing of our
reverse merger on August 31, 2009, refer to Mesa Energy, Inc., a private Nevada
corporation that is now our wholly owned subsidiary, and such references for
periods subsequent to the closing of our reverse merger on August 31, 2009,
refer to Mesa Energy Holdings, Inc., a publicly traded Delaware corporation
formerly known as Mesquite Mining, Inc., together with its subsidiaries,
including Mesa Energy, Inc.
3
PART
I
ITEM
1. BUSINESS
For
definitions of certain oil and gas industry terms used in this Annual Report on
Form 10-K, please see the Glossary beginning on page 24.
Overview
of Our Business
We are an
exploration stage company engaged primarily in the acquisition, development, and
rehabilitation of oil and gas properties.
Our
business plan is to build a strong, balanced and diversified portfolio of oil
and gas reserves and production revenue through the development of highly
diversified, multi-well developmental and defined-risk exploratory drilling
opportunities and the acquisition of solid, long-term existing production with
enhancement potential.
We are
constantly evaluating opportunities in the United States’ most productive
basins, and we currently have interests in two oil and gas
projects:
|
·
|
Java
Field, a natural gas development project in Wyoming County in western New
York; and
|
|
·
|
Coal
Creek Prospect, a natural gas developmental prospect in the Arkoma Basin
of eastern Oklahoma.
|
Our
operations have generated minimal revenues to date, with the first such revenues
occurring in the third quarter of fiscal 2009.
Our
principal executive offices are located at 5220 Spring Valley Road, Suite 525,
Dallas, Texas 75254. Our telephone number is (972)
490-9595. Our website address is www.mesaenergy.us.
Recent
Developments
As part
of the execution of our business strategy discussed above, we have recently
taken the following steps:
|
·
|
We
raised aggregate gross proceeds of $1,945,000 from the sale of 10% secured
convertible notes in several closings of a private placement offering (the
“2009 Private Placement”) from August 31, 2009 through January 25,
2010;
|
|
·
|
On
November 6, 2009, we issued an additional $250,000 principal amount of
convertible promissory notes under the terms of the 2009 Private Placement
to an investor in exchange for our previously outstanding 12% convertible
note in the principal amount of
$250,000;
|
4
|
·
|
In
the first quarter of 2010, James J. Cerna, Jr., Fred B. Zaziski and
Kenneth T. Hern joined our Board of Directors, resulting in a majority of
the Board being independent;
|
|
·
|
We
have formed an Advisory Board chaired by the former Governor of New York
State, George E. Pataki, to provide subject matter expertise and strategic
guidance to management;
|
|
·
|
We
have initiated our efforts to increase production from the existing wells
in the Java Field and have begun the testing of the Marcellus Shale in two
of the existing well bores.
|
|
·
|
Our
two completed wells in the Coal Creek Prospect, the Cook #1 and Gipson #1,
have been successfully connected to an Arkansas Oklahoma Gas Company (AOG)
sales line, and initial production and sales have begun from these
wells.
|
History
Mesa
Energy, Inc. (“MEI”) is a company whose predecessor entity, Mesa Energy, LLC,
was formed in April 2003 to engage in the oil and gas industry. MEI’s
primary oil and gas operations have historically been conducted through its
wholly owned subsidiary, Mesa Energy Operating, LLC, a Texas limited liability
company (“Mesa Operating”). Mesa Operating is a qualified operator in the states
of Texas, Oklahoma, and Wyoming. Mesa Energy, Inc. is a qualified
operator in the State of New York. Prior to our reverse merger, all
of our historic field operations had been conducted by Mesa
Operating. However, to avoid duplication of expense, we decided that
Mesa Energy, Inc. should be the operator of the Java Field and related
properties in New York. Our operating entities have historically
employed, and will continue in the future to employ, on an as-needed basis, the
services of drilling contractors, other drilling related vendors, field service
companies and professional petroleum engineers, geologists and landmen as
required in connection with future drilling and future production
operations.
MEI was
originally incorporated as North American Risk Management Incorporated on
January 24, 2001, in the State of Colorado. It was organized to
engage in the business of providing insurance to independent and fleet truck
operators as an affiliate and was in the process of acquiring a truck fleet of
some 125 vehicles. However, operations ceased after approximately six
months.
On March
3, 2006, MEI was the surviving entity in a merger with Mesa Energy, LLC, a Texas
limited liability company, whose activities between April 2003 and March 2006
included participation in various drilling projects, both as operator and as a
non-operator, as well as the acquisition of the Frenchy Springs and Coal Creek
acreage positions (described below). Subsequently, MEI reincorporated
in the State of Nevada by merging with and into Mesa Energy, Inc., a Nevada
corporation, on March 13, 2006.
In July
2008, MEI filed with the SEC a Form 1-A and an Offering Circular in connection
with a proposed “small issue” offering of its common stock, with the intent of
raising up to $5,000,000 in investment capital. However, the effort
was abandoned in early 2009 due to a significant drop in oil and gas prices and
the upheaval in the capital markets that began in late 2008.
5
On August
31, 2009, we closed a reverse merger transaction pursuant to which a wholly
owned subsidiary of Mesa Energy Holdings, Inc. merged with and into MEI, and
MEI, as the surviving corporation, became a wholly owned subsidiary of Mesa
Energy Holdings, Inc.
Immediately
following the closing of the reverse merger, under the terms of a Split-Off
Agreement and a General Release Agreement, we transferred all of our pre-merger
operating assets and liabilities to a wholly owned subsidiary of
ours. Thereafter, pursuant to the Split-Off Agreement, we transferred
all of the outstanding shares of capital stock of such subsidiary to Beverly
Frederick, our pre-reverse merger majority stockholder, in exchange for (i) the
surrender and cancellation of all 21,000,000 shares of our common stock held by
that stockholder and (ii) certain representations, covenants and
indemnities.
After the
reverse merger and the split-off, Mesa Energy Holdings, Inc. succeeded to the
business of MEI as its sole line of business, and all of Mesa Energy Holdings,
Inc.’s then-current officers and directors resigned and were replaced by MEI’s
officers and directors.
The
reverse merger was accounted for as a reverse acquisition and recapitalization
of MEI for financial accounting purposes. Consequently, the assets and
liabilities and the historical operations that are reflected in Mesa Energy
Holdings, Inc.’s financial statements for periods prior to the reverse merger
are those of MEI and have been recorded at the historical cost basis of MEI, and
Mesa Energy Holdings, Inc.’s consolidated financial statements for periods after
completion of the reverse merger include both Mesa Energy Holdings, Inc.’s and
MEI’s assets and liabilities, the historical operations of MEI prior to the
reverse merger and Mesa Energy Holdings, Inc.’s operations from and after the
closing date of the reverse merger.
General
Philosophy
Our
business plan is to build a strong, balanced and diversified portfolio of oil
and gas reserves and production revenue through the development of highly
diversified, multi-well developmental and defined-risk exploratory drilling
opportunities and the acquisition of solid, long-term existing production with
enhancement potential. We believe this approach may enable us to
achieve steady reserve growth, strong earnings, and significant capital
appreciation.
With the
exception of the Coal Creek Project, as discussed below, we intend to operate,
or directly control the operation of, through our wholly-owned subsidiaries or
their designees, all properties that we own or acquire. In our
opinion, the lack of control resulting from leaving operational control in the
hands of third parties substantially increases the risks associated with oil and
gas drilling, development and production.
We
believe that a successful oil and gas development program should
include:
|
·
|
Diversification
– variety of location, depth, supporting data, oil vs.
gas;
|
|
·
|
Volume
– ownership of and/or participation in a large number of wells;
and
|
6
|
·
|
Potential
– the possibility of multiple payback of the initial
investment.
|
We plan
for our portfolio to ultimately consist of a balanced and diversified mix of
multiple asset components that will include existing production plus
developmental and defined-risk exploratory drilling opportunities with special
emphasis on the three keys to success as outlined above. The
developmental drilling program, we believe, should provide a relatively low risk
method of achieving stable, repeatable growth in revenue and
reserves. The existing production acquisition component in our
business plan should provide a strong revenue base resulting in long-term
stability. The exploratory drilling component, although higher risk
than the other two components, provides an opportunity for significant growth
due to higher rates of return on capital (in the form of multiple payback of the
initial investment). We generally look for exploratory projects with
multiple well potential and an estimated payback of at least four times the
amount of capital invested.
Various
Federal and state regulations regarding the discharge of materials into the
environment are applicable to our operations. We maintain strict
compliance with these regulations and endeavor to do all we can to make certain
that the environment is protected in and around our operations. The
cost of environmental control facilities and efforts is included as a line item
in the budget of each operation as appropriate. We anticipate no
extraordinary capital expenditures for environmental control facilities related
to any of our existing operations for the current fiscal year.
Employees
As of
April 12, 2010, we had two full-time employees and three part-time employees,
including our executive officers, as well as two consultants working on a
consistent basis. We believe the relationship we have with our
employees is good. Later in 2010, we anticipate the need for
additional accounting and technical personnel and, although demand for quality
staff is high in the oil and gas industry, we believe we will be able to fill
these positions in a timely manner.
Financial
Statements and “Going Concern” Opinion
The
auditor’s report accompanying our audited financial statements for the years
ended December 31, 2009 and 2008, included in this Annual Report, contained an
explanation that our financial statements were prepared assuming that we will
continue as a going concern. The report cites the generation of
recurring losses from operations and a working capital deficit. Our
ability to continue operating as a going concern will depend on our ability to
derive sufficient funds from sales of equity and/or debt securities and/or
additional loans from officers or our creation of a source of recurring revenue,
to generate operating capital in excess of our required cash expenditures and,
thereafter, to generate sufficient funds to allow us to effectuate our business
plan. We cannot provide any assurance that we will have sufficient
sales or that sufficient financing will be available to us on terms or at times
that we may require. Failure in any of these efforts may materially
and adversely affect our ability to continue our operations.
7
Oil
and Gas Industry Overview
Exploration
and production (“E&P”) companies explore for and develop oil and natural gas
reserves in various basins around the world. The capital spending budgets of
domestic E&P companies have grown in recent years as tight supply conditions
and strong global demand have spurred companies to expand their operations.
According to various industry publications, drilling and completion spending
grew by an estimated 29% from 2002 to 2008. Following a 22% projected decline in
spending from 2008 to 2009, drilling and completion spending is again projected
to grow at a compound annual growth rate of approximately 5% from 2009 to
2014. Much
of this growth is expected to come from a need to compensate for accelerating
depletion rates in existing domestic oil and natural gas reservoirs, improved
E&P technologies and an increase in demand for natural gas, especially from
power generation.
Due to
the unprecedented level of exploration expenditures in recent years, U.S. and
Canadian rig counts increased dramatically between 2002 and
2008. According to a report prepared by Spears & Associates,
Inc., following an approximately 14% and 7% projected decline in U.S. and
Canadian rig counts respectively from 2008 to 2009, U.S. and Canadian rig counts
are again expected to increase at a compound annual growth rate of approximately
3% and 1%, respectively, between 2009 and 2014. Furthermore, more technically
sophisticated drilling methods such as horizontal drilling coupled with higher
oil and natural gas prices relative to long term averages, are making E&P in
previously underdeveloped areas like Appalachia and the Rockies more
economically feasible. As part of this trend, there has been growing commercial
interest in several shale deposit areas in the U.S., including the Bakken,
Barnett, Fayetteville, Haynesville and Marcellus shales.
The
Shale Gas Business
Natural
gas production from hydrocarbon rich shale formations, known as “shale gas,” is
one of the most rapidly expanding trends in onshore domestic oil and gas
exploration and production today. In some areas, this has included bringing
drilling and production to regions of the country that have seen little or no
activity in the past. Natural gas plays a key role in meeting U.S. energy
demands. Natural gas, coal and oil supply about 85% of the nation’s energy, with
natural gas supplying about 22% of the total. The percent contribution of
natural gas to the U.S. energy supply is expected to remain fairly constant for
the next 20 years. The United States has abundant natural gas resources. The
Energy Information Administration estimates that the U.S. has more than 1,744
trillion cubic feet (tcf) of technically recoverable natural gas, including 211
tcf of proved reserves (the discovered, economically recoverable fraction of the
original gas-in-place). Technically recoverable unconventional gas (shale gas,
tight sands, and coalbed methane) accounts for 60% of the onshore recoverable
resource.
Although
forecasts vary in their outlook for future demand for natural gas, they all have
one thing in common: natural gas will continue to play a significant role in the
U.S. energy picture for some time to come. The lower 48 states have a wide
distribution of highly organic shales containing vast resources of natural gas.
Already, the Barnett Shale play in Texas produces 6% of all natural gas produced
in the lower 48 States.
8
Three
factors have come together in recent years to make shale gas production
economically viable: (1) advances in horizontal drilling, (2) advances in
hydraulic fracturing, and (3) rapid increases in natural gas prices in the last
several years as a result of significant supply and demand pressures. Analysts
have estimated that by 2011 most new reserves growth (50% to 60%, or
approximately 3 bcf/day) will come from unconventional shale gas reservoirs. The
total recoverable gas resources in four new shale gas plays (the Haynesville,
Fayetteville, Marcellus, and Woodford) may be over 550 tcf. This potential for
production in the known onshore shale basins, coupled with other unconventional
gas plays, is predicted to contribute significantly to the U.S.’s domestic
energy outlook.
Shale gas
is natural gas produced from shale formations that typically function as both
the reservoir and source for the natural gas. Gas shales are
organic-rich shale formations that were previously regarded only as source rocks
and seals for gas accumulating in the stratigraphically-associated sandstone and
carbonate reservoirs of traditional onshore gas development. Shale is a
sedimentary rock that is predominantly comprised of consolidated clay-sized
particles. Shales are deposited as mud in low-energy depositional environments
such as tidal flats and deep water basins where the fine-grained clay particles
fall out of suspension in these quiet waters. The clay grains tend to lie flat
as the sediments accumulate and subsequently become compacted as a result of
additional sediment deposition. This results in mud with thin laminar bedding
that lithifies (solidifies) into thinly layered shale rock. The very fine
sheet-like clay mineral grains and laminated layers of sediment result in a rock
that has limited horizontal permeability and extremely limited vertical
permeability. This low permeability means that gas trapped in shale
cannot move easily within the rock except over geologic expanses of time
(millions of years).
Shale gas
is stored both as free gas in fractures and as absorbed gas on kerogen and clay
surfaces within the shale matrix.
Oil
and Natural Gas Leases
General.
The
typical oil and natural gas lease agreement provides for the payment of
royalties to the mineral owner for all oil and natural gas produced from any
well(s) drilled on the leased premises. This amount will typically range from
1/8th (12.5%) resulting in a 87.5% net revenue interest to us to 3/16th (18.75%)
resulting in an 81.25% net revenue interest to us, for most leases directly
acquired by us.
Because
the acquisition of leases is a very competitive process, and involves certain
geological and business risks to identify productive areas, prospective leases
are often held by other oil and natural gas companies. In order to gain the
right to drill these leases, we may elect to farm-in leases and/or purchase
leases from other oil and natural gas companies. Many times the assignor of such
leases and/or lease brokers or finders will reserve an overriding royalty
interest (an “ORRI”) which may further reduce the net revenue interest available
to us to between 75% and 80%.
9
Oil and
natural gas leases generally have a primary term of three to five years but
provide that if wells on the property are producing or drilling is underway, the
lease continues and is said to be “held by production” (HBP) for as long as the
production continues.
Participations.
On rare
occasions, the mineral owner may elect to joint venture with us and participate
for his royalty interest in the drilling unit. In this event, our working
interest ownership would be reduced by the amount retained by the third party.
In all other instances, we anticipate owning a 100% working interest in newly
drilled wells.
Commodity
Price Environment
Generally,
the demand for and the price of natural gas increases during the colder winter
months and decreases during the warmer summer months. Pipelines, utilities,
local distribution companies and industrial users utilize natural gas storage
facilities and purchase some of their anticipated winter requirements during the
summer, which can lessen seasonal demand fluctuations. Crude oil and the demand
for heating oil are also impacted by seasonal factors, with generally higher
prices in the winter. Seasonal anomalies, such as mild winters, sometimes lessen
these fluctuations.
Our
results of operations and financial condition are significantly affected by oil
and natural gas commodity prices, which can fluctuate dramatically. Commodity
prices are beyond our control and are difficult to predict. We do not currently
plan to hedge any of our production.
During
the first half of 2008, the prices received industry-wide for domestic
production of oil and natural gas increased significantly, which resulted in
increased demand for the equipment and services required to drill, complete and
operate wells. As a result of this increased demand for oil field services,
shortages developed from 2007 into 2008, leading to an escalation in drilling
rig rates, field service costs, material prices and all costs associated with
drilling, completing and operating wells through the first half of
2008. West Texas Intermediate (“WTI”) crude prices, the standard oil
benchmark for the western hemisphere, tumbled from over one hundred forty
dollars ($140) per barrel in mid 2008 to less than forty dollars ($40) per
barrel in early 2009, before rebounding somewhat to approximately seventy-nine
dollars ($79) at year end 2009. During the same period, the
next-month contract price for natural gas price on NYMEX fell from a high of
over $13 per thousand cubic feet (mcf) to below $3/mcf before rebounding
somewhat to around $5.50/mcf at year end 2009.
The
following two charts are indicative of oil and natural gas prices in the United
States in recent years:
10
Price
of Crude Oil and Natural Gas
Daily
Spot Prices of West Texas Intermediate (WTI) Crude Oil from March 16, 2000 to
March 16, 2010, US$ per Barrel – source: U.S. Energy Information
Administration.
Daily Next-Month Contract Price for
Natural Gas on NYMEX from March 16, 2000 to March 16, 2010, US$ per thousand
cubic feet – source: U.S. Energy Information
Administration.
11
Java
Field Natural Gas Development Project – Wyoming County, New York
Overview
On August
31, 2009, we acquired the Java Field, a natural gas development project in
Wyoming County in western New York. The acquisition includes a 100%
working interest in 19 leases held by production covering approximately 3,235
mineral acres, 19 existing natural gas wells, two tracts of land totaling
approximately 36 acres and two pipeline systems, including a 12.4 mile pipeline
and gathering system that serves the existing field as well as a separate 2.5
mile system located east of the field. Our average net revenue
interest (NRI) in the leases is approximately 78%. The following map
shows the location of the Java Field.
History
The wells
in the Java Field were originally drilled in the 1970s through the Devonian
Shales to the Medina Sandstone at around 3,000 feet in depth. The
primary intent at that time was to access natural gas production to be used
locally to heat homes, businesses and farms. Many of these wells had
strong gas shows in the Devonian Shale, but the prevailing attitude of the day
was that the shales were not economically viable. The Barnett Shale
of north central Texas was viewed the same way for decades until Mitchell Energy
Company decided in the mid 1990’s to try a new frac technology on one of the
wells they had drilled through the shale. Since then, thousands of
wells have been drilled in the Barnett Shale, and it has become one of the
largest natural gas fields in the United States. It is our belief
that a similar situation may exist in the northern Appalachian basin, and
specifically in the area of the Java Field.
12
Area
Overview
The Java
Field is at the northern end of the Marcellus Shale trend which spans
approximately 600 miles extending from West Virginia to western New
York. In April 2009, the United States Department of Energy estimated
the Marcellus to contain 262 trillion cubic feet of recoverable
gas. Most of the existing activity is farther south in Pennsylvania
and West Virginia. Companies such as Range Resources, Chesapeake
Energy and Atlas Resources hold significant Marcellus acreage positions in
Pennsylvania and West Virginia. They have spent the last few years
leasing acreage and refining their drilling and fracturing techniques and,
according to various industry publications and company news releases, have
recently experienced significant increases in initial production rates from
their Marcellus Shale wells. The Marcellus Shale is deeper in that
area, generally being found at 6,000 to 7,000 feet. However, the
shallower, more northern portion of the play in northern Pennsylvania and
western New York has not yet been extensively explored. The northern
portion of the play is not as deep (resulting in lower drilling costs) and is
close to large domestic markets with extensive pipeline infrastructure already
in place.
13
Marcellus
Shale in the Appalachian Basin
Geologic
Analysis
Currently,
the principal producing zone of the Java Field is the Medina
Sandstone. The Medina Sandstone is a blanket, gas-producing sand at
approximately 3,000 feet that is widely produced in the area. We
believe the Medina has significant potential for expansion using modern
fracturing and/or horizontal technology.
In
addition, there have recently been new wells drilled to the Theresa Sandstone at
approximately 6,000 feet to the southwest of the Java Field, and we believe that
the Theresa fairway may extend southwest to northeast across the southern
portion of the Java Field acreage.
Uphole
from the Medina is the Hamilton Group. Although the primary target is
the Marcellus Shale, which is the deepest member of the Hamilton Group, there
are at least three shale members above the Marcellus, each of which, we believe,
has significant production potential.
14
Reserve
Information
This
presentation of proved reserve quantities provides estimates only and should be
read in connection with Note 11 to our consolidated financial statements –
“Supplemental Information on Oil and Gas Exploration, Development and Production
Activities (Unaudited).” These estimates are consistent with current
knowledge of the characteristics and production history of the
reserves. We emphasize that reserve estimates are inherently
imprecise and that estimates of new discoveries are more imprecise than those of
producing oil and gas properties. Accordingly, significant changes to
these estimates can be expected as future information becomes
available.
Proved
reserves are those estimated reserves of crude oil (including condensate and
natural gas liquids) and natural gas that geological 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 those expected to be
recovered through existing wells, equipment, and operating methods.
The
reserve estimates set forth below were prepared by Chadwick Energy Consulting,
Inc. (Chadwick), using reserve definitions and pricing requirements prescribed
by the SEC. Chadwick is a professional engineering firm specializing
in the technical and financial evaluation of oil and gas
assets. Chadwick’s report was conducted under the direction of
Jeffrey A. Chadwick, President of Chadwick. At the time of the
report, Chadwick and its employees had no interest in the Company, and were
objective in determining the results of the Company’s
reserves. Chadwick used a combination of production performance,
offset analogies, seismic data and their interpretation, subsurface geologic
data and core data, along with estimated future operating and development costs
as provided by the Company and based upon historical costs adjusted for known
future changes in operations or development plans, to estimate our
reserves. The Company does not operate any of its oil and gas
properties.
We had
total estimated proved developed reserves of 66,821mcf, and no estimated proved
undeveloped reserves, of natural gas at December 31, 2009.
Project
Potential
Operators
in Pennsylvania and West Virginia have had success drilling and completing the
Marcellus Shale using techniques similar to those used in the Barnett
Shale. Although we would not expect the reserves and initial
production rates in the Java Field to be as favorable as the wells being drilled
in Pennsylvania and West Virginia, the drilling and completion costs in our area
should be significantly lower due to the shallower depths, which, we believe,
will result in economics that rival the deeper wells.
We
believe we can potentially drill and complete up to 80 vertical Marcellus Shale
wells on the project acreage at an estimated per well cost of less than $500,000
with very little risk of dry holes. We do not have the capital,
however, to begin drilling these wells at this time and we will need to raise
capital through the sale of our debt or equity to obtain the needed development
funds. There can be no assurance that additional financing will be
available in amounts or on terms acceptable to us, if at all.
15
Many of
the wells drilled in the Marcellus Shale in Pennsylvania and West Virginia are
horizontal, and, at some point, we will probably drill a horizontal well to test
the concept in this field. We believe that a horizontal well at this
depth could be drilled and completed for $1.0 million to $1.2 million and that
it could reasonably be expected to produce at much higher rates than the
vertical wells. However, because Marcellus Shale wells have not yet
been drilled on the property, formal proved reserve reports relating to the Java
Field are not yet possible and there can be no assurance that our expectations
will prove out.
The
current production on the Java Field is being sold to a local manufacturing
plant. However, higher levels of production generated as a result of
field expansion and development would be sold, we expect, not only to the
manufacturing plant but also into a public intrastate transportation line
located approximately 12 miles north of the Java Field. Our Java
Field pipeline system has an existing tap into that line, which leads directly
to the New York City area. Natural gas pricing in the area
historically has averaged above posted NYMEX pricing and has occasionally been
significantly above NYMEX pricing in peak winter months.
We
believe the shale in the Java Field and surrounding area could provide an
excellent opportunity to achieve significant daily production rates at a
relatively low cost. In addition, the project offers the opportunity
to drill a large number of wells in this “blanket” formation, resulting, we
believe, in the potential to book significant reserves and develop a long term,
repeatable drilling program.
Economic
Factors
The Java
Field and the associated pipeline systems were acquired from the seller in a
cash transaction on August 31, 2009. In addition to landowner
royalties, a number of the leases carry additional burdens in the form of
ORRI’s. As a result, the average NRI of the leases prior to closing
was approximately 81%. As a part of the overall consideration to the
seller, the purchase and sale agreement provided that the seller retain a 1%
ORRI on each lease.
We paid
an initial cash finder’s fee for the Java Field of $50,000 to a finder, with the
balance of the finder’s fee to be paid at a rate of $5,000 per month for 12
months. In addition, the agreement with the finder provides that he
receive a 2% ORRI on the existing leases.
As a
result of the above, the overall average NRI to us going forward will be
approximately 78%.
Based on
our internal estimates, we believe that the finding cost of natural gas to be
produced from the Marcellus and associated shales in the Java Field will be
approximately $1/mcf.
Plans
for Development
Two of
the existing wells in the Java Field have never been hooked up to the pipeline
system, and the others have had very little attention in a number of
years. In the fourth quarter of 2009, we initiated efforts to work
over several of the existing wells, replace meters and associated equipment and
set compression in the field which, we expect, should substantially increase
existing production levels.
16
The first
phase of development of the Marcellus Shale was also initiated in the fourth
quarter of 2009. We initially evaluated a number of the existing
wells in order to determine the viability of the re-entry of existing wellbores
for plug-back and re-completion of the wells in the Marcellus
Shale. As a result of this evaluation, we selected the Reisdorf Unit
#1 and the Ludwig #1 as our initial targets. The frac for both wells
has been designed and we are awaiting permits in order to
proceed. Based on the results of these planned re-completions and our
ongoing testing, a second phase of development may be planned to include the
drilling of up to 80 Marcellus Shale wells on our existing acreage as well as on
additional acreage to be leased for future development.
Coal
Creek Prospect – Sequoyah County, Oklahoma
The Coal
Creek Prospect is a developmental prospect targeting the Brent Sand, a shallow
gas reservoir present in the Arkoma Basin of eastern Oklahoma. We
have approximately 677 gross acres under lease near the town of Muldrow,
Oklahoma. The following map shows the location of the Coal Creek
Prospect.
On
December 26, 2007, we closed a “farm-out” transaction with Wentworth Operating
Company of Edmond, OK (“Wentworth”), wherein we sold Wentworth our pipeline
right-of-way and agreed to grant Wentworth an undivided 70% interest in all the
leases following completion by Wentworth of construction of a natural gas
gathering system and approximately three miles of pipeline to connect the Cook
#1 and future wells to an Arkansas Oklahoma Gas Company (AOG) pipeline to the
south. In addition, Wentworth agreed to fund, drill, and complete the
Gipson #1, a direct offset to the Cook #1 and a twin to the Eglinger #1
well.
17
The
Eglinger #1 was drilled in 1944 in search of oil and encountered gas in two
Brent Sand zones between 1,200 and 1,300 feet. It tested 1.5 million
cubic feet per day from these intervals. Due to the lack of pipeline
access and low gas prices, this well was not completed and was later
plugged. Because the Eglinger #1 was drilled so long ago, the
decision was made to drill the Gipson #1 in close proximity as a twin rather
than to attempt to re-enter the old well bore. The Gipson #1 was
recently drilled to a total depth of approximately 3,000 feet to test not only
the Brent Sand but also the Hunton Sand, a gas-bearing sand widely produced in
this area. The well tested over one million cubic feet per day of
gas. The pipeline referenced above was completed, the two wells were
connected and initial production began in the third quarter of
2009.
As a
result of amendments to the farm-out agreement with Wentworth, we now own 35% of
the working interest in the Cook #1 and 25% of the working interest in the
Gipson #1, with Wentworth and other industry partners owning the
balance. We believe there are multiple offset drilling locations and
expect those locations to be drilled in 2010 as part of the overall development
plan for the Coal Creek prospect.
Although
our general philosophy is to operate all of our properties, we have a
long-standing relationship with Wentworth and are comfortable with that company
as the operator of this property. Wentworth has a similar property
that is only a few miles away and, as a result of this arrangement, both
projects will be able to share a pipeline tap and processing facilities
resulting in a significant cost savings to us. We believe other
operational efficiencies will also result from this arrangement.
Economic
Factors
The Coal
Creek leases have various landowner royalties ranging from 12.5% to
18.75%. The acquisition of the Coal Creek leases provides for a 78%
NRI to be delivered to us, with the difference between the landowner royalty and
22% to be retained by Wentworth. In addition, a 1% ORRI is to be
delivered to Cold Water Creek Exploration, LLC, a finder. As a
result, the net NRI to us on all Coal Creek leases, both the original leases and
any new leases taken in the area, is 77%.
Prior
Activities
In the
last three years, we have drilled one exploratory well, the Frenchy Springs
23-22, and one developmental well, the Gipson #1 described above. In
November 2008, we commenced operations to plug and abandon the Frenchy Springs
well as discussed below.
Main Pass
35 Project – Plaquemines Parish, Louisiana; IP #1 Re-completion - Hancock
County, Mississippi
In
January, 2008, we acquired Poydras Energy, LLC, a New Orleans-based Louisiana
operating company, along with the Main Pass 35 Project. The Project
was producing approximately 150 barrels of oil per day prior to being shut down
in advance of Hurricane Katrina. The wells were undamaged but there
was extensive damage to the processing facility. We commenced
rehabilitation of the processing facility in April 2008.
18
In
October 2008 we commenced the re-completion of the IP #1 well in the Ansley
Field in Hancock County, Mississippi. Initial testing indicated fluid
entry of approximately 350 barrels per day with an oil cut of 10% to
12%. Several potential completion scenarios were subsequently
evaluated. At the end of 2008, Mesa sold 25% of the
working interest in the well to its executive officers and a third party in
order to raise cash to assist in the payment of the cost of completion of the
well and expected to retain 75% of the working interest in the
well.
As a
result of multiple factors including delays during the summer of 2008 associated
with Hurricane Gustav and Hurricane Ike, high construction costs and lack of
availability of equipment and personnel after the hurricanes and the subsequent
collapse of oil prices, Poydras Energy, LLC, experienced severe cash flow
constraints and had difficulty in meeting short-term cash commitments,
particularly with its vendors. As a result, we reached an agreement with the
prior owners of Poydras Energy, LLC, wherein as of June 1, 2009, we transferred
our ownership interest in Poydras for no cash consideration to the prior owners
in exchange for the assumption of all liabilities and a release of any
responsibility for the liabilities and contractual obligations of Poydras. We
also agreed to assign the lease for the IP #1 well. As a result, we
are no longer involved in the Main Pass 35 Project or the IP #1
well.
Frenchy
Springs Prospect – Johnson County, Wyoming
An
initial test well, the Mesa Energy #23-22, was drilled by Mesa Energy Operating,
LLC, in August 2006, to a total vertical depth of 4,026 feet. The
deepest zone, the second Wall Creek, showed good potential for both oil and gas,
and an effort to complete the well took place in early January
2007. However, we were unable to establish production in the second
Wall Creek or in one of the up-hole zones. Due to weather issues and
environmental restrictions (no surface disturbing activities between February 1
and July 31 of each year), we deferred further attempts to complete the well
until a later date. Additional geological and engineering testing
took place in May 2008. As a result of those tests and additional
data gathered in November 2008, we elected to plug the well and abandon the
associated lease, which has since expired. Mesa Energy, Inc. owned a
50% working interest in the well.
