UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2010
[ ] 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 333-158721
Topaz Resources, Inc.
(Formerly Kids Germ Defense Corp.)
(Exact name of registrant as specified in its charter)
Florida 26-4090511
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1012 North Masch Branch Road, Denton, TX 76207-2057
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (940) 243-1122
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.0001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 [X] No [ ]
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 [ ] No [ ] (not applicable)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant, based on the closing price of $0.018 per share
on December 31, 2010, as reported by the Over-the-Counter Bulletin Board was $
9,147,450.
At April 8, 2011, the registrant had 518,175,000 outstanding shares of $0.001
par value common stock.
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS 4
ITEM 1A. RISK FACTORS 7
ITEM 2. DESCRIPTION OF PROPERTIES 13
ITEM 3. LEGAL PROCEEDINGS 14
ITEM 4. REMOVED AND RESERVED 14
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
SMALL BUSINESS ISSUER PURCHASE OF EQUITY SECURITIES 14
ITEM 6. SELECTED FINANCIAL INFORMATION 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24
Balance Sheets as of December 31, 2010 and 2009 26
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Statements of Operations for the Year ended December 31, 2010
and for the period from inception (January 16, 2010) to
December 31, 2009 27
Statements of Changes in Stockholders' Equity for the Year
ended December 31, 2010 and for the period from inception
(January 16, 2010) to December 31, 2009 28
Statements of Cash Flows for the Year ended December 31, 2010
and for the period from inception (January 16, 2010) to
December 31, 2009 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 41
ITEM 9A(T). CONTROLS AND PROCEDURES 41
ITEM 9B. OTHER INFORMATION 42
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 42
ITEM 11. EXECUTIVE COMPENSATION 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS 45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE 46
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 48
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 49
GLOSSARY OF TERMS 50
SIGNATURES 53
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2
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements are based on
our current expectations, assumptions, estimates and projections for the future
of our business and our industry and are not statements of historical fact.
Words such as "anticipate," "believe," "could," "estimate," "expect," "intend,"
"may," "plan," "predict," "project," "will" and similar expressions identify
forward-looking statements. Examples of forward-looking statements include
statements about the following:
* our future operating results;
* our future capital expenditures
* our expansion and growth of operations; and
* our future investments in and acquisitions of oil and natural gas
properties.
We have based these forward-looking statements on assumptions and analyses made
in light of our experience and our perception of historical trends, current
conditions, and expected future developments. However, you should be aware that
these forward-looking statements are only our predictions and we cannot
guarantee any such outcomes. Future events and actual results may differ
materially from the results set forth in or implied in the forward-looking
statements. Important factors that could cause actual results to differ
materially from our expectations include, but are not limited to, the following
risks and uncertainties:
* general economic and business conditions;
* exposure to market risks in our financial instruments;
* fluctuation in worldwide prices and demand for oil and natural gas;
* fluctuations in the levels of our oil and natural gas exploration and
development activities;
* our ability to find, acquire and develop oil and natural gas
properties;
* risks associated with oil and natural gas;
* competition for raw materials and customers in the oil and natural gas
industry;
* technological changes and developments in the oil and natural gas
industry;
* legislative and regulatory uncertainties, including proposed changes
to federal tax law and climate change legislation, and potential
environmental liabilities;
* our ability to continue as a going concern;
* our ability to secure additional capital to fund operations; and
* other factors discussed elsewhere in this Form 10-K and in our other
public filings, press releases, and discussions with Company
management.
Should one or more of the risks or uncertainties described above or elsewhere in
this Form 10-K occur, or should underlying assumptions prove incorrect, our
actual results and plans could differ materially from those expressed in any
forward-looking statements. We specifically undertake no obligation to publicly
update or revise any information contained in a forward-looking statement or any
forward-looking statement in its entirety, whether as a result of new
information, future events, or otherwise, except as required by law.
All forward-looking statements attributable to us are expressly qualified in
their entirety by this cautionary statement.
3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION - OIL AND GAS OVERVIEW
Topaz Resources, Inc. and its wholly owned subsidiary Masch Branch Exploration
LLC (referred to herein collectively or separately as "we," "our," "Topaz", or
the "Company") is an independent oil and gas company focusing on production,
acquisitions and developmental drilling opportunities within proven producing
areas of north, central and west Texas.
Our objectives are to increase shareholder value, to enhance cash flows and to
grow our proven reserve values by pursuing a balanced strategy of:
* remaining focused in our area of operation within north, central and
west Texas where our management team has exploration and operating
experience in
* driving growth through internally generated projects;
* exploiting and drilling our existing core properties to maximize
reserve growth;
* strategic reserve and leasehold acquisitions to supplement cash flow
and to complement our drill-bit growth strategy; and
* achieving operational control of our properties in order to manage our
costs and development schedules.
Topaz is focused on a strategy of acquiring acreage and production within its
area of operation and to enhance this acreage through drilling and well
workovers. Topaz's objective is to increase and to enhance cash flows and to
maximize the proven reserve values, with an eye towards a possible monetization
via sale of Topaz assets or of individual properties.
Our focus is to pursue oil and gas drilling opportunities by teaming with
smaller industry partners as a means of limiting our drilling risk. Prospects
are generally brought to us by other oil and gas companies or individuals. We
identify and evaluate prospective oil and gas properties to determine both the
degree of risk and the commercial potential of the project. We seek projects
that offer a mix of low risk with a potential of steady reliable revenue as well
as projects with a higher risk, but that may also have a larger return. We
strive to use modern technology to help us identify and develop potential oil
and gas reservoirs and to mitigate our risk. We seek to maximize the value of
our asset base by exploring and developing properties that have both production
and reserve growth potential.
In some instances, we will seek to be operator of our oil and gas properties. As
the operator, we are more directly in control of the timing, costs of drilling,
completion and production operations on our projects.
Our corporate office is located at 1012 North Masch Branch Road, Denton, Texas
76207-3640. Our telephone number is (940) 243-1122.
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COMPETITION
We compete with independent oil and gas companies for exploration prospects,
property acquisitions and for the equipment and labor required to operate and
develop these properties. Many of our competitors have substantially greater
financial and other resources than we have. These competitors may be able to pay
more for exploratory prospects and may be able to define, evaluate, bid for and
purchase a greater number of properties and prospects than we can.
We conduct all of our drilling, exploration and production activities onshore in
the United States. All of our oil and gas assets are located in the United
States and all of our revenues are from sales to customers within the United
States.
TITLE TO PROPERTIES
As is customary in the oil and natural gas industry, we search the title, and
remedy material defects, if any, to undeveloped oil and natural gas leases at
the time we acquire them. To the extent title opinions or other investigations
reflect title defects, we (rather than the seller or lessor of the undeveloped
property) may be obligated to cure any such title defects at our expense. If we
are unable to remedy or cure any title defects, so that it would not be prudent
for us to commence drilling operations on the property, we could suffer a loss
of our entire investment in the property. We believe that we have good title to
our oil and natural gas properties, some of which are subject to immaterial
encumbrances, easements, and restrictions.
REGULATION
The exploration and development of oil and gas properties are subject to various
types of federal, state and local laws and regulations. These laws and
regulations govern a wide range of matters, including the drilling and spacing
of wells, allowable rates of production, restoration of surface areas, plugging
and abandonment of wells and specific requirements for the operation of wells.
Failure to comply with such laws and regulations can result in substantial
penalties.
Laws and regulations relating to our business frequently change so we are unable
to predict the future cost or impact of complying with such laws. Future laws
and regulations, including changes to existing laws and regulations, could
adversely affect our business. These regulatory burdens generally do not affect
us any differently than they affect other companies in our industry with similar
types, quantities and locations of production.
OPERATIONAL HAZARDS AND INSURANCE
Our operations are subject to the usual hazards inherent to the drilling and
production of oil and gas, such as blowouts, cratering, explosions,
uncontrollable flows of oil, gas or well fluids, fires and pollution and other
environmental risks. These hazards can cause personal injury and loss of life,
severe damage to and destruction of property and equipment, pollution or
environmental damage and suspension of operation. In addition, the presence of
unanticipated pressures or irregularities in formations, miscalculations, or
accidents may cause our drilling activities to be unsuccessful and result in a
total loss of our investment.
We do not currently maintain insurance to cover our operations. We are
considering arranging appropriate insurance coverage during fiscal 2011, with
policy limits and retention liability customary in the industry. The occurrence
of a significant adverse event, the risks of which are not fully covered by
insurance, could have a material adverse effect on our financial condition and
results of operations. We cannot give any assurances that we will be able to
arrange or maintain adequate insurance in the future at rates we consider
reasonable.
EMPLOYEES AND CONSULTANTS
At December 31, 2010, we had no employees. We engage consultants on an as-needed
basis for accounting, technical, oil field, geological, and administrative
services. Since we have no employees there is no collective bargaining
agreement. We may hire more employees in the next fiscal year as needed. All
other services are currently contracted for with independent contractors. We
have not obtained "key man" life insurance on any of our officers or directors.
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RECENT DEVELOPMENTS
In April 2010, under the direction of new management and a new Board, the
Company changed its name to Topaz Resources, Inc. and began to execute our oil
and gas strategy.
In June, 2010, Topaz agreed to cooperate with Dark Horse Operating Co. L.L.C.
("DHOPCO") to drill a vertical Barnett Shale oil and natural gas well on one of
the tracts within an approximately 1,187.75 acre lease in Montague County,
Texas. DHOPCO acted as operator on behalf of Topaz. By the end of August the
well had been successfully drilled, logged and cased. It is currently awaiting
completion. DHOPCO is owned by two officers of Topaz and is therefore considered
a related party to Topaz.
On September 21, 2010, RMJ, Inc. ("RMJ"), an independent energy company, agreed
to purchase a 25% working interest in this recently drilled Barnett Shale oil
and natural gas well and its surrounding unit acreage in Montague County. In
November, 2010, RMJ, decided to expand its involvement when it purchased a
31.25% working interest in the remaining Montague County lease acreage.
In October 2010, Topaz acquired all the leasehold rights and equipment owned by
Viejo Coyote Energy, LLC in a lease tract located in Wichita County, Texas. This
acquisition included four oil wells that are capable of producing and all the
related surface equipment. In November 2010 and later in January 2011, the
Company completed two separate leasing transactions which consolidated and
increased its leasehold acreage position for this project to approximately 600
contiguous acres, all located in Wichita County.
In January 2011, RMJ agreed to acquire a 25% working interest in our first well
and the surrounding unit acres to be drilled on our Wichita County acreage.
