U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549

FORM 10-Q

(Mark One)
 T  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

      For the fiscal quarter ended                 June 30, 2014                 

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

               For the transition period from                              to

RIO BRAVO OIL, INC.

(Exact name of small business issuer as specified in its charter)

Nevada		000-54564		42-1771917
(State of Incorporation)		(Commission File Number)		(IRS Employer Identification No.)

5868 Fountainview, Suite 345, Houston, TX 77057

 (Address of principal executive offices) (Zip code)

Issuer’s telephone number: (713) 787-9060
Securities registered under Section 12(g) of the Exchange Act:

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 T    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes T    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   (Do not check if a smaller reporting company)	Smaller reporting company T

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

There were 33,052,657 shares outstanding of registrant’s common stock, par value $0.001 per share, as of August 11, 2014.

Transitional Small Business Disclosure Format (check one):     Yes o   No T

1

TABLE OF CONTENTS

2

PART I

 

ITEM 1. FINANCIAL STATEMENTS

RIO BRAVO OIL, INC.

(An Exploration Stage Company)

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,		December 31,
	2014		2013
ASSETS	Unaudited		*
CURRENT ASSETS
Cash and cash equivalents	$ 1,444		$ -
Other receivables	-		-
Prepaid expenses	-		5,742
TOTAL CURRENT ASSETS	1,444		5,742
PROPERTY AND EQUIPMENT
Proved oil and gas properties, net of accumulated depletion	1,569,538		-
Unproved oil and gas properties	1,975,197		-
Furniture, fixtures and equipment, net of accumulated deprec.	14,965		14,939
Assets held for sale	-		7,590,352
Deferred loan costs, net of amortization	68,578		128,578
TOTAL ASSETS	$ 3,629,722		$ 7,739,611
LIABILITIES
CURRENT LIABILITIES
Accounts payable	$ 553,759		$ 439,570
Accrued expenses	1,619,895		1,341,202
Advances payable – Related Party	90,704		90,704
Accrued Rio Bravo assets purchase payable	-		6,968
Loan from former director	3,332		3,332
Liabilities held for sale	-		799,290
Short term notes payable – related party	32,269		-
Short term notes payable	6,597,851		6,427,330
Bridge notes payable	350,000		350,000
TOTAL CURRENT LIABILITIES	9,247,810		9,458,396
NON CURRENT LIABILITIES
Notes payable	687,651		613,829
Liabilities held for sale	-		3,517,861
Asset retirement obligation	275,730		-
TOTAL LIABILITIES	10,211,191		13,590,086
Commitments and contingencies
REDEEMABLE SERIES A PREFERRED STOCK	4,889,000		5,389,000
REDEEMABLE SERIES C PREFERRED STOCK	492,000		492,000
STOCKHOLDERS’ EQUITY
Series B Preferred Stock, $0.001 par value, 5,000,000. Authorized 3,250,000 and 3,250,000 issued and outstanding shares as of June 30, 2014 and December 31, 2013	3,250		3,250
Common Stock, $0.001 par value, 120,000,000 Authorized
33,052,657 and 32,502,657 Issued and outstanding shares as of
June 30, 2014 and December 31, 2013, respectively	33,052		32,502
Additional paid-in capital	6,726,638		6,190,688
Stockholders’ deficit accumulated in the exploratory stage	(18,725,409)		(17,957,915)
Stockholders’ Equity (deficit)	(11,962,469)		(11,731,475)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$ 3,629,722		$ 7,739,611

* Derived from audited information

See accompanying notes to the Condensed Consolidated Financial Statements (unaudited)

3

RIO BRAVO OIL, INC.

(An Exploration Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

					From
					Inception
	Six Months Ended				Through
	June 30,				June 30,
	2014		2013		2014
REVENUES AND GAINS
Revenues from sale of oil and gas	$           9,748		$        65,738		$        231,457
OPERATING EXPENSES:
Leasehold operating and workover expense	9,902		1,063,281		2,294,489
General and administrative	228,899		320,151		1,723,154
Professional fees	77,950		289,136		1,956,696
Depreciation, depletion, impairment
and amortization expense	3,036		57,654		10,831,273
Total operating expenses	319,787		1,730,222		16,805,612
LOSS FROM OPERATIONS	(310,039)		(1,664,484)		(16,574,155)
OTHER INCOME AND EXPENSE
Other income	-		1,562		1,563
Interest expense	(374,955)		(396,648)		(1,755,692)
Total other income (expense)	(374,955)		(395,086)		(1,754,129)
NET LOSS	(684,994)		(2,059,570)		(18,328,284)
Preferred dividends	82,500		82,500		391,875
Net loss to common stockholders	$      (767,494)		$ (2,142,070)		$   (18,720,159)
Basic and diluted loss per common share	$            (0.02)		$          (0.07)		$(0.32)
Basic and diluted weighted average common
shares outstanding	33,248,213		32,484,774		58,298,273

See accompanying notes to the Condensed Consolidated Financial Statements (unaudited)

4

RIO BRAVO OIL, INC.

(An Exploration Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended
	June 30,
	2014		2013
REVENUES AND GAINS
Revenues from sale of oil and gas	$ 26		$ 57,026
OPERATING EXPENSES:
Leasehold operating and workover expense	3,564		445,305
General and administrative	113,666		182,574
Professional fees	59,483		190,168
Depreciation, depletion and amortization expense	791		32,500
Total operating expenses	177,504		850,547
LOSS FROM OPERATIONS	(177,478)		(793,521)
OTHER INCOME AND EXPENSE
Other income (expense)	(6,970)		1,562
Interest expense	(169,474)		(202,213)
Total other income (expense)	(176,444)		(200,651)
NET LOSS	(353,922)		(994,172)
Preferred dividends	41,250		41,250
Net loss to common stockholders	(395,172)		$ (1,035,422)
Basic and diluted loss per common share	$ (0.01)		$ (0.03)
Basic and diluted weighted average common
shares outstanding	33,052,657		32,502,657

5

RIO BRAVO OIL, INC.

(An Exploration Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

6

RIO BRAVO OIL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION AND GOING CONCERN

Nature of Operations and Presentation

These financial statements include the accounts of Rio Bravo Oil, Inc. (the “Company”), formerly Soton Holdings Group, Inc., which was formed on June 9, 2010 in the state of Nevada and its wholly-owned subsidiary Pan American Oil Company, LLC. Except where the context otherwise requires, the “Company,” “we,” “our” and “us” refers to Rio Bravo Oil, Inc. and our wholly-owned subsidiary Pan American Oil Company, LLC.

The consolidated condensed financial statements included herein are unaudited. Such consolidated financial statements reflect, in the opinion of management, all adjustments necessary to present fairly the financial position and results of operations as of and for the periods indicated. All such adjustments are of a normal recurring nature except for those related to the sale of its working interests in its oil and gas leaseholds and receipt of a 10% carried working interest in those same leaseholds as described later in this document. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2014 or for any other period. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company believes that the disclosures are adequate to make the interim information presented not misleading. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the SEC on April 14, 2014.

 

Going Concern

The Company has incurred significant operating losses since its inception and has an accumulated deficit at June 30, 2014 of $18.725 million. In addition, as of June 30, 2014, the Company had a working capital deficit of $9.246 million and is currently unable to satisfy it’s debt obligations when they come due.  Management expects that significant on-going operating and drilling expenditures will be necessary to successfully implement the Company’s drilling plans. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern. Implementation of the Company’s plans and its ability to continue as a going concern depend upon its securing substantial additional financing.

