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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - Surge Global Energy, Inc.ex_31-1.htm
EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C. 1350 - Surge Global Energy, Inc.ex_32-1.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM 10-K
 
 x
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010

OR

o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________ TO __________.

Commission File Number 0-24269
___________________

SURGE GLOBAL ENERGY, INC.
(Exact name of registrant as specified in its charter)

DELAWARE
(State or other jurisdiction of incorporation or organization)
34-1454529
(I.R.S. Employer Identification No.)
   
74-333Highway 111, Suite 101, Palm Desert CA 92260
(Address of principal executive offices)
92260
(Zip Code)

Registrant's telephone number, including are code:  (760) 610-6758

Securities registered pursuant to Section 12(b) of the Act:  

Title of each class
 
Name of each exchange on which registered
NONE
Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value
 
(Title of Class)
 
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 Exchange Act. Yes  x     No  o

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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.  Yes  x       No  o
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  o        No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K    o
 
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     o
 
Accelerated file     o
       
 
Non-accelerated filer     o  (Do not check if a smaller reporting company)
 
Smaller reporting company     x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  x

The aggregate market value of the registrant’s approximate 22,100,000 shares of common stock held by non-affiliates computed by reference to the closing sales price of such common equity (i.e. $0.05) as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2010) was $1,105,000.

       The number of shares outstanding of the registrant’s common stock at March 31, 2011 was 35,887,387.   

 
 
 


 
 
INDEX

 
Page
   
1
     
PART I
 
1
1
 5
12
13
13
     
PART II
   
14
15
15
19
19
21
21
22
     
PART III
   
23
27
31
33
33
     
PART IV
   
34
 
 
 

 

 
This Annual Report on Form 10-K, including exhibits thereto, contains 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. These forward-looking statements are typically identified by the words “anticipates,” “believes,” “expects,” “intends,” forecasts,” estimates,” “plans,” “future,” “strategy,” or words of similar meaning. In particular, the following types of statements are forward-looking:

 
statements regarding our potential growth opportunities;
 
statements regarding our ability to generate revenues from our operations;
 
statements regarding our anticipated exploration work;
 
statements regarding our ability to extract, refine, sell oil or sell oil properties;
 
statements regarding our ability to comply or continue to comply with governmental regulations; and
 
statements regarding our estimated future costs and expenses.

Various factors could cause actual results to differ materially from those expressed in the forward-looking statements, including those described in “Risk Factors” in this Form 10-K. The company assumes no obligations to update these forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors, except as required by law.
 

BUSINESS

General Overview
 
Surge Global Energy, Inc. is a Delaware corporation dually traded on the OTCQX Bulletin Board under the symbol “SRGG.” Our principal executive offices are located at 74-333 Highway 111, Suite 101, Palm Desert, CA 92260. Our telephone number is (760) 610-6758. Our fax number is (760) 766-2990. We maintain a website at www.SurgeGlobalEnergy.com.
 
We are an oil and gas exploration and development company. Our primary objective is to identify, acquire and develop working interests in oil and gas projects. We intend to develop oil and gas properties and explore for oil and gas, focusing mainly in the United States and Canada. We will engage in oil and gas exploration, drilling of new and development wells, and acquiring and/or leasing producing properties as the most prudent ways to generate income and increase shareholder value to the extent that our limited cash resources will permit us to accomplish this. Our strategic initiative is to pursue potential high rate of return projects with reduced risk and explore ways to maximize values from our investments in Andora Energy Corporation, 11Good Energy, Inc. warrants, and a production payment receivable relating to an oil and gas property in Oklahoma, as described hereafter.
 
All amounts are stated in U.S. dollars unless otherwise indicated.

Corporate History

We were incorporated as The Havana Group, Inc. on November 25, 1997 under the laws of the state of Delaware. Our initial business was the sale of pipes and tobacco products and we completed our initial public offering in May 1998. On October 13, 2004, Surge’s name was changed from The Havana Group, Inc to Surge Global Energy, Inc. and the symbol was changed to “SRGG”.

On December 31, 2003, our pipe and tobacco inventory was liquidated and the tangible and intangible assets related to that business were sold off.  In December 2004, we completed the restructuring of our balance sheet and the cancellation of outstanding Preferred A and Preferred B shares and indebtedness related to the discontinued tobacco and pipe business.

From 2005 through 2010, we engaged in a series of acquisition, divestiture and capital transactions in an effort to expand our business and provide the basis for long-term shareholder returns from oil and gas exploration and development.  Because our operations from 2005 forward have not generated any revenue, we have used our equity and the value of interests in other entities that we have controlled from time to time, to attempt to develop business opportunities we believed would be advantageous.  Our management has also undergone a number of changes during this period.

Because we are an exploration stage company, the inability to develop successful oil and gas prospects has reduced our working capital and created the need for additional strategic transactions to raise capital and liquidate assets.
 
 
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                        Finding new strategic transactions along with management and board changes and several litigation matters, the majority of which have now been settled, have occupied a great deal of our efforts over the last four years.  

Recent Developments

                        On October 1, 2010 the Company entered into an asset purchase agreement to acquire all of the assets of SEC-Compliance, Inc. for a total of $350,000, of which $100,000 was payable in cash, of which $40,000 was paid initially and the balance was due $10,000 per month monthly thereafter, plus 5,000,000 shares of Surge Global Energy common stock valued at $250,000. Concurrent with this purchase, the Company entered into an employment agreement with David McGuire for two years at a salary of $10,000 per month and reimbursement of expenses. Subsequently, Mr. McGuire assigned 100% of his stock interest in SEC-Compliance to the Company for nominal consideration. All assets previously purchased by the Company from SEC-Compliance were assigned to this corporation.

                        As of December 31, 2010, the Company and Mr. McGuire and McGuire Consulting Services, Inc. ("MCS") entered into a rescission agreement pursuant to which Mr. McGuire agreed to resign from Surge's board, return all of his 5,000,000 shares of the Company's Common Stock for cancellation, and cancel his employment agreement without penalty. Surge, in turn, transferred all assets and client lists of SEC-Compliance, Inc. and assigned all liabilities of SEC-Compliance to MCS all effective as of December 31, 2010.

                        MCS also agreed to indemnify Surge from any liabilities or claims related to SEC-Compliance, Inc. for a two-year period. Surge also agreed to make a one-time payment of $10,000 to MCS upon execution of the settlement agreement, receipt of the 5,000,000 Surge shares, resignation by Mr. McGuire from the Surge board and option cancellation of 400,000 stock options held by Mr. McGuire.

                        A total of $50,000.00 was paid agreement to Mr. McGuire in conjunction with the asset purchase agreement and $45,000.00 was paid pursuant to his consulting agreement the fourth quarter of 2010, which amounts the Company expects to recover from the receipt of shares in another company pursuant to the terms of the Rescission Agreement.

Oil and Gas Drilling Activities

                        In June 2008, we began the process of acquiring via lease oil and gas properties for drilling and development. Three properties were leased in 2008 and one in 2009. The two of the three properties acquired in 2008 were written off due to insufficient reserves. The first was drilled in November, 2008 in Crane County, Texas and was plugged and abandoned and fully impaired in 2008. The second well (Qualmay #1) commenced drilling in November, 2008 in Park County, Wyoming. This well was completed with natural gas and oil results, but after two fracture procedures the well was deemed commercially unsuccessful and was shut in. The Qualmay #1 was fully impaired for financial statement purposes in 2009 due to the lack of commercial reserves. The Company was successful in selling our 35% working interest\this property in December, 2010 and recovered approximately $39,000 of costs expensed previously. The third lease, on 2,500 acres in Pine Valley, Nevada was acquired in July, 2008 and was the lease expired and written off in 2010. The cost of drilling this Nevada well to explore this property was greater than the Company’s financial ability to complete it and we were unable to find partners or sell the property prior to the lease exploration period.

                        In December, 2009, the Company entered into an equipment lease agreement with Mandalay Energy, Inc. (“Mandalay”) to provide funds for the workover of four (4) oil and gas wells with an option to workover six (6) additional wells on a 40 acre lease located in Pawnee County, Oklahoma at a cost to the Company of $300,000. Shortly after workover operations commenced the operations were delayed by a dispute over leasehold rights by a new owner of the lease. Litigation between the landowner, and a cross complaint by Mandalay, has stopped development of the property until each party’s legal right are determined.

                        In 2010, the Company entered into a written settlement agreement with Mandalay for the recovery of $354,000 plus legal fees, none of which has been received pending the outcome of the above mentioned litigation. To minimize our exposure in this property, the Company also entered into a written agreement with CAVU Resources, Inc. in September, 2010 which provides for the return to us $130,000 of this investment, plus interest, which amount is expected to be paid in June, 2011. When received, this payment will in turn offset a similar amount of the settlement owed to us by Mandalay..
 
The Company has taken an impairment of $85,000 in the year ended December 31, 2010 to reflect our revised estimate of the net realizable value which will be ultimately recoverable from this property.

                        During 2010, the Company had opportunities to invest in new oil and gas properties. However, the Company was unable to receive additional financing to invest in any new projects. The Company's ability to invest in future oil and gas transactions is dependent upon our ability to obtain additional financing on terms satisfactory to us, if at all and/or liquidate our investment in Andora on terms satisfactory to us, if at all. See "Risk Factors."

 
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 Andora Energy Corporation (formerly Signet Energy)

In 2005, we formed a Canadian subsidiary that entered into an agreement to drill wells in the Sawn Lake Property located in Northern Alberta, Canada with Deep Well Oil & Gas, Inc. (“Deep Well”) and Northern Alberta Oil, Ltd. (“NAOL”).  In November 2005 that subsidiary, renamed Signet Energy, Inc. (“Signet”) was reorganized.  Surge issued 5,100,000 shares of its common stock to former Signet officers, directors and certain shareholders, and transferred shares of Signet to Deep Well and NAOL.  Surge retained 10,500,000 shares of Signet after the foregoing transaction (approximately 49%) of Signet on a non-diluted basis.  As a result, we became a minority shareholder in Signet, and obtained leases of oil and gas properties from Deep Well and NAOL.  In July 2006, our interest in Signet was further diluted by the issuance of additional equity by Signet.  On September 17, 2007, Signet combined with Andora Energy Corporation (“Andora”), resulting in further dilution of our interest in the combined entity to approximately 5.6% of the fully diluted shares of Andora.  
  
As a result of the dismissal of the Dynamo lawsuit and a settlement agreement with Andora dated February 2, 2010, 375,000 Andora shares were paid to Andora in full payment of all outstanding claims of approximately $560,000 owed Andora for legal fees.  
      