In two separate transactions in January 2011 and February 2011, the Company
completed the acquisition of an undivided 45.4% leasehold interest in a lease
covering approximately 84 acres in Denton County, Texas plus a 45.4% working
interest in a shut -in horizontal Barnett Shale natural gas well on that
acreage. Also in these transactions, the Company became the operator of the
property and is in a position to control the development program for the lease.
In a previous transaction in October 2010, RMJ agreed to purchase a 22.7%
working interest in this well and lease.
In March 2011, Polar Resources Corporation ("Polar") agreed to acquire an
approximately 63% working interest in the Montague County Barnett Shale oil and
natural gas well and to participating with the Company in drilling additional
Barnett Shale oil and natural gas wells. Closing of this transaction requires an
initial cash payment to the Company which as of April 12, 2011 has not been
received by the Company.
In April 2011, the Company and DHOPCO executed an agreement which transfers to
the Company all right and title of the Montague County Barnett Shale oil and
natural gas well and all the leasehold rights in and to the lease acreage in
Montague County.
LONG TERM SUCCESS
Our success depends on the successful acquisition, exploration and development
of commercial grade oil and gas properties as well as the prevailing prices for
oil and natural gas to generate future revenues and operating cash flow. Oil and
natural gas prices have been extremely volatile in recent years and are affected
by many factors outside of our control. The volatile nature of the energy
markets makes it difficult to estimate future prices of oil and natural gas;
however, any prolonged period of depressed prices would have a material adverse
effect on our results of operations and financial condition. Such pricing
factors are largely beyond our control, and may result in fluctuations in our
earnings. We believe there are significant opportunities available to us in the
oil and gas exploration and development industry.
AVAILABILITY OF SEC FILINGS
You may read and copy any materials we file with the U.S. Securities and
Exchange Commission (the "SEC") at the SEC's Public Reference Room at 100 F
Street, NE, Washington, DC 20549, on official business days during the hours of
10:00 am to 3:00 pm. You can obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC. The address
of that site is http://www.sec.gov.
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WEBSITE / AVAILABLE INFORMATION
Our website can be found at www.topazresourcesinc.com . Our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to those reports filed with or furnished to the SEC, pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 ("the Exchange
Act") can be accessed free of charge on our web site at
www.topazresourcesinc.com in the "Investors" section of our web site under the
"Filings" button as soon as is reasonably practicable after we electronically
file such material with, or otherwise furnish it to, the SEC.
Information contained on or connected to our web site is not incorporated by
reference into this Annual Report and should not be considered part of this
report or any other filing that we make with the SEC.
ITEM 1A. RISK FACTORS
The following risk factors together with other information set forth in this
Form 10-K, should be carefully considered by current and future investors in our
securities. An investment in our securities involves substantial risks. If any
of the following risks actually occur, our financial condition and our results
of operations could be materially and adversely affected. Additional risks and
uncertainties not presently known to us may also impair our business operations.
In any such case, the trading price of our Common Stock could decline, and you
could lose all, or a part, of your investment.
RISKS RELATING TO OUR BUSINESS AND THE OIL AND GAS INDUSTRY
WE MAY BE UNABLE TO CONTINUE AS A GOING CONCERN IN WHICH CASE OUR SECURITIES
WILL HAVE LITTLE OR NO VALUE.
Our financial statements for the year ended December 31, 2010 were prepared on a
going concern basis, which contemplates the realization of assets and the
settlement of liabilities in the normal course of business. We have incurred net
losses since inception which raises substantial doubt about our ability to
continue as a going concern. In the event we are not able to continue
operations, you will likely suffer a complete loss of your investment in our
securities.
TO EXECUTE OUR BUSINESS PLAN WE WILL NEED TO DEVELOP CURRENT PROJECTS AND EXPAND
OUR OPERATIONS REQUIRING SIGNIFICANT CAPITAL EXPENDITURES WHICH WE MAY BE UNABLE
TO FUND.
We have a history of net losses and expect that our operating expenses will
continue over the next 12 months as we continue to implement our business plan.
Our business plan contemplates the development of our current exploration
projects and the expansion of our business by identifying, acquiring, and
developing additional oil and gas properties.
We need to rely on external sources of financing to meet the capital
requirements associated with the development of our current properties and the
expansion of our oil and gas operations. We plan to obtain the funding we need
through debt and equity markets. There is no assurance that we will be able to
obtain additional funding when it is required or that it will be available to us
on commercially acceptable terms.
We may make offers to acquire oil and gas properties in the ordinary course of
our business. If these offers are accepted, our capital needs will increase
substantially. If we fail to obtain the funding that we need when it is
required, we may have to forego or delay potentially valuable opportunities to
acquire new oil and gas properties. In addition, without the necessary funding,
we may default on existing funding commitments to third parties and forfeit or
dilute our rights in existing oil and gas property interests.
OUR FINANCIAL CONDITION WILL DETERIORATE IF WE ARE UNABLE TO RETAIN OUR
INTERESTS IN OUR LEASED OIL AND GAS PROPERTIES.
All of our properties are held under interests in oil and gas mineral leases. If
we fail to meet the specific requirements of each lease, the lease may be
terminated or otherwise expire. We cannot be assured that we will be able to
meet our obligations under each lease. The termination or expiration of our
"working interests" (interests created by the execution of an oil and gas lease)
relating to these leases would impair our financial condition and results of
operations.
We will need significant additional funds to meet capital calls, drilling and
other production costs in our effort to explore, produce, develop and sell the
natural gas and oil produced by our leases. We may not be able to obtain any
such additional funds on acceptable terms.
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WE HAVE EXPERIENCED SIGNIFICANT OPERATING LOSSES IN THE PAST AND THERE CAN BE NO
ASSURANCE THAT WE WILL BECOME PROFITABLE IN THE FUTURE.
We have reported a net loss of $92,182 for the year ended December 31, 2010, and
we have an accumulated deficit through December 31, 2010 of $154,816. Without
successful exploration and development of our properties your investment in the
Company could become devalued or worthless.
WE MAY SEEK TO RAISE ADDITIONAL FUNDS IN THE FUTURE THROUGH DEBT FINANCING WHICH
MAY IMPOSE OPERATIONAL RESTRICTIONS AND MAY FURTHER DILUTE EXISTING OWNERSHIP
INTERESTS.
We expect to seek to raise additional capital in the future to help fund our
acquisition, development, and production of oil and natural gas reserves. Debt
financing, if available, may require restrictive covenants which may limit our
operating flexibility. Future debt financing may also involve debt instruments
that are convertible into or exercisable for Common Stock. The conversion of the
debt to equity financing may dilute the equity position of our existing
shareholders.
WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO BASE AN INVESTMENT DECISION.
We have a limited history of oil and gas production and have minimal proven
reserves. To date, we have not yet generated a sustainable positive cash flow or
earnings. We cannot provide any assurances that we will ever operate
profitability. As a result of our limited operating history, we are more
susceptible to business risks. These risks include unforeseen capital
requirements, failure to establish business relationships, and competitive
disadvantages against larger and more established companies.
WE MAY LOSE KEY MANAGEMENT PERSONNEL WHICH COULD ENDANGER THE FUTURE SUCCESS OF
OUR OIL AND GAS OPERATIONS.
Our President and Chief Executive Officer, who is also acting as our interim
chief financial officer, our Chief Operating Officer, two Vice-Presidents and
two directors each have substantial experience in the oil and gas business. The
loss of any of these individuals, could adversely affect our business. If one or
more members of our management team dies, becomes disabled or voluntarily
terminates employment with us, there is no assurance that a suitable or
comparable substitute will be found.
THE OIL AND GAS BUSINESS IS HIGHLY COMPETITIVE, PLACING THE COMPANY AT AN
OPERATING DISADVANTAGE.
We expect to be at a competitive disadvantage in (a) seeking to acquire suitable
oil and or gas drilling prospects; (b) undertaking exploration and development;
and (c) seeking additional financing. We base our preliminary decisions
regarding the acquisition of oil and or gas prospects and undertaking of
drilling ventures upon general and inferred geology and economic assumptions.
This public information is also available to our competitors.
In addition, we compete with larger oil and gas companies with longer operating
histories and greater financial resources than us. These larger competitors, by
reason of their size and greater financial strength, can more easily:
* access capital markets;
* recruit more qualified personnel;
* absorb the burden of any changes in laws and regulations in applicable
jurisdictions;
* handle longer periods of reduced prices of oil and natural gas;
* acquire and evaluate larger volumes of critical information; and
* compete for industry-offered business ventures.
These disadvantages could create negative results for our business plan and
future operations.
OIL AND GAS PRICES ARE VOLATILE. DECLINES IN COMMODITY PRICES HAVE ADVERSELY
AFFECTED, AND IN THE FUTURE MAY ADVERSELY AFFECT, OUR FINANCIAL CONDITION,
LIQUIDITY, RESULTS OF OPERATIONS, CASH FLOWS, ACCESS TO THE CAPITAL MARKETS, AND
ABILITY TO GROW.
Our revenues, operating results, liquidity, cash flows, profitability and value
of proved reserves depend substantially upon the market prices of oil and
natural gas. Product prices affect our cash flow available for capital
8
expenditures and our ability to access funds through the capital markets. If
commodity prices decline in the future, the decline could have adverse effects
on our reserves and availability of funds.
The prices we receive for our oil and natural gas depend upon factors beyond our
control, including among others:
* changes in the supply of and demand for oil and natural gas;
* market uncertainty;
* the level of consumer product demands;
* hurricanes and other weather conditions;
* domestic governmental regulations and taxes;
* the supply of foreign oil and natural gas;
* political instability in the Middle East and other major oil and
natural gas producing regions;
* actions by OPEC, the Organization of Petroleum Exporting Countries;
and
* overall domestic and foreign economic conditions.
These factors make it very difficult to predict future commodity price movements
with any certainty. Oil prices and natural gas prices do not necessarily
fluctuate in direct relation to each other.
OUR ABILITY TO REACH AND MAINTAIN PROFITABLE OPERATING RESULTS IS DEPENDENT ON
OUR ABILITY TO FIND, ACQUIRE, AND DEVELOP OIL AND GAS PROPERTIES.
In general, production from oil and natural gas properties declines over time as
reserves are depleted, with the rate of decline depending on reservoir
characteristics. At such time, if ever, that we start producing commercial
quantities of oil and natural gas, our reserves will decline with production.
