Attached files
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009
Commission
File Number 000-52590
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PAXTON
ENERGY, INC.
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(Exact
name of registrant as specified in its charter)
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Nevada
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20-5081381
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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295
Highway 50, Suite 2
Lake
Village Professional Building
Stateline,
NV 89449
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P.O.
Box 1148
Zephyr
Cove, NV 89448-1148
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(Address
of principal executive offices)
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(Mailing
Address)
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Main:
775 588-5390
Toll
Free: 1 800 313-9150
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(Registrant’s
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Exchange
Act:
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Title
of each class
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Name
of each exchange on which registered
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N/A
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N/A
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Securities
registered pursuant to Section 12(g) of the Exchange
Act:
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Common
Stock, Par Value $0.001
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(Title
of Class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o
No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x
No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, indefinitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o
No x
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s
most recently completed second fiscal quarter. As of June 30, 2009, the aggregate
market value of the 18,816,529 voting and nonvoting common equity held by
nonaffiliates of the issuer was $376,331.
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date. As of April 7, 2010, the issuer had
23,586,139 shares of issued and outstanding common stock, par value
$0.001.
DOCUMENTS INCORPORATED BY
REFERENCE: None.
TABLE
OF CONTENTS
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Item
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Page
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Part
I
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--
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Special
Note on Forward-Looking Statements
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1
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1
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Business
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2
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--
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Recent
Developments
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3
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1A
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Risk
Factors
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10
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1B
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Unresolved
Staff Comments
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14
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2
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Properties
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14
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3
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Legal
Proceedings
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14
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4
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[Removed
and Reserved]
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15
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Part
II
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5
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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15
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6
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Selected
Financial Data
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16
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7
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Management’s
Discussion and Analysis of Financial Condition and Results Of
Operation
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16
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7A
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Quantitative
and Qualitative Disclosures about Market Risk
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19
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8
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Financial
Statements and Supplementary Data
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19
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9
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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19
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9A(T)
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Controls
and Procedures
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19
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9B
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Other
Information
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20
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Part
III
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10
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Directors,
Executive Officers and Corporate Governance
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21
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11
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Executive
Compensation
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23
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12
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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25
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13
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Certain
Relationships and Related Transactions, and Director
Independence
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26
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14
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Principal
Accounting Fees and Services
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26
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Part
IV
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15
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Exhibits,
Financial Statement Schedules
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27
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--
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Signatures
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30
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--
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Index
to Financial Statements
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F-1
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Report
of Independent Registered Public Accounting Firm
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F-2
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i
SPECIAL
NOTE ON FORWARD-LOOKING STATEMENTS
This
report contains statements about the future, sometimes referred to as
“forward-looking” statements. Forward-looking statements are
typically identified by the use of the words “believe,” “may,” “could,”
“should,” “expect,” “anticipate,” “estimate,” “project,” “propose,” “plan,”
“intend,” and similar words and expressions. Statements that describe
our future strategic plans, goals, or objectives are also forward-looking
statements. We intend that the forward-looking statements will be
covered by the safe harbor provisions for forward-looking statements contained
in Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934.
Readers
of this report are cautioned that any forward-looking statements, including
those regarding us or our management’s current beliefs, expectations,
anticipations, estimations, projections, strategies, proposals, plans, or
intentions, are not guarantees of future performance or results of events and
involve risks and uncertainties, such as:
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whether
we will be able to acquire oil and gas properties generating revenue from
existing production with proven undeveloped reserves or discover and
produce oil or gas in commercial quantities from any
prospect;
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whether
the quantities of oil or gas we acquire or discover will be as large as
our initial estimate of an exploration target area’s gross unrisked
potential;
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whether
actual results of the properties acquired or actual exploration results
will be consistent with our
forecasts;
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future
acquisition or drilling and other exploration schedules and sequences for
wells and other activities;
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the
future results of acquired properties or results from drilling individual
wells and other exploration and development
activities;
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future
variations in well performance as compared to projections or initial test
data;
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the
ability to develop economically and market discovered
reserves;
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the
prices at which we may be able to sell oil or
gas;
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uncertainties
inherent in estimating quantities of undeveloped proved reserves and
actual production rates and associated
costs;
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·
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future
events that may result in the need for additional
capital;
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the
cost and availability of additional capital that we may require and
possible related restrictions on our future operating or financing
flexibility;
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our
future ability to attract industry or financial participants to share the
costs of exploration, exploitation, development, and acquisition
activities;
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future
plans and the financial and technical resources of industry or financial
participants;
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other
factors that are not listed above.
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The
forward-looking information is based on present circumstances and on our
predictions respecting events that have not occurred, that may not occur, or
that may occur with different consequences from those now assumed or
anticipated. Actual events or results may differ materially from
those discussed in the forward-looking statements. The
forward-looking statements included in this report are made only as of the date
of this report.
1
PART
I
ITEM
1. BUSINESS
Nature
of Business
Paxton
Energy, Inc., is a small oil and gas exploration and production company with a
minority working interest in limited production and drilling prospects in the
Cooke Ranch area of La Salle County, Texas, and Jefferson County, Texas, all
operated by Bayshore Exploration L.L.C.
We have
working interests ranging from 3.97% to 31.75% (net revenue interests ranging
from 3% to 23.8125%) in the various wells in which we have
participated. A “working interest” is a percentage of ownership in an
oil and gas lease granting its owner the right to explore, drill, and produce
oil and gas from a tract of property. Working interest owners are
obligated to pay a corresponding percentage of the cost of leasing, drilling,
producing, and operating a well or unit. After royalties are paid,
the working interest also entitles its owner to share in production revenues
with other working interest owners based on the percentage of working interest
owned. A “net revenue interest” is a share of production after all
burdens, such as royalties, have been deducted from the working
interest. It is the percentage of production that each party actually
receives.
Organization
We were
incorporated in Nevada on June 30, 2004. At that time, we issued
to our founder 10,000,000 shares of common stock (after giving effect to the
immediate cancellation of 41,000,000 shares) and 5,000,000 shares to another
stockholder for cash. On August 25, 2004, a group of investors
obtained the controlling interest in our company by purchasing 14,650,000 of the
15,000,000 shares then issued and outstanding, the initial officer and director
resigned, and on that date, Robert Freiheit, purchased 7,500,000 of the
outstanding shares transferred, was appointed as sole director and president and
served in those positions until March 17, 2010.
In
mid-2005, we initiated oil and gas exploration activities by acquiring for cash
and common stock a working interest in the Cooke No. 3 test well to be
drilled on the Cooke Ranch in La Salle County, Texas. We have
subsequently expanded our La Salle County, Texas working interests.
Business
As noted
above, we are a small oil and gas exploration company participating with
minority working interests in oil and gas drilling in the Cooke Ranch field and
another area in La Salle County, Texas, all operated by Bayshore.
We have
working interests ranging from 3.97% to 31.75% (net revenue interests ranging
from 3% to 23.8125%) in the various wells in which we have
participated. During 2008, we participated in the completion of the
Cartwright No. 3 well and the re-completion of the Cooke No. 3
well. In the third quarter of 2008, the Cartwright No. 3
well was placed into production through a farm-out arrangement with Corrizo
Exploration, Inc. The Cartwright No. 3 well is currently
producing. As of March 31, 2008, the Cooke No. 3 well
had been re-completed and was producing before subsequent mechanical problems
that forced us to shut-in the Cooke No. 3 well in April
2008. The Cooke No. 3 well was put back into production in
early March 2009 and is currently producing. The
Cooke No. 5 well was shut-in in September 2008 due to production at
non-economic levels and is scheduled to be plugged and
abandoned. Production from the Cooke No. 2 well decreased
significantly in the second half of 2008, and we are currently planning paraffin
treatments and/or other procedures to enhance production. The
Fiedler No. 1 well had no production in the first half of 2008 and was
shut-in in July 2008, and was sold for salvage value in December
2008. The Cooke No. 6 well is currently
producing. As of April 15, 2009, we had an aggregate of 0.5 net
producing wells with aggregate net production of approximately 440 thousand
cubic feet, or Mcf, of gas and 180 barrels of oil per month.
We are
dependent on Bayshore, the operator of all of the properties in which we have a
working interest, to operate the wells, increase production, and establish
reserves. We have issued an aggregate of 907,000 shares of common
stock to Bayshore or its principal, Jamin Swantner, as partial consideration for
various exploration rights, along with 100,000 shares for advisory services, so
that together with an additional 50,000 shares they have acquired privately,
they are now the owners of approximately 3.2% of our issued and outstanding
stock. From our inception through December 31, 2009, we have
paid Bayshore or incurred $176,800 as additional consideration for exploration
rights, $81,023 for seismic studies, $2,678,339 for well drilling and completion
costs, and $326,463 to acquire additional exploration rights and leasehold near
the Cooke Ranch.
2
We intend
to diversify our opportunities and risk by seeking working interests in other
producing oil and gas properties, and seeking other prospects, relying on the
experience and expertise of other operators, rather than building an internal
exploration capability. We will need to obtain additional funding to
carry out such activities.
Business
Strategy
The
execution of any strategy for the future benefit of the company will require
additional funds which we do not currently possess. If we are able to
raise such necessary additional funds, our strategy will be to acquire existing
revenue-generating production with proven undeveloped reserves and to evaluate
the area surrounding the Cooke Ranch to determine an appropriate strategy in an
effort to increase our production and cash flow and build reserves through
acquisition, exploration, and development drilling. The principal
components of our business strategy are:
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Rely on the
Exploration Expertise of Others. We will
continue to rely on the technical expertise and experience of a variety of
oil and gas experts and consultants in order to reduce our ongoing general
and administrative expenses.
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·
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Focus on
the Acquisition of Existing Production and Development
Opportunities. We believe our experience in the oil and
gas industry will allow us to generate and evaluation opportunities to
acquire existing production.
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·
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Balance Our
Opportunities. We intend to diversify and balance our
production acquisition with exploration opportunities in areas
in which we might be able to team with operators having experience and
expertise.
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RECENT
DEVELOPMENTS
On March
17, 2010 we entered into a “Change of Control and Recapitalization Agreement”
with Charles Volk of San Francisco, California. On that same day, all
directors and officers of our company resigned and were replaced by Charles F.
Volk, Jr., James E. Burden, and Clifford Henry as directors and Charles F, Volk,
Jr. as CEO, Treasurer (Chief Financial Officer) and Chairman of the Board of
Directors and James E. Burden as President and Secretary.
Pursuant
to the Agreement, the new officers and directors have undertaken to effectuate
the following provisions of the Agreement that are related to a recapitalization
of the company:
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·
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the
reaching of an agreement with the Registrant’s secured creditors to extend
the due date of approximately $330,000 of debt to August 31, 2010 and to
bring all interest current,
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·
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the
conversion of approximately $637,000 of Registrant’s
debt to common stock at the rate of $0.05 a share providing for the
issuance of approximately 12,757,380 common
shares,
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·
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an
initial reverse stock split (a stock consolidation) of 1 new share for
each 3 shares outstanding,
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·
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after
the initial reverse stock split, the conversion of 1,644,250 common stock
options to 1,644,250 shares of common stock,
and
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·
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after
the initial reverse stock split the issuance of 300,000 shares of common
stock to a nominee of Whale Haven Inc., one of the Registrant’s largest
shareholders, that will be appointed a director of the Registrant and
300,000 to another person nominated by Charles Volk that will be appointed
a director,
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·
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with
the result that there will be approximately 22,500,000 shares of common
stock outstanding, which shares will then be consolidated by a subsequent
reverse stock split into 10 million
shares,
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·
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in
contemplation of the restructuring above, the Registrant will be
authorized to undertake the issuance or offering of the following new
shares, not subject to the reverse splits
–
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3
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issue
62,700,000 shares of post-consolidation common stock to Mr. Volk in
consideration of his transfer to the registrant of producing and
non-producing oil and gas properties with minimum net tangible worth of
$2,000,000 , and an annual net cash flow of
$1,000,000,
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offer
3.3 million shares of common stock to an investment
banker,
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offer
for sale up to 6 million Units at $0.05 a Unit, each Unit consisting of
one share of common stock and ½ a common stock purchase warrant
exercisable at $0.15 a warrant share,
and
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·
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subsequent
to the sale of the foregoing Units, offer for sale up to 20 million Units
at $0.15 a Unit, each Unit consisting of one share of common stock and ½ a
common stock purchase warrant exercisable at $0.45 a warrant
share.
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A
successful transaction is dependent on meeting a number of conditions precedent
including the approval of the two reverse splits by the
shareholders.
Increase
in liquidity. The above
measures, when achieved, will greatly improve the liquidity of the
company. In addition, subsequent to the execution of the above
agreement and the change in control of the company, on March 27, 2010 the
company under its new management signed a Letter of Intent with DEEJ Consulting,
LLC to purchase that company’s Jaspers wells located in Concho and Menard
Counties, Texas. The purchase price for the wells is $700,000, consisting of
$600,000 cash and $100,000 worth of post-stock-splits common stock of Paxton
Energy.
Capital
resources. The above “Change
of Control and Recapitalization Agreement” describes our intended sources of
funds to recapitalize the company. Mr. Volk is reviewing now several
producing oil and gas properties for possible purchase. An investment
banking firm in San Francisco has been retained to conduct the two private
placements described in the agreement.
Previous
Exploration on the Cooke Ranch
In 1959,
Pan American Petroleum Company established production from the Edwards formation
at approximately 10,300 to 10,900 feet on oil and gas leases on the
8,883-gross-acre Cooke Ranch. These wells are still
producing. Beginning in 1983, Bayshore became involved with the Cooke
Ranch leases and drilled, completed, and produced over 25 wells located in the
Edwards and Wilcox formations at 10,300-10,900 and 4,100-5,500 feet,
respectively, and in 2004, in the Olmos formation at approximately 7,900
feet. Bayshore is owned and managed by Jamin Swantner, an independent
petroleum geologist with over 26 years of experience in evaluating, developing,
drilling, and producing oil and gas prospects along the Texas and Louisiana gulf
coast for Bayshore and Jamin Energy, Inc.
Cooke
Ranch Activities
Cooke No. 3 Well
As a
result of agreements reached in 2005 and 2006, we have retained a 9% working
interest (6.8875% net revenue interest) in the Cooke No. 3 well, and an
11.75% working interest (8.8125% net revenue interest) in the balance of the
8,843-acre Cooke Ranch leases outside the Cooke No. 3 well and 40-acre
drilling site.
In an
effort to increase production from deeper reservoirs, in February 2008, we began
operations to test the Cooke No. 3 well in the Pearsall formation at
approximately 13,100 feet. During the original drilling of this well
in 2005, drilling encountered over 600 feet of Pearsall formation, which the
operators believed warranted a further test. Due to re-entry
difficulties encountered during those operations, however, we decided to
re-complete the well in the Escondido formation and review our options to test
the Pearsall formation at 1300 feet at a later date. As of
March 31, 2008, the Cooke No. 3 well had been re-completed and was
producing intermittently from a depth of approximately 6700 feet in the
Escondido formation. The Cooke No. 3 well produced
intermittently at that depth in the Escondido from March 2008 to April
2008. In April 2008, the Cooke No. 3 well was shut-in due to
mechanical issues related to a packer in the well and a pump at the
surface. In early March 2009, we put the Cooke No. 3 back into
production. During 2009, we received $2,838 of net revenue from this
well and paid $3,556 in lease operating expenses.
4
Cooke
No. 5 Well
The Cooke
No. 5 well, located approximately 1,200 feet northwest of the Cooke
No. 3 initial well, reached a total depth of 6,850 feet on
September 3, 2006. Bayshore completed this well for production
in an approximately 200-foot section in the Escondido formation below a depth of
approximately 6,650 feet and in November 2006 initiated production as it
completed the installation of a tank battery and gas-gathering system and
pipeline connection. We hold a 31.75% working interest (23.8125% net
revenue interest) in the Cooke No. 5 well. In 2008, production from
the Cooke No. 5 well was at average rates of 360 gross barrels of oil per
month and 600 gross Mcf of gas per month. During 2009, we received
$242 in net revenue from this well and paid $2,654 in lease operating
expenses.
Cooke
No. 2 Well
On
October 12, 2006, we reached an agreement with Bayshore to bear 25% of the
actual costs of re-completing the Cooke No. 2 well on the Cooke Ranch,
estimated at approximately $500,000 for 100% of the working interest, in order
to acquire a 25% working interest (17.5% net revenue interest) in the well and
related 160 gross-acre drilling site. Bayshore re-completed the well
in an approximately 45-foot section at a depth of approximately 6,400-6,445 feet
in the Escondido formation and in November 2006 initiated production as it
completed the installation of a tank battery and construction of gas-gathering
system and an approximately 4,000-foot pipeline connection. We
re-entered and re-completed the Cooke No. 2 well in August 2007 and
re-established production from that well in October 2007. As of the
first quarter of 2009, the Cooke No. 2 well was producing oil at a rate of
150-180 gross barrels per month and 150 gross Mcf per month. During
2009, we received $1,758 in net revenue from this well and paid $4,619 in lease
operating expenses.
Fiedler
No. 1 Well
In July
2008, the Fiedler No. 1 well was shut-in. In December 2008, the
Fiedler No. 1 well was sold for salvage value. We held an 18.75%
working interest (14.0625% net revenue interest) in the Fiedler No. 1
well, and the Company’s portion of the sale proceeds was $16,406 and was applied
against the Company’s liability to Bayshore. Prior to the Company’s
sale of the Fiedler No. 1 well, in 2008 it had no
production. The well was sold in 2008 and the salvage purchaser was
responsible for compliance with the regulations of the Texas Railroad Commission
applicable to the plugging and abandonment of the Fiedler No. 1
well.
Cooke
No. 6 Well
The Cooke
No. 6 well began production in September 2007. We held a 31.75%
working interest (23.8125% net revenue interest) in the Cooke No. 6 well at
the time of its completion. Our share of the drilling and completion
costs for the Cooke No. 6 well was $260,337, of which $117,508 had been
paid as of September, 2008. On September 1, 2008, we sold a 21.75%
working interest to an unrelated third party, leaving us with a 10.00% working
interest and a net revenue interest of 7.50%. As of September 2008,
this well produced oil at an average rate of 1,050 barrels per month and gas at
an average rate of 3,750 Mcf per month. Production from the Cooke No.
6 well subsequently decreased with production as of March 1, 2009, at
approximate rates of 450 gross barrels of oil per month and 600 gross Mcf per
month. During 2009, we received $6,227 in net revenue from this well
and paid $2,510 in lease operating expenses.
Cartwright
No. 3
In the
third quarter of 2008, the Cartwright No. 3 was placed into production
through a farm-out arrangement with Carrizo Exploration, Inc. In the
first four months following May 2008, the Cartwright No. 3 well produced at
approximate rates of 1,350 barrels of oil per month and 6,600 Mcf of gas per
month. Production levels subsequently declined such that since
November 2008, the Cartwright No. 3 well has produced at approximate rates
of 300 gross barrels of oil per month and 2,550 gross Mcf of gas per
month. We have a 3.97% working interest and 3.0% net revenue interest
in the Cartwright No. 3 well. During 2009, we received $4,364 in
net revenue from this well and paid $2,505 in lease operating
expenses.
Oil
and Gas Sales
A sweet
gas and sour gas pipeline runs through the Cooke Ranch with adequate excess
capacity to handle foreseeable production from wells that we might
drill. “Sour gas” is a natural gas containing small amounts of
hydrogen sulfide (H 2 S) and
carbon dioxide (CO 2 ), while
“sweet gas” is a natural gas that does not contain hydrogen sulfide or
significant quantities of carbon dioxide. A “sweet gas and sour gas
pipeline” can carry both of these types of natural gas.