 

The Company has only enough cash to operate through the end of August 2014 and at the time of these financial statements. Management’s plans include efforts to obtain additional capital, although no assurances can be given about the Company’s ability to obtain such capital. If the Company is unable to obtain adequate additional financing or generate additional hydrocarbon production, it will be unable to continue its drilling plans and other activities and may be forced to cease operations. The consolidated financial statements presented herein do not include any adjustments that might result from the outcome of this uncertainty.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The consolidated financial statements included herewith include the accounts of the Company and its wholly-owned subsidiary. All significant inter-company balances and transactions have been eliminated in consolidation. 

 Cash and cash equivalents

The Company considers all highly liquid instruments with original maturity of less than 90 days to be cash equivalents.

7

Exploration Stage Enterprise

The Company has been devoting most of its efforts to exploring for and developing its oil and gas assets and, consequently, meets the definition of An Exploration Stage Enterprise, under the Accounting Standards Codification “Accounting and Reporting for Development Stage Enterprises.” Certain additional financial information is required to be included in the financial statements for the period from inception of the Company to the current balance sheet date.

 

Furniture, Fixtures & Equipment

 

Property and equipment are stated at cost less accumulated depreciation and are depreciated using the straight-line method over the assets’ estimated useful lives. Principal useful lives are as follows:

 

Office furniture and equipment	7 years

 

Normal maintenance and repairs for property and equipment are charged to expense as incurred, while significant improvements are capitalized.

 

Oil and Gas Properties

 

The Company follows the full cost method of accounting for oil and natural gas operations. Under this method all productive and nonproductive costs incurred in connection with the acquisition, exploration, and development of oil and natural gas reserves are capitalized on a country-by-country basis into an individual country “cost pool.” The Company has operations in the United States and, consequently, only has one cost pool. No gains or losses are recognized upon the sale or other disposition of oil and natural gas properties except in transactions that would significantly alter the relationship between capitalized costs and proved reserves. The costs of unevaluated oil and natural gas properties are excluded from the amortizable base until the time that either proven reserves are found or it has been determined that such properties are impaired. As properties become evaluated, the related costs are transferred to the proved oil and natural gas properties cost pool using full cost accounting.

 

Under the full cost method the net book value of oil and natural gas properties, less related deferred income taxes, may not exceed the estimated after-tax future net revenues from proved oil and natural gas properties, discounted at 10% (the “Ceiling Limitation”). In arriving at estimated future net revenues, estimated lease operating expenses, development costs, and certain production-related and ad valorem taxes are deducted. In calculating future net revenues, prices and costs are held constant indefinitely, except for changes that are fixed and determinable by existing contracts. Prices are determined using a simple arithmetic average of the first day of each month during the most recent twelve month period presented herein. The net book value is compared to the Ceiling Limitation on a quarterly and yearly basis. The excess, if any, of the net book value above the Ceiling Limitation is charged to expense in the period in which it occurs and is not subsequently reinstated.

 

Unit-of-production depletion is applied to capitalized costs of the full cost pool. Unit-of-production rates are based on the amount of proved reserves (both developed and undeveloped) of oil, gas and other minerals that are estimated to be recoverable from existing facilities using current operating methods.

The costs of investments in unproved properties and portions of costs associated with major development projects are excluded from the depreciation, depletion and amortization calculation until the project is evaluated.

 

Unproved property costs include leasehold costs, seismic costs and other costs incurred during the exploration phase. In areas where proved reserves are established, significant unproved properties are evaluated periodically, but not less than annually, for impairment. If a reduction in value has occurred, these property costs are considered impaired and are transferred to the related full cost pool. Unproved properties whose acquisition costs are not individually significant are aggregated, and the portion of such costs estimated to be ultimately nonproductive, based on experience, and is amortized to the full cost pool over an average holding period.

 

8

Use of Estimates

 

The preparation of the Company’s financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management believes that the following material estimates affecting the financial statements could significantly change in the coming year.

 

The most significant estimates pertain to proven oil and natural gas reserves and related cash flow estimates used in impairment tests of long-lived assets, estimates of future development, dismantlement and abandonment costs. Certain of these estimates require assumptions regarding future costs and expenses and future production rates. Actual results could differ from those estimates.

 

The Company’s revenue, profitability and future growth are substantially dependent upon the prevailing and future prices for oil and natural gas, which are dependent upon numerous factors beyond their control such as economic, political and regulatory developments and competition from other energy sources. The energy markets have historically been very volatile and there can be no assurance that oil and natural gas prices will not be subject to wide fluctuations in the future. A substantial or extended decline in oil and natural gas prices could have a material adverse effect on the Company’s financial position, results of operations, cash flows and quantities of oil and natural gas reserves that may be economically produced.

 

Estimates of oil and natural gas reserves and their values, future production rates and future costs and expenses are inherently uncertain for numerous reasons, including many factors beyond the Company’s control. Reservoir engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of data available and of engineering and geological interpretation and judgment. In addition, estimates of reserves may be revised based on actual production, results of subsequent exploration and development activities, prevailing commodity prices, operating cost and other factors. These revisions may be material and could materially affect future depletion, depreciation and amortization expense, dismantlement and abandonment costs, and impairment expense.

 

Revenue Recognition

 

Revenues are recognized when hydrocarbons have been delivered, the customer has taken title and payment is reasonably assured.

Asset Retirement Obligations

 

The Company provides for future asset retirement obligations on its resource properties and facilities based on estimates established by current legislation and industry practices. The asset retirement obligation is initially measured at fair value and capitalized as an asset retirement cost that is amortized on a straight line 15 year basis. The obligation is accreted through interest expense until it is expensed and or settled. The fair value of the obligation is estimated based on recent operations in the area and is then accreted using an expected inflation rate for oil field service costs. The Company recognizes revisions to either the timing or amount of the original estimate as increases or decreases to the asset retirement obligation.

 

The significant assumptions used to develop the expected liability during the period are as follows:

 

Average cost to remediate individual well sites: $4,000 to $7,000 (net to our interest)

Average gross salvage value expected from individual well sites remediated: $0 (net)

Expected inflation rate for oil field service costs: 5%

Risk weighted cost of credit: 8%

Average time to abandonment: 20 years

9

 

Actual retirement costs will be recorded against the obligation when incurred. Any difference between the recorded asset retirement obligation and the actual retirement costs incurred is recorded as a gain or loss in the settlement period.

 

Beginning balance, December 31, 2013		$	-
Liabilities incurred			273,000
Liabilities Settled			-
Accretion expense			2,730
Balance at June 30, 2014		$	275,730

 

 

Fair Value

 

As defined in authoritative guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (“exit price”). To estimate fair value, the Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable.

 

The authoritative guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities ("Level 1" measurements) and the lowest priority to unobservable inputs ("Level 3" measurements). The three levels of the fair value hierarchy are as follows:

 

Level 1 - Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.

 

Level 2 - Other inputs that are observable, directly or indirectly, such as quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3 - Unobservable inputs for which there is little or no market data and which the Company makes its own assumptions about how market participants would price the assets and liabilities.