Our future performance depends upon our ability to find, acquire, and develop
oil and gas reserves that are economically recoverable. Without successful
exploration and acquisition activities, we will not be able to develop reserves
or generate production revenues to achieve and maintain profitable operating
results. No assurance can be given that we will be able to find, acquire or
develop these reserves on acceptable terms. We also cannot assure that
commercial quantities of oil and gas deposits will be discovered that are
sufficient to enable us to recover our exploration and development costs.
Although certain management personnel have significant experience in the oil and
gas industry, we have not yet established a history of locating and developing
properties that have economically feasible oil and gas reserves.
SHORTAGE OF RIGS, EQUIPMENT, SUPPLIES AND PERSONNEL COULD DELAY OR OTHERWISE
ADVERSELY AFFECT OUR COST OF OPERATIONS OR OUR ABILITY TO OPERATE ACCORDING TO
OUR BUSINESS PLANS.
If drilling activity increases in Texas or the southern United States generally,
a shortage of drilling and completion rigs, field equipment and qualified
personnel could develop. The demand for and wage rates of qualified drilling rig
crews generally rise in response to the increasing number of active rigs in
service and could increase sharply in the event of a shortage. Shortages of
drilling and completion rigs, field equipment or qualified personnel could
delay, restrict or curtail our exploration and development operations, which
could in turn harm our operating results.
OUR OIL AND GAS EXPLORATION AND PRODUCTION, AND RELATED ACTIVITIES ARE SUBJECT
TO EXTENSIVE ENVIRONMENTAL REGULATIONS, AND TO LAWS THAT CAN GIVE RISE TO
SUBSTANTIAL LIABILITIES FROM ENVIRONMENTAL CONTAMINATION.
Our operations are subject to extensive federal, state and local environmental
laws and regulations, which impose limitations on the discharge of pollutants
into the environment, establish standards for the management, treatment,
storage, transportation and disposal of hazardous materials and of solid and
hazardous wastes, and impose obligations to investigate and remediate
contamination in certain circumstances. Liabilities to investigate or remediate
contamination, as well as other liabilities concerning hazardous materials or
contamination such as claims for personal injury or property damage, may arise
at many locations, including properties in which we have an ownership interest
but no operational control, properties we formerly owned or operated and sites
where our wastes have been treated or disposed of, as well as at properties that
we currently own or operate. Such liabilities may arise even where the
contamination does not result from any noncompliance with applicable
environmental laws. Under a number of environmental laws, such liabilities may
also be joint and several, meaning that we could be held responsible for more
than our share of the liability involved, or even the entire share.
Environmental requirements generally have become more stringent in recent years,
and compliance with those requirements more expensive.
9
We have incurred expenses in connection with environmental compliance, and we
anticipate that we will continue to do so in the future. Failure to comply with
extensive applicable environmental laws and regulations could result in
significant civil or criminal penalties and remediation costs. Some of our
properties may be affected by environmental contamination that may require
investigation or remediation. In addition, claims are sometimes made or
threatened against companies engaged in oil and gas exploration and production
by owners of surface estates, adjoining properties or others alleging damage
resulting from environmental contamination and other incidents of operation.
Compliance with, and liabilities for remediation under, these laws and
regulations, and liabilities concerning contamination or hazardous materials,
may adversely affect our business, financial condition and results of
operations.
WHEN WE MAKE THE DETERMINATION TO INVEST IN OIL OR GAS PROPERTIES WE RELY UPON
GEOLOGICAL AND ENGINEERING ESTIMATES WHICH INVOLVE A HIGH LEVEL OF UNCERTAINTY.
Geologic and engineering data are used to determine the probability that a
reservoir of oil or natural gas exists at a particular location. This data is
also used to determine whether oil and natural gas are recoverable from a
reservoir. Recoverability is ultimately subject to the accuracy of data
including, but not limited to, geological characteristics of the reservoir,
structure, reservoir fluid properties, the size and boundaries of the drainage
area, reservoir pressure, and the anticipated rate of pressure depletion. Also
the increasing costs of production operations may render some deposits
uneconomic to extract.
The evaluation of these and other factors is based on available seismic data,
computer modeling, well tests and information obtained from production of oil
and natural gas from adjacent or similar properties. There is a high degree of
risk in proving the existence and recoverability of reserves. Actual recoveries
of proved reserves can differ materially from original estimates. Accordingly,
reserve estimates may be subject to downward adjustment. Actual production,
revenue and expenditures will likely vary from estimates, and such variances may
be material.
TITLE DEFICIENCIES COULD RENDER OUR OIL AND GAS LEASES WORTHLESS; THUS DAMAGING
THE FINANCIAL CONDITION OF OUR BUSINESS.
The existence of a material title deficiency can render a lease worthless,
resulting in a large expense to our business. We rely upon the judgment of oil
and gas lease brokers who perform the field work and examine records in the
appropriate governmental office before attempting to place a specific mineral
interest under lease. This is a customary practice in the oil and gas industry.
We anticipate that we, or the person or company acting as "operator" (the
individual or company responsible for the exploration, exploitation and
production of an oil or natural gas well or lease, usually pursuant to the terms
of a joint operating agreement among the various parties owning the working
interest in the well) on the properties that we lease, will examine title prior
to any well being drilled. Even after taking these precautions, deficiencies in
the marketability of the title to the leases may still arise. Such deficiencies
may render some leases worthless, negatively impacting our financial condition.
IF WE AS OPERATORS, OR THE OPERATOR OF OUR OIL AND GAS PROJECTS FAIL TO MAINTAIN
ADEQUATE INSURANCE, OUR BUSINESS COULD BE EXPOSED TO SIGNIFICANT LOSSES.
Our oil and gas projects are subject to risks inherent in the oil and gas
industry. These risks involve explosions, uncontrollable flows of oil, gas or
well fluids, pollution, fires, earthquakes and other environmental issues. These
risks could result in substantial losses due to injury and loss of life, severe
damage to and destruction of property and equipment, pollution and other
environmental damage. We currently do not maintain insurance coverage for
operating hazards such as physical damage and nor do we have comprehensive
general liability coverage. The occurrence of a significant event on any project
against which we are not adequately covered by insurance could have a material
adverse effect on our financial position.
In the projects in which we are not the operator, we require the operator to
maintain insurance of various types to cover our operations with policy limits
and retention liability customary in the industry. The occurrence of a
significant adverse event on any of these projects if they are not fully covered
by insurance could result in the loss of all or part of our investment. The loss
of this project investment could have a material adverse effect on our financial
condition and results of operations.
10
IN THE PAST, WE HAVE DISCLOSED MATERIAL WEAKNESS IN OUR INTERNAL CONTROLS AND
PROCEDURES WHICH COULD ERODE INVESTOR CONFIDENCE, JEOPARDIZE OUR ABILITY TO
OBTAIN INSURANCE AND LIMIT OUR ABILITY TO ATTRACT QUALIFIED PERSONS TO SERVE AT
TOPAZ.
Our management evaluated our disclosure controls and procedures as of December
31, 2010 and concluded that as of that date, our disclosure controls were not
effective. In addition, our management evaluated our internal controls over
financial reporting as of December 31, 2010 and concluded that there were
material weaknesses in our internal controls over financial reporting as of that
date and that our internal controls over financial reporting were not effective
as of that date. A material weakness is a control deficiency, or combination of
control deficiencies, such that there is a reasonable possibility that a
material misstatement of the financial statements will not be prevented or
detected on a timely basis.
We have not yet remediated these material weaknesses and we believe that our
disclosure controls and procedures continue to be ineffective. Until these
issues are corrected, our ability to report financial results or other
information required to be disclosed on a timely and accurate basis may be
adversely affected and our financial reporting may continue to be unreliable,
which could result in additional misinformation being disseminated to the
public. Investors relying on this misinformation may make an uninformed
investment decision.
Failure to comply with these rules regarding internal controls and procedures
may make it more difficult for us to obtain certain types of insurance,
including director and officer liability insurance. We may be forced to accept
reduced policy limits and coverage and/or incur substantially higher costs to
obtain the same or similar coverage. The impact of these events could also make
it more difficult for us to attract and retain qualified persons to serve on our
Board of Directors, on committees of our Board of Directors, or as executive
officers.
RISKS RELATING TO OUR COMMON STOCK
THE MARKET PRICE OF OUR COMMON STOCK COULD BE VOLATILE, WHICH MAY CAUSE THE
INVESTMENT VALUE OF OUR STOCK TO DECLINE.
Our Common Stock is quoted on the Over-the-Counter Bulletin Board (OTC.BB)
market and on the OTC QB market under the symbol TOPZ.
The Bulletin Board market and the OTC QB market are characterized by low trading
volume. Because of this limited liquidity, shareholders may be unable to sell
their shares at or above the cost of their purchase prices. The trading price of
our shares has experienced wide fluctuations and these shares may be subject to
similar fluctuations in the future.
The trading price of our Common Stock may be affected by a number of factors
including events described in these risk factors, as well as our operating
results, financial condition, announcements of drilling activities, general
conditions in the oil and gas exploration and development industry, and other
events or factors.
In recent years, broad stock market indices, in general, and smaller
capitalization companies, in particular, have experienced substantial price
fluctuations. In a volatile market, we may experience wide fluctuations in the
market price of our Common Stock. These fluctuations may have a negative effect
on the market price of our Common Stock.
PRIVATELY PLACED ISSUANCES OF OUR COMMON STOCK, PREFERRED STOCK AND WARRANTS
HAVE AND MAY CONTINUE TO DILUTE OWNERSHIP INTERESTS WHICH COULD HAVE AN ADVERSE
EFFECT ON OUR STOCK PRICES.
Our authorized capital stock consists of 700,000,000 shares of Common Stock and
10,000,000 shares of preferred stock. As of April 8, 2011, there were
518,175,000 shares of Common Stock and no shares of Preferred stock outstanding.
In addition to the completed private placements, we may in the future issue
additional previously authorized and unissued Common Stock. These events may
result in the further dilution of the ownership interests of our present
shareholders and purchasers of Common Stock offered in this prospectus.
Historically we have, and likely will continue to issue additional shares of our
Common Stock in connection with the compensation of personnel, future
acquisitions, private placements, or for other business purposes. Future
11
issuances of substantial amounts of these equity securities could have a
material adverse effect on the market price of our Common Stock, and would
result in further dilution of existing stock ownership.
THE RESALE OF SHARES OFFERED IN PRIVATE PLACEMENTS COULD DEPRESS THE VALUE OF
THE SHARES.