5
In 2008
and 2009, we participated in activities related to the following wells, with the
interests and results indicated as of December 31, 2009:
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Interest
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Approximate
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Well
Name
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Working
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Net
Revenue
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Depth
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Formation
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Status
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Cooke
No. 3
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8.5000%
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6.375%
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6,660
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Escondido
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Producing.
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Cooke
No. 6
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10.0000
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7.5000
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6,671
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Escondido
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Producing.
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Cooke
No. 2
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25.0000
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18.5000
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6,400
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Escondido
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Producing
at non-economic levels (awaiting enhancement/paraffin
treatment).
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Cooke
No. 5
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31.7500
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23.8125
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6,600
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Escondido
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Shut
in. (awaiting sale for salvage value).
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Fiedler
No. 1
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18.7500
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14.0625
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8,170
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Olmos
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Sold
for salvage value.
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Cartwright
No. 3
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3.9700
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3.0000
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6,800
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Escondido
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Producing.
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Acquisition
and Drilling Activities
We will
need to obtain additional funding to acquire additional properties and
participate in additional drilling. The following table sets forth
the wells drilled and completed by us during 2008 and 2009,
respectively:
|
2008
|
2009
|
||||||
|
Gross
|
Net
|
Gross
|
Net
|
||||
|
Development
Wells:
|
|||||||
|
Producing
|
--
|
--
|
--
|
--
|
|||
|
Nonproducing
|
--
|
--
|
--
|
--
|
|||
|
Total
|
--
|
--
|
--
|
--
|
|||
|
Exploratory
Wells:
|
|||||||
|
Discoveries
|
1.00
|
0.04
|
--
|
--
|
|||
|
Exploratory
Dry Holes
|
--
|
--
|
--
|
--
|
|||
|
Total
|
1.00
|
0.04
|
--
|
--
|
|||
Productive
Wells and Acreage
As of December 31, 2009, we had
interests in productive wells as follows:
|
Wells
|
Acreage
|
Average
Daily Production (1)
|
||||
|
Gross
|
Net
|
Gross
|
Net
|
Gross
|
Net
|
|
|
Oil
(2)
|
5.0
|
0.59
|
160
|
19
|
11
|
.44
|
|
Gas
|
--
|
--
|
--
|
--
|
47
|
2.1
|
_______________
|
(1)
|
Average
daily oil production is expressed in barrels of oil per
day. Average daily gas production is expressed in thousands of
cubic feet per day.
|
|
(2)
|
Wells
producing both oil and gas were counted as oil wells. Includes
the Cooke No. 2 well, which is not producing at economic levels
and will be treated in an effort to enhance
production.
|
All of the above wells are located in
LaSalle County, Texas.
6
Wells
and Acreage
The following table sets forth our
gross and net acres of developed and undeveloped oil and gas leases as of
December 31, 2008 and 2009, respectively:
|
Developed
Acreage
|
Undeveloped
Acreage
|
||||||
|
Gross
|
Net
|
Gross
|
Net
|
||||
|
2009
|
160
|
19
|
11,133
|
3,535
|
|||
|
2008
|
160
|
19
|
11,133
|
3,535
|
|||
Production,
Transportation, and Marketing
Our share
of the oil produced is sold at posted field prices to an unaffiliated
purchaser. Posted prices are generally competitive among crude oil
purchasers. Our crude oil sales contracts may be terminated by either
party upon 30 days’ notice.
No
Proved Reserves
As of
December 31, 2009, we have no proved reserves.
Operational
Hazards and Insurance
We intend
to acquire properties with existing oil and gas production, explore, drill for,
and produce oil and gas, and as such, our operations are subject to the usual
hazards incident to the industry. These hazards include blowouts,
cratering, explosions, uncontrollable flows of oil, natural gas or well fluids,
fires, pollution, releases of toxic gas, and other environmental hazards and
risks. These hazards can cause personal injury and loss of life,
severe damage to and destruction of property and equipment, pollution or
environmental damage, and suspension of operations.
We
currently do not maintain insurance to cover operational hazards, but rely on
the insurance that Bayshore is required to maintain under our
agreements. The operator of the wells in which we have interests is
required to maintain $1.0 million worker’s compensation, $4.0 million employer’s
and general liability, $2.0 million aggregate general liability, $5.0 million
well control, bodily injury, and property damage insurance coverage for joint
operations on areas in which we have interests. We cannot
assure that we could obtain or that Bayshore or our contractors will be able to
continue to obtain insurance coverage for current or future
activities. Further, we cannot assure that any insurance obtained
will provide coverage customary in the industry, be comparable to the insurance
now maintained, or be on favorable terms or at premiums that are
reasonable.
The
insurance maintained by Bayshore or our contractors does not cover all of the
risks involved in oil and gas exploration, drilling, and production and, if
coverage does exist, may not be sufficient to pay the full amount of such
liabilities. We may not be insured against all losses or liabilities
that may arise from all hazards because such insurance may not be available at
economical rates, the respective insurance policies may have limited coverage
and other factors. For example, insurance against risks related to
violations of environmental laws is not maintained. The occurrence of
a significant adverse event that is not fully covered by insurance could have a
materially adverse effect on us. Further, we cannot assure that
adequate levels of insurance will be maintained for our benefit in the future at
rates we consider reasonable.
7
Government
Regulation
United
States - State and Local Regulation of Drilling and Production
Our
exploration and production operations are subject to various types of regulation
at the federal, state, and local levels. Such regulation includes
requiring permits for the drilling of wells, maintaining bonding requirements in
order to drill or operate wells, regulating the location of wells, the method of
drilling and casing wells, the surface use and restoration of properties upon
which wells are drilled, and the plugging and abandoning of
wells. Our operations are also subject to various conservation laws
and regulations. These include the regulation of the size of drilling
and spacing units or proration units and the density of wells that may be
drilled and the unitization or pooling of oil and gas properties. In
this regard, Texas, like many states, allows the forced pooling or integration
of tracts to facilitate exploration, while other states rely on voluntary
pooling of lands and leases. In addition, state conservation laws
establish maximum rates of production from oil and natural gas wells, generally
prohibit the venting or flaring of natural gas, and impose requirements
regarding the ratability of production. The effect of these
regulations is to limit the amounts of oil and natural gas we can produce from
our wells and to limit the number of wells or the locations that we can
drill.
Production
of any oil and gas by us is affected to some degree by state regulations, some
of which regulate the production and sale of oil and gas, including provisions
regarding deliverability. Such statutes and related regulations are
generally intended to prevent waste of oil and gas and to protect correlative
rights to produce oil and gas between owners of a common
reservoir. State authorities also frequently regulate the amount of
oil and gas produced by assigning allowable rates of production to each well or
proration unit.
Environmental
Regulations
The
federal government and Texas, as well as local governments, have adopted laws
and regulations regarding the control of contamination of the
environment. These laws and regulations generally require the
acquisition of a permit by operators before drilling commences; restrict the
types, quantities, and concentration of various substances that can be released
into the environment in connection with drilling and production activities;
limit or prohibit drilling activities on lands lying within wilderness,
wetlands, and other protected areas; and impose substantial liabilities for
pollution resulting from our operations. These laws and regulations
generally increase the costs of drilling and operation of wells.
We may be
held liable for the costs of removal and damages arising out of a pollution
incident to the extent set forth in the Federal Water Pollution Control Act, as
amended by the Oil Pollution Act of 1990. In addition, we may be
subject to other civil claims arising out of any such incident. As a
working interest owner, we are also subject, as with any owner of property, to
clean-up costs and liability for toxic or hazardous substance that may exist on
or under any of our properties. We believe that the operator of our
properties is in compliance in all material respects with such laws, rules, and
regulations and that continued compliance will not have a material adverse
effect on our operations or financial condition. Furthermore, we do
not believe that we are affected in a significantly different manner by these
laws and regulations than are our competitors in the oil and gas
industry.
The
Comprehensive Environmental Response, Compensation and Liability Act, also known
as the “Superfund” law, imposes liability, without regard to fault or the
legality of the original conduct, on certain classes of persons that are
considered to be responsible for the release of a “hazardous substance” into the
environment. These persons include the owner or operator of the
disposal site or sites where the release occurred and companies that disposed or
arranged for the disposal of the hazardous substances. Such persons
may be subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment, for damages
to natural resources, and for the costs of certain health damages or
studies. Furthermore, it is not uncommon for neighboring landowners
and other third parties to file claims for personal injury and property damage
allegedly caused by hazardous substances or other pollutants released into the
environment.
The
Resource Conservation and Recovery Act and related regulations govern the
generation, storage, transfer, and disposal of hazardous wastes. This
law, however, excludes from the definition of hazardous wastes “drilling fluids,
produced waters, and other wastes associated with the exploration, development,
or production of crude oil, natural gas, or geothermal
energy.” Because of this exclusion, many of our operations are exempt
from these regulations. Nevertheless, we must comply with these
regulations for any of our operations that do not fall within the
exclusion.
The Oil
Pollution Act of 1990 and regulations promulgated pursuant thereto impose a
variety of regulations on responsible parties related to the prevention of oil
spills and liability for damages resulting from such spills. The Oil
Pollution Act of 1990 establishes strict liability for owners of facilities that
are the site of a release of oil into “waters of the United
States.” While liability more typically applies to facilities
near substantial bodies of water, at least one district court has held that
liability can attach if the contamination could enter waters that may flow into
navigable waters.
8
Stricter
standards in environmental legislation may be imposed on the oil and gas
industry in the future, such as proposals made in Congress, and at the state
level from time to time that would reclassify certain oil and natural gas
exploration and production wastes as “hazardous wastes” and make the
reclassified wastes subject to more stringent and costly handling, disposal, and
clean-up requirements. The impact of any such changes, however, would
not likely be any more burdensome to us than to any other similarly situated
company involved in oil and gas exploration and production.
Safety
and Health Regulations
Operations
in which we have an interest must be conducted in accordance with various laws
and regulations concerning occupational safety and health. Currently,
we do not foresee expending material amounts to comply with these occupational
safety and health laws and regulations. However, since such laws and
regulations are frequently changed, we are unable to predict the future effect
of these laws and regulations.
Oil
and Gas Leases
The
properties in which we have and are likely to obtain interests in Texas are and
will likely be held under oil and gas leases standard in the oil and gas
industry. Such leases provide for the payment of royalty to the
property owner and generally govern the manner in which activities are to be
conducted. We believe the operations on the leases in which we have
an interest comply with all material provisions of such
regulations.
Title
to Properties
All of
our working interests are, and working interests acquired in the future likely
will be, held under leases from third parties. The operator of the
project typically obtains a title opinion concerning such properties prior to
the commencement of drilling operations. We are advised that Bayshore
has obtained such title opinions or other third-party review on all of the
producing properties in which we have an interest and believe that we have
satisfactory title to all such properties sufficient to meet standards generally
accepted in the oil and gas industry. Our working interests are
subject to typical burdens, including customary royalty interests and liens for
current taxes, but we believe that such burdens do not materially interfere with
our use of such properties and that the economic effects of such burdens have
been appropriately reflected in our acquisition cost of our working
interests. Title investigation before the acquisition of undeveloped
properties is less thorough than that conducted prior to drilling, as is
standard practice in the industry.
Employees
and Consultants
Other
than our executive officer, we have no employees. From time to time,
we may engage technical consultants to provide specific geological, geophysical,
and other professional services.
On
March 27, 2010, the Company entered into a consulting agreement with Deej
Consulting LLC for services as follows:
|
|
•
|
Project
evaluation services the Company in connection with its operational
efforts;
|
|
|
•
|
Consulting
services include, but are not limited to economic evaluations, budget
reviews, participation in operational meetings, and project
management;
|
|
|
•
|
Consulting
services also include formulating strategic planning, identifying and
contacting potential vendors, developing relationships with other
operators;
|
|
|
•
|
Evaluate
and report to the Company on potential joint venture and financing
opportunities with other oil and gas
companies;
|
|
|
•
|
Oversee
all aspects of field operations including AFEs and LOEs;
and
|
|
|
•
|
Ensure
maximum production and daily operations from all
wells.
|
Deej
received a non-refundable retainer of $16,000 on signing and is to receive
$8,000 a month beginning April 27, 2010 The term of the agreement is
for a period of 12 months unless terminated earlier and the agreement may be
renewed and extended for additional periods of 12 months each from the end of
the initial term or subsequent extension terms. The agreement may be
terminated by either party at any time upon 30 days prior written notification
of the other party.
9
ITEM
1A. RISK FACTORS
Risk
Factors
We
are not the operator of any of our properties, so we have no control and limited
influence over our current exploration, development, and production
activities.
We are
not the operator of any of the properties in which we have an interest and on
which we plan to devote substantially all of our financial and other resources
in drilling and related activities, so we are dependent on the financial and
technical resources, initiative, and management of the operator,
Bayshore. Bayshore, as the operator, initiates drilling and other
activities, and we have the right to elect whether to participate in specific
proposed activities by bearing our working-interest share of expenses or to
withhold participation, in which case we would not bear related costs or share
in any resulting revenues. We have very limited rights to propose
drilling or other activities. We rely to a significant extent on the
initiative, expertise, and financial capabilities of our strategic partner,
Bayshore. The failure of Bayshore to proceed with exploration and
development of the Cooke Ranch area or to perform its obligations under
contracts with us could prevent us from continuing to drill in an effort to
establish production and reserves and recover our current or future investment
in the Cooke Ranch area. Bayshore has oil and gas interests in which
we do not participate. If Bayshore’s separately held interests should
become more promising to Bayshore than interests held with us, Bayshore may
focus its efforts, funds, expertise, and other resources
elsewhere. In addition, should our relationship with Bayshore
deteriorate or terminate, our oil and gas exploratory programs may be delayed
significantly.
Bayshore
is the principal source of our energy investments to date, so we are dependent
on its ability to select prospects and conduct exploration and, if warranted,
development.
With
respect to the La Salle County Texas properties, we rely principally on
Bayshore, which has provided us with all of the prospects in which we have
participated to date, to select prospects for energy investments and to conduct
exploration. We will also be dependent on Bayshore if any such
prospects warrant development. We might be unable to continue with
our energy investment activities if Bayshore were unable or unwilling to
continue to provide these services to us.
Our
ability to monitor Bayshore and the competitiveness of the rates we pay to it
are limited.
We do not
have sufficient personnel to audit Bayshore or the services it provides to us,
so we have not completed an internal administrative or third party review of
Bayshore’s field activities or expenditures. We also have little or
no basis by which to determine whether we are being charged competitive rates
for the services provided to us by Bayshore. We have not, and in the
future, may not, obtain competitive bids for the services provided to us by
Bayshore. We do not know if the quantity and quality of services we
receive from Bayshore are as beneficial to us as we could obtain from competitor
negotiations.
Our
spending on general and administrative costs is substantial despite our limited
revenue.
We have
and may continue to incur substantial costs for general and administrative
expenses that are substantially greater than our limited revenue. In
2009, we incurred general and administrative expenses of $155,804 while our net
oil and gas revenue was only $17,581.
We
have recognized substantial impairment loss on oil and gas properties with
little generation of revenue.
To date,
we have incurred $4,616,607 in oil and gas property acquisition and exploration
costs, and we have recognized an impairment loss on oil and gas properties of
$1,739,545 in 2006 and an additional impairment loss on oil and gas properties
of $2,077,351 in 2008 and a $30,296 impairment loss in 2009. We
generated oil and gas revenue of $17,581 in 2009 from properties with a carrying
value under the full cost method as of December 31, 2009, of
$587,886. We may further impair the carrying value of our oil and gas
properties in the future. There is no guarantee that further
exploration spending by us would produce differing results. Further,
we would require additional funding to participate in any additional
exploration.
10
Since
all of our operations are concentrated in a geographical area, a single disaster
could halt all of our operations.
All of
our assets and operations are currently concentrated in La Salle County, Texas,
except for the 160 gross-acre Nome prospect in Jefferson County, Texas, on which
we drilled the McDermand No. 1 dry hole. So all of our
operations may be temporarily disrupted or permanently halted in the case of a
natural or other disaster in that geographical area. Such a disaster
could result in the loss of our assets and termination of our
activities.
We
have no officer, director, or employee with any formal oil and gas exploration
or engineering education or training and will continue to rely on the expertise
of Bayshore, whose interests may not always be aligned with ours.
During
2009, we had no officer, director, or employee with geological, geophysical, or
petroleum engineering training or experience. This increases our
dependence on Bayshore and consultants we may engage from time to
time. The expertise Bayshore provides may be influenced by its
position as the majority working interest owner and its interest in obtaining
funding from us for proposed activities.
We
have limited internal controls due to our small size and limited number of
people, which may keep us from preventing or detecting waste or
fraud.
During
2009, we had only two directors, one of whom is also our sole
officer, so we rely on manual systems without independent officers
and employees to implement full, formal, internal control
systems. Accordingly, we do not have separate personnel that provide
dual signatures on checks, separate accounts receivable and cash receipts,
accounts payable and check writing, or other functions that frequently are
divided among several individuals as a method of reducing the likelihood of
improper activity. This reliance on a few individuals and the lack of
comprehensive internal control systems may impair our ability to detect and
prevent internal waste and fraud.
Our
independent auditors have qualified their report to express substantial doubt
about our ability to continue as a going concern.
The
reports of our auditors on our consolidated financial statements for the years
ended December 31, 2008 and 2009, contain an explanatory paragraph
expressing substantial doubt regarding our ability to continue as a going
concern. If we fail to continue as a going concern, our stockholders
may suffer a complete loss of their investment.
We
have a history of operating losses, which is likely to continue.
As of
December 31, 2009, we had an accumulated deficit of $8,083,231, and expect
that we will continue to incur losses and that our accumulated deficit will
increase. We reported losses of $2,376,293 and $337,516 for the years
ended December 31, 2008 and 2009, respectively. We anticipate
that we will continue to incur losses from our exploration activities unless and
until we are successful in establishing significant production.
We
will need additional capital, which we may seek through the sale of equity
securities.
We will
need additional funds to cover expenditures in excess of our current commitments
for our share of costs related to the exploration and development of our current
and future leasehold interests and to pay our current liabilities. We
will fund any additional amounts required for exploration and development or
possible acquisition of additional prospect interests through the sale of
additional equity securities, which would reduce the percentage interest in our
corporation held by existing stockholders and may dilute the economic interest
of existing stockholders. Our board of directors can authorize the
sale of additional equity securities without stockholder consent.
There
is very limited trading in our common stock.
Our
common stock has been quoted on the Over-the-Counter Bulletin Board and reported
in the Pink Sheets published by Pink Sheets, LLC, since June 2005.
During
the last year, the trading price of our common stock has varied from a low of
approximately $0.0031 to a high of approximately $0.045. The
aggregate trading volumes for each of the four calendar quarters in 2009 were
588,861; 322,438; 1,356,369; and 391,340 shares, respectively. Based
on the aggregate volume of trading per month and the number of days of trading
in our common stock per month, there was an average approximate volume of shares
traded per day in our common stock in 2009 as reflected in the table
below. The trading volume above reflects the limited trading volume
of our common stock, which creates the potential for significant changes in the
trading
price of our common stock as a result of relatively minor changes in the supply
and demand. It is likely that trading prices and volumes for our
common stock will fluctuate in the future, without regard to our business
activities.
11
|
Month
of 2009
|
Volume
of Shares
Traded
Per Day
|
|
December
|
5,141
|
|
November
|
2,165
|
|
October
|
10,679
|
|
September
|
27,607
|
|
August
|
32,474
|
|
July
|
4,304
|
|
June
|
2,179
|
|
May
|
3,321
|
|
April
|
9,909
|
|
March
|
19,337
|
|
February
|
1,274
|
|
January
|
6,963
|
Penny
stock regulations will impose certain restrictions on resales of our securities,
which may cause an investor to lose some or all of its investment.
