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UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, DC. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2014

 

OR

 

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

 

For the transition period from_______to________

 

Commission File Number: 000-55010

 

(Exact name of registrant as specified in its charter)

3131 E. Camelback Road, Suite 211

(Address of principal executive offices, including zip code)

 

(Registrants telephone number, including area code)

 

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 such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark 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 such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

At November 14, 2014 there were 12,246,343 shares of the registrants Common Stock outstanding.

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EXPLANATORY NOTE

 

On September 20, 2012, an Exchange Agreement was executed between Clark Scott LLC and the company. The key provisions of the Exchange involved a 200 to 1 reverse split of the Company’s outstanding Common Stock, the outstanding Preferred Shares of the Company being surrendered, and the Company’s name and stock symbol would be changed.

 

On November 27, 2013, the Board of Directors approved an amendment to the Articles of Incorporation to reflect a change in par value from $.001 to $.0001.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Statements in this Quarterly Report or in the documents incorporated by reference herein that are not descriptions of historical facts are forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.  Reference is made in particular to the descriptions of our plans to, and objectives for, future acquisitions and operations underlying such plans and objectives and other forward looking terminology such as “may”, “expects”, “believes”, “anticipates”, “intends”, “projects” or similar terms, variations of such terms or the negative of such terms. Forward –looking statements are based on management’s current expectations. Actual results could differ materially from those currently anticipated due to a number of factors, including those set forth under “Risk Factors” including, in particular, risks related to the following:

 

We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any changes in our expectations or any changes in events, conditions or circumstances on which any such statement is based.

 

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TABLE OF CONTENTS

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TABLE OF CONTENTS

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Core Resource Management, Inc. (formerly known as Direct Pet Health Holdings, Inc.) (The “Company”) was incorporated in Nevada as Apex Sports.com, Inc. on February 17, 1999. The Company was renamed to Quad X Sports.com, Inc. in March 1999. The Company’s business strategy was to make acquisitions within the extreme sports industry. The Company was unable to make any acquisitions, ceasing operations in 2000. The Company was renamed to Bethel Holdings in August 2001.  The business strategy involved seeking attractive business combinations. No operations commenced or acquisitions completed during this time. The Company was renamed to Direct Pet Health Holdings, Inc. in June 2006. The Company’s strategy was to seek combinations in online pet health products. The Company has an authorized capital of 100,000,000 commons shares with a par value of $0.0001. The Company’s year-end is December 31.

The Company, pursuant to a Plan of Merger dated September 20, 2012 deemed it advisable that Clark Scott LLC, Inc. (“Clark Scott”) be merged into Direct Pet Health Holdings, Inc. Clark Scott was the surviving Corporation and subsequent to merger was renamed to “Core Resource Management, Inc.”. The Company filed the appropriate state filings with the State of Nevada on September 20, 2012.

The Company engages in the acquisition of existing producing oil and gas properties and interests in cooperation with established oil and gas operators.  The Company's business plan is to acquire positions of up to 50% in current oil & gas producing properties and interests from well-established operators, seeking from time to time, to sell a percentage of their existing production in order to recycle their capital into new leases and wells. The Company does not intend to engage in oil and gas development, but it may from time to time participate in development drilling on the properties and interests it has acquired. Management believes it can maximize value for its shareholders while also negotiating fair and reasonable valuations with respect to the properties and interests that it acquires.

The accompanying consolidated financial statements include the accounts of the Company and its subsidiary Core-Chiltepin Holdings, Inc. and Core Royalties Corporation, Inc.

The accompanying financial statements as of September 30, 2014 and December 31, 2013. Include all transactions occurring during the period from the Company’s incorporation to its fiscal year end.  These financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The accompanying financial statements include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. This includes all normal and recurring adjustments. References to GAAP are done using the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC” or “Codification”) 105, Generally Accepted Accounting Principles (“ASC 105”).

The accompanying financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted. However, in the opinion of management, all adjustments (which include only normal recurring accruals) necessary to present fairly the financial position and results of operations for the periods presented have been made. The results for interim periods are not necessarily indicative of trends or of results to be expected for the full year. These financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2013 (including the notes thereto) set forth in Form 10-K.

