UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

Commission file no. 0-30502

JOHN D. OIL AND GAS COMPANY

(Exact name of Registrant as specified in its charter)

MARYLAND		94-6542723
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

(Address of principal executive office)

Registrant’s telephone number, including area code: (440) 255-6325

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ 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 þ No 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 filer o		Non-accelerated filer o		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of the registrant’s common stock as of November 5, 2011 was 9,067,090 shares.

Except as otherwise indicated, the information contained in this Report is as of September 30, 2011.

 

 

JOHN D. OIL AND GAS COMPANY
INDEX TO QUARTERLY REPORT
ON FORM 10-Q

		Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 4. Controls and Procedures			28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			29
Item 3. Defaults Upon Senior Securities			29
Item 6. Exhibits			29
Signatures			30
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

Item 1.		Consolidated Financial Statements

John D. Oil and Gas Company and Subsidiary
Consolidated Balance Sheets

		September 30, 2011				December 31, 2010
		(Unaudited)				(Audited)
ASSETS
Current Assets:
Cash		$	5,027			$	20,016
Accounts Receivable			60,525				47,312
Accounts Receivable from Related Parties			513,780				848,395
Other Current Assets			2,549				4,610
Total Current Assets			581,881				920,333
Property and Equipment, Net			6,602,248				7,465,911
Investment in Unconsolidated Affiliate			941,503				736,953
TOTAL ASSETS		$	8,125,632			$	9,123,197
LIABILITIES AND EQUITY
Current Liabilities:
Bank Overdraft		$	86,673			$	—
Line of Credit			9,480,187				9,480,187
Current Maturities of Long Term Debt			138,197				136,812
Accounts Payable			305,328				276,452
Accounts Payable to Related Parties			1,010,802				627,425
Accrued Expenses			389,237				190,038
Total Current Liabilities			11,410,424				10,710,914
Long Term Debt, Net of Current Maturities			834,184				927,593
Asset Retirement Obligation			677,774				654,493
Equity (Deficit):
Serial Preferred Stock — $.001 par value: 2,000,000 shares authorized, 1,350 shares issued and outstanding			1				1
Common Stock — $.001 par value: 50,000,000 shares authorized; 9,067,090 shares issued and outstanding			9,067				9,067
Paid-in Capital			30,280,439				30,277,787
Accumulated Deficit			(34,363,916	)			(32,746,986	)
Total John D. Oil and Gas Company Shareholder’s Equity			(4,074,409	)			(2,460,131	)
Non-Controlling Interest			(722,341	)			(709,672	)
Total Equity (Deficit)			(4,796,750	)			(3,169,803	)
TOTAL LIABILITIES AND EQUITY		$	8,125,632			$	9,123,197

The accompanying notes to consolidated financial statements are an integral part of these statements.

John D. Oil and Gas Company and Subsidiary
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Revenues
Oil and Natural Gas Sales		$	280,998			$	485,008			$	927,796			$	1,640,218
Self-Storage Operation Revenues			87,801				86,917				260,239				251,787
Interest and Other			3,734				—				14,218				179,008
Total Revenues			372,533				571,925				1,202,253				2,071,013
Operating Expenses
Interest			120,079				178,984				435,258				314,021
Accretion			8,568				11,040				23,281				27,081
Oil and Natural Gas Production Costs			117,431				116,291				499,182				406,845
Self-Storage Property Operating Expense			36,154				40,082				104,087				111,144
Legal and Professional Fees			45,546				56,543				155,279				309,953
Property Taxes and Insurance			20,325				18,339				60,935				50,431
General and Administrative			154,611				162,083				497,472				459,567
Loss from Unconsolidated Affiliate			1,915				2,620				80,650				33,051
Depreciation, Depletion and Amortization			298,194				283,442				894,930				1,139,961
Total Operating Expenses			802,823				869,424				2,751,074				2,852,054
Net Loss			(430,290	)			(297,499	)			(1,548,821	)			(781,041	)
Net Income (Loss) attributable to Non-controlling Interest			(3,422	)			(4,022	)			(12,669	)			104,375
Net Loss attributable to John D. Oil and Gas Company		$	(426,868	)			(293,477	)		$	(1,536,152	)		$	(885,416	)
Weighted Average Shares Outstanding —Basic and Diluted			9,067,090				9,067,090				9,067,090				9,067,090
Loss per Common Share — Basic and Diluted		$	(.05	)		$	(0.04	)		$	(.18	)		$	(0.11	)

The accompanying notes to consolidated financial statements are an integral part of these statements.

John D. Oil and Gas Company and Subsidiary
Consolidated Statements of Equity (Deficit)
For The Nine Months Ended September 30, 2011 and 2010

																		Non-
		Preferred				Common				Paid-in				Accumulated				Controlling
		Stock				Stock				Capital				Deficit				Interest				Total
Balance at December 31, 2009 (audited)		$	1			$	9,067			$	30,273,239			$	(31,151,171	)		$	(813,644	)		$	1,682,508
Restricted Common Stock Award											3,411												3,411
Dividends Declared and Paid															(80,778	)							(80,778	)
Net Income (Loss)															(885,416	)			104,375				(781,041	)
Balance at September 30, 2010 (unaudited)		$	1			$	9,067			$	30,276,650			$	(32,117,365	)		$	(709,269	)		$	(2,540,916	)
Balance at December 31, 2010 (audited)		$	1			$	9,067			$	30,277,787			$	(32,746,986	)		$	(709,672	)		$	(3,169,803	)
Restricted Common Stock Award											2,652												2,652
Dividends Declared and Paid															(80,778	)							(80,778	)
Net Loss															(1,536,152	)			(12,669	)			(1,548,821	)
Balance at September 30, 2011 (unaudited)		$	1			$	9,067			$	30,280,439			$	(34,363,916	)		$	(722,341	)		$	(4,796,750	)

The accompanying notes to consolidated financial statements are an integral part of these statements.

John D. Oil and Gas Company and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)

		Nine Months Ended September 30,
		2011				2010
Cash Flows from Operating Activities:
Net Loss		$	(1,548,821	)		$	(781,041	)
Adjustments to Reconcile Net Loss to Net Cash Provided By Operating Activities
Accretion			23,281				27,081
Loss from Unconsolidated Affiliate			80,650				33,051
Depreciation, Depletion and Amortization			894,930				1,139,961
Restricted Common Stock Award			2,652				3,411
Changes in Operating Assets and Liabilities:
Accounts Receivable			321,402				(64,045	)
Other Current Assets			2,061				(132,039	)
Other Assets			—				5,495
Accounts Payable			412,253				63,426
Accrued Expenses			199,199				(66,498	)
Net Cash Provided By Operating Activities			387,607				228,802
Cash Flows from Investing Activities:
Purchases of Property and Equipment			(31,267	)			(117,592	)
Expenditures for Unconsolidated Affiliate			(285,200	)			(93,440	)
Expenditures for Oil and Natural Gas Wells			—				(10,493	)
Net Cash Used In Investing Activities			(316,467	)			(221,525	)
Cash Flows from Financing Activities:
Dividends Paid to Preferred Stockholders			(80,778	)			(80,778	)
Bank Overdraft			86,673				114,999
Proceeds from Long Term Debt			—				63,956
Payments on Line of Credit			—				(16,837	)
Principal Payments on Long Term Debt			(92,024	)			(110,689	)
Net Cash Used In Financing Activities			(86,129	)			(29,349	)
Net Decrease in Cash			(14,989	)			(22,072	)
Cash, Beginning of Period			20,016				22,072
Cash, End of Period		$	5,027			$	—
Supplemental Disclosure of Cash flow Information:
Interest Paid on Borrowings		$	21,749			$	279,194

The accompanying notes to consolidated financial statements are an integral part of these statements.

John D. Oil and Gas Company and Subsidiary

Notes to Unaudited Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

John D. Oil and Gas Company, formerly Liberty Self-Stor, Inc. (the “Company”), is a corporation organized under the laws of the State of Maryland.