The
Securities and Exchange Commission has adopted regulations that generally define
a “penny stock” to be any equity security that has a market price (as defined)
of less than $5.00 per share that is not traded on a national securities
exchange or Nasdaq or that has an exercise price of less than $5.00 per share,
subject to certain exceptions. As a result, our common stock is
subject to rules that impose additional sales practice requirements on
broker-dealers that sell such securities to persons other than established
customers and accredited investors (generally those with assets in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with their
spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of such
securities and have received the purchaser’s written consent to the transaction
prior to the purchase. Further, if the price of the stock is below
$5.00 per share and the issuer does not have $2.0 million or more net tangible
assets or is not listed on a registered national securities exchange or Nasdaq,
sales of such stock in the secondary trading market are subject to certain
additional rules promulgated by the Securities and Exchange
Commission. These rules generally require, among other things, that
brokers engaged in secondary trading of penny stocks provide customers with
written disclosure documents, monthly statements of the market value of penny
stocks, disclosure of the bid and asked prices, and disclosure of the
compensation to the broker-dealer and the salesperson working for the
broker-dealer in connection with the transaction. These rules and
regulations may affect the ability of broker-dealers to sell our common stock,
thereby effectively limiting the liquidity of our common stock. These
rules may also adversely affect the ability of persons that acquire our common
stock to resell their securities in any trading market that may exist at the
time of such intended sale.
We
may not be able to obtain additional financing.
There
can be no assurance that any net proceeds we receive from the exercise of
outstanding warrants of this offering will satisfy our capital
needs. We may require additional capital to address unanticipated
expenses. There is no assurance that additional financing will be
available when needed on terms favorable to us or at all. The
unavailability of adequate financing on acceptable terms could have a material
adverse effect on our financial condition and on our continued
operation.
Risk
Factors Relating to our Industry
Operational
hazards for which we do not maintain insurance are inherent in the exploration,
drilling, and production of oil and gas.
Usual
operational hazards incident to our industry include blowouts, cratering,
explosions, uncontrollable flows of oil, natural gas or well fluids, fires,
pollution, releases of toxic gas, and other environmental hazards and
risks. These hazards can cause personal injury and loss of life,
severe damage to and destruction of property and equipment, pollution or
environmental damage, and suspension of operations. We do not
maintain insurance to cover operational hazards, but rely on our agreements that
require the operator of the properties in which we have an interest to maintain
$1.0 million workers’ compensation, $1.0 employer’s and general liability, $2.0
million aggregate general liability, $5.0 million well control, and $5.0 million
bodily injury and property damage insurance coverage. The insurance
policies purchased under this covenant
include us as the owner of a non-operating working interest as an insured under
such policies. We cannot assure that we could obtain or that Bayshore
or our contractors will be able to continue to obtain insurance coverage for
current or future activities. Further, we cannot assure that any
insurance obtained will provide coverage customary in the industry, be
comparable to the insurance now maintained, or be on favorable terms or at
premiums that are reasonable. The insurance maintained by Bayshore or
our contractors does not cover all of the risks involved in oil and gas
exploration, drilling, and production, and if coverage does exist, may not be
sufficient to pay the full amount of such liabilities. We may not be
insured against all losses or liabilities that may arise from all hazards
because such insurance may not be available at economical rates, the respective
insurance policies may have limited coverage, and other factors. For
example, insurance against risks related to violations of environmental laws is
not maintained. The occurrence of a significant adverse event that is
not fully covered by insurance or for which the coverage is insufficient to
cover aggregate losses could expose us to liability because we may be
responsible for our working interest share of the damages in excess of any
related insurance coverage. Further, we cannot assure that adequate
levels of insurance will be maintained for our benefit in the future at rates we
consider reasonable. The occurrence of any of these risks could lead
to a reduction in the value of our Company and the loss of investments made by
purchasers of our stock.
12
We
could incur expenses and be forced to interrupt exploration, development, or
production to comply with environmental and other governmental
regulations.
Our
business is governed by numerous laws and regulations at various levels of
government governing the operation and maintenance of our facilities, the
discharge of materials into the environment, and other environmental protection
issues. The laws and regulations may, among other potential
consequences, require that permits be acquired before commencement of drilling
on any of the properties in which we have an interest, restrict the substances
that can be released into the environment with drilling and production
activities, limit or prohibit drilling activities on protected areas such as
wetlands or wilderness areas, require that reclamation measures be taken to
prevent pollution from former operations, require remedial measures to mitigate
pollution from former operations, such as plugging abandoned wells and
remediating contaminated soil and groundwater, and require remedial measures to
be taken with respect to property designated as a contaminated
site. Under these laws and regulations, we could be liable for
personal injury, clean-up costs, and other environmental and property damages,
as well as administrative, civil, and criminal penalties. We do not
maintain insurance coverage for sudden and accidental environmental damages or
environmental damage that occurs over time. We do not believe that
insurance coverage for the full potential liability of environmental damages is
available at a reasonable cost. Accordingly, we could be liable, or
could be required to cease production on properties, if environmental damage
occurs. The costs of complying with environmental laws and
regulations in the future may harm our business. Furthermore, future
changes in environmental laws and regulations could result in stricter standards
and enforcement, larger fines and liability, and increased capital expenditures
and operating costs, any of which could have a material adverse effect on our
financial condition or results of operations.
Our
results of operations as well as the carrying value of our oil and gas
properties are substantially dependent upon the prices of oil and natural gas,
which historically have been volatile and are likely to continue to be
volatile.
Our
results of operations and the ceiling on the carrying value of our oil and gas
properties are dependent on the estimated present value of proved reserves,
which depends on the prevailing prices for oil and gas, which are and are likely
to continue to be volatile. Recent world events have significantly
increased oil and gas prices, but we cannot assure that such prices will
continue. Various factors beyond our control affect prices of oil and
natural gas, including political and economic conditions; worldwide and domestic
supplies of and demand for oil and gas; weather conditions; the ability of the
members of the Organization of Petroleum Exporting Countries to agree on and
maintain price and production controls; political instability or armed conflict
in oil-producing regions; the price of foreign imports; the level of consumer
demand; the price and availability of alternative fuels; and changes in existing
federal and state regulations. Current prices for oil are at or near
historical highs, and any significant decline in oil or gas prices could have a
material adverse effect on our operations, financial condition, and level of
development and exploration expenditures and could result in a reduction in the
carrying value of our oil and gas properties. Further, we have no
proved reserves. If we had proved reserves, any decline in prices
would cause a reduction in the amount of any reserves and, in turn, in the
amount that we might be able to borrow to fund development and acquisition
activities. To date, we do not believe that the lack of reserves has
hindered our efforts to obtain the capital we have sought.
We
cannot predict whether production or reserves will be established on properties
in which we have an interest.
The
decision to develop, exploit, purchase, or explore a property will depend, in
part, on our assessment of the information we are provided by Bayshore about
potential recoverable reserves, future oil and natural gas prices and operating
costs, potential environmental and other liabilities risks, and other factors
that are beyond our control. Such assessments are necessarily
inexact, and their accuracy is inherently uncertain. Results from
previous exploration and production in the Cooke Ranch area by others do not
assure that hydrocarbons in commercial quantities exist in the areas in which we
have or may obtain an interest or that we may discover or recover any reserves
in place. Even if geophysical and geological analyses and engineering
studies, which often produce inconclusive or varied interpretations, indicate
high reserve potential
of a prospect or project, there can be no assurance that our development,
exploitation, acquisition, or exploration activities will result in establishing
reserves or that we will be successful in drilling productive
wells.
In
general, the volume of production from oil and natural gas properties declines
as reserves are depleted. Except to the extent we conduct successful
development, exploitation, and exploration activities or acquire properties
containing proved reserves, or both, any reserves we establish will decline as
reserves are produced.
13
We
have no proved reserves, and any future estimates we may make of quantities of
proved oil and gas reserves we may have in the future and projected rates of
production and the timing and results of development expenditures may prove
inaccurate because of numerous uncertainties.
We are
testing geological formations that have not previously been explored or produced
widely in the Cooke Ranch area, so our wells should be considered exploratory
unless and until there is greater drilling experience. Because of the
limited drilling of the geological formations that we are drilling, we cannot
forecast the anticipated results of drilling, even though a particular drilling
site may be adjacent to or nearby a producing well.
We
currently have no proved reserves and will be able to establish reserves only if
the results of drilling provide sufficient engineering and geological data to
demonstrate with reasonable certainty that our properties contain hydrocarbons
that may be recoverable in future years from known reservoirs under existing
economic and operating conditions. We can establish reserves
respecting an individual well only after, if ever, we have sustained production
from such well over several months and have related engineering and geological
data to demonstrate the existence and recoverability of
hydrocarbons. We cannot assure that we will be able to establish
proved reserves in any well we drill. We will be unable to estimate
precisely any reserves we may establish. Oil and gas reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact way, and estimates of other
engineers might differ. The accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. Results of drilling, testing, and
production subsequent to the date of an estimate may justify revision of such
estimate. Accordingly, reserve estimates are often significantly
different from the quantities of oil and gas that are ultimately
recovered. In addition, estimates of our future net revenues from any
future proved reserves and the present value thereof are based on certain
assumptions regarding future oil and gas prices, production levels, and
operating and development costs that may not prove to be correct. Any
significant variance in these assumptions could materially affect our estimated
quantity of reserves and future net revenues therefrom.
ITEM
1B. UNRESOLVED STAFF COMMENTS
This item is not applicable to our
company.
ITEM
2. PROPERTIES
Our principal executive offices are
located at 295 Highway 50, Suite 2, Lake Village Professional Building,
Stateline, Nevada 89449. Our mailing address is P.O. Box 1148, Zephyr
Cove, NV 89448-1148. Our telephone number is 775 588-5390, Toll Free:
1 800 313 9150, and our facsimile number there is 775 588-6350. This
space includes approximately 300 square feet of office space along with an
additional 400 square feet of shared lobby, and office space. The
term of the lease is month to month with a rental of $350 a month.
See “Item 1. Description of
Business” for descriptions of our oil and gas properties.
ITEM
3. LEGAL PROCEEDINGS
We are not a party to any material
legal proceedings and no material legal proceedings have been threatened by us
or, to the best of our knowledge, against us.
ITEM
4. [REMOVED AND RESERVED]
14
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our
common stock has been quoted on the Over-the-Counter Bulletin Board since April
2007 and reported in the Pink Sheets published by Pink Sheets, LLC, on at least
an unsolicited basis since June 2005.
The
following table sets forth for the periods indicated the high and low bid prices
for our common stock as quoted under the symbol PXTE in the Pink
Sheets. Such quotations do not include commissions or retail mark-ups
or mark-downs and may not represent actual transactions:
|
Low
|
High
|
||
|
2009:
|
|||
|
Fourth
Quarter
|
0.0031
|
0.020
|
|
|
Third
Quarter
|
0.0042
|
0.025
|
|
|
Second
Quarter
|
0.0105
|
0.030
|
|
|
First
Quarter
|
0.0110
|
0.045
|
|
|
Fourth
Quarter
|
0.01
|
0.08
|
|
|
Third
Quarter
|
0.08
|
0.18
|
|
|
Second
Quarter
|
0.12
|
0.29
|
|
|
First
Quarter
|
0.23
|
0.39
|
On
April 7, 2010, the Bulletin Board reported that the closing price for our
common stock was $0.03 per share.
We have
never paid cash dividends on our common stock and do not anticipate that we will
pay dividends in the foreseeable future. We intend to reinvest any
future earnings to further expand our business. We estimate that, as
of March 31, 2010, we had approximately 79 stockholders.
Penny
Stock Regulations
Our stock
is presently regulated as a penny stock, and broker-dealers will be subject to
regulations that impose additional requirements on us and on broker-dealers that
want to publish quotations or make a market in our common stock. The
Securities and Exchange Commission has promulgated rules governing
over-the-counter trading in penny stocks, defined generally as securities
trading below $5.00 per share that are not quoted on a securities exchange or
Nasdaq or which do not meet other substantive criteria. Under these
rules, our common stock is currently classified as a penny stock. As
a penny stock, our common stock is currently subject to rules promulgated by the
Securities and Exchange Commission that impose additional sales practice
requirements on broker-dealers that sell such securities to persons other than
established customers and institutional accredited investors. For
transactions covered by the rule, the broker-dealer must make a special
suitability determination for the purchaser and receive the purchaser’s written
consent to the transaction prior to sale. Further, if the price of
the stock is below $5.00 per share and the issuer does not have $2.0 million or
more net tangible assets or is not listed on a registered national securities
exchange or Nasdaq, sales of such stock in the secondary trading market are
subject to certain additional rules promulgated by the Securities and Exchange
Commission. These rules generally require, among other things, that
brokers engaged in secondary trading of penny stocks provide customers with
written disclosure documents, monthly statements of the market value of penny
stocks, disclosure of the bid and asked prices, and disclosure of the
compensation to the broker-dealer and the salesperson working for the
broker-dealer in connection with the transaction. These rules and
regulations may affect the ability of broker-dealers to sell our common stock,
thereby effectively limiting the liquidity of our common stock. These
rules may also adversely affect the ability of persons that acquire our common
stock to resell their securities in any trading market that may exist at the
time of such intended sale.
Equity
Compensation Plans
During 2009, we have not had any equity
compensation plans or issued any shares pursuant to any equity compensation
plans.
15
ITEM
6. SELECTED FINANCIAL DATA
This item is not applicable to our
company.
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion should be read in conjunction with our audited financial
statements and notes to our financial statements included elsewhere in this
report. This discussion contains forward-looking statements that
involve risks and uncertainties. Actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors discussed elsewhere in this report.
Certain
information included herein contains statements that may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, such as statements relating to our anticipated revenues, gross
margin and operating results, future performance and operations, plans for
future expansion, capital spending, sources of liquidity, and financing
sources. Such forward-looking information involves important risks
and uncertainties that could significantly affect anticipated results in the
future, and accordingly, such results may differ from those expressed in any
forward-looking statements made herein. These risks and uncertainties
include those relating to our liquidity requirements, whether the quantities of
oil or gas we discover will be as large as our initial estimate of an
exploration target area’s gross un-risked potential, whether actual exploration
risks will be consistent with our forecasts, future drilling and other
exploration schedules and sequences for wells and other activities, the future
results of drilling individual wells and other exploration and development
activities, future variations in well performance as compared to initial test
data, the prices at which we may be able to sell oil or gas, uncertainties
inherent in estimating quantities of proved reserves and actual production rates
and associated costs, future events that may result in the need for additional
capital, the cost and availability of additional capital that we may require and
possible related restrictions on our future operating or financing flexibility,
our future ability to attract industry or financial participants to share the
costs of exploration, exploitation, development, and acquisition activities,
future plans and the financial and technical resources of industry or financial
participants, and other factors.
Overview
We are a
small oil and gas exploration and production company. In June 2005,
we acquired our first working interest in an oil and gas
property. The Cooke No. 3 well was drilled in 2005 and commenced
production in November 2005. We began production from three
additional wells in 2006, acquired additional interests in oil and gas
properties, and drilled three dry holes. In 2007, we drilled two
additional wells. During 2008, we participated in the farm out of our interest
in a new well drilled by others, retaining a small interest in the new
well. During the year ended December 31, 2009, minor costs were
incurred in connection with the recompletion of the Cooke No. 3
well. We continue to be considered an exploration-stage company due
to the absence of significant revenue.
We have
no proved reserves. For the period from June 30, 2004, the date of
our inception, to December 31, 2009, we have incurred $7,194,888 of costs and
operating expenses, principally consisting of an impairment losses of $3,847,192
on oil and gas properties, $1,737,962 of general and administrative expenses,
and $1,468,575 of stock-based compensation related to the issuance of common
stock for the initial services of our chief operating officer, a stock option
granted to a director, and the issuance of common stock to consultants for
financial advisory, public relations, and geological advisory
services. The impairment losses were due to the determination by us
that capitalized costs for wells drilled and other oil and gas properties were
in excess of estimated present value of future cash flow from those
properties.
We have
relied significantly upon the issuance of common stock and promissory notes to
finance our exploration-stage operations. In certain cases, the
promissory notes were accompanied by some form of equity interest, including
stock and beneficial conversion features. Generally accepted
accounting principles require that the proceeds from promissory notes and the
equity interests be accounted for by allocating a portion of the proceeds to the
equity interests and recording a corresponding discount to the
notes. This discount was amortized over the terms of the notes (or
through the date of conversion into common stock) and recorded as a non-cash
expense characterized as “interest expense from amortization of discount on
secured convertible notes and other debt.” These charges totaled
$996,081 as of December 31, 2009.
In
connection with an offering of common stock and warrants in April 2006, we
entered into a registration rights agreement that, among other matters, provides
for the payment by us of 1% per month (up to a maximum of 18%) of the proceeds
of the offering in partial liquidated damages for our failure to file a
registration statement by June 30, 2006, and meet certain other deadlines
until the registration statement
is declared effective. We determined that the features of the partial
liquidated damages provision of the registration rights agreement in relation to
the deadlines for the registration statement to be declared effective cause this
arrangement to be accounted for under Financial Accounting Standards Board Staff
Position on EITF 00-19 (FSP EITF 0019-2). In accordance with FSP EITF
0019-2, we have recorded a estimated liability of $672,636 for probable payments
of penalties and interest that will be payable under the registration rights
agreement.
16
As of
December 31, 2009, we have acquired oil and gas properties with a carrying
value of $587,886 through the payment of cash and the issuance of common stock,
after the recognition of $3,847,192 in impairment loss as described
above. At December 31, 2009, we had current assets of $13,522,
principally consisting of cash and prepaid expenses and had current liabilities
of $1,380,690, resulting in a working capital deficit of
$1,367,168.
Results
of Operations
Comparison
of Years Ended December 31, 2008 and 2009
Oil
and Gas Revenues
Our net
oil and gas revenue was $49,485 for the year ended December 31, 2008,
compared to $17,581 for the year ended December 31, 2009, representing a
decrease of $31,904, or 64%. The decrease in revenues for the year
ended December 31, 2009, was principally due to significant reductions in
the monthly production from our Cooke No. 3 well and our Cooke No. 6
well.
Cost
and Operating Expenses
Our costs
and operating expenses were $2,364,096 for the year ended December 31,
2008, compared to $205,362 for the year ended December 31, 2009,
representing a decrease of $2,158,734, or 91% due primarily to an impairment
loss on oil and gas properties of $2,077,351 in 2008.
Lease Operating Expenses —
Lease operating expenses were $47,439 for the year ended December 31, 2008,
compared to $17,565 for the year ended December 31, 2009, representing a
decrease of $29,874, or 63%. The decrease in lease operating costs
primarily related to decreased costs of approximately $31,400 on the Cooke No. 5
and No. 6 wells for abnormally high costs in 2008 that were not incurred in 2009
related to workover efforts in 2008.
Impairment Loss on Oil and Gas
Properties — During the year ended December 31, 2008, the Company
determined that capitalized costs for wells drilled were in excess of estimated
present value of future cash flows from those wells. As a result, the
Company recognized an impairment loss in the amount of $1,400,951, reducing the
carrying value for wells drilled to zero. Other oil and gas
properties, including leasehold interest costs, exploration agreement costs, and
geological and geophysical costs, are carried at the lower cost or fair market
value. During the year ended December 31, 2008, management also
evaluated the carrying value of these other oil and gas properties and
recognized impairment of $676,400, reducing their carrying value to
$587,886. During the year ended December 31, 2009, the Company
capitalized $30,296 for recompletion costs, but recognized impairment of the
costs to again reduce the carrying value for wells drilled to zero.
General and Administrative
Expense — General and administrative expense was $236,147 for the year
ended December 31, 2008, as compared to $155,804 for the year ended December 31,
2009, representing a decrease of $80,343, or 34%. The decrease in
general and administrative expense during the year ended December 31, 2009 is
related to 1) decreases in legal, auditing, consulting and other outside
service costs totaling $70,827, 2) decreases in salary expense of $17,800
because the chief executive officer ceased taking compensation effective
March 1, 2008, 3) decreases in other general and administrative expenses
totaling $17,019, offset by 4) additional registration rights penalties of
$25,303 during 2009 (none in 2008).