 

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The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

The Company recognizes oil and gas revenues for its ownership percentage of total production under the entitlement method, whereby the working interest owner records revenue based on its share of entitled production, regardless of whether the Company has taken its ownership share of such volumes. An over-produced owner would record the excess of the amount taken over its entitled share as a reduction in revenues and a payable while the under-produced owner records revenue and a receivable for the imbalance amount.

Basic net loss per share is computed by dividing the net loss available to common shareholders (the numerator) for the period by the weighted average number of common shares outstanding (the denominator) during the period. The computation of diluted earnings is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares had been issued. For the periods ended September 30, 2014 and December 31, 2013, basic and fully diluted loss per share are the same since the calculation of diluted per share amounts would result in an anti-dilutive calculation.

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

The Company accounts for stock-based employee compensation arrangements using the fair value method in accordance with the provisions of ASC Topic 718, Compensation – Stock Compensation (“ASC 718”).

The Company accounts for equity instruments issued in exchange for the receipt of goods or services in accordance with the provisions of ASC 505-50 "Equity - Based Payments to Non-Employees." Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably determinable.

The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services as defined by these accounting standards. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

 

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During June 2014, the FASB issued an Accounting Standards Update No. 2014-10, "Development Stage Entities (Topic 915) - Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation ("ASU 2014-10")".  The objective of ASU 2014-10 is to improve financial reporting by reducing the cost and complexity associated with the incremental reporting requirements for development stage entities.  ASU 2014-10 is effective for annual reporting periods beginning after December 15, 2014, and interim periods therein.  The Company is implementing ASU 2014-10 on its current filing.

 

 During May 2014, the FASB issued an Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic 606)".  The objective of ASU 2014-09 is to (1) remove inconsistencies and weaknesses in revenue requirements, (2) provide a more robust framework for addressing revenue issues, (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, (4) provide more useful information to users of financial statements through improved disclosure requirements, and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.  ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  The Company is currently evaluating the effect of this standard on its financial statements.

 

For purposes of the statement of cash flows, cash includes demand deposits with original maturities of three months or less when purchased. The Federal Deposit Insurance Corporation provides coverage for interest bearing accounts of up to $250,000 and unlimited coverage for non-interest bearing transaction accounts through December 31, 2012. As of September 30, 2014 and December 31, 2013, none of the Company’s cash accounts was in excess of federally insured limits.

The Company's financial instruments consist primarily of cash and cash equivalents, investments, accounts payable, certificate of deposits, and long-term debt.  The carrying values of cash and cash equivalents, investments, accounts payable, certificate of deposits, and long-term debt are representative of their fair values due to their short-term maturities. The Company's Convertible Note is recorded at cost and the fair value is disclosed in Note 14 – Long-Term Debt.    

The ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in accordance with U.S. generally accepted accounting principles, and requires certain disclosures about fair value measurements. In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the customer’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Impairment analyses will be made of all assets using future cash flow analysis. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount.

The Company held investments in equity securities that are required to be measured at fair value on a recurring basis. The Company’s investments consist of common stock of publicly traded company for which market prices are readily available.

The Company held investments in convertible notes that are required to be measured at fair value on a recurring basis. Currently these investments are valued at amortized cost due to there is no active market for these investments. The Company performed qualitative and quantitative analysis of these investments as of September 30, 2014 and determined that the investments balances are not impaired.

 

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The fair value measurements of the Company’s investments consisted of the following:

There were no transfers between the three levels during the year ended September 30, 2014. The Changes in Level 3 assets measured at fair value for the year ended September 30, 2014 were:

The Company’s investments in equity securities are classified as trading securities and as such are carried at fair value based on quoted market prices. Realized and unrealized gains and losses for trading securities are included as earnings in statements of operations.

Investments in equity securities as of September 30, 2014:

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the Company has begun operations and has begun to generate income. If these conditions remain constant or improve the Company will maintain the ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Management believes financial operations will continue on this upward trend but a substantial downturn in income could jeopardize the Company’s going concern status.

 

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The Company has an obligation under an operating lease agreement for rent of its office space in Phoenix, Arizona. The term of the lease is from 2012 through 2020. The average monthly base lease payment over the remaining term of the lease is $5,222.

