Attached files
| file | filename |
|---|---|
| EX-32.1 - Sterling Oil & Gas CO | form10q083110ex32-1.htm |
| EX-31.2 - Sterling Oil & Gas CO | form10q083110ex31-2.htm |
| EX-32.2 - Sterling Oil & Gas CO | form10q083110ex32-2.htm |
| EX-31.1 - Sterling Oil & Gas CO | form10q083110ex31-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
P QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: August 31, 2010
£ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number: 000-52959
Sterling Oil & Gas Company
(Exact name of small business issuer as specified in its charter)
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Nevada
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20-8999059
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(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification No.)
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121 W. Merino St.
PO Box 500
Upton , WY 82730
(Address of principal executive offices)
(307) 468-9368
(Issuer’s telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 P No £
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.
Large accelerated filer Accelerated filer
Non-accelerated filer P Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes £ No P
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 15,925,000 shares of common stock, $.00001 par value and 0 shares of preferred stock, $.00001 par value as of October 15, 2010
1
STERLING OIL & GAS COMPANY
INDEX
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Page
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PART 1.
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FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL STATEMENTS
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Condensed Balance Sheets as of August 31, 2010 (Unaudited) and February 28, 2010
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3
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Condensed Statements of Operations for the three months ended August 31, 2010 and 2009 and for the six months ended August 31, 2010 and 2009 and for the cumulative period from May 1, 2007 (Inception ) through August 31, 2010 (Unaudited)
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4
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Condensed Statements of Cash Flows for the six months ended August 31, 2010 and 2009 and for the cumulative period from May 1, 2007( Inception) through August 31, 2010 (Unaudited)
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5
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Condensed Statement of Shareholders’ Equity for the six months ended August 31, 2010 and for the cumulative period from May 1, 2007 (Inception) through August 31, 2010 (Unaudited)
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6
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Notes to Unaudited Condensed Financial Statements
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7
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ITEM 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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13
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ITEM 4T.
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CONTROLS AND PROCEDURES
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16
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PART II.
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OTHER INFORMATION
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17
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ITEM 1.
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Legal Proceedings
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17
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ITEM 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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17
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ITEM 3.
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Default Upon Senior Securities
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17
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ITEM 4.
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Submission of Matters to a Vote of Security Holders
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17
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ITEM 5.
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Other Information
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17
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ITEM 6.
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EXHIBITS
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17
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SIGNATURES
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17
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2
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ITEM 1.
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FINANCIAL STATEMENTS.
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Sterling Oil & Gas Company
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(An Exploration Stage Company)
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Condensed Balance Sheets
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August 31, 2010
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February 28,
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Assets
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(Unaudited)
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2010
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Current assets:
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Cash and cash equivalents
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$ | 73,605 | $ | 139,267 | ||||
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Total current assets
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73,605 | 139,267 | ||||||
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Oil and Gas Properties-Unevaluated Properties, full cost method (less $354,922 and $323,824 impairment, respectively)
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219,847 | 242,840 | ||||||
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Total Assets
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$ | 293,452 | $ | 382,107 | ||||
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Liabilities and Shareholders’ Equity
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Accounts payable
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$ | 1,689 | $ | 2,419 | ||||
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Shareholders’ equity:
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Preferred stock, $.00001 par value; 100,000,000 shares authorized, 0 shares
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issued and outstanding
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-- | -- | ||||||
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Common stock, $.00001 par value; 100,000,000 shares authorized,
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15,925,000 shares issued and outstanding
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at August 31, 2010 and February 28, 2010, respectively.
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159 | 159 | ||||||
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Additional paid-in capital
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2,284,332 | 2,282,582 | ||||||
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Deficit accumulated during development stage
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(1,992,728 | ) | (1,903,053 | ) | ||||
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Total shareholders’ equity
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291,763 | 379,688 | ||||||
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Total Liabilities and Shareholders’ Equity
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$ | 293,452 | $ | 382,107 | ||||
See accompanying notes to condensed financial statements.