The Company is in the business of acquiring, exploring, developing, and producing oil and natural gas in Northeast Ohio. The Company currently has fifty-eight producing wells. The Company cannot guarantee success under its business plan as drilling wells for oil and natural gas is a high-risk enterprise and there is no guarantee the Company will become profitable.

The Company also still retains one self storage facility located in Painesville, Ohio. The self-storage facility is operated through a partnership agreement between Liberty Self-Stor Ltd. (“Ltd”) and the Company. Liberty Self Stor, Ltd’s interest in LSS I Limited Partnership (LSS I) is reflected as a non-controlling interest in these consolidated financial statements. Due to the losses incurred by the self-storage facilities, current and previously owned, the initial investment was previously written off. The Company may, if business and time warrant, sell the Painesville facility in the future.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information and with instructions to Form 10-Q and, accordingly, do not include all information and footnotes required under accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, these interim consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial position of the Company as of September 30, 2011 and the results of its operations and cash flows for the three and nine months ended September 30, 2011 and 2010. Interim results of operations are not necessarily indicative of the results to be expected for the year ended December 31, 2011.

Accounting estimates were revised as necessary during the quarter based on new information and changes in facts and circumstances. These unaudited consolidated financial statements should be read in conjunction with the comprehensive discussion of the Company’s management estimates and significant accounting policies in the Company’s Form 10-K for the year ended December 31, 2010.

The accompanying unaudited interim consolidated financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern. See Note 2 to these consolidated financial statements.

Principles of Consolidation

Pursuant to the terms of the partnership agreement of LSS I, the Company, as sole general partner, controls LSS I. Accordingly, the Company accounts for its investment in LSS I utilizing the consolidation method. The investment in an unconsolidated affiliate, Kykuit Resources LLC (Kykuit) is accounted for using the equity method. All significant inter-company transactions and balances have been eliminated.

Use of Estimates

The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues, costs and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates all of these estimates, including those related to the provision for possible losses, deferred tax assets and liabilities, depreciation and depletion, and certain accrued liabilities. The Company bases estimates on historical experience and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company’s financial statements are based on a number of significant estimates, including collectability of receivables, selection of useful lives for property and equipment and timing and costs associated with its retirement obligations. Estimated oil and natural gas reserve quantities are the basis for the calculation of depreciation, depletion and impairment of oil and natural gas properties.

The Company’s oil and natural gas business makes it vulnerable to changes in wellhead prices of crude oil and natural gas. Such prices have been volatile in the past and are expected to continue to be volatile. Proved reserves are based on current oil and natural gas prices and estimated reserves, which is considered a significant estimate by the Company, and is subject to change.

Accounts Receivable

The Company has certain trade receivables consisting of oil and natural gas sale obligations due under normal trade terms. The Company currently sells its production to a related party through an oil and natural gas agreement, extending credit on an unsecured basis to them. In evaluating its allowance for possible losses, the Company performs a review of outstanding receivables. The trade receivables outstanding are typically three months of natural gas production due to the timing and accounting treatment by the main distribution pipeline company in Northeast Ohio and related party accounting treatments.

The Company’s accounts receivable, arising from the self-storage business, are due from individuals as well as business entities. Tenants are required to pay their rent on the first of each month. Past due amounts are those that are outstanding longer than the contractual payment terms. If an account is more than 75 days past due, the Company generally writes off the balance directly to expense. For such past due accounts, the Company has the right to auction the contents of the rented space, which allows for recovery of written-off balances. Any such recoveries are credited to other income when received. Approximately $2,400 and $1,900 of bad debt expense was incurred in the nine months ended September 30, 2011 and 2010, respectively.

At September 30, 2011 and December 31, 2010, the Company’s credit evaluation indicated that it has no need for an allowance for possible losses.

Property and Equipment

All property and equipment is depreciated using the straight-line method over estimated useful lives of twenty five years for buildings and improvements and five to seven years for furniture and equipment.

The Company uses the successful efforts method of accounting for oil and natural gas producing activities. Under this method, acquisition costs for proved and unproved properties are capitalized when incurred. Exploration costs, including geological and geophysical costs, the costs of carrying and retaining unproved properties and exploratory dry hole drilling costs, are expensed. Development costs, including the costs to drill and equip development wells and successful exploratory drilling costs to locate proved reserves, are capitalized. Upon sale or retirement of a proved property, the cost and accumulated depreciation, depletion and amortization are eliminated from property accounts and the resultant gain or loss is recognized.

Exploratory drilling costs are capitalized when incurred pending the determination of whether a well has found proved reserves. If a well is determined to be successful, the capitalized drilling costs will be reclassified as part of the cost of the well. If a well is determined to be unsuccessful, the capitalized drilling costs will be charged to expense in the period the determination is made. The Company is involved in exploratory drilling only to the extent that it is a partner of Kykuit, which is doing exploratory drilling in Montana. The Company is an owner and managing member of Kykuit, an unconsolidated affiliate.

Development costs of proved oil and natural gas properties, including estimated dismantlement, restoration, abandonment costs and acquisition costs, are depreciated and depleted on a well by well basis by the units-of-production method using estimated proved developed reserves. The costs of oil and natural gas properties are periodically assessed for impairment.

Asset Impairment

The Company reviews its self-storage property and capitalized well costs for impairment when events or changes in circumstances indicate the carrying amounts of the properties may not be recoverable. When such conditions exist, management estimates future cash flows from operations and ultimate disposition of the individual properties. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related property’s estimated fair market value would be recorded and an impairment loss would be recognized.

Asset Retirement Obligation

The Company accounts for its asset retirement obligations in accordance with GAAP which requires the fair value of an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. For the Company, asset retirement obligations primarily relate to the abandonment, dismantling and plugging of oil and natural gas wells. The present value of the estimated asset retirement cost is capitalized as part of the long-lived asset. The capitalized asset retirement cost is depreciated and the asset retirement obligation is accreted over the estimated life of the well.

The following table presents the Company’s asset retirement obligation activity.

		For the Nine Months Ended
		September 30,
		2011				2010
Asset retirement obligations, beginning of the period		$	654,493			$	680,056
Liabilities incurred during the period			—				6,095
Accretion expense			23,281				27,081
Asset retirement obligations, end of the period			677,774				713,232
Less current liabilities			—				—
Asset retirement obligations, net of current maturities		$	677,774			$	713,232

At September 30, 2011 and December 31, 2010, the Company’s current portion of the asset retirement obligations was $0.

Revenue Recognition

The Company recognizes revenue from its oil and natural gas interests in producing wells as oil and natural gas is sold to a purchaser at a fixed or determinable price, when delivery has occurred, title and risk of loss have transferred to the purchaser and the collectability of revenue is reasonably assured. The Company has a management agreement with a related party to transport the Company’s natural gas production through the related party’s pipeline and include this natural gas with the related party’s natural gas in order to fulfill production volume contracts they currently have in place. The Company utilizes the sales method to account for gas production volume imbalances. Under this method, revenue is recognized only when gas is produced and sold on the Company’s behalf. The Company had no material gas imbalances at September 30, 2011 and December 31, 2010.

The Company’s revenue from self-storage operations is derived primarily from monthly rentals of self-storage units. Rental revenue is recognized in the period the rent is earned which is typically on a monthly basis.

The Company also leases certain commercial space in its Painesville property under long-term lease agreements through December 1, 2020. Total lease revenue related to these leases was $56,715 and $54,962 for the three months and $169,695 and $156,706 for the nine months ended September 30, 2011 and 2010, respectively. Revenue under these long-term lease agreements is recognized on a straight-line basis over the respective lease terms.

Future minimum lease revenue from operations under non-cancelable leases excluding options to renew for each of the five succeeding annual periods ending September 30 and thereafter are as follows:

2012		$	212,170
2013			201,684
2014			187,887
2015			171,378
2016			49,440
Thereafter			125,030
		$	947,589

Stock-Based Compensation

On June 16, 2009 at the Company’s Annual Meeting, of the stockholders who voted, 81.7% voted to approve amendments to the Company’s stock option plan. The plan was extended another ten years.