Following is a schedule of lease payments by year:

Rent expense for the nine months ended September 30, 2014 and 2013 was $49,699 and $51,297, respectively.

As of September 30, 2014 and December 31, 2013, the officers of the Company advanced $2,000 and $20,000 to the Company, respectively.

In 2013, the Company guarantees a personal loan to one of the officers of the Company. The Company pledges the certificate of deposit as collateral for this loan. On April 2014, the certificate of deposit has been released and the Company has been released from its position as loan guarantee for the officer.

 

The Company accounts for income taxes under ASC Topic 740, Income Taxes (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. There was no current or deferred income tax expense or benefits for the nine months ended September 30, 2014 and 2013.

 

A former director of the Company is a managing director of Pegasus Funds, LLC (“Pegasus”). As of September 30, 2014, Pegasus and its affiliates owned approximately 2,650,000 common shares.

The Company issued 40,000 shares for services to former outside directors.

One of the shareholders of the Company advanced funds for the Company’s operations. These advances have no formal agreement, no stated interest rate and are due on demand. The amount due as of September 30, 2014 and December 31, 2013 was $2,000 and $20,000, respectively.

The Company executed a promissory note in the amount of $300,000 payable in twenty four equal installments to Pegasus Funds, Ltd. following the completion of raising $2,000,000 in capital. The note was secured by certificate of deposits. As of September 30, 2014, this note was paid off as part of a settlement with Pegasus and one of its managing members.  This settlement did not include the settlement of the Company's claims against W. Brown Glenn, Jr., a chief executive officer and director of the Company and co-manager of Pegasus. The amount due as of December 31, 2013 was $125,000.

 

The Company loaned Nitro Petroleum, Inc. $314,622 for Nitro's operating capital. The loan is part of a note agreement signed August 21, 2014 with 12% interest rate and due on demand.

 

The Company guaranteed a personal loan to W. Brown Glenn, Jr. The Company pledged the certificate of deposit as collateral guarantee for this loan. These actions taken by the Company were improperly made by Mr. Glenn without approval of the board of directors of the Company. On April 2014, the certificate of deposit was released and the Company has been released from its position as loan guarantor for Mr. Glenn.

 

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The Company’s long-term debt consisted of the following:

Related Party Note

In December 2012, the Company entered into a note agreement with Pegasus in which the Company agrees to pay Pegasus $300,000 in twenty four equal monthly installments. The note is secured by the certificate of deposits. This collateral will be reduced by 50% on the first anniversary of the initial monthly installment and released on the second anniversary of the initial monthly installment. Please refer to note 8 for additional information.

 

Convertible Note

 

The Company raised $3,778,000 in senior convertible debentures (“The Note”) that matures in 2017 and 2018. The Note is convertible into shares of the Company’s common stock, at an initial conversion price of $3.00 per share. The Note accrues interest at a rate of 7.0% per annum and effective interest rate of 15%, compounded quarterly, to be paid on each April 15, July 15, October 15, and January 15.

 

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During April 2014, the Company issued conversion-subscription rights offering to the note holders for a short period. The offering modifies the conversion price from $3.00 per share to $2.00 per share. During this time period, holders of an aggregate of $2,933,000 in principal of the notes exercised their rights and the Company issued an aggregate of 1,466,500 shares of common stock to the note holders for the conversion of $2,933,000 of principal to common stock. After conversion, $845,000 of the principal amount of the convertible note remained outstanding. In connection with the modification and conversion of the Notes, the Company recorded a debt conversion inducement expense of $2,075,458, reflecting the cost of reducing the conversion price from $3.00 to $2.00 per share.

The Company raised $904,489 in senior convertible debentures (“The Note”) that matures in 2019. The Note is convertible into shares of the Company’s common stock, at an initial conversion price of $3.00 per share. The Note accrues interest at a rate of 8.0% per annum and effective interest rate of 15%, compounded quarterly, to be paid on each April 15, July 15, October 15, and January 15.

Total accrued interest for both notes as of September 30, 2014 was $35,638.