Planned
Acquisitions and Drilling
Acquisition
and Testing of Low-Risk Drilling Prospects with Significant Expansion
Potential:
In
keeping with our philosophy of balance and diversification, we are currently
evaluating a number of oil and gas drilling prospects with existing production
as well as significant expansion potential. The types of properties we are
interested in are shallow drilling prospects in shale (both oil and gas), tight
gas or coal bed methane reservoirs with significant acreage positions and the
potential to drill hundreds of wells and book extensive reserves. We
believe that these types of reservoirs are relatively low-risk, because they
have hydrocarbons in place, and we expect the likelihood of dry holes to be
relatively small.
Our
short-term strategy called for the acquisition and early stage testing of one of
these prospects in 2009 with a large-scale developmental drilling program to get
underway in 2010. In implementing this strategy, we recently acquired the Java
Field as described above. This property has existing production with enhancement
potential as well as large-scale development potential in the Marcellus
Shale.
19
In
keeping with our philosophy, we intend to acquire and develop multiple
properties of this type, encompassing both oil and natural gas drilling and
production. As an exploration stage public company seeking to rapidly
accumulate reserves and build significant shareholder equity, we believe that
this kind of large-scale, low-risk, developmental drilling may result in stable,
long term growth in revenue, reserve base and shareholder value.
Producing
Properties
In
keeping with our long-term business plan, we are constantly evaluating producing
oil and gas properties generating significant monthly net revenue with
re-completion and offset developmental drilling
potential. Acquisitions of this type could accelerate our growth, add
proved developed reserves to our asset base and provide a strong foundation for
future growth.
There can
be no assurance, however, that any acquisitions of the types described above
will be consummated or, if consummated, will prove productive or
profitable.
Governmental
Regulation
Our
operations are or will be subject to various types of regulation at the federal,
state and local levels. Such regulation includes requiring state (and sometimes
local) permits for the drilling of wells; maintaining bonding or escrow
requirements in order to drill or operate wells; implementing spill prevention
plans; submitting notification and receiving permits relating to the presence,
use and release of certain materials incidental to oil and gas operations; and
regulating the location of wells, the method of drilling and casing wells, the
use, transportation, storage and disposal of fluids and materials used in
connection with drilling and production activities, surface usage and the
restoration of properties upon which wells have been drilled, the plugging and
abandoning of wells and the transporting of production. Our
operations are or will also be subject to various conservation matters,
including the regulation of the size of drilling and spacing units or proration
units, the number of wells which may be drilled in a unit and the unitization or
pooling of oil and gas properties. In this regard, some states allow
the forced pooling or integration of tracts to facilitate exploration while
other states rely on voluntary pooling of lands and leases, which may make it
more difficult to develop oil and gas properties. In addition, state
conservation laws typically establish maximum rates of production from oil and
gas wells, generally limit the venting or flaring of gas, and impose certain
requirements regarding the transportation of production. The effect
of these regulations is to limit the amounts of oil and gas we may be able to
produce from the wells and to limit the number of wells or the locations at
which we may be able to drill.
Our
business is affected by numerous laws and regulations, including energy,
environmental, conservation, tax and other laws and regulations relating to the
oil and gas industry. We plan to develop internal procedures and
policies to ensure that operations are conducted in full and substantial
environmental regulatory compliance.
Our
failure to comply with any laws and regulations may result in the assessment of
administrative, civil and criminal penalties, the imposition of injunctive
relief or both. Moreover, changes in any of these laws and
regulations could have a material adverse effect on our business. In
view of the many uncertainties with respect to current and future laws and
regulations, including their applicability to us, we cannot predict the overall
effect of such laws and regulations on future operations.
20
We
believe that our operations comply in all material respects with applicable laws
and regulations and that the existence and enforcement of such laws and
regulations have an effect no more restrictive on our operations than on other
similar companies in the energy industry. We do not anticipate any
material capital expenditures to comply with federal and state
requirements.
Environmental
Regulation
Our
operations on properties in which we have an interest are subject to extensive
federal, state and local environmental laws that regulate the discharge or
disposal of materials or substances into the environment and otherwise are
intended to protect the environment. Numerous governmental agencies
issue rules and regulations to implement and enforce such laws, which are often
difficult and costly to comply with and which carry substantial administrative,
civil and criminal penalties and in some cases injunctive relief for failure to
comply.
Some
laws, rules and regulations relating to the protection of the environment may,
in certain circumstances, impose “strict liability” for environmental
contamination. These laws render a person or company liable for
environmental and natural resource damages, cleanup costs and, in the case of
oil spills in certain states, consequential damages without regard to negligence
or fault. Other laws, rules and regulations may require the rate of
oil and gas production to be below the economically optimal rate or may even
prohibit exploration or production activities in environmentally sensitive
areas. In addition, state laws often require some form of remedial
action, such as reclamation of inactive pits and plugging of abandoned wells, to
prevent pollution from former or suspended operations.
Legislation
has been proposed in the past and continues to be evaluated in Congress from
time to time that would reclassify certain oil and gas exploration and
production wastes as “hazardous wastes.” This reclassification would
make these wastes subject to much more stringent storage, treatment, disposal
and clean-up requirements, which could have a significant adverse impact on our
operating costs. Initiatives to further regulate the disposal of oil and gas
wastes are also proposed in certain states from time to time and may include
initiatives at the county, municipal and local government
levels. These various initiatives could have a similar adverse impact
on our operating costs.
The
regulatory burden of environmental laws and regulations increases the cost and
risk of doing business and consequently affects profitability. The
federal Comprehensive Environmental Response, Compensation and Liability Act, or
CERCLA, also known as the “Superfund” law, imposes liability, without regard to
fault, on certain classes of persons with respect to the release of a “hazardous
substance” into the environment. These persons include the current or
prior owner or operator of the disposal site or sites where the release occurred
and companies that transported or disposed, or arranged for the transport or
disposal, of the hazardous substances found at the site. Persons who
are or were responsible for releases of hazardous substances under CERCLA may be
subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment and for
damages to natural resources, and it is not uncommon for the federal or state
government to pursue such claims.
21
It is
also not uncommon for neighboring landowners and other third parties to file
claims for personal injury or property or natural resource damages allegedly
caused by the hazardous substances released into the
environment. Under CERCLA, certain oil and gas materials and products
are, by definition, excluded from the term “hazardous substances.” At
least two federal courts have held that certain wastes associated with the
production of crude oil may be classified as hazardous substances under
CERCLA. Similarly, under the federal Resource, Conservation and
Recovery Act, or RCRA, which governs the generation, treatment, storage and
disposal of “solid wastes” and “hazardous wastes,” certain oil and gas materials
and wastes are exempt from the definition of “hazardous wastes.” This
exemption continues to be subject to judicial interpretation and increasingly
stringent state interpretation. During the normal course of our
operations on properties in which we have an interest, exempt and non-exempt
wastes, including hazardous wastes, that are subject to RCRA and comparable
state statutes and implementing regulations are generated or have been generated
in the past. The federal Environmental Protection Agency and various
state agencies continue to promulgate regulations that limit the disposal and
permitting options for certain hazardous and non-hazardous wastes.
We have
established guidelines and management systems to ensure compliance with
environmental laws, rules and regulations. The existence of these
controls cannot, however, guarantee total compliance with environmental laws,
rules and regulations. We believe that with respect to the
Properties, we are in substantial compliance with applicable environmental laws,
rules and regulations. We do not currently maintain any insurance
against the risks described above, and there is no assurance that we will be
able to obtain insurance that is adequate to cover all such costs or that
insurance will be available at premium levels that justify
purchase. The occurrence of a significant event not fully insured or
indemnified against could have a material adverse effect on our financial
condition and operations. Compliance with environmental requirements,
including financial assurance requirements and the costs associated with the
cleanup of any spill, could have a material adverse effect on our capital
expenditures, earnings or competitive position. We do believe,
however, that the operators are in substantial compliance with current
applicable environmental laws and regulations. Nevertheless, changes
in environmental laws have the potential to adversely affect our
operations. At this time, we have no plans to make any material
capital expenditures for environmental control facilities.
Competition
The oil
and gas industry is intensely competitive with respect to the acquisition of
prospective oil and natural gas properties and oil and natural gas
reserves. Our ability to effectively compete is dependent on our
geological, geophysical and engineering expertise and our financial
resources. We must compete against a substantial number of major and
independent oil and natural gas companies that have larger technical staffs and
greater financial and operational resources than we do. Many of these
companies not only engage in the acquisition, exploration, development and
production of oil and natural gas reserves, but also have refining operations,
market refined products and generate electricity. We also compete
with other oil and natural gas companies to secure drilling rigs and other
equipment necessary for drilling and completion of wells. Consequently, drilling
equipment may be in short supply from time to time. With the recent
decline in crude oil and natural gas prices, access to drilling equipment is
currently more available.
22
Research
and Development
We have
not spent any amounts on research and development activities during either of
the last two fiscal years.
Plan
of Operation for the Remainder of 2010
Two wells
in our Coal Creek project have been completed and are currently
producing. In addition, fifteen of the wells included in the
acquisition of the Java Field are currently producing at a low rate (the
Reisdorf Unit #1 and the Ludwig #1 have been plugged back in preparation for
testing the Marcellus Shale). See “Item 1. Business—Java Field
Natural Gas Development Project – Wyoming County, New
York—Economics.”
In
addition to our planned development program for the Java Field, and contingent
upon our ability to raise additional capital, we may engage in additional
expenditures over the next 12 months for the acquisition of new land and
drilling rights, the drilling and/or re-completion of additional wells on owned
or acquired acreage as well as the acquisition of existing
production. However, we are not yet ready to move forward on any
additional projects and would require additional financing in order to proceed
with any such project.
If the
testing of the Marcellus Shale in the Java Field is successful, then we
anticipate the drilling of up to 8 developmental wells in 2010 at an aggregate
cost of approximately $4,000,000 and we will likely hire additional
administrative and/or field personnel in the second or third quarter of 2010 to
support that effort.
There can
be no assurance, however, that financing the development of the Java Field or
for one or more future projects will be available to us or, if it is available,
that it will be available on terms acceptable to us and that it will be
sufficient to fund our needs. If we are unable to obtain the financing necessary
to support these expenditures, we may not be able to proceed with our plan of
operation.
Legacy
Business Formation and Split-Off
The
registrant was incorporated in the State of Delaware, as “Mesquite Mining,
Inc.,” on October 23, 2007 to engage in the acquisition and exploration of
mining properties (the “Legacy Business”). In mid 2009, the
registrant’s Board of Directors decided to redirect the registrant’s efforts
towards identifying and pursuing a new business plan and
direction. Amid discussions with Mesa Energy, Inc. regarding a
potential business combination, on June 19, 2009, the registrant changed its
name to Mesa Energy Holdings, Inc.
On August
31, 2009, we closed a reverse merger transaction pursuant to which a wholly
owned subsidiary of Mesa Energy Holdings, Inc. merged with and into Mesa Energy,
Inc., and Mesa Energy, Inc., as the surviving corporation, became a wholly owned
subsidiary of Mesa Energy Holdings, Inc. (the “reverse
merger”).
23
Immediately
following the closing of the reverse merger, under the terms of a Split-Off
Agreement, we transferred all of our pre-merger operating assets and liabilities
to our wholly owned subsidiary, Mesquite Mining Group, Inc. (“Split-Off
Subsidiary”), a Delaware corporation formed on August 13,
2009. Thereafter, pursuant to the Split-Off Agreement, we transferred
all of the outstanding shares of capital stock of Split-Off Subsidiary to
Beverly Frederick, our pre-reverse merger majority stockholder and sole
executive officer and director, in exchange for the surrender and cancellation
of all 21,000,000 shares of our common stock held by that
stockholder.
As of
August 31, 2009, Ms. Frederick is no longer a stockholder, executive officer or
director of the registrant.
In
conjunction with the Split-Off Agreement and effective as of August 31, 2009, we
entered into a General Release Agreement with Split-Off Subsidiary and Ms.
Frederick, whereby Split-Off Subsidiary and Ms. Frederick pledged not to sue us
from any and all claims, actions, obligations, liabilities and the like,
incurred by Split-Off Subsidiary or Ms. Frederick arising from any fact, event,
transaction, action or omission that occurred or failed to occur on or prior to
August 31, 2009 and related to the Legacy Business.
GLOSSARY
OF OIL AND GAS TERMS
The
following are the meanings of some of the oil and gas industry terms that may be
used in this prospectus.
2-D
seismic: (two-dimensional seismic data) Geophysical data that
depicts the subsurface strata in two dimensions. A vertical section of seismic
data consisting of numerous adjacent traces acquired sequentially.
3-D
seismic: A set of numerous closely-spaced seismic lines that provide a
high spatially sampled measure of subsurface reflectivity. Events are placed in
their proper vertical and horizontal positions, providing more accurate
subsurface maps than can be constructed on the basis of more widely spaced 2D
seismic lines. In particular, 3D seismic data provide detailed information about
fault distribution and subsurface structures.
Annular
injection: Injection of water, gas or other substances down the well-bore
between the production casing and tubing for purposes of water disposal or
pressure maintenance.
Arkoma
Basin: A structural feature located in southern Oklahoma and western
Arkansas consisting of Middle Cambrian to Late Mississippian age carbonate,
shale, and sandstone sediments.
Barnett
Shale: A geological formation consisting of sedimentary rocks of
Mississippian age (354–323 million years ago) in north central
Texas.
Basin: A depression of the
earth's surface into which sediments are deposited, usually characterized by
sediment accumulation over a long interval; a broad area of the earth beneath
which layers of rock are inclined, usually from the sides toward the
center.
24
BCF:
Billion cubic feet; BCFD:
Billion cubic feet per day
Block: Subdivision
of an area for the purpose of licensing to a company or companies for
exploration/production rights.
BOPD: Abbreviation
for barrels of oil per day, a common unit of measurement for volume of crude
oil. The volume of a barrel is equivalent to 42 US gallons.
Brent
Sand: A sandstone member of the Pennsylvanian age Atoka Group, a sequence
of marine, silty sandstones and shales generally located in eastern Oklahoma and
western Arkansas.
Cash call:
Request for pro-rata funding of drilling operations per approved
budgets.
Completion: The
installation of permanent equipment for the production of oil or natural gas, or
in the case of a dry hole, the reporting of abandonment to the appropriate
agency.
Compression:
Each gas well has natural wellhead pressure from the formation which varies from
each other well. In order to make the wells flow into a common gas
transmission line at the rate of their individual ability to produce, the
pressure from each well needs to exceed the flowing pressure in the gas
transmission line. To accomplish this, a mechanical engine compresses
the gas from each well into a higher amount of pressure than the pressure in the
transmission line so the well can produce its gas into the gas transmission
line. This is commonly called adding “compression”.
Crude oil:
A general term for unrefined petroleum or liquid petroleum.
Defined-risk:
Projects defined by multiple evaluation techniques in order to estimate
more reasonably the potential for success. These techniques may
include 2-D or 3-D seismic, geo-chemistry, subsurface geology, surface mapping,
data from surrounding wells, and/or satellite imagery.
Developmental
drilling: Drilling that occurs after the initial discovery of
hydrocarbons in a reservoir.
Devonian
Shale: Shale formed from organic mud deposited during the Devonian Period
(416–359 million years ago).
Dry
hole: A well found to be incapable of producing hydrocarbons
in sufficient quantities such that proceeds from the sale of such production
would exceed production expenses and taxes.
E&P: Exploration
and production.
Exploration: The
initial phase in petroleum operations that includes generation of a prospect or
play or both, and drilling of an exploration well. Appraisal,
development and production phases follow successful
exploration.
25
Exploratory
well: A well drilled to find and produce oil and gas reserves
that is not a development well.
Fairway: A
term used in the industry to describe an area believed to contain the most
productive mineral acreage in a play.
Farm-out:
An agreement whereby the owner of a lease (farmor) agrees to assign part
or all of a leasehold interest to a third party (farmee) in return for drilling
of a well or wells and/or the performance of other required
activities. The farmee is said to “farm-in.”
Field: An
area consisting of either a single reservoir or multiple reservoirs, all grouped
on or related to the same individual geological structural feature and/or
stratigraphic condition.
Finding
cost: The total cost to drill, complete and hook up a well divided by the
mcf or barrels of proved reserves.
Formation: An
identifiable layer of rocks named after the geographical location of its first
discovery and dominant rock type.
Fracturing: Hydraulic
fracturing is a method used to create fractures that extend from a borehole into
rock formations, which are typically maintained by a proppant, a material such
as grains of sand, ceramic beads or other material which prevent the fractures
from closing. The method is informally called fracking or
hydro-fracking. The technique of hydraulic fracturing is used to
increase or restore the rate at which fluids, such as oil, gas or water, can be
produced from the desired formation. By creating fractures, the reservoir
surface area exposed to the borehole is increased.
Gas
show: While drilling a well through different rock formations,
gas may appear in the drilling mud which is circulating through the drill pipe,
which indicates the presence of gas in the formation being drilled; drillers
call this a “gas show”.
Hamilton
Group: A bedrock unit in New York, Pennsylvania, Maryland and
West Virginia; the oldest strata of the Devonian gas shale sequence. In the
interior lowlands of New York, the Hamilton Group contains the Marcellus,
Skaneateles, Ludlowville, and Moscow Formations, in ascending order, with the
Tully Limestone above.
Horizontal
well: a well in which the borehole is deviated from vertical
at least 80 degrees so that the borehole penetrates a productive formation in a
manner parallel to the formation. A single horizontal lateral can
effectively drain a reservoir and eliminate the need for several vertical
boreholes.
Hunton
Sand: A Devonian-Silurian age group of interbedded limestone
members primarily found in eastern Oklahoma. The Hunton typically
produces a significant volume of water with initial production with increasing
volumes of gas and decreasing volumes of water as production
matures.
Hydrocarbon: A
naturally occurring organic compound comprising hydrogen and carbon.
Hydrocarbons can be as simple as methane [CH4], but many
are highly complex molecules, and can occur as gases, liquids or solids. The
molecules can have the shape of chains, branching chains, rings or other
structures. Petroleum is a complex mixture of hydrocarbons. The most common
hydrocarbons are natural gas, oil and coal.
26
Lead: a possible
prospect.
Marcellus
Shale: The lowest unit of the Devonian age Hamilton Group; a
unit of marine sedimentary rock found in eastern North America. Named for a
distinctive outcrop near the village of Marcellus, New York, it extends
throughout much of the Appalachian Basin. The shale contains largely untapped
natural gas reserves, and its proximity to the high-demand markets along the
East Coast of the United States makes it an attractive target for energy
development.
MCF: Thousand
cubic feet; MCFD: Thousand
cubic feet per day
MMCF: Million
cubic feet; MMCFD: Million
cubic feet per day
Medina
Sandstone: The Lower Silurian age Medina Group sandstones
comprise the dominant tight gas sandstone play in western and southwestern New
York. Depths vary from 1,800 feet in the west central part of the
state to 4,500 feet in the western part of the state.
Net revenue
interest (NRI): The portion of oil and gas production revenue
remaining after the deduction of royalty and overriding royalty
interests.
NYMEX: The
New York Mercantile Exchange, the world's largest physical commodity futures
exchange, located in New York City.
Offset
well: A well drilled in the vicinity of other wells to access
the extent and characteristics of the reservoir and, in some cases, to drain
hydrocarbons from an adjoining tract.
Operator: The
individual or company responsible for the exploration and/or exploitation and/or
production of an oil or gas well or lease.
Overriding
royalty interest (ORRI): an interest carved out of the
lessee’s working interest that entitles its owner to a fraction of production
free of any production or operating expense, but not free of production or
severance tax levied on the production. An overriding interest’s
duration derives from the lease in which it was created.
Participation
interest: The proportion of exploration and production costs
each party will bear and the proportion of production each party will receive,
as set out in an operating agreement.
Play: A
group of oil or gas fields or prospects in the same region that are controlled
by the same set of geological circumstances.
Production: The phase that
occurs after successful exploration and development and during which
hydrocarbons are drained from an oil or gas field.
27
Prospect: A
specific geographic area, which based on supporting geological, geophysical or
other data and also preliminary economic analysis using reasonably anticipated
prices and costs, is deemed to have potential for the discovery of commercial
hydrocarbons.
Recompletion: After
the initial completion of a well, the action and technique of re-entering the
well and repairing the original completion or completing the well in a different
formation to restore the well’s productivity.
Reservoir: A subsurface,
porous, permeable rock formation in which oil and gas are found.
Royalty interest:
An ownership interest in the portion of oil, gas and/or minerals produced
from a well that is retained by the lessor upon execution of a lease or to one
who has acquired possession of the royalty rights, based on a percentage of the
gross production from the property free and clear of all costs except
taxes.
Seismic: Pertaining
to waves of elastic energy, such as that transmitted by P-waves and S-waves, in
the frequency range of approximately 1 to 100 Hz. Seismic energy is studied by
scientists to interpret the composition, fluid content, extent and geometry of
rocks in the subsurface. "Seismic," used as an adjective, is preferable to
"seismics," although "seismic" is used commonly as a noun.
Shale: A
fine-grained sedimentary rock composed of flakes of clay minerals and tiny
fragments of other minerals, especially quartz and calcite. Shale is
characterized by thin laminate, or parallel layering or bedding less than one
centimeter in thickness.
Shut
in: Not currently producing
Spud,
to: To commence drilling operations.
Sunk
costs: Costs that cannot be recovered once they have been
incurred.
TCF: Trillion
cubic feet
Theresa
Sandstone: An Upper Cambrian age sandstone underlying most of
western New York at depths ranging from 3,000 feet to 13,000
feet. Theresa wells are typically drilled to depths ranging from
5,000 feet to 7,000 feet.
Twin
well: A well drilled on the same location as another well or
closely offsetting it.
Wall
Creek: A sandstone member of the Frontier Group of Cretaceous
age rock composed of medium to fine grained gray sands, generally about 200 feet
thick and found at approximately 4,000 feet in central Wyoming.
Water
cut: A term used in production testing to specify the ratio of
water produced compared to the volume of total liquids (water and oil)
produced.
28
West Texas
Intermediate (“WTI”): Light, sweet crude oil with high API
gravity and low sulfur content used as the benchmark for U.S. crude oil refining
and trading. WTI is deliverable at Cushing, Oklahoma to fill NYMEX
futures contracts for light, sweet crude oil.
Working
interest: The interest in oil or gas that includes the
responsibility for all drilling, developing and operating costs.
Workover: The
performance of one or more of a variety of remedial operations on a producing
well to try to increase or restore production.
29
ITEM
1A.
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RISK
FACTORS
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THIS
ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. YOU ARE
CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND ARE SUBJECT TO VARIOUS
RISKS AND UNCERTAINTIES, MANY OF WHICH ARE BEYOND OUR CONTROL, AND THAT ACTUAL
EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH
STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED IN
THIS ANNUAL REPORT ON FORM 10-K, INCLUDING THE MATTERS SET FORTH BELOW, WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH
FORWARD-LOOKING STATEMENTS.
RISKS
RELATED TO THE BUSINESS AND FINANCIAL CONDITION
We
are an exploration stage company and have minimal current
revenues. Our business plan depends on our ability to explore for and
develop oil and gas reserves and place any such reserves into
production. Because we have a limited operating history, it is
difficult to predict our future performance.
Although
our predecessor entity was formed in April 2003, we have been and continue to be
an exploration stage company. Therefore, we have limited operating
and financial history available to help potential investors evaluate our past
performance and the risks of investing in us. Moreover, our limited
historical financial results may not accurately predict our future
performance. Companies in their initial stages of development present
substantial business and financial risks and may suffer significant
losses. As a result of the risks specific to our new business and
those associated with new companies in general, it is possible that we may not
be successful in implementing our business strategy.
Until the
third fiscal quarter of 2009, we had no revenues from operations. We have yet to
generate positive earnings and there can be no assurance that we will ever
operate profitably. Our success is significantly dependent on raising sufficient
capital to develop our existing properties and acquire new properties and the
execution of a successful drilling, completion and production program. Our
operations will be subject to all the risks inherent in the establishment of a
developing enterprise and the uncertainties arising from the absence of a
significant operating history. We may be unable to locate recoverable reserves
or operate on a profitable basis. We are in the exploration stage and potential
investors should be aware of the difficulties normally encountered by
enterprises in the exploration stage. If our business plan is not successful,
and we are not able to operate profitably, investors may lose some or all of
their investment in the Company.
Investment
in exploration projects increases the risks inherent in our oil and gas
activities and our drilling operations may not be successful.
While we
intend a develop a portfolio consisting of a balanced and diversified mix of
existing production, developmental, and exploration drilling opportunities, to
the extent that we invest in exploration, there are much greater risks than in
acquisitions and developmental drilling. Any particular success in
exploration does not assure that we will discover meaningful levels of
reserves. There can be no assurance that future exploration and
drilling activities will be successful. We cannot be sure that an
overall drilling success rate or production operations within a particular area
will ever come to fruition and, in any event, production rates inevitably
decline over time. We may not recover all or any portion of the capital
investment in our wells or the underlying leaseholds. Unsuccessful drilling
activities would have a material adverse effect upon our results of operations
and financial condition. Additionally, there are significant uncertainties as to
the future costs and timing of drilling, completing, and producing
wells. Our drilling operations may be curtailed, delayed, or canceled
as a result of a variety of factors, including:
30
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unexpected
drilling conditions;
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equipment
failures or accidents;
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adverse
weather conditions;
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compliance
with governmental requirements; and
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shortages
or delays in the availability of drilling rigs and the delivery of
equipment or materials.
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We
have a history of operating losses and a significant accumulated deficit, and we
may not achieve or maintain profitability in the future.
We have
not been profitable since our inception in 2003. As of December 31,
2009, we had an accumulated deficit of $5,164,062. We expect to
continue to incur additional losses for the foreseeable future as a result of a
high level of operating expenses, significant up-front expenditures including
the cost of exploration and acquisition of oil and gas properties and limited
revenue from the sale of our products. We began sales of our first
product in September 2009, and we may never realize sufficient revenues from the
sale of our products or be profitable.
Our
independent registered public accountants expressed substantial doubt about our
ability to continue as a going concern in their audit report related to our
financial statements for the year ended December 31, 2009.
Our
independent registered public accounting firm has included an explanatory
paragraph in their report on our financial statements included in this Annual
Report on Form 10-K expressing doubt as to our ability to continue as a going
concern. Our financial statements accompanying this Form 10-K have been prepared
assuming that we will continue as a going concern, however, there can be no
assurance that we will be able to do so. Our recurring losses from
operations and working capital deficit raise substantial doubt about our ability
to continue as a going concern, and our consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty. Based on our current cash flow projections, we will need
to raise additional funds in order to maintain our
operations. However, there is no guarantee that we will be able to
obtain further financing, or to do so on reasonable terms. If we are
unable to raise additional funds on a timely basis, or at all, we would be
materially adversely affected.
31
Because
we may not operate all of our properties, we could have limited influence over
their development.
Although
we intend to operate or otherwise directly control the operation of all our
properties, there may be certain situations, including with respect to our Coal
Creek prospect in Sequoyah County, Oklahoma, wherein we elect to allow others to
operate. In that event, we would have limited influence over the
operations of those properties. Our lack of control could result in
the following:
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the
operator may initiate exploration or development on a faster or slower
pace than we prefer;
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the
operator may propose to drill more wells or build more facilities on a
project than we have budgeted for or that we deem appropriate, which may
mean that we are unable to participate in the project or share in the
revenues generated by the project even though we paid our share of
exploration costs; and if an operator refuses to initiate a project, we
may be unable to pursue a project.
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Either of
these events could materially reduce the value of our properties.
Competitive
industry conditions may negatively affect our ability to conduct
operations.
We intend
to operate in the highly competitive areas of oil and gas exploration,
development, and production. We compete with other oil and gas
companies for the purchase of leases, most of which companies have materially
greater economic resources than we. These leases include exploration
prospects as well as properties with proved reserves. Factors that
affect our ability to compete in the marketplace include:
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our
access to the capital necessary to drill wells and acquire
properties;
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our
ability to acquire and analyze seismic, geological and other information
relating to a property;
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our
ability to retain the personnel to properly evaluate seismic, geological
and other information relating to a
property;
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our
ability to obtain pipe, drilling rigs and associated equipment and field
personnel in a timely manner and at competitive
prices;
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the
location of, and our access to, pipelines and other facilities used to
produce and transport oil and gas
production;
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the
standards we establish for the minimum projected return on an investment
or our capital; and
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the
availability of alternative fuel
sources.
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Our
competitors include major integrated oil companies, independent energy
companies, affiliates of major interstate and intrastate pipelines, and national
and local gas gatherers, many of which possess greater financial, technological,
and other resources than we do.
32
Our
decision to drill a prospect, whether developmental or exploratory, is subject
to a number of factors and we may decide to alter our drilling schedule or not
drill at all.
We
describe our current prospects and our plans to explore these prospects in this
Current Report. A prospect is a property on which we have identified
what we believe, based on available geological information, to be indications of
hydrocarbons. Our prospects are in various stages of evaluation,
ranging from a prospect which has already been drilled to a prospect which will
require substantial additional testing, data processing and
interpretation. Whether we ultimately drill or continue to drill a
prospect may depend on multiple factors, including, but not limited to, the
following:
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acquisition
and utilization of various evaluation
technologies;
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material
changes in oil or gas prices;
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the
costs and availability of drilling rigs and
equipment;
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the
success or failure of wells drilled in comparable formations or which
would use the same production
facilities;
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availability
and cost of capital;
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our
ability to attract other industry partners to acquire a portion of the
working interest to reduce exposure to costs and drilling risks;
and
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decisions
of our joint working interest
owners.
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We will
continue to gather data about our prospects, and it is possible that additional
information may cause us to alter our drilling schedule or determine that a
prospect should not be pursued at all. You should understand that our
plans regarding our prospects are subject to change.
Weather,
unexpected subsurface conditions, and other unforeseen hazards may adversely
impact our ability to conduct business.
There are
many operating hazards in exploring for and producing oil and gas,
including:
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our
drilling operations may encounter unexpected formations, pressures, lost
circulation and/or other unforeseen conditions which could cause damage to
equipment, personal injury or equipment
failure;
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we
may experience power outages, labor disruptions, fire, equipment failures
which could curtail or stop drilling or production;
and
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we
could experience blowouts, sour gas leakages or other damages to the
productive formations that may require a well to be re-drilled or other
corrective action to be taken.
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33
In
addition, any of the foregoing may result in environmental damages for which we
could be liable. We cannot assure you that we will be able to
maintain adequate insurance at rates we consider reasonable to cover our
possible losses from operating hazards. The occurrence of a
significant event not fully insured or indemnified against could materially and
adversely affect our financial condition and results of operations.
We
have no experience in drilling wells to the Marcellus Shale and less information
regarding reserves and decline rates in the Marcellus Shale than in other areas
of our operations.