Andora is a privately owned oil and gas company of which 53.4% is owned and controlled by Pan Orient Energy Corp., a Canadian energy company listed on the TSX Venture Exchange.  After the foregoing transactions, we currently own approximately 5.1% of Andora on a fully diluted basis. For a more detailed description of this series of transactions, see Note B to our Consolidated Financial Statements, “Investment in Andora.”

As of December 31, 2010, we owned a total of 3,214,832 shares in Andora valued at $3,276,739 for financial statement purposes ($1.02 per share).

North Peace Energy Corp. and related transactions

On March 2, 2007, Cold Flow Energy ULC (“Cold Flow”), a Canadian subsidiary of our 1294697 Alberta Ltd. subsidiary (also a Canadian company, formed in order to facilitate the transaction at the advice of Canadian tax counsel), acquired all of the outstanding shares of Peace Oil Corp (“Peace Oil”), another Canadian company.  Cold Flow paid consideration valued at CDN$16,620,000 in cash, promissory notes and exchangeable shares of Cold Flow preferred stock (the “Exchangeable Shares”).  
 
At that time, each Exchangeable Share could be exchanged for two shares of our common stock for five years from the closing subject to certain redemption rights of Surge.  We also issued a warrant to purchase 1,000,000 shares of our common stock to 1304146 Alberta Ltd. at an exercise price of $1.00 per share subject to certain contingencies which remains outstanding.  Peace Oil was an oil and gas exploration and development company, and at the time held an undivided 30% working interest in 135 square miles (86,400 acres) of oil sands leases in the Red Earth area of Alberta, Canada (the “Red Earth Leases”).

On June 28, 2007, the Company and Peace Oil sold certain assets of Peace Oil to North Peace Energy Corp., a Canadian oil sands company listed on the TSX Venture Exchange (“North Peace”), including the Red Earth Leases.  The aggregate consideration was approximately CDN$20,000,000, consisting of CDN$15,000,000 in cash and CDN$5,000,000 in common shares of North Peace at an agreed price of CDN$2.20 per share (the “North Peace Transaction”).  Since 2007, we have utilized the proceeds from the sale of North Peace stock to continue our operations in the oil and gas business.  

In December 2007, we determined that we had incurred Canadian tax liability estimated at $5.281 million as June 30, 2007 related to these transactions and as a result restated our June 30, 2007 and September 30, 2007 financial reports.   In June, 2008, we sold our Peace Oil Corp subsidiary and thereby mitigated that tax liability at a cost of approximately $1,573,000, which amount has been included in the financial statements as an expense of sale of Peace Oil Corp. See “Risk Factors.”
 
In June and July 2008, the Company exchanged a total of 584,929 North Peace Energy shares (NPE) for all of the outstanding Cold Flow Exchangeable shares and 3,689,617 common shares of the Company, leaving a balance of North Peace shares owned from the North Peace transaction at 1,739,129 shares, or 3.1% of North Peace as of December 31, 2008.  For financial statement purposes the Company recorded a realized gain of $57,638 and a net unrealized loss on the investment in NPE shares which are held as securities available-for-sale of $1,008,121 for the year ended December 31, 2008.
 
In the year ended December 31, 2010 we sold 1,402,501 shares of North Peace for working capital purposes for total proceeds of $277,373 and a loss on sales of $104,633.  In the year ended December 31, 2009, we sold a total of 336,628 North Peace Energy shares for total proceeds of $155,799 and a loss on sales of $120,237. As a result, the Company no longer owns any North Peace shares.  For a more detailed description of this series of transactions, see Note 4 to our Consolidated Financial Statements.

 
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11 Good Energy, Inc. Investment

On September 29, 2008, we made an initial investment in the biofuels sector with 11 Good Energy, Inc., a developer of G2 Diesel, a next generation biodiesel. The Convertible Note earned interest at 8% per annum and was due and payable on June 30, 2009. The Note was also convertible at a 15% discount to 11 Good Energy’s next equity financing. We elected to accept payment in full on the note in June, 2009 and relinquished our conversion right. We retained our right to approximately 107,843 of warrants to purchase 11Good Energy common stock exercisable at $2.55 which originally expired on June 30, 2010.

Also in 2008, Frederick C. Berndt, the CEO of 11 Good Energy and a former director of Surge, transferred to Surge 500,000 shares of restricted common stock from his personal holdings of 11 Good Energy, and Surge agreed to issue to Mr. Berndt a stock purchase warrant to purchase 1,000,000 shares of restricted Surge common stock at an exercise price of seventy-five cents ($0.75) per Surge share through December 31, 2009 which warrants were cancelled upon payment of the Note in June, 2009.  
 
In October, 2009, we sold 450,000 11 Good Energy shares for $1.00 per share and realized proceeds of $450,000.  In February, 2010 we sold the remaining 50,000 11 Good Energy shares and realized cash proceeds of $122,500 and recorded a gain on sale of $108,750.

The Company continues to own a stock purchase warrant to acquire 107,843 shares of 11Good Energy, Inc. at $2.55 per share. The warrant had been scheduled to expire on June 30, 2010 but the expiration date was extended until June 30, 2012. The Company did not previously value the warrant for financial statement purposes since the Company did not have sufficient funds to exercise the warrant on or before June 30, 2010 but the extended expiration date and the prospect that 11 Good Energy, Inc. common stock will be publically traded this year has caused us to value the warrant at $102,451 as of December 31, 2010.

Working Capital Activities
  
In 2009, the Company sold 450,000 shares of 11 Good Energy for $450,000 and we invested $300,000 in an oil and gas equipment lease on property in Pawnee County, Oklahoma.

In 2010, the Company sold the remaining 50,000 11 Good Energy shares for $122,500.

In 2010, the Company issued a total of 2,200,000 common shares for net total proceeds of $218,000.

In December, 2010 the Company sold its interest in the Qualmay #12-42 well in Wyoming for $10,000.00 in cash due in March, 2011, foregiveness of lease operating expenses on the well totalling $19,405, and release of any plugging liability (estimated previously at $10,500), for a total recovery of $39,405. 

Competition
 
The oil and gas business is highly competitive. Subject to receipt of additional financing, of which we can provide no assurances, we will compete with private, public and state-owned companies in all facets of the oil business, including suppliers of energy and fuel to industrial, commercial and individual customers. Numerous independent oil and gas companies, oil and gas syndicates and major oil and gas companies actively seek out and bid for oil and gas prospects and properties as well as for the services of third-party providers, such as drilling companies, upon which we rely. Many of these companies not only explore for, produce and market oil and natural gas, but also carry out refining operations and market the resultant products on a worldwide basis. A substantial number of our competitors have longer operating histories and substantially greater financial and personnel resources than we do.  Competitive conditions may be substantially affected by various forms of energy legislation and/or regulation considered from time to time by the government of the United States and other countries, as well as factors that we cannot control, including international political conditions, overall levels of supply and demand for oil and gas, and the markets for synthetic fuels and alternative energy sources.
 
Government and Environmental Regulation
  
Our operations will be subject to extensive and developing federal, state and local laws and regulations in the US and Canada relating to environmental, health and safety matters; laws affecting petroleum, chemical products and materials; and waste management.   Permits, registrations or other authorizations are required for the operation of certain of our facilities and for our oil and
 
 
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gas exploration and production activities. These permits, registrations or authorizations are subject to revocation, modification and renewal. Governmental authorities have the power to enforce compliance with these regulatory requirements, the provisions of required permits, registrations or other authorizations, lease conditions, and violators are subject to civil and criminal penalties, including fines, injunctions or both. Failure to obtain or maintain a required permit may also result in the imposition of civil and criminal penalties. Third parties may have the right to sue to enforce compliance. Foreign and domestic development, production and sale of oil are extensively regulated in Canada at both the federal and state levels. Legislation affecting the oil and gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, in Canada and at federal and state levels, have issued rules and regulations binding on the oil and gas industry and its individual members, compliance with which is often difficult and costly and some of which carry substantial penalties for failure to comply. Canada and multiple state statutes and regulations where we intend to conduct operations require permits for drilling operations, drilling bonds and reports concerning wells. Such jurisdictions also have statutes and regulations governing conservation matters, including the unitization or pooling of oil and gas properties and establishment of maximum rates of production from oil and gas wells.

Some risk of costs and liabilities related to environmental, health and safety matters is inherent in our operations, as it is with other companies engaged in similar businesses, and there can be no assurance that material costs or liabilities will not be incurred. In addition, it is possible that future developments, such as stricter requirements of environmental or health and safety laws and regulations affecting our business or more stringent interpretations of, or enforcement policies with respect to, such laws and regulations, could adversely affect us. To meet changing permitting and operational standards, we may be required, over time, to make site or operational modifications at our facilities, some of which might be significant and could involve substantial expenditures. There can be no assurance that material costs or liabilities will not arise from these or additional environmental matters that may be discovered or otherwise may arise from future requirements of laws in the US and Canada.
 
Number of Total Employees and Number of Full-time Employees
 
From our inception through the period ended December 31, 2010, we have relied on the services of outside consultants for services in addition to from one (1) to three (3) full-time employees. In order for us to attract and retain quality personnel, we anticipate we will have to offer competitive salaries to future employees. As we continue to expand, we may incur additional costs for personnel and consultants. This projected increase in personnel is dependent upon our generating revenues and obtaining sources of financing. There is no guarantee that we will be successful in raising the funds required or generating revenues sufficient to fund the projected increase in the number of employees. None of our employees are covered by collective bargaining agreements, and we believe our relations with our employees are favorable.
RISK FACTORS

An investment in our common stock is speculative and involves a high degree of risk and uncertainty. You should carefully consider the risks described below, together with the other information contained in our reports filed with the SEC, including the consolidated financial statements and notes thereto of our company, before deciding to invest in our common stock. The risks described below are not the only ones facing our company. Additional risks not presently known to us or that we presently consider immaterial may also adversely affect our company. If any of the following risks occur, our business, financial condition and results of operations and the value of our common stock could be materially and adversely affected.

RISKS RELATED TO OUR COMPANY
 Risk Factors

Loss of Investment Company Act Exclusion Would Adversely Affect Our Business
 
Surge Global Energy (“Surge”) currently relies on section 3(c)(9) of the Investment Company Act of 1940 (“1940 Act”) to avoid federal registration and regulation as an investment company. Section 3(c)(9) excludes from the 1940 Act’s definition on investment company “[a]ny person substantially all of whose business consists of owning or holding oil, gas, or other mineral royalties or leases, or fractional interests therein, or certificates of interest or participation in or investment contracts related to such mineral royalties or leases, or fractional interests therein relative to such royalties, leases, or fractional interests.”