Other
Income (Expense)
Gain on Transfer of Common Stock
from Bayshore Exploration, L.L.C. — As more fully discussed in
Notes 2 and 3 of the financial statements, 300,000 shares of common stock
were transferred to new noteholders by Bayshore Exploration, L.L.C., in
connection with the amendment of the Exploration Agreement with
Bayshore. The Company has accounted for this transfer as a
contribution of common stock to the Company and an issuance to the new
noteholders. In connection with this arrangement, we recognized a
gain of $24,000 in 2008.
Interest Expense — We
incurred interest expense of $73,147 for the year ended December 31, 2008, as
compared to $123,173 for the year ended December 31, 2009. The
majority of interest expense in 2009 relates to interest of $36,000 on notes
payable issued in 2008 in the principal amount of $300,000 and interest accrued
on the liability for the registration rights penalty of
$86,386. Interest expense in 2008 relates to interest of $12,409 on
notes payable and interest accrued on the liability for the registration rights
penalty of $60,738. In connection with the issuance of notes payable
in 2008, we recorded a discount to the notes of $38,710 for the allocation of
proceeds to common stock issued in connection with the notes
payable. The discount has been amortized over the original term of
the notes, $25,806 in 2009 and $12,903 in 2008.
17
Although
the net changes and percent changes with respect to our revenues and our costs
and operating expenses for the years ended December 31, 2008 and 2009, are
summarized above, the trends contained therein are limited and should not be
viewed as a definitive indication of our future results.
Liquidity
and Capital Resources
At
December 31, 2009, our principal source of liquidity consisted of $4,026 of
cash. At December 31, 2008, we had a working capital deficit of
$1,033,528 as compared to a deficit of $1,367,168 as of December 31,
2009. In addition, we have a deficit in our total stockholders’
equity of $815,758 at December 31, 2009, compared to total stockholders’
deficit of $477,734 at December 31, 2008, a decrease in the stockholders’
equity of $338,024, principally as a result of our net loss for the year ended
December 31, 2009.
Our
operations used net cash of $196,296 during the year ended December 31, 2008,
compared to using $130,307 of net cash during the year ended December 31,
2009. Net cash used in operating activities during the year ended
December 31, 2009 consists of our net loss, adjusted principally for the
non-cash impairment loss and amortization of discount on notes payable
recognized during the year, plus changes in the non-cash elements of our working
capital. The $65,989 decrease in the net cash used in our operating
activities primarily resulted from reduced cash expenditures during the year
ended December 31, 2009, principally due to decreased cash available to pay for
operations.
Investing
activities for the year ended December 31, 2008, used $40,913 of net cash, as
compared to no net cash used during the year ended December 31,
2009. Cash used in investing activities principally relates to
expenditures for exploration and development of oil and gas
properties.
Financing
activities provided $147,522 of net cash during the year ended December 31,
2008, as compared to $106,810 net cash provided during the year ended December
31, 2009. Cash flows from financing activities principally relates to
the receipt of note proceeds in 2008 and 2009 from the trust account of an
attorney, plus proceeds from notes payable from related parties in 2009, less
$75,000 paid to Bayshore in 2008.
As
disclosed above under “Recent Developments – Increase in Liquidity and Capital
Resources,” we recently entered into a letter of intent with Charles Volk that
provides for a change of control and a recapitalization of the
company. The change of control has already occurred. Set
forth in the disclosure is a list of specific undertakings involving the raising
of capital for the company that the new management is
undertaking. This new management is working closely with Jesup &
Lamont Securities Corporation, an investment banking firm in San Francisco, to
raise the capital needed to purchase significant producing oil and natural gas
properties with development wells potential.
Critical
Accounting Policies
We have
identified the policies outlined below as critical to our business operations
and an understanding of our results of operations. The list is not
intended to be a comprehensive list of all of our accounting
policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by accounting principles
generally accepted in the United States, with no need for management's judgment
in their application. The impact and any associated risks related to
these policies on our business operations is discussed throughout Management's
Discussion and Analysis of Financial Condition and Results of Operations where
such policies affect our reported and expected financial results. For
a detailed discussion on the application of these and other accounting policies,
see the Notes to the December 31, 2009 Financial Statements. Note
that our preparation of the financial statements requires us to make estimates
and assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of our financial
statements, and the reported amounts of revenue and expenses during the
reporting period. There can be no assurance that actual results will
not differ from those estimates.
18
Revenue
Recognition
All revenues are derived from the sale
of produced crude oil and natural gas. Revenue and related production
taxes and lease operating expenses are recorded in the month the product is
delivered to the purchaser. Payment for the revenue, net of related
taxes and lease operating expenses, is received from the operator of the well
approximately 45 days after the month of delivery. Accounts
receivable are stated at the amount management expects to
collect. Management provides for probable uncollectible amounts
through a charge to earnings and a credit to an allowance based on its
assessment of the collectibility of the receivable.
Income
Taxes
Provisions
for income taxes are based on taxes payable or refundable and deferred
taxes. Deferred taxes are provided on differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements and tax operating loss carryforwards. Deferred tax assets
and liabilities are included in the financial statements at currently enacted
income tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
Impairment
of Long-Lived Assets
Long-lived
assets, including oil and gas properties, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. Recoverability is measured by a comparison of
the carrying amount of an asset or asset group to estimated future undiscounted
net cash flows of the related asset or group of assets over their remaining
lives. If the carrying amount of an asset exceeds its estimated
future undiscounted cash flows, an impairment charge is recognized for the
amount by which the carrying amount exceeds the estimated fair value of the
asset. Impairment of long-lived assets is assessed at the lowest
levels for which there are identifiable cash flows that are independent of other
groups of assets. The impairment of long-lived assets requires
judgments and estimates. If circumstances change, such estimates
could also change.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
This item is not applicable to our
company.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our
consolidated financial statements are filed with and begin on page F-1 of this
report.
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A(T). CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, that are
designed to ensure that information required to be disclosed by us in the
reports that we file or submit to the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized, and reported within the time periods specified by the Securities and
Exchange Commission’s rules and forms, and that information is accumulated and
communicated to our management, including our principal executive and principal
financial officer (who are the same person and whom we refer to as our
Certifying Officer), as appropriate to allow timely decisions regarding required
disclosure. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance the objectives of
the control system are met.
19
Our
Certifying Officer evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act) as
of December 31, 2009, and concluded that our disclosure controls and
procedures were not effective, because certain deficiencies involving internal
controls constituted material weaknesses, as discusses below. The
material weaknesses identified did not result in the restatement of any
previously reported financial statements or any other related financial
disclosure, and management does not believe that the material weaknesses had any
effect on the accuracy of our financial statements for the current reporting
period.
Management’s
Annual Report on Internal Controls Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial
reporting is a process designed by our principal executive and principal
financial officers to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of our financial statements for external
reporting purposes in accordance with generally accepted accounting
principles. Because of inherent limitations, a system of internal
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of the
effectiveness of a system of internal control to future periods are subject to
the risk that controls may become inadequate due to changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate.
As of
December 31, 2009, our Certifying Officer conducted an assessment of the
effectiveness of our internal control over financial reporting based on the
framework established in Internal Control — Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this assessment, management has determined that our
internal controls over financial reporting were not effective because there were
material weaknesses in our internal control over financial reporting as of
December 31, 2008. A material weakness is a control deficiency,
or combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of annual or interim financial
statements will not be prevented or detected. As of December 31,
2009, management identified the following material weaknesses:
1. Lack
of a system to administratively review, audit or verify the reporting by
Bayshore of revenues and expenditures in connection with the oil and gas
properties on which we conducted activities during 2008 and
2009. Similarly, we have not obtained units of production or similar
third-party purchaser confirmation of the details of our oil and gas
production.
2. We
do not have a sufficient number of company personnel to separate accounting and
recordkeeping functions in accordance with sound bookkeeping
practices. Our principal executive and principal financial officer
are the same person, and therefore cannot provide an independent review and
quality assurance function within the accounting and financial reporting
group.
3. We
do not maintain certain entity-level controls as defined by the framework issued
by COSO. Specifically, our lack of staff does not allow us to
effectively maintain a sufficient number of adequately trained personnel
necessary to anticipate and identify risks critical to financial
reporting. There is a risk that a material misstatement of the
financial statements could be caused, or at least not be detected in a timely
manner, due to lack of adequate staff with such expertise.
These
weaknesses are continuing. Management and the Board of Directors are
aware of these weaknesses that result because of limited resources and
staff. In order to mitigate these weaknesses to a degree, we have
outsourced certain of our accounting processes to a third-party accounting
firm. Due to our limited financial and managerial resources, we
cannot assure when we will be able to implement effective internal controls over
financial reporting.
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.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting that occurred
during the quarter ended December 31, 2009 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
ITEM
9B. OTHER INFORMATION
None
20
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Management
All of
the directors will serve until the next annual meeting of stockholders or until
their earlier death, retirement, resignation, or removal. Executive
officers serve at the discretion of the board of directors and are appointed to
serve until the first board meeting following the annual meeting of
stockholders.
The
following table sets forth the name, age, and position of each of our current
directors and executive officers:
|
Name
|
Age
|
Title
|
||
|
Charles
F. Volk, Jr.
|
50
|
Chairman
of the Board of Directors, Chief Executive Officer, Treasurer (Chief
Financial Officer)
|
||
|
James
E. Burden
|
70
|
President,
Secretary, Director
|
||
|
Clifford
W. Henry
|
70
|
Director
|
Executive
Officer and Directors
Charles F. Volk,
Jr. Mr. Volk holds B.S. degree in Business
Administration from the Menlo School of Business Administration in Menlo Park,
CA. (1981) Mr. Volk brings more than twenty-seven years of professional
experience:
Currently
Chairman of Bermuda Segregated Funds, Ltd. an open end Mutual Fund in
Bermuda.
|
·
|
Osage
Energy Corporation-Chairman & President 2004-2007
|
|
Oil
and Gas exploration and Production Company headquartered
in
|
|
|
Oklahoma
City. Company shares are traded on the Bulletin Board in
the
|
|
|
U.S.
under the symbol OEDV. Market Capitalization today of
$2,500,000.
|
|
|
·
|
Private
Investor-Mercator Minerals, Ltd.
|
|
From
2000-2004 Mr. Volk served seed investor and co-founder in
an
|
|
|
operating
Copper Mine in Arizona. Company shares are traded on
the
|
|
|
Toronto
Stock Exchange under the ML, Market Capitalization today of
$472,000,000.
|
|
|
·
|
Cyril
Petrochemical Corporation Managing Director
|
|
From
1997-2000 Mr. Volk held the position of Managing Director for
Cyril
|
|
|
Petrochemical
Corporation. Cyril Petrochemical Corporation owns an
oil
|
|
|
refinery
in Cyril, Oklahoma. The company had environmental and
debt
|
|
|
structuring
problems which Mr. Volk helped resolve.
|
|
|
·
|
Norman
Capital, Inc. Managing Director
|
|
From
1992-1997 Mr. Volk operated as Managing Director for
Norman
|
|
|
Capital,
Inc. Norman Capital, Inc. is a consulting firm specializing
in
|
|
|
Investment
Banking services for small and mid-size companies. The
|
|
|
company
has worked primarily with natural resource companies,
|
|
|
organizing
private placements and public financings, asset and
debt
|
|
|
restructurings
and investor relations in the U.S. and
Canada.
|
21
|
·
|
Gold
Circle Mines, Inc. President
|
|
From
1983-1991 Mr. Volk operated as President of Gold Circle Mines,
Inc.
|
|
|
Gold
Circle Mines, Inc. is a company engaged in acquisition
and
|
|
|
development
of gold mining properties in the state of Nevada.
Activities
|
|
|
included
acquisition of a competitor; reverse takeovers and takeovers
of
|
|
|
affiliate
companies; organization of $10 million aggregate funding
for
|
|
|
companies
which included partnerships, joint-ventures, private
|
|
|
placements,
convertible debentures, loans and Initial Public Offerings
in
|
|
|
the
U.S. and Canada.
|
|
|
·
|
Oil
& Gas Partnerships General Partner
|
|
From
1981-1993 Mr. Volk Promoted wells drilled in Texas
utilizing
|
|
|
existing
tax deductions. 75% payback rate on completion of wells
drilled
|
|
|
during
that period.
|
Additional
participation in management and marketing of Esilux Corporation, an
international marketer and distributor of specialized industrial safety systems.
Creation of original business plan for marketing to public sector.
James Burden,
J.D. Mr. Burden has forty years of experience in
corporate finance, law practice, and business operations. After a lengthy legal
career in which he functioned in both a legal and business capacity, in 2001,
Mr. Burden ceased the practice of law and concentrated full efforts to business
activities for his own account. He has co-founded, operated, and served as an
officer, director or management committee member of a variety of companies,
including a number of oil exploration companies. He was a principal and
management committee member of Judgment Oil & Gas, Luling, TX, a production
company with over 145 wells. He co-founded and was a managing general partner of
AusTex Oil & Gas, Luling, TX, an oil exploration company, which was funded
by Mr. Burden and two others with personal, not syndicated, funds.
Mr.
Burden is President and the majority owner of Dorset Capital, LLC, a company
that facilitates the formation and financing of companies both in the U.S. and
in the United Kingdom. U.S. companies include KineMed, Inc. (www.kinemed.com)
where he was a co-founding director, stockholder, and was Chief Operations
Officer from 2001 to 2005, and helped grow the company from a start-up to over
55 employees. He is currently back working with KineMed as counsel and helping
to position the company for acquisition. Other U.S. companies co-founded and
developed by Mr. Burden include Emiliem, Inc. (www.emiliem.com), where he
currently is a director and officer and Info4cars, Inc., which he co-founded and
grew to annual revenues of $11m before the company was sold. As an underwriting
member of Lloyds of London, starting in the early 1980’s, Mr. Burden established
U.K. business relationships and co-founded a number of U.K. companies and was a
cofounding director of the Gloucestershire Innovation Centre, Ltd., in
Cheltenham, England, and EuroGen Pharmaceuticals, Ltd., company affiliated with
a NASDAQ-listed U.S. company. He remains active in U.K. business and currently
acts as an advisor to a number of U.K. companies.
Mr.
Burden received a B.S. degree from the School of Business Administration (Haas
School of Business), University of California, Berkeley, and a J.D. degree from
the University of California, Hastings College of Law. He did post- J.D.
graduate work at the Graduate School of Law, University of Southern California
and is an active member of the California State Bar.
Clifford W.
Henry. Mr. Henry has over forty years of experience in all
areas of finance and investments. After spending a number of years in
banking he became involved in the investing area as an outgrowth of his personal
investments.
He is
currently President and Chief Investment Officer of CWH Associates, Inc., an
investment firm he founded in 1989. CWH manages Worthington Growth
L.P., an investment fund specializing in long term investing in early stage high
growth companies in specific sectors such as energy, both conventional and
alternative, technology, education, and life sciences, including biotechnology
and stem cell companies.
Originally
focused on domestic, public companies, the firm has expanded into international
investing, primarily South East Asia, and is also involved in private company
investments as well.
Prior to
founding CWH, Mr. Henry was a founder, principal and member of the Investment
Committee at Dawson-Henry Capital Management. During that time, Mr.
Henry also served as a General Partner of Southport Management L.P., an
investment partnership for individuals managed by Dawson-Henry. Mr.
Henry’s responsibilities at Southport Management included direction of overall
investment policies
with special emphasis on emerging growth, financial and consumer
groups. In addition, Mr. Henry was responsible for the research and
implementation of a real time valuation model for the general market and
individual stocks.
22
Immediately
before Dawson-Henry, Mr. Henry managed the equity portfolio for the JCPenney
Insurance Company, and was a member of the Investment Policy
Committee.
Mr. Henry
has served as a consultant, advisor or member of the board for several
companies. Currently he is a director of Array Connector Company, a
private Miami, Florida, based manufacturer of application specific connectors
for military and commercial companies. He is a consultant to Spare
Backup Company, a Palm Desert, California supplier of cloud computing based
initiatives for backing up computing systems for individuals and small
businesses. He is a partner and advisor to Vietnam Partners, an
investment partnership with numerous investments both public and private in
Vietnam, Laos, and Cambodia. He is President of the Board of Trustees
of the Clay Art Center, Port Chester, New York.
Mr. Henry
has a B.A. from Princeton University, and an M.B.A. in Finance from Columbia
University.
Mr. Volk
spends all of his time on our business. Mr. Burden will spend at
least half his time on our business.
Board
of Directors’ Committees
Mr. Henry
is considered an independent member of our board of directors under NASD Rule
4200(a)(15).
Code
of Ethics
The
Company has adopted a Code of Ethics that applies to all of its employees,
including its principal executive officer, principal financial officer and its
principal accounting officer. The Code of Ethics is available on
request from the Company and will be posted on the Company’s website when the
website is constructed:
www.paxenergyinc.com.
Corporate
Governance Matters
We have
not adopted any material changes to the procedures by which security holders may
recommend nominees to our board of directors.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
directors and executive officers, and persons that own more than 10% of a
registered class of the Company’s equity securities, to file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in
ownership of equity securities of the Company. Officers, directors
and greater than 10% stockholders are required to furnish the Company with
copies of all Section 16(a) forms they file.
Based
solely upon a review of Forms 3, 4 and 5 and amendments thereto filed with the
Securities and Exchange Commission during or respecting the last fiscal year
ended December 31, 2009, no person that, at any time during the most recent
fiscal year, was a director, officer, beneficial owner of more than 10% of any
class of equity securities of the Company, or any other person known to be
subject to Section 16 of the Exchange Act failed to file, on a timely basis,
reports required by Section 16(a) of the Securities Exchange Act.
ITEM
11. EXECUTIVE COMPENSATION
Executive
Compensation
The
following table sets forth, for the last two completed fiscal years (or such
lesser period that we have been in existence), the dollar value of all cash and
noncash compensation earned by any person who was our principal executive
officer and each of our other two most highly compensated executive officers
whose total compensation exceeded $100,000 during the last fiscal year
(together, the “Named Executive Officers”):
23
|
Name
and Principal Position
|
Year
Ended
Dec.
31
|
Salary
($)
|
Bonus
($)
|
Stock
Award(s)
($)
|
Option
Awards
$
|
Non-Equity
Incentive
Plan
Compensation
|
Change
in
Pension
Value
and
Non-Qualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compen- sation
($)
|
Total
($)
|
||||||||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
||||||||||||||||||||||||
|
Robert
Freiheit, Chairman
|
2009
2008
|
$
$
|
--
17,800
|
--
--
|
--
--
|
--
--
|
--
--
|
--
--
|
--
--
|
$
$
|
0
17,800
|
||||||||||||||||||||||
|
Chief
Executive Officer
|
|||||||||||||||||||||||||||||||||
We have
not granted any options or similar equity awards to any Named Executive Officer
during 2009.
We have
not granted any options or stock appreciation rights, or SARs, during the last
completed fiscal year to our Named Executive Officers.
No Named
Executive Officer exercised any options or SARs during the last completed fiscal
year or owned any unexercised options or SARs at the end of the fiscal
year. However, Mr. Manz, a director, continues to own options
to purchase 375,000 shares of common stock granted to him by us on July 19,
2006. Pursuant to the terms of the Change of Control Agreement
executed on March 17, 2010, Mr. Manz’s options will be exchanged for 375,000
shares of common stock at no consideration by Mr. Manz.
Directors’
Compensation
The
following table sets forth the compensation paid to each director who was not a
Named Executive Officer during the year ended December 31,
2009.
|
Name
|
Fees
Earned
or
Paid in
Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
||||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
||||||||||||||||||||
|
Thomas
J. Manz
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||||||||
We paid no compensation to
Mr. Manz in 2009.