Of the 300,000 stock options that may be granted, none were outstanding as of September 30, 2011 and 2010, respectively. The former President and Chief Operating Officer of the Company was granted 35,000 restricted shares that amortize ratably over a five year vesting period through July of 2011. The compensation expense recorded for the restricted shares was $379 and $1,137 for the three months ended September 30, 2011 and 2010 and $2,652 and $3,411 for the nine months ended September 30, 2011 and 2010.

On June 20, 2008, the Company granted a warrant to purchase 50,000 shares of common stock to Richard M. Osborne in return for Mr. Osborne providing collateral for the Company’s credit facility with RBS Citizens, N.A., d/b/a Charter One (“Charter One”). The fair value of the warrant was expensed in 2008. The warrant has an exercise price of $1.00 per share and a term of five years.

Income Taxes

Effective January 1, 2006, the Company became a “C” Corporation for tax purposes.

In establishing a provision for income taxes, the Company must estimate when in the future certain items will affect taxable income. Deferred taxes are recorded for future tax consequences of events that have been recognized in the financial statements or tax returns, based upon enacted tax laws and rates. Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not.

The Company has net operating loss carry forwards (NOLS) and a valuation allowance to offset any tax effects. The Company has no unrecognized tax benefits and therefore, there is no anticipated effect on the Company’s effective tax rate. Any tax penalties or interest expense will be recognized in income tax expense. No interest and penalties were accrued as of September 30, 2011 or December 31, 2010, or paid during the periods then ended. The Company does not anticipate a significant change over the next twelve months to any tax liability.

The Company is open to federal and state tax audits until the applicable statute of limitations expire. There are currently no federal or state income tax examinations underway for the Company. Generally, the three previous tax years remain open to examination by the major taxing jurisdictions in which we operate, although no material changes to unrecognized tax positions are expected within the next twelve months. The Company does, however, have prior year net operating losses which remain open for examination.

Fair Value of Financial Instruments

The fair value of the Company’s financial instruments is determined by using available market information and appropriate valuation methodologies. The Company’s principal financial instruments are cash, accounts receivable, accounts payable and debt. Cash, accounts receivable and accounts payable, due to their short maturities and liquidity, are carried at amounts which reasonably approximate fair value. Based upon rates available for similar borrowings, the Company’s book value approximated the fair value of its debt at September 30, 2011 and December 31, 2010.

Recently Issued Accounting Pronouncements

The Company reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe any such pronouncements will have a material impact on the financial statements.

Reclassifications

Certain reclassifications of prior year comparative amounts have been made to conform to current period presentation. These reclassifications had no effect on net loss or shareholders’ equity as previously reported.

Note 2. Going Concern

The Company’s independent registered accounting firm indicated, in the Company’s Form 10-K for the year ended December 31, 2010, in their audit report in an explanatory paragraph that, due to the Company’s recurring losses and the Company’s outstanding debt of $9.5 million currently due and subject to a forbearance agreement, there was substantial doubt about the Company’s ability to continue as a going concern at December 31, 2010. The Company’s unaudited consolidated financial statements as of September 30, 2011 have been prepared on the assumption that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. The Company has incurred substantial losses, which have strained its financial resources, and the Company’s liabilities exceed its assets at September 30, 2011. The Company’s $9.5 million line of credit with RBS Citizens, N.A. d/b/a Charter One (“Charter One”) was due August 1, 2009 and was in default. On August 24, 2009, Charter One received a judgment in its favor against the Company and Mr. Osborne related to this debt. On June 18, 2010, the Company, other parties, and Charter One entered into a forbearance agreement (“the Forbearance Agreement”), pursuant to which Charter One agreed to forbear from enforcing its rights and remedies under the Company’s line of credit as well as the other parties’ loan agreements until July 1, 2011, subject to no further events of default including the payments due under the Forbearance Agreement.

The forbearance period expired on July 1, 2011, and has not been extended. The full amount of the loan is now past due. On October 3, 2011, Charter One instituted an action in United States District Court Northern District of Ohio Eastern Division claiming a default under the line of credit and seeking to foreclose upon property of the Company securing the line of credit and to appoint a receiver for the Company and certain companies owned or controlled by Mr. Osborne. The Company has filed a motion to dismiss the Charter One action and a motion in opposition to the Charter One action.

The Company continues to attempt to reach a loan agreement satisfactory to both parties. Additionally, the Company continues to pursue alternative sources of financing, but there is no guarantee that a receiver will not be appointed. See Note 5 “Line of Credit and Long-Term Debt” to these consolidated financial statements for more information.

Note 3. Property and Equipment

Property and equipment consists of the following:

		September 30, 2011				December 31, 2010
		(Unaudited)				(Audited)
Oil and Natural Gas Properties:
Proved Properties		$	16,495,518			$	16,473,401
Unproved Properties			79,308				79,308
Well Material Inventory			50,349				50,349
Accumulated Depletion			(11,395,008	)			(10,613,130	)
Total Oil and Natural Gas Properties			5,230,167				5,989,928
Other Property and Equipment:
Land			307,780				307,780
Building and Improvements			2,402,983				2,402,983
Furniture and Equipment			257,270				248,120
Accumulated Depreciation			(1,595,952	)			(1,482,900	)
Total Other Property and Equipment			1,372,081				1,475,983
Property and Equipment, Net		$	6,602,248			$	7,465,911

Note 4. Investment in Unconsolidated Affiliate

The Company is an owner and managing member of an unconsolidated affiliate, Kykuit Resources LLC, (“Kykuit”) which is accounted for using the equity method of accounting. The Company had a 22.80% and a 21.79% ownership in Kykuit at September 30, 2011 and December 31, 2010, respectively. On June 18, 2010, the Company pledged its partnership interest in Kykuit to Charter One in connection with the Forbearance Agreement. During the third quarter of 2010, the Company borrowed funds totaling $39,789 from Kykuit. For the nine months ended September 30, 2011, the Company made cash investments totaling $285,200 to Kykuit and has an addional $124,000 of cash commitments recorded in accounts payable. The investment by the Company in this venture is $941,503 which includes cash totaling $1,905,530 and a cumulative net book loss of $964,027 at September 30, 2011.

The following table displays the unaudited balance sheets of Kykuit at September 30, 2011 and December 31, 2010 and the unaudited statements of operations for the three and nine months ended September 30, 2011 and 2010, respectively.

Kykuit Resources LLC
Balance Sheet

		September 30, 2011				December 31, 2010
Current Assets		$	545,399			$	429,656
Unproved Leaseholds and Development Costs			3,648,808				3,647,721
Furniture and Fixtures, Net of Depreciation			11,843				20,373
Other Assets			8,294				15,726
		$	4,214,344			$	4,113,476
Current Liabilities		$	226,362			$	677,331
Paid in Capital			8,356,674				7,436,674
Accumulated Deficit			(4,368,692	)			(4,000,529	)
		$	4,214,344			$	4,113,476

Kykuit Resources LLC
Statement of Operations

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Total Revenues		$	—			$	—			$	—			$	—
Total Expenses			8,520				12,301				368,163				156,168
Net Loss		$	(8,520	)		$	(12,301	)		$	(368,163	)		$	(156,168	)

Note 5. Line of Credit and Long-Term Debt

On September 28, 2006, the Company along with Mr. Richard M. Osborne, the Company’s Chairman and CEO entered into an unsecured loan agreement for a line of credit with a one year term with Charter One Bank for up to $5.0 million dollars in total borrowings with interest at a rate of 1.75% over LIBOR adjusted monthly. The Charter One liability was jointly loaned, so the Company and Mr. Osborne were each liable for the debt of the other.