We have
no experience in drilling development wells to the Marcellus Shale. As of the
date hereof, we own 19 existing wells that are completed in the Medina Sand on
our Java Field properties. We plan to work over several of these
wells and drill new wells to the Marcellus Shale on this property. Thus, we have
much less information with respect to the ultimate recoverable reserves and the
production decline rate in the Marcellus Shale than we have in our other areas
of operation. To the extent that we decide to re-enter and recomplete our
existing wells, the wells will be susceptible to mechanical problems such as
casing collapse and lost equipment in the wellbore. In addition, the fracturing
of the Marcellus Shale will be more extensive and complicated than fracturing
the geological formations in our other areas and will require greater volumes of
water than conventional gas wells. The management of water and the
treatment of produced water from Marcellus Shale wells may be more costly than
the management of produced water from other geologic
formations. These Marcellus Shale wells may also require horizontal
drilling which would further increase our development costs.
We
do not own all of the land on which our pipelines are located or on which we may
seek to locate pipelines in the future, which could disrupt our operations and
growth.
We do not
own the land on which Java Field pipelines have been constructed, but we do have
right-of-way and easement agreements from landowners, some of which may require
annual payments to maintain the agreements and most of which have a perpetual
term. New pipeline infrastructure construction may subject us to more onerous
terms or to increased costs if the design of a pipeline requires redirecting.
Such costs could have a material adverse effect on our business, results of
operations and financial condition.
In
addition, the construction of additions to the Java Field pipeline may require
us to obtain new rights-of-way prior to constructing new pipelines. We may be
unable to obtain such rights-of-way to expand the Java Field pipeline or
capitalize on other attractive expansion opportunities. Additionally, it may
become more expensive to obtain new rights-of-way. If the cost of obtaining new
rights-of-way increases, then our cash flows and results of operation could be
adversely affected.
A
shortage of drilling rigs and other equipment and geophysical service crews
could hamper our ability to exploit any oil and gas resources we may
acquire.
Because
of the increased oil and gas exploration activities in the United States,
competition for available drilling rigs and related services and equipment has
increased significantly and these rigs and related items have become
substantially more expensive and harder to obtain. If we do acquire
properties and related rights to drill wells, we may not be able to procure the
necessary drill rigs and related services and equipment, or the cost of such
items may be prohibitive. Our ability to comply with future license
obligations or otherwise generate revenues from the production of operating oil
and gas wells could be hampered as a result of this, and our business could
suffer.
34
Drilling
wells could result in liabilities, which could endanger our interests in our
prospective properties and assets.
There are
risks associated with the drilling of oil and natural gas wells, including
encountering unexpected formations or pressures, premature declines of
reservoirs, blow-outs, sour gas releases, fires and spills. The occurrence of
any of these events could significantly reduce our future revenues or cause
substantial losses, impairing our future operating results. We may become
subject to liability for pollution, blow-outs or other hazards. We will obtain
insurance with respect to these hazards as appropriate to our activities, but
such insurance has limitations on liability that may not be sufficient to cover
the full extent of such liabilities. The payment of such liabilities could
reduce the funds available to us or could, in an extreme case, result in a total
loss of our properties and assets. Moreover, we may not be able to maintain
adequate insurance in the future at rates that are considered reasonable. Oil
and natural gas production operations are also subject to all the risks
typically associated with such operations, including premature decline of
reservoirs and the invasion of water into producing formations.]
Decommissioning
costs are unknown and may be substantial; unplanned costs could divert resources
from other projects.
We may
become responsible for costs associated with abandoning and reclaiming wells,
facilities and pipelines which we may use for production of oil and gas
reserves. Abandonment and reclamation of these facilities and the costs
associated therewith is often referred to as “decommissioning.” We have
established a cash escrow account with the State of New York for these potential
costs in the Java Field. We may establish similar accounts for other
properties in which we have a participation interest. If
decommissioning is required before economic depletion of our future properties
or if our estimates of the costs of decommissioning exceed the value of the
escrow account or the reserves remaining at any particular time to cover such
decommissioning costs, we may have to draw on funds from other sources to
satisfy such costs. The use of other funds to satisfy such decommissioning costs
could impair our ability to focus capital investment in other areas of our
business.
Our
inability to obtain necessary facilities could hamper our
operations.
Oil and
natural gas exploration and development activities are dependent on the
availability of drilling and related equipment, transportation, power and
technical support in the particular areas where these activities will be
conducted, and our access to these facilities may be limited. To the extent that
we conduct our activities in remote areas, needed facilities may not be
proximate to our operations which will increase our expenses. Demand for such
limited equipment and other facilities or access restrictions may affect the
availability of such equipment to us and may delay exploration and development
activities. The quality and reliability of necessary facilities may also be
unpredictable and we may be required to make efforts to standardize our
facilities, which may entail unanticipated costs and delays. Shortages and/or
the unavailability of necessary equipment or other facilities will impair our
activities, either by delaying our activities, increasing our costs or
otherwise.
35
Our
ability to sell natural gas and/or receive market prices for our natural gas may
be adversely affected by pipeline and gathering system capacity constraints and
various transportation interruptions.
If
drilling in the Marcellus Shale continues to be successful, the amount of
natural gas being produced by us and others could exceed the capacity of the
various gathering and intrastate or interstate transportation pipelines
currently available in this area. If this occurs, it will be necessary for new
pipelines and gathering systems to be built. Because of the current economic
climate, certain pipeline projects that are planned for the Marcellus Shale area
may not be undertaken for lack of financing. In addition, capital constraints
could limit our ability to build intrastate gathering systems necessary to
transport our gas from our properties to interstate pipelines. In such event, we
might have to shut in one or more of our wells awaiting a pipeline connection or
capacity and/or sell natural gas production at significantly lower prices than
those quoted on NYMEX or than we currently project, which would adversely affect
our results of operations.
Compliance
with environmental and other government regulations could be costly and could
negatively impact production.
Our
operations are subject to numerous federal, state and local laws and regulations
governing the operation and maintenance of our facilities and the discharge of
materials into the environment or otherwise relating to environmental
protection. These laws and regulations may:
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require
that we acquire permits before commencing
drilling;
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restrict
the substances that can be released into the environment in connection
with drilling and production
activities;
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limit
or prohibit drilling activities on protected areas such as wetland or
wilderness areas; and
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require
remedial measures to mitigate pollution from former operations, such as
dismantling abandoned production
facilities.
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Under
these laws and regulations, we could be liable for personal injury and clean-up
costs and other environmental and property damages, as well as administrative,
civil and criminal penalties. We maintain limited insurance coverage
for sudden and accidental environmental damages. We do not believe
that insurance coverage for environmental damages that occur over time is
available at a reasonable cost. Also, we do not believe that
insurance coverage for the full potential liability that could be caused by
sudden and accidental environmental damages is available at a reasonable
cost. Accordingly, we may be subject to liability or we may be
required to cease production (subsequent to any commencement) from properties in
the event of environmental damages.
Factors
beyond our control affect our ability to market production and our financial
results.
The
ability to market oil and gas produced from our wells depends upon numerous
factors beyond our control. These factors include:
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the
extent of domestic production and imports of oil and
gas;
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36
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the
proximity of the gas production to gas
pipelines;
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the
availability of pipeline capacity;
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the
demand for oil and gas by utilities and other end
users;
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the
availability of alternative fuel
sources;
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the
effects of inclement weather;
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state
and federal regulation of oil and gas marketing;
and
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federal
regulation of gas sold or transported in interstate
commerce.
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Additionally,
world prices and markets for oil and gas are unpredictable, highly volatile,
potentially subject to governmental fixing, pegging, controls, or any
combination of these and other factors, and respond to changes in domestic,
international, political, social, and economic environments. Also, due to
worldwide economic uncertainty, the availability and cost of funds for
production and other expenses have become increasingly difficult, if not
impossible, to project. These changes and events may materially adversely affect
our financial performance.
Because
of these factors, we may be unable to market all of the oil or gas that we might
produce. In addition, we may be unable to obtain favorable prices of
the oil and gas that we might produce.
The
market for oil and gas is highly competitive, and we face competition from many
established domestic and foreign companies. We may not be able to
compete effectively with these companies.
The
markets in which we operate are highly competitive. We compete
against numerous well-established national and foreign companies in every aspect
of the oil and gas production industry. We may not be able to compete
effectively with these competitors, and customers may not buy any or all of the
oil and gas that we expect to produce. Some of our competitors have
longer operating histories, and significantly greater recognition in the market
and financial and other resources, than we.
If
we are unable to obtain additional funding, business operations will be harmed
and if we do obtain additional financing, existing shareholders may suffer
substantial dilution.
We will
require additional funds to drill wells on our properties. We anticipate that we
will require up to approximately $10,000,000 to adequately fund our projected
operations for the next twelve months, depending on revenue, if any, from
operations. Additional capital will likely be required to effectively
support the operations and to otherwise implement our overall business strategy.
We have raised some capital to date, including through the sale of the
Debentures (discussed below), but we currently do not have any contracts or firm
commitments for additional financing. There can be no assurance that additional
financing will be available in amounts or on terms acceptable to us, if at
all. An inability to obtain additional capital would restrict our
ability to grow and could diminish our ability to continue to conduct our
business operations. If we are unable to obtain additional financing,
we will likely be required to curtail drilling and development plans and
possibly cease operations. Any additional equity financing may involve
substantial dilution to then existing shareholders.
37
Because
we are small and do not have much capital, we may have to limit our exploration
and developmental drilling activity which may result in a loss of your
investment.
Because
we are a small, exploration stage company and do not have much capital, we must
limit our drilling activity. As such, we may not be able to complete a drilling
program that is as thorough as we would like. In that event, existing reserves
may go undiscovered. Without finding reserves, we cannot generate revenues and
you may lose any investment you make in our shares.
If
we are unable to continue to retain the services of Messrs. Randy M. Griffin,
Ray L. Unruh and David L. Freeman or if we are unable to successfully recruit
qualified managerial and field personnel having experience in oil and gas
exploration, we may not be able to continue operations.
Success
depends to a significant extent upon the continued services of Mr. Randy M.
Griffin, the Chief Executive Officer, Ray L. Unruh, the President and David L.
Freeman, the Executive Vice President of Oil & Gas Operations. Loss of the
services of Messrs. Griffin, Unruh or Freeman could have a material adverse
effect on growth, revenues, and prospective business. We plan to obtain,
however, key-man insurance covering Messrs. Griffin, Unruh and Freeman. We
cannot assure you, however, that this insurance will be available at a
reasonable cost or at all. In order to successfully implement and
manage our business plan, we will be dependent upon, among other things,
successfully recruiting qualified managerial and field personnel having
experience in the oil and gas exploration business. Competition for qualified
individuals is intense. There can be no assurance that we will be able to find
and attract new employees and retain existing employees or that we will be able
to find, attract and retain qualified personnel on acceptable
terms.
Our
directors and executive officers control a significant portion of our stock and,
if they choose to vote together, could have sufficient voting power to control
the vote on substantially all corporate matters.
As of
April 12, 2010, our directors and executive officers beneficially owned 51.0% of
our outstanding common stock in the aggregate. Our directors and
executive officers, in their capacities as stockholders, may have significant
influence over our policies and affairs, including the election of
directors. Should they act as a group, they will have the power to
elect all of our directors and to control the vote on substantially all other
corporate matters without the approval of other
stockholders. Furthermore, such concentration of voting power could
enable those stockholders to delay or prevent another party from taking control
of our company even where such change of control transaction might be desirable
to other stockholders.
38
We
may have difficulty managing growth in our business.
Because
of the relatively small size of our business, growth in accordance with our
long-term business plans, if achieved, will place a significant strain on our
financial, technical, operational and management resources. As we increase our
activities and the number of projects we are evaluating or in which we
participate, there will be additional demands on our financial, technical,
operational and management resources. The failure to continue to upgrade our
technical, administrative, operating and financial control systems or the
occurrence of unexpected expansion difficulties, including the recruitment and
retention of required personnel could have a material adverse effect on our
business, financial condition and results of operations and our ability to
timely execute our business plan.
As
our properties are in the exploration stage, there can be no assurance that we
will establish commercial discoveries on the properties.
Exploration
for economic reserves of oil and gas is subject to a number of risk factors.
Many properties that are explored are not ultimately developed into producing
oil and/or gas wells. As it relates to the Marcellus Shale, our
properties are in the exploration stage and we have only preliminary third party
engineering reports relating to an indication of the potential for proven,
undeveloped reserves on such properties. Our existing wells are
producing minimal volumes of natural gas and we may not establish any new
commercial discoveries on any of the properties.
Production
initiatives may not prove successful.
The
primary target for production of natural gas in our Java Field property is the
Marcellus Shale. The amount of natural gas that can be commercially produced
from any shale gas reservoir depends upon the rock and shale formation quality,
the original free gas content of the shales, the thickness of the shales, the
reservoir pressure, the rate at which gas is released from the shales, the
existence of any natural fractures through which the gas can flow to the well
bore and the success of the hydraulic fracturing of the formation.
There is
no guarantee that the potential drilling locations we now have or may acquire in
the future will ever produce commercial volumes of natural gas, which could have
a material adverse effect upon our results of operations.
Prospects
that we decide to drill may not yield natural gas in commercially viable
quantities.
Although
we commenced operations in preparation for recompletion of two wells in the Java
Field, those activities are not yet complete. The use of seismic
data, historical drilling logs, offsetting well information and other
technologies and the study of producing fields in the same area will not enable
us to know conclusively prior to recompletion and testing of these wells whether
natural gas will be present or, if present, whether natural gas or oil will be
present in sufficient quantities or quality to recover drilling or completion
costs or to be economically viable. In sum, the cost of drilling, completing and
operating any wells is often uncertain and new wells may not be
productive.
39
If
production results from operations, we will be dependent upon transportation and
storage services provided by third parties.
We will
be dependent on the transportation services offered by various interstate and
intrastate pipeline companies for the delivery and sale of gas production. Both
the performance of transportation services by interstate pipelines and the rates
charged for such services are subject to the jurisdiction of the Federal Energy
Regulatory Commission or state regulatory agencies. An inability to obtain
transportation services at competitive rates could hinder processing and
marketing operations and/or affect our sales margins.
Any
change to government regulation/administrative practices may have a negative
impact on the ability to operate and profitability.
The laws,
regulations, policies or current administrative practices of any government
body, organization or regulatory agency in the United States or any other
jurisdiction, may be changed, applied or interpreted in a manner which will
fundamentally alter the ability of our company to carry on our
business.
The
actions, policies or regulations, or changes thereto, of any government body or
regulatory agency, or other special interest groups, may have a detrimental
effect on us. Any or all of these situations may have a negative impact on our
ability to operate profitably.
Current
volatile market conditions and significant fluctuation in energy prices may
continue indefinitely and could negatively affect our business prospects and
viability.
Commodities
and capital markets have been under great stress and volatility during the past
18 months in part due to the credit crisis affecting lenders and borrowers on a
worldwide basis. As a result, crude oil prices have tumbled from over one
hundred forty dollars ($140) per barrel in mid 2008 to less than forty dollars
($40) per barrel in early 2009, causing companies to re-think existing
strategies and new business ventures. We are vigilant of the situation unfolding
and are adjusting our strategy to reflect these new market conditions.
Nonetheless, we will not be immune to lower commodities prices and significantly
more restrictive credit market conditions. Our ability to enter into
exploration and production projects may be compromised, and in a continuing
environment of lower crude oil and natural gas prices, our future results of
operations and market value could be affected negatively.
Difficult
conditions in the global capital markets may significantly affect our ability to
raise additional capital to continue operations.
The
ongoing worldwide financial and credit upheaval may continue
indefinitely. Because of reduced market liquidity, we may not be able
to raise additional capital when we need it. Because the future of
our business will depend on our ability to explore and develop the natural gas
resources on our existing leasehold properties and the completion the
acquisition of one or more additional leasehold properties for which, most
likely, we will need additional capital, we may not be able to complete such
development and acquisition projects or develop or acquire revenue producing
assets. As a result, we may not be able to generate income and, to
conserve capital, we may be forced to curtail our current business activities or
cease operations entirely.
40
Being
a public company has increased our expenses and administrative
workload.
As a
public company, we must comply with various laws and regulations, including the
Sarbanes-Oxley Act of 2002 and related rules of the SEC. Complying
with these laws and regulations requires the time and attention of our board of
directors and management, and increases our expenses. Among other things, we
must:
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·
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maintain
and evaluate a system of internal controls over financial reporting in
compliance with the requirements of Section 404 of the Sarbanes-Oxley Act
and the related rules and regulations of the SEC and the Public Company
Accounting Oversight Board;
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·
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maintain
policies relating to disclosure controls and
procedures;
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prepare
and distribute periodic reports in compliance with our obligations under
federal securities laws;
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institute
a more comprehensive compliance function, including with respect to
corporate governance; and
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involve
to a greater degree our outside legal counsel and accountants in the above
activities.
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In
addition, being a public company has made it more expensive for us to obtain
director and officer liability insurance. In the future, we may be required to
accept reduced coverage or incur substantially higher costs to obtain this
coverage. These factors could also make it more difficult for us to attract and
retain qualified executives and members of our board of directors, particularly
directors willing to serve on an audit committee which we expect to
establish.
Our
insurance may be inadequate to cover liabilities we may incur.
Our
involvement in the exploration for and development of oil and natural gas
properties may result in our becoming subject to liability for pollution,
blow-outs, property damage, personal injury or other hazards. Although we plan
to obtain insurance in accordance with industry standards to address such risks,
such insurance has limitations on liability that may not be sufficient to cover
the full extent of such liabilities. In addition, such risks may not, in all
circumstances be insurable or, in certain circumstances, we may choose not to
obtain insurance to protect against specific risks due to the high premiums
associated with such insurance or for other reasons. The payment of such
uninsured liabilities would reduce the funds available to us. If we suffer a
significant event or occurrence that is not fully insured, or if the insurer of
such event is not solvent, we could be required to divert funds from capital
investment or other uses towards covering our liability for such
events.
We
will rely on technology to conduct our business and our technology could become
ineffective or obsolete.
We will
rely on technology, including geologic and seismic analysis techniques and
economic models, to develop reserve estimates and to guide our planned
exploration and development and production activities. We will be required to
continually enhance and update our technology to maintain its efficacy and to
avoid obsolescence. The costs of doing so may be substantial, and may be higher
than the costs that we anticipate for technology maintenance and development. If
we are unable to maintain the efficacy of our technology, our ability to manage
our business and to compete may be impaired. Further, even if we are able to
maintain technical effectiveness, our technology may not be the most efficient
means of reaching our objectives, in which case we may incur higher operating
costs than we would were our technology more efficient.
41
RISKS
RELATED TO OUR SECURITIES
Our
common stock is thinly traded, and a more active market may never
develop.
There
currently is a limited public market for our common stock. Further,
although our common stock is currently quoted on the OTC Bulletin Board (the
“OTCBB”), trading of our common stock may be extremely sporadic. For
example, several days may pass before any shares may be traded. As a
result, an investor may find it difficult to dispose of, or to obtain accurate
quotations of the price of, our common stock. Accordingly, investors
must assume they may have to bear the economic risk of an investment in our
common stock for an indefinite period of time. There can be no
assurance that a more active market for our common stock will develop, or if one
should develop, there is no assurance that it will be sustained. This
severely limits the liquidity of our common stock, and would likely have a
material adverse effect on the market price of our common stock and on our
ability to raise additional capital.
We
cannot assure you that our common stock will become liquid or that it will be
listed on a securities exchange.
Until our
common stock is listed on a national securities exchange such as the New York
Stock Exchange or the Nasdaq National Market, we expect our common stock to
remain eligible for quotation on the OTCBB, or on another over-the-counter
quotation system. In those venues, however, an investor may find it
difficult to obtain accurate quotations as to the market value of our common
stock. In addition, if we fail to meet the criteria set forth in SEC
regulations, various requirements would be imposed by law on broker-dealers who
sell our securities to persons other than established customers and accredited
investors. Consequently, such regulations may deter broker-dealers
from recommending or selling our common stock, which may further affect the
liquidity of our common stock. This would also make it more difficult
for us to raise capital.
Our
common stock is subject to the “penny stock” rules of the SEC and the trading
market in our common stock is limited, which makes transactions in our common
stock cumbersome and may reduce the value of an investment in the
stock.
The SEC
has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for
the purposes relevant to us, as any equity security that has a market price of
less than $5.00 per share or with an exercise price of less than $5.00 per
share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, the rules require:
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·
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that
a broker or dealer approve a person’s account for transactions in penny
stocks; and
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42
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·
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the
broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased.
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In order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must:
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·
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obtain
financial information and investment experience objectives of the person;
and
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·
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make
a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
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The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form sets forth:
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the
basis on which the broker or dealer made the suitability determination;
and
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that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
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Generally,
brokers may be less willing to execute transactions in securities subject to the
“penny stock” rules. This may make it more difficult for investors to dispose of
common stock and cause a decline in the market value of stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
The
price of our common stock may become volatile, which could lead to losses by
investors and costly securities litigation.
The
trading price of our common stock is likely to be highly volatile and could
fluctuate in response to factors such as:
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actual
or anticipated variations in our operating
results;
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announcements
of developments by us, our strategic partners or our
competitors;
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announcements
by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital
commitments;
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adoption
of new accounting standards affecting our
industry;
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43
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additions
or departures of key personnel;
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sales
of our common stock or other securities in the open market;
and
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·
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other
events or factors, many of which are beyond our
control.
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The stock
market is subject to significant price and volume fluctuations. In the past,
following periods of volatility in the market price of a company’s securities,
securities class action litigation has often been initiated against the company.
Litigation initiated against us, whether or not successful, could result in
substantial costs and diversion of our management’s attention and resources,
which could harm our business and financial condition.
Compliance
with U.S. securities laws, including the Sarbanes-Oxley Act, will be costly and
time-consuming.
Upon
consummating the reverse merger, we became a reporting company under U.S.
securities laws, and we are be obliged to comply with the provisions of
applicable U.S. laws and regulations, including the Securities Act of 1933, the
Securities Exchange Act of 1934, and the Sarbanes-Oxley Act of 2002 and the
related rules of the SEC, and the rules and regulations of the relevant U.S.
market, in each case, as amended from time to time. Preparing and
filing annual and quarterly reports and other information with the SEC,
furnishing audited reports to stockholders and other compliance with these rules
and regulations will involve a material increase in regulatory, legal and
accounting expenses and the attention of management, and there can be no
assurance that we will be able to comply with the applicable regulations in a
timely manner, if at all.
We
do not anticipate dividends to be paid on our common stock, and investors may
lose the entire amount of their investment.
Cash
dividends have never been declared or paid on our common stock, and we do not
anticipate such a declaration or payment for the foreseeable future. We expect
to use future earnings, if any, to fund business growth. Therefore, stockholders
will not receive any funds absent a sale of their shares. We cannot assure
stockholders of a positive return on their investment when they sell their
shares, nor can we assure that stockholders will not lose the entire amount of
their investment.
If
securities analysts do not initiate coverage or continue to cover our common
stock or publish unfavorable research or reports about our business, this may
have a negative impact on the market price of our common stock.
The
trading market for our common stock may be affected by, among other things, the
research and reports that securities analysts publish about our business and the
Company. We do not have any control over these analysts. There is no guarantee
that securities analysts will cover our common stock. If securities analysts do
not cover our common stock, the lack of research coverage may adversely affect
its market price. If we are covered by securities analysts, and our stock is the
subject of an unfavorable report, our stock price and trading volume would
likely decline. If one or more of these analysts ceases to cover the Company or
fails to publish regular reports on the Company, we could lose visibility in the
financial markets, which could cause our stock price or trading volume to
decline.
44
State
Blue Sky registration: potential limitations on resale of the
shares.
The
holders of the shares of our common stock and persons who desire to purchase the
shares in any trading market that might develop in the future should be aware
that there may be significant state law restrictions upon the ability of
investors to resell the securities. Accordingly, investors should
consider the secondary market for our securities to be a limited
one. It is the intention of our management to seek coverage and
publication of information regarding the Company in an accepted publication
which permits a “manuals exemption.” This manuals exemption permits a
security to be sold by shareholders in a particular state without being
registered if the company issuing the security has a listing for that security
in a securities manual recognized by that state. The listing entry
must contain (i) the names of issuers, officers, and directors, (ii) an issuer’s
balance sheet, and (iii) a profit and loss statement for either the fiscal year
preceding the balance sheet or for the most recent fiscal year of
operations. The principal accepted manuals are those published by
Standard and Poor’s, and Mergent, Inc. Many states expressly
recognize these manuals. A smaller number of states declare that they
recognize securities manuals, but do not specify the recognized
manuals. Among others, the following states do not have any
provisions and, therefore, do not expressly recognize the manuals
exemption: Alabama, California, Georgia, Illinois, Kentucky,
Louisiana, Montana, South Dakota, Tennessee, Vermont, and
Wisconsin.
You
may experience dilution of your ownership interests because of the future
issuance of additional shares of our common stock.
In the
future, we may issue our authorized but previously unissued equity securities,
resulting in the dilution of the ownership interests of our present stockholders
and the purchasers of our common stock offered hereby. We are
currently authorized to issue an aggregate of 310,000,000 shares of capital stock
consisting of 300,000,000 shares of
common stock and 10,000,000 shares of preferred stock with preferences and
rights to be determined by the our Board of Directors. As
of April 12, 2010, there were 40,574,611 shares of our
common stock and no shares of our preferred stock outstanding. There
are 4,952,000
shares of our common stock reserved for issuance under our 2009 Equity Incentive
Plan and 100,000 shares issuable pursuant to the terms of Consulting
Agreements. These numbers do not include shares of our common stock
issuable upon the exercise of outstanding options and conversion of outstanding
convertible promissory notes.
Any
future issuance of our equity or equity-backed securities may dilute
then-current stockholders’ ownership percentages and could also result in a
decrease in the fair market value of our equity securities, because our assets
would be owned by a larger pool of outstanding equity. As described above, we
may need to raise additional capital through public or private offerings of our
common or preferred stock or other securities that are convertible into or
exercisable for our common or preferred stock. We may also issue such
securities in connection with hiring or retaining employees and consultants
(including stock options issued under our equity incentive plans), as payment to
providers of goods and services, in connection with future acquisitions or for
other business purposes. Our Board of Directors may at any time authorize the
issuance of additional common or preferred stock without common stockholder
approval, subject only to the total number of authorized common and preferred
shares set forth in our certificate of incorporation. The terms of equity
securities issued by us in future transactions may be more favorable to new
investors, and may include dividend and/or liquidation preferences, superior
voting rights and the issuance of warrants or other derivative securities, which
may have a further dilutive effect. Also, the future issuance of any such
additional shares of common or preferred stock or other securities may create
downward pressure on the trading price of the common stock. There can be no
assurance that any such future issuances will not be at a price (or exercise
prices) below the price at which shares of the common stock are then
traded.
45
We
may obtain additional capital through the issuance of preferred stock, which may
limit your rights as a holder of our Common Stock.
Without
any stockholder vote or action, our board of directors may designate and approve
for issuance shares of our preferred stock. The terms of any
preferred stock may include priority claims to assets and dividends and special
voting rights which could limit the rights of the holders of our common
stock. The designation and issuance of preferred stock favorable to
current management or stockholders could make any possible takeover of the
Company or the removal of our management more difficult.
Any
failure to maintain effective internal control over our financial reporting
could materially adversely affect us.
Section
404 of the Sarbanes-Oxley Act of 2002 will require us to include in our annual
reports on Form 10-K, an assessment by management of the effectiveness of our
internal control over financial reporting. In addition, beginning
with our Form 10-K for the fiscal year ending December 31, 2010, our independent
auditors must attest to and report on management’s assessment of the
effectiveness of such internal control over financial reporting. While we intend
to diligently and thoroughly document, review, test and improve our internal
control over financial reporting in order to ensure compliance with Section 404,
management may not be able to conclude that our internal control over financial
reporting is effective. Furthermore, even if management were to reach
such a conclusion, if our independent auditors are not satisfied with the
adequacy of our internal control over financial reporting, or if the independent
auditors interpret the requirements, rules or regulations differently than we
do, then they may decline to attest to management’s assessment or may issue a
report that is qualified. Any of these events could result in a loss
of investor confidence in the reliability of our financial statements, which in
turn could negatively impact the price of our common stock.
In
particular, we must perform system and process evaluation and testing of our
internal control over financial reporting to allow management and our
independent registered public accounting firm to report on the effectiveness of
our internal control over financial reporting, as required by Section
404. Our compliance with Section 404 will require that we incur
substantial accounting expense and expend significant management efforts. We
currently do not have an internal audit group, and we will need to retain the
services of additional accounting and financial staff or consultants with
appropriate public company experience and technical accounting knowledge to
satisfy the ongoing requirements of Section 404. We intend to review the
effectiveness of our internal controls and procedures and make any changes
management determines appropriate, including to achieve compliance with Section
404 by the date on which we are required to so comply.
As of
December 31, 2009, our management assessed the effectiveness of our internal
control over financial reporting based on the criteria for effective internal
control over financial reporting established in Internal Control–Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and SEC guidance on conducting such assessments. Based on that
evaluation, they concluded that, during the fiscal year ended December 31, 2009,
such internal controls and procedures were not effective to detect the
inappropriate application of US GAAP rules as more fully described
below. This was due to deficiencies that existed in the design or
operation of our internal controls over financial reporting that adversely
affected our internal controls and that may be considered to be material
weaknesses.
46
The
matters involving internal controls and procedures that our management
considered to be material weaknesses under the standards of the Public Company
Accounting Oversight Board were: (1) our lack of a functioning audit
committee due to a lack of a majority of independent members and a lack of a
majority of outside directors on our board of directors, resulting in
ineffective oversight in the establishment and monitoring of required internal
controls and procedures; (2) we had not developed and effectively communicated
to our employees our accounting policies and procedures, resulting in
inconsistent application of such policies and procedures in our financial
statements in 2009; (3) inadequate segregation of duties consistent with control
objectives; and (4) ineffective controls over period end financial disclosure
and reporting processes. The aforementioned material weaknesses were
identified by our Chief Executive Officer in connection with the review of our
financial statements as of December 31, 2009.
Any
significant deficiencies in our control systems may affect our ability to comply
with SEC reporting requirements and any applicable listing standards or cause
our financial statements to contain material misstatements, which could
negatively affect the market price and trading liquidity of our common stock and
cause investors to lose confidence in our reported financial information, as
well as subject us to civil or criminal investigations and
penalties.
We
are a holding company that depends on cash flow from our subsidiaries to meet
our obligations and pay dividends.
We are a
holding company with no material assets other than the stock of our wholly owned
subsidiaries, Mesa Energy, Inc. and Mesa Energy Operating,
LLC. Accordingly, we anticipate that all of our operations will be
conducted, directly or indirectly, by Mesa Energy, Inc. (and any additional
subsidiaries we may form or acquire). We currently expect that the
earnings and cash flow of our subsidiaries will primarily be retained and used
by them in their operations, including servicing any debt obligations they may
have now or in the future. Therefore, our subsidiaries may not be
able to generate sufficient cash flow to distribute funds to us in order to
allow us to pay our obligations as they become due or, although we do not
anticipate paying any dividends in the foreseeable future, pay future dividends
on, or make any distributions with respect to, our common or other
stock. Additionally, our ability to participate as an equity holder
in any distribution of assets of any subsidiary upon liquidation is generally
subordinate to the claims of creditors of the subsidiaries.
ITEM
1B.
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UNRESOLVED
STAFF COMMENTS
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Not
applicable.
47
ITEM
2.