3
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Sterling Oil & Gas Company
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(An Exploration Stage Company)
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Condensed Statements of Operations
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(Unaudited)
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For the Three Months ended
August 31,
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For the Six Months ended
August 31,
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May 1, 2007
(Inception)
Through
August 31,
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2010
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2009
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2010
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2009
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2010
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Revenues
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$ | -- | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||||
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Costs and expenses
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Personnel costs
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21,636 | 19,726 | 35,091 | 27,278 | 302,961 | |||||||||||||||
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Professional fees
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2,220 | 4,940 | 21,083 | 37,568 | 331,179 | |||||||||||||||
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Impairment and abandonment of unproved properties
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31,098 | 228,482 | 31,098 | 228,482 | 1,326,835 | |||||||||||||||
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Other general and administrative
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1,497 | 2,362 | 3,446 | 3,228 | 43,944 | |||||||||||||||
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Operating loss
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(56,451 | ) | (255,510 | ) | (90,718 | ) | (296,556 | ) | (2,004,919 | ) | ||||||||||
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Other income (expense)
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Interest income
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421 | 421 | 1,043 | 536 | 12,191 | |||||||||||||||
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Net loss
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$ | (56,030 | ) | $ | (255,089 | ) | $ | (89,675 | ) | $ | (296,020 | ) | $ | (1,992,728 | ) | |||||
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Basic and diluted loss per share
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$ | (0.00 | ) | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.02 | ) | ||||||||
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Weighted average common shares outstanding, basic and diluted
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15,925,000 | 15,925,000 | 15,925,000 | 15,925,000 | ||||||||||||||||
See accompanying notes to condensed financial statements.
4
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Sterling Oil & Gas Company
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(An Exploration Stage Company)
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Condensed Statements of Cash Flows
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(Unaudited)
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For the Six Months ended August 31,
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For the Six Months ended August 31,
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From May 1, 2007 (Inception) Through
August 31,
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2010
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2009
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2010
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Cash Flows From Operating Activities:
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Net Loss
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$ | (89,675 | ) | $ | (296,020 | ) | $ | (1,992,728 | ) | |||
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Adjustments to reconcile net loss to net cash used by operating activities:
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Contributed services
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1,750 | 13,150 | 56,050 | |||||||||
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Impairment and abandonment of unproved properties
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31,098 | 228,482 | 1,326,835 | |||||||||
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Changes in operating assets and liabilities:
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Trading securities
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-- | -- | -- | |||||||||
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Accounts payable
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(730 | ) | 310 | 1,689 | ||||||||
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Net cash(used in) operating activities
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(57,557 | ) | (54,078 | ) | (608,154 | ) | ||||||
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Cash flows from investing activities:
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Unevaluated oil and gas properties-additions
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(8,105 | ) | (8,104 | ) | (224,540 | ) | ||||||
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Refund of purchase deposit
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-- | -- | 80,856 | |||||||||
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Undeveloped oil and gas properties-sales
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-- | 183,000 | 391,233 | |||||||||
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Net cash provided by, (used in) investing activities
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(8,105 | ) | 174,896 | 247,549 | ||||||||
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Cash flows from financing activities:
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Proceeds from the sale of common stock
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-- | -- | 435,000 | |||||||||
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Payments for offering costs
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-- | -- | (790 | ) | ||||||||
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Net cash provided by financing activities
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-- | -- | 434,210 | |||||||||
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Net Increase (decrease) in cash and cash equivalents
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(65,662 | ) | 120,818 | 73,605 | ||||||||
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Cash and cash equivalents:
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Beginning of period
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139,267 | 66,321 | -- | |||||||||
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End of period
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$ | 73,605 | $ | 187,139 | $ | 73,605 | ||||||
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Noncash investing and financing transaction:
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Transfer of oil and gas properties from Big Cat
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$ | -- | $ | -- | $ | 1,794,231 | ||||||
See accompanying notes to condensed financial statements.