The loan was subsequently revised several times until on March 28, 2008, the Company entered into the First Amended and Restated Loan and Security Agreement (the “Loan Agreement”) between the Company, Richard M. Osborne (the Company and Mr. Osborne together, the “Borrowers”), and Charter One. The Loan Agreement extended the maturity date to August 1, 2009, continuing with the original interest rate calculation of 1.75% over LIBOR adjusted monthly. Under the agreement, only the Company could borrow on the line of credit when any amounts were paid down against the $9.5 million outstanding on the loan. The Company and Great Plains Exploration LLC, a company owned by Mr. Osborne (“Great Plains”), agreed that the related party loan of $3.8 million from Great Plains was satisfied in full and terminated upon the Company’s entry into the new Charter One loan and assumption of the $3.8 million portion of the line of credit drawn by Mr. Osborne. Therefore, the Company had $9.5 million in outstanding debt to Charter One and $0 in outstanding debt to Great Plains at March 31, 2008. As part of this loan agreement, Mr. Osborne has pledged several real estate properties that he personally owns, to provide sufficient collateral allowing the Company to enter into the loan agreement. The Company did not meet the reserve collateral requirements for a $9.5 million loan without additional collateral.

The Company’s $9.5 million line of credit matured on August 1, 2009. On August 20, 2009, Charter One received a judgment in its favor against the Company and Mr. Osborne related to the $9.5 million line of credit. The average balance during 2011 was $9.5 million and the weighted average interest rate was 4.75%. The average balance during 2010 was $9.5 million and the weighted average interest rate was 3.55%.

The Company’s line of credit with Charter One was almost fully drawn for $9.5 million at December 31, 2010 at a rate of 4.75%. Charter One contends that the interest rate at December 31, 2010 is LIBOR plus 1.75% with a LIBOR floor of 3.00%. The Company believes that there is an interest rate cap of 3.00%. Also, Charter One has applied a default rate to the loan from January 4, 2010 through June 18, 2010. The Company does not agree with the default rate and therefore has not booked approximately $171,000 of additional interest expense. It is the Company’s position that the interest for the period from judgment date to forbearance date should remain at the original contract rate at the date of judgment, based upon the per diem interest amount expressly stated in that judgment. Attorneys for the Company also strongly support that position and have so stated in letters to Charter One and for purposes of the annual audit.

On June 18, 2010, the Company, Mr. Osborne, the Richard M. Osborne Trust (the “Trust”), Great Plains, and Oz Gas, Ltd. (companies owned by Mr. Osborne) entered into a Forbearance Agreement with Charter One regarding the Company’s $9.5 million line of credit under the Loan Agreement and regarding the $25.0 million loan agreement between Great Plains, Oz Gas and Mr. Osborne and Charter One, dated August 2, 2007 (together, the “Loan Agreements”). The Company, Mr. Osborne, the Trust, Great Plains and Oz Gas are collectively referred to in the Forbearance Agreement and herein as the “Loan Parties.”

Pursuant to the Forbearance Agreement and during the forbearance period, Charter One agreed to, among other things, forbear from exercising its rights and remedies arising out of the judgments and the Loan Agreements and to stay any action on its motion for the appointment of a receiver.

Under the Forbearance Agreement, Charter One’s agreement to forbear was conditioned upon and subject to the following conditions:

	•		Payment by the Loan Parties of a forbearance fee of $40,000 per month during the forbearance period;
	•		No material adverse change in the condition of the Loan Parties;
	•		An assignment and grant of a security interest by the Company and Great Plains of each of their ownership interests in the Alpha and Panzica wells;
	•		A pledge by the Loan Parties of their ownership interests in Kykuit Resources LLC; and
	•		A pledge by Mr. Osborne of not less than 800,000 shares of common stock of Gas Natural Inc. with such stock having a market value of not less than $9.6 million pursuant to a pledge agreement.

In addition, commencing July 1, 2010 and each month thereafter until all amounts under the judgments and loan agreements have been paid in full, the Loan Parties agreed to pay Charter One $400,000, including the $40,000 forbearance fee. The Company had previously felt they would pay one third of the $400,000, but due to lack of cash, they have decided to accrue interest and one third of the $40,000 monthly fee and legal fees. The monthly $400,000 was being paid by the other Loan Parties. Such payments by the Loan Parties were applied first to Charter One’s fees and expenses, second to accrued but unpaid interest due under the judgments, and third to principal amounts due under the judgments. In addition, the Company was to deposit all proceeds of its operations into accounts maintained by Charter One but during the forbearance period Charter One would not take any action to set off funds in any such account.

The forbearance period expired on July 1, 2011, and has not been extended. The full amount of the loan is now past due. On October 3, 2011, Charter One instituted an action in United States District Court Northern District of Ohio Eastern Division claiming a default under the line of credit and seeking to foreclose upon property of the Company securing the line of credit and to appoint a receiver for the Company and certain companies owned or controlled by Mr. Osborne. The Company has filed a motion to dismiss the Charter One action and a motion in opposition to the Charter One action.

The Company continues to attempt to reach a loan agreement satisfactory to both parties. Additionally, the Company continues to pursue alternative sources of financing, but there is no guarantee that a receiver will not be appointed.

The Painesville facility is encumbered by a mortgage with First Merit Bank, N.A. by agreement dated June 9, 2009. The loan was deemed to be in default by First Merit Bank, N.A. in August 2009 when Charter One sought judgments against the Company regarding its line of credit.

On May 11, 2010, Liberty Self Stor, LTD and First Merit Bank, N.A signed a loan modification agreement which waived the prior defaults. The terms of the mortgage include a five year term, maturing on June 1, 2014, with a ten year amortization period at a variable rate of the 30 day LIBOR plus 250 basis points. Monthly payments include principal of $10,370 plus interest. The current rate on September 30, 2011 was 2.7215%. The principal amount of the loan as of September 30, 2011 and December 31, 2010 was $927,404 and $1,010,364, respectively.

The repayment terms for the Painesville loan include the following principal payments over the next three years ending September 30:

2012		$	124,440
2013			124,440
2014			678,524
		$	927,404

In February 2010, the Company entered into a loan for the lease of a vehicle which matures in February 2015. The interest rate is fixed at 2.90%. The outstanding principal amount of the lease as of September 30, 2011 was $44,975.

The future minimum lease payments over the next four years ending September 30 are as follows:

2012		$	13,756
2013			13,756
2014			13,756
2015			3,707
			44,975
Less current portion			(13,756	)
		$	31,219

Interest expense on these debt instruments was $120,079 and $178,984 for the three months and $435,258 and $314,021 for the nine months ended September 30, 2011 and 2010, respectively.

Note 6. Notes Payable to Related Party

The Company entered into an agreement with Mr. Osborne for an unsecured revolving demand note dated January 1, 2006. Interest is payable annually at the prime rate with principal being due on demand. The revolving demand note does not include an expiration date or a limit on the amount that the Company may borrow. The prime rate at September 30, 2011 and December 31, 2010 was 3.25%. There were no outstanding balances under the note at September 30, 2011 and December 31, 2010, respectively.

As there have been no previous or current borrowings on this note, interest expense on the related party note was $0 and $0 for the three months and nine months ended September 30, 2011 and 2010, respectively.

Note 7. Stockholder’s Equity

Effective February 12, 2008, the Company filed Articles Supplementary to its Articles of Incorporation, as amended, restated and supplemented with the State Department of Assessment and Taxation of Maryland designating 5,000 Series A Preferred Shares, par value $0.001 per share. Dividends accumulate on the Series A Preferred Shares at the rate of 8% per annum and must be paid on a quarterly basis. Failure to pay dividends on a timely basis results in the imposition of a default rate of 10% per annum that continues until the default is cured by the Company by payment of all accrued dividends. Further, the initial default by the Company entitles the holders of the Series A Preferred Shares to elect, as a class, one director to the Company’s Board of Directors who shall serve until the Series A Preferred Shares are liquidated or converted.