The Company evaluated both notes for derivatives and determined that they do not qualify for derivative treatment for financial reporting purpose. The Company then evaluated both notes for beneficial conversion features and determined that some do contain beneficial conversion features. The aggregate intrinsic value of the beneficial conversion features was determined to be $588,256. This amount was recorded as a debt discount at the date of issuance that is being amortized over the life of the notes. Total debt discount amortization during the nine months ended September 30, 2014 was $140,424.

Future maturities of long-term debt as of September 30, 2014 are as follows:

The Company approved a non-qualified stock option plan in November 2013 to provide directors, officers, and employees and under which 40,000 shares of common stock have been reserved for issuance. The options are non-qualified stock options and are valued at the fair market value of the stock on the date of grant. The options expire 5 years after the date of grant.

The Company accounts for stock-based compensation under the provisions of FASB ASC 718-10-55. This statement requires the Company to record an expense associated with the fair value of stock-based compensation. The Company uses the Black- Scholes option valuation model to calculate stock-based compensation at the date of grant. Option pricing models require the input of highly subjective assumptions, including the expected price volatility. The Company used the simplified method to determine the expected term of the options due to the lack of sufficient historical data. Changes in these assumptions can materially affect the fair value estimate. The total fair value of the options is recognized as compensation over the vesting period.

 

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A summary of the status of the Company’s option grants as of September 30, 2014 and the changes during the periods then ended is presented below:

The weighted average fair value at date of grant for options year ended December 31, 2013 was estimated using the Black-Scholes option valuation model with the following inputs:

Risk-free interest rates for the options were taken from the Daily Federal Yield Curve Rates on the grant dates for the expected life of the options as published by the Federal Reserve. The expected volatility was based upon historical data and other relevant factors such as the Company’s changes in historical volatility, capital structure, and its daily trading volumes.

In calculating the expected life of stock options, the Company determines the amount of time from grant date to contractual term date for vested options. In developing the expected life assumption, all amounts of time are weighted by the number of underlying options.

A summary of the status of the Company’s vested and non-vested option grants at September 30, 2014 and the weighted average grant date fair value is presented below:

As of September 30, 2014, there were $74,992 of unrecognized compensation expenses related to the non-vested stock grant.

 

The Company is in the process of completing a merger with Nitro Petroleum, Inc. The merger is subject to the approval of Nitro Petroleum, Inc.'s stockholders.

 

The Company has evaluated subsequent events through November 14, 2014, the date the financial statements were available to be issued. No events have occurred which would have a material effect on the financial statements of the Company as of that date.

 

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS

 

Overview

 

Core Resource Management, Inc. was established to assemble, by acquisitions, a portfolio of existing producing oil & gas properties and interests in corporation with successful and long established oil & gas operators. The Company seeks acquisition opportunities that are low risk and low cost. We acquire positions of up to 50% in current oil & gas production from well-established operators, seeking from time to time, to sell a percentage of our existing production in order to recycle our capital into new producing properties and interests.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The Company is engaged in the acquisition of existing producing oil and gas properties and interests from established oil and gas operators and may, from time to time, acquire positions in smaller publicly traded exploration and production companies and funding the acquisitions through a combination of common equity and senior notes. In addition, the Company may from time to time paticipate in limited development on the producing properties and interests which it owns, but has no intent at this time to engage in exploratory drilling projects. The Company intends to acquire positions of up to 50% in current oil and gas producing properties and interests from established operators, seeking from time to time, to sell a percentage of its existing properties and interests in order to recycle its capital into producing property acquisitions. Management believes it can maximize value for its shareholders while also negotiating fair and reasonable valuations for its acquisitions.

 

We are continuing our efforts to identify and assess investment opportunities in oil and natural gas properties, utilizing our directors and stockholders until such time as funding is sourced from the capital markets. We have raised certain funds through private placements of our equity and convertible debenture securities, and attempts are ongoing to raise additional funds through private placements, and said attempts will continue throughout 2014. We may also use other various debt instruments to raise needed capital during 2014. We have also entered into an exclusive placement agreement with Casimir Capital whereby Casimir will raise up to $100,000,000 for the Company through a combination of debt and equity.

 

We are aggressively pursuing joint-ventures as well as merger and acquisition possibilities in order to scale operations.  Utilizing Company equity and or financing, though active private security offerings as well as initiatives by Casimir Capital as the Company’s Investment bank; We will begin putting funds immediately to work in order to procure revenue producing assets.