In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

 

		Fair  Value				Level 1				Level 2				Level 3
Asset retirement obligation			275,730				-				-				275,730

  

NOTE 3 – SALE OF OIL AND GAS LEASEHOLD INTEREST

In February 2014, the Company entered into a sale agreement with Eagle Ford, the current operator for its oil field interests, such that the Company sold the entirety of its working and net revenue interests in all of its oil field leaseholds and also sold all of its salvage equipment obtained through its acquisitions of Pan American Oil Company, LLC and Rio Bravo Oil, LLC and Numa Luling, LLC. In addition, Eagle Ford agreed to take over all of the Company’s payables related to the leasehold interests and all of the remaining obligations incurred by the Company when it acquired its leasehold interests from Eagle Ford back in 2012. As consideration Eagle Ford issued a note to the Company in the amount of $500,000 plus a 10% carried working interest in the oil field leaseholds sold to Eagle Ford. The 10% carried working interest is subject to the existing 25% overriding royalty interests that exist on the leaseholds. The Company’s carried working interest means they are not obligated for any cash calls for any drilling or re-work drilling activity and are only obligated for 10% of the leasehold operating expenses. Because the plan for the sale of the assets was in place as of December 31, 2013, these financial statements show all of the assets and liabilities at all balance sheet dates presented as “held for sale”.

10

The following table shows the assets and liabilities held for sale as of December 31:

 

		2013
ASSETS HELD FOR SALE
Proved oil and gas property			15,888,126
Unproved oil and gas property			1,862,117
Accumulated depletion and impairment			(10,657,849	)
Net oil and gas properties			7,092,394
Well Equipment			668,349
Accumulated depreciation			(170,391	)
Net property, plant and equipment			497,958
Total assets held for sale			7,590,352
LIABILITIES HELD FOR SALE
Operator Payable			486,088
Eagle Ford asset purchase payable			190,000
Due to the Caltex bankruptcy estate			123,202
Current liabilities held for sale			799,290
Due to the Caltex bankruptcy estate			834,054
Asset retirement obligations			2,683,807
Non-current liabilities held for sale			3,517,861

 

The Company determined at December 31, 2013 that due to its plan of sale and the subsequent consummation in February 2014, that the sale would significantly alter the relationship between capitalized costs and it’s proved reserves. The Company has thus included in its loss from operations an impairment charge at December 31, 2013 amounting to $10,607,064. The Company calculated the impairment as the difference between the carrying amount of its oil and gas properties as of December 31, 2013 and the carrying value of the salvage equipment and the value of the liabilities assumed by Eagle Ford. The Company valued the note receivable of $500,000 at zero fair value. The Company also did not include certain liabilities that the Company took over from Eagle Ford during 2013 as the third parties were not party to the transaction. The Company has treated those liabilities in which it agreed with the third party to become liable for as having a continuing guarantee to those third parties. In addition, the Company performed a recalculation of the value of its proved reserves under the 10% carried working interest it obtained in the sale. The Company valued those reserves at $1,571,000. The excess of the liabilities transferred to Eagle Ford against the value of the salvage equipment over and above the $1,571,000 in proved reserves was $1,975,197, which the Company has moved to unproved reserves as of June 30, 2014.

NOTE 4 - OIL AND GAS PROPERTIES

 

Oil and gas properties consisted of the following:

 

		June 30, 2014				December 31, 2013
Proved  properties		$	1,571,000			$	-
Accumulated depletion, depreciation and impairment			(1,462)				-
Proved property, net			1,569,538				-
Unproved property			1,975,197				-
Total oil and gas property, net		$	3,544,735			$	-

Depletion expense amounted to $1,462 and $9,861 for the six months ended June 30, 2014 and 2013 respectively.

11

NOTE 5 - FURNITURE, FIXTURES AND EQUIPMENT

 

Furniture, fixtures and equipment consisted of the following:

 

		June 30,				December 31,
		2014				2013
Office furniture and equipment		$	16,539				$ 14,939
Accumulated depreciation			(1,574)				-
		$	14,965				$ 14,939

Depreciation expense for the six months ended June 30, 2014 was $1,574. There was depreciation expense of $47,817 for the six months ended June 30, 2013.

NOTE 6 - NOTES AND ADVANCES PAYABLE

 

In connection with the acquisition of Pan Am the Company acquired certain advances payable and short term bridge notes in the principal amount of $1,900,000 from two unaffiliated entities. Of the $1,900,000 borrowed, $600,000 was evidenced by an unsecured promissory note, had an interest rate of 10% per annum and was repaid March 2012. The remaining $1,300,000 borrowed was evidenced by a series of loan agreements all with essentially the same terms; interest at the rate of 6% per annum, unsecured, and due on the earlier of December 31, 2012 or upon demand.   As of December 31, 2013 and June 30, 2014, $350,000 was due on this loan.  The Company is currently in negotiations with the lender to extend the maturity date of the loan and expects to complete the extension in 2014.

 

In addition, in 2011 Pan Am was advanced approximately $90,000 by a then related party. The advance is non-interest bearing, is unsecured and due on demand and as of June 30, 2014 the balance the Company owed is $90,704.

 

On February 24, 2012, the Company received gross proceeds of $2.5 million from the sale of two promissory notes to two unrelated entities. The notes mature on December 31, 2014, bear interest at the rate of 8% per annum, are unsecured and are convertible into up to 2.5 million shares of the Company’s common stock, subject to certain adjustments, at the option of the holders. In addition, should the Company’s common stock trade above $2.50 for a period of 30 or more consecutive trading days, the notes and all accrued and unpaid interest automatically convert into common stock of the Company, at the conversion rate then in effect.

In connection with the $2.5 million notes noted above, the Company paid a 10% fee to and unrelated third party who helped facilitate the transaction.  The fee is being amortized on a straight line basis over the life of the loans. For the six months ended June 30, 2014 the Company amortized approximately $60,000 to interest expense.

On April 30, 2012, the Company received gross proceeds of $750,000 from the sale of a promissory note that matures on April 30, 2017, is unsecured and bears interest at the rate of 3% per annum.  The note contains conversion privileges such that the holder may convert at any time into common stock of the Company at a conversion rate of $0.75 per share. The conversion feature includes standard anti-dilution provisions.  The Company recorded a discount of $150,000 as a result of the beneficial conversion feature, and amortized $87,651 of the discount through June 30, 2014.  

On May 21, 2012, the Company received gross proceeds of $300,000 from the sale of a promissory note that originally matured on the earlier of December 31, 2012 or upon the Company raising $1,500,000 in debt or equity after the sale of the note, bears interest at the rate of 6% per annum and is unsecured.  On December 24, 2012, the maturity date of the note was extended until March 31, 2013.   The principal balance under this note is $300,000 as of June 30, 2014.  The Company is still in negotiations with the lender to extend that maturity date.

12

In October 2012 through December 2012 the Company received gross proceeds of $1,635,000 from the sale of promissory notes to two stockholders that mature on the earlier of December 31, 2013 or upon the Company raising $1,500,000 in debt or equity after the sale of the notes. The notes bear interest at the rate of 6% per annum and are unsecured. During 2013, the Company borrowed an additional $1,267,600 from the same two stockholders on essentially the same terms with maturity dates ranging from January 2014, through September 2014. The amount owed at December 31, 2013 was $2,902,600. In the first six months of 2014, the Company borrowed an additional $141,000 from the stockholders and issued promissory notes with essentially the same terms as previous loans with maturities ranging from January 2015 through June 2015. The Company is attempting to negotiate an extension of the maturity date of these notes.  