The Series A Preferred Shares have voting rights only with respect to certain extraordinary actions that would impair the rights of holders of the Series A Preferred Shares, such as a merger, reorganization or issuance of a class or series of stock on parity with or senior to the Series A Preferred Shares. Each of the Series A Preferred Shares is convertible into common shares by dividing the sum of $1,000 and any accrued but unpaid dividends on the Series A Preferred Shares by the conversion price of $1.00 (the “Conversion Price”). The Conversion Price is proportionately increased (or decreased, as the case may be) for combinations, stock splits and similar events that would affect the number of shares of the Company’s common stock outstanding. The Series A Preferred Shares have a liquidation preference of $1,000 per share, plus any accrued but unpaid dividends.

The Company sold an aggregate of 1,350 shares of its Series A Convertible Preferred Shares in a private placement to a total of nine accredited investors during the first six months of 2008. All Series A Preferred Shares were sold at a price of $1,000 per share for a total of $1,350,000 with no underwriting discounts or commissions, as no underwriters were used to facilitate the transactions.

The Company did not issue stock in 2011 or 2010.

Note 8. Interest and Other Revenue

Interest and other revenue for the nine months ended September 30, 2010 includes a refund for real estate property tax of $177,918 for tax years 2006 through 2009 on the Painesville self storage facility.

Note 9. Earnings/Loss Per Share

Basic income (loss) per share of common stock is determined by dividing net income (loss) less declared preferred stock dividends by the weighted average number of shares of common stock outstanding during the period.

The restricted stock awards, Class A Limited Partnership conversion and warrants for the three and nine months ended September 30, 2010 and 2009 were anti-dilutive and had no effect on diluted earnings per share. The Company’s Class A Limited Partnership exchange factor is .1377148 per share.

The Company paid no cash distributions to its common stockholders for the three or nine months ended September 30, 2011 and 2010. However, the Company declared and paid $27,222 in preferred stock dividends for the three months ended September 30, 2011 and 2010. The Company declared and paid $80,778 in preferred stock dividends for the nine months ended September 30, 2011 and 2010.

Note 10. Income Taxes

At December 31, 2010, the Company had net operating loss carry forwards (NOLS) for future years of approximately $16.6 million. These NOLS will expire at various dates through 2028. Utilization of the NOLS could be limited if there is a substantial change in ownership of the Company and is contingent on future earnings. In addition, the Company paid $41,187 for alternative minimum tax (AMT) in 2006, creating a tax credit that carries forward indefinitely.

The Company has provided a valuation allowance equal to 100% of the total net deferred asset in recognition of the uncertainty regarding the ultimate amount of the net deferred tax asset that will be realized. The Company also expects to continue generating tax losses in the forseeable future.

Note 11. Other Related Party Transactions

Mr. Osborne is the sole manager of Liberty Self-Stor II, Ltd., an Ohio limited liability company, which is the owner of a truck rental business, which makes trucks available for short-term rental to the general public, including tenants of the Company’s self-storage facility, and provides for the retail sale of locks, boxes, packing materials and related merchandise at the self-storage facility. The Company has entered into a cost sharing agreement with Liberty Self-Stor II, Ltd. with respect to the sharing of employees and space at the office of the self-storage facility for the benefit of both companies. Liberty Self-Stor II, Ltd. owed the Company funds associated with these transactions, as well as for cash advances between the companies, which are included in accounts receivable from related parties in the accompanying consolidated balance sheets and listed in the table below.

The Company leases its executive offices from OsAir, Inc., a company owned by Mr. Osborne. The current lease has a three year term maturing on April 1, 2012 for $2,000 per month. Rent expense totaled $6,000 for the three months ended September 30, 2011 and 2010 and $18,000 for the nine months ended September 30, 2011 and 2010, respectively, and is included in general and administrative expenses.

Effective January 1, 2006, the Company entered into a contract with Great Plains for well operations and sale of natural gas and oil production, net of pipeline costs. The term of the agreement was one year from the effective date. It was extended as of January 1, 2007 and shall be extended for consecutive one year periods unless terminated earlier.

The Company is a fifty percent partner and the operating manager of Lucky Brothers LLC, a company whose other partners are almost all related to Mr. Osborne. The partnership owns one well at September 30, 2011. The purpose of Lucky Brothers LLC is to engage in a joint venture for drilling wells. The Company has invested $174,392 in well tangibles and intangibles at September 30, 2011 and December 31, 2010.

The Company purchases well supplies from Big Oats Oilfield Supply Company, a company owned by Mr. Osborne.

At September 30, 2011, the Company had a $12,000 invoice outstanding to Oz Gas Ltd., a company owned by Mr. Osborne, for payments made on the Company’s behalf to Charter One. See Note 5 “Line of Credit and Long-Term Debt” to these consolidated financial statements for more information.

The Company is an owner and managing member of an unconsolidated affiliate, Kykuit Resources LLC, which is accounted for using the equity method of accounting. The Company had a 22.80% interest in Kykuit at September 30, 2011 and a 21.79% interest at December 31, 2010. On June 18, 2010, the Company pledged its interest in Kykuit to Charter One in connection with the Forbearance Agreement. For the three months ended September 30, 2011, the Company committed to invest $124,000. Additionally, the Company had $27,500 in accounts payable for borrowed funds owed to Kykuit at September 30, 2011. The recorded investment by the Company in this venture is $941,503 which includes cash totaling $1,905,530 and a cumulative net book loss of $964,027 at September 30, 2011. Additional information is disclosed in Note 4 to these financial statements.

Mr. Osborne, the Company’s Chairman and Chief Executive Officer, and Gas Natural Inc., a publicly-held public utility company of which Mr. Osborne is the Chairman, Chief Executive Officer and a significant stockholder, own interests in Kykuit. Mr. Osborne’s personal interests in Kykuit were pledged to Charter One in connection with the Forbearance Agreement.

The following tables summarize the related party transactions for accounts receivable of oil and natural gas production, capitalized costs for wells, outstanding accounts payable, revenues received and payments paid for expenses to related parties for the periods indicated. The accounts receivable from various companies owned by Mr. Osborne in the accompanying consolidated balance sheets represent amounts owed to the Company for minor cost sharing transactions and are listed in the following table.

		September 30,				December 31,
		2011				2010
Accounts Receivable Oil and Gas Sales:
Great Plains Exploration, LLC.		$	503,707			$	839,961
Liberty Self Stor II			4,376				3,806
Various Related Companies			5,697				4,628
		$	513,780			$	848,395
Accounts Payable and Accrued Liabilities:
Great Plains Exploration, LLC.		$	863,183			$	418,705
Big Oats Oilfield Supply Company			100,030				23,111
OzGas Ltd.			12,000				12,000
Kykuit Resources LLC			27,500				160,391
Osair, Inc.			8,089				11,922
Orwell Natural Gas			—				1,296
		$	1,010,802			$	627,425

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Great Plains Exploration, LLC:
Revenues
Revenue From the Sale of Oil and Natural Gas Production, net of pipeline transportation costs		$	256,263			$	445,882			$	842,072			$	1,393,258
Operating expenses
Well Management, Water Hauling and Service Rig		$	97,959			$	107,756			$	324,496			$	307,006

Note 12. Financial Information Relating to Industry Segments

The Company reports operating segments and reportable segments by business activity according to GAAP, “Disclosure about Segments of an Enterprise and Related Information.” The Company includes revenues from external customers, interest revenue and expense, depreciation, depletion and amortization and other operating expenses in its measure of segment profit or loss.

The Company’s operations are classified into two principal industry segments. The following tables present the three and nine months ended September 30, 2011 and 2010.