Employment
Agreements, Termination of Employment, and Change in Control
During
the first two months of 2008 Robert Freiheit was employed as an officer and
director under a non-written arrangement whereby Mr. Freiheit was employed
on a month-by-month basis and paid a salary of $8,900 per
month. As of March 2008, Mr. Freiheit continued to act as an
officer and director but no longer received a salary. This
arrangement does not address or contemplate any termination compensation or
other remuneration to Mr. Freiheit beyond such monthly
salary. We have no written or other employment arrangements with any
other executive officer and do not currently pay, or propose to pay, any
compensation to any other executive officer. However, from time to
time in the future, our board of directors may provide compensation in the form
of cash, stock, or stock purchase options to one or more of such
persons. Such transactions will not be the result of arm’s-length
negotiations. On March 17, 2010 there occurred a change of control of
the company. At present, the directors have not yet addressed the
issue of compensation for the new officers and directors.
24
Equity
Compensation Plans
We had no equity compensation plans as
of December 31, 2009.
Indemnification
of Officers and Directors
Our
articles of incorporation and bylaws provide for the indemnification of our
officers, directors, and others to the maximum extent permitted by Nevada
law. Accordingly, our officers and directors would be entitled to
indemnification under a variety of circumstances, which may include liabilities
under the Securities Act.
Insofar
as indemnification under the Securities Act may be permitted to directors,
officers, and controlling persons pursuant to the foregoing provisions, we have
been informed that, in the opinion of the Securities and Exchange Commission,
such indemnification is contrary to public policy as expressed in the Securities
Act and, therefore, is unenforceable.
Limitation
on Liability
Our
articles of incorporation limit the liability of directors to the maximum extent
permitted by Nevada law. In addition, our bylaws require us to
indemnify our directors and officers and allow us to indemnify our other
employees and agents to the fullest extent permitted at law. At
present, we are aware of no material pending litigation or proceeding involving
any director, officer, employee, or agent in which indemnification will be
required or permitted. We are not aware of any threatened litigation
or proceeding that might result in a claim for indemnification. If we
permit indemnification for liabilities arising under the Securities Act to
directors, officers, or controlling persons under these provisions, we have been
informed that, in the opinion of the Securities and Exchange Commission, this
indemnification is against public policy as expressed in the Securities Act and
is unenforceable.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The
following table sets forth, as of March 15, 2010, the outstanding common stock
owned of record or beneficially by each executive officer and person who owned
of record, or was known by us, to own beneficially, more than 5% of the shares
of common stock issued and outstanding, and the name and share holdings of each
director and all of the executive officers and directors as a
group:
|
Person or
Group
|
Nature of
Ownership (1)
|
Number
|
Percent (2)
|
||||||
|
Principal
Stockholders:
|
|||||||||
|
Robert
Freiheit (3)
|
Common
stock
|
4,288,328
|
18.2
|
||||||
|
1095
Myron Court
Zephyr
Cove, NV 89448
|
|||||||||
|
Howard
S. Landa (4)
|
Common
stock
|
1,891,501
|
8.0
|
||||||
|
3000
Connor Street, Unit 6
|
Warrants
|
30,000
|
*
|
||||||
|
Salt
Lake City, UT 84109
|
1,921,501
|
8.1
|
|||||||
|
Thomas
J. Manz
|
Common
stock
|
481,282
|
2.0
|
||||||
|
4210
East Lane
|
Warrants
|
100,000
|
*
|
||||||
|
Sacramento,
CA 95864
|
Options
|
375,000
|
1.6
|
||||||
|
956,282
|
4.0
|
||||||||
|
Directors:
|
|||||||||
|
Robert
Freiheit
|
--see
above--
|
||||||||
|
Thomas
J. Manz
|
--see
above--
|
||||||||
|
All
Executive Officers and Directors as a Group (two persons):
|
Common
stock
|
4,769,610
|
20.2
|
%
|
|||||
|
Warrants
|
100,000
|
*
|
|||||||
|
Options
|
375,000
|
1.6
|
|||||||
|
Total
|
5,244,610
|
21.8
|
%
|
||||||
25
_______________
|
*
|
Less
than 1%.
|
||
|
(1)
|
Except
as otherwise noted, shares are owned beneficially and of record, and such
record stockholder has sole voting, investment, and dispositive
power.
|
||
|
(2)
|
Calculations
of total percentages of ownership for each person or group assume the
exercise of options and warrants owned by that person or group to which
the percentage relates pursuant to Rule 13d-3(d)(1)(i).
|
||
|
(3)
|
Amount
includes 333,229 shares held by Charles Schwab & Co. Inc. as custodian
for Mr. Freiheit, and 1,082,108 shares owned by members of Mr. Freiheit's
family.
|
||
|
(4)
|
Amount
includes 435,572 shares held by Pamplona, Inc., of which Mr. Landa is an
officer, and 90,000 shares held by the spouse of Mr. Landa,
Terry E. Landa; 150,000 shares held by DWC Holdings, LLC, of which
Terry E. Landa is the manager; and 511,429 shares held by Auction
Specialists, Inc., of which Mr. Landa is an
officer.
|
||
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
We had no related party transactions in
2009.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit
Fees
We were
billed $22,186 for professional services rendered for the audit and reviews of
our 2009 annual and interim financial statements. We were billed
$36,650 for professional services rendered for the audit and reviews of our 2008
annual and interim financial statements.
Audit
Related Fees
For our fiscal years ended
December 31, 2008 and 2009, we did not incur any audit related
fees.
Tax
Fees
During our fiscal years ended
December 31, 2008 and 2009, we were billed $2,370 and $2,847, respectively,
for professional services rendered for tax compliance.
Audit
and Non-Audit Service Preapproval Policy
In
accordance with the requirements of the Sarbanes-Oxley Act of 2002 and the rules
and regulations promulgated thereunder, the board of directors has, as of
May 19, 2008, adopted an informal approval policy that it believes will
result in an effective and efficient procedure to preapprove services performed
by the independent registered public accounting firm. Prior to
adoption of this approval policy, audit and non-audit services performed by the
independent registered public accounting firm were preapproved primarily at the
discretion of the principal executive officer who is also the principal
financial and accounting officer.
26
Audit
Services. Audit services include
the annual financial statement audit (including quarterly reviews) and other
procedures required to be performed by the independent registered public
accounting firm to be able to form an opinion on our financial statements.
The board of directors preapproves specified annual audit services
engagement terms and fees and other specified audit fees. All other audit
services must be specifically preapproved by the board of directors. The
board of directors monitors the audit services engagement and may approve, if
necessary, any changes in terms, conditions, and fees resulting from changes in
audit scope or other items.
Audit-Related
Services. Audit-related services
are assurance and related services that are reasonably related to the
performance of the audit or review of our financial statements which
historically have been provided to us by the independent registered public
accounting firm and are consistent with the SEC’s rules on auditor
independence. The board of directors preapproves specified
audit-related services within preapproved fee levels. All other
audit-related services must be preapproved by the board of
directors.
Tax
Services. The board of directors
preapproves specified tax services that the Audit Committee believes would not
impair the independence of the independent registered public accounting firm and
that are consistent with SEC rules and guidance. The board of directors
must specifically approve all other tax services.
All Other
Services. Other services are
services provided by the independent registered public accounting firm that do
not fall within the established audit, audit-related, and tax services
categories. The board of directors preapproves specified other services
that do not fall within any of the specified prohibited categories of
services.
Procedures. All proposals for
services to be provided by the independent registered public accounting firm,
which must include a detailed description of the services to be rendered and the
amount of corresponding fees, are submitted to the board of directors and the
Chief Financial Officer. The Chief Financial Officer authorizes services
that have been preapproved by the board of directors. If there is any
question as to whether a proposed service fits within a preapproved service, the
board of directors is consulted for a determination. The Chief Financial
Officer submits requests or applications to provide services that have not been
preapproved by the board of directors, which must include an affirmation by the
Chief Financial Officer and the independent registered public accounting firm
that the request or application is consistent with the SEC’s rules on auditor
independence, to the board of directors (or its Chair or any of its other
members pursuant to delegated authority) for approval.
PART
IV
ITEM
15. EXHIBITS
|
Exhibit
Number*
|
Title
of Document
|
Location
|
||
|
Item 3.
|
Articles
of Incorporation and Bylaws
|
|||
|
3.01
|
Articles
of Incorporation
|
Incorporated
by reference to the Registration Statement on Form SB-2 filed on August 1,
2006, SEC File No. 333-136199.
|
||
|
3.02
|
Amended
and Restated Articles of Incorporation of Paxton Energy,
Inc.
|
Incorporated
by reference to the Registration Statement on Form SB-2/A (Amendment No.
1) filed on December 21, 2006, SEC File
No. 333-136199.
|
||
|
3.03
|
Bylaws
of Paxton Energy, Inc. (as amended and restated October 1,
2005)
|
Incorporated
by reference to the Registration Statement on Form SB-2 filed on August 1,
2006, SEC File No. 333-136199.
|
||
|
Item 4.
|
Instruments
Defining the Rights of Holders, Including Indentures
|
|||
|
4.01
|
Specimen
stock certificate
|
Incorporated
by reference to the Registration Statement on Form SB-2 filed on August 1,
2006, SEC File No. 333-136199.
|
||
|
4.02
|
Form
of Warrant
|
Incorporated
by reference to the Registration Statement on Form SB-2 filed on August 1,
2006, SEC File No. 333-136199.
|
27
|
Item 5.
|
Opinion
re: Legality
|
|||
|
5.01
|
Opinion
of Kruse Landa Maycock & Ricks, LLC
|
Incorporated
by reference to the Registration Statement on Form SB-2 filed on August 1,
2006, SEC File No. 333-136199.
|
||
|
Item 10.
|
Material
Contracts
|
|||
|
10.01
|
Bayshore
Exploration L.L.C. letter to Paxton Energy, Inc., dated April 20,
2005, re: Area of Mutual Interest and Lease Options (Cooke No. 3
Well-Cooke Ranch Deep Prospect)
|
Incorporated
by reference to the Registration Statement on Form SB-2 filed on August 1,
2006, SEC File No. 333-136199.
|
||
|
10.02
|
Bayshore
Exploration L.L.C. letter to Paxton Energy, Inc., dated April 20,
2005, re: Leases & Options (AMI-Cooke Ranch Deep
Prospect)
|
Incorporated
by reference to the Registration Statement on Form SB-2 filed on August 1,
2006, SEC File No. 333-136199.
|
||
|
10.03
|
Participation
Agreement between Paxton Energy, Inc., and Bayshore Exploration L.L.C.
dated June 6, 2005 (Cooke No. 3 Well-Cooke Ranch Deep
Prospect)
|
Incorporated
by reference to the Registration Statement on Form SB-2/A (Amendment No.
1) filed on December 21, 2006, SEC File
No. 333-136199.
|
||
|
10.04
|
Farm-In
Participation Agreement between Paxton Energy, Inc. and Maxim Resources,
Inc. dated July 25, 2005 (Cooke No. 3 Well-Cooke Ranch Deep
Prospect)
|
Incorporated
by reference to the Registration Statement on Form SB-2/A (Amendment No.
1) filed on December 21, 2006, SEC File
No. 333-136199.
|
||
|
10.05
|
Participation
Agreement between Paxton Energy, Inc. and Bayshore Exploration L.L.C.
dated July 28, 2005 (Cooke No. 3 Well-Cooke Ranch Deep
Prospect)
|
Incorporated
by reference to the Registration Statement on Form SB-2/A (Amendment No.
1) filed on December 21, 2006, SEC File
No. 333-136199.
|
||
|
10.06
|
Participation
Agreement between Paxton Energy, Inc. and Bayshore Exploration L.L.C.
dated November 20, 2005 (Cartwright No. 1 Well-Cooke Ranch Deep
Prospect)
|
Incorporated
by reference to the Registration Statement on Form SB-2 filed on August 1,
2006, SEC File No. 333-136199.
|
||
|
10.07
|
Purchase
Agreement between Paxton Energy, Inc. and Bayshore Exploration L.L.C.
dated December 30, 2005 (Cartwright No. 1 Well-Cooke Ranch Deep
Prospect)
|
Incorporated
by reference to the Registration Statement on Form SB-2/A (Amendment No.
1) filed on December 21, 2006, SEC File
No. 333-136199.
|
||
|
10.08
|
Promissory
Note for $300,000 dated February 1, 2006, payable to Robert
Freiheit
|
Incorporated
by reference to the Registration Statement on Form SB-2 filed on August 1,
2006, SEC File No. 333-136199.
|
||
|
10.09
|
Secured
Convertible Note Purchase Agreement dated February 1,
2006
|
Incorporated
by reference to the Registration Statement on Form SB-2 filed on August 1,
2006, SEC File No. 333-136199.
|
||
|
10.10
|
Lease
Acquisition Agreement between Paxton Energy, Inc. and Bayshore Exploration
L.L.C. dated March 16, 2006 (3,200 Acres M/L, La Salle County,
TX)
|
Incorporated
by reference to the Registration Statement on Form SB-2/A (Amendment No.
1) filed on December 21, 2006, SEC File
No. 333-136199.
|
||
|
10.11
|
Exploration
Agreement between Bayshore Exploration LLC and Paxton Energy, Inc.,
executed April 17, 2006, effective March 1, 2006 (Cooke No. 3
Well-Cooke Ranch Deep Prospect)
|
Incorporated
by reference to the Registration Statement on Form SB-2/A (Amendment No.
1) filed on December 21, 2006, SEC File
No. 333-136199.
|
||
|
Form
of Registration Rights Agreement with related schedule
|
Incorporated
by reference to the Registration Statement on Form SB-2 filed on August 1,
2006, SEC File No. 333-136199.
|
|||
|
10.13
|
Amendment
to Lease Acquisition Agreement between Paxton Energy, Inc. and Bayshore
Exploration L.L.C. dated June 13, 2006 (3,200 Acres M/L, La Salle
County, TX)
|
Incorporated
by reference to the Registration Statement on Form SB-2 filed on August 1,
2006, SEC File No. 333-136199.
|
||
|
10.14
|
Notice
of Option Grant (Thomas Manz)
|
Incorporated
by reference to the Registration Statement on Form SB-2/A (Amendment No.
1) filed on December 21, 2006, SEC File
No. 333-136199.
|
28
|
10.15
|
Option
Agreement between Paxton Energy, Inc., and Bayshore Exploration L.L.C.
dated October 22, 2006 (Cooke No. 2 Well-Cooke Ranch Deep
Prospect)
|
Incorporated
by reference to the Registration Statement on Form SB-2/A (Amendment No.
1) filed on December 21, 2006, SEC File
No. 333-136199.
|
||
|
10.16
|
Participation
Agreement between Paxton Energy, Inc., and Bayshore Exploration L.L.C.
dated November 7, 2006 (McDermand No. 1 Well-South Nome Field
Prospect)
|
Incorporated
by reference to the Registration Statement on Form SB-2/A (Amendment No.
1) filed on December 21, 2006, SEC File
No. 333-136199.
|
||
|
10.17
|
Farmout
Agreement between Paxton Energy, Inc., and Bayshore Exploration L.L.C.
dated January 10, 2007 (Fiedler No. 1 Well-Storey Ranch
Prospect)
|
Incorporated
by reference to the Registration Statement on Form SB-2/A (Amendment No.
2) filed on March 19, 2007, SEC File
No. 333-136199.
|
||
|
10.18
|
Bayshore
Exploration L.L.C., letter to Paxton Energy, Inc., dated July 21,
2008, re: Amendment of Exploration Agreement of March 1,
2006.
|
Incorporated
by reference from our quarterly report on Form 10-Q filed
August 19, 2008
|
||
|
10.19
|
Bayshore
Exploration L.L.C., letter to Paxton Energy, Inc., dated July 21,
2008, re: Election to Participate in 220 Acre
Lease.
|
Incorporated
by reference from our quarterly report on Form 10-Q filed
August 19, 2008
|
||
|
10.20
|
Form
of Secured Promissory Note, dated September 3, 2008, with related
schedule of holders
|
Incorporated
by reference from our quarterly report on Form 10-Q filed
November 19, 2008
|
||
|
10.21
|
Form
of Security Agreement, dated September 3, 2008, with related schedule
of secured parties
|
Incorporated
by reference from our quarterly report on Form 10-Q filed
November 19, 2008
|
||
|
10.22
|
Assignment
and Bill of Sale related to Sale of Working Interest in
Cook No. 6 (21.75% working interest) effective September 1,
2008
|
Incorporated
by reference from our quarterly report on Form 10-Q filed
November 19, 2008
|
||
|
10.23
|
Agreement
for Change of Control and Recapitalization of Paxton Energy, Inc., dated
March 17, 2010 among Charles Volk, Paxton Energy, Inc., Robert Freiheit
and Tom Manz
|
This
filing.
|
||
|
Item
31.
|
Rule
13a-14(a)/15d-14(a) Certifications
|
|||
|
31.1
|
Certification
of Principal Executive Officer Pursuant to Rule 13a-14 (during 2009 and
ending on March 17, 2010)
|
This
filing.
|
||
|
31.2
|
Certification
of Principal Executive Officer Pursuant to Rule 13a-14 (commencing March
17, 2010)
|
This
filing.
|
||
|
31.3
|
Certification
of Principal Financial Officer Pursuant to Rule 13a-14 (during
2009 and ending on March 17, 2010)
|
This
filing.
|
||
|
31.4
|
Certification
of Principal Financial Officer Pursuant to Rule 13a-14 (commencing March
17, 2010)
|
This
filing.
|
||
|
Item
32.
|
Section
1350 Certifications
|
|||
|
32.
1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (during 2009 and
ending on March 17, 2010)
|
This
filing.
|
||
|
32.2
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (commencing
March 17, 2010)
|
This
filing.
|
||
|
32.3
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (during 2009 and
ending on March 17, 2010)
|
This
filing.
|
||
|
32.4
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (commencing
March 17, 2010)
|
This
filing.
|
||
_______________
|
*
|
The
number preceding the decimal indicates the applicable SEC reference number
in Item 601, and the number following the decimal indicating the
sequence of the particular
document.
|
29
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
PAXTON
ENERGY, INC.
|
||
|
Date: April
15, 2010
|
By:
|
/s/ Robert Freiheit
|
|
Robert Freiheit, President and Director during 2009 and ending on March
17, 2010
|
||
|
Principal Executive Officer during 2009 and ending on March 17,
2010
|
||
|
Principal Financial and Accounting Officer during 2009 and ending on March
17, 2010
|
||
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
date indicated.
|
Date: April
15, 2010
|
/s/ Thomas J. Manz
|
|
Thomas J. Manz, Director during 2009 and ending on March 17,
2010
|
|
|
Date: April
15, 2010
|
/s/ Charles F. Volk, Jr.
|
|
Charles F. Volk, Jr., Chief Executive Officer, Treasurer (Chief Financial
Officer) and Director commencing March 17, 2010
|
|
|
Date: April
15, 2010
|
/s/
James E. Burden
|
|
James
E. Burden, President, Secretary and Director, commencing March 17,
2010
|
|
|
Date: April
15, 2010
|
|
| Clifford W. Henry, Director commencing March 17, 2010 | |
30
PAXTON
ENERGY, INC.