Any future failure by Surge to qualify for the section 3(c)(9) exclusion, or any other exemption or exclusion from the 1940 Act or the rules thereunder, could cause Surge to be required to register with the U.S. Securities and Exchange Commission as an investment company under the 1940 Act or to reorganize its business so as to avoid such registration and regulation. Regulation and registration as an investment company under the 1940 Act and the rules thereunder would, among other things, prevent Surge from conducting its business as described herein.

 
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We will need additional financing to carry out our business plans and to finance our future operations.

 We have a history of net losses and expect that our operating expenses will continue the need to raise additional financing as we have no revenues.  Our business model contemplates expansion of our business by identifying and acquiring additional oil and gas properties, subject to availability of sufficient cash resources.  To make these acquisitions, our capital needs will increase substantially.  We have limited working capital and cash resources to fund our oil and gas exploration operations. We may need to become involved in litigation to preserve our rights, the outcome and legal expense of which could adversely affect our operations and cash resources. We plan to attempt to obtain our future funding that we will need to drill wells on leases owned, to lease additional properties and to otherwise finance our operations through debt and equity markets or joint venture agreements with third parties; however, we can provide no assurances that we will be able to obtain additional funding (and/or joint venture partners willing to fund specific exploration projects) when it is required or that it will be available to us on commercially acceptable terms, if at all.  If we fail to obtain the financing that we need when it is required, we may have to forego or delay potentially valuable opportunities to acquire new oil and gas properties or default on existing funding commitments to third parties and forfeit or dilute our rights in existing oil property interests.   In the event additional financing is not available to us on commercially acceptable terms, if and when needed to finance our operations and to meet our cash needs as they come due, this may seriously harm our business, financial condition and results of operations and may adversely affect our ability to remain a going concern on a long term basis.

Our Oklahoma property may not produce oil and gas in commercial quantities sufficient to be profitable.

 In December, 2009, the Company entered into a lease and equipment agreement with Mandalay Energy, Inc. to provide funds for the workover of four (4) oil and gas wells initially with an option to workover six (6) additional wells on a 40 acre lease located in Pawnee County, Oklahoma. After workover operations commenced the operations were delayed by a dispute over leasehold rights by a new owner of the lease. We can provide no assurances that the amount of natural gas and barrels of oil per day will be actually recoverable from our Oklahoma property and sold in sufficient commercial quantities for us to profitably operate this property. As a result we have written down this asset by $85,000 in the quarter ended December 31, 2010. In September, 2010 the Company concluded an agreement with CAVU Resources, Inc. to recover $130,000 plus interest relating to this property. However, we have not yet received any payment as required by the agreement. See “Item 1 – Oil and Gas Drilling Activities.”

We may be involved in litigation and other disputes.

Our business and operations may subject us to claims, litigation and other proceedings brought by private parties and governmental authorities. Any claim that is successfully asserted against us could result in significant damage claims and other losses. Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations, which adversely affect our financial condition, results of operations or cash flows.

We have a history of net operating losses.
 
 We have a history of net operating losses and we will need to generate substantial revenues to achieve profitability. In the short term we must realize value from our existing assets or generate earnings from our oil and gas activities.  We may not be able to generate revenue either in the short term or the longer term.  Even if we do achieve profitability, we cannot assure you that we will be able to sustain or increase profitability on a quarterly or annual basis in the future. There can be no assurance that future operations will be profitable. Revenues and profits, if any, will depend upon various factors, including whether we will be able to continue expansion of our operations and sell or finance existing assets. We may not achieve our business objectives and the failure to achieve such goals would have an adverse impact on us.  Our future performance is dependent upon our ability to identify, acquire and implement the strategy to develop oil properties for production or resale which may delay shareholder return on investment for years.

We are an exploration stage company with an accumulated deficit of $38,773,070.

 In January 2005, as a result of the disposal of our tobacco wholesale business in December 2004, and the restructuring of our management and ownership, we began implementing plans to establish an oil and gas exploration business. As a result, we are an exploration stage enterprise, as defined by Statement of Financial Accounting Standards No. 7 (“SFAS7”), with only a limited operating history upon which to base an evaluation of our current business and future prospects, and we have just begun to implement our business plan. Since our inception and the inception of our exploration stage on January 1, 2005, we have suffered recurring losses from operations and have been dependent on new investment to sustain our operations.

 During the year ended December 31, 2010 we reported a net loss of $1,050,802 and a comprehensive income after unrealized losses on available for sale securities and foreign currency adjustments of $1,049,701. In 2009, we reported a net loss of $2,329,180 and a comprehensive loss of $1,334,372. We cannot give any assurances that we can achieve profits from operations. For the period from inception of exploration stage through December 31, 2010, the Company has accumulated losses of $38,773,070.

 
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We may not be able to acquire other profitable oil and gas interests.
 
We can provide no assurance that oil and gas will be discovered in commercial quantities in any of the properties we currently hold interests in or properties in which we may acquire interests in the future. Our success will depend upon our ability to acquire working and revenue interests in properties upon which oil reserves are ultimately discovered in commercial quantities for production capability or to attract the interest of larger oil field companies. We do not have an established history of locating and developing properties that have oil and gas reserves. We may not have adequate working capital to invest in new properties.

We may not have good and marketable title to our properties.
 
It is customary in the oil and gas industry that upon acquiring an interest in a non-producing property, only a preliminary title investigation be done at that time and that a drilling title opinion be done prior to the initiation of drilling, neither of which can substitute for a complete title investigation. We have followed this custom and intend to continue to follow this custom in the future. Furthermore, title insurance is not available for mineral leases, and we will not obtain title insurance or other guaranty or warranty of good title. If the title to our prospects should prove to be defective, we could lose the costs that we have incurred in their acquisition, or incur substantial costs for curative title work.

We do not presently control any of our operations as our properties are operated by others.
 
We do not operate any of our drilled properties or the entities in which we hold interests and we therefore have no influence over the testing, drilling and production operations of our properties. Our lack of control could result in the following:

 
if an operator refuses to initiate a project, we might be unable to pursue the project;
 
the operator might initiate exploration or development on a faster or slower pace than we prefer;
 
the operator might obtain additional financing which may further dilute our interest in the property as well as trigger additional asset impairment.

Any of these events could materially reduce the value of our properties as currently stated in our financial statements.

Information in this report regarding our future exploration and development projects reflects our current intent and is subject to change.
 
We do not currently have any new exploration and development plans. Whether we ultimately undertake additional exploration or development projects will depend on the following factors:

 
availability and cost of capital both by the company and our planned majority partners;
 
receipt of additional seismic data or the reprocessing of existing data;
 
current and projected oil or natural gas prices;
 
reserve results could be less than our anticipated recovery rate range;
 
success or failure of activities in similar areas;
 
changes in the estimates of the costs to complete the projects;
 
our ability to attract other industry partners to acquire a portion of the working interest to reduce costs and exposure to risks;
 
decisions of our joint working interest owners and partners; and
 
market prices for our oil field assets could change and could vary when the development efforts and subsequent oil field values accrue.

 
7

 
 
We will continue to gather data about our projects and it is possible that additional information will cause us to alter our schedule or determine that a project should not be pursued at all. You should understand that our plans regarding our projects might change.  Reserve estimates also require numerous assumptions relating to operating conditions and economic factors, including the price at which recovered oil and gas can be sold, the costs of recovery, assumptions concerning future operating costs, severance and excise taxes, development costs and workover and remedial costs, prevailing environmental conditions associated with drilling and production sites, availability of enhanced recovery techniques, ability to transport oil and gas to markets and governmental and other regulatory factors, such as taxes and environmental laws. A negative change in any one or more of these factors could result in quantities of oil and gas previously estimated as proved reserves becoming uneconomic. For example, a decline in the market price of oil or gas to an amount that is less than the cost of recovery of such oil or gas in a particular location could make production commercially impracticable. The risk that a decline in price could have that effect is magnified in the case of reserves requiring sophisticated or expensive production enhancement technology and equipment, such as some types of heavy oil. Each of these factors, by having an impact on the cost of recovery and the rate of production, will also affect the present value of future net cash flows from estimated reserves.

We rely heavily upon reserve, geological and engineering data when determining whether or not to invest in a particular oil and gas property.
 
The reserve, geological and engineering data information that we use in evaluating oil and gas prospects is based on estimates involving a great deal of uncertainty. Different engineers may make different estimates of reserves and cash flows based on the same available data. Reserve estimates depend in large part upon the reliability of available geologic and engineering data, which is inherently imprecise. Geologic and engineering data are used to determine the probability that a reservoir of oil and gas exists at a particular location, and whether oil and/or gas and natural gas are recoverable from a reservoir. Recoverability is ultimately subject to the accuracy of data including, but not limited to, geological characteristics of the reservoir, structure, reservoir fluid properties, the size and boundaries of the drainage area, reservoir pressure, and the anticipated rate of pressure depletion. The evaluation of these and other factors is based upon available seismic data, computer modeling, well tests and information obtained from production of oil and gas from adjacent or similar properties, but the probability of the existence and recoverability of reserves is less than 100% and actual recoveries of proved reserves can differ from estimates.

Our ability to produce sufficient quantities of oil and gas from our properties may be adversely affected by a number of factors outside of our control.
 
The business of exploring for and producing gas involves a substantial risk of investment loss. Drilling wells involves the risk that the wells may be unproductive or that, although productive, that the wells may not produce oil in economic quantities. Other hazards, such as unusual or unexpected geological formations, pressures, fires, blowouts, loss of circulation of drilling fluids or other conditions may substantially delay or prevent completion of any well. Adverse weather conditions can also hinder drilling operations. A productive well may become uneconomic due to pressure depletion, water encroachment, mechanical difficulties and other reasons which impair or prevent the production of oil and gas from the well.

There can be no assurance that oil and gas will be produced from the properties in which we have interests. In addition, the marketability of any oil and gas that we acquire or discover may be influenced by numerous factors beyond our control. These factors include the proximity and capacity of oil and gas pipelines and processing equipment, market fluctuations of prices, taxes, royalties, land tenure, allowable production and environmental protection. We cannot predict how these factors may affect our business. In addition, the success of our business is dependent upon the efforts of various third parties that we do not control. We rely upon various companies to assist us in identifying desirable oil prospects to acquire and to provide us with technical assistance and services. We also rely upon the services of geologists, geophysicists, chemists, engineers and other scientists to explore and analyze oil prospects to determine a method in which the oil prospects may be developed in a cost-effective manner. In addition, we rely upon the owners and operators of oil drilling equipment to drill and develop our prospects to production or to attract the interest of larger oil field companies. Although we have developed relationships with a number of third-party service providers, we cannot assure that we will be able to continue to rely on such persons. If any of these relationships with third-party service providers are terminated or are unavailable on commercially acceptable terms, we may not be able to execute our business plan.