In January 2013, the Company and 0947388 BC Ltd. (“094”) entered into a letter of intent for 094 to farm into the Edwards formation assets acquired through its acquisition of Pan American Oil Company, LLC and Numa Luling, LLC and also the 80% interest in certain leasehold interests acquired from Eagle Ford Oil Co., Inc. The Company and 094 were unable to successfully negotiate a farm-in by 094. At the time of entering the letter of intent, 094 paid a deposit of $300,000. That deposit remains outstanding as of June 30, 2014 and is included in short term notes payable.

In March and April 2013, the Company received gross proceeds of $110,000 from an unrelated third party and issued promissory notes in the same amount. Those notes bear interest at the rate of 6% per annum, are unsecured and mature on the earlier of the one year anniversary of upon the Company obtaining $1.5 mm in financing.  The principal balance of $110,000 remains outstanding as of June 30, 2014.

On August 1, 2013, the Company entered into a secured promissory note with HII Technologies for $290,000. The Company entered into the promissory note to forestall mechanics lien issues with the Company’s leaseholds. HII Technologies was a drilling supplier for Eagle Ford who because of its own financial stress, had been unable to timely pay its suppliers, including HII Technologies. The Company and Eagle Ford agreed to reduce the Company’s operator payable to Eagle Ford by the same amount of the promissory note. The loan agreement bears interest at the rate of 5% per annum and matures on or before July 31, 2014. The loan is secured by a lien on the Company leasehold interest in 204 acres in Caldwell County, Texas (see Note 3).

In the first quarter of 2014, the Company issued promissory notes to an unrelated third party in the aggregate principal amount of $37,000 and received gross proceeds of the same amount.  The promissory notes bear interest at 6% per annum, are unsecured and mature at dates ranging between February and March 2015.  

During 2014, the CEO and an entity affiliated with the CEO advanced the Company approximately $23,000.  As of June 30, 2014, the balance outstanding under those advances was approximately $32,000.

NOTE 7 - PREFERRED STOCK

 

Series A

In connection with the acquisition of Pan American Oil Company, LLC in 2012, the Company issued 5,500,000 shares of Series A preferred stock as partial consideration for the purchase. The Series A preferred stock had an initial issue price of $1 per share and accrues a dividend quarterly to each holder at the rate of 3% per annum based on the original issue price, payable quarterly in cash or in kind. Series A preferred holders are required to have received all dividends before any dividend on common stock may be issued. The Series A preferred ranks senior to common stock in the event of a liquidation or winding up of the Company. The Series A preferred may be converted in whole or in part at any time at the option of the holder at the rate of 1 common share for each Series A Preferred, subject to adjustments as defined in the Series A certificate of designation. In addition, should the common stock of the Company trade in any over the counter market above $1.75 per share for a period of at least 30 consecutive trading days, the Company have an initial public offering of any class of securities in which gross proceeds are in excess of $50 million or consummate a merger in which the existing Company shareholders obtain less than 50% of the voting control of the combined entity, then the Series A preferred will automatically convert into the number of shares of common stock as the then conversion rate indicates. In the event that holders elect not to convert their Series A preferred or no automatic conversion is triggered, on January 31, 2019, the Series A preferred will become mandatorily redeemable for cash at its original issue price plus any unpaid dividends accrued as of that date. On the date of issuance, the Company determined that no beneficial conversion feature was present. As of June 30, 2014 the Company accrued $381,875 of Series A dividends.  

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Series B

In connection with the acquisition of Numa Luling, LLC in 2012, the Company issued 3,250,000 shares of Series B preferred stock as partial consideration for the purchase.  The Series B preferred stock had an initial issue (also liquidation price) of $1 per share.  The Series B ranks junior to the Series A preferred stock in respect to the payment of dividends but senior to shares of common stock.  The Series B is non-cumulative and dividends must be declared before they become payable by the Company.  The Series B ranks pari-passu in respect to liquidation and all other matters to the Series A preferred stock.  Each share of Series B preferred stock may be converted at any time by the holder into 1.33 shares of common stock.  In the event that the Company’s common stock trades above $1.75 per share for 30 consecutive trading days, the Company closes on a qualified sale (as defined in the agreement) in which the consideration to be received is greater than $50 million, or the Company has an underwritten public offering with proceeds in excess of $50 million, the Series B preferred stock automatically converts into common stock at the rate of 1.33 common shares for each Series B share.  The holders also have standard anti-dilution protections.  On the date of issuance, the Company determined that no beneficial conversion feature was present.

Series C

The Board of Directors adopted a resolution on July 30, 2012 authorizing 12,000,000 shares of Series C convertible redeemable preferred stock with a par value of $.001. The original issuance price was $1.00 per share. The Series C Preferred Stock shall, with respect to dividend rights and rights upon liquidation, winding up or dissolution, rank junior to or pari passau to other classes or series of preferred stock and prior to common stock.

 

The Corporation shall pay the holders of Series C Preferred Stock a dividend in an amount equal to five percent (5%) per annum multiplied by the Original Issue Price of the Series C Preferred Stock. Cumulative Preferred Dividends shall be payable in quarterly installments in cash or in kind, at the sole option of the Corporation.

 

Each share of Series C Preferred Stock may be converted by any holder thereof, without any further consideration, at any time, into 1.11 shares of Common Stock (the “Conversion Rate”).

Automatic Conversion. Each share of Series C Preferred Stock shall be automatically converted into shares of the Company’s Common Stock at the Conversion Rate upon the occurrence of any of the following events:

 

	(i)	The shares of the Corporation’s Common Stock shall trade at a price of over $1.75 per share (as adjusted for stock splits or other events which would result in an adjustment of the Conversion rate) for a period in excess of thirty (30) consecutive trading days and the shares of the Corporation’s Common Stock underlying the Series C Preferred Stock are either (i) included in an effective registration statement or (ii) eligible to be traded pursuant to an applicable exemption from registration.

	(ii)	The sale of all or substantially all of the assets of the Corporation or the outstanding shares of capital stock of the Corporation entitled to vote generally for the election of directors..

 

	(iii)	The merger of the Company which results in the shareholders of the Company prior to the merger owning less than fifty percent (50%) of the voting power of the Company following the merger.

 

	(iv)	An underwritten initial public offering of the Company’s shares with gross proceeds of at least $50,000,000.

 

The conversion rate will be adjusted for the following:

 

	·	Stock Splits and Combinations.

 

	·	Certain Dividends and Distributions.

 

	·	Other Dividends and Distributions.

 

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	·	Adjustments for Reclassification, Exchange or Substitution.

 

	·	Adjustments for Reorganization, Merger, Consolidation or Sales of Assets.

 

	·	Consideration for Stock. In case any shares of Common Stock or Convertible Securities other than the Series C Preferred Stock, or any rights or warrants or options to purchase any such Common Stock or Convertible Securities, shall be issued or sold in connection with a merger or consolidation.

  

The Corporation shall mandatorily redeem all shares of Series C Preferred Stock which remain issued and outstanding at January 31, 2019 (“Redemption Date”) at a price equal to the sum of the Original Issue Price and the aggregate amount of any unpaid Cumulative Preferred Dividends attributable to such shares. Such redemption shall be made only to the extent the Corporation has funds legally available for such redemption as of the Redemption Date.

 

Except as otherwise provided herein or required by law, the holders of the Series C Preferred Stock shall be entitled to vote together as a single class with the holders of Common Stock and any other capital stock of the Corporation entitled to vote, upon any matter submitted to the stockholders for a vote. The holders of Series C Preferred Stock shall be entitled to one vote for each share of Common Stock into which each share of Series C Preferred Stock held by such holders at the record date for the determination of the stockholders entitled to vote on such matters or, if no such record date is established, at the date such vote is taken, is convertible.