Shares of our Common Stock have been offered and sold in private placements at
significant discounts to the trading price of the Common Stock at the time of
the offering. Sales of substantial amounts of Common Stock eligible for future
sale in the public market, or the availability of shares for sale, including
shares issued upon exercise of outstanding warrants, could adversely affect the
prevailing market price of our Common Stock and our ability to raise capital by
an offering of equity securities.
PURSUANT TO SEC RULES OUR COMMON STOCK IS CLASSIFIED AS A "PENNY STOCK'
INCREASING THE RISK OF INVESTMENT IN THESE SHARES.
Our Common Stock is designated as "penny stock" and thus may be more illiquid
than shares traded on an exchange or on NASDAQ. Penny stocks generally are any
non-NASDAQ or non-exchange listed equity securities with a price of less than
$5.00, subject to certain exceptions.
The "penny stock" reporting and disclosure requirements may have the effect of
reducing the level of trading activity in the secondary market for a stock that
is subject to these rules. The market liquidity for the shares could be severely
and adversely affected by limiting the ability of broker- dealers to sell these
shares. In addition, the ability of purchasers in this offering to sell their
stock in any secondary market could be adversely restricted.
THE FINANCIAL INDUSTRY REGULATORY AUTHORITY, OR FINRA, HAS ADOPTED SALES
PRACTICE REQUIREMENTS WHICH MAY LIMIT A STOCKHOLDER'S ABILITY TO BUY AND SELL
OUR STOCK.
In addition to the "penny stock" rules described above, FINRA has adopted rules
that require that in recommending an investment to a customer, a broker-dealer
must have reasonable grounds for believing that the investment is suitable for
that customer. Prior to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to
obtain information about the customer's financial status, tax status, investment
objectives and other information. Under interpretations of these rules, FINRA
believes that there is a high probability that speculative low priced securities
will not be suitable for at least some customers. FINRA requirement make it more
difficult for broker-dealers to recommend that their customers buy our common
stock, which may limit your ability to buy and sell our common stock and have an
adverse effect on the market for our shares.
PREFERRED STOCK MAY BE ISSUED WITH GREATER RIGHTS THAN THE COMMON STOCK ISSUED,
WHICH MAY DILUTE AND DEPRESS THE INVESTMENT VALUE OF THE COMMON STOCK
INVESTMENTS.
The Board of Directors has the power to issue shares without shareholder
approval, and such shares can be issued with such rights, preferences, and
limitations as may be determined by our Board of Directors.
The rights of the holders of Common Stock are subject to and may be adversely
affected by the rights and preferences afforded to the holders of these
preferred shares. The rights and preferences of the issued preferred shares
could include:
* conversion into Common Stock of the Company anytime the preferred
stockholder may wish;
* cumulative dividends in the amount of a percentage of the original
purchase price per annum, payable on declaration by the board of
directors;
* the ability to vote together with the Common Stock of the Company with
a number of votes equal to the number of shares of Common Stock to be
issued on conversion of the preferred stock.
The issuance of these preferred shares could make it less likely that
shareholders receive a premium for their shares of Common Stock as a result of
any such attempt to acquire the Company. Further, this issuance could adversely
affect the market price of, and the voting and other rights, of the holders of
Common Stock as a result of any such attempt to acquire the Company. Further,
this issuance could adversely affect the market price of, and the voting and
other rights of, the holders of the outstanding shares of Common Stock.
WE DO NOT ANTICIPATE PAYING DIVIDENDS ON OUR COMMON STOCK WHICH COULD DEVALUE
THE MARKET VALUE OF THESE SECURITIES.
12
We have not paid any cash dividends on our Common Stock since our inception. We
do not anticipate paying cash dividends in the foreseeable future. Any dividends
paid in the future will be at the complete discretion of our board of directors.
For the foreseeable future, we anticipate that we will retain any revenues which
we may generate from our operations. These retained revenues will be used to
finance and develop the growth of the Company. Prospective investors should be
aware that the absence of dividend payments could negatively affect the market
value of our Common Stock.
OUR CORPORATE HISTORY
We were incorporated in Florida on January 16, 2009 as Kids Germ Defense Corp.
as a manufacturing, wholesale, marketing and sales company specializing in germ
defense products for children 0 to 10 years of age.
Effective April 16, 2010, we undertook a new business direction for the Company;
that of an exploration and development company in the oil and gas industry. On
April 16, 2010, to better reflect this new direction of the Company, our
shareholders approved changing our name to Topaz Resources, Inc.
ITEM 2. DESCRIPTION OF PROPERTIES
During the past fiscal year, we were involved in acquiring and evaluating
onshore oil and gas projects in north, central and west Texas. Since none of our
properties contain proved reserves we have not filed any estimates of total,
proved net oil or gas reserves with any federal agency for the fiscal year ended
December 31, 2010. Throughout this Form 10-K, oil is shown in barrels ("Bbls"),
and natural gas is shown in thousand cubic feet ("Mcf").
The following summarizes the Company's leasehold interest wells by county:
MONTAGUE COUNTY, TEXAS
In June, 2010, Topaz agreed to cooperate with DHOPCO to drill a vertical Barnett
Shale oil and natural gas well on one of the tracts within an approximately
1,187.75 acre lease in Montague County, Texas. DHOPCO acted as operator on
behalf of Topaz. In July and August the well was drilled to a total depth of
7,740 feet stopping at the top of the Viola formation. The electronic logs
identified a 600 foot section of Barnett Shale which includes a solid 400 foot
section in the Lower Barnett with porosity and permeability values that indicate
potential productive capabilities. The logs also confirm potential productive
characteristics from 6,775 feet to 6,785 feet, from 6,817 feet to 6,827 feet and
from 6,881 feet to 6,888 feet in the shallower Conglomerate formation,
supporting the oil and gas shows that were encountered during drilling through
these depths. In addition, oil and gas shows during drilling and the logs
indicate that we have encountered a potential productive Marble Falls zone at
6,980 feet to 7,160 feet. Based on these results, Topaz set casing and cemented
as a vertical well through the Barnett Shale up to the shallower Conglomerate
and Marble Falls zones. We currently are designing a completion program and are
assessing the behind pipe production and reserve potential in the Marble Falls
and Conglomerate formations.
Our strategy is to pursue oil and gas drilling opportunities by teaming with
smaller industry partners as a means of limiting our drilling risk. As a result,
on September 21, 2010, RMJ agreed to purchase a 25% working interest in this
recently drilled Barnett Shale well and its surrounding unit acreage and in
November, 2010 also purchased a 31.25% working interest in the entire Montague
County lease acreage. In March 2011, Polar Resources Corporation ("Polar")
agreed to acquire an approximately 63% working interest in the Montague County
Barnett Shale oil and natural gas well and to participating with the Company in
drilling additional Barnett Shale oil and natural gas wells. Closing of this
transaction requires an initial cash payment to the Company which as of April
12, 2011 has not been received by the Company. If this transaction closes as
anticipated, the Company will have established a funding partner for the ongoing
drilling development of the Montague acreage.
In April 2011, the Company and DHOPCO executed an agreement which transfers to
the Company all right, title and interest of DHOPCO in and to the Montague
County Barnett Shale oil and natural gas well and all the lease acreage in
Montague County.
13
DENTON COUNTY, TEXAS
In two separate transactions in January 2011 and February 2011, the Company
completed the acquisition of an undivided 45.4% leasehold interest in a lease
covering approximately 84 acres in Denton County, Texas plus a 45.4% working
interest in a shut-in horizontal Barnett Shale natural gas well on that acreage.
Also in these transactions, the Company became the operator of the property and
is in a position to control the development program for the lease. In a previous
transaction in October 2010, RMJ agreed to purchase a 22.7% working interest in
this well and lease.
This well was originally drilled in 2005/2006 but was shut-in waiting for
pipeline access to early 2008 when it was completed. The first reported
production was in February 2008 at an initial rate of 3,000 Mcf per day. By July
2009 it had produced a total of 584,718 Mcf of natural gas. At that point it was
shut-in as a result of a dispute and litigation between the landowner and the
operator and majority working interest owner. All disputes and litigation are
now resolved and with the acquisition of its interest, the Company is planning a
work-over to bring the well back into production.
WICHITA COUNTY, TEXAS
Adding and developing oil properties in north and west Texas is a key part of
our strategy to develop a balanced portfolio of oil and gas properties and to
take advantage of the continuing high price of oil. In October 2010, Topaz
acquired all the leasehold rights and equipment owned by Viejo Coyote Energy,
LLC in a lease tract located in Wichita County, Texas. This acquisition included
four oil wells capable of production, three wells not capable for production,
two water injection wells and all the related surface equipment. In November
2010 and later in January 2010, the Company completed two separate leasing
transactions which consolidated and increased our leasehold acreage position for
this project to approximately 600 contiguous acres, all located in Wichita
County.
An analysis of logs indicates that the lease acreage could contain as many as
three potentially productive horizons at approximate depths of 500, 1,300 and
1,700 feet, with the majority of historical production coming from the shallower
zone. The Company also anticipates that further exploration might also reveal
deeper zone potential.
In January 2011, we drilled our first well to a total depth of 1,944 feet. RMJ
agreed to acquire a 25% working interest in this well and the surrounding unit
acres. This well is currently being completed and results are pending.
Topaz initially will concentrate on completing work-overs on the existing wells
capable of production and performing remedial work on the existing surface
equipment. We also plan to commence the engineering and geological work required
to develop a program of drilling new wells, recompleting existing wellbores and
deepening existing wellbores to test the productive potential of the other known
productive horizons and to exploit the deeper formations.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company, nor any of our officers or directors is a party to any
material legal proceeding or litigation, and such persons know of no material
legal proceeding or contemplated or threatened litigation. There are no
judgments against us or our officers or directors. None of our officers or
directors has been convicted of a felony or misdemeanor relating to securities
or performance in corporate office.
ITEM 4. REMOVED AND RESERVED
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASE OF EQUITY SECURITIES
Our Common Stock is quoted in the over-the-counter market on the OTC Bulletin
Board under the symbol "TOPZ". The following table shows the high and low
closing sales prices for our Common Stock for the period from when the Common
Stock started to trade on a public exchange. The quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions. The information is derived from information received from
online stock quotation services.
14
OTC Bulletin Board
Quarter Ending High Closing Low Closing
-------------- ------------ -----------
April 1 - 8, 2011 $0.015 $0.012
March 31, 2011 $0.019 $0.008
December 31, 2010 $0.169 $0.095
September 30, 2010 $0.160 $0.050
June 30, 2010 $0.179 $0.033
March 31, 2010 $0.050 $0.050
|
As of April 8, 2011, the Company had 27 shareholders of record. This number does
not include an indeterminate number of shareholders whose shares are held by
brokers in street name.