If we are unable to access our properties or conduct our operations due to legal or surface conditions, our business will be adversely affected.
 
Our exploration and development of oil and gas reserves depends upon access to the areas where our operations are to be conducted. We conduct a portion of our operations in regions where we are only able to do so on a seasonal basis. Unless the surface is sufficiently frozen, we are unable to access our properties, drill or otherwise conduct our operations as planned. In addition, if the surface thaws earlier than expected, we must cease our operations for the season earlier than planned. Our operations are affected by road bans imposed from time to time during the break-up and thaw period in the spring. Road bans are also imposed due to snow, mud and rock slides and periods of high water, which can restrict access to our well sites and production facility sites.

 
8

 
 
Our inability to access our properties or to conduct our operations as planned will result in a shutdown or slow down of our operations, which will adversely affect our business.

Essential equipment might not be available.
 
Oil and gas exploration and development activities depend upon the availability of drilling and related equipment in the particular areas where those activities will be conducted. Demand for that equipment or access restrictions may affect the availability of that equipment to us and delay our exploration and development activities.
  
Pipeline capacity may be inadequate.
 
There may be periods of time when pipeline capacity is inadequate to meet our gas transportation needs. It is often the case that as new development comes online, pipelines are close to or at capacity. During periods when pipeline capacity is inadequate, we may be forced to reduce production or incur additional expense as existing production is compressed to fit into existing pipelines.

Our reliance on third parties for gathering and distribution could curtail future exploration and production activities.
 
The marketability of our production will depend on the proximity of our reserves to and the capacity of, third party services and facilities, including oil and natural gas gathering systems, pipelines, trucking or terminal facilities, and processing facilities. The unavailability or insufficient capacity of these facilities and services could force us to shut-in producing wells, delay the commencement of production, or discontinue development plans for some of our properties, which would adversely affect our financial condition and performance.


 Our compliance with the Sarbanes-Oxley Act and other SEC rules concerning internal controls are time consuming, difficult and costly for us.
 
It may be time consuming, difficult and costly for us to develop and implement provisions of the Sarbanes-Oxley Act applicable to us. We may need to hire additional financial reporting, internal controls and other finance staff in order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with the internal controls and other requirements of the Sarbanes-Oxley Act, we may not be able to obtain the independent accountant certifications that the Sarbanes-Oxley Act requires publicly-traded companies to obtain.

The loss of key employees would materially adversely affect our ability to operate our business and implement our business plan.
 
Our business operations are presently managed by one key employee, E. Jamie Schloss, who serves in the dual capacity as our Chief Executive Officer and our Chief Financial Officer. The loss of the services of such employee could seriously impair our business operations. Mr. Schloss’ employment contract expires on April 30, 2011. We do not have key man life insurance on our Chief Executive Officer, any of our executives, directors or employees. We can provide no assurances that Mr. Schloss’ contract will be extended on terms satisfactory to us, if at all.

Complying with environmental and other government regulations could be costly and could negatively impact our production.
 
Our business is governed by numerous laws and regulations at various levels of government. These laws and regulations govern 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 we acquire permits before commencing drilling, 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 are currently evaluating insurance coverage for sudden and accidental environmental damages as well as environmental damage that occurs over time. However, 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.

 
9

 
 
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 occur that 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.
 
  Review of Risks Arising from Compensation Policies and Practices
  
We have reviewed our compensation policies and practices for all employees and we concluded that any risks arising from our policies and practices are not reasonably likely to have a material adverse effect on the Company, although no assurances can be given in this regard..

RISKS RELATED TO OUR INDUSTRY
 

The successful implementation of our business plan is subject to risks inherent in the oil and gas business.
 
Our oil and gas operations are subject to the economic risks typically associated with exploration, development production activities and locating suitable purchasers of our properties, including the necessity of significant expenditures to locate and acquire properties and to drill exploratory wells. In addition, the cost and timing of drilling, completing and operating wells is often uncertain In conducting exploration and development activities, the presence of unanticipated pressure or irregularities in formations, miscalculations or accidents may cause our exploration, development and production activities to be unsuccessful. This could result in a total loss of our investment in a particular property. If exploration efforts are unsuccessful in establishing proved reserves and exploration activities cease, the amounts accumulated as unproved costs will be charged against earnings as impairments.

The oil and gas industry is highly competitive.
 
The oil and gas industry is highly competitive. We compete with oil and gas companies and other individual producers and operators, many of which have longer operating histories and substantially greater financial and other resources than we do, as well as companies in other industries supplying energy, fuel and other needs to consumers. Many of these companies not only explore for and produce crude oil and gas, but also carry on refining operations and market petroleum and other products on a worldwide basis. In addition, we compete with other oil development firms in marketing their properties to other larger oil field operators. Our larger competitors, by reason of their size and relative financial strength, can more easily access capital markets than we can and may enjoy a competitive advantage in the recruitment of qualified personnel. They may be able to absorb the burden of any changes in laws and regulation in the jurisdictions in which we do business and handle longer periods of reduced prices of gas and oil more easily than we can. Our competitors may be able to pay more for productive oil and gas properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than we can. Our ability to acquire additional properties in the future will depend upon our availability of cash resources, ability to conduct efficient operations, evaluate and select suitable properties, implement advanced technologies and consummate transactions in a highly competitive environment.

Oil and gas operations involve various hazardous risks.
 
The oil and gas business involves operating hazards such as well blowouts, craterings, explosions, uncontrollable flows of crude oil, natural gas or well fluids, fires, formations with abnormal pressures, pipeline ruptures or spills, pollution, releases of toxic gas and other environmental hazards and risks. Personal injuries, damage to property and equipment, reservoir damage, or loss of reserves may occur if such a catastrophe occurs, any one of which could cause us to experience substantial losses. In addition, we may be liable for environmental damage caused by previous owners of properties purchased or leased by us.
 
Market fluctuations in the prices of oil and gas could adversely affect our business.
 
Prices for oil and gas tend to fluctuate significantly in response to factors beyond our control. These factors include, but are not limited to, acts of terrorists, the continued threat of war in the Middle East and actions of the Organization of Petroleum Exporting Countries and its maintenance of production constraints, the U.S. economic environment, weather conditions, the availability of alternate fuel sources, transportation interruption, the impact of drilling levels on crude oil and gas supply, and the environmental and access issues that could limit future drilling activities for the industry.

Changes in commodity prices may significantly affect our capital resources, liquidity and expected operating results. Price changes directly affect revenues and can indirectly impact expected production by changing the amount of funds available to reinvest in exploration and development activities. Reductions in oil and gas prices not only reduce revenues and profits, but could also reduce the quantities of reserves that are commercially recoverable. Significant declines in prices could result in non-cash charges to earnings due to impairment.
 
 
10

 
 
Changes in commodity prices may also significantly affect our ability to estimate the value of producing properties for acquisition and divestiture and often cause disruption in the market for oil and gas producing properties, as buyers and sellers have difficulty agreeing on the value of the properties. Price volatility also makes it difficult to budget for and project the return on acquisitions and development and exploration of projects. We expect that commodity prices will continue to fluctuate significantly in the future.

 RISKS RELATED TO OUR STOCK
 
Insiders have substantial control over us, and they could delay or prevent a change in our corporate control even if our other stockholders wanted it to occur.
 
Our executive officers, directors, and principal stockholders who hold 5% or more of the outstanding common stock and their affiliates beneficially owned approximately 21,300,000 shares as of December 31, 2010, in the aggregate including warrants, stock options and voting rights exercisable with 60 days, approximately 50% of our fully diluted common stock.  These stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could delay or prevent an outside party from acquiring or merging with us even if our other stockholders wanted it to occur.

 Future sales of our common stock may cause our stock price to decline.
 
Our stock price may decline by future sales of our shares or the perception that such sales may occur. If we issue additional shares of common stock in private financings under an exemption from the registration laws, then those shares will constitute “restricted shares” as defined in Rule 144 under the Securities Act. The restricted shares may only be sold if they are registered under the Securities Act, or sold under Rule 144, or another exemption from registration under the Securities Act.
 
All of our outstanding shares of common stock are either free trading or eligible for sale pursuant to Rule 144 in accordance with requirements and the limitation contained therein. We are unable to estimate the amount, timing, or nature of future sales of outstanding common stock. Sales of substantial amounts of our common stock in the public market may cause the stock’s market price to decline.

Our stock price can be extremely volatile.
 
Our common stock is traded dually on the OTC Bulletin Board and the Pink Sheets. There can be no assurance that an active public market will continue for the common stock, or that the market price for the common stock will not decline below its current price. Such price may be influenced by many factors, including, but not limited to, investor perception of us and our industry and general economic and market conditions. The trading price of the common stock could be subject to wide fluctuations in response to announcements of our business developments or our competitors, quarterly variations in operating results, and other events or factors. In addition, stock markets have experienced extreme price volatility in recent years. This volatility has had a substantial effect on the market prices of companies, at times for reasons unrelated to their operating performance. Such broad market fluctuations may adversely affect the price of our common stock. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

We do not expect to pay dividends.
 
We have not paid dividends since inception on our common stock, and we do not contemplate paying dividends in the foreseeable future on our common stock in order to use all of our earnings, if any, to finance expansion of our business plans.

If we fail to remain current on our reporting requirements, we could be removed from the OTCXB Bulletin Board, we could be investigated by the SEC or we could incur liability to our shareholders.
 
Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under the Securities Exchange Act of 1934, as amended, and must be current in their reports in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market. Failure to remain current in our reporting obligations might also subject us to SEC investigation or private rights of action by our shareholders.

 
11

 
 
Our common stock is subject to the “penny stock” rules off the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.
 
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:

 
that a broker or dealer approve a person’s account for transactions in penny stocks; and
 
the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:

 
obtain financial information and investment experience objectives of the person; and
 
make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:

 
sets forth the basis on which the broker or dealer made the suitability determination; and
 
that the broker or dealer received, prior to the transaction but after a waiting period of at least two business days, a signed acknowledgement of the suitability determination from the investor and an agreement from the investor to purchase the penny stock.  

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
 
PROPERTIES

Our principal executive offices are presently located at 74-333 Highway 111, Palm Desert, California 92260. As of  May 1, 2011 we expect to rent on a month to month basis at $400.00 per month at that location. Previously, on May 6, 2008, we cancelled our prior six-month lease at 990 Highland Drive, Solan Beach, CA 92075 and entered into a new lease for a larger space (Suite #206) in the same building. The new lease is a three-year lease which commenced May 6, 2008. The annual rentals were $25,740 for the period from May 6, 2008 to May 5, 2009, $26,676 for the period from May 6, 2009 to May 5, 2010, and $27,612 for the period from May 6, 2010 to May 5, 2011 for approximately 2,000 feet of space. This space was sub-leased on January 1, 2010 at a rental of $500.00. Our facilities are in good condition for their intended use as offices and are sufficient to meet our present needs.