 

In 2012 the Company raised gross proceeds of $492,000 and issued 492,000 shares of Series C preferred stock. In addition, the Company issued one warrant for each share of Series C preferred stock sold in the offering.  Each warrant entitles the holder to acquire one share of the Company’s common stock, at an exercise price of $2.50 per share and expires 3 years from the date of issuance.

 

NOTE 8 - COMMON STOCK

 

On December 16, 2011, the Company filed a Preliminary Information Statement on Schedule 14-C disclosing that the holder of a majority of the Company’s common stock voted to (i) approve an amendment to the Company’s Articles of Incorporation to (a) change the name of the Company from Soton Holdings Group, Inc. to “Rio Bravo Oil, Inc.”, (b) increase the authorized common stock from 75,000,000 shares, par value $0.001, to 120,000,000 shares, par value $0.001, and (c) create a class of preferred stock, consisting of 30,000,000 shares, par value $0.001, the rights, privileges, and preferences of which may be set by the Company’s Board of Directors without further shareholder approval; and (ii) grant the Board of Directors the authority to amend the Company’s Articles of Incorporation in the future for the purpose of effectuating a forward stock split at a ratio between 2-for-1 and 30-for-1 without further approval by the shareholders.  These actions were approved by the holder of a majority of the Company’s voting securities. The name change, increase in authorized common stock and authorized preferred stock took effect with the Secretary of State for the State of Nevada on January 19, 2012, with the name change to Rio Bravo Oil, Inc. recognized by FINRA and the OTC Bulletin Board effective January 26, 2012. The forward stock split became effective as of February 15, 2012. All share amounts have been restated for the forwards stock split since inception.

 

In May 2012 the Board of Directors adopted a stock compensation plan.  The plan allows the Company to issue shares of common stock, options to purchase common stock or stock appreciation rights to employees, directors and consultants employed by the Company.   The number of shares of common stock issuable under the plan is determined each January 1, such that the plan may issue shares of common stock or instruments to acquire common stock of the Company up to 15% of the then outstanding common stock of the Company.  No awards were granted or outstanding during the period ending June 30, 2014.

In March 2014, a Series A preferred shareholder converted 500,000 shares of Series A preferred and received 550,000 shares of common stock of the Company.  The Company has recorded compensation expense of $36,500 in connection with the issuance as the holder was entitled to receive only 500,000 shares of common stock via the conversion of the Series A preferred (see Note 7).

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NOTE 9 - COMMITMENTS AND CONTINGENCIES

 

General

 

There have been significant changes in the U.S. economy, oil and gas prices and the finance industry which have adversely affected and may continue to adversely affect the Company in its attempt to obtain financing or in its process to produce commercially feasible gas exploration or production.

 

Federal, state and local authorities regulate the oil and gas industry. In particular, gas and oil production operations and economies are affected by environmental protection statutes, tax statutes and other laws and regulations relating to the petroleum industry, as well as changes in such laws, changing administrative regulations and the interpretations and application of such laws, rules and regulations. The Company believes it is in compliance with all federal, state and local laws, regulations, and orders applicable to the Company and its properties and operations, the violation of which would have a material adverse effect on the Company or its financial condition.

 

Operating Hazards and Insurance

 

The gas and oil business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formation, and environmental hazards such as oil spills, gas leaks, ruptures or discharges of toxic gases, the occurrence of any of which could result in substantial losses to the Company due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation and penalties, and suspension of operations.

The Company is a passive working and net revenue interest owner and operator in the oil and gas industry. As such, the Company to date has not acquired its own insurance coverage over its passive interests in the properties; instead the Company has relied on the third party operators for its properties to maintain insurance to cover its operations.

 

There can be no assurance that insurance, if any, will be adequate to cover any losses or exposure to liability. Although the Company believes the policies obtained by the third party operators provide coverage in scope and in amounts customary in the industry, they do not provide complete coverage against all operating risks. An uninsured or partially insured claim, if successful and of significant magnitude, could have a material adverse effect on the Company and its financial condition via its contractual liability to the prospect.

 

Title to Properties

 

The Company’s practice has been to acquire or have its members contribute ownership or leasehold rights to oil and natural gas properties from third parties. The Company’s existing rights are dependent on those previous third parties having obtained valid title to the properties. Prior to the commencement of oil or gas drilling operations on those properties, the third parties customarily conduct a title examination. The Company generally does not conduct examinations of title prior to obtaining its interests in its operations, but rely on representations from the third parties that they have good, valid and enforceable title to the oil and gas properties. Based upon the foregoing, the Company believes it has satisfactory title to their producing properties in accordance with customary practices in the oil and gas industry. The Company is not aware of any title deficiencies as of the date of these financial statements.

 

Potential Loss of Oil and Gas Interests/Cash Calls

 

The Company has agreed to be bound by the existing joint operating agreements with various operators for the drilling of oil and gas properties, and still owes certain operator payments on drilling wells. In addition, the Company might be subject to future cash calls due to (1) the drilling of any new well or wells on drilling sites; (2) rework or recompletion of a well; and (3) deepening or plugging back of dry holes, etc. If the Company does not pay delinquent amounts due or its share of future authorization for expenditures invoices, it may forfeit all of its rights in certain of its interests on the applicable prospects and any related profits. If one or more of the other members of the prospects fail to pay their share of the prospect costs, the Company may need to pay additional funds to protect its investments.

 

NOTE 10 - NON CASH DISCLOSURES NOT MADE ELSEWHERE

 

No amounts were paid for income taxes in the periods presented in these financial statements.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

  

Forward Looking Statements

 

This Interim Report on Form 10-Q contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PLSRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) regarding Rio Bravo Oil, Inc. (the “Company” or “Rio Bravo,” also referred to as “us”, “we” or “our”). Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties. Forward-looking statements include statements regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategies, (c) anticipated trends in our industries, (d) our future financing plans and (e) our anticipated needs for working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plans,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” or the negative of these words or other variations on these words or comparable terminology. These statements may be found under “Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Business,” as well as in this Form 10-Q generally. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results.

 

Any or all of our forward-looking statements in this report may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this Form 10-Q generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to publicly update any forward-looking statements, whether as the result of new information, future events, or otherwise. We intend that all forward-looking statements be subject to the safe harbor provisions of the PSLRA.

 

Background

 

Overview

 

In January 2012, Rio Bravo Oil, Inc. (f/k/a/ Soton Holdings Group, Inc.), a Nevada corporation (the “Company”) determined to change its business plan to focus on the oil and gas industry and to seek, investigate, and, if warranted, acquire one or more properties or businesses in the oil and gas industry, and to pursue other related activities intended to enhance shareholder value. The acquisition of the oil and gas assets described herein was undertaken in furtherance of that strategy.

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The Management of the Company originally adopted a strategy of developing a growth-oriented independent energy and production company with a focus on development of proven undeveloped reservoirs and expansion of fields through unconventional methods of resource development. The Company began to execute this strategy through it’s acquisitions and aggregation of certain working interests located within the Luling Edwards, Darst Creek Luling Branyon, and Salt Flat fields in Texas, (collectively referred to as the “Luling Edwards Fields”). It had been the Company’s strategy to acquire certain significant working interests and assets within productive Edwards reservoirs, to additionally acquire additional rights associated with its targeted leases and to obtain secondary development opportunities.