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Balance
Sheets – December 31, 2009 and 2008
|
F-3
|
|
Statements
of Operations for the Years Ended December 31, 2009 and 2008, and for
the
|
|
|
Cumulative
Period from June 30, 2004 (Date of Inception) through December 31,
2009
|
F-4
|
|
Statements
of Stockholders’ Equity (Deficit) for the Period from June 30, 2004 (Date
of Inception)
|
|
|
through
December 31, 2007 and for the Years Ended December 31, 2008 and
2009
|
F-5
|
|
Statements
of Cash Flows for the Years Ended December 31, 2009 and 2008, and for
the
|
|
|
Cumulative
Period from June 30, 2004 (Date of Inception) through December 31,
2009
|
F-6
|
|
Notes
to Financial Statements
|
F-7
|
|
Supplemental
Information on Oil and Gas Producing Activities
(Unaudited)
|
F-21
|
F-1
|
HANSEN, BARNETT & MAXWELL,
P.C.
|
||
|
A
Professional Corporation
|
Registered
with the Public Company
|
|
|
CERTIFIED
PUBLIC ACCOUNTANTS
|
Accounting
Oversight Board
|
|
|
5
Triad Center, Suite 750
|
||
|
Salt
Lake City, UT 84180-1128
|
||
|
Phone:
(801) 532-2200
Fax:
(801) 532-7944
www.hbmcpas.com
|
 |
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and the Shareholders
Paxton
Energy, Inc.
We have
audited the accompanying balance sheets of Paxton Energy, Inc. (an
exploration-stage company) as of December 31, 2009 and 2008 and the related
statements of operations, stockholders’ equity (deficit), and cash flows for the
years then ended and for the cumulative period from June 30, 2004 (date of
inception) through December 31, 2009. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
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 about 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 financial statements referred to above present fairly, in all
material respects, the financial position of Paxton Energy, Inc. (an
exploration-stage company) as of December 31, 2009 and 2008, and the results of
its operations and its cash flows for the years then ended and for the
cumulative period from June 30, 2004 (date of inception) through December 31,
2009, in conformity with accounting principles generally accepted in the United
States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company is in the exploration stage and during the years ended
December 31, 2009 and 2008, incurred losses from operations and had negative
cash flows from operating activities. As of December 31, 2009, the Company had a
working capital deficiency of $1,367,168. The Company has accumulated a deficit
of $8,083,231 from the date of inception through December 31, 2009. These
conditions raise substantial doubt about the Company’s ability to continue as a
going concern. Management's plans regarding these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
|
HANSEN,
BARNETT & MAXWELL, P.C.
|
Salt Lake
City, Utah
April 14,
2010
F-2
|
PAXTON
ENERGY, INC.
|
||||||||
|
(AN
EXPLORATION-STAGE COMPANY)
|
||||||||
|
BALANCE
SHEETS
|
||||||||
|
December
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 4,026 | $ | 27,523 | ||||
|
Receivable
from attorney's trust account
|
668 | 77,478 | ||||||
|
Accounts
receivable
|
- | 4,076 | ||||||
|
Prepaid
expenses and other current assets
|
8,828 | 10,410 | ||||||
|
Total
Current Assets
|
13,522 | 119,487 | ||||||
|
Property
and Equipment, net of accumulated depreciation
|
1,005 | 2,428 | ||||||
|
Oil and gas properties,
using full cost accounting
|
587,886 | 587,886 | ||||||
|
Total
Assets
|
$ | 602,413 | $ | 709,801 | ||||
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||
|
Current
Liabilities
|
||||||||
|
Accounts
payable
|
$ | 259,068 | $ | 231,221 | ||||
|
Accrued
liabilities
|
27,287 | 6,750 | ||||||
|
Payable
to Bayshore Exploration L.L.C.
|
91,699 | 79,903 | ||||||
|
Notes
payable, less unamortized discount
|
225,000 | 199,194 | ||||||
|
Notes
payable to related parties
|
105,000 | 75,000 | ||||||
|
Accrued
registration right penalties and interest
|
672,636 | 560,947 | ||||||
|
Total Current
Liabilities
|
1,380,690 | 1,153,015 | ||||||
|
Long-Term
Liabilities
|
||||||||
|
Long-term
asset retirement obligation
|
36,217 | 34,520 | ||||||
|
Fair
value of warrants
|
1,264 | - | ||||||
|
Total
Long-Term Liabilities
|
37,481 | 34,520 | ||||||
|
Stockholders'
Deficit
|
||||||||
|
Preferred
stock, $0.001 par value; 5,000,000 shares authorized, none issued
and outstanding
|
- | - | ||||||
|
Common
stock, $0.001 par value; 100,000,000 shares authorized, 23,586,139
shares issued and outstanding
|
23,586 | 23,586 | ||||||
|
Additional
paid-in capital
|
7,243,887 | 7,243,887 | ||||||
|
Retained
earnings (deficit)
|
- | (1,066,295 | ) | |||||
|
Deficit
accumulated during the exploration stage
|
(8,083,231 | ) | (6,678,912 | ) | ||||
|
Total
Stockholders' Deficit
|
(815,758 | ) | (477,734 | ) | ||||
|
Total
Liabilities and Stockholders' Deficit
|
$ | 602,413 | $ | 709,801 | ||||
The
accompanying notes are an integral part of these financial
statements.
F-3
|
PAXTON
ENERGY, INC.
|
||||||||||||
|
(AN
EXPLORATION-STAGE COMPANY)
|
||||||||||||
|
STATEMENTS
OF OPERATIONS
|
||||||||||||
|
For
the Period from
|
||||||||||||
|
June
30, 2004
|
||||||||||||
|
For
the Years Ended
|
(Date
of Inception)
|
|||||||||||
|
December
31,
|
through
|
|||||||||||
|
2009
|
2008
|
December
31, 2009
|
||||||||||
|
Oil
and gas revenues, net
|
$ | 17,581 | $ | 49,485 | $ | 347,600 | ||||||
|
Costs
and Operating Expenses
|
||||||||||||
|
Lease
operating expenses
|
17,565 | 47,439 | 133,248 | |||||||||
|
Impairment
loss on oil and gas properties
|
30,296 | 2,077,351 | 3,847,192 | |||||||||
|
Accretion
of asset retirement obligations
|
1,697 | 3,159 | 7,911 | |||||||||
|
General
and administrative expense
|
155,804 | 236,147 | 1,737,962 | |||||||||
|
Stock-based
compensation
|
- | - | 1,468,575 | |||||||||
|
Total
costs and operating expenses
|
205,362 | 2,364,096 | 7,194,888 | |||||||||
|
Loss
from operations
|
(187,781 | ) | (2,314,611 | ) | (6,847,288 | ) | ||||||
|
Other
income (expense)
|
||||||||||||
|
Interest
income
|
- | 368 | 63,982 | |||||||||
|
Change
in fair value of warrants
|
(756 | ) | - | (1,264 | ) | |||||||
|
Gain
on transfer of common stock from Bayshore Exploration,
L.L.C.
|
- | 24,000 | 24,000 | |||||||||
|
Interest
expense
|
(123,173 | ) | (73,147 | ) | (326,580 | ) | ||||||
|
Interest
expense from amortization of discount on secured convertible notes
and other debt
|
(25,806 | ) | (12,903 | ) | (996,081 | ) | ||||||
|
Total
other income (expense)
|
(149,735 | ) | (61,682 | ) | (1,235,943 | ) | ||||||
|
Net
Loss
|
$ | (337,516 | ) | $ | (2,376,293 | ) | $ | (8,083,231 | ) | |||
|
Basic
and Diluted Loss Per Common Share
|
$ | (0.01 | ) | $ | (0.10 | ) | ||||||
|
Basic
and Diluted Weighted-Average Common Shares
Outstanding
|
23,586,139 | 23,586,139 | ||||||||||
The
accompanying notes are an integral part of these financial
statements.
F-4
|
PAXTON
ENERGY, INC.
|
||||||||||||||||||||||||
|
(AN
EXPLORATION-STAGE COMPANY)
|
||||||||||||||||||||||||
|
STATEMENTS
OF STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||||||||||||||||||
|
For
the Period from June 30, 2004 (Date of Inception) through December 31,
2007 and
|
||||||||||||||||||||||||
|
For
the Years Ended December 31, 2008 and 2009
|
||||||||||||||||||||||||
|
Deficit
|
||||||||||||||||||||||||
|
Accumulated
|
Total
|
|||||||||||||||||||||||
|
Additional
|
Retained
|
During
the
|
Stockholders'
|
|||||||||||||||||||||
|
Common
Stock
|
Paid-In
|
Earnings
|
Exploration
|
Equity
|
||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
(Deficit)
|
Stage
|
(Deficit)
|
|||||||||||||||||||
|
Balance
- June 30, 2004 (Date of Inception)
|
- | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||
|
Stock-based
compensation for services of founder,
|
||||||||||||||||||||||||
|
June
2004, $0.01 per share
|
10,000,000 | 10,000 | 90,000 | - | - | 100,000 | ||||||||||||||||||
|
Issuance
of shares for cash, June 2004,
|
||||||||||||||||||||||||
|
$0.01
per share
|
5,000,000 | 5,000 | 45,000 | - | - | 50,000 | ||||||||||||||||||
|
Issuance
of shares for cash, June 2005, $0.35 per
|
||||||||||||||||||||||||
|
share,
less offering costs of $14,188
|
442,516 | 443 | 140,250 | - | - | 140,693 | ||||||||||||||||||
|
Issuance
of shares in connection with acquisition
|
||||||||||||||||||||||||
|
of
oil and gas property, June 2005, $0.75 per share
|
507,000 | 507 | 379,743 | - | - | 380,250 | ||||||||||||||||||
|
Stock-based
compensation for services during 2005,
|
||||||||||||||||||||||||
|
$0.35
per share
|
950,000 | 950 | 331,550 | - | - | 332,500 | ||||||||||||||||||
|
Issuance
of shares to the chief executive officer
|
||||||||||||||||||||||||
|
for
2005 compensation liability, January 2006,
|
||||||||||||||||||||||||
|
$0.35
per share
|
350,000 | 350 | 122,150 | - | - | 122,500 | ||||||||||||||||||
|
Issuance
of beneficial conversion features and
|
||||||||||||||||||||||||
|
shares
in conjunction with the issuance of secured
|
||||||||||||||||||||||||
|
convertible
notes and other debt, February 2006
|
223,800 | 224 | 967,244 | - | - | 967,468 | ||||||||||||||||||
|
Conversion
of secured convertible notes into
|
||||||||||||||||||||||||
|
shares,
April 2006, $0.35 per share
|
2,625,723 | 2,625 | 916,375 | - | - | 919,000 | ||||||||||||||||||
|
Issuance
of shares and 1,269,250 warrants for cash,
|
||||||||||||||||||||||||
|
less
offering and registration costs of $375,848 and
|
||||||||||||||||||||||||
|
derivative
liability of $1,467,704, April 2006,
|
||||||||||||||||||||||||
|
$1.25
per share
|
2,452,100 | 2,452 | 1,219,121 | - | - | 1,221,573 | ||||||||||||||||||
|
Issuance
of shares in connection with acquisition
|
||||||||||||||||||||||||
|
of
oil and gas properties, March 2006, $2.10 per
|
||||||||||||||||||||||||
|
share
|
100,000 | 100 | 209,900 | - | - | 210,000 | ||||||||||||||||||
|
Issuance
of shares in connection with acquisition
|
||||||||||||||||||||||||
|
of
oil and gas properties, June 2006, $2.35 per
|
||||||||||||||||||||||||
|
share
|
300,000 | 300 | 704,700 | - | - | 705,000 | ||||||||||||||||||
|
Stock-based
compensation for services, March
|
||||||||||||||||||||||||
|
2006,
$2.75 per share
|
25,000 | 25 | 68,725 | - | - | 68,750 | ||||||||||||||||||
|
Stock-based
compensation for options granted,
|
||||||||||||||||||||||||
|
July
2006
|
- | - | 522,825 | - | - | 522,825 | ||||||||||||||||||
|
Reclassification
of warrants subject to registration
|
||||||||||||||||||||||||
|
payment
arrangement from derivative liability,
|
||||||||||||||||||||||||
|
October
1, 2006
|
- | - | 1,067,704 | - | - | 1,067,704 | ||||||||||||||||||
|
Cumulative-effect
adjustment of change in accounting
|
||||||||||||||||||||||||
|
method
for registration payment arrangements,
|
||||||||||||||||||||||||
|
October
1, 2006
|
- | - | - | (1,066,295 | ) | - | (1,066,295 | ) | ||||||||||||||||
|
Stock-based
compensation for services, August
|
||||||||||||||||||||||||
|
to
November 2007, $0.46 to $0.90 per share
|
610,000 | 610 | 443,890 | - | - | 444,500 | ||||||||||||||||||
|
Net
loss
|
- | - | - | - | (4,302,619 | ) | (4,302,619 | ) | ||||||||||||||||
|
Balance
- December 31, 2007
|
23,586,139 | 23,586 | 7,229,177 | (1,066,295 | ) | (4,302,619 | ) | 1,883,849 | ||||||||||||||||
|
Common
stock contributed to the Company by
|
||||||||||||||||||||||||
|
Bayshore
Exploration L.L.C., September 2008
|
(300,000 | ) | (300 | ) | (23,700 | ) | - | - | (24,000 | ) | ||||||||||||||
|
Common
stock contributed to the Company by
|
||||||||||||||||||||||||
|
Chief
Operating Officer, September 2008
|
(300,000 | ) | (300 | ) | 300 | - | - | - | ||||||||||||||||
|
Common
stock issed in connection with the
|
||||||||||||||||||||||||
|
issuance
of notes payable, September 2008
|
600,000 | 600 | 38,110 | - | - | 38,710 | ||||||||||||||||||
|
Net
loss
|
- | - | - | - | (2,376,293 | ) | (2,376,293 | ) | ||||||||||||||||
|
Balance
- December 31, 2008, as previously reported
|
23,586,139 | 23,586 | 7,243,887 | (1,066,295 | ) | (6,678,912 | ) | (477,734 | ) | |||||||||||||||
|
Cumulative
effect of reclassification of warrants
|
- | - | - | 1,066,295 | (1,066,803 | ) | (508 | ) | ||||||||||||||||
|
Balance
- January 1, 2009, as adjusted
|
23,586,139 | 23,586 | 7,243,887 | - | (7,745,715 | ) | (478,242 | ) | ||||||||||||||||
|
Net
loss
|
- | - | - | - | (337,516 | ) | (337,516 | ) | ||||||||||||||||
|
Balance
- December 31, 2009
|
23,586,139 | $ | 23,586 | $ | 7,243,887 | $ | - | $ | (8,083,231 | ) | $ | (815,758 | ) | |||||||||||
The
accompanying notes are an integral part of these financial statements.
F-5
|
PAXTON
ENERGY, INC.
|
||||||||||||
|
(AN
EXPLORATION-STAGE COMPANY)
|
||||||||||||
|
STATEMENTS
OF CASH FLOWS
|
||||||||||||
|
For
the Period from
|
||||||||||||
|
June
30, 2004
|
||||||||||||
|
For
the Years Ended
|
(Date
of Inception)
|
|||||||||||
|
December
31,
|
through
|
|||||||||||
|
2009
|
2008
|
December
31, 2009
|
||||||||||
|
Cash
Flows From Operating Activities
|
||||||||||||
|
Net
loss
|
$ | (337,516 | ) | $ | (2,376,293 | ) | $ | (8,083,231 | ) | |||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
|
Impairment
loss on oil and gas properties
|
30,296 | 2,077,351 | 3,847,192 | |||||||||
|
Stock-based
compensation for services
|
- | - | 1,468,575 | |||||||||
|
Interest
expense from amortization of discount on secured convertible notes
and other debt
|
25,806 | 12,903 | 996,081 | |||||||||
|
Gain
on transfer of common stock from Bayshore Exploration,
L.L.C.
|
- | (24,000 | ) | (24,000 | ) | |||||||
|
Accretion
of asset retirement obligations
|
1,697 | 3,159 | 7,911 | |||||||||
|
Depreciation
expense
|
1,423 | 1,499 | 4,158 | |||||||||
|
Change
in fair value of warrants
|
756 | - | 1,264 | |||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
4,076 | 31,229 | 16,818 | |||||||||
|
Prepaid
expenses and other current assets
|
1,582 | 5,718 | (8,828 | ) | ||||||||
|
Accounts
payable and accrued liabilities
|
29,884 | 11,400 | 410,454 | |||||||||
|
Accrued
registration rights penalties and interest
|
111,689 | 60,738 | 264,858 | |||||||||
|
Net
Cash Used In Operating Activities
|
(130,307 | ) | (196,296 | ) | (1,098,748 | ) | ||||||
|
Cash
Flows From Investing Activities
|
||||||||||||
|
Acquisition
of oil and gas properties
|
- | (39,776 | ) | (1,916,515 | ) | |||||||
|
Purchase
of property and equipment
|
- | (1,137 | ) | (5,163 | ) | |||||||
|
Net
Cash Used In Investing Activities
|
- | (40,913 | ) | (1,921,678 | ) | |||||||
|
Cash
Flows From Financing Activities
|
||||||||||||
|
Proceeds
from the issuance of common stock, net of registration and offering
costs
|
- | - | 2,879,970 | |||||||||
|
Proceeds
from issuance of secured convertible notes and other debt, and
related beneficial conversion features and common stock, less amounts held
in attorney's trust account
|
76,810 | 147,522 | 854,332 | |||||||||
|
Proceeds
from related parties for issuance of secured convertible notes and
other debt, and related beneficial conversion features and common
stock
|
30,000 | 75,000 | 180,000 | |||||||||
|
Payment
of payable to Bayshore Exploration L.L.C.
|
- | (75,000 | ) | (489,600 | ) | |||||||
|
Payment
of principal on notes payable to stockholder
|
- | - | (325,000 | ) | ||||||||
|
Payment
of principal on note payable
|
- | - | (75,250 | ) | ||||||||
|
Net
Cash Provided By Financing Activities
|
106,810 | 147,522 | 3,024,452 | |||||||||
|
Net
Increase (Decrease) In Cash And Cash Equivalents
|
(23,497 | ) | (89,687 | ) | 4,026 | |||||||
|
Cash
and Cash Equivalents At Beginning Of Period
|
27,523 | 117,210 | - | |||||||||
|
Cash
and Cash Equivalents At End Of Period
|
$ | 4,026 | $ | 27,523 | $ | 4,026 | ||||||
Supplemental
Schedule of Noncash Investing and Financing Activities – Note 11
The
accompanying notes are an integral part of these financial
statements.
F-6
PAXTON
ENERGY, INC.
(AN
EXPLORATION STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and
Nature of Operations –
Paxton Energy, Inc. (the “Company”) was organized under the laws of the
State of Nevada on June 30, 2004. During August 2004, shareholder
control of the Company was transferred, a new board of directors was elected and
new officers were appointed. During June 2005, the Company commenced
acquiring working interests in oil and gas properties principally located in the
Cooke Ranch prospect in LaSalle County, Texas. The Company is engaged
primarily as a joint interest owner with Bayshore Exploration L.L.C. (Bayshore)
in the acquisition, exploration, and development of oil and gas properties and
the production and sale of oil and gas. Through December 31, 2009,
the Company has participated in drilling ten wells. Additionally, the
Company owns a working interest in the 8,843-acre balance of the Cooke Ranch
prospect and has the right to participate in a program to acquire up to a 75%
working interest in leases adjacent to the Cooke Ranch prospect, where, to date,
the Company has acquired an interest in leases on approximately 2,268 gross
acres. The Company is considered to be in the exploration stage due
to the lack of significant revenues. Bayshore is sufficiently capitalized such
that it is not a variable interest entity. As further discussed below
under “Business Condition”, on March 17, 2010, the existing members of the
Company’s board of directors resigned, new members were appointed to
the board of directors, and managerial control of the Company was transferred to
new management.
Business
Condition – The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has not had significant
revenue and is still considered to be in the exploration
stage. The Company incurred losses of $337,516 and $2,376,293
during the years ended December 31, 2009 and 2008, respectively, and used
$130,307 and $196,296 of cash in its operating activities during the years ended
December 31, 2009 and 2008, respectively. Through December 31, 2009,
the Company has accumulated a deficit during the exploration stage of
$8,083,231. At December 31, 2009, the Company has a working capital
deficit of $1,367,168, including current liabilities of
$1,380,690. The current liabilities are composed of accrued
registration right penalties and interest of $672,636, notes payable of
$330,000, accounts payable and accrued liabilities of $286,355, and payables to
Bayshore of $91,699. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern.