We commenced oil and gas exploration activities in February 2005. However, (1) we did not engage in any production activities during the fiscal years ended December 31, 2009 and 2010, nor did we have any proved reserves at the end of such periods, and thus, were not required to provide any of the production data required by ASC 932 (formerly Statement of Financial Accounting Standards No. 69 (“SFAS 69”), (2) we did not engage in any drilling activities during the fiscal years ended December 31, 2007 and 2006 applicable to ASC932. We did commence drilling activities in 2008 but none of the properties were proved as of December 31, 2010 and have been substantially written off.

            Undeveloped acreage is considered to be those lease acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil or natural gas, regardless of whether or not that acreage contains proved reserves, but does not include undrilled acreage held by production under the terms of a lease. As is customary in the oil and gas industry, we can generally retain our interest in undeveloped acreage by drilling activity that establishes commercial production sufficient to maintain the leases or by paying delay rentals during the remaining primary term of such a lease.

 
12

 
 
In June 2008, we began acquiring oil and gas properties for drilling and exploration. Three properties were acquired in 2008, the first was Green Springs Prospect in White Pine County, Nevada which consists of two leases aggregating approximately 2,500 acres, the second was an oil and gas prospect in Crane County, Texas which was drilled, logged and found non productive, and the third a deep gas well named the Qualmay #12-42 well, a 7,200 foot deep well oil & gas well drilled on 40 acres of land in Park County, Wyoming.  The well did not perform to our expectations and in December, 2010 we sold this property for $10,000 in cash due in March, 2011 and the forgiveness of approximatley $29,000 in accrued liabilities.


In December, 2009, we entered into an equipment lease for four wells on a property in Pawnee County, Oklahoma which requires rework, which will rework commenced in 2009 but was not completed. Further rework will continue in 2010 after legal issues surrounding the lease are resolved. We paid $300,000 for the rights under the equipment lease which agreement provides that we will receive 75% of the net income until payout. Thereafter we would own a 25% working interest.

In September, 2010, we entered into an agreement with CAVU Resources, Inc. for return of $130,000.00, plus interest, in conjunction with this property. We expect this payment to be received in June, 2011.

In December, 2010 we sold our entire 35% working interest in the Qualmay #1 well for $10,00.00 in cash and forgiveness of approximately $29,000 of accrued liabilities.

We do not have any obligations under existing contracts or agreements calling for the provision of fixed and determinable quantities of oil and gas over the next three years, and have therefore not filed any information or reports with any federal authority or agency, containing estimates of total, proved developed or undeveloped net oil or gas reserves.



LEGAL PROCEEDINGS

The Company’s business and operations may subject the Company to claims, litigation and other proceedings brought by private parties and governmental authorities. The Company has in the past been involved in contract and indemnity disputes in several litigation matters. Currently there is no ongoing litigation. Litigation can involve complex factual and legal questions and its outcome is uncertain. Any claim that is successfully asserted against us could result in significant damage claims and other losses and could adversely affect our financial condition. Even if the Company were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations, which adversely affect our financial condition, results of operations or cash flows. 

2009 Default Judgment against Subsidiary

Three Span Oil & Gas Litigation: On September 30, 2009, the Company’s wholly owned Nevada subsidiary, namely, Surge Energy Resources, Inc., was sued by Three Span Oil & Gas, Inc, in Midland Texas (Case #CC15386) for nonpayment of $60,125.  The action arises out of an operating agreement between the Plaintiff and the Defendant pursuant to which Surge Energy Resources is alleged to have agreed to make certain payments of $20,000 on August 14, 2009, September 1, 2009 and October 1, 2009 until a $56,239 deficiency was paid.  The entire amount of this claim was accrued by Surge Energy Resources, Inc. as of December 31, 2009. The action against Surge Energy Resources is for breach of contract, plus attorneys’ fees. Surge Energy Resources has no material assets or operations. A default judgment was entered into against Surge Energy Resources, Inc. for $60,125 plus fees in December, 2009.

Other than the foregoing, there are no other legal proceedings pending against the Company.
 
RESERVED.
 
 
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MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Common Stock
 
Our common stock is quoted dually on the OTCXB Bulletin Board and the Pink Sheets under the trading symbol “SRGG.” The following table sets forth the high and low bid prices for our common stock for the periods indicated. Such quotations are taken from information provided by “Yahoo! Finance” and reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent actual transactions.
 
Quarter Ended
High
Low
March 31, 2009
$0.13
$.0.02
June 30, 2009
$0.10
$0.02
September 30, 2009
$0.09
$0.04
December 31, 2009
$0.10
$0.04
March 31, 2010
$0.16
$0.05
June 30, 2010
$0.15
$0.10
September 30, 2010
$0.17
$0.05
December 31, 2010
$0.10
$0.03


American Stock Transfer (59 Maiden Lane, New York, NY 10038) is the registrar and transfer agent for our common shares.   As of April 1, 2011, we had 35, 887,387 shares of common stock outstanding and approximately 80 stockholders of record.
 
Dividend Policy
 
We have never declared or paid dividends on our common stock, and we do not anticipate that we will do so in the foreseeable future. We intend to retain future earnings, if any, for use in our operations and the expansion of our business.

Sale of Unregistered Securities

During the year ended December 31, 2010 and the three months ended March 31, 2011, there were no sales of securities by the Company, except as follows:

Date of Sale
 
Title of Security 
 
Number Sold
 
Consideration Received,
Commissions 
 
Purchasers 
 
Exemption from
Registration Claimed 
                     
      2010
 
Common Stock
Options (1)
 
 2,2000,000 shares and
1,900,000 warrants
 
 
 $218,500 received from eight (8) Investors
 
Accredited Investors
 
Rule 506; Section 4(2)
      2011
 
Common Stock
and Warrants (2)
 
2,250,000 shares
2,250,000 warrants
 
$67,500  received from three (3) Investors
 
Accredited
Investors
 
Rule 506; Section 4(2)

(1)  The Company offered to sell in a private placement a Unit at a cost of $50,000 per Unit. Each Unit consisted of 500,000 shares of Common Stock and Warrants to purchase 500,000 shares, exercisable over a period of two years at a price of $0.25 per share. The Company also sold 300,000 shares at $0.05 to two directors and an unrelated third party.

(2)  The Company offered to sell in a second private placement Units at a cost of $30,000 per Unit.  Each full Unit consisted of 1,000,000 shares of Common Stock at $0.03 per share and Warrants to purchase 1,000,000 shares, exercisable over a period of one year at a price of $.05 per share.

 
14

 

Repurchase of Securities

During fiscal 2010, the Company did not repurchase any of its securities, except as follows:

(1) See Item 13 regarding entering into consulting agreements in February, 2010 with three of the Company's former directors. These consulting agreements included the immediate cancellation of options to purchase a total of 4,700,000 options which had been issued previously in 2008 and 2009. The total cost of the consulting agreements was $200,000, all of which was paid in 2010.
 
(2)See” Item 1- Recent Developments” regarding the repurchase of 5,000,000 shares of Common Stock pursuant to a rescission agreement with SEC-Compliance, Inc.
 
SELECTED FINANCIAL DATA

Not Applicable
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition, changes in financial condition and results of operations for the fiscal years ended December 31, 2010 and December 31, 2009, should be read in conjunction with the audited annual financial statements and the notes thereto. The Company began implementing plans to establish an oil and gas development business in 2005. As a result, the Company has not generated any revenues and has incurred significant operating expenses. Our consolidated financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles, although we have and have had interests in Canadian companies.
 
Overview
 
For the year ended December 31, 2010 we had a comprehensive net loss of $1,049,700 versus a comprehensive loss in 2009 of $1,334,400, a decreased loss of $284,700. Details of these figures are described in detail in the “Notes to the Consolidated Financial Statements” and are briefly summarized above in “Item 1 Business.”  Equity transactions and sale of assets helped provide increased shareholders equity in 2010. The Company continues to seek additional capital to utilize its assets to fund its operations, but there can be no assurance that we will be able to raise additional working capital or complete other financings in the future.
 
In 2011, our financial focus will be on continuing to reduce operating expenses, realizing value from our remaining assets in order to position Surge to take advantage of oil and gas and other business opportunities, and raising additional financing to meet our cash liquidity and capital resource needs as they arise through the sale of common stock, debt and/or other convertible securities.

Results of Operations
 
For the year ended December 31, 2010, we had a net loss from operations of $1,051,000 versus a net loss in 2009 of $2,329,00, an improvement of $1,278,000. The net loss per share was $0.03 in 2010 versus a loss of $0.07 per share in 2009.

The Company had no operating revenues in the years ended December 31, 2010 and 2009 other than the sale of assets; we had a gain of $305,000 from the sale of investments in 2010, compared with a gain of $206,000 in 2009. In 2009 we had an impairment of marketable securities of $778,000 in 2009 with no comparable charge in 2010. We also had an impairment of oil and gas and related investments of $616,000 in 2010 versus an impairment on oil and gas properties of $572,000 in 2009.

Selling general and administrative expenses for the year ended December 31, 2010 compared to 2009 decreased by $589,000 to $733,000 from $1,322,000 in the comparable prior period. Included within this $589,000 decrease is a reduction of $131,000 of non-cash employee compensation costs, a decrease of $247,000 in payroll, consulting and related costs, a decrease of $75,000 in selling, general and administrative (SG&A) expenses, and a decrease of $136,000 in legal and audit expenses. The decrease in non-cash compensation cost of $131,000 in 2010 was the result of fewer options and warrants issued.  Depreciation and amortization decreased $1,200 from $6,300 in 2009 to $5,100 in 2010.

 
15

 
 
      Net financing cash flow in 2010 was $153,000 versus cash outflows of $160,000 in 2009, an improvement of $313,000 in cash flow from financing activities.

Net interest expense in 2010 was $2,600 versus interest income $143,100 in 2009, a decrease of $145,700.