5
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Sterling Oil & Gas Company
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(An Exploration Stage Company)
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Condensed Statement of Shareholders’ Equity
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(Unaudited)
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Common Stock
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Shares
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Par value $.00001
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Additional Paid-in Capital
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(Deficit) Incurred During
Exploration Stage
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Total
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Balance, at May 1, 2007( Inception)
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-- | $ | -- | $ | -- | $ | -- | $ | -- | |||||||||||
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Stock issued for properties transferred from Big Cat at inception, May 1, 2007, $0.1794 per share
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10,000,000 | 100 | 1,794,131 | – | 1,794,231 | |||||||||||||||
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Private placement June 2007, $0.05 per share
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5,000,000 | 50 | 249,950 | – | 250,000 | |||||||||||||||
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Other-contributed services
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– | – | 30,800 | – | 30,800 | |||||||||||||||
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Other costs-issuance fees
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(790 | ) | (790 | ) | ||||||||||||||||
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Net loss
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– | – | – | (740,320 | ) | (740,320 | ) | |||||||||||||
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Balance, February 29, 2008
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15,000,000 | 150 | 2,074,091 | (740,320 | ) | 1,333,921 | ||||||||||||||
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Public offering August 2008, $0.20 per share
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325,000 | 3 | 64,997 | – | 65,000 | |||||||||||||||
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Public offering October 2008, $0.20 per share
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600,000 | 6 | 119,994 | -- | 120,000 | |||||||||||||||
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Other-contributed services
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-- | -- | 8,700 | -- | 8,700 | |||||||||||||||
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Net loss
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– | – | – | (750,266 | ) | (750,266 | ) | |||||||||||||
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Balance, February 28, 2009
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15,925,000 | 159 | 2,267,782 | (1,490,586 | ) | 777,355 | ||||||||||||||
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Other-contributed services
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-- | -- | 14,800 | -- | 14,800 | |||||||||||||||
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Net loss
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-- | -- | -- | (412,467 | ) | (412,467 | ) | |||||||||||||
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Balance, February 28,2010
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15,925,000 | 159 | 2,282,582 | (1,903,053 | ) | 379,688 | ||||||||||||||
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Other-contributed services
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-- | -- | 1,750 | -- | 1750 | |||||||||||||||
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Net loss
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-- | -- | -- | (89,675 | ) | (89,675 | ) | |||||||||||||
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Balance, August 31, 2010
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15,925,000 | $ | 159 | $ | 2,284,332 | $ | (1,992,728 | ) | $ | 291,763 | ||||||||||
See accompanying notes to condensed financial statements.
6
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1.
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Presentation, Organization and Nature of Operations:
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Presentation
The accompanying condensed financial statements of Sterling Oil & Gas Company (the “Company”) at August 31, 2010 and 2009 have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial statements pursuant to instructions to Form 10-Q and Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended February 28, 2010. In management’s opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation to make the Company’s financial statements not misleading have been included. The results of operations presented for the periods ended August 31, 2010 and 2009 are not necessarily indicative of the results to be expected for the full year. The February 28, 2010 balance sheet has been derived from the Company’s audited financial statements included in the Company’s annual report on Form 10-K for the year ended February 28, 2010.
Description of Operations
Sterling Oil & Gas Company (“Sterling”) is an independent energy company engaged in the exploration and acquisition of natural gas and crude oil prospects in the western United States. On May 1, 2007, Big Cat Energy Corporation (“Big Cat”) formed Sterling as a wholly owned subsidiary and transferred its unproved oil and gas properties, consisting of various mineral leases and related costs, to Sterling in return for 10 million shares of Sterling restricted common stock. On April 2, 2008, Big Cat spun off Sterling by distributing the 10 million shares it held pro rata to the Big Cat shareholders.
The Company is in the exploration stage in accordance with FASB Accounting Standard Codification (“ASC”) 915, Development Stage Entities. The Company has been in the exploration stage since inception and has yet to enter revenue-producing operations. Activities since its inception have primarily involved organization and development of the Company.
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2.
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Liquidity:
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Going Concern
As of August 31, 2010, the Company had working capital of $71,916 and shareholders’ equity of $291,763. Sterling has relied upon outside investor funds to maintain its operations and develop its business. Sterling’s plan for continuation anticipates continued funding from investors. This funding would be used for operations, for working capital, as well as business expansion during the upcoming fiscal year. The Company can provide no assurance that additional investor funds will be available on terms acceptable to the Company and there is substantial doubt about the ability of the Company to continue as a going concern.