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PROPERTIES
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Java
Field, Wyoming County, New York
In August
2009 we acquired mineral leases, surface agreements, wells and well related
equipment, pipelines, rights of way, and other related facilities in the Java
Field from Hydrocarbon Generation, Inc. The acquisition includes a
100% working interest in 19 leases covering approximately 3,235 mineral acres
with 19 existing wells, two tracts of land totaling approximately 36 acres and
two pipeline systems, including a 12.4 mile pipeline and gathering system that
serves the existing field as well as a separate 2.5 mile system located north of
the field. We obtained a title report covering these interests prior
to the Merger. See “Item 1. Business—Java Field Natural Gas
Development Project – Wyoming County, New York,” above, for more
information.
Coal
Creek Prospect, Sequoyah County, Oklahoma
We have
interests in 8 oil and gas leases covering approximately 677 gross acres in the
Coal Creek Prospect. We acquired the interests from Wentworth Operating Company
(“Wentworth”) in September 2004. In that transaction, we acquired all of
Wentworth’s working interest in each of the leases. At that time, we
obtained a title opinion covering the interests, and we obtained an additional
title report prior to the reverse merger. We and Wentworth entered
into a farm-out agreement in December 2007, pursuant to which Wentworth
re-acquired an undivided 70% interest in the leases which we had originally
acquired from Wentworth, as described in more detail above. See “Item
1. Business—Coal Creek Prospect – Sequoyah County, Oklahoma,” above, for more
information.
Description
of Corporate Offices
Our
corporate offices are currently located in Spring Valley Center, a six-story
office complex at 5220 Spring Valley Road, Dallas, Texas 75254. The
current lease for our office space (Suite 525) expired September 30, 2008 and we
are currently occupying the premises on a month-to-month
arrangement. The existing office space covers 1,492 square feet with
a monthly rent of $2,293. Due to the increase in staffing that will
likely be required for accounting and technical support of our operations; we
anticipate the need for more office space in the near future, possibly in the
second or third quarter of 2010. Our management believes that there
is ample space to accommodate such growth in the existing building complex or in
a number of surrounding commercial office buildings.
ITEM
3.
|
LEGAL
PROCEEDINGS
|
From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is
subject to inherent uncertainties, and an adverse result in these or other
matters that may arise from time to time that may harm business.
Except
for the matter described below, other than routine litigation arising in the
ordinary course of business that we do not expect, individually or in the
aggregate, to have a material adverse effect on us, there is no currently
pending legal proceeding and, as far as we are aware, no governmental authority
is contemplating any proceeding to which we are a party or to which any of our
properties is subject.
48
Although
there can be no assurance as to the ultimate outcome, we have denied liability
in the case pending against us, and we intend to defend vigorously such case.
Based on information currently available, we believe the amount, or range, of
reasonably possible losses in connection with the action against us not to be
material to our consolidated financial condition or cash flows. However, losses
may be material to our operating results for any particular future period,
depending on the level of income for such period.
Shallow Draft
Elevating Boats, Inc. vs. Poydras Energy, LLC, Poydras Energy Partners, LLC,
Mesa Energy, Inc. and David Freeman: In connection with its previous
ownership of Poydras Energy, LLC, MEI has been named in a legal action by a
Poydras vendor regarding approximately $114,000 in unpaid
invoices. The case was filed on June 22, 2009, in the 25th Judicial
District Court of Plaquemines Parish, Louisiana, by Shallow Draft Elevating
Boats, Inc., seeking to perfect a lien against various wells in the Main Pass 35
project. These invoices are the responsibility of Poydras Energy,
LLC. In the agreement to sell Poydras to St. Francisville Oil &
Gas, LLC, which closed June 1, 2009, St. Francisville agreed to fully indemnify
MEI against any claims related to Poydras Energy, LLC. We believe
that St. Francisville has filed all appropriate responses to the legal action on
our behalf and is handling the case as appropriate. We do not believe
there is any merit to the claim as it relates to MEI but will continue to
monitor the situation.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
No
matters were submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the fourth quarter of the fiscal year covered by
this Annual Report.
49
PART
II
ITEM
5.
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Market
Information and Holders
As of
April 12, 2010, there were 40,574,611 shares of our common stock issued and
outstanding (including 841,100 shares of common stock that have been issued and
are being held in escrow for disbursement to investor relations consultants,
pursuant to an IR Shares Escrow Agreement between us and Gottbetter &
Partners, LLP, as escrow agent), 8,808,290 shares of common stock issuable upon
conversion of principal and accrued but unpaid interest amounts of outstanding
convertible promissory notes, 100,000 shares issuable pursuant to the terms of
Consulting Agreements and 4,952,000 shares reserved for issuance pursuant to
grants of awards under our 2009 Equity Incentive Plan. On that date,
there were approximately 115 holders of record of our outstanding common
stock. As of that date, there are no shares of our common stock
outstanding or issuable upon conversion or exercise of outstanding securities
that could be sold under Rule 144.
We
granted registration rights to the investors purchasing convertible promissory
notes in our private placement offering thereof. We are required to
prepare and file with the SEC a registration statement on Form S-1 covering the
resale and distribution of no less than 125% of the shares of common stock
issuable upon conversion of the convertible promissory notes (the “Registrable
Shares”). We were required to file such registration statement with
the SEC by February 27, 2010 and use our best efforts to have such the
registration statement declared effective by the SEC by May 28,
2010. If we are unable to comply with these deadlines, then we will
be required to pay as partial liquidated damages to the investors a cash sum
equal to 1% of the principal amount of convertible promissory notes and the
purchase price of Registrable Shares issued upon conversion of convertible
promissory notes, in each case that are affected by such default, for each full
thirty (30) days during which such default continues. We have not
filed the required registration statement and are seeking waivers of the
liquidated damages provisions from the holders of our convertible promissory
notes. As of April 12, 2010, we have obtained such waivers from the
purchasers of all but $75,000 principal amount of such notes.
We also
granted a demand registration right to the investors purchasing convertible
promissory notes in our private placement offering. On one occasion,
commencing February 28, 2010, but not later than August 31, 2011, upon the
request of holders of more than 50% of the shares issued and issuable upon
conversion of outstanding convertible promissory notes, we must prepare and file
a registration statement registering the Registrable Shares with the
SEC. If we are unable to file such registration statement within 60
days after such request and have such registration statement declared effective
by the SEC within 120 days after such request, then we will be required to pay
the same liquidated damages as described above.
The
shares of common stock issued or issuable upon conversion of the convertible
promissory notes also have the benefit of “piggyback” registration rights for
such shares of common stock with respect to registration statements we may file
for our own account or for the account of other security holders or both, with
certain exceptions.
50
We have
no outstanding shares of preferred stock.
From May
30, 2008 through August 4, 2009, our common stock was quoted on the OTCBB under
the trading symbol “MSQT.OB,” and commencing August 5, 2009, our trading symbol
has been “MSEH.OB.” Prior to December 14, 2009, no shares of our
common stock were traded on the OTCBB.
Trades in
our common stock may be subject to Rule 15g-9 under the Exchange Act, which
imposes requirements on broker/dealers who sell securities subject to the rule
to persons other than established customers and accredited
investors. For transactions covered by the rule, broker/dealers must
make a special suitability determination for purchasers of the securities and
receive the purchaser’s written agreement to the transaction before the
sale.
The SEC
also has rules that regulate broker/dealer practices in connection with
transactions in “penny stocks.” Penny stocks generally are equity
securities with a price of less than $5.00 (other than securities listed on
certain national exchanges, provided that the current price and volume
information with respect to transactions in that security is provided by the
applicable exchange or system). The penny stock rules require a
broker/dealer, before effecting a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document
prepared by the SEC that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker/dealer also
must provide the customer with current bid and offer quotations for the penny
stock, the compensation of the broker/dealer and its salesperson in the
transaction, and monthly account statements showing the market value of each
penny stock held in the customer’s account. The bid and offer quotations, and
the broker/dealer and salesperson compensation information, must be given to the
customer orally or in writing before effecting the transaction, and must be
given to the customer in writing before or with the customer’s
confirmation. These disclosure requirements may have the effect of
reducing the level of trading activity in the secondary market for shares of our
common stock. As a result of these rules, investors may find it
difficult to sell their shares.
The
following table sets forth the high and low closing bid prices for our common
stock for the fiscal quarters indicated as reported on the OTCBB. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions. Our common stock is thinly
traded and, thus, pricing of our common stock on the OTCBB does not necessarily
represent its fair market value.
Period
|
High
|
Low
|
||||||
Fiscal Year Ended December 31,
2009:
|
||||||||
Fourth
Quarter (beginning December 14, 2009)
|
$ | 1.48 | $ | 0.40 |
Dividends
We have
not previously paid any cash dividends on our common stock and do not anticipate
or contemplate paying dividends on our common stock in the foreseeable
future. Also, the terms of the convertible promissory notes restrict
our ability to pay dividends. We intend to retain future earnings to
fund ongoing operations and future capital requirements. Any future
determination to pay cash dividends will be at the discretion of our Board of
Directors and will be dependent upon our financial condition, results of
operations, capital requirements and such other factors as the Board of
Directors deems relevant.
51
Securities
Authorized for Issuance under Equity Compensation Plans
We
adopted our 2009 Equity Incentive Plan on August 20, 2009 and the plan was
approved by the holders of a majority of our outstanding shares of common stock
on August 21, 2009. The 2009 Equity Incentive Plan allows for awards
of up to an aggregate of 5,000,000 shares of our common stock, subject to
adjustment under certain circumstances. If an incentive award granted
under the 2009 Equity Incentive Plan expires, terminates, is unexercised or is
forfeited, or if any shares are surrendered to us in connection with an
incentive award, the shares subject to such award and the surrendered shares
will become available for further awards under the 2009 Equity Incentive
Plan. As of April 12, 2010, we have outstanding option awards under
the 2009 Equity Incentive Plan exercisable for an aggregate of 1,048,000 shares
of our common stock, and our Board has granted awards of restricted stock with
respect to an aggregate of 48,000 shares. We have not maintained any other
equity compensation plans since our inception.
The
following table provides information as of December 31, 2009 with respect to the
shares of common stock that may be issued under our existing equity compensation
plans:
Plan Category
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of securities remaining
available for future issuance under
equity compensation plans (excluding
securities reflected in column (a))
|
|||||||||
(a)
|
(b)
|
(c)
|
||||||||||
Equity
compensation plans approved by security holders (1)
|
— | n/a | 5,000,000 | |||||||||
Equity
compensation plans not approved by security holders (2)
|
— | n/a | — | |||||||||
Total
|
— | n/a | 5,000,000 |
(1)
|
Represents
our 2009 Equity Incentive Plan.
|
(2)
|
Does
not include 1,000,000 shares of common stock which we were required to
issue pursuant to the IR Shares Escrow Agreement between us and Gottbetter
& Partners, LLP, as escrow agent, 150,000 of which had been disbursed
to an investor relations firm pursuant to such agreement prior to our 2009
fiscal year end.
|
See
“Executive Compensation” for information regarding individual equity
compensation arrangements received by our executive officers pursuant to their
employment agreements with us.
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
Not
applicable.
52
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this Annual Report on Form
10-K. This discussion contains forward-looking statements that involve risks,
uncertainties and assumptions. See “Note Regarding Forward-Looking Statements.”
Our actual results could differ materially from those anticipated in the
forward-looking statements as a result of certain factors discussed in “Risk
Factors” and elsewhere in this Annual Report on Form 10-K.
Overview
and Going Concern
North
American Risk Management Incorporated was incorporated on January 24, 2001 in
the State of Colorado to engage in the business of providing insurance to
independent and fleet truck operators. However, it had no significant
operations, and because its business operations did not commence in a timely
manner, operations ceased after approximately six months. On February
13, 2006, North American Risk Management Incorporated changed its name to “Mesa
Energy, Inc.” Then, on March 3, 2006, Mesa Energy, Inc. was the
surviving entity in a merger with Mesa Energy, LLC, a Texas limited liability
company, whose activities between April 2003 and March 2006 included
participation in various drilling projects, both as operator and as a
non-operator, as well as the acquisition of the Frenchy Springs and Coal Creek
acreage positions (described above, under “Item 1. Business”). On
March 13, 2006, Mesa Energy, Inc. formed a wholly owned subsidiary in the state
of Nevada, also named “Mesa Energy, Inc.,” and merged with and into it in order
to change its domicile to Nevada.
Mesquite
Mining, Inc. was incorporated in the State of Delaware on October 23, 2007 to
engage in the acquisition and exploration of mining properties. On
June 19, 2009, Mesquite Mining, Inc. amended its Certificate of Incorporation
(i) to change its name from Mesquite Mining, Inc. to Mesa Energy Holdings, Inc.
and (ii) to increase its authorized common stock to 300,000,000 shares, and its
preferred stock to 10,000,000 shares.
On August
31, 2009, we closed a reverse merger transaction pursuant to which a wholly
owned subsidiary of Mesa Energy Holdings, Inc. merged with and into Mesa Energy,
Inc., and Mesa Energy, Inc., as the surviving corporation, became a wholly owned
subsidiary of Mesa Energy Holdings, Inc. (the “reverse merger”).
Immediately
following the closing of the reverse merger, under the terms of a Split-Off
Agreement and a General Release Agreement, we transferred all of our pre-merger
operating assets and liabilities to our wholly owned subsidiary, Mesquite Mining
Group, Inc. (“Split-Off Subsidiary”), a Delaware corporation formed on August
13, 2009. Thereafter, pursuant to the Split-Off Agreement, we
transferred all of the outstanding shares of capital stock of Split-Off
Subsidiary to Beverly Frederick, our pre-reverse merger majority stockholder, in
exchange for (i) the surrender and cancellation of all 21,000,000 shares of our
common stock held by that stockholder and (ii) certain representations,
covenants and indemnities.
After the
reverse merger and the split-off, Mesa Energy Holdings, Inc. succeeded to the
business of Mesa Energy, Inc. as its sole line of business, and all of Mesa
Energy Holdings, Inc.’s then-current officers and directors resigned and were
replaced by Mesa Energy, Inc.’s officers and directors.
53
The
reverse merger was accounted for as a reverse acquisition and recapitalization
of Mesa Energy, Inc. for financial accounting purposes. Consequently,
the assets and liabilities and the historical operations that are reflected in
our financial statements for periods prior to the reverse merger are those of
Mesa Energy, Inc. and have been recorded at the historical cost basis of Mesa
Energy, Inc., and our consolidated financial statements for periods after
completion of the reverse merger include both Mesa Energy Holdings, Inc.’s and
Mesa Energy, Inc.’s assets and liabilities, the historical operations of Mesa
Energy, Inc. prior to the reverse merger and Mesa Energy Holdings, Inc.’s
operations from the closing date of the reverse merger.
The
following discussion highlights the principal factors that have affected our
financial condition as well as our liquidity and capital resources for the
periods described and provides information which management believes is relevant
for an assessment and understanding of the statements of financial condition and
results of operations presented herein. The discussion should be read in
conjunction with our unaudited financial statements and related notes and the
other financial information included elsewhere in this report.
The
Java Field
On August
31, 2009, the closing date of our reverse merger, we acquired the Java Field, a
natural gas development project targeting the Marcellus Shale present in the
Appalachian basin in Wyoming County in western New York. This
acquisition included a 100% working interest in 19 leases held by production
covering approximately 3,235 mineral acres, 19 existing natural gas wells, two
tracts of land totaling approximately 36 acres and two pipeline systems,
including a 12.4 mile pipeline and gathering system that serves the existing
field as well as a separate 2.5 mile system located east of the
field. Our average net revenue interest (NRI) in the leases is
approximately 78%.
The
current minimal production from the Java Field is being sold to a local
manufacturing plant. Two of the existing wells in the Java Field have
never been hooked up to the pipeline system, and the others are believed to have
had very little attention in a number of years. In the fourth quarter
of 2009, we initiated efforts to work over several of the existing wells,
replace meters and associated equipment and set compression in the field which,
we expect, should substantially increase existing production
levels.
The first
phase of development of the Marcellus Shale was also initiated in the fourth
quarter of 2009. We initially evaluated a number of the existing
wells in order to determine the viability of the re-entry of existing wellbores
for plug-back and fracturing of the Marcellus Shale. As a result of
this evaluation, we selected the Reisdorf Unit #1 and the Ludwig #1 as our
initial targets. The frac for both wells has been designed and we are
awaiting permits in order to proceed. Based on the results of these
planned work-overs and our ongoing testing, a second phase of development may be
planned to include the drilling of up to 80 Marcellus Shale wells on our
existing acreage as well as on additional acreage to be leased for future
development.
54
Coal
Creek Prospect
The Coal
Creek Prospect is our developmental prospect targeting the Brent Sand, a shallow
gas reservoir present in the Arkoma Basin of eastern Oklahoma. We
have approximately 677 gross acres under lease near the town of Muldrow,
Oklahoma. This acreage includes two test wells, the Cook #1 well and
the Gipson #1 well, both of which have been completed and tested and recently
hooked up to a third party pipeline.
Acquisition
and Sale of Member Interests in Poydras
On
January 1, 2008, we acquired Poydras Energy Partners, LLC, a Louisiana limited
liability company now known as Poydras Energy, LLC
(“Poydras”). Poydras is a New Orleans-based oil and gas operating
company, whose primary asset is a leasehold interest in the Main Pass 35 Field,
Plaquemines Parish, Louisiana (the “Main Pass 35 Project”). The Main
Pass 35 Project was producing approximately 150 barrels of oil per day prior to
being shut down in advance of Hurricane Katrina. The wells were
undamaged but there was extensive damage to the processing
facility.
We
acquired a 50% member interest in Poydras from David L. Freeman who subsequently
became our Executive Vice President – Oil & Gas Operations. In
exchange, we issued 1,500,000 shares of our restricted common stock to entities
controlled by him. The remaining 50% member interest in Poydras was
acquired from our Chairman and CEO, Randy M. Griffin. For his member
interest in Poydras, we issued a $100,000 promissory note to him, which we paid
in full on April 4, 2008. The consideration paid to Mr. Griffin was
his cost basis in such member interest, which he had recently acquired
specifically for the transfer of such interest to us.
We
expended $1,566,167 in development cost during the year ended December 31, 2008
and $436,037 in additional development costs during the first six months of
2009. We concluded that we did not have adequate resources to
continue our development of the Main Pass Project and the IP #1
well. Accordingly, on June 1, 2009, we sold 100% of our member
interest in Poydras Energy, LLC (“Poydras”) to St. Francisville Oil & Gas,
LLC (“St. Francisville”). St. Francisville agreed to assume all the
assets and related liabilities of the Main Pass 35 Project and the IP #1 well,
which amounted to $2,627,655 of assets and $1,475,658 of
liabilities. We recognized a loss of $1,151,997 on the
transaction.
Going
Concern
As
indicated in the accompanying consolidated financial statements, we have
incurred recurring losses from operations and had a working capital deficit at
December 31, 2009 of $7,518,536. These conditions raise substantial
doubt as to our ability to continue as a going concern. To finance
our net losses, we sold stock and our officers and directors funded us through
notes payable. There can be no assurance that we can sell stock or
debt or that the officers and directors will continue or have the ability to
continue to make financing available to us in the future. Our
officers and directors are under no legal obligation to provide additional loans
to us. In the event that our officers cannot make such loans; that we
cannot create a source of recurring revenues; or that we do not receive funds
from other sources, we may be unable to continue to operate as a going
concern. Our financial statements do not include any adjustments that
might be necessary if we are unable to continue as a going
concern.
55
Adjusted
EBITDA as a Non-GAAP Performance Measure
In
evaluating our business, management believes earnings before interest,
amortization of financing costs, taxes, depreciation, depletion, amortization
and accretion of abandonment liabilities, unrealized gains and losses on
financial instruments, gains and losses on sales of assets and stock-based
compensation expense ("Adjusted EBITDA") is a key indicator of financial
operating performance and is a measure of our ability to generate cash for
operational activities and future capital expenditures. Adjusted
EBITDA is not a GAAP measure of performance. We use this non-GAAP measure
primarily to compare our performance with other companies in our industry and as
a measure of our current liquidity. We believe that this measure may
also be useful to investors for the same purposes and as an indication of our
ability to generate cash flow at a level that can sustain or support our
operations and capital investment program. Investors should not
consider this measure in isolation or as a substitute for income from
operations, or cash flow from operations determined under GAAP, or any other
measure for determining operating performance that is calculated in accordance
with GAAP. In addition, because Adjusted EBITDA is not a GAAP
measure, it may not necessarily be comparable to similarly titled measures that
may be disclosed by other companies.
The
following is a reconciliation of our net income (loss) in accordance with GAAP
to our Adjusted EBITDA for the years ending December 31, 2009 and
2008:
2009
|
2008
|
|||||||
Net
income (loss)
|
$ | (1,931,539 | ) | $ | 115,179 | |||
Add
Back:
|
||||||||
Interest
expense, net
|
1,654,877 | 41,716 | ||||||
Amortization
of deferred financing costs
|
38,197 | - | ||||||
Income
tax expense
|
- | - | ||||||
Depreciation,
depletion, accretion and impairment
|
28,619 | 39,100 | ||||||
Gain
on change in derivative value
|
(1,921,700 | ) | - | |||||
(Gain)/loss
on sales of assets
|
1,151,997 | (1,673,620 | ) | |||||
Stock
based compensation
|
341,000 | 3,750 | ||||||
Adjusted
EBITDA
|
$ | (638,549 | ) | $ | (1,473,875 | ) |
Recent
Developments
As part
of the execution of our business strategy discussed above, we have recently
taken the following steps:
56
|
·
|
We
raised aggregate gross proceeds of $1,945,000 from the sale of 10% secured
convertible notes in several closings of a private placement offering (the
“2009 Private Placement”) from August 31, 2009 through January 25,
2010;
|
|
·
|
On
November 6, 2009, we issued an additional $250,000 principal amount of
convertible promissory notes under the terms of the 2009 Private Placement
to an investor in exchange for our previously outstanding 12% convertible
note in the principal amount of
$250,000;
|
|
·
|
In
the first quarter of 2010, James J. Cerna, Jr., Fred B. Zaziski and
Kenneth T. Hern joined our Board of Directors, resulting in a majority of
the Board being independent;
|
|
·
|
We
have formed an Advisory Board chaired by the former Governor of New York
State, George E. Pataki, to provide subject matter expertise and strategic
guidance to management;
|
|
·
|
We
have initiated our efforts to increase production from the existing wells
in the Java Field and have begun the testing of the Marcellus Shale in two
of the existing well bores.
|
|
·
|
We
have completed drilling and begun production on two wells on our Coal
Creek Prospect.
|
Results
of Operations
We are an
exploration stage company and have generated minimal revenues from operations to
date.
We
generated minimal revenues of $16,639 for the year ended December 31, 2009 while
we generated no revenues for the year ended December 31, 2008. This
revenue figure represents four month’s revenue from the existing producing wells
in the Java Field in Wyoming County, New York.
Operating
Expenses
Operating
expenses excluding the loss on the sale of oil and gas properties for the year
ended December 31, 2009 were $1,070,629 a decrease of $446,775 from $1,517,404
for the year ended December 31, 2008. The decrease was primarily due
to (1) lower legal and professional fees and other general and administrative
expenses that incurred in 2008 for work related to a proposed offering that was
not consummated, (2) prospect and finance fees related to the acquisition of the
Main Pass property and the sale of a 40% working interest in the property, and
(3), the dry hole cost of the Frenchy Springs property as a result of plugging
and abandoning the well in November 2008. We will continue our
efforts to manage administrative costs going forward.
57
Loss
on sale of oil and gas properties
In 2009
we sold 100% of our member interest in Poydras to St. Francisville Oil &
Gas, LLC (“St. Francisville”). St. Francisville agreed to assume all
the assets and related liabilities of the Main Pass 35 Project and the IP #1
well, which amounted to $2,627,655 of assets and $1,475,658 of
liabilities. Mesa recognized a loss of $1,151,997.
Depreciation
and Amortization
Depreciation,
depletion, amortization, accretion, and impairment expense for the years ended
December 31, 2009 and 2008 was $28,619 and $39,100, primarily due to the
impairment from the expiration of non-essential mineral leases.
Gain
on Change in Derivative Value
Gain on
change in derivative value in 2009 is derived from the noncash gain associated
with the change in value of the conversion feature of our convertible promissory
notes issued in 2009. The conversion feature is accounted for as an
embedded financial derivative and, accordingly, is valued each reporting period
based on a valuation model that considers market rate inputs and management’s
assumptions. The change in value is recorded in the statement of
operations. The change in derivative valuation is a noncash
adjustment.
Interest
Income and Expense
Interest
expense was $1,655,494 for the year ended December 31, 2009 as compared to
interest expense of $63,820 for the year ended December 31, 2008, an increase of
$1,591,674. The difference was due to additional debt and the amortization of
the debt discount and deferred financing cost for our 2009 Private
Placement. We also recorded a gain on the change in the value of our
derivative liability of $1,921,700 for the year ended December 31,
2009. We did not have a derivative liability for the 2008
period. Interest income for the same periods was $617 and $22,104,
respectively.
Liquidity
and Capital Resources
Overview
Due to
our brief history and historical operating losses, our operations have not been
a source of liquidity, and our sources of liquidity primarily have been debt and
proceeds of the sale of MEI common stock and working interest in properties we
have acquired. Although we have begun to generate minimal revenues from the sale
of natural gas from our wells in the Java Field and the Coal Creek Prospect,
there can be no assurances that we will be able to increase or maintain
production or that we will be able to generate sufficient liquidity from the
sale of our natural gas to fund our operations. If we cannot generate revenues
from the sale of our natural gas, our business, results of operations, liquidity
and financial condition may suffer materially.
Various
factors outside of our control, including the price of oil and natural gas,
overall market and economic conditions, the downturn and volatility in the US
equity markets and the trading price of our common stock may limit our ability
to raise the capital needed to execute our plan of operations. We recognize that
the US economy is currently experiencing a period of uncertainty and that the
capital markets have been depressed from recent levels. We also recognize that
the price of oil and natural gas has decreased significantly during the last 18
months and that natural gas has yet to fully recover to previous
levels. If the price of natural gas remains depressed and the markets
remain volatile, we expect that these or other factors could adversely affect
our ability to raise additional capital. If we are unable to raise
sufficient additional capital, our short-term or long-term liquidity and our
ability to execute our plan of operations will be materially
impaired.
58
On August
31, 2009, we conducted an initial closing (the “Initial Closing”) of a private
placement (the “2009 Private Placement”) selling $500,000 principal amount of
10% Secured Convertible Promissory Notes, at a purchase price equal to the
principal amount thereof. We conducted additional closings (the
“Additional 2009 Closings”) of the 2009 Private Placement on October 19, 2009,
for $250,000, on November 4, 2009, for $250,000, on November 12, 2009, for
$100,000, on November 13, 2009, for $100,000, on November 25, 2009, for $80,000,
for an aggregate gross amount (including the Initial Closing, but excluding the
Convertible Note issued in exchange for the Denton Note (as defined below)) of
$1,280,000 raised during fiscal 2009. The convertible promissory
notes are, at the option of the holder, convertible into shares of our common
stock at a conversion price of $0.25 per share, subject to adjustment in certain
circumstances as provided in the convertible promissory notes. We
paid an aggregate of $22,800 cash placement agent fees in connection with the
Additional 2009 Closings. After deducting such fees and our other
expenses of the offering, our net proceeds received during fiscal 2009 from the
2009 Private Placement were approximately $1,050,818.
Subsequent
to December 31, 2009, we conducted further closings (the “Additional 2010
Closings”) of the 2009 Private Placement on January 15, 2010, for $615,000, and
on January 25, 2010, for $50,000. We paid an aggregate of $24,150
cash placement fees in connection with the Additional 2010
Closings.
In
addition, on November 6, 2009, the holder of an outstanding 12% convertible note
in the principal amount of $250,000 exchanged such note for $250,000 principal
amount of the convertible promissory notes under the terms of our 2009 Private
Placement. No placement agent fees were paid in connection with this
exchange.
On
November 6, 2009, we repaid Sycamore Resources, Inc., a company owned by our
CEO, Randy M. Griffin (“Sycamore”), $50,000 that Sycamore had advanced as a
deposit to the seller of the Java Field. Also, on November 6, 2009,
we repaid $18,500 to Mr. Griffin against loans he made to us after the reverse
merger. On January 20, 2010, we repaid the $43,000 remaining balance
owed to Mr. Griffin for loans made to us after the merger.
The
proceeds from the initial closing of the 2009 Private Placement allowed us to
complete the Merger and acquire the Java Field. We will apply the
proceeds from the remaining closings of the 2009 Private Placement towards the
implementation of our plan for the development of the Java Field and for general
working capital purposes. We will require total funding of
approximately $600,000 to provide the capital for the initial phase of
development of the Java Field, as well as our general and administrative capital
needs through the first quarter of 2010. The initial phase of
development of the Java Field will include an attempt to enhance the existing
production in the Java Field as well as testing of the Marcellus Shale by
re-entering an existing well. That effort began towards the end of
2009.
Additional
capital of approximately $4,000,000 will be required to fund the second phase of
development of the Java Field property. In addition, our business
plan calls for the acquisition of additional acreage as well as a producing
property. We plan to raise approximately $8,000,000 to $10,000,000 of
capital to address those needs and hope to raise that capital through additional
sales of equity securities in the second quarter of 2010. There can
be no assurance, however, that such financing will be available to us or, if it
is available, that it will be available on terms acceptable to us or that it
will be sufficient to fund our needs. If we are unable to obtain this
financing, we may not be able to proceed with the second phase of development of
the Java Field or meet our ongoing operational working capital
needs.
59
As of
December 31, 2009, we had a working capital deficit of $7,518,536 as compared to
a working capital deficit of $1,220,655 as of December 31, 2008. The increase in
our working capital deficit was primarily attributable to our increase in
derivative liability of $7,461,680, the sale of Poydras Energy, LLC (“Poydras”)
and the reduction in accounts payable associated therewith. Our
current assets increased to $431,373 at December 31, 2009, from $331,947 at
December 31, 2008. This $99,426 increase in current assets during the
period was attributed to the current portion of the deferred financing costs
associated with the 2009 Private Placement.
As of
December 31, 2009, the outstanding balance of principal and accrued interest on
debt was $2,128,858 a net increase of $1,351,611 from the outstanding balance of
$777,247 as of December 31, 2008. This net increase was primarily due
to accrued interest as well as additional loans from our CEO to fund ongoing
operations and the $1,280,000 that we received upon the several closings of the
2009 Private Placement that were held during fiscal 2009.
Cash
and Accounts Receivable
At
December 31, 2009, we had cash and cash equivalents in the bank of $267,141,
compared to $311,947 at December 31, 2008. The $44,806 decrease in
cash and cash equivalents was primarily due to expenditures for the Main Pass
Project prior to it disposition and normal general and administrative expenses
of the Company.
Liabilities
Accounts
payable and accrued expenses decreased by $112,616 to $332,738 at December 31,
2009, from $445,355 at December 31, 2008. The decrease was attributable to the
disposition of payables related to the sale of the Main Pass property during
2009.
Notes
payable to related parties increased $43,000 from $451,400 on December 31, 2008
to $494,400 on December 31, 2009 as a result of new loans from our
CEO.
Cash
Flows
For the
year ended December 31, 2009, the net cash used by operating activities of
$501,361 reflected working capital requirements to fund operating, general and
administrative activities and our completion of the reverse
merger. The net cash used by operating activities was $696,771 for
the year ended December 31, 2008.