Material Events

 

In February 2014, the Company entered into a sale agreement with Eagle Ford Oil, Inc. (the “Sale Agreement”), the then operator for its oil field interests, such that the Company sold the entirety of its working and net revenue interests in all of its oil field leaseholds and also sold all of its salvage equipment obtained through its acquisitions of Pan American Oil Company, LLC and Rio Bravo Oil, LLC and Numa Luling, LLC. In addition, Eagle Ford agreed to take over all of the Company’s payables related to the leasehold interests and all of the remaining obligations incurred by the Company when it acquired its leasehold interests from Eagle Ford back in 2012. As consideration Eagle Ford issued a note to the Company in the amount of $500,000 plus a 10% carried working interest in the oil field leaseholds sold to Eagle Ford. The 10% carried working interest is subject to the existing 25% overriding royalty interests that exist on the leaseholds. The Company’s carried working interest means they are not obligated for any cash calls for any drilling or re-work drilling activity and are only obligated for 10% of the leasehold operating expenses.

Operations

Effective the date of the Sale Agreement, the Company ceased active operations of all of its prior oil assets and operations and thereafter retains only a 10% carried working interest subject to a 25% overriding royalty interest on it’s prior leaseholds, for which it is not obligated for any cash calls for any drilling or re-work drilling activity and is only obligated for 10% of the related leasehold operating expenses.

 

Finance

Debt:

In connection with the acquisition of Pan Am the Company acquired certain advances payable and short term bridge notes in the principal amount of $1,900,000 from two unaffiliated entities. Of the $1,900,000 borrowed, $600,000 was evidenced by an unsecured promissory note, had an interest rate of 10% per annum and was repaid March 2012. The remaining $1,300,000 borrowed was evidenced by a series of loan agreements all with essentially the same terms; interest at the rate of 6% per annum, unsecured, and due on the earlier of December 31, 2012 or upon demand.   As of December 31, 2013 and June 30, 2014, $350,000 was due on this loan.  The Company is currently in negotiations with the lender to extend the maturity date of the loan and expects to complete the extension in 2014.

 

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In addition, in 2011 Pan Am was advanced approximately $90,000 by a then related party. The advance is non-interest bearing, is unsecured and due on demand and as of June 30, 2014 the balance the Company owed is $90,704.

 

On February 24, 2012, the Company received gross proceeds of $2.5 million from the sale of two promissory notes to two unrelated entities. The notes mature on December 31, 2014, bear interest at the rate of 8% per annum, are unsecured and are convertible into up to 2.5 million shares of the Company’s common stock, subject to certain adjustments, at the option of the holders. In addition, should the Company’s common stock trade above $2.50 for a period of 30 or more consecutive trading days, the notes and all accrued and unpaid interest automatically convert into common stock of the Company, at the conversion rate then in effect.

In connection with the $2.5 million notes noted above, the Company paid a 10% fee to and unrelated third party who helped facilitate the transaction.  The fee is being amortized on a straight line basis over the life of the loans. For the six months ended June 30, 2014 the Company amortized approximately $60,000 to interest expense.

On April 30, 2012, the Company received gross proceeds of $750,000 from the sale of a promissory note that matures on April 30, 2017, is unsecured and bears interest at the rate of 3% per annum.  The note contains conversion privileges such that the holder may convert at any time into common stock of the Company at a conversion rate of $0.75 per share. The conversion feature includes standard anti-dilution provisions.  The Company recorded a discount of $150,000 as a result of the beneficial conversion feature, and amortized $87,651 of the discount through June 30, 2014.  

On May 21, 2012, the Company received gross proceeds of $300,000 from the sale of a promissory note that originally matured on the earlier of December 31, 2012 or upon the Company raising $1,500,000 in debt or equity after the sale of the note, bears interest at the rate of 6% per annum and is unsecured.  On December 24, 2012, the maturity date of the note was extended until March 31, 2013.   The principal balance under this note is $300,000 as of June 30, 2014.  The Company is still in negotiations with the lender to extend that maturity date.

In October 2012 through December 2012 the Company received gross proceeds of $1,635,000 from the sale of promissory notes to two stockholders that mature on the earlier of December 31, 2013 or upon the Company raising $1,500,000 in debt or equity after the sale of the notes. The notes bear interest at the rate of 6% per annum and are unsecured. During 2013, the Company borrowed an additional $1,267,600 from the same two stockholders on essentially the same terms with maturity dates ranging from January 2014, through September 2014. The amount owed at December 31, 2013 was $2,902,600. In the first six months of 2014, the Company borrowed an additional $141,000 from the stockholders and issued promissory notes with essentially the same terms as previous loans with maturities ranging from January 2015 through June 2015. The Company is attempting to negotiate an extension of the maturity date of these notes.

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In January 2013, the Company and 0947388 BC Ltd. (“094”) entered into a letter of intent for 094 to farm into the Edwards formation assets acquired through its acquisition of Pan American Oil Company, LLC and Numa Luling, LLC and also the 80% interest in certain leasehold interests acquired from Eagle Ford Oil Co., Inc. The Company and 094 were unable to successfully negotiate a farm-in by 094. At the time of entering the letter of intent, 094 paid a deposit of $300,000. That deposit remains outstanding as of June 30, 2014 and is included in short term notes payable.

In March and April 2013, the Company received gross proceeds of $110,000 from an unrelated third party and issued promissory notes in the same amount. Those notes bear interest at the rate of 6% per annum, are unsecured and mature on the earlier of the one year anniversary of upon the Company obtaining $1.5 mm in financing.  The principal balance of $110,000 remains outstanding as of June 30, 2014.

On August 1, 2013, the Company entered into a secured promissory note with HII Technologies for $290,000. The Company entered into the promissory note to forestall mechanics lien issues with the Company’s leaseholds. HII Technologies was a drilling supplier for Eagle Ford who because of its own financial stress, had been unable to timely pay its suppliers, including HII Technologies. The Company and Eagle Ford agreed to reduce the Company’s operator payable to Eagle Ford by the same amount of the promissory note. The loan agreement bears interest at the rate of 5% per annum and matures on or before July 31, 2014. The loan is secured by a lien on the Company leasehold interest in 204 acres in Caldwell County, Texas.

In the first quarter of 2014, the Company issued promissory notes to an unrelated third party in the aggregate principal amount of $37,000 and received gross proceeds of the same amount.  The promissory notes bear interest at 6% per annum, are unsecured and mature at dates ranging between February and March 2015.  

During 2014, the CEO and an entity affiliated with the CEO of the Company advanced the Company approximately $23,000.  As of June 30, 2014, the balance outstanding under these advances was approximately $32,000.

Equity

PREFERRED STOCK:

Series A

In connection with the acquisition of Pan American, the Company issued 5,500,000 shares of Series A preferred stock as partial consideration for the purchase. The Series A preferred stock had an initial issue price of $1 per share and accrues a dividend quarterly to each holder at the rate of 3% per annum based on the original issue price, payable quarterly in cash or in kind. Series A preferred holders are required to have received all dividends before any dividend on common stock may be issued. The Series A preferred ranks senior to common stock in the event of a liquidation or winding up of the Company. The Series A preferred may be converted in whole or in part at any time at the option of the holder at the rate of 1 common share for each Series A Preferred, subject to adjustments as defined in the Series A certificate of designation. In addition, should the common stock of the Company trade in any over the counter market above $1.75 per share for a period of at least 30 consecutive trading days, the Company have an initial public offering of any class of securities in which gross proceeds are in excess of $50 million or consummate a merger in which the existing Company shareholders obtain less than 50% of the voting control of the combined entity, then the Series A preferred will automatically convert into the number of shares of common stock as the then conversion rate indicates. In the event that holders elect not to convert their Series A preferred or no automatic conversion is triggered, on January 31, 2019, the Series A preferred will become mandatorily redeemable for cash at its original issue price plus any unpaid dividends accrued as of that date.  On the date of issuance, the Company determined that no beneficial conversion feature was present. As of June 30, 2014 the Company accrued $381,875 of Series A dividends.  