Sterling’s ability to continue as a going concern is dependent upon raising capital through debt or equity financing and ultimately by producing revenue and achieving profitable operations. The Company can offer no assurance that it will be successful in its efforts to raise additional proceeds or achieve profitable operations. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business, and no adjustments have been made as a result of this uncertainty.
7
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3.
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Summary of Significant Accounting Policies:
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Use of Estimates
The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of any oil and gas reserves, assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various assumptions it believes to be reasonable under the circumstances. Although actual results may differ from these estimates under different assumptions or conditions, the Company believes that its estimates are reasonable.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts held in banks and highly liquid investments purchased with an original maturity of three months or less.
Concentrations of Credit Risk
The Company’s cash equivalents and short-term investments are exposed to concentrations of credit risk. The Company manages and controls this risk by investing these funds with major financial institutions.
Oil and Gas Properties
The Company follows the full cost method of accounting whereby all costs related to the acquisition and exploration of proved oil and gas properties are capitalized into a single cost center (“full cost pool”). Such costs include lease acquisition costs, geological and geophysical expenses, overhead directly related to exploration activities and costs of drilling both productive and non-productive wells. Proceeds from property sales are generally credited to the full cost pool without gain or loss recognition unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to these costs. A significant alteration would typically involve a sale of 25% or more of the proved reserves related to a single full cost pool. Generally, any such sale of unproved properties will also be recognized on a cost recovery basis with no gain or loss.
As of August 31, 2010, the Company does not have any proven oil and gas reserves and all of its properties are unproved. The costs of unproved properties will be withheld from the depletion base until such time as they are either developed or abandoned. Unproved properties are assessed at least annually by the Company for impairment. Impairment is estimated by the Company by applying factors based on historical experience and other data such as primary lease terms of the properties, average holding periods of unproved properties, and geographic and geologic data of groupings of individually insignificant properties and projects. Therefore, any impairment of said unproved properties would result in an expense to the Company.
Depletion of exploration and development costs and depreciation of production equipment is computed using the units of production method based upon estimated proved oil and gas reserves. Total well costs, if and when drilled, will be transferred to the depletable pool even when multiple targeted zones have not been fully evaluated. For depletion and depreciation purposes, relative volumes of oil and gas production and reserves are converted at the energy equivalent rate of six thousand cubic feet of natural gas to one barrel of crude oil.
8
Under the full cost method of accounting, capitalized oil and gas property costs, less accumulated depletion and net of deferred income taxes (full cost pool), may not exceed an amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and gas reserves less the future cash outflows associated with the asset retirement obligations that have been accrued in the balance sheet plus the cost, or estimated fair value, if lower of unproved properties and the costs of any properties not being amortized. Should the full cost pool exceed this ceiling, impairment is recognized. The present value of estimated future net revenues is computed by applying average monthly prices for the prior twelve months to estimated future production of proved oil and gas reserves as of period end, less estimated future expenditures to be incurred in developing and producing the proved reserves assuming the continuation of existing economic conditions.
Income Taxes
Income taxes are accounted for by recognizing deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax basis of assets, liabilities and carryforwards. Deferred tax assets are recognized for the expected future effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefit which, more likely than not, are not expected to be realized.
We adopted ASC 740, Income Taxes as of March 1, 2008. This topic provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements. Tax positions must meet a "more-likely-than-not" recognition threshold at the effective date to be recognized upon the adoption of ASC 740 and in subsequent periods. We have identified no significant uncertain tax positions as of February 28, 2010 or at August 31, 2010. The cumulative effect of adopting ASC 740 has not resulted in a liability on the balance sheet. The total amount of unrecognized tax benefits as of the date of adoption was zero.
We recognize interest and penalties related to uncertain tax positions in income tax expense. No interest and penalties related to uncertain tax positions were accrued as of February 28, 2010 or at August 31, 2010.