		Oil and Gas				Self-Storage
Three Months ended September 30, 2011		Production				Facilities				Total
Revenues from external customers		$	280,998			$	87,801			$	368,799
Interest and other revenue			3,734				—				3,734
Total Revenue			284,732				87,801				372,533
Interest Expense			115,708				4,371				120,079
Accretion Expense			8,568				—				8,568
Property Operating Costs			117,431				36,154				153,585
Other Operating expenses			199,299				21,183				220,482
Loss from Unconsolidated Affiliate			1,915				—				1,915
Depreciation, depletion and amortization			267,221				30,973				298,194
Total Operating Expenses			710,142				92,681				802,823
Net Loss		$	(425,410	)		$	(4,880	)		$	(430,290	)
Property and Equipment additions		$	18,321			$	—			$	18,321

		Oil and Gas				Self-Storage
Nine Months ended September 30, 2011		Production				Facilities				Total
Revenues from external customers		$	927,796			$	260,239			$	1,188,035
Interest and other revenue			14,090				128				14,218
Total Revenue			941,886				260,367				1,202,253
Interest expense			417,316				17,942				435,258
Accretion expense			23,281				—				23,281
Property Operating Costs			499,182				104,087				603,269
Other Operating expenses			649,945				63,741				713,686
Loss from Unconsolidated Affiliate			80,650				—				80,650
Depreciation, depletion and amortization			802,260				92,670				894,930
Total Operating Expenses			2,472,634				278,440				2,751,074
Net Income (Loss)		$	(1,530,748	)		$	(18,073	)		$	(1,548,821	)
Property and Equipment additions		$	24,615			$	6,652			$	31,267
Total Assets		$	6,838,837			$	1,286,795			$	8,125,632

		Oil and Gas				Self-Storage
Three Months ended September 30, 2010		Production				Facilities				Total
Revenues from external customers		$	485,008			$	86,917			$	571,925
Interest and other revenue			—				—				—
Total Revenue			485,008				86,917				571,925
Interest Expense			171,351				7,633				178,984
Accretion Expense			11,040				—				11,040
Property Operating Costs			116,291				40,082				156,373
Other Operating expenses			222,627				14,338				236,965
Loss from Unconsolidated Affiliate			2,620				—				2,620
Depreciation, depletion and amortization			252,843				30,599				283,442
Total Operating Expenses			776,772				92,652				869,424
Net Loss		$	(291,764	)		$	(5,735	)		$	(297,499	)
Property and Equipment additions		$	13,215			$	—			$	13,215

		Oil and Gas				Self-Storage
Nine Months ended September 30, 2010		Production				Facilities				Total
Revenues from external customers		$	1,640,218			$	251,787			$	1,892,005
Interest and other revenue			1,090				177,918				179,008
Total Revenue			1,641,308				429,705				2,071,013
Interest expense			285,486				28,535				314,021
Accretion expense			27,081				—				27,081
Property Operating Costs			406,845				111,144				518,989
Other Operating expenses			769,868				50,083				819,951
Loss from Unconsolidated Affiliate			33,051				—				33,051
Depreciation, depletion and amortization			1,048,913				91,048				1,139,961
Total Operating Expenses			2,571,244				280,810				2,852,054
Net Income (Loss)		$	(929,936	)		$	148,895			$	(781,041	)
Property and Equipment additions		$	81,538			$	46,547			$	128,085
Total Assets		$	8,077,911			$	1,393,798			$	9,471,709

Note 13. Commitments and Contingencies

Environmental Matters

The oil and gas industry is subject, by its nature, to environmental hazards and clean-up costs. At this time, management knows of no substantial costs from environmental accidents or events for which it may be currently liable.

Oil and Gas Contracts

Effective January 1, 2006, the Company entered into a contract with Great Plains Exploration, LLC for well operations and sale of natural gas and oil production to third parties. The term of the agreement was one year from the effective date. It was extended as of January 1, 2007 and shall be extended for consecutive one year periods unless terminated earlier. The original contract was amended November 14, 2006 and filed as exhibit 10.4 to our Form 10-QSB for the quarter ended September 30, 2006. The Amendment No. 1 to the Oil and Gas Operations and Sale Agreement modified the original terms to create less cumbersome paperwork in tracking cost sharing between the companies.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company entered into the business of extracting and producing oil and natural gas products during 2006. The Company currently has two segments: one that is drilling and operating natural gas wells with oil as a by-product in Northeast Ohio and one composed of a self-storage facility located in Painesville, Ohio. The Company cannot guarantee success under its business plan as drilling wells for oil and natural gas is a high-risk enterprise and there is no guarantee the Company will become profitable. To date, the Company’s oil and gas operations have not been profitable. The decline in the current market price of natural gas severely affects the viability of any future drilling because our lower cash flow makes it economically difficult to incur the high costs of drilling a well. Additionally, our production will continue to decline if the Company is not drilling any new wells. Although the oil production is profitable with the higher oil market pricing, this revenue is not enough to offset the lower natural gas production and operating expenses.

Without additional wells being drilled and because of the Company’s substantial debt financing, the Company will continue to show losses and be unprofitable. Therefore, the Company is concerned about its future viability as a going concern.

As previously disclosed in the Company’s Form 8-K filed on June 25, 2010 with the Securities and Exchange Commission, on June 18, 2010, the Company, along with Mr. Richard M. Osborne, the Richard M. Osborne Trust, Great Plains and Oz Gas Ltd. (companies owned by Mr. Osborne), entered into a Forbearance Agreement with Charter One. Pursuant to the agreement, Charter One agreed to forbear from enforcing its rights and remedies under the Company’s fully-drawn $9.5 million line of credit as well as the other parties’ loan agreements until July 1, 2011, subject to no further events of default including the payments due under the Forbearance Agreement. During the forbearance period, the parties agreed to pay Charter One $400,000 per month, including a $40,000 per month forbearance fee, until all amounts under the loan agreements have been paid in full. At June 30, 2011, the loan parties were in compliance with the required payments.

The forbearance period expired on July 1, 2011, and has not been extended. The full amount of the loan is now past due.

On October 3, 2011, Charter One instituted an action in United States District Court Northern District of Ohio Eastern Division claiming a default under the line of credit and seeking to foreclose upon property of the Company securing the line of credit and to appoint a receiver for the Company and certain companies owned or controlled by Mr. Osborne. The Company has filed a motion to dismiss the Charter One action and a motion in opposition to the Charter One action.

The Company continues to attempt to reach a loan agreement satisfactory to both parties. Additionally, the Company continues to pursue alternative sources of financing, but there is no guarantee that a receiver will not be appointed. See Note 5 “Line of Credit and Long-Term Debt” to the Company’s consolidated financial statements for more information.

During August 2009, Liberty Self Stor, LTD defaulted on its $1.2 million loan from First Merit Bank, N.A. On May 11, 2010, Liberty Self Stor, LTD and First Merit Bank signed a loan modification agreement which waived the prior defaults. The terms of the mortgage include a five year term, maturing on June 1, 2014, with a ten year amortization period at a variable rate of the 30 day LIBOR plus 250 basis points. Monthly payments consist of principal at $10,370 plus interest.

Critical Accounting Policies

The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. These interim financial statements contain certain amounts that were based upon the Company’s best estimates, judgments and assumptions that were believed to be reasonable under the circumstances. A “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

A comprehensive discussion of the Company’s critical accounting policies and management estimates and significant accounting policies followed in the preparation of the financial statements is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 1, in the Company’s Form 10-K for the year ended December 31, 2010. There have been no significant changes in critical accounting policies, management estimates or accounting policies followed since the year ended December 31, 2010.

Liquidity and Capital Resources

Liquidity represents the Company’s ability to generate sufficient amounts of cash to meet its financial commitments. The Company’s cash flow from operating and financing activities will not be sufficient to meet its anticipated operating requirements in the foreseeable future.

The Company requires substantial capital expenditures to maintain and/or grow production and reserves. We depend on debt or equity financing to pay for exploration and operations. The current economic environment makes it more difficult to obtain debt or equity financing on acceptable terms to address our liquidity issues. Capital may not be available to meet these continuing costs, or if capital is available, it may not be on terms acceptable to us.