TRANSFER AGENT
The transfer agent for our Common Stock is Island Stock Transfer, 100 Second
Avenue South, Suite 705, St. Petersburgh, FL 33701. Their web site address is:
www.islandstocktransfer.com.
DIVIDEND POLICY
The Company has not declared or paid cash dividends or made distributions in the
past, and the Company does not anticipate that it will pay cash dividends or
make distributions in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
The Company's Board of Directors has authorized 700,000,000 shares of common
stock with a par value of $0.0001 and 10,000,000 shares of preferred stock, par
value of $0.0001 to be issued in accordance with the terms and conditions as
determined by the Board. The Preferred Stock ranks senior to the common stock as
to dividends and liquidation.
On January 16, 2009, the Company issued 378,000,000 shares of common stock at
$0.00001587 per share for a total of $6,000.
On January 16, 2009, the Company authorized a Private Placement Offering of up
to 126,000,000 shares of common stock at a price of $0.000238 per share. The
total amount raised in this financing was $29,000. As of December 31, 2009, the
Company had issued 121,800,000 common shares and had received $28,500 in cash
proceeds, and $500 in a stock subscription receivable. As of March 31, 2010 the
additional $500 had been received for the total of $29,000 from the sale of its
stock.
Effective April 16, 2010, the Company effected a forward stock split of the
Company's common stock on a seven for one basis, such that its authorized shares
of common stock has increased from 100,000,000 to 700,000,000.
Effective April 16, 2010, the Company changed its name from Kids Germ Defense
Corp. to Topaz Resources, Inc. The Company also effected a forward stock split
of the Company's common stock on a seven for one basis, such that it's
authorized shares of common stock has increased from 100,000,000 to 700,000,000.
Effective April 22, 2010, the Company and an investor signed a subscription
agreement to purchase a total of 4,800,000 shares of the Company's common stock
at $0.04167 per share plus 180,000,000 warrants to purchase shares of the
Company's common stock at an exercise price of $0.0833 per share for a total
amount of $200,000.
The warrant entitles the holder to purchase 180,000,000 shares of the Company's
common stock, at any time, at an exercise price of $0.0833 per share, provided,
however, that in no event shall the holder be entitled to exercise this warrant
for a number of shares in excess of the number of shares which, upon giving
effect to such exercise, would cause the aggregate number of shares of common
stock beneficially owned by the holder and its affiliates to exceed 4.99% of the
outstanding shares of common stock. The holder may exercise the warrant on
either a cash or cashless exercise as determined by the holder of the warrant.
The warrants expire in 2015.
15
During August 2010, the Company and an investor signed a subscription agreement
to purchase a total of 3,000,000 shares of the Company's common stock at
$0.04167 per share for a total amount of $125,000. The Company issued the
3,000,000 shares of common stock during November 2010.
On December 21, 2010, the Company issued 120,000 shares of common stock to a
Company that assisted in the closing of a secured note payable. These shares
were valued at the fair market value of $0.019 or $2,280 and are recorded as
debt issue costs at December 31, 2010. The costs were included in interest
expense.
On December 21, 2010 and in connection with the issuance of a secured note
payable, the Company issued the lender 80,000 shares of common stock at the fair
market value of $0.019 or $1,520. The amount is recorded as a discount on the
related Note and will be amortized over the 6 month term and expensed as
interest.
During the year ended December 31, 2010, the Company received marketing and
advertising services valued at $15,000. In exchange for those services, the
Company issued 375,000 shares of common stock at $0.04 per share.
On January 12, 2011, we issued 5,000,000 shares of Common Stock to an accredited
investor as part of the purchase price for the acquisition of a lease for 84
acres in the Barnett Shale field in Denton County, Texas plus a 45.4% working
interest in a horizontal Barnett gas well on that acreage.
On March 1, 2011, we issued 5,000,000 shares of Common Stock to an accredited
investor as part of the purchase price to become the managing director of a
limited partnership that operates a horizontal Barnett gas well.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN
The Company has no qualified or nonqualified stock option plans and has no
outstanding stock options.
COMMON STOCK
The Company is authorized to issue 700,000,000 shares of Common Stock with a par
value of $0.0001 of which 518,175,000 shares were issued and outstanding as of
April 8, 2011. In comparison, at December 31, 2009, a total of 428,400,000
shares were issued and outstanding. This increase of 89,600,000 shares was
primarily due to the private placements of shares of Common Stock more fully
described in the preceding section.
All shares of Common Stock are equal to each other with respect to voting,
liquidation, dividend and other rights. Owners of shares of Common Stock are
entitled to one vote for each share of Common Stock owned at any shareholders'
meeting. Holders of shares of Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of funds legally
available therefore; and upon liquidation, are entitled to participate pro rata
in a distribution of assets available for such a distribution to shareholders.
There are no conversion, pre-emptive, or other subscription rights or privileges
with respect to any shares of our Common Stock. Our stock does not have
cumulative voting rights, which means that the holders of more than 50% of the
shares voting in an election of directors may elect all of the directors if they
choose to do so. In such event, the holders of the remaining shares aggregating
less than 50% would not be able to elect any directors.
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of Preferred Stock
with a par value of $0.0001. Our Preferred Stock may be entitled to preference
over the Common Stock with respect to the distribution of assets of the Company
in the event of liquidation, dissolution, or winding-up of the Company, whether
voluntarily or involuntarily, or in the event of any other distribution of
assets of the Company among its shareholders for the purpose of winding-up its
affairs. The authorized but unissued shares of Preferred Stock may be divided
into and issued in designated series from time to time by one or more
resolutions adopted by the Board of Directors. The directors in their sole
discretion shall have the power to determine the relative powers, preferences,
and rights of each series of Preferred Stock.
As of April 8, 2011 there were no shares of Preferred Stock issued.
16
ITEM 6. SELECTED FINANCIAL INFORMATION
As a smaller reporting company, we are not required to provide the information
otherwise required by this Item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following management's discussion and analysis ("MD&A") is management's
assessment of the historical financial and operating results of the Company
during the period covered by the financial statements. This MD&A should be read
in conjunction with the audited financial statements and the related notes and
other information included elsewhere in this Form 10-K.
SAFE HARBOR PROVISION
Certain statements contained in our Management's Discussion and Analysis of
Financial Condition or Plan of Operation are intended to be covered by the safe
harbor provided for under Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Exchange Act. All statements other than statements of
historical facts contained in this MD&A report, including statements regarding
our current expectations and projections about future results, intentions, plans
and beliefs, business strategy, performance, prospects and opportunities, are
inherently uncertain and are forward-looking statements. To understand more
about forward looking statements, please refer to the section labelled
"Cautionary Statement About Forward-Looking Statements" at the beginning of this
Form 10-K.
INTRODUCTION AND OVERVIEW
On April 16, 2010 the Company changed its plan of operations from developing
health and safety products to an independent oil and gas company focusing on
production, acquisitions and developmental drilling opportunities within proven
producing areas of north, central and west Texas. As such, the results of
operations for the year ended December 31, 2010, are not comparable to the
results of operations for the period from inception (January 16, 2009) to
December 31, 2009, nor are the assets, liabilities and stockholders' equity at
December 31, 2010 comparable to the assets, liabilities and stockholders' equity
at December 31, 2009.
We are an independent oil and natural gas exploration, development and
production company. Our basic business model is to increase shareholder value by
finding and developing oil and gas reserves through exploration and development
activities, and selling the production from those reserves at a profit. To be
successful, we must, over time, be able to find oil and gas reserves and then
sell the resulting production at a price that is sufficient to cover our finding
costs, operating expenses, administrative costs and interest expense, plus offer
us a return on our capital investment.
We have a limited operating history and minimal proven reserves, production and
cash flow. To date, we have had limited revenues and have not been able to
generate sustainable positive earnings. Our management cannot provide any
assurances that the Company will ever operate profitably. As a result of our
limited operating history, we are more susceptible to the numerous business,
investment and industry risks that have been described in Item 1A. Risk Factors
of this Form 10-K.
Our longer-term success depends on, among many other factors, the acquisition
and drilling of commercial grade oil and gas properties and on the prevailing
sales prices for oil and natural gas along with associated operating expenses.
The volatile nature of the energy markets makes it difficult to estimate future
prices of oil and natural gas; however, any prolonged period of depressed prices
would have a material adverse effect on our results of operations and financial
condition.
Our operations are focused on identifying and evaluating prospective oil and gas
properties and funding projects that we believe have the potential to produce
oil or gas in commercial quantities. We currently have projects and properties
in Montague, Denton and Wichita Counties in Texas.
17
RESULTS OF OPERATIONS
THE YEAR ENDED DECEMBER 31, 2010 COMPARED TO THE PERIOD FROM INCEPTION (JANUARY
16, 2009) TO DECEMBER 31, 2009
The following table presents a summary of our results of operations. It should
be read in conjunction with our audited financial statements for the year ended
December 31, 2010 which are included herein.
For the period
from inception
For the year (January 16, 2009)
ended to
December 31, December 31,
2010 2009
-------- --------
Oil and gas sales $ -- $ --
Professional fees 62,885 42,970
General and administrative expenses 30,403 19,664
Interest expense 2,421 --
Interest income 3,527 --
-------- --------
Net loss $ 92,182 $ 62,634
======== ========
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PROFESSIONAL FEES
The professional fees of $62,885 incurred during the year ended December 31,
2010 were comprised predominantly of engineering and land title costs associated
with properties that the Company decided not to pursue, and accounting and legal
fees.
GENERAL AND ADMINISTRATIVE EXPENSES
The Company incurred $30,403 in general and administrative expenses during the
year ended December 31, 2010. These expenses were comprised of costs associated
with being a public company, including filing fees and public relations.
During the year ended December 31, 2010 the Company focused on acquiring
drilling rights in north central Texas. This entailed:
* identifying opportunities in existing oil and natural gas producing
areas;
* evaluating the production history of producing wells in the general
vicinity of the opportunity;
* researching the legal title to the identified properties;
* negotiating the terms and conditions with the landowners and/or
working interest owners; and
* drilling two (2) wells.