Risks and Uncertainties
Historically, oil and gas prices have experienced significant fluctuations and have been particularly volatile in recent years. Price fluctuations can result from variations in weather, levels of regional or national production and demand, availability of transportation capacity to other regions of the country and various other factors. Increases or decreases in prices received could have a significant impact on future results.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable and accounts payable. The fair market value of these financial instruments approximates or is equal to the book value.
In the first quarter of fiscal year 2009, the Company adopted ASC 820 Fair Market Measurement and Disclosures including the application of the statement to non-recurring, non-financial assets and liabilities. The adoption of ASC 820 did not have a material impact on the Company’s fair value measurements. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
9
Level 1- Quoted prices in active markets for identical assets or liabilities.
Level 2- Inputs, other than the quoted prices in active markets that are observable either directly or indirectly.
Level 3- Unobservable inputs based on the Company’s assumptions,
ASC 820 requires the use of observable market data if such data is available without undue cost and effect.
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Fair Value Measurements at Reporting Date Using
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||||
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Description
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August 31, 2010
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Quoted Prices in Active Markets for Identical Assets
(Level 1)
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Significant Other Observable Inputs
(Level 2)
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Significant Unobservable Inputs
(Level 3)
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Oil & gas properties-unevaluated properties
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$219,847
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$0
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$0
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$219,847
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Total
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$219,847
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$0
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$0
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$219,847
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Level 3 assets are comprised of unproved oil and gas properties. The Company has classified the fair value of the properties as a Level 3 due to the lack of available data to obtain market values for the unevaluated properties. The Company considered current gas prices and the remaining lease term as a basis for determining the reserve amount.
The following table sets for the reconciliation of fair market value of the impairment reserve classified as Level 3 for the six months ended August 31, 2010.
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Six Months Ended
August 31, 2010
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||||
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Balance February 28,2010
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$ | 242,840 | ||
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Delay rental payments
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8,105 | |||
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Impairment
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( 31,098 | ) | ||
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Balance August 31, 2010
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$ | 219,847 | ||
Net Loss Per Share
Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Contingently issuable shares are included in the computation of basic net income (loss) per share when the related conditions are satisfied. Diluted net income (loss) per share is computed using the weighted average number of common shares and potentially dilutive securities outstanding during the period. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive.
As of August 31, 2010 and 2009 the Company had 15,925,000 shares of common stock outstanding and warrants for the purchase of 3,425,000 shares. The warrants were excluded from the calculation of diluted earnings per share for both years, due to the fact that they were anti-dilutive.
10
Reclassifications
Certain amounts for the period from Inception (May 1, 2007) to August 31, 2010 have been reclassified to conform to the August 31, 2010 presentation. Such reclassifications had no effect on net loss.
Other Comprehensive Income
The Company does not have any material items of other comprehensive income for the six months ended August 31, 2010 or August 31, 2009. Therefore, total comprehensive income (loss) is the same as net income (loss) for these periods.
Recent Pronouncements
We have reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial condition or the results of our operations.
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4.
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Oil and Gas Property Acquisitions:
|
During the three months ended August 31, 2010 and 2009 the Company paid delay rentals on its Montana leases in the amount of $7,152.
During the three months ended August 31, 2009, the Company completed a review of its oil and gas leaseholds and elected not to pay delay rentals on certain leases in the Powder River Basin of Montana and therefore abandoned the leases. The effect of abandonment of these leases was a reduction of 9,991 net mineral acres to an ending 11,701 net mineral acres, which is considered a significant reduction in our oil and gas properties. As a result, the Company wrote off $152,321 against its impairment reserve and recorded an abandonment of unproved properties expense of $228,482 to reflect the reduction in acreage.
During the six months ended August 31, 2010 and 2009, the Company paid delay rentals of $8,105. The Company recorded non-cash impairment expense of $31,098 in the three months ended August 31, 2010.
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5.
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Related Party Transactions:
|
During the three months ended August 31, 2010 and 2009, certain officers of Big Cat Energy Corporation, an affiliated public company, performed part time management duties for the Company. The Company did not pay cash for these services; however, the Company recorded the services at a fair market value as consulting fees and additional paid-in capital. Contributed services were $700 for the three months ended August 31, 2010 compared $1,100 for the same period in 2009.