 

As producing oil and gas properties and interests become available and appear attractive to our management, funds, when and if they become available, will be spent on due diligence and research to determine if said prospects could be purchased to provide income for the Company. Established oil companies continue to strive to reduce costs and debt. This causes significant market opportunities for us to possibly position ourselves with sellers that wish to divest themselves of production in order to provide liquidity. Our management believes that current market conditions are creating situations that could result in the opportunity for such production acquisitions.  Management continues to evaluate the price of oil and gas as commodities to determine if a hedging program should be initiated.  Internal procedures are being put into place so if such opportunity is deemed viable, the implementation period would be significantly shortened.

 

Management believes the price of oil’s recent dip has strengthened its buy side positioning and will act aggressively to consummate transactions as the market conditions are favorable.

 

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Our operating expenses may increase as we undertake our plan of operations. Much of this increase will be affiliated with the M & A activities, diligence of potential targets, and base line expansions.  Next, a more thorough field risk management and active asset management will expand operating budgets.  In addition, increases may be attributable to the additional cost of operations associated with operations, raising additional capital, sourcing acquisitions, road show expenses and continued professional fees that will be incurred.  As described in 8-K filings, Subsequent developments following quarter end, Company has consummated a joint-venture agreement and entered into an executed definitive merger agreement with Nitro-Petroleum, Inc. (“Nitro”) (OTCQB: NTRO). The Company completed a merger agreement of Nitro on August 28, 2014.  Upon closing Company will acquire all of the issued and outstanding stock of Nitro through Core Resource Management Holding Co., (a merger subsidiary of Company) in a reverse triangular merger structure. Nitro will survive the merger and remain a wholly owned subsidiary of Company and Company will report as a consolidated Company.  Upon final consummation of the Merger, based on the number of shares of Nitro common stock outstanding on August 28, 2014, each outstanding share of Nitro common stock (other than shares held by those Nitro stockholders properly exercising dissenters' rights) would be converted into .0952 shares of the Company’s common stock (Ratio 10.5 to 1).  Management believes the merger will add significant assets to the Company’s portfolio, expand Company reach into newer markets, allow the Company to obtain new acquisitions within the Oklahoma region and beyond, as well as creating a synergistic management competency to the consolidated Company, from current Nitro management talent pool.

 

The financial information with respect to the three month periods ended September 30, 2014 that is discussed below is unaudited. In the opinion of management, this information contains all adjustments, consisting only of normal recurring accruals, necessary to state fairly the unaudited financial statements. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full fiscal year.

 

Financial Condition and Results of Operations

 

Revenues

 

The Company’s business plan is to maximize cash flow and shareholder value by acquiring current oil and gas production via suitable Working Interests and Royalty Interests in North American oil and gas production and fund those acquisitions via a combination of common equity and senior notes. The Company may also, from time to time, acquire positions in publicly traded oil and gas companies when management believes it can trade those positions for current production. New emphasis has been placed on utilizing the capital markets for mergers and acquisition purposes, in order to scale operations.  The Company initiated acquisitions during the second quarter of this year and has completed acquisitions in Texas, Oklahoma and Kansas having acquired working or royalty interests in 31 producing well and one saltwater disposal wells.  Further, initiation and diligence has begun on two joint-venture projects, and two separate acquisitions of oil and gas companies, one private market acquisition and one public company acquisition.

 

Oil and Gas Production

 

Revenue from oil and gas production from purchased interests commenced during the third quarter and was $67,134 for the three months ended September 30, 2014 with 57,523 revenues comparable to the same period in 2014.  For the first nine month period of 2014 revenues were $179,788 versus $63,482 for the same nine month period of 2014.  Management believes that with the continued expansion of revenue producing wells in 2014 for this upward trend to continue.

 

Interest Income

 

Interest income from investments and cash held was $2,963 for the three months ended September 30, 2014 with $3,938 income comparable in the same period in 2013.  For the nine months ending September 30, 2014 Interest income totaled $8,213 comparable to $6,169 over the same nine month period in 2014.