For the
year ended December 31, 2009, net cash used by investing activities was $637,263
compared to net cash provided by investing activities of $1,217,275 for the same
period in 2008. The principal investing activity in 2009 related to the payment
of $597,263 of oil and gas development costs, while principal investing activity
in 2008 related to proceeds of $2,512,500 from the sale of a portion of our
working interests in the Main Pass 35 Project.
For the
year ended December 31, 2009, net cash provided by financing activities was
$1,093,818, compared to net cash used by financing activities of $236,000 for
the year ended December 31, 2008, primarily as a result of principal payments
made on debt from related parties in fiscal 2008, compared to proceeds received
from issuance of debt in 2009 to fund oil and gas development and working
capital needs.
60
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
Oil
and Gas Properties, Successful Efforts Method
We use
the successful efforts method of accounting for oil and gas producing
activities. Under the successful efforts method, costs to acquire mineral
interests in oil and gas properties, to drill and equip exploratory wells that
find proved reserves, and to drill and equip development wells are
capitalized. Costs to drill exploratory wells that do not find proved
reserves, geological and geophysical costs, and costs of carrying and retaining
unproved properties are expensed as incurred. We evaluate our proved
oil and gas properties for impairment on a field-by-field basis whenever events
or changes in circumstances indicate that an asset’s carrying value may not be
recoverable. We follow the Accounting Standards Codification ASC 360
Property, Plant, and Equipment (formerly SFAS No. 144), for these
evaluations. Unamortized capital costs are reduced to fair value if
the undiscounted future net cash flows from our interest in the property’s
estimated proved reserves are less than the asset’s net book value.
Proved
reserves
Estimates
of our proved reserves included in this report are prepared in accordance with
accounting principles generally accepted in the United States of America and SEC
guidelines. Our engineering estimates of proved oil and natural gas
reserves directly impact financial accounting estimates, including depreciation,
depletion and amortization expense and the impairment. Proved oil and
natural gas reserves are the estimated quantities of oil and natural gas
reserves that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
period-end economic and operating conditions. The process of
estimating quantities of proved reserves is very complex, requiring significant
subjective decisions in the evaluation of all geological, engineering and
economic data for each reservoir. The accuracy of a reserve estimate
is a function of: (i) the quality and quantity of available data; (ii) the
interpretation of that data; (iii) the accuracy of various mandated economic
assumptions and (iv) the judgment of the persons preparing the
estimate. The data for a given reservoir may change substantially
over time as a result of numerous factors, including additional development
activity, evolving production history and continual reassessment of the
viability of production under varying economic conditions. Changes in
oil and natural gas prices, operating costs and expected performance from a
given reservoir also will result in revisions to the amount of our estimated
proved reserves. We engage reserve engineers to estimate our proved
reserves.
61
Share-Based
Compensation
We follow
ASC 718-10 Compensation - Stock Compensation (formerly SFAS No.
123-R). Under ASC 718-10, we estimate the fair value of each stock
option award at the grant date by using the Black-Scholes option pricing
model.
Derivative
Valuation
We follow
ASC 820-10 Fair Value Measurements and Disclosures (formerly SFAS No.
157). Under ASC 820-10, we estimate the fair value of financial
assets and liabilities based on a three-level valuation hierarchy for
disclosures of fair value measurement and enhance disclosure requirements for
fair value measures.
The three
levels are defined as follows:
·
|
Level
1 - inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
·
|
Level
2 - inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
·
|
Level
3 - inputs to the valuation methodology are unobservable and significant
to the fair value measurement.
|
Revenue
recognition
Revenues
from the sale of oil and natural gas are recognized when the product is
delivered at a fixed or determinable price, title has transferred, and
collectability is reasonably assured and evidenced by a contract. We
follow the “sales method” of accounting for oil and natural gas revenue, so we
recognize revenue on all natural gas or crude oil sold to purchasers, regardless
of whether the sales are proportionate to our ownership in the
property. We recognize a receivable or liability only to the extent
that we have an imbalance on a specific property greater than our share of the
expected remaining proved reserves. For oil sales, this occurs when
the customer's truck takes delivery of oil from the operators’ storage
tanks.
New
Accounting Pronouncements
62
In
December 2008, the SEC released Final Rule, Modernization of Oil and Gas
Reporting. The new disclosure requirements include provisions that
permit the use of new technologies to determine proved reserves if those
technologies have been demonstrated empirically to lead to reliable conclusions
about reserve volumes. The new requirements also will allow companies to
disclose their probable and possible reserves to investors. In
addition, the new disclosure requirements require a company: (a) to report the
independence and qualifications of its reserves preparer or auditor; (b) to file
reports when a third party is relied upon to prepare reserves estimates or
conducts a reserves audit; and (c) to report oil and natural gas reserves using
an average price based upon the prior 12-month period rather than period-end
prices. The use of average prices will affect future impairment and
depletion calculations. The new disclosure requirements became
effective for annual reports on Form 10-K for our fiscal year ending December
31, 2009.
Effective
January 1, 2009, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51.” SFAS
No. 160 (ASC 810 “Consolidation”) requires companies:
|
•
|
To
recharacterize minority interests, previously classified within
liabilities, as noncontrolling interests reported as a component of
consolidated equity on the balance
sheet,
|
|
•
|
To
include total income in net income, with separate disclosure on the face
of the consolidated income statement of the attribution of income between
controlling and noncontrolling interests,
and
|
|
•
|
To
account for increases and decreases in noncontrolling interests as equity
transactions with any difference between proceeds of a purchase or
issuance of noncontrolling interests being accounted for as a change to
the controlling entity’s equity instead of as current period gains/losses
in the consolidated income statement. Only when the controlling entity
loses control and deconsolidates a subsidiary will a gain or loss be
recognized.
|
SFAS No.
160 was effective prospectively for fiscal years beginning on or after December
15, 2008, except for its specific transition provisions for retroactive adoption
of the balance sheet and income statement presentation and disclosure
requirements for existing minority interests that are reflected in these
consolidated financial statements for all periods presented. The new
authoritative guidance did not have an impact on our consolidated financial
statements
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles (“SFAS 168” or ASC
105-10). SFAS 168 (ASC 105-10), which establishes the Codification as the sole
source of authoritative accounting principles recognized by the FASB to be
applied by all nongovernmental entities in the preparation of financial
statements in conformity with GAAP. SFAS 168 (ASC 105-10) was
prospectively effective for financial statements issued for fiscal years ending
on or after September 15, 2009, and interim periods within those fiscal
years. The adoption of SFAS 168 (ASC 105-10) on July 1, 2009 did not
impact our results of operations or financial condition. The
Codification did not change GAAP; however, it did change the way GAAP is
organized and presented. As a result, these changes impact how companies
reference GAAP in their financial statements and in their significant accounting
policies. We implemented the Codification in this Report by providing references
to the Codification topics alongside references to the corresponding
standards.
63
Other
than the pronouncement discussed above, we do not expect the adoption of any
other recently issued accounting pronouncements to have a significant impact on
our results of operations, financial position or cash flows.
ITEM
7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Our
audited consolidated financial statements as of, and for the years ended,
December 31, 2009 and 2008, and for the period from April 23, 2003 (inception)
through December 31, 2009, are included beginning on Page F-1 immediately
following the signature page to this report. See Item 15 for a list
of the financial statements included herein.
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
ITEM
9A(T) CONTROLS AND PROCEDURES
We
carried out an evaluation, under the supervision and with the participation of
our management, including our principal executive officer and principal
financial officer, of the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
as of December 31, 2009. Based upon that evaluation, our principal executive
officer and principal financial officer concluded that, as of the end of the
period covered in this report, our disclosure controls and procedures were not
effective to ensure that information required to be disclosed in reports filed
by us under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the required time periods and is accumulated and
communicated to our management, including our principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure. In particular, we concluded that internal
control weaknesses in our accounting policies and procedures relating to our
equity and debt transactions, financial statement disclosures and segregation of
duties were material weaknesses.
Our
management, including our principal executive officer and principal financial
officer, does not expect that our disclosure controls and procedures or our
internal controls will eliminate all error or potential for fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints and the benefits of controls must be considered relative to
their costs. Due to the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, have been detected. To address the material
weaknesses, we performed additional analysis and other post-closing procedures
in an effort to ensure our consolidated financial statements included in this
Annual Report have been prepared in accordance with generally accepted
accounting principles in the United States of America. In addition, we engaged
independent accounting consultants to assist us with our accounting functions
and in performing the additional analyses referred to
above. Accordingly, management believes that the financial statements
included in this report fairly present in all material respects our financial
condition, results of operations and cash flows for the periods
presented.
64
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Acting Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting as of December 31, 2009 based on the framework in
Internal Control—Integrated Framework and the Internal Control over Financial
Reporting – Guidance for Smaller Public Companies both issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). A material
weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a
material misstatement of the company's annual or interim financial statements
will not be prevented or detected on a timely basis. Our management
has identified the following material weaknesses.
|
1.
|
As
of December 31, 2009, we did not maintain effective internal controls over
financial reporting. For one, we did not have a functioning
audit committee due to a lack of a majority of independent members and a
lack of a majority of outside directors on our board of
directors. This lack of a functioning audit committee resulted
in our having ineffective oversight in the establishment and monitoring of
required internal controls and procedures, and management concluded that
it constituted a material weakness in our system of financial
reporting.
|
|
2.
|
Secondly,
we had not developed and effectively communicated to our employees our
accounting policies and procedures. This resulted in inconsistent
application of such policies and procedures in our financial statements in
2009. Since these entity level control weaknesses had a pervasive effect
across the organization, management concluded that these circumstances
constituted a material weakness in our system of financial
reporting.
|
|
3.
|
As
of December 31, 2009, we did not maintain effective controls over
financial statement disclosure and the recording of equity and debt
transactions. Specifically, controls were not designed and in place to
ensure that all disclosures required were originally addressed in our
financial statements. Accordingly, management concluded that this control
deficiency constituted a material
weakness.
|
|
4.
|
As
of December 31, 2009, we did not adequately segregate, or mitigate the
risks associated with, incompatible functions among personnel to reduce
the risk that a potential material misstatement of the financial
statements would occur without being prevented or detected. Accordingly,
management concluded that this control deficiency constituted a material
weakness.
|
65
Because
of these material weaknesses, management has concluded that we did not maintain
effective internal control over financial reporting as of December 31, 2009,
based on the criteria established in "Internal Control-Integrated Framework"
issued by the COSO.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.
Management
is evaluating the process to address the material weaknesses,
including:
|
(a)
|
considering
the engagement of consultants to assist in ensuring that accounting
policies and procedures are consistent across the organization and that we
have adequate control over financial statement
disclosures;
|
|
(b)
|
increasing
our workforce in preparation for exiting the exploration stage and
beginning operations; and
|
|
(c)
|
hiring
an experienced Chief Financial
Officer.
|
We
believe that these combined efforts, if successful, will remedy the material
weaknesses in our current system of internal control over financial
reporting
Officers’
Certifications
Appearing
as exhibits 31.1 and 31.2 to this Annual Report are “Certifications” of our
Chief Executive Officer and Acting Chief Financial Officer which are required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302
Certifications”). This section of the Annual Report contains
information concerning the evaluation of disclosure controls and procedures
referred to in the Section 302 Certifications. This information
should be read in conjunction with the Section 302 Certifications for a more
complete understanding of the topics presented.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in our internal control over financial reporting that
occurred during the quarter ended December 31, 2009 that have materially
affected or are reasonably likely to materially affect our internal control over
financial reporting.
66
ITEM
9B.
|
OTHER
INFORMATION
|
Not applicable.
PART
III
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE
|
Executive
Officers and Directors
Below are
the names and certain information regarding the Company’s current executive
officers and directors:
Name
|
Age
|
Title
|
Date First Appointed
|
|||
Randy M. Griffin
|
56
|
Chairman
of the Board and Chief Executive Officer
|
August 31, 2009
|
|||
Ray L. Unruh
|
63
|
President,
Secretary, Acting Chief Financial Officer and Director
|
August 31, 2009
|
|||
David L. Freeman
|
51
|
Executive
Vice President – Oil and Gas Operations
|
August 31, 2009
|
|||
James J. Cerna, Jr.
|
41
|
Director
|
January 5, 2010
|
|||
Kenneth T. Hern
|
72
|
Director
|
January 27, 2010
|
|||
Fred B. Zaziski
|
57
|
Director
|
January 5, 2010
|
Pursuant
to the terms of the Merger Agreement with respect to the reverse merger, we
agreed that our Board of Directors, as of the closing of the reverse merger,
would consist of three members, two of whom (Mr. Griffin and Mr. Unruh) were
designated by Mesa Energy, Inc. and one was to be designated at some point prior
to our next annual meeting of stockholders by the persons who were the
stockholders of Mesa Energy Holdings, Inc. immediately prior to the reverse
merger.
Directors
are elected to serve until the next annual meeting of stockholders and until
their successors are elected and qualified. Executive officers are
appointed by the Board of Directors and serve at its pleasure.
Certain
biographical information for each of our executive officers and directors is set
forth below.
67
Randy M. Griffin has served as
our Chairman of the Board of Directors and Chief Executive Officer since August
31, 2009. He had served in the same capacities for Mesa Energy, Inc.
and its predecessor entity, Mesa Energy, LLC, since its inception in April
2003. Mr. Griffin’s responsibilities include oversight of the
business and administrative activities of our company as well as direction of
the ongoing effort to identify, acquire, and develop high-quality drilling and
production prospects. He performed the same functions for MEI’s
predecessor entity, Mesa Energy, LLC, from its inception in April
2003. From March 2001 until March 2003, Mr. Griffin was associated
with a Dallas-based group of companies engaged in oil and gas exploration and
development, pipeline development and construction, land management and lease
acquisition. During that period, he served as President of Southwest
Land Management, L.P., and Americo Gas Pipeline, LLC, where he was responsible
for prospect and lease generation, land management and pipeline
development. He also served as chief operating officer of an
affiliate of those entities, Santa Fe Petroleum, LLC. Mr. Griffin
graduated from East Texas State University in May 1975 with a degree in Finance
and Business Management.
Ray L. Unruh has served as our
President, Secretary, Acting Chief Financial Officer and a director since August
31, 2009. He had served in the same capacities for Mesa Energy, Inc.
and its predecessor entity, Mesa Energy, LLC, since its inception in April
2003. Mr. Unruh’s responsibilities include oversight and management
of company operations including drilling and land management. He
performed the same functions for MEI’s predecessor entity, Mesa Energy, LLC,
from its inception in April 2003. From March 1999 until March 2003,
Mr. Unruh served as Vice-President of Santa Fe Petroleum, L.L.C. and President
of its operating affiliate, TexTron Southwest, LLC. Mr. Unruh left
Santa Fe Petroleum, LLC and TexTron Southwest, LLC, in March 2003 with Mr.
Griffin to form and operate Mesa Energy, LLC. Previously, Mr. Unruh
performed management and financial consulting services for Texas Northern Oil
Company in the early 1990’s and Phoenix Resources, LLC from 1995 to
1998. He owned and operated Red River Energy and Supply Company, an
oil field equipment company in the early 1980’s. Mr. Unruh attended
Oklahoma State University, where he majored in Business Administration and
Finance.
David L. Freeman has served as
our Executive Vice President – Oil and Gas Operations since August 31,
2009. He has served in the same position with MEI since January 1,
2008. Mr. Freeman has over thirty years experience in oil and gas
operations, business development, and property transactions. From
2003 until July, 2005, Mr. Freeman worked as an acquisition consultant to
Celebrex Energy, LLC. Early in his career, Mr. Freeman received
extensive training in Electronics Technology and Business Management at Delgado
Junior College, Port Sulphur Vo-Tech School, and Our Lady of Holy Cross College,
as well as 500 hours of professional training in petroleum production operations
at the Petroleum Institute of Technology (PETEX).
James J. Cerna, Jr. was
appointed to our Board of Directors on January 5, 2010. From 2006 to
2009, Mr. Cerna served as Chairman of the Board of Lucas Energy, Inc. (NYSE
Amex: LEI), and was also CEO and President thereof from 2006 through September
2, 2008. From 2004 to 2006, Mr. Cerna was President of the privately
held Lucas Energy Resources. Prior to joining Lucas Energy, Mr. Cerna
was the Chief Oil and Gas Analyst and CFO of Petroleum Partners LLC from 2001 to
2004. He was the founder and CEO of NetCurrents, Inc., (NASDAQ: NTCS), an
organization that focuses on Internet information monitoring and analysis. Prior
to NetCurrents, Mr. Cerna was the manager of the GT Global/AIM Funds performance
analysis group in San Francisco. Mr. Cerna has received five certificates of
achievement from the Institute of Chartered Financial Analysts. He is
honored by Strathmore's Who's Who for leadership and achievement in the Finance
Industry. Mr. Cerna is the Public Affairs Officer and Pilot with the Civil Air
Patrol, U.S. Air Force Auxiliary, Squadron 192. Currently, in
addition to serving on our Board, he acts as an advisor to the board of
directors of several traditional and green energy companies. Mr.
Cerna received a BS in Finance from the California State University, Chico, in
1990.
68
Kenneth T. Hern was appointed
to our Board of Directors on January 27, 2010. Mr. Hern currently
serves, and has served since November 2009, on the Board of Directors and as
Chairman of the Governance Committee of Flotek Industries, Inc. (NYSE: FTK ), a
supplier of drilling and production related products and services to the energy
and mining industries. Mr. Hern also served as Chairman of the Board
and CEO of Nova Biosource Fuels, Inc. (NYSE Amex: NBF), a leading provider of
biodiesel fuel, and held that position from December 2, 2005 to January
2010. From January 2003 to December 2005, Mr. Hern was Chairman of
the Board of Homeland Renewable Energy LLC, a privately held holding company of
Fibrowatt LLC. Fibrowatt LLC is a developer, builder, owner and
operator of poultry litter-fueled power plants, and is based in
Pennsylvania. From 1969 to 1994, Mr. Hern served in several
capacities at Texaco, Inc., including President and Chairman of the Board of
Texaco Brazil from 1989 to 1994. Mr. Hern earned a B.A. in Chemistry
from Austin College in 1960 and an M.S. in Organic Chemistry from North Texas
State University in 1962. Mr. Hern also received Associates Degrees
from the Wharton School of Business and from Carnegie Mellon University in 1990
and 1991, respectively.
Fred B. Zaziski was appointed
to our Board of Directors on January 5, 2010. Mr. Zaziski was
President and CEO of Epsilon Energy Ltd. (TSX: EPS), a publicly traded
exploration and production company based in Toronto and Houston, from 2007 to
2009. From 2006 to 2007, Mr. Zaziski served as Chairman and CEO of
PetroSouth Energy Corp. (OTCBB: PSEG), another publicly traded exploration and
production company based in Houston, and from 2004 to 2008, he served as
President and CEO of Falcon Natural Gas Corp., Houston
(FNGC.PK). Prior to 2004, Mr. Zaziski worked in a number of senior
management capacities for a number of other oil & gas companies including
National Petroleum Technology Company, Saudi Arabia (1997 – 1999) and
Halliburton Energy Services, Bahrain (1977 – 1997). Currently, Mr.
Zaziski also serves as a Managing Director of the Wilcox Energy Gas Fund,
LLC. Mr. Zaziski graduated from Pennsylvania State University with a
BSc, in petroleum engineering in 1976. He received an MBA in Organizational
Management and a Masters in International Business from Cairo University, Egypt
in 1986 and 1987, respectively. He is a member of the Society of Petroleum
Engineers, the American Petroleum Institute and the American Society of
Mechanical Engineers.
Advisory
Board
As of
January 4, 2010, we established an Advisory Board to advise and make non-binding
recommendations to our Board of Directors with respect to matters within the
areas of expertise of the Advisory Board’s members, including, but not limited
to, the ongoing monitoring of federal and New York State governmental issues
that affect or have the potential to affect our oil and gas development and
production operations.
Our
Advisory Board is chaired by the former Governor of New York State, George E.
Pataki, and also includes Robert C. Avaltroni, Jeffrey A. Chadwick, Arthur J.
Pyron and Nicholas A. Spano.
69
Our Board
determined to compensate the Advisory Board members as follows:
|
·
|
Certain
members of the Advisory Board were each granted stock options under our
2009 Equity Incentive Plan to purchase 24,000 shares of our common stock
upon appointment to the Advisory Board, which options have an exercise
price equal to the fair market value of our common stock on the date of
grant, will fully vest in four equal installments with one quarter vesting
immediately and one quarter vesting after each subsequent six-month
period;
|
|
·
|
Other
members of the Advisory Board each received restricted stock grants under
our 2009 Equity Incentive Plan with respect to 24,000 shares of our common
stock, with respect to 6,000 of which the restrictions lapse immediately
upon appointment to the Advisory Board and with respect to an additional
6,000 shares the restrictions will lapse on each of the six-month,
one-year and eighteen-month anniversaries of such
appointment.
|
|
·
|
The
Chairman of our Advisory Board shall receive options to purchase 226,000
additional shares of our common stock upon his or her appointment as
Chairman, which options shall have an exercise price equal to the fair
market value of our common stock on the date of grant, will fully vest in
four equal installments with one quarter vesting immediately and one
quarter vesting after each subsequent three-month period;
and
|
|
·
|
All
members of our Advisory Board shall be reimbursed for reasonable
out-of-pocket expenses incurred by them in connection with their Advisory
Board services.
|
Each
Advisory Board member enters into an agreement with us to serve for a fixed term
ranging from one to three years. In addition, certain of these
advisors may render additional services to us for which they will be compensated
separately.
Director
Independence
We are
not currently subject to listing requirements of any national securities
exchange or inter-dealer quotation system which has requirements that a majority
of the board of directors be “independent” and, as a result, we are not at this
time required to have our Board of Directors comprised of a majority of
“Independent Directors.” Nonetheless, since Mr. Hern’s appointment to
the Board on January 27, 2010, our Board of Directors has been comprised of a
majority of independent directors.
Board
Committees
We have
not yet established any committees of our Board of Directors. Our
Board of Directors may designate from among its members an executive committee
and one or more other committees in the future. We do not have a
nominating committee or a nominating committee charter. The entire
Board of Directors performs all functions that would otherwise be performed by
committees. Given the present size of our board, we do not believe
that it is practical for us to have committees. If we are able to
grow our business and increase our operations, we intend to expand the size of
our board and allocate responsibilities accordingly.
70
Audit
Committee Financial Expert
We have
no separate audit committee at this time. The entire Board of
Directors oversees our audits and auditing procedures.
Shareholder
Communications
Currently,
we do not have a policy with regard to the consideration of any director
candidates recommended by security holders. To date, no security
holders have made any such recommendations.
Code
of Ethics
Compliance
with Section 16(a) of the Exchange Act
Our
common stock is not registered pursuant to Section 12 of the Exchange
Act. Accordingly, our officers, directors and principal shareholders
are not subject to the beneficial ownership reporting requirements of Section
16(a) of the Exchange Act.
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
The
following table sets forth information concerning the total compensation paid or
accrued by us during the last two fiscal years ended December 31, 2009 to (i)
all individuals that served as our principal executive officer or acted in a
similar capacity for us at any time during the fiscal year ended December 31,
2009; (ii) all individuals that served as our principal financial officer or
acted in a similar capacity for us at any time during the fiscal year ended
December 31, 2009; and (iii) all individuals that served as executive officers
of ours at any time during the fiscal year ended December 31, 2009 that received
annual compensation during the fiscal year ended December 31, 2009 in excess of
$100,000.
71
Summary
Compensation Table
Name and
Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-
Equity
Incentive
Plan
Compen-sation ($)
|
Change
in
Pension
Value
and Non-
qualified
Deferred
Compen-
sation
Earnings
($)
|
All Other
Compensation
($)
|
Total ($)
|
|||||||||||||||||||||||||
Randy
M. Griffin
|
||||||||||||||||||||||||||||||||||
Chief
Executive Officer and
|
2009
|
— | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Chairman of the Board
(1)
|
2008
|
— | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Ray
L. Unruh
|
||||||||||||||||||||||||||||||||||
Acting
Chief Financial
|
2009
|
— | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Officer
(2)
|
2008
|
— | — | — | — | — | — | — | — |
(1)
|
Effective
August 31, 2009, in connection with our reverse merger, Mr. Griffin became
the registrant’s Chief Executive Officer and Chairman of the
Board. Mr. Griffin had served in the same capacities for Mesa
Energy, Inc. and its predecessor entity, Mesa Energy, LLC, since its
inception in April 2003.
|
(2)
|
Effective
August 31, 2009, in connection with our reverse merger, Mr. Unruh became
the registrant’s President, Secretary and Acting Chief Financial
Officer. Mr. Unruh had served in the same capacities for Mesa
Energy, Inc. and its predecessor entity, Mesa Energy, LLC, since its
inception in April 2003.
|
Mr.
Griffin is currently entitled to an annual salary of $120,000 for his services
to us as Chairman of the Board and Chief Executive Officer according to his
employment agreement with us (See, below, under “Employment Agreements with
Executive Officers”). However, in order to support Mesa and his
substantial equity stake, Mr. Griffin has waived his salary through December 31,
2009. We have no other contracts, agreements, plans or arrangements,
whether written or unwritten, that provide for payments to the named executive
officers listed above, other than the reimbursement to all directors of
reasonable out-of-pocket expenses incurred in attending meetings.
Outstanding
Equity Awards at Fiscal Year-End
We have
not issued any stock options or maintained any stock option or other incentive
plans other than our 2009 Equity Incentive Plan. (See “Market for Common Equity
and Related Stockholder Matters – Securities Authorized for Issuance under
Equity Compensation Plans,” above.) At December 31, 2009, we had not
yet granted any awards under the 2009 Equity Incentive Plan. During
fiscal 2010 and as of the date of this Annual Report, we have granted option
awards under the 2009 Equity Incentive Plan to purchase an aggregate of
1,048,000 shares of common stock, and our Board has granted awards of restricted
stock with respect to an aggregate of 48,000 shares.
72
We have
no plans in place and have never maintained any plans that provide for the
payment of retirement benefits or benefits that will be paid primarily following
retirement including, but not limited to, tax qualified deferred benefit plans,
supplemental executive retirement plans, tax-qualified deferred contribution
plans and nonqualified deferred contribution plans.
Employment
Agreements with Executive Officers
In
connection with the reverse merger, we entered into an employment agreement with
Randy M. Griffin with the following terms:
Our
employment agreement with Mr. Griffin provides that he will serve as our
Chairman of the Board of Directors and Chief Executive Officer, effective August
31, 2009. Pursuant to the agreement, Mr. Griffin will receive
annual compensation of $120,000 for the first year of employment, $150,000 for
the second year and $180,000 for the third year and any years thereafter unless
adjusted by the Board within its sole discretion. In addition, Mr.
Griffin is entitled to participate in any and all benefit plans, from time to
time, in effect for our employees, along with vacation, sick and holiday pay in
accordance with policies established and in effect from time to
time. In the event that Mr. Griffin terminates the employment
agreement for Good Reason (as defined therein) or we terminate the employment
agreement without Cause (as defined therein), Mr. Griffin will be entitled to
any earned but unpaid base salary and unpaid pro rata annual bonus and continued
coverage, at our expense, under all benefits plans in which he was a participant
immediately prior to his last date of employment with us for a period of one
year following the termination of employment. The term of the
employment agreement is for a period of three years and automatically renews for
one year periods thereafter unless terminated pursuant to the
agreement.
Compensation
of Non-Employee Directors
As of
December 31, 2009, we had no non-employee directors, and our directors were not
compensated for their services in such capacity, although their expenses in
attending meetings were reimbursed. On January 5, 2010, our Board
determined to provide non-employee directors with the following
compensation:
|
·
|
Each
new non-employee director shall be granted stock options to purchase
250,000 shares of our common stock upon his or her appointment or election
to the Board, which options shall have an exercise price equal to the fair
market value of the common stock on the date of grant, as reasonably
determined by the Board, will fully vest in four equal installments with
one quarter vesting immediately and one quarter vesting after each
subsequent three-month period, shall have a term of five (5) years from
the date of grant;
|
|
·
|
Each
non-employee director will receive cash compensation of $500 per month of
service; and
|
|
·
|
All
directors will be reimbursed for reasonable out-of-pocket expenses
incurred in attending Board and committee
meetings.
|
73
Equity
Compensation Plan Information
On August
20, 2009, our Board of Directors adopted, and on August 21, 2009, our
stockholders approved, the 2009 Equity Incentive Plan (the “2009 Plan”), which
reserves a total of 5,000,000 shares of our Common Stock for issuance under the
2009 Plan. If an incentive award granted under the 2009 Plan expires,
terminates, is unexercised or is forfeited, or if any shares are surrendered to
us in connection with an incentive award, the shares subject to such award and
the surrendered shares will become available for further awards under the 2009
Plan.
In
addition, the number of shares of Common Stock subject to the 2009 Plan, any
number of shares subject to any numerical limit in the 2009 Plan, and the number
of shares and terms of any incentive award are expected to be adjusted in the
event of any change in our outstanding Common Stock by reason of any stock
dividend, spin-off, split-up, stock split, reverse stock split,
recapitalization, reclassification, merger, consolidation, liquidation, business
combination or exchange of shares or similar transaction.
Administration
It is
expected that the Compensation Committee of the Board of Directors, or the Board
of Directors in the absence of such a committee, will administer the 2009
Plan. Subject to the terms of the 2009 Plan, the Compensation
Committee would have complete authority and discretion to determine the terms of
awards under the 2009 Equity Incentive Plan.
Grants
The 2009
Plan authorizes the grant to participants of nonqualified stock options,
incentive stock options, restricted stock awards, restricted stock units,
performance grants intended to comply with Section 162(m) of the Internal
Revenue Code (as amended, the “Code”) and stock appreciation rights, as
described below:
|
·
|
Options
granted under the 2009 Plan entitle the grantee, upon exercise, to
purchase a specified number of shares from us at a specified exercise
price per share. The exercise price for shares of Common Stock covered by
an option cannot be less than the fair market value of the Common Stock on
the date of grant unless agreed to otherwise at the time of the
grant.
|
|
·
|
Restricted
stock awards and restricted stock units may be awarded on terms and
conditions established by the compensation committee, which may include
performance conditions for restricted stock awards and the lapse of
restrictions on the achievement of one or more performance goals for
restricted stock units.
|
|
·
|
The
compensation committee may make performance grants, each of which will
contain performance goals for the award, including the performance
criteria, the target and maximum amounts payable, and other terms and
conditions.
|
|
·
|
The
2009 Plan authorizes the granting of stock awards. The compensation
committee will establish the number of shares of Common Stock to be
awarded and the terms applicable to each award, including performance
restrictions.
|
74
|
·
|
Stock
appreciation rights (“SARs”) entitle the participant to receive a
distribution in an amount not to exceed the number of shares of Common
Stock subject to the portion of the SAR exercised multiplied by the
difference between the market price of a share of Common Stock on the date
of exercise of the SAR and the market price of a share of Common Stock on
the date of grant of the SAR.
|
Duration,
Amendment and Termination
The Board
has the power to amend, suspend or terminate the 2009 Plan without stockholder
approval or ratification at any time or from time to time. No change
may be made that increases the total number of shares of Common Stock reserved
for issuance pursuant to incentive awards or reduces the minimum exercise price
for options or exchange of options for other incentive awards, unless such
change is authorized by our stockholders within one year. Unless sooner
terminated, the 2009 Plan would terminate ten years after it is
adopted.