The Company’s $9.5 million line of credit with Charter One matured on August 1, 2009. On August 20, 2009, Charter One received a judgment in its favor against the Company, Mr. Osborne and the Richard M. Osborne Trust (the “Trust”), jointly and severally for $9.5 million plus interest and late charges.

On June 18, 2010, the Company, along with Richard M. Osborne, the Trust, Great Plains and Oz Gas Ltd. (companies owned by Mr. Osborne), has entered into a Forbearance Agreement with Charter One pursuant to which Charter One agreed to forbear from enforcing its rights and remedies under the Company’s line of credit as well as the other parties’ loan agreements until July 1, 2011, subject to no further events of default including the payments due under the Forbearance Agreement.

The Company, Mr. Osborne, the Trust, Great Plains and Oz Gas are collectively referred to in the Forbearance Agreement and herein as the “Loan Parties.”

Under the Forbearance Agreement, Charter One’s agreement to forbear was conditioned upon and subject to the following conditions:

	•		Payment by the Loan Parties of a forbearance fee of $40,000 per month during the forbearance period;
	•		No material adverse change in the condition of the Loan Parties;
	•		An assignment and grant of a security interest by the Company and Great Plains of each of their ownership interests in the Alpha and Panzica wells;
	•		A pledge by the Loan Parties of their ownership interests in Kykuit Resources LLC; and
	•		A pledge by Mr. Osborne of not less than 800,000 shares of common stock of Gas Natural Inc. with such stock having a market value of not less than $9.6 million pursuant to a pledge agreement.

In addition, commencing July 1, 2010 and each month thereafter until all amounts under the judgments and loan agreements have been paid in full, the Loan Parties agreed to pay Charter One $400,000, including the $40,000 forbearance fee. The Company had previously felt they would pay one third of the $400,000, but due to lack of cash, they have decided to accrue interest and one third of the $40,000 monthly fee and legal fees. The monthly $400,000 was being paid by the other Loan Parties. Such payments by the Loan Parties were applied first to Charter One’s fees and expenses, second to accrued but unpaid interest due under the judgments, and third to principal amounts due under the judgments. Charter One applied a default rate to the loan from January 4, 2010 thru June 18, 2010. The Company does not agree with the default rate and therefore has not booked approximately $171,000 of additional interest expense. It is the Company’s position that the interest for the period from judgment date to forbearance date should have remained at the original contract rate at the date of judgment, based upon the per diem interest amount expressly stated in that judgment. Attorneys for the Company also support that position and have so stated in letters to Charter One and for purposes of the Company’s 2010 annual audit. In addition, the Company was yo deposit all proceeds of its operations into accounts maintained by Charter One but during the forbearance period Charter One would not take any action to set off funds in any such account.

The forbearance period expired July 1, 2011 and the full amount of the loan is now past due. On October 3, 2011, Charter One instituted an action in United States District Court Northern District of Ohio Eastern Division claiming a default under the line of credit and seeking to foreclose upon property of the Company securing the line of credit and to appoint a receiver for the Company and certain companies owned or controlled by Mr. Osborne. The Company has filed a motion to dismiss the Charter One action and a motion in opposition to the Charter One action.

The Company continues to attempt to reach a loan agreement satisfactory to both parties. Additionally, the Company continues to pursue alternative sources of financing, but there is no guarantee that a receiver will not be appointed. See Note 5 “Line of Credit and Long-Term Debt” to the Company’s consolidated financial statements for more information.

The Company’s current assets decreased $338,452 to $581,881 at September 30, 2011 from $920,333 at December 31, 2010, largely due to a decrease in accounts receivable from related parties.

The Company’s current liabilities increased $699,510 to $11,410,424 at September 30, 2011, from $10,710,914 at December 31, 2010, primarily due to increases in accounts payable to related parties and accrued expenses.

The Company had a positive cash flow from operating activities of $387,607 for the nine months ended September 30, 2011 compared to a positive cash flow of $228,802 for the same period in 2010. The overall positive cash flow is primarily a result of payments received on related party receivables and increases in related party payables as well as an increase in accrued expenses.

The Company had a negative cash flow from investing activities of $316,467 for the nine months ended September 30, 2011 compared to a negative cash flow of $221,525 for the same period in 2010. The negative cashflow was primarily due to increased cash calls for Kykuit.

The Company had a negative cash flow from financing activities of $86,129 for the nine months ended September 30, 2011 compared to a negative cash flow of $29,349 for the same period in 2010. The negative cashflow was primarily due to a decrease in the bank overdraft.

The items affecting operating cash flow and cash are discussed more fully in the “Material Changes in Results of Operations” section.

Material Changes in Results of Operations

Revenues from Operations

Total revenues from operations and interest income decreased $199,392, or 34.9%, to $372,533 for the three months ended September 30, 2011, compared to $571,925 for the same period in 2010. Total revenues from operations and interest income decreased $868,760, or 41.9%, to $1,202,253 for the nine months ended September 30, 2011, compared to $2,071,013 for the same period in 2010. The decrease is due to lower natural gas production and lower contract pricing in 2011. Also, in the first quarter of 2010 the company received a real estate property tax refund related to the Painesville self-storage facility that was not repeated in 2011.

Expenses from Operations

Total operating expenses decreased $66,601, or 7.7%, to $802,823 for the three months ended September 30, 2011, from $869,424 for the same period in 2010. Total operating expenses decreased $100,979, or 3.5%, to $2,751,074 for the nine months ended September 30, 2011 from $2,852,054 for the same period in 2010. These decreases were primarily due to the decrease in depreciation, depletion and amortization.

Interest expense decreased $58,905, or 32.9%, to $120,079 for the three months ended September 30, 2011 compared to $178,984 for the same period in 2010. Interest expense increased $121,237, or 38.6%, to $435,258 for the nine months ended September 30, 2011 compared to $314,021 for the same period in 2010. Interest expense was lower for the three months ended September 30, 2011 due to the expiration of the monthly forbearance fees paid to Charter One. Interest expense was higher for the nine months ended September 30, 2011 due to the interest rate increase in effect from June 18, 2010 to June 30, 2011 and to forbearance fees paid from June 18, 2010 to September 30, 2011.

Accretion expense decreased $2,472, or 22.4%, to $8,568 for the three months ended September 30, 2011 compared to $11,040 for the same period in 2010. Accretion expense decreased $3,800, or 14.0%, to $23,281 for the nine months ended September 30, 2011 compared to $27,081 for the same period in 2010. The decrease for both periods was due to changes in estimated well lives and the static number of wells since 2010.

Oil and natural gas production costs increased $1,140, or 1.0%, to $117,431 for the three months ended September 30, 2011 compared to $116,291 for the same period in 2010. Oil and natural gas production costs increased $92,337, or 22.7%, to $499,182 for the nine months ended September 30, 2011 compared to $406,845 for the same period in 2010. The increases for the three and nine months ended September 30, 2010 is largely due to expenses associated with attempts to improve well production.

Self-storage property operating expenses decreased $3,928, or 9.8%, to $36,154 for the three months ended September 30, 2011 compared to $40,082 for the same period in 2010. Self-storage property operating expenses decreased $7,057, or 6.4%, to $104,087 for the nine months ended September 30, 2011 compared to $111,144 for the same period in 2010. The decreases for both periods are largely due to fewer repairs and lower utility and snowplowing bills in 2011.

Legal and professional fees decreased $10,997, or 19.5% to $45,546 for the three months ended September 30, 2011 compared to $56,543 for the same period in 2010. Legal and professional fees decreased $154,674, or 49.9% to $155,279 for the nine months ended September 30, 2011 compared to $309,953 for the same period in 2010. The decreases for the three and nine months ended September 30, 2011 compared to the same period in 2010 are directly related to the modification agreement with FirstMerit and to the forbearance settlement on June 18, 2010 with Charter One whereby the Company paid its attorney expenses and the Bank’s as part of the court settlement. These expenses occurred in 2010 and not in 2011.