As of April 8, 2010 the Company has not completed either well and has not
determined whether they are commercially viable. As such, the Company had no
sales of oil and natural gas during the year ended December 31, 2010.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
December 31, December 31,
2010 2009
-------- --------
Current assets $ 337,168 $ 25,254
Current liabilities 663,591 53,388
Working capital deficit $ 326,423 $ 28,134
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The Company had $337,168 at December 31, 2010, of which $300,000 was held for
the purposes of completing the acquisition of a lease for approximately 84 acres
in Denton County, Texas plus a working interest in a shut-in horizontal Barnett
18
Shale natural gas well on that acreage. This acquisition was completed in two
separate transactions in January 2011 and February 2011. The Company will also
convey a portion of its working interest to another energy company that has
agreed to participate. The Company will record the proceeds as a reduction of
its investment in oil and gas properties, which is consistent with its full cost
accounting policy.
The Company does not currently have the cash to fund the level of activity
required on its existing properties. As set out in the Company's strategic
focus, included herein, the Company will seek to arrange the funding by some
combination of: (i) proceeds from the sale of oil and natural gas produced from
wells once they are completed; (ii) the sale of a portion of the Company's
working interest in wells to be drilled, in a manner consistent with that which
occurred during the year ended December 31, 2010; (iii) the incurrence of
interest bearing debt, which may include the issuance of equity securities, such
as warrants, preferred stock and/or common stock, to enhance the yield of the
lender and thus increase the effective interest rate of the Company; and (iv)
the issuance of equity instruments, such as warrants, preferred stock and/or
common stock.
There is no assurance that the Company will be able to obtain the further funds
required for our continued working capital requirements. The lease acquisition
costs and the exploration and development costs are largely discretionary in
nature. In the event that the Company does not have sufficient cash resources to
fund these activities, the level of activity can and will be adjusted
accordingly. The ability of the Company to meet its financial liabilities and
commitments is primarily dependent on the issuance of debt and equity
instruments to existing and new lenders and stockholders, and the Company's
ability to achieve and maintain profitable operations.
There is substantial doubt about the ability of the Company to continue as a
going concern as the continuation of the business of the Company is dependent on
obtaining further long-term financing, successful exploration of the Company's
property interests, the identification of reserves sufficient enough to warrant
development, successful development of the property interests of the Company
and, finally, achieving a profitable level of operations. The issuance of
additional equity securities by the Company could result in significant dilution
of the equity interests of the current stockholders. Obtaining commercial loans,
assuming these loans would be available, will increase the Company's liabilities
and future cash commitments.
SALE OF WORKING INTERESTS
During the year ended December 31, 2010 the Company sold a portion of its
working interest in a well to be drilled in north central Texas for $161,725.
The Company also sold a portion of its working interest in the leases on which
this well is located for $241,684. The Company retains a working interest in the
well, drilling of which has commenced but has not been completed, and a working
interest in the lease on which this well is located. The transfer of title of
this property has not been perfected as of April 12, 2011 and therefore the
Company has accounted for its interests in the property as a deposit on oil and
natural gas properties.
DEPOSIT
The Company received a deposit of $300,000 to be held for the purposes of
completing the acquisition of a lease for approximately 84 acres in Denton
County, Texas plus a working interest in a shut-in horizontal Barnett Shale
natural gas well on that acreage. This acquisition was completed in two separate
transactions in January 2011 and February 2011. Since as of December 31, 2010
the Company had not completed the transaction we have recorded it as a current
liability in its financial statements.
NOTES PAYABLE
On December 21, 2010, the Company issued a secured note payable in the amount of
$40,000. This note matures on June 21, 2011, bears interest at 12% on the face
value of the note and is secured by a first position lien on certain oil and
natural gas assets of the Company. In conjunction with the issuance of this
secured note payable, the Company granted the lender 80,000 shares of common
stock.
During the period January 28, 2011 through January 31, 2011 the Company issued
three additional secured notes payable, each in the amount of $25,000, for a
total of $75,000. The first $25,000 note payable matures on July 28, 2011, while
the second and third notes, for a total of $50,000, mature on July 31, 2011.
Each of these three notes bears interest at 12% of the face value of the note.
These notes payable are secured by a first position lien on certain oil and
19
natural gas assets of the Company. In conjunction with the issuance of these
secured notes payable, the Company conveyed a small working interest in the
wells to be drilled with the proceeds of these notes payable.
OIL AND NATURAL GAS PRODUCTION COSTS
The Company did not have, at December 31, 2010, any producing wells, nor does it
at April 8, 2011. At such time as the Company completes one or more wells and
commences production of oil and natural gas it will incur production costs.
These production costs will be funded from the proceeds from the sale of the oil
and natural gas produced from those wells.
LAND ACQUISITION AND EXPLORATION AND DEVELOPMENT COSTS
In order to maintain this continued right to explore and develop the oil and
natural gas rights on its leases in Montague and Wichita Counties in Texas, the
Company is obligated to continue to drill wells. On the Montague County acreage
the lease terms are satisfied if a well that tests the Barnett Shale is drilled
approximately every 9 months or if a shallower well is drilled approximately
every 6 months. The estimated cost to drill and complete each well is estimated
to be between $650,000 and $2,500,000 depending on the type and depth of the
well. On the Wichita County acreage the lease terms are satisfied if a well is
drilled every 12 months at an approximate cost of $150,000 per well. In the
event that the Company fails to meet its ongoing drilling obligations under this
lease then the Company's right to explore and develop the land that has not been
drilled will be forfeited. The Company will consider selling some or all of its
working interest in these leases.
PROFESSIONAL FEES
The Company uses the services of independent legal counsel, certified landmen,
auditors and corporate tax preparers during the course of the fiscal year.
GENERAL AND ADMINISTRATIVE EXPENSES
The Company does not have any employees, but does, from time to time contract
for administrative and accounting services.
CASH FLOWS
CASH FLOW USED IN OPERATING ACTIVITIES
The Company used $21,972 in operating activities during the year ended December
31, 2010. This is the result of a $92,182 net loss for the year, attributable to
the professional fees and general administrative expenses offset by $14,723 in
cash as a result of changes to working capital accounts and non-cash equity
transactions of $55,487.
CASH FLOW PROVIDED BY INVESTING ACTIVITIES
The Company invested $874,524 related to the acquisition and deposits on oil and
natural gas properties. The Company sold portions of its working interests in
the oil and natural gas properties that it was exploring for proceeds of
$403,409, for a net of use of $471,115 in its investing activities.
CASH FLOW PROVIDED BY FINANCING ACTIVITIES
The Company raised a net of $805,000 from its financing activities, including
$40,000 from the issuance of secured notes payable, $325,500 from the issuance
of equity securities, $457,500 from the receipt of a deposit that will be used
to drill a well, which will then be accounted for as a reduction in the
investment in oil and natural gas properties, offset by the repayment of $18,000
advance from a stockholder.
CAPITAL EXPENDITURES
As of December 31, 2010 the Company had committed approximately $150,000 to
complete the drilling of a well.
20
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2010, we did not have any relationships with unconsolidated
entities or financial partners, such as entities often referred to as structured
finance or special purpose entities, which have been established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. As such, we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of our financial condition and results of
operations are based on our financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires management to
make estimates, judgments 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.
On an ongoing basis, we evaluate our estimates, including those related to
revenue recognition, bad debts, cancellation costs associated with long term
commitments, investments, intangible assets, assets subject to disposal, income
taxes, service contracts, contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making estimates and judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Estimates, by
their nature, are based on judgment and available information. Therefore, actual
results could differ from those estimates and could have a material impact on
our financial statements, and it is possible that such changes could occur in
the near term.
GOING CONCERN
Due to the uncertainty of our ability to meet our current operating and capital
expenses, in their report on the annual financial statements for the year ended
December 31, 2010, our independent auditors included an explanatory paragraph
regarding concerns about our ability to continue as a going concern. Our
financial statements contain additional note disclosures describing the
circumstances that lead to this disclosure by our independent auditors.
There is substantial doubt about our ability to continue as a going concern as
the continuation of our business is dependent upon obtaining further financing.
The issuance of additional equity securities by us could result in a significant
dilution in the equity interests of our current stockholders. Commercial loans,
assuming those loans would be available, will increase our liabilities and
future cash commitments.
There are no assurances that we will be able to obtain further funds required
for our continued operations or for our entry into the petroleum exploration and
development industry. We are pursuing various financing alternatives to meet our
immediate and long-term financial requirements. There can be no assurance that
additional financing will be available to us when needed or, if available, that
it can be obtained on commercially reasonable terms. If we are not able to
obtain the additional financing on a timely basis, we will not be able to meet
our other obligations as they become due.
OIL AND GAS PROPERTIES
The Company uses the full cost method of accounting for its oil and natural gas
properties. Under this method, the Company capitalizes all acquisition,
exploration and development costs incurred for the purpose of finding oil and
natural gas reserves, including leasehold acquisition costs, geological and
geophysical expenditures, lease rentals on undeveloped properties and costs of
drilling of productive and non-productive wells into the full cost pool. To the
extent that support equipment is used in oil and gas activities, the related
depreciation is capitalized. Proceeds from the disposition of oil and natural
gas properties are accounted for as a reduction of capitalized costs, with no
gain or loss recognized unless such disposition would alter the depletion and
depreciation rate by 20% or more. As of December 31, 2010 the Company had no
proven oil and natural gas properties. When the Company obtains proven oil and
gas reserves, capitalized costs, including estimated future costs to develop the
reserves proved and estimated abandonment costs, net of salvage, will be
depleted on the units-of-production method using estimates of proved reserves.
The costs of unproved properties are not amortized until it is determined
whether or not proved reserves can be assigned to the properties. The Company
21
assesses its properties at least annually to ascertain whether impairment has
occurred. In assessing impairment the Company considers factors such as
historical experience and other data such as primary lease terms of the
property, average holding periods of unproved property, and geographic and
geologic data.
Capitalized costs of development oil and natural gas properties may not exceed
an amount equal to the present value, discounted at 10%, of estimated future net
revenues from proven reserves plus the lower of cost or fair value of unproven
properties. Should capitalized costs exceed this ceiling, an impairment is
recognized.
The present value of estimated future net cash flows is computed by applying the
average first-day-of-the-month prices during the previous twelve month period of
oil and natural gas to estimated future production of proved oil and natural gas
reserves as of year-end less estimated future expenditures to be incurred in
developing and producing the proved reserves and assuming continuation of
existing economic conditions.
DEPOSITS ON OIL AND NATURAL GAS PROPERTIES
The Company accounts for expenditures that are made in conjunction with oil and
natural gas properties that it has not yet completed the transfer of title to
the properties as a deposit. At such time as the transfer of title has been
completed the Company transfers the balance to its Investment in Oil and Natural
Gas Properties, in a manner consistent with the full cost method. In the event
that the transfer of title is not completed the Company takes an impairment
charge for the amount of the deposit.