The amount of contributed services for the six months ended August 31, 2010 were $1,750 compared to $13,150 for the same period in 2009.
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6.
|
Shareholders’ Equity:
|
There was no equity sales transaction during the six months ended August 31, 2010 or 2009.
11
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7.
|
Income Taxes:
|
The federal net operating loss (NOL) carryforward of approximately $1,573,000 as of August 31, 2010 expires on various dates through 2030. Internal Revenue Code Section 382 places a limitation on the amount of taxable income which can be offset by NOL carryforwards incurred before a change in control. “Change in control” for these purposes generally means greater than a 50% change in ownership of the corporation. After a change in control, a loss corporation cannot deduct NOL carryforwards existing at the time of the change in control in excess of the Section 382 limitations. Due to these “change in ownership” provisions, utilization of NOL carryforwards may be subject to an annual limitation in future periods. We have not performed a Section 382 analysis, however approximately ninety percent of the present NOL was incurred during the fiscal years beginning March 1, 2007, and thereafter.
We have established a full valuation allowance against the deferred tax assets because, based on the weight of available evidence including our continued operating losses, it is more likely than not that all of the deferred tax assets will not be realized. Because of the full valuation allowance, no income tax expense or benefit is reflected on the statement of operations.
We adopted ASC 740, Income Taxes as of March 1, 2008. This topic provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements. Tax positions must meet a "more-likely-than-not" recognition threshold at the effective date to be recognized upon the adoption of ASC 740 and in subsequent periods. We have identified no significant uncertain tax positions as of February 28, 2010 or at August 31, 2010. The cumulative effect of adopting ASC 740 has not resulted in a liability on the balance sheet. The total amount of unrecognized tax benefits as of the date of adoption was zero.
No interest and penalties related to uncertain tax positions were accrued as August 31, 2010.
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8.
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Commitments and Contingencies:
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Environmental Issues– The Company is engaged in oil and gas exploration and may become subject to certain liabilities as they relate to environmental clean up of well sites or other environmental restoration procedures as they relate to the drilling of oil and gas wells and the operation thereof. If the Company acquires existing or previously drilled well bores, the Company may not be aware of what environmental safeguards were taken at the time such wells were drilled or during such time the wells were operated. Should it be determined that a liability exists with respect to any environmental clean up or restoration, the liability to cure such a violation could fall upon the Company. Management believes its properties, all of which are currently unevaluated, are operated in conformity with local, state and federal regulations. No claim has been made, nor is the Company aware of any uninsured liability which the Company may have, as it relates to any environmental clean up, restoration or the violation of any rules or regulations relating thereto.
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9.
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Subsequent Events
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Management has evaluated all activity of the Company and concluded that no subsequent events have occurred that would require disclosure.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Forward-Looking Statements
This Quarterly Report includes certain statements that may be deemed to be “forward-looking statements that reflect our current views with respect to future events and financial performance. All statements included in this Quarterly Report, other than statements of historical facts, address matters that we reasonably expect, believe or anticipate will or may occur in the future. Forward-looking statements may relate to, among other things:
our future financial position, including working capital and anticipated cash flow;
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the risks of the oil and gas industry, such as operational risks in exploring for, developing and producing crude oil and natural gas;
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market demand;
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risks and uncertainties involving geology of oil and gas deposits;
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the uncertainty of any reserve estimates and reserves life;
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the uncertainty of estimates and projections relating to any production, costs and expenses;
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potential delays or changes in plans with respect to exploration or development projects or capital expenditures;
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fluctuations in oil and gas prices;
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health, safety and environmental risks;
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uncertainties as to the availability and cost of financing; and
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the possibility that government policies or laws may change or governmental approvals may be delayed or withheld.
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Other sections of this Quarterly Report may include discussion of additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Our forward looking statements contained in this Quarterly Report are made as of the respective dates set forth in this Quarterly Report. Such forward-looking statements are based on the beliefs, expectations and opinions of management as of the date the statements are made. We do not intend to update these forward-looking statements, except as required by law. For the reasons set forth above, investors should not place undue reliance on forward-looking statements.