Officer Loans and accrued salary:

In April, 2010, the Company extended Mr. Schloss’ employment agreement on the same financial terms as were in effect previously until December 31, 2010, and then subsequently extended his employment agreement until April 30, 2011. On September 1, 2010, the agreement was amended to provide that commencing September 1, 2010 $2,500 per month in salary would be paid to Mr. Schloss in Andora Energy common stock in lieu of cash.  As of December 31, 2010, a total of 16,667 Andora shares were issued pursuant to this agreement as $10,000 in salary due was converted into shares. Also, in fourth quarter of 2010 Mr. Schloss advanced funds to the Company. The total loan and deferred salary due Mr. Schloss at December 31, 2010 totalled $80,000. The loan was made without interest or prepayment penalty, is secured by Andora shares, and is repayable at the time a liquidity event (such as the sale of stock or collection of receivables), is completed.

Liquidity and Capital Resources

As of December 31, 2010, we had cash and cash equivalents of approximately $500 versus cash of $56,800 at December 31, 2009, a reduction of $56,300.  This decrease was comprised of net cash used in operating activities of $604,600, cash provided by investing activities of $394,000, cash flow provided in financing activities of $153,000, and the net effect of exchange rate changes on cash and cash equivalents of $1,100, which together reduced cash by $56,300. See cash flow statement for complete details.

Our net positve working capital position at December 31, 2010 was $129,000 versus working capital deficit of $72,000 at December 31, 2009, an improvement of $201,000. Current assets declined by $462,700 caused primarily by a reduction in cash of $56,300, a reduction in prepaid expenses of $53,200 and a reduction in investment of marketable securities of $278,200. Current liabilities decreased by $663,400, caused primarily by a decrease in accounts payable and accrued liabilities of $678,000 resulting primarily from the settlement with Andora of legal fees owed, payment of outstanding notes payable of $65,400 less an increase in loans payable to officer of $80,000.
 
The net cash flow deficit from operating activities was $604,600 versus cash used in operating activities of $936,300 in 2009, a decrease of $331,700. The decrease on the deficit consisted primarily of a reduction of $61,000 in net employee compensation expense arising from stock options and expenses issued to employees and directors, a decrease in the impairment  of marketable securities of $778,000 in 2009 versus none in 2009, a decrease of selling, general and adminstrative expenses of $589,000. The decrease in SG &A was primarily as a result of a reduction in legal fees in 2010 versus 2009.

The net cash flow provided in financing activities of $153,000 in 2010 consists of the Company receiving proceeds from the sale of common stock of $218,000 less principal payments on note payable of $65,000, as compared with cash used in financing activities of $159,000 for payment of notes in 2009.

We have a history of net losses and expect that our operating expenses will require additional financing as we have no revenues.  Our business model contemplates expansion of our business by identifying and acquiring additional oil and gas properties, subject to availability of sufficient cash resources.    To make these acquisitions, our capital needs will increase substantially.  We have limited working capital and cash resources to fund our oil and gas exploration operations. We are involved in various litigations, the outcome and legal expense of which could adversely affect our operations and cash resources. We plan to attempt to obtain our future funding that we will need to drill wells on leases owned, to lease additional properties and to otherwise finance our operations through debt and equity markets or joint venture agreements with third parties; however, we can provide no assurances that we will be able to obtain additional funding (and/or joint venture partners willing to fund specific exploration projects) when it is required or that it will be available to us on commercially acceptable terms, if at all.  If we fail to obtain the financing that we need when it is required, we may have to forego or delay potentially valuable opportunities to acquire new oil and gas properties or default on existing funding commitments to third parties and forfeit or dilute our rights in existing oil property interests. In the event additional financing is not available to us on commercially acceptable terms, if and when needed to finance our operations and to meet our cash needs as they come due, this may seriously harm our business, financial condition and results of operations and may adversely affect our ability to remain a going concern on a long term basis. See “Risk Factors” under “Item 1.A.”

 
16

 
 
Product Research and Development

We do not anticipate performing research and development for any products during the next twelve months.

Acquisition or Disposition of Plant and Equipment

None.

Number of Employees

From our inception through the period ended December 31, 2010, we have primarily relied on the services of outside consultants for services. In order for us to attract and retain quality personnel, we anticipate we will have to offer competitive salaries to future employees. As of December 31, 2010, we had one (1) full-time employee and we anticipate no increase in our administrative employment base during the next 12 months at the present time.

In the event that we continue to expand oil and gas operations, we will incur additional cost for oil and gas related personnel. This projected increase in personnel is dependent upon our generating revenues and obtaining sources of additional financing. There is no guarantee that we will be successful in raising the funds required or generating revenues sufficient to fund the projected increase in the number of employees. None of our employees are covered by collective bargaining agreements, and we believe our relations with our employees are favorable.

Inflation

Management believes that inflation has not had a material effect on our operations.

Off Balance Sheet Arrangements

We do not maintain off-balance sheet arrangements nor do we participate in non-exchange traded contracts requiring fair value accounting treatment.
 
Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operation are based upon consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The following summarizes several of our critical accounting policies. See a complete list of significant accounting policies in Note A to the Consolidated Financial Statements.

Oil and Gas Properties

We follow the full cost accounting method to account for the costs incurred in the acquisition, exploration, development and production of oil and gas reserves. All costs, including internal costs, directly related to acquisition, exploration and development activities, are capitalized as oil and gas property costs.   The capitalized costs of oil and gas properties, excluding unevaluated or unproven properties, are amortized using a unit-of-production method based on estimated proved recoverable oil and gas reserves. Amortization of unevaluated property costs begins when the properties become proved or their values become impaired. Impairment of unevaluated prospects is assessed based on management’s intention with regard to future exploration and development of individually significant properties and our ability to obtain funds to finance such exploration and development. We anticipate our unevaluated property costs to remain as unevaluated for no longer than two years.

Under full cost accounting rules for each cost center, capitalized costs of evaluated oil and gas properties, including asset retirement costs, less accumulated amortization and related deferred income taxes, may not exceed an amount (the “cost ceiling”) equal to the sum of (a) the present value of future net cash flows from estimated production of proved oil and gas reserves, based on current economic and operating conditions, discounted at 10%, plus (b) the cost of properties not being amortized, plus (c) the lower of cost or estimated fair value of any unproved properties included in the costs being amortized, less (d) any income tax effects related to differences between the book and tax basis of the properties involved. If capitalized costs exceed this limit, the excess is charged to earnings.
 
Given the volatility of oil and gas prices, it is reasonably possible that the estimate of discounted future net cash flows from proved oil and gas reserves could change in the near term. If oil and gas prices decline in the future, even if only for a short period of time, it is possible that additional impairments of oil and gas properties could occur. In addition, it is reasonably possible that additional impairments could occur if costs are incurred in excess of any increases in the present value of future net cash flows from proved oil and gas reserves, or if properties are sold for proceeds less than the discounted present value of the related proved oil and gas reserves.  

 
17

 
 
Investment in unconsolidated subsidiary

Investee entities that the Company can exercise significant influence, but not control, are accounted for under the equity method of accounting. Whether the Company exercises significant influence with respect to an investee depends on an evaluation of several factors, among others, representation of the company’s board of directors and ownership level, generally 20% to 50% interest in the voting securities of the company including voting rights associated with the Company’s holdings in common, preferred and other convertible instruments in the company. Under the equity method of accounting, the Company’s share of the earnings or losses of these companies is included in the equity income (loss) section of the consolidated statements of operations.  Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment.

Impairment of Long-Lived Assets

Long-lived assets and certain identifiable intangibles held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. We evaluate the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should an impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.
 
Stock Based Compensation

We measure and recognize compensation expense for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values.

New Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48 - Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109.  FIN 48 prescribes detailed guidance for the financial statement recognition, measurement, and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes.  Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods.  We adopted FIN 48 effective January 1, 2007.  The impact of the adoption of FIN 48 did not have a material effect on our financial position, results of operations, or cash flows.
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements”.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements.  This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007.  We implemented SFAS No. 157 effective January 1, 2008, and it did not have a significant impact on our financial position, results of operations, and cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB statement No. 115.” This Statement permits all entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. If an entity elects the fair value option for a held-to-maturity or available-for-sale security in conjunction with the adoption of this Statement, that security shall be reported as a trading security under Statement 115, but the accounting for a transfer to the trading category under paragraph 15(b) of Statement 115 does not apply. Electing the fair value option for an existing held-to-maturity security will not call into question the intention of an entity to hold other debt securities to maturity in the future. We implemented SFAS No. 159 effective January 1, 2008, and it did not have a significant impact on our financial position, results of operations, and cash flows.

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”.  This standard will significantly change the accounting and reporting related to noncontrolling interests in a consolidated subsidiary. After adoption, any noncontrolling interests will be classified as shareowner’s equity, a change from its current classification between liabilities and shareowner’s equity. Any earnings attributable to minority interests will be included in net earnings. Purchases and sales of minority interests will be reported in equity, deferring, perhaps permanently, recognition of the economic gain or loss on partial dispositions.  This statement is effective as of the first fiscal year that begins after December 15, 2008.

 
18

 
 
In December 2007, the FASB issued SFAS 141R, Business Combinations, This standard will significantly change the accounting for business combinations both during the period of the acquisition and in subsequent periods.  This statement is effective as of the first fiscal year that begins after December 15, 2008.

The Company does not expect the adoption of any other recently issued accounting pronouncements to have a significant impact on its results of operations, financial position or cash flow.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, stock and commodity prices. The Company does not have any financial instruments held for trading or other speculative purposes and does not invest in derivative financial instruments, interest rate swaps or other investments that alter interest rate exposure, except that we own equity securities in a private company held for long term investment and we hold equity securities in a publicly traded company whose value is marked to market on a quarterly basis. Our primary exposure to market risk is interest rate risk associated with our short term money market investments and the market price risk of our publicly traded investment. The Company does not have any credit facilities with variable interest rates.
 
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The report of the Independent Registered Public Accounting Firms, Financial Statements and Schedules are set forth beginning on page F-1 of this Annual Report on Form 10-K following this page.

 
19

 
 
SURGE GLOBAL ENERGY, INC.
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
 
 
20

 

SURGE GLOBAL ENERGY, INC.
(AN EXPLORATION STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   
Page No
     
 
F-2~F-3
     
 
F~4
     
 
F~5
     
 
F-6 ~ F-8
     
 
F-9 ~ F-11
     
 
F-12 ~ F-26
 
 
F-1

 
 
 
To the Board of Directors
Surge Global Energy, Inc.
(An Exploration Stage Company)
Palm Desert, California 92260
 
I have audited the accompanying consolidated balance sheets of Surge Global Energy, Inc. and its subsidiaries (“the Company”)  as of December 31, 2010 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended, and for the period January 1, 2005 (inception of exploration stage) through December 31, 2010.  These financial statements are the responsibility of the Company’s management. My responsibility is to express an opinion on these financial statements based upon my audit.  