ASSET RETIREMENT OBLIGATION
The Company follows FASB ASC 410 - Asset Retirement and Environmental
Obligations which requires entities to record the fair value of a liability for
legal obligations associated with the retirement obligations of tangible
long-lived assets in the period in which it is incurred. This standard requires
the Company to record a liability for the fair value of the dismantlement and
plugging and abandonment costs excluding salvage values. When the liability is
initially recorded, the entity increases the carrying amount of the related
long-lived asset. Over time, accretion of the liability is recognized each
period and the capitalized cost is amortized over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement.
CONCENTRATIONS OF CREDIT RISK AND ALLOWANCE
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. Accounts are guaranteed by the Federal Deposit
Insurance Corporation ("FDIC") up to $250,000 in 2010 and 2009. At December 31,
2010 the Company had approximately $87,168 in excess of FDIC insured limits. The
Company has not experienced any losses in such accounts.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash in banks and highly liquid investments
which mature within three months of the date of purchase.
USE OF ESTIMATES
The preparation of these financial statements in conformity with accounting
principles generally accepted in the United States of America 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 amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
LONG-LIVED ASSETS
Long-lived assets including investments to be held and used or disposed of other
than by sale are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. When
required, impairment losses on assets to be held and used or disposed of other
than by sale are recognized based on the fair value of the asset. Long-lived
assets to be disposed of by sale are reported at the lower of the asset's
carrying amount or fair value less cost to sell.
22
INCOME TAXES
The Company accounts for income taxes pursuant to FASB ASC 740 - Income Taxes,
which requires recognition of deferred income tax liabilities and assets for the
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. The Company provides for deferred taxes on
temporary differences between the financial statements and tax basis of assets
using the enacted tax rates that are expected to apply to taxable income when
the temporary differences are expected to reverse.
FASB ASC-740 establishes a more-likely-than-not threshold for recognizing the
benefits of tax return positions in the financial statements. Also, the
statement implements a process for measuring those tax positions which meet the
recognition threshold of being ultimately sustained upon examination by the
taxing authorities. There are no uncertain tax positions taken by the Company on
its tax returns. The Company files tax returns in the US and states in which it
has operations and is subject to taxation. The tax year 2009 remains open to
examination by U.S. federal and state tax jurisdictions.
LOSS PER SHARE
Basic earnings per share amounts are calculated based on the weighted average
number of shares of common stock outstanding during each period. Diluted
earnings per share is based on the weighted average numbers of shares of common
stock outstanding for the periods, including dilutive effects of stock options,
warrants granted and convertible preferred stock. Dilutive options and warrants
that are issued during a period or that expire or are canceled during a period
are reflected in the computations for the time they were outstanding during the
periods being reported. Since the Company has incurred losses for all periods,
the impact of the common stock equivalents would be anti-dilutive and therefore
are not included in the calculation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, receivables, payables and
long-term debt. The carrying amount of cash, receivables and payables
approximates fair value because of the short-term nature of these items. The
carrying amount of long-term debt approximates fair value due to the
relationship between the interest rate on long-term debt and the Company's
incremental risk adjusted borrowing rate.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2010, the FASB issued FASB Accounting Standards Update (ASU) No.
2010-03 Oil and Gas Estimations and Disclosures (ASU 2010-03). This update
aligns the current oil and natural gas reserve estimation and disclosure
requirements of the Extractive Industries Oil and Gas topic of the FASB
Accounting Standards Codification (ASC Topic 932) with the changes required by
the SEC final rule ASC 2010-03, as discussed above. ASU 2010-03 expands the
disclosures required for equity method investments, revises the definition of
oil and natural gas-producing activities to include nontraditional resources in
reserves unless not intended to be upgraded into synthetic oil or natural gas,
amends the definition of proved oil and natural gas reserves to require 12-month
average pricing in estimating reserves, amends and adds definitions in the
Master Glossary that is used in estimating proved oil and natural gas quantities
and provides guidance on geographic area with respect to disclosure of
information about significant reserves. ASU 2010-03 must be applied
prospectively as a change in accounting principle that is inseparable from a
change in accounting estimate and is effective for entities with annual
reporting periods ending on or after a change in accounting estimate and is
effective for entities with annual reporting periods ending on or after December
31, 2009. The impact on the Company's operating results, financial position and
cash flows has been recorded in the financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information
otherwise required by this Item.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Topaz Resources, Inc.
Years Ended December 31, 2010 and 2009
Contents
Report of Independent Registered Public Accounting Firm 25
Financial Statements:
Balance Sheets 26
Statements of Operations 27
Statements of Stockholders' Deficit 28
Statements of Cash Flows 29
Notes to Financial Statements 30
|
24
SEALE AND BEERS, CPAs
PCAOB & CPAB REGISTERED AUDITORS
www.sealebeers.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Topaz Resources, Inc.
(An Exploration Stage Company)
We have audited the accompanying balance sheets of Topaz Resources, Inc. (An
Exploration Stage Company) as of December 31, 2010 and 2009, and the related
statements of income, stockholders' equity and comprehensive income, and cash
flows for each of the years ended December 31, 2010 and 2009, and from inception
on January 16, 2009 through December 31, 2010. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Topaz Resources, Inc. (An
Exploration Stage Company) as of December 31, 2010 and 2009, and the related
statements of income, stockholders' equity and comprehensive income, and cash
flows for each of the years ended December 31, 2010 and 2009, and from inception
on January 16, 2009 through December 31, 2010, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has a net loss since inception, is still in
its development stage, and has earned no revenues in that time, which raises
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Seale and Beers, CPAs
-----------------------------------
Seale and Beers, CPAs
Las Vegas, Nevada
April 14, 2011
|
50 S. Jones Blvd. Suite 202 Las Vegas, NV 89107
Phone:(888)727-8251 Fax: (888)782-2351
25
Topaz Resources, Inc.
(formerly Kids Germ Defense Corp.)
(A Development Stage Company)
Consolidated Balance Sheets
December 31,
2010 2009
----------- -----------
ASSETS
Current assets:
Cash $ 337,168 $ 25,254
----------- -----------
Total current assets 337,168 25,254
----------- -----------
Deposit on Investment in unevaluated oil and natural gas
properties, related parties 661,708 --
Investment in unevaluated oil and natural gas properties 84,406 --
----------- -----------
TOTAL ASSETS $ 1,083,282 $ 25,254
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 21,815 $ 35,388
Accounts payable-related party 28,164 --
Deposit 300,000 --
Note payable, net of unamortized discount of $1,520) 38,612 --
Due to related party 275,000 18,000
----------- -----------
Total current liabilities 663,591 53,388
----------- -----------
Stockholders' equity
Preferred stock; $0.0001 par value; 10,000,000 shares authorized;
none issued and outstanding -- --
Common stock; $0.0001 par value; 700,000,000 shares authorized;
508,175,000 and 499,800,000 shares issued and outstanding at
December 31, 2010 and 2009, respectively 50,818 49,980
Common stock payable 157,500 --
Additional paid in capital 366,189 (14,980)
Stock subscription receivable -- (500)
Accumulated deficit during Development Stage (154,816) (62,634)
----------- -----------
Total stockholders' equity 419,691 (28,134)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,083,282 $ 25,254
=========== ===========
|
The accompanying notes are an integral part of the financial statements.
26
Topaz Resources, Inc.
(Formerly Kids Germ Defense Corp.)
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
Period Period
January 16, 2009 January 16, 2009
(Date of Inception) (Date of Inception)
Year Ended through through
December 31, December 31, December 31,
2010 2009 2010
------------ ------------ ------------
Revenue $ -- $ -- $ --
Operating expenses:
Professional fees expense 62,885 42,970 105,855
General and administrative expenses 30,403 19,664 50,067
------------ ------------ ------------
Loss from operations (93,288) (62,634) (155,922)
Net loss before taxes (93,288) (62,634) (155,922)
Other Income:
Interest expense (2,421) -- (2,421)
Interest income 3,527 3,527
Income tax expense -- -- --
------------ ------------ ------------
Total Other Income 1,106 -- 1,106
------------ ------------ ------------
Net loss $ (92,182) $ (62,634) $ (154,816)
============ ============ ============
Net loss per share $ (0.00) $ (0.00)
============ ============
Weighted average number of common
shares outstanding 503,568,219 385,677,936
============ ============
|
The accompanying notes are an integral part of the financial statements.
27
Topaz Resources, Inc.
(Formerly Kids Germ Defense Corp.)
(A Development Stage Company)
Statements of Stockholders' Equity
For Each of the Years From January 16, 2009 (Date of Inception)
through December 31, 2010
Common Stock
Common Stock Payable Deficit
---------------------- --------------- Accumulated
Amount Additional Stock During
Par Value Paid-In Subscriptions Development
Shares $0.0001 Shares Amount Capital receivable Stage Total
------ ------- ------ ------ ------- ---------- ----- -----
Balance at Inception,
January 16, 2009 -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock
for cash ($0.000095,
January 16, 2009) 378,000,000 37,800 -- -- (31,800) -- -- 6,000
Issuance of common stock
for cash ($0.0014,
December 9, 2009) 121,800,000 12,180 -- -- 16,820 (500) -- 28,500
Net loss for the period -- -- -- -- -- -- (62,634) (62,634)
----------- -------- --------- -------- -------- ------- --------- --------
Balance, December 31, 2009 499,800,000 49,980 -- -- (14,980) (500) (62,634) (28,134)
Payment on stock
subscription receivables
(January 14, 2010) -- -- -- -- -- 500 -- 500
Capital contribution
from shareholders
(February 16, 2010) -- -- -- -- 38,207 -- -- 38,207
Issuance of common stock
and warrants for cash
($0.04167, March 26, 2010) 4,800,000 480 -- -- 199,520 -- -- 200,000
Issuance of common stock
for oil and gas investment
properties ($0.0525,
October 23, 2010) -- -- 3,000,000 157,500 -- -- -- 157,500
Issuance of common stock
for cash ($0.04167,
November 8, 2010) 3,000,000 300 -- -- 124,700 -- -- 125,000
Issuance of common stock
for services ($0.04,
December 2010) 375,000 38 -- -- 14,962 -- -- 15,000
Issuance of common stock
for debt issue costs
($0.019, December 21, 2010) 120,000 12 -- -- 2,268 -- -- 2,280
Issuance of common stock
in connection with a note
($0.019, December 21, 2010) 80,000 8 -- -- 1,512 -- -- 1,520
Net loss for year ended
December 31, 2010 -- -- -- -- -- -- (92,182) (92,182)
----------- -------- --------- -------- -------- ------- --------- --------
Balance, December 31, 2010 508,175,000 $ 50,818 3,000,000 $157,500 $366,189 $ -- $(154,816) $419,691
=========== ======== ========= ======== ======== ======= ========= ========
|
The accompanying notes are an integral part of the financial statements.