As
discussed above, the existing members of the Company’s board of directors
resigned on March 17, 2010 and new members were appointed. The plans
of the new board of directors include the following:
|
|
·
|
Commence
the placement of unsecured convertible promissory notes to raise up to
$300,000 for the payment of transaction expenses and providing of working
capital.
|
|
|
·
|
Pay
accrued interest on all outstanding notes payable through January 31, 2010
and obtain the extension of the due date of those notes to August 31,
2010.
|
|
|
·
|
Convert
the substantial majority of accrued registration right penalties and
interest into common stock at an exchange rate of $0.05 per
share.
|
|
|
·
|
Convert
all outstanding options and warrants to purchase 1,644,250 shares of
common stock into 1,644,250 shares of common
stock.
|
|
|
·
|
Issue
600,000 shares of common stock to two nominees to become members of the
board of directors.
|
F-7
PAXTON
ENERGY, INC.
(AN
EXPLORATION STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
|
|
·
|
With
shareholder approval, consummate a reverse stock split that will result in
a total of 10,000,000 post-split shares of common
stock.
|
|
|
·
|
Upon
completion of this restructuring as described above, issue 62,700,000
shares of post-split shares of common stock to one of the new members of
the board of directors in consideration of his transfer to the Company of
producing and non-producing oil and gas properties with a minimum net
tangible worth of $2,000,000 and an annual net cash flow of
$1,000,000.
|
|
|
·
|
Commence
the placement of secured convertible promissory notes to raise up to
$1,000,000 for the acquisition of oil and gas properties and providing of
working capital.
|
|
|
·
|
Issuance
of 3,300,000 post-split shares of common stock to an investment banker for
services provided in connection with these placements of convertible
promissory notes and other services related to this change of
control.
|
|
|
·
|
Issuance
of 1,250,000 post-split shares of the Company common stock to former
management and 250,000 post-split shares to an advisor as compensation for
services in connection with this change of
control.
|
Use of Estimates
– The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The
carrying value of oil and gas properties is particularly susceptible to change
in the near term. Changes could occur from obtaining additional
information regarding its fair value.
Property and
Equipment –
Property and equipment consist of office equipment. Useful lives
range from 3-5 years. Depreciation is charged to operations on a
straight-line basis. Property and equipment consisted of the
following at December 31, 2009 and 2008:
|
2009
|
2008
|
|||||||
|
Office
equipment
|
$ | 5,163 | $ | 5,163 | ||||
|
Less
accumulated depreciation
|
(4,158 | ) | (2,735 | ) | ||||
|
Property
and equipment, net
|
$ | 1,005 | $ | 2,428 | ||||
Depreciation
expense was $1,423 and $1,499 for the years ended December 31, 2009 and 2008,
respectively.
Oil and Gas
Properties – The Company follows the full cost method of accounting for
oil and gas properties. Under this method, all costs associated with
acquisition, exploration, and development of oil and gas reserves, including
directly related overhead costs and related asset retirement costs, are
capitalized. Costs capitalized include acquisition costs, geological
and geophysical expenditures, lease rentals on undeveloped properties, and costs
of drilling and equipping productive and nonproductive
wells. Drilling costs include directly related overhead
costs. Capitalized costs are categorized either as being subject to
amortization or not subject to amortization.
F-8
PAXTON
ENERGY, INC.
(AN
EXPLORATION STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
All
capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, will be amortized, once proved reserves are
determined to exist, on the unit-of-production method using estimates of proved
reserves. The Company has not yet obtained a reserve report because
the properties are considered to be in the exploration stage, management has not
completed an evaluation of the properties and the properties have had limited
oil and gas exploration and production. At December 31, 2009, there
were no capitalized costs subject to amortization. Investments in unproved
properties and major development projects are not amortized until proved
reserves associated with the projects can be determined or until impairment
occurs. If the results of an assessment indicate that the properties
are impaired, the amount of the impairment is added to the capitalized costs to
be amortized. Until properties subject to amortization are
identified, the amount of impairment is charged to operations.
In
addition, the capitalized costs are subject to a “ceiling test,” which basically
limits such costs to the aggregate of the “estimated present value,” based on
the projected future net revenues from proved reserves, discounted at 10% per
annum to present value of future net revenues from proved reserves, based on
current economic and operating conditions, plus the lower of cost or fair market
value of unproved properties.
The
Company has performed evaluations of its oil and gas properties during the
years ended December 31, 2009 and 2008, including as of December 31,
2009. As a result of these evaluations, management noted that
estimated future cash flows associated with the producing wells were not
sufficient to realize the capitalized costs relating to the leasehold interests
at December 31, 2009 or at December 31, 2008. The Company has also
considered the current market conditions in the evaluation of the properties for
impairment. Based on these evaluations, the Company recognized an
impairment loss on its oil and gas properties in the amounts of $30,296 and
$2,077,351 during the years ended December 31, 2009 and 2008,
respectively.
Sales of
proved and unproved properties are accounted for as adjustments of capitalized
costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in the
results of operations. Abandonments of properties are accounted for
as adjustments of capitalized costs with no loss recognized.
Impairment of
Long-Lived Assets – Long-lived assets, such as oil and gas properties and
property and equipment, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying value of an asset may not be
recoverable. Recoverability is measured by a comparison of the
carrying amount of an asset or asset group to estimated future undiscounted net
cash flows of the related asset or group of assets over their remaining
lives. If the carrying amount of an asset exceeds its estimated
future undiscounted cash flows, an impairment charge is recognized for the
amount by which the carrying amount exceeds the estimated fair value of the
asset. Impairment of long-lived assets is assessed at the lowest
levels for which there are identifiable cash flows that are independent of other
groups of assets. The impairment of long-lived assets requires
judgments and estimates. If circumstances change, such estimates
could also change.
Revenue
Recognition – All revenues are derived from the sale of produced crude
oil and natural gas. Revenue and related production taxes and lease
operating expenses are recorded in the month the product is delivered to the
purchaser. Payment for the revenue, net of related taxes and lease
operating expenses, is received from the operator of the well approximately 45
days after the month of delivery. Accounts receivable are stated at
the amount management expects to collect. Management provides for
probable uncollectible
amounts through a charge to earnings and a credit to an allowance based on its
assessment of the collectibility of the receivable. At December 31,
2009 and 2008, no allowance for doubtful accounts was deemed
necessary.
F-9
PAXTON
ENERGY, INC.
(AN
EXPLORATION STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
Stock-Based
Compensation
- The Company recognizes compensation expense for stock-based awards
expected to vest on a straight-line basis over the requisite service period of
the award based on their grant date fair value. The Company estimates
the fair value of stock options using a Black-Scholes option pricing model which
requires management to make estimates for certain assumptions regarding
risk-free interest rate, expected life of options, expected volatility of stock
and expected dividend yield of stock.
Income
Taxes – Provisions for income taxes are based on taxes payable or
refundable and deferred taxes. Deferred taxes are provided on
differences between the tax bases of assets and liabilities and their reported
amounts in the financial statements and tax operating loss
carryforwards. Deferred tax assets and liabilities are included in
the financial statements at currently enacted income tax rates applicable to the
period in which the deferred tax assets and liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for
income taxes. Assets and liabilities are established for uncertain
tax positions taken or positions expected to be taken in income tax returns when
such positions are judged to not meet the “more-likely-than-not” threshold based
on the technical merits of the positions. Estimated interest and penalties
related to uncertain tax positions are included as a component of general and
administrative expense.
Cash
Equivalents – The Company considers all highly liquid investments having
an original maturity of three months or less to be cash
equivalents.
Basic and Diluted
Loss per Common Share – Basic loss per share amounts are computed by
dividing net loss by the weighted-average number of shares of common stock
outstanding during each period. Diluted loss per share amounts are
computed assuming the issuance of common stock for potentially dilutive common
stock equivalents. All outstanding stock options and warrants are
currently antidilutive and have been excluded from the diluted loss per share
calculations. None of the 1,644,250 shares of common stock issuable
upon exercise of options and warrants were included in the computation of
diluted loss per share during the years ended December 31, 2009 or
2008.
Concentrations of
Risk – The Company’s operations to date have exclusively been
concentrated in the exploration and development of oil and gas properties,
principally in La Salle County, Texas. Substantially all oil and gas
properties have been acquired through agreements with Bayshore Exploration
L.L.C., which acquires and sells interests in the leaseholds, sells
participation interests in the leaseholds and wells, and manages the exploration
and development as operator of the properties. All revenue through
December 31, 2009, and all of the accounts receivable at December 31, 2009 and
2008, have been from the operator of the wells in production, which is Bayshore
Exploration, L.L.C.
Fair Values of
Financial Instruments – The carrying amounts reported in the balance
sheets for accounts receivable, receivable from attorney’s trust account,
accounts payable, payable to Bayshore Exploration, L.L.C., notes payable, notes
payable to related parties, accrued liabilities, accrued registration right
penalties and interest approximate fair value because of the immediate or
short-term maturity of these financial instruments. The asset
retirement obligation is stated at fair value computed using a discount rate
that approximates the current market rate. The fair value of certain
warrants is determined using the Black-Scholes option pricing
model.
F-10
PAXTON
ENERGY, INC.
(AN
EXPLORATION STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
Subsequent
Events – The Company has evaluated subsequent events through April 14,
2010, the date these financial statements were available to be
issued. See Note 12 to these financial statements for a description
of events occurring subsequent to December 31, 2009.
Recent Accounting
Pronouncements – In December 2008, the Securities and Exchange Commission
(SEC) announced that it had approved revisions to modernize the oil and gas
reserve reporting disclosures. The Company is still in the
exploration stage and has not yet obtained a study of oil and gas reserves or
determined that any proved oil or gas reserves exist. Accordingly,
the Company has not presented oil and gas reserve reporting
disclosures. At such time as the Company obtains a study of oil and
gas reserves, it will make the required reserve reporting disclosures in
accordance with the modernized reporting requirements prescribed by the
SEC.
In June
2009, the Financial Accounting Standards Board (FASB) issued changes to the
accounting for variable interest entities. These changes require a
qualitative approach to identifying a controlling financial interest in a
variable interest entity (VIE), and requires ongoing assessment of whether an
entity is a VIE and whether an interest in a VIE makes the holder the primary
beneficiary of the VIE. These changes are effective for annual reporting periods
beginning after November 15, 2009. These changes are not expected to have a
material impact on the Company’s current financial
statements. However, these changes could impact the accounting for
controlling financial interests in a VIE that the Company may acquire in the
future.
In
October 2009, the FASB issued a new accounting standard which amends guidance on
accounting for revenue arrangements involving the delivery of more than one
element of goods and/or services. This standard addresses the unit of accounting
for arrangements involving multiple deliverables and removes the previous
separation criteria that objective and reliable evidence of fair value of any
undelivered item must exist for the delivered item to be considered a separate
unit of accounting. This standard also addresses how the arrangement
consideration should be allocated to each deliverable. Finally, this standard
expands disclosures related to multiple element revenue arrangements. This
standard is effective for the Company beginning January 1, 2011. The
adoption of this standard is not expected to have a material impact on the
Company’s financial statements.
NOTE
2 – OIL AND GAS PROPERTIES
During
2005, the Company commenced participation in oil and gas exploration and
development activities with Bayshore in La Salle County,
Texas. During 2005, the Company acquired from Bayshore a 31.75%
working interest (23.8125% net revenue interest) in the Cooke Ranch prospect,
consisting of approximately 8,883 acres. Drilling of the Cooke No. 3
well was completed in November 2005 and drilling of the Cartwright No. 1 well
was commenced in 2005.
During
2006, the Company
entered into an agreement with Bayshore to acquire a 50% working interest in
approximately 3,200 acres of oil and gas leases and oil and gas lease options
located in La Salle County, Texas, for the purpose of oil and gas exploration
and production. The Company was also granted an option to increase
its working interest in the leases to 75% within 90 days of the date of the
agreement, on the same terms and conditions. On June 13, 2006, the
Company exercised its option to increase its working interest to 75% (56.25% net
revenue interest). To date, the Company has acquired a 75%working interest in
approximately 2,268 gross acres.
F-11
PAXTON
ENERGY, INC.
(AN
EXPLORATION STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
Additionally
during 2006, the Company entered into a Joint Exploration Agreement with
Bayshore covering the 8,883 acres of the Cooke Ranch prospect. The Exploration
Agreement provides for the Company and Bayshore to join together for the purpose
of drilling exploratory wells and performing studies of the Cooke Ranch prospect
acreage and acquiring additional prospective oil and gas properties on which to
explore for, develop, and produce oil and gas.
During
2006, the Company participated in the drilling of an additional five wells and
the completion of the Cartwright No. 1. Four of these wells, the
Cooke No. 2, the Cooke No. 4, the Cooke No. 5, and the Cartwright No. 2 wells,
are in the Cooke Ranch prospect. One additional well, the McDermand
No. 1 well, was in process of being drilled at December 31, 2006 in
participation with Howard Exploration in Jefferson County, Texas. Of
the wells drilled during 2006, the Cooke No. 4 and the Cartwright No. 2 wells
were dry, and were plugged and abandoned.
During
2007, the Company participated in drilling two additional wells and the
evaluation of the McDermand No. 1. The McDermand No. 1 well was
drilled to total depth, was determined to be dry, and was plugged and
abandoned. In January 2007, the Fiedler No. 1 well was drilled on
acreage outside of Cooke Ranch in which the Company has an
interest. The Company conveyed its 75% interest in the Fiedler No. 1
40-acre drilling location to Bayshore, subject to the Company’s right to earn an
18.75% working interest by paying for its share of completion
costs. Bayshore obtained drilling funding from other sources for 100%
of the costs of drilling to total depth. The Company exercised its
right to earn an 18.75% working interest and paid its share of completion costs
in February 2007. The Fiedler well commenced production in July
2007. In September 2007, drilling of the Cooke No. 6 was
completed. The Company has a 31.75% working interest in the Cooke
No. 6 well.
During
2008, Bayshore entered into a lease of 220 acres in LaSalle County, Texas within
the area of mutual interest covered by the Exploration Agreement dated March 1,
2006. The Company exercised its right to purchase it proportionate
share (31.75%) of that lease and paid Bayshore $17,463 for the Company’s share
of the lease bonus and related expenses. In connection with that new
lease, the Company entered into a participation in a farm out whereby the
Company retained approximately a 4% fully carried working interest in the
Cartwright No. 3 well drilled on the new lease by third parties.
In
accordance with an amendment to the Exploration Agreement, the Company sold a
21.75% working interest in the Cooke No. 6 well effective September 1, 2008 for
$164,993 and the proceeds were applied directly against the Company’s liability
to Bayshore. The proceeds from the sale of the working interest were
applied to reduce the carrying value of oil and gas properties, and no gain or
loss was recognized on the sale. Additionally, from the proceeds of
the issuance of notes payable described in Note 3 to these financial statements,
the Company paid Bayshore $75,000 against the Company’s liability to Bayshore
and Bayshore delivered to the Company 300,000 shares of restricted common
stock.
In
December 2008, the Fiedler No. 1 well was sold for salvage and the Company’s
portion of the proceeds ($16,406) was applied against its liability to
Bayshore.
During
the year ended December 31, 2009, costs totaling $30,296 were incurred in
connection with the recompletion of the Cooke No. 3 well. The costs
were capitalized, but deemed impaired.
At
December 31, 2009, four wells (Cooke No. 2, Cooke No. 3, Cooke No. 6, and
Cartwright No. 3) were producing and two wells (Cooke No. 5 and Cartwright No.
1) are shut in awaiting further evaluation.
F-12
PAXTON
ENERGY, INC.
(AN
EXPLORATION STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
As
described above, the Company has principally conducted its drilling operations
in the Cooke Ranch prospect. At December 31, 2009, given that the
Company is still considered to be in the exploration stage, a determination has
not been made about the extent of oil reserves that should be classified as
proved reserves. Consequently, the oil and gas properties have not
been subjected to amortization of the full cost pool.
During
2006, the Company determined that capitalized costs for wells drilled were in
excess of the present value of estimated future cash flows from those
wells. As a result, the Company recognized an impairment loss in the
amount of $1,739,545 during the year ended December 31, 2006. During
2008, the Company again determined that capitalized costs for wells drilled were
in excess of the present value of estimated future cash flows from those
wells. As a result, the Company recognized additional impairment of
$1,400,951 on wells drilled during the year ended December 31, 2008, reducing
their carrying value to zero at December 31, 2008. Other oil and gas
properties, including leasehold interest costs, exploration agreement costs, and
geological and geophysical costs, are carried at the lower cost or fair market
value. During the year ended December 31, 2008, management evaluated
the carrying value of these other oil and gas properties and recognized
impairment of $676,400, reducing their carrying value to $587,886, which
reflects management’s judgment of the current fair value of leases for similar
properties. During the year ended December 31, 2009, costs totaling
$30,296 related to the recompletion of the Cooke No. 3 well were capitalized,
but deemed impaired.
At
December 31, 2009 and 2008, oil and gas properties, net of impairment losses
recognized, consist of the following:
|
2009
|
2008
|
|||||||
|
Drilling
and exploration costs (unproved properties)
|
$ | - | $ | - | ||||
|
Leasehold
interest costs
|
505,663 | 505,663 | ||||||
|
Exploration
agreement cost
|
1,200 | 1,200 | ||||||
|
Geological
and geophysical costs
|
81,023 | 81,023 | ||||||
| $ | 587,886 | $ | 587,886 | |||||
NOTE
3 – NOTES PAYABLE
In
connection with the amendment of the Exploration Agreement, as discussed in Note
2 to these financial statements, or in anticipation of the issuance of the
promissory notes discussed below, Bayshore and the Chief Operating Officer of
the Company each transferred 300,000 shares of the Company’s common stock to
certain noteholders as an inducement to make loans to the Company. The
shareholders of the Company suffered no dilution by reason of the
transaction. For accounting purposes only, the transaction was
treated as if the shares were first contributed to the Company by the principal
shareholders and then reissued to the noteholders. The Company did not issue any
rights or consideration to the Chief Operating Officer and therefore recognized
the 300,000 shares received from him at no value. The common stock contributed
to the Company by Bayshore was recognized as a concession from a creditor, was
valued at its fair value of $24,000, or $0.08 per share, and, since the
liability to Bayshore was not increased, the concession was recognized a $24,000
gain from the transfer of the common stock from Bayshore.
F-13
PAXTON
ENERGY, INC.
(AN
EXPLORATION STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
On
September 3, 2008, the Company issued $200,000 of secured promissory notes and
600,000 shares of common stock, as described above, to three individuals. All of
these noteholders are unaffiliated with the Company. The
proceeds were allocated to the promissory notes and to the common stock issued
based on their relative fair values. The resulting allocation was $161,290 to
the promissory notes and $38,710 to the common stock. The allocation resulted in
a $38,710 discount to the promissory notes, which has been amortized as a
non-cash charge to interest expense over the term of the promissory notes based
on effective interest rate of 35.2%. At December 31, 2009 and 2008, the balance
of the unamortized discount was $0 and $25,806, respectively. On September 3,
2008, the Company also issued a $25,000 secured promissory note to a shareholder
and consultant to the Company and issued $75,000 of secured promissory notes to
two individuals who are relatives of the Company’s Chief Executive Officer. All
of the promissory notes bear interest at 12% per annum, payable
monthly. The promissory notes were due September 1, 2009 and are
secured by all of the assets of the Company. Interest has been paid
on these notes through April 30, 2009, but interest has not been paid since that
date. As of December 31, 2009, the Company owes $24,000 in accrued
interest on these notes, which is included in accrued liabilities in the
accompany balance sheet. The notes matured on September 1, 2009 and
have not been paid. Both the non-payment of interest and the
Company’s failure to repay the notes when they matured constitute events of
default under the notes. Upon the occurrence of an event of default,
the noteholders have the right to exercise their rights under the security
agreement associated with the notes. These rights include, among
other things, the right to foreclose on the collateral if
necessary. With the change in management control in March 2010,
accrued interest on these notes was paid through January 31, 2010 and the due
dates of the promissory notes were extended to August 31,
2010.