Property taxes and insurance expenses increased $1,986, or 10.8%, to $20,325 for the three months ended September 30, 2011 compared to $18,339 for the same period in 2010. Property taxes and insurance expenses increased $10,504, or 20.8%, to $60,935 for the nine months ended September 30, 2011 compared to $50,431 for the same period in 2010. This increase is largely due to normalization of the taxes on two parcels at the Painesville self-storage facility after a large reduction and refund in 2010.

General and administrative expenses decreased $7,472 or 4.6%, to $154,611 for the three months ended September 30, 2011 compared to $162,083 for the same period in 2010. General and administrative expenses increased $37,905, or 8.3%, to $497,472 for the nine months ended September 30, 2011 compared to $459,567 for the same period in 2010. The decrease in general and administrative expenses for the three months is largely due to printing expenses in 2010 that were not repeated in 2011. The increase in general and administrative expenses for the nine months is largely due to an increase in employees and benefits.

Loss from unconsolidated affiliate expense decreased $705 to $1,915 for the three months ended September 30, 2011 compared to $2,620 for the same period in 2010. Loss from unconsolidated affiliate expense increased $47,599 to $80,650 for the nine months ended September 30, 2011 compared to $33,051 for the same period in 2010. Kykuit expenses increased in 2011 due to increased well expenses and more delay rentals due in 2011.

Depreciation, depletion and amortization expenses increased $14,752, or 5.2%, to $298,194 for the three months ended September 30, 2011 compared to $283,442 for the same period in 2010. Depreciation, depletion and amortization expenses decreased $245,031, or 21.5%, to $894,930 for the nine months ended September 30, 2011 compared to $1,139,961 for the same period in 2010. The increase for the three months was due to higher production in the quarter for 2011, but the overall decrease in depletion expense for the nine months is due to lower production and reduction in the depletable base.

Net Loss

The Company had a net loss from operations of $430,290 for the three months ended September 30, 2011 compared to a net loss of $297,499 for same period in 2010. The Company had a net loss from operations of $1,548,821 for the nine months ended September 30, 2011 compared to a net loss of $781,041 for same period in 2010. The increase in the net loss was a result of the large reduction in natural gas production revenue for the three and nine months ended September 30, 2011, as compared to 2010. Interest and other revenue was much lower for the nine months ended September 30, 2011 compared to 2010 due to the receipt of a large refund for real estate taxes on the self storage facility in 2010.

Net Income (Loss) attributable to Non-Controlling Interest

The Company had a net loss attributable to its non-controlling interest in LSS I of $3,422 for the three months ended September 30, 2011 and a net loss of $4,022 for the same period in 2010. The Company had net loss attributable to its non-controlling interest in LSS I of $12,669 for the nine months ended September 30, 2011 and net income of $104,375 for the same period in 2010. Although LSS I has usually recorded a loss in prior periods, during the nine months ended September 30, 2010, it had income due to the receipt of a large refund for real estate taxes on the self storage facility.

Net Loss attributable to John D. Oil and Gas Company

The Company had a net loss attributable to John D. interests of $426,868 for the three months ended September 30, 2011 compared to a net loss of $293,477 for the same period in 2010. The Company had a net loss attributable to John D. interests of $1,536,152 for the nine months ended September 30, 2011 compared to a net loss of $885,416 for the same period in 2010. The loss for the three and nine months ended September 30, 2011 is largely due to the reduction in natural gas volumes and lower contract pricing in 2011, partially offset by lower operating expense.

Interest Rate Risk

Interest rate risk is the risk that interest rates will increase, which will result in an increase in the Company’s interest expense on its variable rate loans.

The loan on the Painesville facility and the Charter One line of credit, totaling approximately $10.5 million, are tied to variable interest rates. If the Company’s interest rates on the loans were to increase by 1% per year, the Company’s interest expense would increase approximately $106,000 on an annual basis.

Off-Balance Sheet Arrangements

The Company had one off-balance sheet arrangement at September 30, 2011, with respect to its investment in Kykuit. While the Company is not liable for the contribution obligations of other members of Kykuit, the Company is investing additional funds since Kykuit currently does not have production revenue but has incurred expenses. For the nine months ended September 30, 2011 and 2010, the Company invested $285,200 and $93,440, respectively, in Kykuit as part of their cash calls and to make up the difference for members not investing.

Forward-Looking Statements

Statements that are not historical facts, including statements about the Company’s confidence in its prospects and strategies and its expectations about growth, are forward-looking statements that involve risks and uncertainties. These risks and uncertainties, many of which are beyond our control, may include statements about our:

•		our ability to continue as a going concern;
•		our ability to settle the Charter One litigation and avoid the appointment of a receiver;
•		liquidity and our ability to meet our debt obligations;
•		business strategy;
•		financial strategy;
•		drilling locations;
•		natural gas and oil reserves;
•		realized natural gas and oil prices;
•		production volumes;
•		lease operating expenses, general and administrative expenses and finding and development costs;
•		future operating results; and
•		plans, objectives, expectations and intentions.

All of these types of statements, other than statements of historical fact, included in this report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” the negative of these terms or other comparable terminology.

The forward-looking statements contained in this report are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe these estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. We caution all readers that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to factors listed in the “Risk Factors” section and elsewhere in this report. All forward-looking statements speak only as of the date of this report. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

Item 4.		Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of September 30, 2011, the Company’s management under the supervision of and with participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our chief executive officer and chief financial officer each concluded that the Company’s disclosure controls and procedures were not effective in light of the identification of a material weakness in the Company’s internal controls over financial reporting as discussed and reported in the Company’s Form 10-K filed March 31, 2011. The previous year’s reduction in staff continues to hamper the Company’s ability to maintain adequate segregation of duties.

Notwithstanding the material weakness described in the Form 10-K filed March 31, 2011, to the best of their knowledge, the Company’s management believes that the Company’s financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1.		Legal Proceedings

The Company’s lender has brought an action against the Company in foreclosure and seeking a receiver. For more information, see “Item 3. Defaults Upon Senior Securities” below and “Note 5. Line of Credit and Long-Term Debt” of the notes accompanying the consolidated financial statements included in this report.

Item 3.		Defaults Upon Senior Securities.

On June 18, 2010, the Company and the Loan Parties entered into a Forbearance Agreement with RBS Citizens, N.A., d/b/a Charter One (“Charter One”) pursuant to which Charter One agreed to forbear from enforcing its rights and remedies under the Company’s $9.5 million line of credit until July 1, 2011. The Forbearance Agreement expired on July 1, 2011 and has not been extended. On October 3, 2011, Charter One instituted an action in United States District Court Northern District of Ohio Eastern Division claiming a default under the line of credit and seeking to foreclose upon property of the Company securing the line of credit and to appoint a receiver for the Company and certain companies owned or controlled by Mr. Osborne. The Company has filed a motion to dismiss the Charter One action and a motion in opposition to the Charter One action.

The Company continues to attempt to reach a loan agreement satisfactory to both parties. Additionally, the Company continues to pursue alternative sources of financing, but there is no guarantee that a receiver will not be appointed. For more information, please turn to Note 5. Line of Credit and Long-Term Debt of the notes accompanying the consolidated financial statements included in this report.

Item 6.		Exhibits

Exhibit No.			Description
31.1	*		Section 302 Certification of Chairman of the Board and Chief Executive Officer (principal executive officer) pursuant to the Sarbanes-Oxley Act of 2002
31.2	*		Section 302 Certification of Chief Financial Officer (principal financial officer) pursuant to the Sarbanes-Oxley Act of 2002
32.1	*		Certification of Chairman of the Board and Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

JOHN D. OIL AND GAS COMPANY

/s/ Richard M. Osborne		Dated: November 14, 2011
Richard M. Osborne
Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
/s/ Carolyn T. Coatoam		Dated: November 14, 2011
Carolyn T. Coatoam
Chief Financial Officer (Principal Financial and Accounting Officer)