I conducted my audit in accordance with standards of the Public Company Accounting Oversight Board (United States of America).  Those standards require that I 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 was I engaged to perform, an audit of its internal control over financial reporting.  My 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.  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.  I believe my audit provides a reasonable basis for my opinion.

In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2010, and the results of its operations and its cash flows for the year then ended, and for the period January 1, 2005 (inception of exploration stage) through December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to 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.
 
/s/ Peter Messineo, CPA
Peter Messineo, CPA
Palm Harbor FL
April 14, 2011

 
F-2

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors
Surge Global Energy, Inc.
(An Exploration Stage Company)
Palm Desert, California
 
We have audited the accompanying consolidated balance sheet of Surge Global Energy, Inc. and its subsidiaries (“the Company”) as of December 31, 2009 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the years then ended, and for the period January 1, 2005 (inception of exploration stage) 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 upon our audit.  

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States of America).  Those standards require that we plan and perform the audit 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.  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 our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2009, and the results of its operations and its cash flows for the years then ended, and for the period January 1, 2005 (inception of exploration stage) through December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to 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.

/s/ GBH CPAs, PC    

GBH CPAs, PC
www.gbhcpas.com
Houston, Texas
 
April 13, 2010
 
 
F-3

 
 
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS

  
December 31,
 
   
2010
   
2009
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
454
   
$
56,756
 
Accounts Receivable
   
10,000
     
-
 
Production payments receivable
   
215,000
     
300,000
 
Investment in marketable securities
   
102,451
     
380,655
 
Prepaid expenses
   
12,169
     
65,363
 
Total current assets
   
340,074
     
802,774
 
                 
Property and equipment, net of accumulated depreciation of  $32,418  and $27,319, respectively
   
2,402
     
6,656
 
Oil and gas properties, using full cost accounting – unproved
   
-
     
553,241
 
Investment in Andora Energy
   
3,276,739
     
3,675,948
 
                 
Total assets
 
$
3,619,215
   
$
5,038,619
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable and accrued liabilities
 
$
131,011
   
$
809,089
 
Loans Payable-Officer
   
80,000
     
-
 
Note payable
   
-
     
65,357
 
Total current liabilities
   
211,011
     
874,446
 
                 
Asset retirement obligation
   
-
     
10,500
 
Total liabilities
 
$
211,011
   
$
884,946
 
                 
Commitments and contingencies
   
     
 -
 
                 
Stockholders' equity :
               
Preferred stock, par value $0.001 per share; 10,000,000 shares authorized:
               
Series A - none issued and outstanding
   
-
     
-
 
Series B - none issued and outstanding
   
-
     
-
 
Special Voting Preferred – 0 shares issued and outstanding, respectively
   
-
     
-
 
Common stock, par value $0.001 per share; 200,000,000 shares authorized; 33,637,387 and  31,437,387 shares issued and outstanding, respectively
   
33,637
     
31,437
 
Additional paid-in capital
   
54,485,149
     
54,483,117
 
Accumulated other comprehensive income
   
-
     
(1,101
Accumulated deficit
   
(12,337,512
)
   
(12,337,512
)
Deficit from inception of exploration stage
   
(38,773,070
)
   
(37,722,268
)
Total stockholders' equity
   
3,408,204
     
4,153,673
 
                 
Total liabilities and stockholders' equity
 
$
3,619,215
   
$
5,038,619
 

See accompanying footnotes to consolidated financial statements
 
 
F-4

 
 
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

   
For the Year Ended
December 31,
   
For the period
from January 1,
2005 (inception
of exploration
stage) through
December 31,
 
   
2010
     
2009
   
2010
 
Operating expenses:
                   
Selling, general and administrative expenses
$
732,523
   
$
1,321,643
 
$
25,639,363
 
Accretion, depreciation and amortization
 
5,099
     
6,351
   
475,543
 
Oil and gas property impairment
 
615,741
     
571,948
   
8,089,912
 
Total operating expenses
 
1,353,363
     
1,899,942
   
34,204,008
 
                     
Loss from operations
 
(1,353,363
)
   
(1,899,942
)
 
(34,204,008
)
Equity in losses from affiliates
 
--
     
-
   
(2,099,663
)
Loss on redemption of preferred shares
 
-
     
-
   
(105,376
)
Gain(loss) on sale of marketable securities
 
305,138
     
206,013
   
1,168,789
 
Impairment of marketable securities
 
-
     
(778,377
)
 
(3,707,514
)
Warrants issued in connection with Peace Oil acquisition
 
-
     
-
   
(368,000
)
Revaluation loss net of warrant liability
 
-
     
-
   
(431,261
)
Interest income (expense)
 
(2,577
)
   
143,126
   
(4,230,238
)
Gain (loss) on disposition of Peace Oil property and Peace Oil Corp.
 
-
     
-
   
1,525,105
 
Loss from continuing operations, before income taxes and minority interest
 
(1,050,802
)
   
(2,329,180
)
 
(42,452,166
)
Benefit (provision) for income taxes
 
-
     
-
   
-
 
Income (loss) before non-controlling interest
 
(1,050,802
)
   
(2,329,180
)
 
(42,452,166
)
Income (loss) applicable to non-controlling interest
 
-
     
-
   
3,679,096
 
Net income (loss)
 
(1,050,802
)
   
(2,329,180
)
 
(38,773,070
)
Other comprehensive income (loss):
                   
Unrealized gain (loss) on available for sale securities
 
-
     
980,270
   
-
 
Foreign currency translation adjustment
 
1,101
     
14,538
   
-
 
Comprehensive income (loss)
$
(1,049,701
)
 
$
(1,334,372
)
$
(38,773,070
)
                     
Income (loss) per common share - basic and diluted
$
(0.03
)
 
$
(0.07
)
     
                     
Weighted average shares outstanding -  basic and diluted
 
32,860,187
     
31,437,387
       
 
See accompanying footnotes to consolidated financial statements
 
 
F-5

 

(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE PERIOD FROM JANUARY 1, 2005 (INCEPTION OF EXPLORATION STAGE)
THROUGH DECEMBER 31, 2010
                                                                             
      Preferred Stock    
 Common Stock
   
Additional
Paid-in
    Deferred      Accumulated Other Comprehensive      Accumulated Deficit during Exploration      Accumulated           
     
Shares
  Amount    
Shares
    Amount     Capital     Compensation     Income     Stage     Deficit     Total  
Balance at  December 31, 2005
   
-
 
$
-
   
26,277,097
   
$
26,277
   
$
28,328,758
   
$
(3,981,947
)
 
$
(185,414
)
 
$
(8,731,209
)
 
$
(12,337,511
)
 
$
3,118,954
 
                                                                             
Reversal of unamortized deferred compensation upon adoption of SFAS 123R
   
-
   
-
   
-
     
-
     
(3,981,947
)
   
3,981,947
     
-
     
-
     
-
     
-
 
Issuance of common stock in April 2006 in exchange for cash, net of costs and fees at $1.50 per share
   
-
   
-
   
1,200,000
     
1,200
     
1,798,800
     
-
     
-
     
-
     
-
     
1,800,000
 
Shares returned and cancelled in June 2006 related to the acquisition of Phillips & King International Inc. during August 2000
   
-
   
-
   
(450,000
)
   
(450
)
   
450
     
-
     
-
     
-
     
-
     
-
 
Issuance of common stock in June 2006 in exchange for convertible notes in subsidiary
   
-
   
-
   
160,000
     
160
     
178,456
     
-
     
-
     
-
     
-
     
178,616
 
Issuance of common stock in July 2006 in exchange for stock options exercised at $0.25 per share
   
-
   
-
   
400,000
     
400
     
99,600
     
-
     
-
     
-
     
-
     
100,000
 
Issuance of common stock in November 2006 in exchange for cash, net of costs and fees at $0.45 per share
   
-
   
-
   
3,000,000
     
3,000
     
1,347,000
     
-
     
-
     
-
     
-
     
1,350,000
 
Conversion of warrant liability upon registration of warrants in May 2006 
   
-
   
-
   
-
     
-
     
3,787,861
     
-
     
-
     
-
     
-
     
3,787,861
 
Valuation of warrant liabilities in connection with private placement  
   
-
   
-
   
-
     
-
     
(3,420,900
)
   
-
     
-
     
-
     
-
     
(3,420,900
)
Gain on investment
   
-
   
-
   
-
     
-
     
4,147,556
     
-
     
-
     
-
     
-
     
4,147,556
 
Conversion to equity method
   
-
   
-
   
-
     
-
     
3,133,622
     
-
     
-
     
-
     
-
     
3,133,622
 
Employee stock option expense
   
-
   
-
   
-
     
-
     
4,138,639
     
-
     
-
     
-
     
-
     
4,138,639
 
Other stock options awards granted pursuant to employment agreement
   
-
   
-
   
-
     
-
     
640,491
     
-
     
-
     
-
     
-
     
640,491
 
Foreign currency translation adjustment
   
-
   
-
   
-
     
-
             
-
     
339,014
     
-
     
-
     
339,014
 
Net loss
                                                       
(15,926,093
)
           
(15,926,093
)
Balance at  December 31, 2006
   
-
 
$
-
   
30,587,097
   
$
30,587
   
$
40,198,386
   
$
-
   
$
153,600
   
$
(24,687,302
)
 
$
(12,337,511
)
 
$
3,387,760
 
 
See accompanying footnotes to consolidated financial statements

 
F-6

 

SURGE GLOBAL ENERGY, INC.
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY (Continued)
FOR THE PERIOD FROM JANUARY 1, 2005 (INCEPTION OF EXPLORATION STAGE)
THROUGH DECEMBER 31, 2010
                                                                             
    Preferred Stock   Common Stock    
Additional
Paid-in
    Deferred       Accumulated Other Comprehensive      Accumulated Deficit during Exploration      Accumulated           
    Shares   Amount   Shares     Amount     Capital     Compensation     Income     Stage     Deficit     Total  
Balance at  December 31, 2006
   
-
 
$
-
   
30,587,097
   
$
30,587
   
$
40,198,386
   
$
-
   
$
153,600
   
$
(24,657,302
)
 
$
(12,337,511
)
 
$
3,387,760
 
                                                                             
Issuance of common stock in January 2007 in exchange for stock options exercised at $0.24 per share
   
-
   
-
   
383,333
     
383
     
91,483
     
-
     
-
     
-
     
-
     
91,866
 
Employee stock option expense
   
-
   
-
   
-
     
-
     
1,348,943
     
-
     
-
     
-
     
-
     
1,348,943
 
Reclass warrant liability to APIC per EITF 00-19-2
   
-
   
-
   
-
     
-
     
2,309,400
     
-
     
-
     
-
     
-
     
2,309,400
 
Gemini note conversion
   
-
   
-
   
(2,000,000
)
   