The
$300,000 of proceeds were deposited into the escrow account of an attorney.
During the year ended December 31, 2008, $140,000 of the proceeds was disbursed
to reduce liabilities payable to Bayshore and to others, $17,463 was paid to
Bayshore for an interest in an oil and gas lease, $60,000 was disbursed to the
Company for working capital, and $5,059 was paid for escrow and other fees. At
December 31, 2008, $77,478 of the proceeds remained in the attorney’s trust
account. During the year ended December 31, 2009, $45,750 of the
proceeds held in the attorney’s trust account was disbursed to reduce
liabilities payable to Bayshore and to others, $31,000 was disbursed to the
Company for working capital, and $60 was paid for other fees. At December 31,
2009, $668 remained in the attorney’s trust account. The amounts held
in the attorney’s trust account are not restricted and are available to the
Company; therefore, the transactions have been reflected at their gross amounts
in the statements of cash flows.
Between
July 9, 2009 and December 31, 2009, the Company’s two officers and directors
loaned the Company a total of $30,000 to provide working capital for the
immediate needs of the Company. These notes bear interest at 12%, are
not collateralized, and were due December 30, 2009. With the change
in management control in March 2010, accrued interest on these notes was paid
through January 31, 2010 and the due dates of the promissory notes were extended
to August 31, 2010.
F-14
PAXTON
ENERGY, INC.
(AN
EXPLORATION STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
Notes
payable consisted of the following at December 31, 2009 and 2008:
|
2009
|
2008
|
|||||||
|
$200,000
Notes payable; bearing interest at 12% per annum payable
|
||||||||
|
monthly;
due September 1, 2009; secured by all of the assets of
|
||||||||
|
the
Company; less $0 and $25,806, respectively, of unamortized
|
||||||||
|
discount
based on an imputed interest rate of 35.2%
|
$ | 200,000 | $ | 174,194 | ||||
|
Note
payable; bearing interest at 12% per annum payable
monthly;
|
||||||||
|
due September 1, 2009; secured by all of the assets of the
Company
|
25,000 | 25,000 | ||||||
|
Total
Notes Payable
|
$ | 225,000 | $ | 199,194 | ||||
|
Notes
payable to related parties; bearing interest at 12% per
annum
|
||||||||
|
payable
monthly; due September 1, 2009; secured by all of the
|
||||||||
|
assets
of the Company
|
$ | 75,000 | $ | 75,000 | ||||
|
Notes
payable to related parties; bearing interest at 12% per
annum
|
||||||||
|
payable
at maturity; due December 30, 2009; unsecured
|
30,000 | - | ||||||
|
Total
Notes Payable to Related Parties
|
$ | 105,000 | $ | 75,000 | ||||
NOTE
4 – REGISTRATION RIGHTS AGREEMENT
On April
27, 2006, the Company issued 2,452,100 shares of common stock and warrants to
purchase 1,226,050 shares of common stock for a period of five years at $3.00
per share in a private placement offering for cash in the amount of $3,065,125,
or $1.25 per share. The Company also issued 43,200 warrants to the
placement agent that are exercisable on similar terms. In connection
with the offering, the Company entered into a registration rights agreement
(referred to herein as a registration payment arrangement) that, among other
matters, provided that if the Company failed to file a registration statement by
June 30, 2006, and failed to meet certain other deadlines until the registration
statement was declared effective, the Company would be liable for the payment of
partial liquidated damages to the investors of 1% per month (up to a maximum of
18% or $551,723) based on the proceeds of the offering. As of
December 31, 2008, the total recorded liability for the accrued registration
rights penalties and interest was $560,947, which included accrued interest of
$126,481. During the year ended December 31, 2009, the Company
recognized additional registration rights penalties totaling $25,503 related to
certain rights that had previously been waived, but are now expected to be
settled in the same manner as the remaining rights. As of December
31, 2009, the total recorded liability for the accrued registration rights
penalties and interest was $672,636, which includes accrued interest of
$212,867.
NOTE
5 – ASSET RETIRMENT OBLIGATION
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 current asset retirement obligation represents the fair
value of the obligation to the Company for shutting in the associated wells as
determined using an expected cash flow approach with a credit-adjusted risk-free
rate between 8.50% and 13.5%. The associated asset retirement costs are
capitalized as part of the carrying amount of oil and gas properties and
subsequently allocated to expense
using the same method as used for oil and gas properties. Accretion expense is
recorded in each subsequent period to recognize the changes in the liability for
an asset retirement obligation either over the passage of time or due to
revisions to the amount of the original estimate of undiscounted cash flows. The
Company uses the designated credit-adjusted risk-free interest rate to calculate
the increase in liability due to the passage of time. During the
years ended December 31, 2009 and 2008, the Company recognized $1,697 and
$3,159, respectively, of accretion expense under this interest
method.
F-15
PAXTON
ENERGY, INC.
(AN
EXPLORATION STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
The
reconciliation of the asset retirement obligation for the years ended December
31, 2009 and 2008 is as follows:
|
Balance
at December 31, 2007
|
$ | 35,076 | ||
|
Liabilities
incurred
|
748 | |||
|
Accretion
expense
|
3,159 | |||
|
Disposal
of interests in wells
|
(4,463 | ) | ||
|
Balance
at December 31, 2008
|
34,520 | |||
|
Liabilities
incurred
|
- | |||
|
Accretion
expense
|
1,697 | |||
|
Balance
at December 31, 2009
|
$ | 36,217 |
NOTE
6 – FAIR VALUE OF WARRANTS
Effective
January 1, 2009 the Company adopted the provisions of new accounting
standards related to embedded derivatives, which apply to any
freestanding financial instruments or embedded features that have the
characteristics of a derivative, as defined by the accounting standards related
to derivatives and hedging, and to any freestanding financial instruments that
are potentially settled in an entity’s own common stock. As a result of adopting
these provisions, warrants to purchase 1,269,250 of the Company’s common stock
previously treated as equity pursuant to the derivative treatment exemption were
no longer afforded equity treatment. These warrants have an exercise
price of $3.00 and expire in April 2011. These warrants have full
ratchet antidilution provisions which provide for the reset of the exercise
price of the warrants if, among other things, the Company sells common stock or
grants options to purchase common stock at a price per share less than the
exercise price of the warrants. These reset provisions resulted in
derivative treatment under the new accounting standards. As such,
effective January 1, 2009 the Company reclassified the fair value of these
common stock purchase warrants, which have exercise price reset features, from
equity to liability status as if these warrants were treated as a derivative
liability since their date of issue in April 2006. On January 1, 2009, the
Company recorded, as a cumulative effect adjustment, $508 to deficit accumulated
during the exploration stage to recognize the fair value of such warrants on
such date and reclassified the effects of prior accounting for the warrants in
the amount of $1,066,295 from retained earnings (deficit) to deficit accumulated
during the exploration stage. The fair value of these common stock purchase
warrants increased to $1,264 as of December 31, 2009. As such, the Company
recognized a loss from the change in fair value of these warrants of $756 for
the year ended December 31, 2009.
F-16
PAXTON
ENERGY, INC.
(AN
EXPLORATION STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
These
common stock purchase warrants were initially issued in connection with our
April 2006 issuance of 2,452,100 shares of common stock. The common stock
purchase warrants were not issued with the intent of effectively hedging any
future cash flow, fair value of any asset, liability or any net investment in a
foreign operation. The warrants do not qualify for hedge accounting, and as
such, all future changes in the fair value of these warrants will be recognized
currently in results of operations until such time as the
warrants are exercised or expire. These common stock purchase warrants do not
trade in an active securities market, and as such, we estimate the fair value of
these warrants using the Black-Scholes option pricing model using the following
assumptions:
|
December
31, 2009
|
January
1, 2009
|
|||||||
|
Risk
free interest rate
|
0.68% | 0.84% | ||||||
|
Expected
life
|
1.3
Years
|
2.3
Years
|
||||||
|
Dividend
yield
|
- | - | ||||||
|
Volatility
|
306% | 140% | ||||||
Expected
volatility is based primarily on historical volatility. Historical volatility
was computed using weekly pricing observations for recent periods consistent
with the expected life of the warrants. Management believes this
method produces an estimate that is representative of expectations of future
volatility over the expected term of these warrants. The expected life is based
on the remaining term of the warrants. The risk-free interest rate is based on
U.S. Treasury securities with a term consistent with the remaining terms of the
warrants.
NOTE
7 – FAIR VALUE MEASUREMENTS
For asset
and liabilities measured at fair value, the Company uses the following hierarchy
of inputs:
|
•
|
Level
one — Quoted market prices in active markets for identical assets or
liabilities;
|
||
|
•
|
Level
two — Inputs other than level one inputs that are either directly or
indirectly observable; and
|
||
|
•
|
Level
three — Unobservable inputs developed using estimates and assumptions,
which are developed by the reporting entity and reflect those assumptions
that a market participant would
use.
|
Liabilities
measured at fair value on a recurring basis at December 31, 2009 are summarized
as follows:
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Fair
value of warrants
|
$ | - | $ | 1,246 | $ | - | $ | 1,246 | ||||||||
There
were no liabilities measured at fair value at December 31, 2008. As
further described in Note 6, the fair value of warrants was determined using the
Black-Scholes option pricing model.
Assets
measured at fair value on a non-recurring basis at December 31, 2009 and at
December 31, 2008 are summarized as follows:
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Oil
and gas properties
|
$ | - | $ | - | $ | 587,886 | $ | 587,886 | ||||||||
At
December 31, 2009 and 2008, the Company determined that capitalized costs for
wells drilled were in excess of the present value of estimated future cash flows
from those wells. As a result, the Company
recognized impairment on wells drilled, reducing their carrying value
to zero at December 31, 2009 and 2008. Other oil and gas properties,
including leasehold interest costs, exploration agreement costs, and geological
and geophysical costs, are carried at the lower cost or fair market
value. At December 31, 2008, management reduced their carrying value
to $587,886, which reflects management’s judgment of the current fair value of
leases for similar properties at both December 31, 2009 and
2008.
F-17
PAXTON
ENERGY, INC.
(AN
EXPLORATION STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
8 – RELATED PARTY TRANSACTIONS
In
connection with the acquisition of oil and gas properties and the rendering of
services to the Company during the years ended December 31, 2006 and 2005,
common stock was issued to Bayshore Exploration L.L.C. (Bayshore) or its owners,
who are now shareholders of the Company. The Company is engaged as a
joint interest owner with Bayshore in the acquisition, exploration, and
development of oil and gas properties and the production and sale of oil and
gas. Commencing August 2007, Bayshore became the operator on the
completed wells. For the years ended December 31, 2009 and 2008,
Bayshore was paid or was entitled to receive cash payments of $30,296 and
$101,344, respectively, in connection with the acquisition and development of
oil and gas properties. At December 31, 2009 and 2008, the Company
has a liability to Bayshore in the amount of $91,699 and $79,903, respectively,
for unpaid costs in connection with the acquisition, development, and operation
of oil and gas properties.
NOTE
9 – STOCK OPTIONS AND WARRANTS
The
Company accounts for stock options generally accepted accounting standards that
require the recognition of the cost of employee services received in exchange
for an award of equity instruments in the financial statements and is measured
based on the grant date fair value of the award. These standards also require
the stock option compensation expense to be recognized over the period during
which an employee is required to provide service in exchange for the award (the
vesting period), net of estimated forfeitures. The estimation of
forfeitures requires significant judgment, and to the extent actual results or
updated estimates differ from the current estimates, such resulting adjustments
are recorded in the period estimates are revised. No income tax
benefit has been recognized for stock-based compensation arrangements and no
compensation cost has been capitalized in the balance sheet. The
Company did not grant any stock options during either of the years ended
December 31, 2009 or 2008.
A summary
of stock option and warrant activity for the years ended December 31, 2009 and
2008 is presented below:
|
Weighted
|
|||||||||||||||
|
Weighted
|
Average
|
||||||||||||||
|
Options
|
Average
|
Remaining
|
Aggregate
|
||||||||||||
|
and
|
Exercise
|
Contractual
|
Intrinsic
|
||||||||||||
|
Warrants
|
Price
|
Life
|
Value
|
||||||||||||
|
Outstanding
at December 31, 2007
|
1,644,250 | $ | 3.00 |
3.4
years
|
$ | - | |||||||||
|
Granted
|
- | - | |||||||||||||
|
Outstanding
at December 31, 2008
|
1,644,250 | 3.00 |
2.4
years
|
$ | - | ||||||||||
|
Granted
|
- | - | |||||||||||||
|
Outstanding
at December 31, 2009
|
1,644,250 | $ | 3.00 |
1.4
years
|
$ | - | |||||||||
|
Exercisable
at December 31, 2009
|
1,644,250 | $ | 3.00 |
1.4
years
|
$ | - | |||||||||
F-18
PAXTON
ENERGY, INC.
(AN
EXPLORATION STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
10 – INCOME TAXES
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes and operating loss
carryforwards. The significant components of net deferred tax assets
and liabilities were as follows at December 31, 2009 and 2008:
|
2009
|
2008
|
|||||||
|
Deferred
tax asset - Operating loss carry forwards
|
$ | 1,686,695 | $ | 1,628,900 | ||||
|
Oil
and gas properties
|
544,046 | 494,987 | ||||||
|
Stock-based
compensation
|
177,761 | 177,761 | ||||||
|
Other
differences
|
758 | (7,247 | ) | |||||
|
Valuation
allowance
|
(2,409,260 | ) | (2,294,401 | ) | ||||
|
Net
Deferred Tax Asset
|
$ | - | $ | - | ||||
The
valuation allowance increased by $114,859 for the year ended December 31,
2009. The valuation allowance increased by $815,894 from operations
and decreased by $13,161 from the effects of the issuance of notes payable at a
discount for the year ended December 31, 2008.
The
following is a reconciliation of the income tax benefit computed at the
statutory federal rate of 34% to income tax expense included in the accompanying
financial statements for the years ended December 31, 2009 and
2008:
|
2009
|
2008
|
|||||||
|
Income
tax benefit at statutory rate
|
$ | (114,755 | ) | $ | (807,940 | ) | ||
|
Gain
on transfer of common stock from Bayshore
|
- | (8,160 | ) | |||||
|
Other
non-deductible expenses and adjustments
|
(104 | ) | 206 | |||||
|
Change
in valuation allowance
|
114,859 | 815,894 | ||||||
|
Income
Tax Expense
|
$ | - | $ | - | ||||
As of
December 31, 2009, the Company has operating loss carryforwards of approximately
$4,960,000. The operating losses expire, if not used, from 2025
through 2029. The utilization of the net operating losses are
dependent upon the tax laws in effect at the time such losses can be utilized. A
significant change of ownership control of the Company could cause the
utilization of net operating losses to be limited.
The
Company files tax returns in the U.S. Federal jurisdiction and in the state of
Texas. The Company is no longer subject to U.S. federal tax
examinations for tax years before and including December 31,
2006. During the years ended December 31, 2009 and 2008, the Company
did not recognize interest and penalties.
F-19
PAXTON
ENERGY, INC.
(AN
EXPLORATION STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
11 – SUPPLEMENTAL CASH FLOW INFORMATION
During
the year ended December 31, 2009, the Company had the following noncash
investing and financing activities:
|
|
·
|
Of
the transactions with Bayshore during the year ended December 31, 2009,
$30,296 was financed by Bayshore on open
account.
|
During
the year ended December 31, 2008, the Company had the following noncash
investing and financing activities:
|
|
·
|
Of
the transactions with Bayshore during the year ended December 31, 2008,
$61,569 was financed by Bayshore on open
account.
|
|
|
·
|
During
the year ended December 31, 2008, the Company and Bayshore negotiated
a reduction of the amounts owed to Bayshore on the original drilling costs
and the remaining liability on the Cooke No. 3 well by
$97,760.
|
|
|
·
|
During
the year ended December 31, 2008, the Company sold a 21.75% working
interest in the Cooke No. 6 well and 18.75% working interest in the
Fiedler No. 1 well through Bayshore, and the proceeds of $181,399 were
applied directly against the Company’s liability to
Bayshore.
|
|
|
·
|
An
asset retirement obligation was incurred and oil and gas properties were
increased by $748 as a result of wells
drilled.
|
|
|
·
|
Of
the proceeds from the notes payable during the year ended December 31,
2008, $77,478 are being held in an attorney’s trust
account.
|
NOTE
12 – SUBSEQUENT EVENTS
As
discussed in Note 1 to these financial statements, the existing members of the
Company’s board of directors resigned on March 17, 2010 and new members were
appointed. Subsequent to the change in managerial control of the
Company, the new directors have commenced the placement of unsecured convertible
promissory notes to raise up to $300,000 for the payment of transaction expenses
and providing of working capital. As of April 14, 2010, proceeds to
the Company from the placement of the debentures total $105,000.
Subsequent
to the change in managerial control of the Company, the new directors have paid
the accrued interest on all notes payable through January 31, 2010 and obtained
the extension of the notes to August 31, 2010. Additionally, the new
directors have settled certain accounts payable totaling $75,588 for the payment
of $32,000.
F-20
PAXTON
ENERGY, INC.
(AN
EXPLORATION STAGE COMPANY)
SUPPLEMENTAL
INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(Unaudited)
|
Capitalized
Costs Relating to Oil and Gas Producing Activities
|
||||||||
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Unproved
oil and gas properties
|
$ | 4,435,078 | $ | 4,404,782 | ||||
|
Less
impairment of oil and gas properties
|
(3,847,192 | ) | (3,816,896 | ) | ||||
|
Net
Capitalized Costs
|
$ | 587,886 | $ | 587,886 | ||||
|
Costs
Incurred in Oil and Gas Producing Activities
|
||||||||
|
For
the year ended December 31,
|
||||||||
| 2009 | 2008 | |||||||
|
Acquisition
of unproved properties
|
$ | - | $ | 17,463 | ||||
|
Exploration
costs
|
30,296 | 83,882 | ||||||
|
Total
costs and operating expenses
|
$ | 30,296 | $ | 101,345 | ||||
|
Results
of Operations from Oil and Gas Producing Activities
|
||||||||
|
For
the year ended December 31,
|
||||||||
| 2009 | 2008 | |||||||
|
Oil
and gas revenues, net
|
$ | 17,581 | $ | 49,485 | ||||
|
Lease
operating expenses
|
(17,565 | ) | (47,439 | ) | ||||
|
Accretion
of asset retirement obligations
|
(1,697 | ) | (3,159 | ) | ||||
|
Impairment
loss on oil and gas properties
|
(30,296 | ) | (2,077,351 | ) | ||||
|
General
and administrative (exclusive of corporate overhead)
|
(1,961 | ) | (2,774 | ) | ||||
|
Results
of operations before income taxes
|
(33,938 | ) | (2,081,238 | ) | ||||
|
Provision
for income taxes
|
- | - | ||||||
|
Results
of Oil and Gas Producing Operations
|
$ | (33,938 | ) | $ | (2,081,238 | ) | ||
Reserve
Quantities Information and Standardized Measures of Discounted Future Cash
Flows
The
Company’s is still in the exploration stage and has not yet obtained a study of
oil and gas reserves or determined that any proved oil or gas reserves
exist. Accordingly, the Company has not presented reserve quantities
information or standardized measures of discounted future cash
flows.
F-21