 

Realized and unrealized gain on investment in equity securities

 

The company had an unrealized gains of $3,624 for the three months ended September 30, 2014 comparable to an unrealized loss of $9,025 to 2013.  In the nine month period ending September 30, 2014 the Company posted an unrealized gain of $15,888.  Whereas, in 2014 over the same period the Company had an unrealized loss totaling $7,690 on investment in equity securities.

 

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Operating Expenses

 

Our operating expenses for the nine months (“first three quarters”) ended September 30, 2014 were $1,746,529 of which none represented organizational and registration expenses, $37,076 represents lease operating expense, $1,442,720 represents general and administration expense, and $266,732 represent interest expense. The comparable numbers for the same period in 2013 are operational expenses of $1,402,828 of which there were $76,989 represents organization and registration expenses, $1,011,825 represents general and administration expense, and $314,014 represents interest expense.

 

Liquidity and Capital Resources

 

We have continued to fund the bulk of our operating expenses through the issuance of equity investments and convertible debentures.  As of the date of this disclosure statement, in excess of $6.3 million in new capital has been raised, consisting of a combination of equity and convertible notes.

 

Management believes that the conversion of debt securities into equity positions has retired the aged higher priced debt servicing, providing additional liquidity in the short run to grow the company.  Dilution of current shareholders including management was contemplated and considered as a viable alternative for growth.

 

Directors and Employees

 

The Company currently has seven employees and intends to maintain minimal overhead until such time as its monthly cash flows from acquired production exceeds $500,000. Management believes that by acquiring producing properties and partnering with professional operators, it can keep the Company’s headcount to ten or fewer employees.

 

On July, 1, 2014, Mr. Phillip M. Nuciola III was named Director and Chairman of the Board. Since January 1, 2014 Mr. Nuciola served as President of Capital Markets.  Additional employees have been added this quarter in order to assist with new acquisitions, new asset management, and Company and asset risk management.  Management believes it has sufficient liquidity to maintain its current level of operations and service the coupon on its convertible notes through the end of 2014 without the need for additional capital.

 

Future Capital Requirements

 

The Company has no commitments for material capital expenditures beyond installing its accounting system, which has already been contracted and paid for. Management believes that the Company has more than adequate liquidity to fund its operations at current levels through year-end 2014.

 

We expect to continue to rely on sales of our common shares and securities convertible into our common shares, in order to continue to fund our operations.  Issuance of additional shares will result in dilution to existing stockholders.  There is no assurance that we will achieve any additional sales of such securities or arrange for debt or other financing to fund planned acquisitions and exploration activities.

 

On February 21, 2014 we entered into an exclusive agreement with Casimir Capital LP (“Casimir”) to raise up to $100,000,000 through a combination of debt and equity.  The exclusive agreement is for one year and is on a best efforts basis.  Casimir is a full service natural resource investment bank headquartered in New York with offices, affiliates and personnel in Toronto, Ontario, Calgary, Alberta, Melbourne, Australia and San Paulo, Brazil.

 

Known Trends or Uncertainties

 

Fluctuations in oil and natural gas prices, which have been volatile at times, may adversely affect our revenues as well as our ability to maintain our borrowing capacity, repay current or future indebtedness and obtain additional capital on attractive terms.  Our future financial condition, access to capital, cash flow and results of operations are linked to a robust oil and gas market. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control.

 

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While Management believes modest fluctuations will not have a vast material affect, major price drops in oil and gas commodity prices will have a material effect on Company earnings.  Further, potential major regulatory shifts that create significant expense to oil and gas processing or recovery would materially affect the Company.

 

Climate Change

 

Management has evaluated the potential material result of a change in climate change.  An indirect consequence of aggressive environmental regulation could change the ability of American companies to drill oil and gas.  Management’s risk management position is to acquire currently proven properties and producing wells to mitigate the risk of regulation on new developments.  Yet, the overall impact can not be clearly understood and could have a detrimental result.

 

Any climate change legislation could have an effect on the profitability of the Company’s drilling partners and the Company in general.  While there is currently no known policy that would have this impact, the Company continues to assess the potential risk of such legislation or regulation would create as a material consequence.  The potential impact would create an increase in the cost of drilling, thereby raise the production cost to realize the market price of the commodities (oil and gas).  Increase regulation regarding the water disposal of such drilling of oil would also increase the cost of production and alter the Company’s competitive business model.