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Series B

In connection with the acquisition of Numa Luling, the Company issued 3,250,000 shares of Series B preferred stock as partial consideration for the purchase. The Series B preferred stock had an initial issue (also liquidation price) of $1 per share. The Series B ranks junior to the Series A preferred stock in respect to the payment of dividends but senior to shares of common stock. The Series B is non-cumulative and dividends must be declared before they become payable by the Company. The Series B ranks pari-passu in respect to liquidation and all other matters to the Series A preferred stock. Each share of Series B preferred stock may be converted at any time by the holder into 1.33 shares of common stock. In the event that the Company’s common stock trades above $1.75 per share for 30 consecutive trading days, the Company closes on a qualified sale (as defined in the agreement) in which the consideration to be received is greater than $50 million, or the Company has an underwritten public offering with proceeds in excess of $50 million, the Series B preferred stock automatically converts into common stock at the rate of 1.33 common shares for each Series B share. The holders also have standard anti-dilution protections.  On the date of issuance, the Company determined that no beneficial conversion feature was present.

Series C

During the quarter ending September 30, 2012 the Company raised gross proceeds of $492,000 and issued 492,000 shares of Series C preferred stock. In addition, the Company issued one warrant for each share of Series C preferred stock sold in the offering. Each warrant entitles the holder to acquire one share of the Company’s common stock, at an exercise price of $2.50 per share and expires 3 years from the date of issuance. The original issuance price was $1.00 per share. The Series C Preferred Stock shall, with respect to dividend rights and rights upon liquidation, winding up or dissolution, rank junior to or pari passu to other classes or series of preferred stock and prior to common stock. The Corporation shall pay the holders of Series C Preferred Stock a dividend in an amount equal to five percent (5%) per annum multiplied by the Original Issue Price of the Series C Preferred Stock. Cumulative Preferred Dividends shall be payable in quarterly installments in cash or in kind, at the sole option of the Corporation. Each share of Series C Preferred Stock may be converted by any holder thereof, without any further consideration, at any time, into 1.11 shares of Common Stock (the “Conversion Rate”).  In addition, each share of Series C Preferred Stock shall be automatically converted into shares of the Company’s Common Stock at the Conversion Rate upon the occurrence of any of the following events:

(i) The shares of the Company’s Common Stock shall trade at a price of over $1.75 per share (as adjusted for stock splits or other events which would result in an adjustment of the conversion rate) for a period in excess of thirty (30) consecutive trading days and the shares of the Company’s Common Stock underlying the Series C Preferred Stock are either (i) included in an effective registration statement or eligible to be traded pursuant to an applicable exemption from registration.

(ii) The sale of all or substantially all of the assets of the Corporation or the outstanding shares of capital stock of the Corporation entitled to vote generally for the election of directors.

(iii) The merger of the Company which results in the shareholders of the Company prior to the merger owning less than fifty percent (50%) of the voting power of the Company following the merger.

(iv) An underwritten initial public offering of the Company’s shares with gross proceeds of at least $50,000,000.

The conversion rate will be adjusted for the following:

 

	·	Stock Splits and Combinations.

 

	·	Certain Dividends and Distributions.

 

	·	Other Dividends and Distributions.

 

	·	Adjustments for Reclassification, Exchange or Substitution.

 

	·	Adjustments for Reorganization, Merger, Consolidation or Sales of Assets.

 

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	·	Consideration for Stock. In case any shares of Common Stock or Convertible Securities other than the Series C Preferred Stock, or any rights or warrants or options to purchase any such Common Stock or Convertible Securities, shall be issued or sold in connection with a merger or consolidation.

The Company shall mandatorily redeem all shares of Series C Preferred Stock which remain issued and outstanding at January 31, 2019 at a price equal to the sum of the Original Issue Price and the aggregate amount of any unpaid Cumulative Preferred Dividends attributable to such shares. Such redemption shall be made only to the extent the Company has funds legally available for such redemption as of the Redemption Date.

Except as otherwise provided herein or required by law, the holders of the Series C Preferred Stock shall be entitled to vote together as a single class with the holders of Common Stock and any other capital stock of the Company entitled to vote, upon any matter submitted to the stockholders for a vote. The holders of Series C Preferred Stock shall be entitled to one vote for each share of Common Stock into which each share of Series C Preferred Stock held by such holders at the record date for the determination of the stockholders entitled to vote on such matters or, if no such record date is established, at the date such vote is taken, is convertible.

In 2012 the Company raised gross proceeds of $492,000 and issued 492,000 shares of Series C preferred stock. In addition, the Company issued one warrant for each share of Series C preferred stock sold in the offering.  Each warrant entitles the holder to acquire one share of the Company’s common stock, at an exercise price of $2.50 per share and expires 3 years from the date of issuance.

COMMON STOCK:

On December 16, 2011, the Company filed a Preliminary Information Statement on Schedule 14-C disclosing that the holder of a majority of the Company’s common stock voted to (i) approve an amendment to the Company’s Articles of Incorporation to (a) change the name of the Company from Soton Holdings Group, Inc. to “Rio Bravo Oil, Inc.”, (b) increase the authorized common stock from 75,000,000 shares, par value $0.001, to 120,000,000 shares, par value $0.001, and (c) create a class of preferred stock, consisting of 30,000,000 shares, par value $0.001, the rights, privileges, and preferences of which may be set by the Company’s Board of Directors without further shareholder approval; and (ii) grant the Board of Directors the authority to amend the Company’s Articles of Incorporation in the future for the purpose of effectuating a forward stock split at a ratio between 2-for-1 and 30-for-1 without further approval by the shareholders.  These actions were approved by the holder of a majority of the Company’s voting securities. The name change, increase in authorized common stock and authorized preferred stock took effect with the Secretary of State for the State of Nevada on January 19, 2012, with the name change to Rio Bravo Oil, Inc. recognized by FINRA and the OTC Bulletin Board effective January 26, 2012. The forward stock split became effective as of February 15, 2012. All share amounts have been restated for the forwards stock split since inception.

 

In May 2012 the Board of Directors adopted a stock compensation plan.  The plan allows the Company to issue shares of common stock, options to purchase common stock or stock appreciation rights to employees, directors and consultants employed by the Company.   The number of shares of common stock issuable under the plan is determined each January 1, such that the plan may issue shares of common stock or instruments to acquire common stock of the Company up to 15% of the then outstanding common stock of the Company.  No awards were granted or outstanding during the period ending March 31, 2014.

In March 2014, a Series A preferred shareholder converted 500,000 shares of Series A preferred and received 550,000 shares of common stock of the Company.  The Company has recorded compensation expense of $36,500 in connection with the issuance as the holder was entitled to receive only 500,000 shares of common stock via the conversion.