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Plan of Operations
For the fiscal year ending February 28, 2011, the Company’s plan of operation is to evaluate new oil and gas projects that are available to the Company and evaluate utilization of the Company’s existing Montana leasehold interests. The Company presently has 11,701 leasehold net mineral acres. Our ability to explore and develop our acreage or to acquire other acreage for development and to maintain existing acreage depends upon our ability to raise additional capital through equity fundraising and/or borrowing. Depending upon available funds, we may conduct our own field tests or exploration on one or more of our properties in Montana to determine the appropriate structure for possible development. We are in development stage operations and have not generated any revenues from current operations. We cannot guarantee we will be successful in our business operations. Our business is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources, the current lack of production, and possible cost overruns due to price and cost increases in services and operations. Further, we have no assurance that future financing will be available to us on acceptable terms to enable us to develop the business of the Company. If financing is not available on satisfactory terms, we may be unable to continue, develop or expand our operations. Equity financing could result in additional dilution to existing shareholders.
Results of Operations
Three Months Ended August 31, 2010 compared to the Three Months Ended August 31, 2009.
We reported a net loss for the three months ended August 31, 2010 of $56,030 compared to net loss of $255,089 for the period three months ended August 31, 2009. The net loss for the three months ended August 31, 2010 included a non-cash impairment expense of $31,098. The net loss for the three months ended August 31, 2009 included a non-cash loss on abandonment of leaseholds of $228,482.
We had personnel expense of $21,636 for the three months ended August 31, 2010 compared to $19,726 for the three months ended August 31, 2009.
Our other general and administrative costs were $1,479 during the three month period ended August 31, 2010 compared to $2,362 for the same period in 2009.
We had $2,220 of professional fess, $700 of which were non-cash, during the three months ended August 31, 2010, compared to $4,940, $1,100 of which were non-cash, for the three months ended August 31, 2009. The professional fees in 2010 and 2009 are for required SEC filings.
Six Months Ended August 31, 2010 compared to the Six Months Ended August 31, 2009
We reported a net loss for the six months ended August 31, 2010 of $89,675 compared to net loss of $296,020 for the six months ended August 31, 2009. The net loss for the six months ended August 31, 2010 included a non-cash impairment expense of $31,098. The net loss for the six months ended August 31, 2009 included a non-cash loss on abandonment of leaseholds of $228,482.
We had personnel expense of $35,091 in the six months ended August 31, 2010 compare to $27,278 for the six months ended August 31, 2009.
Our other general and administrative costs were $3,446 during the six month period ended August 31, 2010. There was $3,228 of general and administrative expense for the six months ended August 31, 2009.
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We had $21,083 of professional fess during the six months ended August 31, 2010, compared to $37,568 of professional fees for the six months ended August 31, 2009. The professional fees are for required SEC filings.
Liquidity and Capital Resources
As of August 31, 2010, we had working capital of $71,916, and it is uncertain whether this amount will be sufficient to fund operations. Therefore, we may seek additional sources of capital for the coming year.
For the six months ended August 31, 2010, we used net cash from operations of $57,557. Cash used in operations was primarily a result of our net loss offset by the non-cash impairment expense of $31,098, compared to cash used in operations of $54,078 for the six months ended August 31, 2009 which was primarily due to our net loss offset by non cash loss on leaseholds of $228,482.
For the six months ended August 31, 2010, cash used by investing activities was $8,105, for the payment of delay rentals, compared to cash provided by investing activities was $174,896 for the six months ended August 31, 2009, primarily from the sale of the Company’s interest in Cedar Resources.
There were no net cash effects from financing activities for the six months ended August 31, 2010 or 2009.
Financial Instruments and Other Information
As of August 31, 2010 we had cash and cash equivalents, accounts payable and accrued liabilities, which are each carried at approximate fair value due to the short maturity date of those instruments. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments.