Grants
to Officers and Directors
On
January 5, 2010, the Board approved non-incentive stock option grants under the
2009 Plan to the individual non-employee directors, and in the amounts, listed
in the table below. These options can be exercised at a price of
$0.25 per share, the fair market value of our common stock on the date of grant,
as determined by the Board, based on the conversion price of convertible
promissory notes sold in relatively contemporaneous private placement
transactions, vest in four equal installments on the date of grant and each date
that is three months, six months and nine months thereafter and expire after
five years.
Name of Optionee
|
Number of Shares
|
|||
James
Cerna
|
250,000
|
|||
Fred
Zaziski
|
250,000
|
On
January 27, 2010, the Board approved a non-incentive stock option grant under
the 2009 Plan to the non-employee director, and in the amount, listed in the
table below. This option can be exercised at a price of $0.25 per
share, the fair market value of our common stock on the date of grant, as
determined by the Board, based on the conversion price of convertible promissory
notes sold in relatively contemporaneous private placement transactions, vests
in four equal installments on the date of grant and each date that is three
months, six months and nine months thereafter and expires after five
years.
Name of Optionee
|
Number of Shares
|
|||
Kenneth
T. Hern
|
250,000
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
following table sets forth information with respect to the beneficial ownership
of our common stock known by us as of April 12, 2010 by:
75
|
·
|
each
person or entity known by us to be the beneficial owner of more than 5% of
our common stock;
|
|
·
|
each
of our directors;
|
|
·
|
each
of our executive officers; and
|
|
·
|
all
of our directors and executive officers as a
group.
|
Except as
otherwise indicated, the persons listed below have sole voting and investment
power with respect to all shares of our common stock owned by them, except to
the extent such power may be shared with a spouse. Information given
with respect to beneficial owners who are not officers or directors of ours is
to the best of our knowledge. However, as we do not have a class of
stock registered under the Exchange Act, beneficial owners of our securities are
not required to file Williams Act or Section 16 reports, which limits our
ability to determine whether a person or entity is a beneficial owner of more
than 5% of our common stock and the extent of any such beneficial owner’s
holdings or the relationships among beneficial owners.
Unless
otherwise indicated in the following table, the address for each person named in
the table is c/o Mesa Energy Holdings, Inc., 5220 Spring Valley Road, Suite 525,
Dallas, Texas 75254.
Title
of Class: Common Stock
Name and Address of Beneficial Owner
|
Amount and
Nature
of
Beneficial
Ownership1
|
Percentage
of
Class2
|
||||||
Randy
M. Griffin
|
8,539,841 |
(3)
|
21.0 | % | ||||
Ray
L. Unruh
|
7,162,271 |
(4)
|
17.7 | % | ||||
James
J. Cerna, Jr.
|
125,000 |
(5)
|
* | |||||
Kenneth
T. Hern
|
125,000 |
(5)
|
* | |||||
Fred
B. Zaziski
|
125,000 |
(5)
|
* | |||||
All
directors and executive officers as a group (6 persons)
|
20,586,112 | 51.0 | % | |||||
David
L. Freeman
|
4,821,500 |
(6)
|
11.9 | % |
*
Indicates
beneficial ownership of less than one percent.
76
1
|
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes having or sharing voting or investment power with
respect to securities. Shares of common stock subject to
options or warrants currently exercisable or convertible, or exercisable
or convertible within 60 days of August 31, 2009, are deemed outstanding
for computing the percentage of the person holding such option or warrant
but are not deemed outstanding for computing the percentage of any other
person.
|
2
|
Percentages
are based upon 40,574,611 shares of Common Stock issued and outstanding as
of April 12, 2010.
|
3
|
Includes
1,735,740 shares owned by Amagosa Investments Ltd. Mr. Griffin,
as General Partner of Amagosa Investments Ltd., has voting and investment
control over shares held by such
entity.
|
4
|
Includes
551,030 shares owned by Ray L. Unruh Profit Sharing Plan, of which Mr.
Unruh is a trustee and has voting and investment control over shares held
by such entity, and 2,632,539 shares owned by Unruh & Unruh Properties
Ltd. Mr. Unruh, as President of the General Partner of Unruh
& Unruh Properties Ltd., has voting and investment control over shares
held by such entity.
|
5
|
Consists
of 125,000 shares that may be issued upon exercise of non-incentive stock
options granted under our 2009 Equity Incentive Plan, which are
exercisable within 60 days. Does not include 125,000 shares
issuable upon exercise of such options, which are not exercisable within
60 days.
|
6
|
Consists
of 3,471,480 shares owned by Freeman Energy LLC and 1,350,020 shares owned
by H S Investments LLC. Mr. Freeman, as the sole Member of each
of Freeman Energy LLC and H S Investments LLC has voting and investment
control over shares held by such
entities.
|
Securities
Authorized for Issuance Under Equity Compensation Plans
On August
20, 2009, our Board of Directors adopted, and on August 21, 2009, our
stockholders approved, the 2009 Equity Incentive Plan (the “2009 Plan”), which
reserves a total of 5,000,000 shares of our Common Stock for issuance under the
2009 Plan. If an incentive award granted under the 2009 Plan expires,
terminates, is unexercised or is forfeited, or if any shares are surrendered to
us in connection with an incentive award, the shares subject to such award and
the surrendered shares will become available for further awards under the 2009
Plan. As of the date hereof, we have granted option awards under the
2009 Plan exercisable for a net aggregate of 1,048,000 shares of our Common
Stock and our Board has granted awards of restricted stock with respect to an
aggregate of 48,000 shares. We have not maintained any other equity
compensation plans since our inception.
77
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
On
November 3, 2007, a total of 1,500,000 shares of Common Stock were issued to
Beverly Frederick, the registrant’s former sole officer and director, in
exchange for $15,000, or $0.01 per share.
Mesa
Energy, Inc. was originally incorporated as North American Risk Management,
Inc., on January 24, 2001, in the State of Colorado. On February 13,
2006, the name was changed to Mesa Energy, Inc.
On
January 1, 2006, Mesa Energy, LLC, a Texas limited liability company, an entity
owned by Sycamore Resources, Inc. (f/k/a Falcon Petroleum, Inc.) (“Sycamore”),
an entity owned by Randy M. Griffin, our Chairman of the Board and Chief
Executive Officer, and Cherokee Financial Corp., an entity owned by Ray L.
Unruh, our President, acquired Mesa Energy Operating, LLC, a Texas limited
liability company, from Sycamore and Canyon Operating, LLC, an entity owned by
Ray L. Unruh. On March 3, 2006, Mesa Energy, Inc. was the surviving
entity in a merger with Mesa Energy, LLC. Subsequently, Mesa Energy,
Inc. was re-incorporated in the State of Nevada by merging into Mesa Energy,
Inc., a Nevada corporation, on March 13, 2006.
On April
1, 2005, we issued a promissory note to Sycamore Resources, Inc., an entity
controlled by Randy M. Griffin. The note bears interest at 6% per
annum and with a maturity date of March 31, 2007, which has been extended to May
31, 2012. As of December 31, 2009, the outstanding principal amount
under the note was $238,000.
On April
1, 2005, we issued a promissory note to Cherokee Financial Corporation, an
entity controlled by Ray L. Unruh. The note bears interest at 6% per
annum and with a maturity date of March 31, 2007, which has been extended to May
31, 2012. As of December 31, 2009, the outstanding principal amount
under the note was $213,400.
On
January 1, 2008, we acquired Poydras Energy Partners, LLC, a Louisiana operating
company now known as Poydras Energy, LLC (“Poydras”), along with its principal
asset, the Main Pass 35 Project. Mesa Energy, Inc. acquired 50% of
its interest in Poydras from Randy M. Griffin, our Chairman of the Board and
Chief Executive Officer, in exchange for a $100,000 promissory
note. The note bore interest at 6% and was paid in full on April 4,
2008. We issued 2,892,900 shares of our common stock to acquire the
remaining 50% interest from Freeman Energy, LLC (1,928,600 shares) and HS
Investments (964,300 shares), affiliates of David L. Freeman, our Executive Vice
President – Oil and Gas Operations. On June 1, 2009, we transferred
100% of our member interest in Poydras to St. Francisville Oil & Gas,
LLC. The transferee agreed to the full and complete assumption and
acceptance of all liabilities of Poydras.
At the
end of 2008, we sold 10% of the working interest in International Paper #1, a
well located in the Ansley Field in Hancock County, Mississippi, to Sycamore
Resources, Inc., an entity owned by Randy M. Griffin, and 10% of the working
interest in the well to Cherokee Financial Corp., an entity owned by Ray L.
Unruh. This well was ultimately included in the transfer of Poydras
to St. Francisville as discussed above.
78
On June
17, 2009, Sycamore Resources, Inc., an entity owned by Randy M. Griffin, entered
into the Purchase and Sale Agreement with Hydrocarbon Generation, Inc. to
acquire the Java Field in Wyoming County, New York. The purchase
price was $330,000. Sycamore assigned the Java Field to us upon the
consummation of the reverse merger.
Director
Independence
Our Board
of Directors has considered the independence of its directors in reference to
the definition of “independent director” established by the Nasdaq Marketplace
Rule 5605(a)(2). In doing so, the Board has reviewed all commercial
and other relationships of each director in making its determination as to the
independence of its directors. After such review, the Board has
determined that each of Messrs. Cerna, Hern and Zaziski qualifies as independent
under the requirements of the Nasdaq listing standards.
ITEM
14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Audit
Fees.
The
aggregate fees billed to us by our principal accountant for services rendered
during the fiscal years ended December 31, 2009 and 2008 are set forth in the
table below:
Fee Category
|
Fiscal year ended December 31, 2009
|
Fiscal year ended December 31, 2008
|
||||||
Audit
fees (1)
|
$ | 78,890 | $ | 50,915 | ||||
Audit-related
fees (2)
|
12,359 | 5,490 | ||||||
Tax
fees (3)
|
— | — | ||||||
All
other fees (4)
|
— | — | ||||||
Total
fees
|
$ | 91,338 | $ | 56,405 |
(1)
|
Audit
fees consist of fees incurred for professional services rendered for the
audit of consolidated financial statements, for reviews of our interim
consolidated financial statements included in our quarterly reports on
Forms 10-Q and for services that are normally provided in connection with
statutory or regulatory filings or
engagements.
|
(2)
|
Audit-related
fees consist of fees billed for professional services that are reasonably
related to the performance of the audit or review of our consolidated
financial statements, but are not reported under “Audit
fees.”
|
(3)
|
Tax
fees consist of fees billed for professional services relating to tax
compliance, tax planning, and tax
advice.
|
(4)
|
All
other fees consist of fees billed for all other
services.
|
Mesa
Energy Holdings, Inc. did not incur any fees payable to our principal accountant
prior to the closing of the reverse merger on August 31, 2009. The
above fees were incurred by Mesa Energy Holdings, Inc. subsequent to the reverse
merger and by MEI prior to the reverse merger.
79
Audit Committee’s
Pre-Approval Practice
Our Board
currently has no separate Audit Committee. Accordingly, the entire
Board of Directors functions as our audit committee. Our Board is
directly responsible for the appointment, compensation, retention and oversight
of the work of any registered public accounting firm engaged by us for the
purpose of preparing or issuing an audit report or performing other audit,
review or attest services for us, and each such registered public accounting
firm must report directly to the Board. It is our Board’s policy to
approve in advance all audit, review and attest services and all non-audit
services (including, in each case, the engagement fees there for and terms
thereof) to be performed by our independent auditors, in accordance with
applicable laws, rules and regulations. During fiscal 2009 and 2008,
all such services were pre-approved by the Board in accordance with this
policy.
Our Board
selected GBH CPAs, PC as our independent registered public accounting firm for
purposes of auditing our financial statements for the year ended December 31,
2009. In accordance with Board’s practice, GBH CPAs, PC was
pre-approved by the Board to perform these audit services for us prior to its
engagement.
PART
IV
ITEM
15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
Financial
Statement Schedules
The
consolidated financial statements of Mesa Energy Holdings, Inc. are listed on
the Index to Financial Statements on this annual report on Form 10-K beginning
on page F-1.
All
financial statement schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
Exhibits
The
following Exhibits are being filed with this Annual Report on Form
10-K:
In
reviewing the agreements included or incorporated by reference as exhibits to
this Annual Report on Form 10-K, please remember that they are included to
provide you with information regarding their terms and are not intended to
provide any other factual or disclosure information about us or the other
parties to the agreements. The agreements may contain representations and
warranties by each of the parties to the applicable agreement. These
representations and warranties have been made solely for the benefit of the
parties to the applicable agreement and:
•
|
should
not in all instances be treated as categorical statements of fact, but
rather as a way of allocating the risk to one of the parties if those
statements prove to be
inaccurate;
|
80
•
|
have
been qualified by disclosures that were made to the other party in
connection with the negotiation of the applicable agreement, which
disclosures are not necessarily reflected in the
agreement;
|
•
|
may
apply standards of materiality in a way that is different from what may be
viewed as material to you or other investors;
and
|
•
|
were
made only as of the date of the applicable agreement or such other date or
dates as may be specified in the agreement and are subject to more recent
developments.
|
Accordingly,
these representations and warranties may not describe the actual state of
affairs as of the date they were made or at any other
time. Additional information about us may be found elsewhere in this
Annual Report on Form 10-K and our other public filings, which are available
without charge through the SEC’s website at http://www.sec.gov.
Exhibit
No.
|
Description
|
|
2.1
|
Agreement
and Plan of Merger and Reorganization, dated as of August 31, 2009, by and
among Mesa Energy Holdings, Inc., Mesa Energy Acquisition Corp. and Mesa
Energy, Inc. (1)
|
|
2.2
|
Articles
of Merger (1)
|
|
3.1
|
Certificate
of Incorporation of the Registrant (2)
|
|
3.2
|
Certificate
of Amendment to Certificate of Incorporation of the Registrant (3)
|
|
3.3
|
Restated
Bylaws of the Registrant (1)
|
|
10.1
|
Split-Off
Agreement, dated as of August 31, 2009, by and among Mesa Energy Holdings,
Inc., Mesquite Mining Group, Inc., and Beverly Frederick (1)
|
|
10.2
|
General
Release Agreement, dated as of August 31, 2009, by and among Mesa Energy
Holdings, Inc., Mesquite Mining Group, Inc., and Beverly Frederick (1)
|
|
10.3
|
Form
of Lock-Up Agreement between Mesa Energy Holdings, Inc. and the officers,
directors and employees party thereto (1)
|
|
10.4
|
Form
of No Short Selling Agreement between Mesa Energy Holdings, Inc. and the
officers, directors and stockholders party thereto (1)
|
|
10.5
|
IR
Shares Escrow Agreement, dated as of August 31, 2009, between Mesa Energy
Holdings, Inc. and Gottbetter & Partners, LLP, as escrow agent (1)
|
|
10.6
|
Form
of Subscription Agreement between Mesa Energy Holdings, Inc. and the
investors party thereto (1)
|
|
10.7
|
Form
of Secured Convertible Promissory Note of Mesa Energy Holdings, Inc. (1)
|
|
10.8
|
Form
of Subsidiary Guaranty among Mesa Energy, Inc., Mesa Energy Operating, LLC
and the investors party thereto (1)
|
81
Exhibit
No.
|
Description
|
|
10.9
|
Security
Agreement, dated as of August 31, 2009, among Mesa Energy Holdings, Inc.,
Mesa Energy, Inc., Mesa Energy Operating, LLC, the investors party thereto
and Collateral Agents, LLC (1)
|
|
10.10
|
Escrow
Agreement, dated as of August 31, 2009, among Mesa Energy Holdings, Inc.,
the investors party thereto and Grushko & Mittman, P.C. (1)
|
|
10.11
|
Agreement
for Purchase of Oil, Gas and Mineral Leases, dated September 17, 2004,
between Wentworth Operating Company to Mesa Energy, LLC (1)
|
|
10.12
|
Promissory
Note, dated April 1, 2005, issued by Mesa Energy, Inc. to Cherokee
Financial Corporation (1)
|
|
10.13
|
Promissory
Note, dated April 1, 2005, issued by Mesa Energy, Inc. to Sycamore
Resources, Inc. (f/k/a Falcon Petroleum, Inc.) (1)
|
|
10.14
|
Convertible
Promissory Note, dated September 29, 2006, issued by Mesa Energy, Inc. to
Denton Management Company LLC (1)
|
|
10.15
|
Amendment
to Convertible Promissory Note, dated August 19, 2009, between Mesa
Energy, Inc. to Denton Management Company LLC (1)
|
|
10.16
|
Promissory
Note, dated February 27, 2007, issued by Mesa Energy, Inc. to Randy
Griffin (1)
|
|
10.17
|
Spring
Valley Center Office Lease, dated June 1, 2007, between Spring Valley
Center, LLP and Mesa Energy, Inc. (1)
|
|
10.18
|
Amendment
to Coal Creek Prospect purchase agreement, dated March 31, 2009, between
Mesa Energy, Inc. and Wentworth Operating Company (1)
|
|
10.19
|
Assignment
of Oil and Gas Leases and Bill of Sale, dated May 1, 2009, among Mesa
Energy, Inc. and Mesa Energy, LLC and Wentworth Operating Company (1)
|
|
10.20
|
Agreement
for Transfer of Member Interest in Poydras Energy LLC, dated June 1, 2009,
between Mesa Energy, Inc. and St. Francisville Oil & Gas, LLC (1)
|
|
10.21
|
Letter
Agreement, dated March 17, 2009, between Mesa Energy, Inc. and Robert
Thomasson (1)
|
|
10.22
|
Purchase
and Sale Agreement, dated June 17, 2009, between Hydrocarbon Generation,
Inc. and Sycamore Resources, Inc. (1)
|
|
10.23
|
Assignment
of Purchase and Sale Agreement, dated as of August 25, 2009, from Sycamore
Resources, Inc. to Mesa Energy, Inc. (1)
|
|
10.24
|
Employment
Agreement dated August 31, 2009, between Mesa Energy Holdings, Inc. and
Randy M. Griffin (1)
|
|
10.25
|
Mesa
Energy Holdings, Inc. 2009 Equity Incentive Plan (1)
|
|
10.26
|
Collateral
Agent Agreement, dated as of August 31, 2009, among Mesa Energy Holdings,
Inc., Mesa Energy, Inc., Mesa Energy Operating LLC, the investors party
thereto and Collateral Agents, LLC (1)
|
82
Exhibit
No.
|
Description
|
|
16.1
|
Letter
from George Stewart, CPA to the Securities and Exchange Commission
regarding statements included in this Form 8-K (4)
|
|
21
|
*
|
List
of Subsidiaries
|
31.1
|
*
|
Certification
of Principal Executive Officer, pursuant to SEC Rules 13a-14(a) and
15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
31.2
|
*
|
Certification
of Principal Financial Officer, pursuant to SEC Rules 13a-14(a) and
15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
32.1
|
*
|
Certification
of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350,
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002**
|
32.2
|
*
|
Certification
of Acting Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002**
|
(1)
|
Incorporated
by reference to the like numbered Exhibit to the Registrant’s Current
Report on Form 8-K, filed with the SEC on September 3,
2009.
|
(2)
|
Incorporated
by reference to the like numbered Exhibit to the Registrant’s Registration
Statement on Form S-1 (File No. 333-149338), filed with the SEC on
February 21, 2008.
|
(3)
|
Incorporated
by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed with the
SEC on June 25, 2009.
|
(4)
|
Incorporated
by reference to the like numbered Exhibit to the Registrant’s Amendment
No. 1 to Current Report on Form 8-K/A, filed with the SEC on September 22,
2009.
|
*
|
Filed
herewith.
|
** This
certification is being furnished and shall not be deemed “filed” with the SEC
for purposes of Section 18 of the Exchange Act, or otherwise subject to the
liability of that section, and shall not be deemed to be incorporated by
reference into any filing under the Securities Act or the Exchange Act, except
if and to the extent that the Registrant specifically incorporates it by
reference.
83
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MESA
ENERGY HOLDINGS, INC.
|
|||
Dated: April
15, 2010
|
By:
|
/s/ Randy M. Griffin
|
|
Randy
M. Griffin, Chief Executive Officer
|
|||
By:
|
/s/ Ray L. Unruh
|
||
Ray
L. Unruh, Acting Chief Financial
Officer
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE
|
TITLE
|
DATE
|
||
/s/ Randy M. Griffin
|
Chairman
of the Board and Chief
|
April
15, 2010
|
||
Randy
M. Griffin
|
Executive
Officer (principal
executive
officer)
|
|||
/s/ Ray L. Unruh
|
Director,
President, Secretary and
|
April
15, 2010
|
||
Ray
L. Unruh
|
Acting
Chief Financial Officer
(principal
financial officer and
principal
accounting officer)
|
|||
/s/ James J. Cerna, Jr.
|
Director
|
April
15, 2010
|
||
James
J. Cerna, Jr.
|
||||
/s/ Kenneth T. Hern
|
Director
|
April
15, 2010
|
||
Kenneth
T. Hern
|
||||
/s/ Fred B. Zaziski
|
Director
|
April
15, 2010
|
||
Fred
B. Zaziski
|
INDEX
TO FINANCIAL STATEMENTS
Page
|
||||
Report
of Independent Registered Public Accounting Firm
|
F-2 | |||
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-3 | |||
Consolidated
Statements of Operations for the years ended December 31, 2009 and
2008
|
||||
and
for the period from August 23, 2003 (Inception) through December 31,
2009
|
F-4 | |||
Consolidated
Statement of Changes in Stockholders’ Equity (Deficit) for the
period
|
||||
from
August 23, 2003 (Inception) through December 31, 2009
|
F-5 | |||
Consolidated
Statements of Cash Flows for the years ended December 31, 2009 and
2008
|
||||
and
for the period from August 23, 2003 (Inception) through December 31,
2009
|
F-7 | |||
Notes
to Consolidated Financial Statements
|
F-9 |
F-1
Report
of Independent Registered Public Accounting Firm
To the
Shareholders
Mesa
Energy Holdings, Inc.
(An
Exploration Stage Company)
Dallas,
Texas
We have
audited the accompanying consolidated balance sheets of Mesa Energy Holdings,
Inc. as of December 31, 2009 and 2008, and the related consolidated statements
of operations, changes in members’ and stockholders’ equity and cash flows for
the years then ended and for the period from inception (April 25, 2003) to
December 31, 2009. 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 audits. The consolidated financial
statements for the period from inception through December 31, 2006 were audited
by other auditors whose report expressed unqualified opinions on those
statements. The consolidated financial statements for the period from inception
through December 31, 2006 include total revenues and net loss of $0 and
$918,050, respectively. Our opinion on the consolidated statements of
operations, changes in members’ and stockholders' equity and cash flows for the
period from inception through December 31, 2009, insofar as it relates to
amounts for prior periods through December 31, 2006, is based solely on the
report of other auditors.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall 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 Mesa Energy
Holdings, Inc. as of December 31, 2009 and 2008, and the consolidated results of
its operations and its cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements have been prepared assuming that
Mesa will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, Mesa has suffered recurring losses from
operations and has a working capital deficit as of December 31, 2009. These
factors raise substantial doubt about the Company’s ability to continue as a
going concern. Management’s plans in regard to these matters are also discussed
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ GBH
CPAs, PC
GBH CPAs,
PC
www.gbhcpas.com
Houston,
Texas
April 15,
2010
F-2
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
Consolidated
Balance Sheets
December 31, 2009
|
December 31, 2008
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 267,141 | $ | 311,947 | ||||
Accounts
receivable
|
5,515 | - | ||||||
Restricted
cash
|
20,000 | 20,000 | ||||||
Deferred
financing cost, current
|
114,591 | - | ||||||
Prepaid
expenses
|
24,126 | - | ||||||
TOTAL
CURRENT ASSETS
|
431,373 | 331,947 | ||||||
Oil
and gas properties, using successful efforts accounting
|
||||||||
Properties
not subject to amortization, less accumulated impairment of $27,140 and
$27,140, respectively
|
185,777 | 1,709,712 | ||||||
Properties
subject to amortization, less accumulated depletion of $1.411 and $0,
respectively
|
74,984 | - | ||||||
Pipeline
property, less accumulated depreciation of $6,213 and $0,
respectively
|
366,581 | - | ||||||
Property
and equipment, net of accumulated depreciation of $0 and $2,259,
respectively
|
116,760 | 88,102 | ||||||
Net
oil and gas properties
|
744,102 | 1,797,814 | ||||||
Furniture
and equipment, less accumulated depreciation of $5,051 and $4,755,
respectively
|
152 | 448 | ||||||
Deferred
financing cost , net of accumulated amortization of $38,197 and $0,
respectively
|
76,394 | - | ||||||
Prepaid
asset retirement cost
|
40,000 | 600,830 | ||||||
TOTAL
ASSETS
|
$ | 1,292,022 | $ | 2,731,039 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable trade
|
$ | 86,433 | $ | 426,791 | ||||
Accrued
expenses
|
246,305 | 18,564 | ||||||
Accrued
expenses-related parties
|
104,458 | 75,847 | ||||||
Advances
from joint interest owners
|
- | 300,000 | ||||||
Deposits
|
8,033 | 30,000 | ||||||
Notes
payable-related parties
|
43,000 | 451,400 | ||||||
Convertible
note payable
|
- | 250,000 | ||||||
Derivative
liability
|
7,461,680 | - | ||||||
TOTAL
CURRENT LIABILITIES
|
7,949,909 | 1,552,602 | ||||||
Non-current
liabilities
|
||||||||
Long
term debt-related parties
|
451,400 | - | ||||||
Convertible
note payable
|
1,530,000 | - | ||||||
Asset
retirement obligations
|
55,280 | 429,085 | ||||||
TOTAL
LIABILITIES
|
9,986,589 | 1,981,687 | ||||||
Stockholders’
Equity (Deficit)
|
||||||||
Preferred
stock, par value $0.0001, 10,000,000 shares authorized -0- shares issued
and outstanding
|
- | - | ||||||
Common
stock, par value $0.0001, 300,000,000 shares authorized, 39,385,700 and
24,206,391 shares issued and outstanding, respectively
|
3,939 | 2,421 | ||||||
Additional
paid-in capital
|
(5,457,156 | ) | 2,056,742 | |||||
Accumulated
deficit during the exploration stage
|
(3,241,350 | ) | (1,309,811 | ) | ||||
TOTAL
STOCKHOLDERS’ EQUITY (DEFICIT)
|
(8,694,567 | ) | 749,352 | |||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
$ | 1,292,022 | $ | 2,731,039 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
Consolidated
Statements of Operations
For
the years ended December 31, 2009 and 2008 and
For
the period from August 23, 2003 (Inception) through December 31,
2009
Inception
to
|
||||||||||||
December
31,
|
December 31,
|
|||||||||||
2009
|
2008
|
2009
|
||||||||||
Revenues
|
$ | 16,639 | $ | - | $ | 16,639 | ||||||
Operating
expenses:
|
||||||||||||
Exploration
cost
|
101,303 | 37,412 | 483,166 | |||||||||
Dry
hole cost
|
- | 466,066 | 466,066 | |||||||||
Depreciation,
depletion, amortization, accretion, and impairment
|
28,619 | 39,100 | 100,435 | |||||||||
General
and administrative expenses
|
940,707 | 974,826 | 2,692,828 | |||||||||
Loss
on sale of Poydras Energy, LLC
|
1,151,997 | - | 1,151,997 | |||||||||
Gain
on sale of oil and gas properties
|
- | (1,673,620 | ) | (1,673,620 | ) | |||||||
Total
operating expense
|
2,222,626 | (156,216 | ) | 3,220,872 | ||||||||
Income (loss) from
operations
|
(2,205,987 | ) | 156,216 | (3,204,233 | ) | |||||||
Other
income (expense):
|
||||||||||||
Interest
income
|
617 | 22,104 | 24,020 | |||||||||
Interest
expense
|
(1,655,494 | ) | (63,820 | ) | (1,999,966 | ) | ||||||
Other
income
|
7,625 | 679 | 17,129 | |||||||||
Unrealized
gain on change in derivative value
|
1,921,700 | - | 1,921,700 | |||||||||
Total
other expense
|
(274,448 | ) | (41,037 | ) | (37,117 | ) | ||||||
Net
income (loss)
|
$ | (1,931,539 | ) | $ | 115,179 | $ | (3,241,350 | ) | ||||
Net
income (loss) per share:
|
||||||||||||
Basic
|
$ | (0.07 | ) | $ | 0.00 | |||||||
Diluted
|
$ | (0.07 | ) | $ | 0.01 | |||||||
Weighted
average shares outstanding:
|
||||||||||||
Basic
|
29,232,076 | 24,192,811 | ||||||||||
Diluted
|
29,232,076 | 25,299,020 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
Consolidated
Statement of Changes in Stockholders’ Equity (Deficit)
For
the period from August 23, 2003 (Inception) through December 31,
2009
Common Stock
|
||||||||||||||||||||||||
Members’
Equity
|
Shares
|
Par
Value
|
Additional
Paid-in
Capital
|
Accumulated
Deficit
|
Totals
|
|||||||||||||||||||
Balances
at April 25, 2003 (inception)
|
$ | - | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||
Contributions
|
157,416 | - | - | - | - | 157,416 | ||||||||||||||||||
Net
loss
|
(152,274 | ) | - | - | - | - | (152,274 | ) | ||||||||||||||||
Balances
at December 31, 2003
|
5,142 | - | - | - | - | 5,142 | ||||||||||||||||||
Contributions
|
372,673 | - | - | - | - | 372,673 | ||||||||||||||||||
Draws
|
(70,000 | ) | - | - | - | - | (70,000 | ) | ||||||||||||||||
Imputed
Interest
|
11,508 | - | - | - | - | 11,508 | ||||||||||||||||||
Net
loss
|
(166,278 | ) | - | - | - | - | (166,278 | ) | ||||||||||||||||
Balances
at December 31, 2004
|
153,045 | - | - | - | - | 153,045 | ||||||||||||||||||
Contributions
|
94,766 | - | - | - | - | 94,766 | ||||||||||||||||||
Imputed
Interest
|
5,134 | - | - | - | - | 5,134 | ||||||||||||||||||
Net
loss
|
(210,929 | ) | - | - | - | - | (210,929 | ) | ||||||||||||||||
Balances
at December 31, 2005
|
42,016 | - | - | - | - | 42,016 | ||||||||||||||||||
Contributions
|
22,743 | - | - | - | - | 22,743 | ||||||||||||||||||
Net
loss from January 1, 2006 to March 3, 2006
|
(50,495 | ) | - | - | - | - | (50,495 | ) | ||||||||||||||||
Merger
with Mesa Energy, Inc. (Co.)