(2,000
)
   
(898,000
)
   
-
     
-
     
-
     
-
     
(900,000
)
Peace Oil acquisition warrants
   
-
   
-
   
-
     
-
     
368,000
     
-
     
-
     
-
     
-
     
368,000
 
Beneficial conversion feature in connection with issuance of convertible notes payable
   
-
   
-
   
-
     
-
     
1,076,575
     
-
     
-
     
-
     
-
     
1,076,575
 
Exchange of Redeemable Preferred Shares into common stock
               
7,499,907
     
7,500
     
4,468,824
     
-
     
-
     
-
     
-
     
4,476,324
 
Foreign currency translation adjustment
   
-
   
-
   
-
     
-
     
-
     
-
     
(1,068,738
   
-
     
-
     
(1,068,738
Net loss
                                                       
(11,343,620
)
           
(11,343,620
)
Balance at December 31, 2007
   
-
 
$
-
   
36,470,337
   
$
36,470
   
$
48,963,611
   
$
-
   
$
(915,138
)
 
$
(36,000,922
)
 
$
(12,337,511
)
 
$
(253,492
)
                                                                             
Employee stock option expense
   
-
   
-
   
-
     
-
     
265,691
     
-
     
-
     
-
     
-
     
265,691
 
Stock compensation expense - Warrants
   
-
   
-
   
-
     
-
     
24,506
     
-
     
-
     
-
     
-
     
24,506
 
Retirement of stock on sale of Cynthia Holdings, Ltd
   
-
   
-
   
(1,000,000
)
   
(1,000
)
   
1,000
     
-
     
-
     
-
     
-
     
-
 
Options exercised
   
-
   
-
   
150,000
     
150
     
5,700
     
-
     
-
     
-
     
-
     
5,850
 
Purchase and cancellation of stock
   
-
   
-
   
(993,333
)
   
(993
)
   
(67,940
)
   
-
     
-
     
-
     
-
     
(68,933
Purchase and cancellation of stock from prior Cold Flow shareholders
   
-
   
-
   
(3,189,617
)
   
(3,190
)
   
4,774,054
     
-
     
-
     
-
     
-
     
4,770,864
 
Unrealized loss on available for sale securities
   
-
   
-
   
-
     
-
     
-
     
-
     
(980,270
   
-
     
-
     
(980,270
Foreign currency translation adjustment
   
-
   
-
   
-
     
-
     
-
     
-
     
899,499
     
-
     
-
     
899,499
 
Net income
   
-
   
-
   
-
     
-
     
-
     
-
     
-
     
607,835
     
-
     
607,835
 
Balance at December 31, 2008
   
-
 
$
-
   
31,437,387
   
$
31,437
   
$
53,966,622
   
$
-
   
$
(995,909
)
 
$
(35,393,088
)
 
$
(12,337,512
)
 
$
5,271,550
 
 
See accompanying footnotes to consolidated financial statements
 
 
F-7

 
 
SURGE GLOBAL ENERGY, INC.
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY (Continued)
FOR THE PERIOD FROM JANUARY 1, 2005 (INCEPTION OF EXPLORATION STAGE)
THROUGH DECEMBER 31, 2010
 
   
Preferred Stock
  Common Stock    
Additional
Paid-in
    Deferred      Accumulated Other Comprehensive       Accumulated Deficit during Exploration     Accumulated           
    Shares   Amount   Shares     Amount     Capital     Compensation     Income     Stage     Deficit     Total  
Balance at  December 31, 2008
   
-
 
$
-
   
31,437,387
   
$
31,437
   
$
53,966,622
   
$
-
   
$
(995,909
)
 
$
(35,393,088
)
 
$
(12,337,512
)
 
$
5,271,550
 
                                                                             
Employee stock option expense
   
-
   
-
   
-
             
163,649
     
-
     
-
     
-
     
-
     
163,649
 
Stock compensation expense - Warrants
   
-
   
-
   
-
     
-
     
52,846
     
-
     
-
     
-
     
-
     
52,846
 
Unrealized gain on available for sale securities
   
-
   
-
   
-
     
-
     
-
     
-
     
980,270
     
-
     
-
     
980,270
 
Foreign currency translation adjustment
   
-
   
-
   
-
     
-
     
-
     
-
     
14,538
     
-
     
-
     
14,538
 
Net loss
                                                       
(2,329,180
)
           
(2,329,180
)
Balance at December 31, 2009
   
-
 
$
-
   
31,437,387
   
$
31,437
   
$
54,183,117
   
$
-
   
$
(1,101
)
 
$
(37,722,268
)
 
$
(12,377,512
)
 
$
4,153,673
 
                                                                             
Employee stock option expense
   
-
   
-
   
-
             
85,732
     
-
     
-
     
-
     
-
     
85,732
 
Issuance of common shares for various amounts
               
2,200,000
     
2,200
     
216,300
                                     
218,500
 
Foreign currency translation adjustment
   
-
   
-
   
-
     
-
     
-
     
-
     
1,101
     
-
     
-
     
1,101
 
Net loss
                                                       
(1,050,802
)
           
(1,050,802
)
Balance at December 31, 2010
   
-
 
$
-
   
33,637,387
   
$
33,637
   
$
54,485,149
   
$
-
   
$
-
   
$
(38,773,070
)
 
$
(12,337,512
)
 
$
3,408,204
 
 
See accompanying footnotes to consolidated financial statements
 
 
F-8

 
 
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS

     
For the Year Ended
December 31,
     
For the period
from January 1,
2005 (inception
of exploration
stage) through
December 31,
 
     
2010
     
2009
     
2010
 
Cash flows from operating activities:
                       
Net income (loss)
 
$
(1,050,802
)
 
$
(2,329,180
 
$
(38,773,070
)
Non-controlling interest
           
-
     
(3,679,096
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
                       
Share of affiliate loss
   
-
     
-
     
2,099,663
 
Depreciation and amortization
   
5,099
     
6,351
     
475,403
 
Write-off of property and equipment
   
-
     
-
     
4,984
 
Impairment of oil and gas properties
   
615,741
     
571,948
     
10,010,117
 
Gain (loss) on sale of Peace Oil property and Peace Oil Corp., net of liabilities
   
-
     
-
     
(1,525,105
)
Amortization/write-off of debt discount-beneficial conversion feature of convertible debenture
   
-
     
-
     
1,022,492
 
Amortization of discount attributable to warrants
   
-
     
-
     
629,192
 
Impairment of marketable securities
   
-
     
778,377
     
1,786,498
 
Interest on Gemini note
           
-
     
230,000
 
Amortization of discount on note receivable
   
-
     
(137,500
)
   
( 137,500
)
Gain/loss on revaluation of warrant liability
   
-
     
-
     
431,261
 
Gain on sale of marketable securities
   
(305,128
)
   
(206,013
)
   
(1,168,779
)
Loss on redemption of preferred shares
           
-
     
105,376
 
Beneficial conversion feature in conjunction  with issuance of convertible notes payable
           
-
     
1,076,575
 
Founders stock
           
-
     
4,265,640
 
Debt discount
           
-
     
1,010,679
 
Non-cash compensation costs
   
102,720
     
163,649
     
6,862,550
 
Warrant expense
   
-
     
52,846
     
445,352
 
Change in operating assets and liabilities:
                       
Other receivable
   
(10,000
 )
   
-
     
(142,384
)
Prepaid expense and other assets
   
53,194
     
177,337
     
(31.429
)
Other assets
                   
80,958
 
Accounts payable and accrued liabilities
   
(15,399
)
   
(14,143
)
   
798,117
 
Income taxes payable
   
-
     
-
     
-
 
Net cash used in operating activities
 
$
(604,575
)
 
$
(936,328
)
 
$
(11,083,468
 )

See accompanying footnotes to consolidated financial statements
 
 
F-9

 

SURGE GLOBAL ENERGY, INC.
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
For the Year Ended
December 31,
     
For the period
from January 1,
2005 (inception
of exploration
stage) through
December 31,
 
   
2010
     
2009
     
2010
 
Cash flows from investing activities:
                     
Purchases of property and equipment
$
(845
)
 
$
-
   
$
(115,900
)
Production payment advanced
 
-
     
(300,000
)
   
(300,000
)
Proceeds from sale of marketable securities
 
399,873
     
605,795
     
1,195,301
 
Proceeds from sale of investment
 
-
     
-
     
600,000
 
Payment for note receivable
 
-
     
-
     
(137,500
)
Proceeds from note receivable
 
-
     
275,000
     
275,000
 
Purchase of oil and gas properties
 
(5,000
)
   
(98,490
)
   
(13,469,019
)
Deposits
 
-
     
-
     
(9,913
)
Proceeds from sale of oil leases
 
-
     
-
     
6,314,820
 
Consideration paid on sale of subsidiary
 
-
     
     
(1,533,395
)
Asset Retirement Obligation
 
-
     
-
     
51,273
 
Proceeds from disposition of Peace Oil property
 
-
     
     
14,071,294
 
Purchase of marketable securities
 
-
     
     
(5,475,727
)
Gemini note repayment
 
-
     
     
(1,380,000
)
Deduct June 2006 Signet cash balance
 
-
     
     
(5,626,405
)
Net cash provided by (used in) investing activities
 
394,028
     
482,305
     
(5,540,171
)
                       
Cash flows from financing activities:
                     
Proceeds from sale of common stock, net of costs
 
218,500
     
-
     
4,343,513
 
Repurchase of common stock
 
-
     
-
     
(33,933
)
Principal payments on note payable
 
(65,357
)
   
(159,613
)
   
(225,000
)
Proceeds from exercise of options
 
-
     
     
97,717
 
Proceeds from equity to debt conversion
 
-
     
-
     
250,000
 
Net (payments for) proceeds from Joint Venture Partner cash call obligations
 
-
     
-
     
125,000
 
Proceeds from convertible debentures
 
-
     
-
     
1,710,000
 
Proceeds from note payable, gross
 
-
     
-
     
10,421,933
 
Proceeds from Signet stock, net of costs and fees
 
-
     
-
     
1,769,602
 
Deferred financing costs
 
-
     
-
     
(1,208,375
)
Net cash (used in) provided by financing activities
 
153,143
     
(159,613
)
   
17,250,487
 
Effect of exchange rates on cash and cash equivalents
 
1,101
     
13,579
     
(786,299
)
                       
Net  increase (decrease) in cash and cash equivalents
 
(56,302
)
   
(600,087
)
   
(159,451
)
                       
Cash and cash equivalents at the beginning of the period
 
56,756
     
656,843
     
159,935
 
 Cash and cash equivalents at the end of the period
$
454
   
$
56,756