Critical Accounting Polices and Estimates
Use of Estimates in the Preparation of Financial Statements
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of any oil and gas reserves, assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various assumptions it believes to be reasonable under the circumstances. Although actual results may differ from these estimates under different assumptions or conditions, the Company believes that its estimates are reasonable.
Oil and Gas Properties
The Company follows the full cost method of accounting whereby all costs related to the acquisition and exploration of oil and gas properties are capitalized into a single cost center (“full cost pool”). Such costs include lease acquisition costs, geological and geophysical expenses, overhead directly related to exploration activities and costs of drilling both productive and non-productive wells. Proceeds from property sales are generally credited to the full cost pool without gain or loss recognition unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to these costs. A significant alteration would typically involve a sale of 25% or more of the proved reserves related to a single full cost pool. Generally, any such sale of unproved properties will also be recognized on a cost recovery basis with no gain or loss.
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As of August 31, 2010, the Company does not have any proven oil and gas reserves and all of its properties are unproved. The costs of unproved properties will be withheld from the depletion base until such time as they are either developed or abandoned. Unproved properties are assessed at least annually by the Company for impairment. Impairment is estimated by the Company by applying factors based on historical experience and other data such as primary lease terms of the properties, average holding periods of unproved properties, and geographic and geologic data of groupings of individually insignificant properties and projects. Therefore, any impairment of said unproved properties would result in an expense to the Company.
Depletion of exploration and development costs and depreciation of production equipment is computed using the units of production method based upon estimated proved oil and gas reserves. Total well costs, if and when drilled, will be transferred to the depletable pool even when multiple targeted zones have not been fully evaluated. For depletion and depreciation purposes, relative volumes of oil and gas production and reserves are converted at the energy equivalent rate of six thousand cubic feet of natural gas to one barrel of crude oil.
Under the full cost method of accounting, capitalized oil and gas property costs, less accumulated depletion and net of deferred income taxes (full cost pool), may not exceed an amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and gas reserves less the future cash outflows associated with the asset retirement obligations that have been accrued in the balance sheet plus the cost, or estimated fair value, if lower of unproved properties and the costs of any properties not being amortized. Should the full cost pool exceed this ceiling, impairment is recognized. The present value of estimated future net revenues is computed by applying monthly average prices for the prior twelve months to estimated future production of proved oil and gas reserves as of period end, less estimated future expenditures to be incurred in developing and producing the proved reserves assuming the continuation of existing economic conditions.
Risks and Uncertainties
Historically, oil and gas prices have experienced significant fluctuations and have been particularly volatile in recent years. Price fluctuations can result from variations in weather, levels of regional or national production and demand, availability of transportation capacity to other regions of the country and various other factors. Increases or decreases in prices received could have a significant impact on future results.
Recent Pronouncements
We have reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial condition or the results of our operations.
Off-Balance Sheet Arrangements
From time-to-time, we may enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As of August 31, 2010 and February 28, 2010, there were no off–balance sheet arrangements.
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ITEM 4T.
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CONTROLS AND PROCEDURES
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The Company’s Chief Executive Officer and the Principal Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of August 31, 2010. Based on this evaluation, the Chief Executive Officer and Principal Financial Officer concluded that, as of August 31, 2010, the Company’s disclosure controls and procedures are effective.
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There were no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended August 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting,.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings None
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds None
ITEM 3. Defaults Upon Senior Securities None
ITEM 4. Submission of Matters to a Vote of Security Holders None
ITEM 5. Other Information None
ITEM 6. EXHIBITS.
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Exhibits
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Document Description
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31.1
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Section 302 Certification of Principal Executive Officer.
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31.2
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Section 302 Certification of Principal Financial Officer.
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32.1
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Section 906 Certification of Chief Executive Officer.
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32.2
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Section 906 Certification of Chief Financial Officer.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities and Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 12th day of October, 2010.
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Sterling Oil & Gas Company
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BY:
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/s/ Timothy Barritt
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Timothy Barritt, President and Principal Executive Officer
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BY:
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/s/ Richard G. Stifel
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Richard G. Stifel, CFO and Principal Financial Officer
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