|
(14,264 | ) | 19,286,248 | 1,929 | 592,311 | (579,976 | ) | - | ||||||||||||||||
Fair
value of options and warrants issued for services
|
- | - | - | 19,075 | - | 19,075 | ||||||||||||||||||
Shares
issued for cash
|
- | 1,214,484 | 122 | 265,278 | - | 265,400 | ||||||||||||||||||
Net
loss from March 4, 2006 to December 31, 2006
|
- | - | - | - | (338,074 | ) | (338,074 | ) | ||||||||||||||||
Balances
at December 31, 2006
|
20,500,732 | 2,051 | 876,664 | (918,050 | ) | (39,335 | ) | |||||||||||||||||
Shares
issued for cash
|
- | 803,079 | 80 | 208,120 | - | 208,200 | ||||||||||||||||||
Discount
on convertible debt
|
- | - | - | 187,427 | - | 187,427 | ||||||||||||||||||
Net
loss
|
- | - | - | - | (506,940 | ) | (506,940 | ) | ||||||||||||||||
Balances
at December 31, 2007
|
- | 21,303,811 | 2,131 | 1,272,211 | (1,424,990 | ) | (150,648 | ) | ||||||||||||||||
Shares
issued for purchase of stock of Poydras Energy
|
- | 2,892,937 | 289 | 749,711 | - | 750,000 | ||||||||||||||||||
Warrants
issued with sale of oil and gas property
|
- | - | - | 31,071 | - | 31,071 | ||||||||||||||||||
Shares
issued for legal fees
|
- | 9,643 | 1 | 3,749 | - | 3,750 | ||||||||||||||||||
Net
income
|
- | - | - | - | 115,179 | 115,179 | ||||||||||||||||||
Balances
at December 31, 2008
|
- | 24,206,391 | 2,421 | 2,056,742 | (1,309,811 | ) | 749,352 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
Consolidated
Statement of Changes in Stockholders’ Equity (Deficit)
For
the period from August 23, 2003 (Inception) through December 31,
2009
Members’
Equity
|
Shares
|
Par
Value
|
Additional
Paid-in
Capital
|
Accumulated
Deficit
|
Totals
|
|||||||||||||||||||
Balances
at December 31, 2008
|
$ | - | 24,206,391 | $ | 2,421 | $ | 2,056,742 | $ | (1,309,811 | ) | $ | 749,352 | ||||||||||||
Shares
issued for warrants held by MEI shareholders
|
829,309 | 83 | (83 | ) | - | - | ||||||||||||||||||
Reverse
merger with Mesa Energy Holdings
|
- | 14,000,000 | 1,400 | (1,400 | ) | - | - | |||||||||||||||||
Share-based
compensation
|
- | 350,000 | 35 | 340,965 | - | 341,000 | ||||||||||||||||||
Discount
on convertible debt
|
- | - | - | 1,530,000 | - | 1,530,000 | ||||||||||||||||||
Derivative
liability on convertible debt
|
- | - | - | (9,383,380 | ) | - | (9,383,380 | ) | ||||||||||||||||
Net
loss
|
- | - | - | - | (1,931,539 | ) | (1,931,539 | ) | ||||||||||||||||
Balances
at December 31, 2009
|
$ | - | 39,385,700 | $ | 3,939 | $ | (5,457,156 | ) | $ | (3,241,350 | ) | $ | ( 8,694,567 | ) |
F-6
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
Consolidated
Statements of Cash Flows
For
the years ended December 31, 2009 and 2008 and
For
the period from August 23, 2003 (Inception) through December 31,
2009
For the Year Ended
December 31, 2009
|
Inception to
December 31,
|
|||||||||||
2009
|
2008
|
2009
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
Net
income (loss)
|
$ | (1,931,539 | ) | $ | 115,179 | $ | (3,241,350 | ) | ||||
Adjustments
to reconcile net income (loss) to net cash used by operating
activities:
|
||||||||||||
Loss
on sale of oil and gas properties
|
1,151,997 | - | 1,151,997 | |||||||||
Gain
on sale of assets
|
- | (1,673,620 | ) | (1,673,620 | ) | |||||||
Unrealized
gain on change in derivative value
|
(1,921,700 | ) | - | (1,921,700 | ) | |||||||
Dry
hole cost
|
- | 466,066 | 466,066 | |||||||||
Imputed
interest
|
- | - | 16,641 | |||||||||
Debt
discount charged to interest expense
|
1,530,000 | - | 1,717,427 | |||||||||
Depreciation,
depletion, amortization, accretion and impairment expense
|
28,619 | 39,100 | 100,435 | |||||||||
Amortization
of deferred financing cost
|
38,197 | - | 38,197 | |||||||||
Share-based
compensation
|
341,000 | 3,750 | 363,825 | |||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Accounts
receivable and prepaid assets
|
(29,644 | ) | - | (29,644 | ) | |||||||
Accounts
payable and accrued expenses
|
263,097 | 26,469 | 340,864 | |||||||||
Advances
from joint interest owners
|
- | 300,000 | 300,000 | |||||||||
Accrued
expenses – related parties
|
28,612 | 26,285 | 104,459 | |||||||||
CASH
USED IN OPERATING ACTIVITIES
|
(501,361 | ) | (696,771 | ) | (2,266,403 | ) | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
Payment
of cash for restricted certificate of deposit
|
- | (20,000 | ) | (20,000 | ) | |||||||
Payments
for oil and gas development costs
|
(597,263 | ) | (1,270,057 | ) | (2,605,001 | ) | ||||||
Cash
paid for asset retirement obligations
|
(40,000 | ) | (6,494 | ) | (46,494 | ) | ||||||
Cash
acquired from purchase of Poydras Energy, LLC
|
- | 1,326 | 1,326 | |||||||||
Proceeds
from sale of assets
|
- | 2,512,500 | 2,562,500 | |||||||||
Purchases
of fixed assets
|
- | - | (5,203 | ) | ||||||||
CASH
PROVIDED BY (USED) IN INVESTING ACTIVITIES
|
(637,263 | ) | 1,217,275 | (112,872 | ) | |||||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
Proceeds
from the sale of stock
|
- | - | 473,600 | |||||||||
Borrowings
on debt from third parties, net of financing costs
|
1,050,818 | - | 1,300,818 | |||||||||
Borrowings
on debt from related parties
|
61,500 | - | 723,400 | |||||||||
Principal
payments on debt from related parties
|
(18,500 | ) | (236,000 | ) | (429,000 | ) | ||||||
Members
contributions
|
- | - | 647,598 | |||||||||
Members
distributions
|
- | - | (70,000 | ) | ||||||||
CASH
PROVIDED BY (USED) IN FINANCING ACTIVITIES
|
1,093,818 | (236,000 | ) | 2,646,416 | ||||||||
NET
CHANGE IN CASH
|
(44,804 | ) | 284,504 | 267,141 | ||||||||
CASH
AT BEGINNING OF PERIOD
|
311,947 | 27,443 | - | |||||||||
CASH
AT END OF PERIOD
|
$ | 267,141 | $ | 311,947 | $ | 267,141 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-7
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
Consolidated
Statements of Cash Flows
For
the years ended December 31, 2009 and 2008 and
For
the period from August 23, 2003 (Inception) through December 31,
2009
Supplemental
disclosures of cash flow information:
|
||||||||||||
Cash
paid for interest
|
$ | 63,697 | $ | 37,535 | $ | 86,359 | ||||||
Cash
paid for income taxes
|
$ | - | $ | - | $ | - | ||||||
Non-cash
disclosures:
|
||||||||||||
Accrued
oil and gas acquisition and development cost
|
$ | 55,000 | $ | 101,885 | $ | 55,000 | ||||||
Sale
of pipeline right-of-way for payables
|
$ | 60,000 | $ | - | $ | 60,000 | ||||||
Note
payable issued for purchase of Poydras Energy, LLC
|
$ | - | $ | 100,000 | $ | 100,000 | ||||||
Common
stock issued for purchase of Poydras Energy, LLC
|
$ | - | $ | 750,000 | $ | 750,000 | ||||||
Stock
issued in reverse merger
|
$ | 1,400 | $ | - | $ | 1,400 | ||||||
Warrants
issued with the sale of oil and gas property
|
$ | - | $ | 31,071 | $ | 31,071 | ||||||
Change
in asset retirement obligation
|
$ | 47,976 | $ | - | $ | 47,976 | ||||||
Derivative
liability
|
$ | 9,383,380 | $ | - | $ | 9,383,380 |
F-8
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
and nature of operations
Mesa
Energy, Inc. (“MEI”) is a company whose predecessor entity, Mesa Energy, LLC,
was formed in April 2003 to engage in the oil and gas industry. MEI’s
primary oil and gas operations have historically been conducted through its
wholly owned subsidiary, Mesa Energy Operating, LLC, a Texas limited liability
company qualified as an operator in Texas, Oklahoma, New York and Wyoming (“Mesa
Operating”). All significant intercompany accounts and transactions
have been eliminated in consolidation.
MEI was
originally incorporated as North American Risk Management Incorporated on
January 24, 2001, in the State of Colorado. It was organized to
engage in the business of providing insurance to independent and fleet truck
operators as an affiliate and was in the process of acquiring a truck fleet of
some 125 vehicles. However, operations ceased after approximately six
months. On March 3, 2006, MEI was the surviving entity in a merger
with Mesa Energy, LLC, a Texas limited liability company, whose activities
between April 2003 and March 2006 included participation in various drilling
projects, both as operator and as a non-operator, as well as the acquisition of
the Frenchy Springs and Coal Creek acreage positions. Subsequently,
MEI reincorporated in the State of Nevada by merging with and into Mesa Energy,
Inc., a Nevada corporation, on March 13, 2006.
In July
2008, MEI filed with the SEC a Form 1-A and an Offering Circular in connection
with a proposed “small issue” offering of its common stock, with the intent of
raising up to $5,000,000 in investment capital. However, the effort
was abandoned in early 2009 due to a significant drop in oil and gas prices and
the upheaval in the capital markets that began in late 2008.
The
registrant was incorporated in the State of Delaware, as “Mesquite Mining,
Inc.,” on October 23, 2007 to engage in the acquisition and exploration of
mining properties (the “Legacy Business”). In mid 2009, the
registrant’s Board of Directors decided to redirect the registrant’s efforts
towards identifying and pursuing a new business plan and
direction. Amid discussions with MEI regarding a potential business
combination, on June 19, 2009, the registrant changed its name to Mesa Energy
Holdings, Inc.
As used
in these notes to consolidated financial statements, references to “the Company”
for periods prior to the closing of the Merger on August 31, 2009, refer to MEI,
a private Nevada corporation that is now our wholly owned subsidiary, and such
references for periods subsequent to the closing of the Merger on August 31,
2009, refer to Mesa Energy Holdings, Inc., a publicly traded Delaware
corporation formerly known as Mesquite Mining, Inc., together with its
subsidiaries, including MEI.
On August
31, 2009, the Company closed a reverse merger transaction (the “Merger”)
pursuant to which a wholly owned subsidiary of Mesa Energy Holdings, Inc. merged
with and into MEI, and MEI, as the surviving corporation, became a wholly owned
subsidiary of Mesa Energy Holdings, Inc.
Immediately
following the closing of the Merger, under the terms of a Split-Off Agreement
and a General Release Agreement, the Company transferred all of Mesa Energy
Holdings’ pre-Merger operating assets and liabilities to a wholly owned
subsidiary. Thereafter, pursuant to the Split-Off Agreement, the
Company transferred all of the outstanding shares of capital stock of such
subsidiary to Beverly Frederick, the Company’s pre-Merger majority stockholder,
in exchange for (i) the surrender and cancellation of all 21,000,000 shares of
our common stock held by that stockholder and (ii) certain representations,
covenants and indemnities.
After the
Merger and the split-off, Mesa Energy Holdings, Inc. succeeded to the business
of MEI as its sole line of business, and all of Mesa Energy Holdings, Inc.’s
then-current officers and directors resigned and were replaced by MEI’s officers
and directors.
The
Merger was accounted for as a reverse acquisition and recapitalization of MEI
for financial accounting purposes. Consequently, the assets and liabilities and
the historical operations that are reflected in the Company’s financial
statements for periods prior to the Merger are those of MEI and have been
recorded at the historical cost basis of MEI, and the Company’s consolidated
financial statements for periods after completion of the Merger include both
Mesa Energy Holdings, Inc.’s and MEI’s assets and liabilities, the historical
operations of MEI prior to the Merger and Mesa Energy Holdings, Inc.’s
operations from and after the closing date of the Merger.
F-9
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
On June
18, 2009, Mesa Energy Holdings’ Board of Directors authorized a 14-for-1 forward
split of its common stock, par value $0.0001 per share (the “Common Stock”), in
the form of a stock dividend (the “Stock Split”), which was paid on August 4,
2009, to holders of record on July 20, 2009. After giving effect to
the Stock Split, but before giving effect to the Merger and other transactions
described below, there were outstanding 35,070,000 shares of Common
Stock. All share and per share numbers in this Report relating to the
Common Stock prior to the Stock Split have been adjusted to give effect to the
Stock Split unless otherwise stated. Furthermore, except where the
context otherwise requires, all share and per share numbers in this Report
relating to the common stock of MEI have been adjusted to give effect to the
recapitalization represented by the Merger.
Basis
of financial statement presentation
The
accompanying consolidated financial statements have been prepared by the Company
in accordance with generally accepted accounting principles.
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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Reclassification
Certain
amounts for prior periods have been reclassified to conform to the current
presentation.
Principles
of Consolidation
The
consolidated financial statements include the Company’s accounts, including
those of the Company’s wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Cash,
cash equivalents and restricted cash
Cash
equivalents are highly liquid investments with an original maturity of three
months or less. The Company maintains its cash in bank deposit
accounts which, at times, may exceed the federally insured
limits. Accounts are guaranteed by the FDIC up to $250,000 in
2009. At December 31, 2009, the Company had deposits of approximately
$17,141 in excess of FDIC limits. The Company has not experienced any losses in
such accounts.
Accounts
Receivable
Accounts
receivable consist primarily of oil and gas receivables, net of a valuation
allowance for doubtful accounts.
Oil
and Gas Properties, Successful Efforts Method
The
Company uses the successful efforts method of accounting for oil and gas
producing activities. Under the successful efforts method, costs to acquire
mineral interests in oil and gas properties, to drill and equip exploratory
wells that find proved reserves, and to drill and equip development wells are
capitalized. Costs to drill exploratory wells that do not find proved reserves,
geological and geophysical costs, and costs of carrying and retaining unproved
properties are expensed as incurred. The Company evaluates its proved
oil and gas properties for impairment on a field-by-field basis whenever events
or changes in circumstances indicate that an asset’s carrying value may not be
recoverable. The Company follows Accounting Standards Codification
ASC 360 - Property, Plant, and Equipment (formerly SFAS No. 144, Impairment of Long-Lived
Assets), for these evaluations. Unamortized capital costs are reduced to
fair value if the undiscounted future net cash flows from our interest in the
property’s estimated proved reserves are less than the asset’s net book
value.
F-10
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Proved
reserves
Estimates
of the Company’s proved reserves included in this report are prepared in
accordance with accounting principles generally accepted in the United States of
America and SEC guidelines. The Company’s engineering estimates of
proved oil and natural gas reserves directly impact financial accounting
estimates, including depreciation, depletion and amortization expense and the
impairment. Proved oil and natural gas reserves are the estimated
quantities of oil and natural gas reserves that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under period-end economic and operating
conditions. The process of estimating quantities of proved reserves
is very complex, requiring significant subjective decisions in the evaluation of
all geological, engineering and economic data for each reservoir. The
accuracy of a reserve estimate is a function of: (i) the quality and
quantity of available data; (ii) the interpretation of that data; (iii) the
accuracy of various mandated economic assumptions and (iv) the judgment of the
persons preparing the estimate. The data for a given reservoir may
change substantially over time as a result of numerous factors, including
additional development activity, evolving production history and continual
reassessment of the viability of production under varying economic
conditions. Changes in oil and natural gas prices, operating costs
and expected performance from a given reservoir also will result in revisions to
the amount of the Company’s estimated proved reserves. The Company
engages reserve engineers to estimate its proved reserves.
Asset
Retirement Obligations
The
Company follows the provisions of the Accounting Standards Codification ASC 410
- Asset Retirement and Environment Obligations (formerly SFAS No.
143). The fair value of an asset retirement obligation is recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The present value of the estimated asset retirement costs is
capitalized as part of the carrying amount of the long-lived
asset. The Company’s asset retirement obligations relate to the
abandonment of oil and gas producing facilities. The amounts
recognized are based upon numerous estimates and assumptions, including future
retirement costs, future recoverable quantities of oil and gas, future inflation
rates and the credit-adjusted risk-free interest rate.
Share-Based
Compensation
The
Company follows the Accounting Standards Codification ASC 718 - Compensation -
Stock Compensation (formerly SFAS No. 123 (R). Under ASC 718, the Company
estimates the fair value of each stock option award at the grant date by using
the Black-Scholes option pricing model and common shares based on the last
quoted market price of the Company’s common stock on the date of the share
grant. The fair value
determined represents the cost for the award and is recognized over the vesting
period during which an employee is required to provide service in exchange for
the award. As share-based compensation expense is recognized based on awards
ultimately expected to vest, the Company reduces the expense for estimated
forfeitures based on historical forfeiture rates. Previously recognized
compensation costs may be adjusted to reflect the actual forfeiture rate for the
entire award at the end of the vesting period. Excess tax benefits, as defined
in ASC 718, if any, are recognized as an addition to paid-in
capital.
Revenue
recognition
Revenues
from the sale of oil and natural gas are recognized when the product is
delivered at a fixed or determinable price, title has transferred, and
collectability is reasonably assured and evidenced by a contract. The
Company follows the “sales method” of accounting for oil and natural gas
revenue, so it recognizes revenue on all natural gas or crude oil sold to
purchasers, regardless of whether the sales are proportionate to its ownership
in the property. A receivable or liability is recognized only to the
extent that the Company has an imbalance on a specific property greater than its
share of the expected remaining proved reserves. For oil sales, this
occurs when the customer's truck takes delivery of oil from the operators’
storage tanks.
F-11
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Income
Taxes
The
Company is a taxable entity and recognizes deferred tax assets and liabilities
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates expected to be in effect when the temporary
differences reverse. The effect on the deferred tax assets and
liabilities of a change in tax rates is recognized in income in the year that
includes the enactment date of the rate change. A valuation allowance
is used to reduce deferred tax assets to the amount that is more likely than not
to be realized. Interest and penalties associated with income taxes
are included in selling, general and administrative expense.
The
Company has adopted ASC 740 “Accounting for Uncertainty in Income Taxes”
(formerly FIN 48) which prescribes a comprehensive model of how a company should
recognize, measure, present, and disclose in its financial statements uncertain
tax positions that the company has taken or expects to take on a tax
return. ASC 740 states that a tax benefit from an uncertain position
may be recognized if it is "more likely than not" that the position is
sustainable, based upon its technical merits. The tax benefit of a
qualifying position is the largest amount of tax benefit that is greater than 50
percent likely of being realized upon ultimate settlement with a taxing
authority having full knowledge of all relevant information. As of
December 31, 2009, the Company had not recorded any tax benefits from uncertain
tax positions.
Earnings
(Loss) Per Share
The
Company’s earnings (loss) per share are computed by dividing net income (loss)
by the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share reflects the potential dilution of securities,
if any, that could share in the earnings of the Company and is calculated by
dividing net income by the diluted weighted average number of common shares. The
diluted weighted average number of common shares is computed using the treasury
stock method for common stock that may be issued for outstanding stock options.
The following is a reconciliation of basic and diluted earnings per share for
the years ended December 31, 2009 and 2008:
For the Year Ended
|
||||||||
December 31,
|
||||||||
2009
|
2008
|
|||||||
Numerator: | ||||||||
Net
income (loss) available to common shareholders
|
$ | (1,931,539 | ) | $ | 115,179 | |||
Effect
of common stock equivalents:
|
||||||||
Add: interest
expense on convertible debt
|
- | 30,000 | ||||||
Less: tax
effect of decrease interest expense
|
- | (10,200 | ) | |||||
Net
income (loss) adjusted for common stock equivalents
|
(1,931,539 | ) | 134,979 | |||||
Denominator:
|
||||||||
Weighted
average shares – basic
|
29,232,076 | 24,192,811 | ||||||
Net
income (loss) per share – basic
|
$ | (0.07 | ) | $ | 0.00 | |||
Dilutive
effect of common stock equivalents:
|
||||||||
Warrants
|
- | 146,772 | ||||||
Convertible
Debt
|
- | 997,350 | ||||||
Denominator:
|
||||||||
Weighted
average shares – diluted
|
29,232,076 | 25,299,020 | ||||||
Net
income (loss) per share-diluted
|
$ | (0.07 | ) | $ | 0.01 |
F-12
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
All
warrants and convertible debt issued and outstanding were included in the
computation of diluted earnings per share for 2008, but were not included for
2009 due to a net loss in the latter period. In periods when losses
are reported, the weighted-average number of common shares outstanding excludes
common stock equivalents, because their inclusion would be
anti-dilutive.
Financial
instruments
The
accounting standards regarding fair value of financial instruments and related
fair value measurements define fair value, establish a three-level valuation
hierarchy for disclosures of fair value measurement and enhance disclosure
requirements for fair value measures.
The three
levels are defined as follows:
·
|
Level
1 - inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
·
|
Level
2 - inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
·
|
Level
3 - inputs to the valuation methodology are unobservable and significant
to the fair value measurement.
|
Financial
assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement. The
Company has determined that the Convertible Notes outstanding as of the date of
these financial statements includes an exercise price “reset” adjustment that
qualifies as derivative financial instruments under the provisions of FASB ASC
815-40, Derivatives and
Hedging – Contracts in an Entity’s Own Stock.” See Note 5 for discussion
of the impact the derivative financial instruments had on the Company’s
financial statements and results of operations.
The fair
value of these bifurcated conversion features was determined using a Binomial
Model with any change in fair value during the period recorded in earnings as
“Other income (expense) – Gain (loss) on change in derivative
value.
Significant
Level 3 inputs used to calculate the fair value of the warrants include the
stock price on the valuation date, expected volatility, risk-free interest rate
and management’s assumptions regarding the likelihood of a repricing of these
bifurcated conversion features pursuant to the anti-dilution
provision. See Note 5 for further discussion.
The
following table sets forth by level within the fair value hierarchy our
financial assets and liabilities that were accounted for at fair value on a
recurring basis as of December 31, 2009.
Carrying Value at
December 31, 2009
|
Fair Value Measurement at December 31, 2009
|
|||||||||||||||
Level
1
|
Level
2
|
Level
3
|
||||||||||||||
Derivative
liability
|
$
|
7,461,680
|
$
|
-
|
$
|
-
|
$
|
7,461,680
|
The
Company did not identify any other assets and liabilities that are required to
be presented on the consolidated balance sheet at fair value.
F-13
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Subsequent
Events
The
Company evaluated events occurring between the end of our fiscal year, December
31, 2009, and April 15,
2010 when the consolidated financial statements were issued.
Recently
issued accounting pronouncements
In June
2008, the FASB issued FSP EITF 03-6-1 (ASC 260-10), Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (“FSP EITF 03-6-1” or ASC 260-10). FSP EITF 03-6-1 (ASC 260-10)
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in
computing earnings per share under the two-class method described in SFAS No.
128 (ASC 260-10), Earnings Per Share. FSP EITF 03-6-1(ASC 260-10) is effective
for the Company as of January 1, 2009 and in accordance with its requirements it
will be applied retrospectively. The adoption of FSP EITF 03-6-1 (ASC 260-10)
did not have a material impact on the Company’s consolidated financial
statements.
In
December 2008, the SEC released Final Rule, Modernization of Oil and Gas
Reporting. The new disclosure requirements include provisions that
permit the use of new technologies to determine proved reserves if those
technologies have been demonstrated empirically to lead to reliable conclusions
about reserve volumes. The new requirements also will allow companies to
disclose their probable and possible reserves to investors. In
addition, the new disclosure requirements require a company: (a) to report the
independence and qualifications of its reserves preparer or auditor; (b) to file
reports when a third party is relied upon to prepare reserves estimates or
conducts a reserves audit; and (c) to report oil and natural gas reserves using
an average price based upon the prior 12-month period rather than period-end
prices. The use of average prices will affect future impairment and
depletion calculations. The new disclosure requirements became
effective for annual reports on Form 10-K for the Company’s fiscal year ending
December 31, 2009.
Effective
January 1, 2009, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160
(ASC 810 “Consolidation”) which requires companies:
|
•
|
To
recharacterize minority interests, previously classified within
liabilities, as noncontrolling interests reported as a component of
consolidated equity on the balance
sheet,
|
|
•
|
To
include total income in net income, with separate disclosure on the face
of the consolidated income statement of the attribution of income between
controlling and noncontrolling interests,
and
|
|
•
|
To
account for increases and decreases in noncontrolling interests as equity
transactions with any difference between proceeds of a purchase or
issuance of noncontrolling interests being accounted for as a change to
the controlling entity’s equity instead of as current period gains/losses
in the consolidated income statement. Only when the controlling entity
loses control and deconsolidates a subsidiary will a gain or loss be
recognized.
|
SFAS No.
160 was effective prospectively for fiscal years beginning on or after December
15, 2008 except for its specific transition provisions for retroactive adoption
of the balance sheet and income statement presentation and disclosure
requirements for existing minority interests that are reflected in these
consolidated financial statements for all periods presented. The new authoritative
guidance did not have an impact on the Company’s consolidated financial
statements
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles (“SFAS 168” or ASC
105-10). SFAS 168 (ASC 105-10) establishes the Codification as the sole source
of authoritative accounting principles recognized by the FASB to be applied by
all nongovernmental entities in the preparation of financial statements in
conformity with GAAP. SFAS 168 (ASC 105-10) was prospectively effective for
financial statements issued for fiscal years ending on or after September 15,
2009, and interim periods within those fiscal years. The adoption of SFAS 168
(ASC 105-10) on July 1, 2009 did not impact the Company’s results of operations
or financial condition. The Codification did not change GAAP; however, it did
change the way GAAP is organized and presented. As a result, these changes
impact how companies reference GAAP in their financial statements and in their
significant accounting policies. The Company implemented the Codification in
this Report by providing references to the Codification topics alongside
references to the corresponding standards.
F-14
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Other
than pronouncements discussed above, the Company does not expect the adoption of
any other recently issued accounting pronouncements to have a significant impact
on its results of operations, financial position or cash flows.
NOTE 2 –
GOING CONCERN
As
indicated in the accompanying consolidated financial statements, the Company has
incurred recurring losses from operations, has a working capital deficit of
$7,518,536 at December 31, 2009 and currently has limited sources of recurring
revenue. These conditions raise substantial doubt as to the Company’s
ability to continue as a going concern. To finance the Company’s net
losses, the Company has sold debt and equity securities and officers and
directors have funded the Company through the purchase of notes payable (see
Note 4). There can be no assurance that the Company can sell stock or
debt or that the officers and directors of the Company will continue or have the
ability to make financing available to the Company in the future. The
officers and directors are under no legal obligation to provide additional loans
to the Company. If the Company’s officers and directors do not make
such loans, the Company cannot create a source of recurring revenues or the
Company does not receive funds from other sources, then the Company may be
unable to continue to operate as a going concern. The financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
NOTE 3 –
OIL AND GAS PROPERTIES
The
Company’s oil and gas properties are located in the United States.
The
carrying values, net of depletion, depreciation, and impairment, at December 31,
2009 and December 31, 2008 of the Company’s oil and gas properties
were:
Prospect
|
December 31, 2009
|
December 31, 2008
|
||||||
Main
Pass 35 Project
|
$ | - | $ | 1,462,118 | ||||
Coal
Creek Prospect
|
223,469 | 206,085 | ||||||
International
Paper #1 (“IP #1”)
|
- | 129,611 | ||||||
Java
Field
|
520,633 | - | ||||||
Total
|
$ | 744,102 | $ | 1,797,814 |
Net oil
and gas properties at December 31, 2009 were:
Year
Incurred
|
Acquisition
Costs
|
Exploration
Costs
|
Depletion,
Depreciation,
and
Impairment
|
Dry Hole
Cost
|
Disposition
of assets
|
Total
|
||||||||||||||||||
2006
and prior
|
$ | 236,963 | $ | 421,598 | $ | - | $ | - | - | $ | 658,561 | |||||||||||||
2007
|
- | 37,360 | (27,140 | ) | - | - | 10,220 | |||||||||||||||||
2008
|
- | 1,595,099 | - | (466,066 | ) | - | 1,129,033 | |||||||||||||||||
2009
|
556,260 | 488,035 | (7,624 | ) | - | (2,090,383 | ) | (1,053,712 | ) | |||||||||||||||
Total
|
$ | 793,223 | $ | 2,542,092 | $ | (34,764 | ) | $ | (466,066 | ) | (2,090,383 | ) | $ | 744,102 |
The
Company holds oil and gas lease interests in Oklahoma and New
York. The Oklahoma leases are classified as “Properties not subject
to amortization” in the Company’s financial statements. The Company
evaluates each of its properties upon completion of drilling and assessment of
reserves to either classify as “Properties subject to amortization” or impair
the properties.
F-15
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Coal
Creek Prospect, Sequoyah Co., Oklahoma
In
December 2007, the Company completed a “farm-out” transaction with Wentworth
Operating Company of Edmond, OK (“Wentworth”), wherein Wentworth acquired the
Company’s pipeline right-of-way and planned to construct a natural gas gathering
system and approximately three miles of pipeline to connect the Cook #1 and
future wells to an Arkansas Oklahoma Gas Company (AOG) pipeline. In
addition, Wentworth agreed to fund, drill and complete the Gipson #1, a direct
offset to the Cook #1.
Wentworth
made an advance deposit of $30,000 against the acquisition price of $60,000 for
the pipeline right-of-way with the balance payable out of net proceeds from the
initial gas sales from the Cook #1 and Gipson #1 wells. The pipeline
work has been completed and Wentworth has been assigned their interest in the
acreage per agreement. The Company paid the estimated billed
completion prepayment funds for the Gipson #1 well to Wentworth in March 2009,
less $30,000 owed by Wentworth on the pipeline right of ways which completed the
sale of the pipeline to Wentworth. Further development of up to five
additional offset drilling locations is dependent upon the results of the Cook
#1 and Gipson #1 wells.
In
December 2008, a decision was made for the Gipson #1 well to be drilled to a
depth to test the Hunton zone, and, accordingly, the agreement with Wentworth
was amended and Wentworth would fund 100% of the drilling costs to the casing
point on the Gipson #1 well. The costs are now being borne by the
parties per their respective working interests.
Java
Field Natural Gas Development Project – Wyoming County, New York
On August
31, 2009, the Company acquired the Java Field, a natural gas development project
in Wyoming County in western New York for $440,000. The acquisition
includes a 100% working interest in 19 leases held by production covering
approximately 3,235 mineral acres, 19 existing natural gas wells, two tracts of
land totaling approximately 36 acres and two pipeline systems, including a 12.4
mile pipeline and gathering system that serves the existing field as well as a
separate 2.5 mile system located northeast of the field. The
Company’s average net revenue interest (NRI) in the leases is approximately
78%. The Company began receiving revenues for the field on October
20, 2009 for the September 2009 production month.
Main
Pass 35 Project – Plaquemines Parish, Louisiana
On
January 1, 2008, the Company acquired Poydras Energy Partners, LLC, a Louisiana
operating company now known as Poydras Energy, LLC (“Poydras”), along with its
principal asset, the Main Pass 35 Project. The Project has been shut
down since Hurricane Katrina. The wells were undamaged but there was
extensive damage to the processing facility. The Company owned a net
working interest of 30% in the project.
The
Company expended $1,566,167 in development cost during the year ended December
31, 2008 and $436,037 in additional development costs during the first five
months of 2009. The Company concluded that it did not have adequate
resources to continue its development of the Main Pass Project and the IP #1
well. Accordingly, on June 1, 2009, the Company sold 100% of its
member interest in Poydras to St. Francisville Oil & Gas, LLC (“St.
Francisville”). St. Francisville agreed to assume all the assets and
related liabilities of the Main Pass 35 Project and the IP #1 well, which
amounted to $2,627,655 of assets and $1,475,658 of liabilities. The
Company recognized a loss of $1,151,997 on the transaction as detailed in the
table below.