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Period Comparisons

 

Comparison of the three months ended June 30, 2014 to June 30, 2013

 

In the three months ended June 30, 2014 we had revenues of approximately $26 compared to revenues of $57,026 in the three months ended June 30, 2013.  Revenues were derived from the sales of oil and gas attributable to our acquisition of leasehold rights from Eagle Ford Oil Co, Inc., which effectively ceased due to the sale of these assets in February 2014. Effective February 2014, the Company only has a 10% carried working interest in all of the oil and gas leaseholds sold to Eagle Ford. As a result of such sale, our leasehold operating costs were significantly reduced to $3,564 in the three months ended June 30, 2014 compared to $445,305 in the three months ended June 30, 2013.

In the three months ended June 30, 2014, our general and administrative expenses decreased by $68,908 to $113,666 from $182,574 in the three months ended June 30, 2014. This is reflective of the lower level of operating activity during the current period.

 

In the three months ended June 30, 2014, our professional fee expenses decreased to $59,483 from $190,168 in the three months ended June 30, 2013. The decrease was due to one-time charges incurred in the prior year due to the certain acquisitions.

 

Depletion, Depreciation and Amortization expense decreased in the three-month ended June 30, 2014 to $791 from $32,500 for the three months ended June 30, 2013. The decrease is reflective of the lower level of operating activity during the current period.  

 

Interest expense decreased in the three months ended June 30, 2014 to $169,474 from $202,213 in the three months ended June 30, 2013. The increase was the result of decreased borrowings.

 

Comparison of the six months ended June 30, 2014 to June 30, 2013

 

In the six months ended June 30, 2014 we had revenues of approximately $9,748 compared to revenues of $65,738 in the six months ended June 30, 2013.  Revenues were derived from the sales of oil and gas attributable to our acquisition of leasehold rights from Eagle Ford Oil Co, Inc., which effectively ceased due to the sale of these assets in February 2014. Effective February 2014, the Company only has a 10% carried working interest in all of the oil and gas leaseholds sold to Eagle Ford. As a result of such sale, our leasehold operating costs were significantly reduced to $9,902 in the six months ended June 30, 2014 compared to $1,063,281 in the six months ended June 30, 2013.

 

In the six months ended June 30, 2014, our general and administrative expenses decreased by $91,252 to $228,899 from $320,151 in the six months ended June 30, 2014. This is reflective of the lower level of operating activity during the current period.

 

In the six months ended June 30, 2014, our professional fee expenses decreased to $77,950 from $289,136 in the six months ended June 30, 2013. The decrease was due to one-time charges incurred in the prior year due to the certain acquisitions.

 

Depletion, Depreciation and Amortization expense decreased in the six-month ended June 30, 2014 to $3,036 from $57,654 for the six months ended June 30, 2013. The decrease is reflective of the lower level of operating activity during the current period.  

 

Interest expense decreased in the six months ended June 30, 2014 to $374,955 from $396,648 in the six months ended June 30, 2013. The increase was the result of decreased borrowings.

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Liquidity and Capital Resources

 

Liquidity

 

As of June 30, 2014 we had approximately $1,444 in cash, a working capital deficit of approximately $9.246 million and an accumulated deficit of approximately $18,725,409. Total Stockholders’ deficit at June 30, 2014 was approximately $11.962 million. Total debt at June 30, 2014 was approximately $7.667 million, an increase of approximately $273,000 from approximately $7.394 million at December 31, 2013. Our operating activities used $168,014 in cash for the six months ended June 30, 2014. Our investing activities used $33,332 during the six months ended June 30, 2014. We believe that we do not have sufficient cash on hand to fund all of our projected operating expenses for the next twelve months. If we are unable to raise sufficient cash, we may need to curtail operations.

 

Uses of estimates in the preparation of financial statements

 

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimated. To the extent management’s estimates prove to be incorrect, financial results for future periods may be adversely affected. Significant estimates and assumptions contained in the accompanying consolidated financial statements include management’s estimate of the allowance for uncollectible accounts receivable, amortization of intangible assets, and the fair values of options and warrant included in the determination of debt discounts and share based compensation.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable

ITEM 4. CONTROLS AND PROCEDURES

(a)

Disclosure Controls and Procedures.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), as of June 30, 2014. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that our disclosure and controls are not designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) inadequate segregation of duties consistent with control objectives; and (3) ineffective controls over period end financial disclosure and reporting processes.  

Management believes that the material weaknesses set forth in items (2) and (3) above did not have an effect on our financial results.  However, management believes that the lack of a functioning audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods.

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(b)      Changes in Internal Controls

There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the fiscal period to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.  

The Company’s management, including the Company’s CEO and CFO, does not expect that the Company’s internal control over financial reporting will prevent all errors and all fraud.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.

PART II

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A.  RISK FACTORS.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS   

During 2014, (i) a related party advanced the Company approximately $30,000 and (ii) the Company’s CEO advanced the Company approximately $8,000.  

 ITEM 3. DEFAULTS UPON SENIOR SECURITIES     

None.

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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

 

ITEM 6. EXHIBITS

Index to Exhibits

Exhibit No.		Description
31.1		Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 32.2 101.INS 101.SCH 101.CAL 101.DEF 101.LAB 101.PRE		Certification of Principal Executive Officer and Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certification of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. XBRL Instance Document XBRL Taxonomy Extension Schema Document XBRL Taxonomy Extension Calculation Linkbase Document XBRL Taxonomy Extension definition Linkbase Document XBRL Taxonomy Extension Label Linkbase Document XBRL Taxonomy Extension Presentation Linkbase Document

26

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 14, 2014.

	RIO BRAVO OIL, INC.
	By:	/s/ Carlos E. Buchanan, II
		Carlos E. Buchanan II
		President, Principal Executive Officer, Chief Financial Officer and
		Director (Principal Executive Officer and Principal Financial Officer)

27

Exhibit 31.1

CERTIFICATION

      I, Carlos E. Buchanan II, certify that:

1.

I have reviewed this Form 10-Q for the period ended June 30, 2014 of Rio Bravo Oil, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 14, 2014

/s/ Carlos E. Buchanan II

-------------------

Carlos E. Buchanan II

Principal Executive Officer

28

                                                 Exhibit 31.2

CERTIFICATION

      I, Carlos E. Buchanan II, certify that:

1.

I have reviewed this Form 10-Q for the period ended June 30, 2014September 30, 2013 of Rio Bravo Oil, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 14, 2014

/s/ Carlos E. Buchanan II

-------------------

Carlos E. Buchanan II

Principal Executive Officer

29

                                                                    Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

      The undersigned, Carlos E. Buchanan II, the Chief Executive Officer of RIO BRAVO OIL. INC.  (the "Company"), DOES HEREBY CERTIFY that:

      1. The Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (the "Report"), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

      2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

IN WITNESS WHEREOF, the undersigned has executed this statement this 14^th day of August, 2014.

 /s/ Carlos E. Buchanan II

-------------------

Carlos E. Buchanan II

Principal Executive Officer

A signed original of this written statement required by Section 906 has been provided to Rio Bravo Oil, Inc. and will be retained by Rio Bravo Oil, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

30

     Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

      The undersigned, Carlos E. Buchanan II, the Chief Financial Officer of RIO BRAVO OIL. INC.  (the "Company"), DOES HEREBY CERTIFY that:

      1. The Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (the "Report"), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

      2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

IN WITNESS WHEREOF, the undersigned has executed this statement this 14^th day of August 2014.

                                     /s/ Carlos E. Buchanan II

                                     ------------------------------------

                                     Carlos E. Buchanan II

                                     Principal Financial Officer

A signed original of this written statement required by Section 906 has been provided to Rio Bravo Oil, Inc. and will be retained by Rio Bravo Oil, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

31