 

An indirect consequence of environmental regulation may be the subsidies created to fund alternative energy.  Such subsidies may make other forms of energy more competitively priced and thus decrease the demand for oil and gas.  Further, some of the subsidies and tax incentives present to in the oil drilling and discovery sector, would increase the operational cost of such efforts.  Thus, Company drilling partners would not be as competitively situated within the energy sector as a whole.

 

Finally, actual physical changes to the environment, would create drilling challenges and risk for oil and gas production.  At minimum, the physical change would increase the insurance premiums necessary to cover operations as a going concern and increase cost of insuring labor.

 

Cybersecurity

 

In accordance with guidance from the SEC Division of Corporate Finance, the Company has considered risks associated in relation to protection of its sensitive information and cyber securities risks.

 

Management has determined a security breach of information is limited to the end use of such information and would have a limited impact on the revenues related to the going concern.  However, to protect against such security breach, Company has contracted its web developer to implement firewalls and to password protect sensitive information of Shareholders, investment groups, corporate strategy, and financial data.  Company has developed a company intra-net to store all of these items as well as minutes and directives reports from the Board of Directors and Committee charter meetings.  This intra-net has a firewall and is password protected.

 

The costs of such additional cybersecurity was $2,508 for the first nine months of 2014.  The Company will have nominal maintenance costs of such security system going forward.  The Company has not experienced an actual cyber-attack to date.  The Company maintains insurance that would compensate against any major business interruption which would occur in the event of such attack.

 

Off Balance Sheet Arrangements

 

Pegasus Funds, LLC, a consultant to the Company, provided office space, telephones, internet and fax to the Company without charge. The Company began paying $1,000 per month to Pegasus for use of Pegasus’s offices and facilities from the period of February 1, 2013 to March 31, 2014.

 

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The Company guaranteed a personal loan of Mr. Glenn, a principal of Pegasus, by pledging a certificate of deposit as collateral for this loan.

 

In April 2014, the certificate of deposit was released and the Company was also released from its position as a guarantor of Mr. Glenn's indebtedness.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Not applicable

 

ITEM 4.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The company has initiated and continues to monitor its disclosure controls and procedures that are designed to ensure that information required to be disclosed by it in the reports that it files or submits to the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that information is accumulated and communicated to the Company’s management, including its principal executive and principle financial officer (referred to in this report as the Certifying Officer), as appropriate to allow timely decisions regarding required disclosure. The Company’s management evaluated, with the participation of its Certifying Officer, the effectiveness of the Company’s disclosure controls and procedures as of September 30,2014, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Our Certifying Officer concluding these controls are effective.

 

The Company has created an advanced records system that will allow for increased precision and oversight of its corporate governance method implementation. Adopting general market guidance from Securities and Exchange Commission statement, Company management feels this use of technology will provide even greater oversight and reporting of major decisions; focusing on key indicators of operating results, as well as any nonperformance indicators, that will allow investors to better understand and evaluate the Company.

 

Changes in Internal Controls

 

The Company’s has added new internal control mechanisms to create heightened oversight over financial reporting during the quarter ended September 30, 2014.  An internal intra-net link was added to enable key management and Companies audit committee to better analyze financial policy, potential conflicts, and projected expenditures regarding Company financials. Also, during this time Alexander Campbell, Company CEO, was added as a member of the Audit Committee.  While management believes this added risk management measures have not yet materially affected financial reporting, it is reasonably likely to allow for greater risk oversight and management of financial issues, and thus tighten the Company’s internal control over financial reporting.

 

PART II

 

ITEM 1.

LEGAL PROCEEDINGS

 

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ITEM 1.A.

 

Not applicable

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

During the nine months ended September 30, 2014, the Company issued $259,775 in equity (considered financing activities).  In addition, the Company issued 30,000 in shares with a promissory note, $4,385,527 issuance of common stock in satisfaction of convertible notes.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

None

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not Applicable

ITEM 5.

OTHER INFORMATION

 

None, 8K reported

ITEM 6.

EXHIBITS

 

 

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SIGNATURES

Pursuant to the requirements 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.

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 * filed herewith

 

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