F-16
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Assets
assumed by purchaser (St. Francisville):
|
||||
Oil
and gas properties
|
$ | 2,026,825 | ||
Prepaid
asset retirement cost
|
600,830 | |||
Total
assets assumed
|
2,627,655 | |||
Liabilities
assumed by purchaser:
|
||||
Accounts
payable
|
733,178 | |||
Recompletion
deposits
|
300,000 | |||
Asset
retirement obligation
|
442,480 | |||
Total
liabilities assumed
|
1,475,658 | |||
Loss
on sale of Poydras Energy, LLC
|
$ | (1,151,997 | ) |
NOTE 4 –
DEBT - RELATED PARTIES
At
December 31, 2009, debt to related parties consisted of unsecured notes payable
to related parties for cash loaned to the Company. These notes
totaling $451,400 are to entities owned by the founders and bear interest at a
rate of 6% per annum with principal and interest originally to mature on March
31, 2007 but have been amended to mature on May 31, 2012. Also,
during the year ended December 31, 2009, proceeds in the amount of $43,000 were
received by the Company as an additional loan from a related party.
NOTE 5 –
CONVERTIBLE PROMISSORY NOTES
The
Company borrowed $250,000 under a convertible note from a private investor and
consultant to the Company. This note (the “Denton Note”) bore
interest at 12% per annum and matured on September 30, 2007, but was extended
until September 29, 2009. The Denton Note provided the holder the
right to convert any or all of the outstanding Denton Note to shares of the
Company’s common stock, at $0.50 per share, any time prior to the maturity
date. The purchaser of the Denton Note also received three-year
warrants to purchase 300,000 shares of the Company’s common stock exercisable at
$0.50 per share with an expiration date of September 29, 2009. These
warrants were converted to 578,580 shares of the Company’s Common Stock on a
cashless basis upon the closing of the Merger on August 31, 2009. On
November 6, 2009, the $250,000 Denton Note was cancelled and replaced with a
$250,000 Convertible Note as part of the 2009 PPO.
The
Company initially evaluated the terms of the $250,000 Denton Note and attached
warrants in accordance with “EITF 98-5 and EITF 00-27” or ASC
470-20. The relative fair value of the warrants under the
Black-Scholes option pricing model was $93,713, which was recorded as a debt
discount on the convertible note and amortized using the effective interest
method over the term of the Denton Note. The parameters used in the
Black-Scholes valuation model were: a risk-free interest rate of 4.62%; the
current stock price on the date of issuance of $0.50 per common share; the
exercise price of the warrants of $0.50 per share of Common Stock; an expected
term of three years; volatility of 214.54% and an expected dividend yield of
0.0%. The Company also determined that the issuance of the warrants
created a beneficial conversion feature. The Company recorded a
discount of $93,714 to reflect the value of the beneficial conversion feature on
the convertible debt on the date of issuance. Utilizing the effective
interest method, the value of the beneficial conversion feature has been
completely amortized through the maturity date of the debt in accordance with
EITF 00-27 or ASC 470-10. For the year ending December 31, 2007, a
total of $187,427 was charged to interest expense associated with the
amortization of the debt discount and the beneficial conversion
feature
In 2009
the Company commenced a private placement (the “2009 PPO”) of 10% Secured
Convertible Promissory Notes of the Company (the “Convertible Notes”), at a
purchase price of 100% of face value, which, at the option of the respective
holders, are convertible into shares of Common Stock at a conversion price of
$0.25 per share, subject to adjustment in certain circumstances as provided
therein. Several closings of the 2009 PPO were held
during fiscal 2009 in which the Company sold an aggregate of $1,280,000
principal amount of Convertible Notes (not including the Convertible Note in the
principal amount of $250,000 that was issued in exchange for the Denton Note)
raising net proceeds of $1,050,818 after $229,182 of offering
costs. The Convertible Notes issued are due 24 months from issuance
(or earlier upon certain events of default) and bear interest at 10% per annum,
payable semi-annually on December 31 and June 30 in each year (with the first
interest payment due and payable on December 31, 2009). Interest will
be paid in shares of the Common Stock valued for this purpose at 90% of the
volume weighted average price of the Common Stock for the ten trading days
preceding but not including the relevant interest payment date. The
Company shall have the right to redeem from time to time, upon prior notice, all
or any portion of the outstanding principal amount of the Convertible Notes,
without penalty, for 100% of the principal being redeemed plus accrued and
unpaid interest.
F-17
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The
Convertible Notes contain a standard “blocker” provision so that no holder shall
have the right to convert any portion of its Convertible Notes to the extent
that, after giving effect to such conversion, the holder and its affiliates
would beneficially own in excess of 4.99% of the number of shares of Common
Stock outstanding immediately after giving effect to such
conversion. By written notice to the Company, a holder may increase
or decrease such percentage to any other percentage, provided that any such
increase will not be effective until the sixty-first (61st) day after such
notice is delivered and such percentage may not, in any event, exceed
9.99%. All convertible notes above are secured by substantially all
of the assets of the Company.
The
Company determined that the Convertible Notes issued in the 2009 PPO contained
provisions that protect holders from declines in the Company’s stock price that
could result in modification of the exercise price under the conversion feature
based on a variable that is not an input to the fair value of a
“fixed-for-fixed” option as defined under FASB ASC Topic No.
815–40. As a result, the exercise price is not indexed to the
Company’s own stock. The fair value of the conversion feature was
recognized as an embedded derivative instrument and will be measured at fair
value at each reporting period. The Company measured the fair value
of these instruments as of the date of issuance and at December 31, 2009, and
recorded $1,921,700 unrealized gain on change in derivative value to the
statement of operations for the year ended December 31, 2009. The
Company determined the fair values of these securities using a binomial
valuation model that utilizes the Cox-Ross-Rubenstein method of formulating the
Black-Scholes equation for determining the theoretical value of convertible
notes that contain options of the underlying Common Stock of the
Company.
Activity
for derivative instrument during the year ended December 31, 2009 was as
follows:
January 1,
2009
|
Activity during
the period
|
Increase
(Decrease) in
Fair Value of
Derivative
Liability
|
December 31,
2009
|
|||||||||||||
Derivative
conversion feature
|
- | $ | 9,383,380 | $ | (1,921,700 | ) | $ | 7,461,680 |
The fair
value of the derivative conversion feature is estimated using the following
principal assumptions for the binomial valuation model on the dates of initial
valuation:
Date
|
Probability of
issuance of
instruments at a
price lower than the
conversion price
|
Probable prices at
which instruments
will be issued
|
||||
September
2009
|
70%
|
.20
- .15
|
||||
November
2009
|
60%
|
.20
- .15
|
||||
December
2009
|
50%
|
.24
- .21
|
||||
Thereafter
|
50%
|
.24
- .21
|
F-18
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
|
November 23,
2009
|
December 31,
2009
|
||||||||||
Common
stock issuable upon conversion
|
2,000,000 | 4,120,000 | 6,120,000 | |||||||||
Market
price of common stock on measurement date, per posted closing
price
|
$ | 1.85 | $ | 1.45 | 1.50 | |||||||
Conversion
price
|
$ | 0.25 | $ | 0.25 | $ | 0.25 | ||||||
Conversion
period in years
|
2 | 2 | 2 | |||||||||
Expected
volatility (1)
|
130 | % | 130 | % | 130 | % | ||||||
Expected
dividend yield (2)
|
0 | % | 0 | % | 0 | % | ||||||
Risk
free interest rate (3)
|
3 | % | 3 | % | 3 | % |
(1) The
volatility factor was estimated by management using the historical volatilities
of comparable companies in the same industry and region because the Company does
not have adequate trading history to determine its historical
volatility.
(2) The
expected dividend yield was determined by management to be 0% based on its
expectation that there will not be earnings available to pay dividends in the
near term.
(3) The
risk-free interest rate was determined by management using the U.S. Treasury
zero coupon yield over the contractual term of the conversion
feature.
Principal
repayment provisions of long-term debt are as follows at December 31,
2009:
2010
|
$
|
43,000
|
||
2011
|
1,530,000
|
|||
2012
|
451,400
|
|||
Thereafter
|
-
|
|||
Total
|
$
|
2,024,400
|
Asset
retirement obligation balances as December 31, 2009 and December 31, 2008
consisted of:
December 31, 2009
|
December 31, 2008
|
|||||||
Asset
retirement obligations at beginning of the period
|
$ | 429,085 | 9,357 | |||||
Obligation
assumed from acquisition of Poydras
|
- | 389,677 | ||||||
Obligation
relieved from sale of Poydras
|
(442,480 | ) | - | |||||
Payment
of obligation for plugged wells
|
- | (6,494 | ) | |||||
Obligation
for asset retirement of Java Fields
|
49,818 | - | ||||||
Accretion
expense
|
18,591 | 36,545 | ||||||
Revision
in cost estimates
|
266 | - | ||||||
Asset
retirement obligations at end of the period
|
$ | 55,280 | 429,085 |
Prepaid
asset retirement cost of $600,830 represents the amount previously paid in cash
to the state of Louisiana based on an estimate using present values to plug and
abandon the Main Pass prospect. The asset retirement liability was
calculated as the prepaid cost of $600,830 adjusted to future cost using an
inflation factor over the projected life of the Main Pass
prospect. The adjusted future cash flows were then discounted using a
present value factor resulting in the $399,034 asset retirement liability. The
total prepaid asset retirement cost of $600,830 and the related asset retirement
obligation was transferred on June 1, 2009, to the buyer with the transfer of
all the assets and liabilities of Poydras.
NOTE 7 –
INCOME TAXES
Deferred
income taxes are provided on a liability method whereby deferred tax assets and
liabilities are established for the difference between the financial reporting
and income tax basis of assets and liabilities as well as operating loss and tax
credit carry forwards. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
F-19
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Realization
of deferred tax assets is dependent upon sufficient future taxable income during
the period that deductible temporary differences and carry-forwards are expected
to be available to reduce taxable income. At December 31, 2009 the Company has
recorded a 100% valuation allowance as management believes it is likely that any
deferred tax assets will not be realized.
At
December 31, 2009, the Company had net operating loss carryforwards of
$3,038,020 that will expire between 2023 through 2029.
No tax
benefit has been reported in the December 31, 2009 financial statements since
the potential tax benefit is offset by the valuation allowance. Due to the
change in the Tax Reform Act of 1986, net operating loss carryforwards for
federal income tax reporting purposes may be subject to annual limitations in
the event of certain changes in ownership. Should a change in ownership occur,
net operating loss carryforwards may be limited as to use in future
years.
NOTE 8 –
COMMITMENTS AND CONTINGENCIES
From time
to time, the Company may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result in these
or other matters that may arise from time to time that may harm the Company’s
business.
Except
for the matter described below, other than routine litigation arising in the
ordinary course of business that the Company does not expect, individually or in
the aggregate, to have a material adverse effect on the Company, there is no
currently pending legal proceeding and, as far as the Company is aware, no
governmental authority is contemplating any proceeding to which the Company is a
party or to which any of the Company’s properties is subject.
Except
for the matter described below, the Company is currently not aware of any
pending legal proceedings to which the Company is a party or of which any of the
Company’s property is the subject, nor is the Company aware of any such
proceedings that are contemplated by any governmental authority. Although there
can be no assurance as to the ultimate outcome, MEI has denied liability in the
case pending against it, and the Company intends to defend vigorously such case.
Based on information currently available, the Company believes the amount, or
range, of reasonably possible losses in connection with the action against MEI
will not be material to the Company’s consolidated financial condition or cash
flows. However, losses may be material to the Company’s operating results for
any particular future period, depending on the level of income for such
period.
Shallow Draft Elevating Boats, Inc.
vs. Poydras Energy, LLC, Poydras Energy Partners, LLC, Mesa Energy, Inc. and
David Freeman: In connection with its previous ownership of Poydras
Energy, LLC, MEI has been named in a legal action by a Poydras vendor regarding
approximately $114,000 in unpaid invoices. The case was filed on June 22,
2009, in the 25th
Judicial District Court of Plaquemines Parish, Louisiana, by Shallow Draft
Elevating Boats, Inc., seeking to perfect a lien against various wells in the
Main Pass 35 project. These invoices are the responsibility of
Poydras. In the agreement to sell Poydras to St. Francisville, which
closed June 1, 2009, St. Francisville agreed to fully indemnify MEI against any
claims related to Poydras. The Company believes that St. Francisville
has filed all appropriate responses to the legal action on our behalf and is
handling the case as appropriate. The Company does not believe there is
any merit to the claim as it relates to MEI but will continue to monitor the
proceedings.
NOTE 9 –
STOCKHOLDERS’ EQUITY
On March
3, 2006, Mesa Energy, LLC, merged with Mesa Energy, Inc., a Colorado
corporation. Mesa Energy, Inc. (Colorado) (formerly known as North
American Risk Corporation, Inc.) issued 17,550,486 shares in exchange for all of
the assets and liabilities of Mesa Energy, LLC.
F-20
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
On March
13, 2006, the combined entity merged with Mesa Energy, Inc., a Nevada
corporation (MEI), and MEI issued 1,735,762 shares of common stock on a 1:1
basis to Mesa Energy, Inc. (Colorado).
Neither
new entity had any assets, liabilities or operations. Both of the
above transactions were accounted for as recapitalizations of MEI.
During
the year ended December 31, 2006, MEI issued 1,214,484 shares of common stock
for cash proceeds of $265,400 in a series of transactions. MEI also
issued 30,000 warrants for services with an exercise price of $0.50 and an
expiration date of December 15, 2009. The options and warrants were
valued at $19,075 using the Black-Scholes Option Pricing
Model. Immediately prior to the closing of the Merger discussed
below, shares of MEI’s common stock were issued in exchange for all outstanding
warrants to purchase shares of MEI’s common stock.
During
the year ended December 31, 2007, MEI issued 803,079 shares of common stock for
cash proceeds of $208,200.
Effective
January 1, 2008, MEI issued 2,892,937 shares of common stock to entities
controlled by David L. Freeman in exchange for a 50% member interest in
Poydras.
On
January 17, 2008, MEI granted 199,470 warrants to the Sharon Wilensky Revocable
Trust, an affiliate of Roky Operating, LLC, as additional consideration in
connection with Roky’s acquisition of a 40% working interest in an oil and gas
property from MEI. MEI determined the relative fair value of the
warrants under the Black-Scholes valuation model to be $31,071, which was
recorded as additional oil and gas properties in the Main Pass 35
Project. The parameters used in the Black-Scholes valuation model
were: a risk-free interest rate of 2.46%; the current stock price on
the date of issuance of $0.50 per common share; the exercise price of the
warrants of $0.50 per share of common stock; an expected term of three years;
volatility of 98.65% and an expected dividend yield of
0.0%. Immediately prior to the closing of the Merger discussed below,
shares of MEI’s common stock were issued in exchange for all outstanding
warrants to purchase shares of MEI’s common stock.
On August
1, 2008, MEI sold and issued 9,643 shares of its restricted common stock to a
third-party consultant at $0.75 per share for total consideration of $3,750 for
consulting services.
Reverse
Merger
On August
31, 2009, Mesa Energy Holdings, Acquisition Sub and MEI, entered into an
agreement and plan of merger and reorganization (the “Merger Agreement”), which
closed on the same date, and pursuant to which Acquisition Sub merged with and
into MEI, which became a wholly owned subsidiary of Mesa Energy
Holdings.
Pursuant
to the Merger, Mesa Energy Holdings, Inc. ceased to engage in the acquisition
and exploration of mining properties and acquired the business of MEI to engage
in exploration and production activities in the oil and gas industry, as a
publicly traded company under the name Mesa Energy Holdings, Inc.
At the
closing of the Merger, each of the 12,981,115 shares (25,035,700 after
adjustment for stock splits or reverse merger re-capitalization) of MEI’s common
stock issued and outstanding immediately prior to the closing of the Merger,
included 430,000 shares (829,309 after adjustment for stock splits or reverse
merger re-capitalization) of MEI’s common stock issued in exchange for
outstanding warrants to purchase 430,000 shares of MEI’s common stock, was
converted into 1.9286 shares of Mesa Energy Holdings, Inc.’s Common Stock. As a
result, an aggregate of 25,035,700 shares of Mesa Energy Holdings, Inc.’s Common
Stock was issued to the holders of MEI’s common stock. MEI did not have any
stock options or other warrants to purchase shares of its capital stock
outstanding at the time of the Merger. Immediately prior to the
Merger, Mesa Energy Holdings, Inc. had 14,000,000 shares of Common Stock
outstanding.
As of
December 31, 2009, the Company had no options or warrants
outstanding.
F-21
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Upon the
closing of the Merger, under the terms of a Split-Off Agreement and a General
Release Agreement, the Company transferred all of its pre-Merger operating
assets and liabilities to its wholly owned subsidiary, Mesquite Mining Group,
Inc., a Delaware corporation (“Split-Off Subsidiary”) formed on August 13, 2009.
Thereafter, pursuant to the Split-Off Agreement, the Company transferred all of
the outstanding shares of capital stock of Split-Off Subsidiary to Beverly
Frederick, the pre-Merger majority stockholder of Mesquite Mining (the
“Split-Off”), in consideration of and in exchange for (i) the surrender and
cancellation of an aggregate of all 21,000,000 shares of Common Stock held by
that stockholder and (ii) certain representations, covenants and
indemnities.
Investor
Relations Agreement
In the
Merger Agreement, the Company agreed to enter into an agreement with an investor
relations firm or firms to be identified (the “IR Consultants”) to provide
investor relations services to the Company, pursuant to which the Company will
agree to deliver to the IR Consultants an aggregate of 1,000,000 shares of
Common Stock (the “IR Shares”); as of December 31, 2009, 150,000 of those shares
had been issued to an IR Consultant and the remainder were issued after December
31, 2009 to Gottbetter & Partners, LLP to hold as escrow agent pursuant to
the IR Shares Escrow Agreement. The value of the 150,000 shares
issued to IR Consultants for services during 2009 was $139,000 based on the
grant date fair value. The remaining 850,000 IR Shares will be valued
upon their release from escrow to IR Consultants as services are
performed.
2009
Equity Incentive Plan
Before
the Merger, the Board of Directors of the Company adopted, and the
Company’s majority stockholders approved, the 2009 Equity Incentive Plan (the
“2009 Plan”), which provides for the issuance of incentive awards of up to
5,000,000 shares of Common Stock to officers, key employees, consultants and
directors of the Company and its subsidiaries. As of December 31,
2009, no awards had been granted under the 2009 Plan.
Immediately
after giving effect to (i) the Stock Split, (ii) the initial closing of the 2009
PPO, (iii) the closing of the Merger and (iv) the cancellation of 21,000,000
shares in the Split-Off, there were 40,035,700 shares of Common Stock issued or
required to be issued, as follows:
|
·
|
The former MEI stockholders held
25,035,700 shares of Common
Stock;
|
|
·
|
The stockholders of Mesquite
Mining prior to the Merger held 14,000,000 shares of Common
Stock;
|
|
·
|
An IR Consultant held
150,000 shares of Common Stock;
and
|
|
·
|
850,000 shares of Common Stock
were required to be issued to the escrow agent pursuant to an IR Shares
Escrow Agreement.
|
Additionally,
|
·
|
The investor in the initial
closing of the 2009 PPO held a $500,000 Convertible Note convertible into
2,000,000 shares of Common Stock, subject to adjustment in certain
circumstances as provided
therein;
|
|
·
|
MEI’s outstanding Denton Note, in
the principal amount of $250,000, was convertible into an aggregate of
964,300 shares of Common Stock, subject to adjustment in certain
circumstances as provided.
|
|
·
|
the 2009 Plan authorized issuance
of up to 5,000,000 shares of Common Stock as incentive awards to executive
officers, key employees, consultants and directors of the Company and its
subsidiaries; however, no awards had been granted under the 2009
Plan.
|
No other
securities convertible into or exercisable or exchangeable for Common Stock
(including options or warrants) were outstanding at such time.
On
November 6, 2009, the $250,000 Denton Note was cancelled and replaced with a
$250,000 Convertible Note as part of the 2009 PPO. Accordingly, such
Convertible Note is now convertible at $0.25 per share.
F-22
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The
Company conducted additional closings of the 2009 PPO (the “Additional 2009
Closings”) on October 19, 2009 for $250,000, on November 3, 2009 for $250,000,
on November 11, 2009 for $100,000, on November 13, 2009 for $100,000, and on
November 25, 2009 for $80,000 for an aggregate principal amount (including the
initial closing, but excluding the Convertible Note issued in exchange for the
Denton Note) of $1,280,000. The Company paid a one percent (1%)
placement agent fee of $7,800 to a registered broker-dealer in connection with
the sale of Convertible Notes in the Additional 2009 Closings.
NOTE 10 –
SUBSEQUENT EVENTS
Subsequent
to December 31, 2009, the Company conducted further closings (the “Additional
2010 Closings”) of the 2009 PPO for aggregate gross proceeds of
$665,000.
In
January 2010 the Company repaid a note to its CEO for $43,000 in
full.
Subsequent
to December 31, 2009, the Company issued an aggregate of 239,203 shares of
common stock to convert principal and accrued interest on Convertible Notes
totaling $82,926.
From
January 4, 2010 through January 27, 2010, the Company granted 1,048,000 options
with an exercise price of $0.25 a share under the 2009 Option
Plan. The options were valued at $846,596 using the Black Scholes
Model and expire on various dates between 3 to 5 years and have vesting periods
of 18 to 21 months.
On March
11, 2010, a total of 850,000 common shares were issued to Gottbetter &
Partners, LLP to hold as escrow agent pursuant to the IR Shares Escrow
Agreement. On the same day, 8,900 of such common shares, valued at
$18,334 based on the market value of the common shares, were released from the
escrowed shares to an IR Consultant for services provided.
On March
17, 2010, Nicholas A. Spano, former State Senator for New York, joined the
Advisory Board and was granted the right to receive a total of 24,000 shares of
restricted stock under the Company’s 2009 Equity Incentive Plan. The
applicable Restricted Stock Agreement provides that the common shares vest and
be released from escrow over four vesting periods as services are
provided. The first vesting period occurred on the date of grant and
the fair value of the 6,000 common shares released from escrow was
$15,360. The remaining 18,000 common shares will vest, and be
released from escrow, in three six-month periods from the original date of grant
as services are provided.
The
Company also entered into a Consultant Agreement, effective as of March 17,
2010, with Mr. Spano, pursuant to which the Company agreed to compensate Mr.
Spano a total of 76,000 common shares for certain consulting services by issuing
him 26,000 common shares immediately, and an additional 25,000 common shares on
July 31, 2010 and November 30, 2010. The market value of the 25,000
shares of Common Stock issued to Mr. Spano pursuant to the Consulting Agreement
on March 17, 2010 was $64,000.
On April
1, 2010, Robert C. Avaltroni, former Deputy Commissioner of the Department of
Environmental Protection for New York City, joined the Advisory Board and was
granted the right to receive a total of 24,000 shares of restricted stock under
the 2009 Equity Incentive Plan. The applicable Restricted Stock
Agreement provides that the common shares vest, and be released, from escrow
over four vesting periods as services are provided. The first vesting
period occurred on the date of grant and the market value of the 6,000 shares of
common shares released from escrow was $16,020. The remaining 18,000 common
shares will vest, and be released from escrow, in three six-month periods from
the original date of grant as services are provided.
The
Company also entered into a Consultant Agreement, effective as of April 1, 2010,
with Mr. Avaltroni, pursuant to which the Company agreed to compensate Mr.
Avaltroni a total of 76,000 common shares for certain consulting services, by
issuing him 26,000 common shares immediately, and an additional 25,000 common
shares on July 31, 2010 and November 30, 2010. The market value of
the 25,000 common shares issued to Mr. Avaltroni pursuant to the Consulting
Agreement on April 1, 2010 was $66,750.
F-23
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The
Company has evaluated and disclosed all material events occurring between the
end of our fiscal year, December 31, 2009, and April 15, 2010 when the
consolidated financial statements were issued.
NOTE 11 –
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION
ACTIVITIES (UNAUDITED)
This
footnote provides unaudited information required by FASB ASC Topic 932, Extractive Activities—Oil and
Gas.
Geographical
Data
The
following table shows the Company’s oil and gas revenues and lease operating
expenses during the years ended December 31, 2009 and 2008:
2009
|
2008
|
|||||||
Revenues
|
||||||||
Java
Field
|
$ | 16,638 | $ | — | ||||
$ | 16,638 | $ | — | |||||
Production
Cost
|
||||||||
Java
Field
|
$ | — | $ | — | ||||
$ | — | $ | — |
Capital
Costs
Capitalized
costs and accumulated depletion relating to the Company’s oil and gas producing
activities as of December 31, 2009 and 2008, all of which are onshore
properties located in the United States are summarized below:
2009
|
2008
|
|||||||
Unproved
properties not being amortized
|
$ | 185,777 | $ | 1,709,712 | ||||
Proved
properties being amortized
|
74,984 | — | ||||||
Accumulated
depreciation, depletion, and amortization
|
(34,764 | ) | (29,399 | ) | ||||
Net
capitalized costs
|
$ | 225,997 | 1,680,313 |
F-24
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Acquisition,
Exploration and Development Costs Incurred
Costs
incurred in oil and gas property acquisition, exploration and development
activities as of December 31, 2009 and 2008 are summarized
below:
2009
|
||||
Property
acquisition costs:
|
||||
Proved
|
$ | 64,168 | ||
Unproved
|
136,624 | |||
Exploration
costs
|
76,293 | |||
Development
costs
|
— | |||
Total
costs incurred
|
$ | 277,085 |
2008
|
||||
Property
acquisition costs:
|
||||
Proved
|
$ | — | ||
Unproved
|
88,590 | |||
Exploration
costs
|
1,506,627 | |||
Development
costs
|
— | |||
Total
costs incurred
|
$ | 1,595,217 |
Reserve
Information and Related Standardized Measure of Discounted Future Net Cash
Flows
In
December 2009, the Company adopted revised oil and gas reserve estimation and
disclosure requirements. The primary impact of the new disclosures is to conform
the definition of proved reserves with the SEC Modernization of Oil and Gas
Reporting rules, which were issued by the SEC at the end of 2008. The
accounting standards update revised the definition of proved oil and gas
reserves to require that the average, first-day-of-the-month price during the
12-month period before the end of the year rather than the year-end price, must
be used when estimating whether reserve quantities are economical to
produce. This same 12-month average price is also used in calculating
the aggregate amount of (and changes in) future cash inflows related to the
standardized measure of discounted future net cash flows. The rules
also allow for the use of reliable technology to estimate proved oil and gas
reserves if those technologies have been demonstrated to result in reliable
conclusions about reserve volumes. The unaudited supplemental
information on oil and gas exploration and production activities for 2009 has
been presented in accordance with the new reserve estimation and disclosure
rules, which may not be applied retrospectively.
The
supplemental unaudited presentation of proved reserve quantities and related
standardized measure of discounted future net cash flows provides estimates only
and does not purport to reflect realizable values or fair market values of the
Company’s reserves. Volumes reported for proved reserves are based on
reasonable estimates. These estimates are consistent with current knowledge of
the characteristics and production history of the reserves. The
Company emphasizes that reserve estimates are inherently imprecise and that
estimates of new discoveries are more imprecise than those of producing oil and
gas properties. Accordingly, significant changes to these estimates
can be expected as future information becomes available.
F-25
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Proved
reserves are those estimated reserves of crude oil (including condensate and
natural gas liquids) and natural gas that geological 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 those expected to be
recovered through existing wells, equipment, and operating methods.
The
reserve estimates set forth below were prepared by Chadwick Energy Consulting,
Inc. (Chadwick), using reserve definitions and pricing requirements prescribed
by the SEC. Chadwick is a professional engineering firm specializing
in the technical and financial evaluation of oil and gas
assets. Chadwick’s report was conducted under the direction of
Jeffrey A. Chadwick, President of Chadwick. At the time of the
report, Chadwick and its employees had no interest in the Company, and were
objective in determining the results of the Company’s reserves. As of the
date the consolidated financial statements were issued (that is, April 15,
2010), Jeffrey Chadwick serves as a member of the Company’s Advisory Board,
which serves in an advisory capacity and is not part of the Company’s Board of
Directors. Chadwick used a combination of production
performance, offset analogies, seismic data and their interpretation, subsurface
geologic data and core data, along with estimated future operating and
development costs as provided by the Company and based upon historical costs
adjusted for known future changes in operations or development plans, to
estimate our reserves. The Company does not operate any of its oil
and gas properties.
Total
estimated proved developed and undeveloped reserves by product type and the
changes therein are set forth below for the years indicated. The Company had no
proved reserves during the year ended December 31, 2008.
Mesa
Energy
Holdings
|
||||
Gas (mcf)
|
||||
Total
proved reserves
|
||||
Balance
December 31, 2008
|
— | |||
Extensions
and discoveries
|
— | |||
Purchase
of minerals in place
|
69,845 | |||
Revisions
of prior estimates
|
— | |||
Production
|
(3,024 | ) | ||
Balance
December 31, 2009
|
66,821 | |||
Proved
developed reserves
|
||||
at
December 31, 2008
|
— | |||
at
December 31, 2009
|
66,821 | |||
Proved
undeveloped reserves
|
||||
at
December 31, 2008
|
— | |||
at
December 31, 2009
|
— |
During
2009 and 2008, the Company did not record any extensions and
discoveries.
The
standardized measure of discounted future net cash flows relating to proved oil
and gas reserves is computed using average first-day-of the-month prices for oil
and gas during the 12 month period for 2009, and using year-end prices for 2008,
(with consideration of price changes only to the extent provided by contractual
arrangements) to the estimated future production of proved oil and gas reserves,
less estimated future expenditures (based on year-end costs) to be incurred in
developing and producing the proved reserves, less estimated related future
income tax expenses (based on year-end statutory tax rates, with consideration
of future tax rates already legislated), and assuming continuation of existing
economic conditions. Future income tax expenses give effect to
permanent differences and tax credits but do not reflect the impact of
continuing operations including property acquisitions and
exploration. The estimated future cash flows are then discounted
using a rate of ten percent a year to reflect the estimated timing of the future
cash flows.
F-26
MESA
ENERGY HOLDINGS, INC.
(An
Exploration Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Standard
measure of discounted future net cash flows at December 31,
2009
Future
net cash flow
|
$ | 216,298 | ||
Future
production cost
|
(180,840 | ) | ||
Future
development cost
|
— | |||
Future
income tax
|
— | |||
10%
annual discount for timing of cash flow
|
(8,361 | ) | ||
Standard
measure of discounted future net cash flow relating to proved oil and gas
reserves
|
$ | 27,097 | ||
Changes
in standardized measure:
|
||||
Change
due to current year operations
Sales, net of production costs |
$ | (2,639 | ) | |
Change
due to revisions in standardized variables:
|
||||
Income
taxes
|
— | |||
Accretion
of discount
|
1,728 | |||
Net
change in sales and transfer price, net of production
costs
|
(7,450 | ) | ||
Previously
estimated development costs incurred during the period
|
— | |||
Changes
in estimated future development costs
|
— | |||
Revision
and others
|
— | |||
Discoveries
|
— | |||
Purchase
of reserves in place
|
35,458 | |||
Changes
in production rates and other
|
— | |||
Net
|
27,097 | |||
Beginning
of year
|
— | |||
End
of year
|
$ | 27,097 |
F-27