28
Topaz Resources, Inc.
(Formerly Kids Germ Defense Corp.)
(A Development Stage Company)
Statements of Cash Flows
Period Period
January 16, 2009 January 16, 2009
(Date of Inception) (Date of Inception)
Year Ended through through
December 31, December 31, December 31,
2010 2009 2010
--------- --------- ---------
OPERATING ACTIVITIES:
Net loss $ (92,182) $ (62,634) $(154,816)
Adjustments to reconcile net loss to net
cash used in operating activities:
Stock issued for expenses 17,280 -- 17,280
Contribution from stockholder 38,207 -- 38,207
(Decrease) increase in:
Accounts payable (14,141) 35,388 21,248
Accounts payable-related party 28,864 -- 28,864
--------- --------- ---------
Net cash used by operating activities (21,972) (27,246) (49,217)
--------- --------- ---------
INVESTING ACTIVITIES:
Acquisition of oil and gas properties (84,406) -- (84,406)
Deposit on oil and gas properties (790,118) -- (790,118)
Proceeds from sale of oil and gas properties 403,409 -- 403,409
--------- --------- ---------
Net cash used by investing activities (471,115) -- (471,115)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from advances from stockholder -- 18,000 18,000
Repayment of from advances from stockholder (18,000) -- (18,000)
Proceeds from issuance of note payable 40,000 -- 40,000
Deposit for sale of working interest 457,500 -- 457,500
Proceeds from issuance of common stock 325,500 34,500 360,000
--------- --------- ---------
Net cash provided by financing activities 805,000 52,500 857,500
--------- --------- ---------
NET INCREASE IN CASH 311,914 25,254 337,168
CASH, BEGINNING OF PERIOD 25,254 -- --
--------- --------- ---------
CASH, END OF PERIOD $ 337,168 $ 25,254 $ 337,168
========= ========= =========
SUPPLEMENT INFORMATION
Cash paid for interest $ -- $ -- $ --
========= ========= =========
Cash paid for taxes $ -- $ -- $ --
========= ========= =========
NON-CASH ACTIVITIES
Stock issued for a receivable $ -- $ 500 $ --
========= ========= =========
Deposit on investment in oil and gas
properties for common stock payable $ 157,500 $ -- $ 157,500
========= ========= =========
Stock issued with a note payable $ 1,520 $ -- $ 1,520
========= ========= =========
|
The accompanying notes are an integral part of the financial statements.
29
Topaz Resources, Inc.
(Formerly Kids Germ Defense Corp.)
(A Development Stage Company)
Notes to Consolidated Financial Statements
Year Ended December 31, 2010 and the Period from Inception
(January 16, 2009) to December 31, 2009
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND ORGANIZATION
Topaz Resources, Inc. formerly Kids Germ Defense Corp. (the "Company") is a
development stage enterprise that was incorporated in the state of Florida on
January 16, 2009. To date, the Company's activities have been limited to raising
capital, organizational matters and structuring its business plan. The corporate
headquarters are located in Denton, Texas. The Company is an independent oil and
gas company focusing on production, acquisitions and developmental drilling
opportunities within proven producing areas of North-Central-West Texas.
Effective April 16, 2010, the Company changed its name from Kids Germ Defense
Corp. to Topaz Resources, Inc.
On April 16, 2010 the Company commenced oil and gas exploration activities. As
of December 31, 2010, the Company has not achieved its planned principal
operations from its oil and gas operations. Accordingly, the Company's
activities are considered to be those of a "Development Stage Enterprise". Among
the disclosures required, are that the Company's financial statements be
identified as those of a development stage enterprise. In addition, the
statements of operations, stockholders equity (deficit) and cash flows are
required to disclose all activity since the Company's date of inception. The
Company will continue to prepare its financial statements and related
disclosures as those of a development stage enterprise until such time that the
Company achieves planned principle operations.
CONSOLIDATION
The accompanying consolidated financial statements include all accounts of Topaz
and its wholly-owned subsidiary. All significant inter-company balances and
transactions have been eliminated in consolidation.
RECLASSIFICATIONS AND ADJUSTMENTS
Certain prior year amounts in the consolidated financial statements have been
reclassified to conform to the fiscal 2010 presentation. All historical share
and per share data in the consolidated financial statements and notes thereto
have been restated to give retroactive recognition of the 1-for-7 forward stock
split and the share dividend of 5 additional shares of common stock for each
share of common stock held on November 12, 2010. In the consolidated statements
of stockholders' equity, for all periods presented, the par value of the reduced
shares was reclassified to additional paid-in-capital from common stock. See
Note 8 for additional information regarding the forward stock split and the
share dividend.
OIL AND GAS PROPERTIES
The Company uses the full cost method of accounting for its oil and natural gas
properties. Under this method, the Company capitalizes all acquisition,
exploration and development costs incurred for the purpose of finding oil and
natural gas reserves, including leasehold acquisition costs, geological and
geophysical expenditures, lease rentals on undeveloped properties and costs of
drilling of productive and non-productive wells into the full cost pool. To the
extent that support equipment is used in oil and gas activities, the related
depreciation is capitalized. Proceeds from the disposition of oil and natural
gas properties are accounted for as a reduction of capitalized costs, with no
30
gain or loss recognized unless such disposition would alter the depletion and
depreciation rate by 20% or more. As of December 31, 2010 the Company had no
proven oil and natural gas properties. When the Company obtains proven oil and
gas reserves, capitalized costs, including estimated future costs to develop the
reserves proved and estimated abandonment costs, net of salvage, will be
depleted on the units-of-production method using estimates of proved reserves.
The costs of unproved properties are not amortized until it is determined
whether or not proved reserves can be assigned to the properties. The Company
assesses its properties at least annually to ascertain whether impairment has
occurred. In assessing impairment the Company considers factors such as
historical experience and other data such as primary lease terms of the
property, average holding periods of unproved property, and geographic and
geologic data.
Capitalized costs of development oil and natural gas properties may not exceed
an amount equal to the present value, discounted at 10%, of estimated future net
revenues from proven reserves plus the lower of cost or fair value of unproven
properties. Should capitalized costs exceed this ceiling, an impairment is
recognized.
The present value of estimated future net cash flows is computed by applying the
average first-day-of-the-month prices during the previous twelve month period of
oil and natural gas to estimated future production of proved oil and natural gas
reserves as of year-end less estimated future expenditures to be incurred in
developing and producing the proved reserves and assuming continuation of
existing economic conditions.
DEPOSITS ON OIL AND NATURAL GAS PROPERTIES
The Company accounts for expenditures that are made in conjunction with oil and
natural gas properties that it has not yet completed the transfer of title to
the properties as a deposit. At such time as the transfer of title has been
completed the Company transfers the balance to its Investment in Oil and Natural
Gas Properties, in a manner consistent with the full cost method. In the event
that the transfer of title is not completed the Company takes an impairment
charge for the amount of the deposit.
ASSET RETIREMENT OBLIGATION
The Company follows FASB ASC 410 - Asset Retirement and Environmental
Obligations which requires entities to record the fair value of a liability for
legal obligations associated with the retirement obligations of tangible
long-lived assets in the period in which it is incurred. This standard requires
the Company to record a liability for the fair value of the dismantlement and
plugging and abandonment costs excluding salvage values. When the liability is
initially recorded, the entity increases the carrying amount of the related
long-lived asset. Over time, accretion of the liability is recognized each
period and the capitalized cost is amortized over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement.
CONCENTRATIONS OF CREDIT RISK AND ALLOWANCE
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. Accounts are guaranteed by the Federal Deposit
Insurance Corporation ("FDIC") up to $250,000 in 2010 and 2009. At December 31,
2010 the Company had approximately $87,168 in excess of FDIC insured limits. The
Company has not experienced any losses in such accounts.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash in banks and highly liquid investments
which mature within three months of the date of purchase.
31
USE OF ESTIMATES
The preparation of these financial statements in conformity with accounting
principles generally accepted in the United States of America 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 amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
LONG-LIVED ASSETS
Long-lived assets including investments to be held and used or disposed of other
than by sale are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. When
required, impairment losses on assets to be held and used or disposed of other
than by sale are recognized based on the fair value of the asset. Long-lived
assets to be disposed of by sale are reported at the lower of the asset's
carrying amount or fair value less cost to sell.
INCOME TAXES
The Company accounts for income taxes pursuant to FASB ASC 740 - Income Taxes,
which requires recognition of deferred income tax liabilities and assets for the
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. The Company provides for deferred taxes on
temporary differences between the financial statements and tax basis of assets
using the enacted tax rates that are expected to apply to taxable income when
the temporary differences are expected to reverse.
FASB ASC-740 establishes a more-likely-than-not threshold for recognizing the
benefits of tax return positions in the financial statements. Also, the
statement implements a process for measuring those tax positions which meet the
recognition threshold of being ultimately sustained upon examination by the
taxing authorities. There are no uncertain tax positions taken by the Company on
its tax returns. The Company files tax returns in the US and states in which it
has operations and is subject to taxation. The tax year 2009 remains open to
examination by U.S. federal and state tax jurisdictions.
LOSS PER SHARE
Basic earnings per share amounts are calculated based on the weighted average
number of shares of common stock outstanding during each period. Diluted
earnings per share is based on the weighted average numbers of shares of common
stock outstanding for the periods, including dilutive effects of stock options,
warrants granted and convertible preferred stock. Dilutive options and warrants
that are issued during a period or that expire or are canceled during a period
are reflected in the computations for the time they were outstanding during the
periods being reported. Since the Company has incurred losses for all periods,
the impact of the common stock equivalents would be anti-dilutive and therefore
are not included in the calculation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, receivables, payables and
long-term debt. The carrying amount of cash, receivables and payables
approximates fair value because of the short-term nature of these items. The
carrying amount of long-term debt approximates fair value due to the
relationship between the interest rate on long-term debt and the Company's
incremental risk adjusted borrowing rate.
32
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2010, the FASB issued FASB Accounting Standards Update (ASU) No.
2010-03 Oil and Gas Estimations and Disclosures (ASU 2010-03). This update
aligns the current oil and natural gas reserve estimation and disclosure
requirements of the Extractive Industries Oil and Gas topic of the FASB
Accounting Standards Codification (ASC Topic 932) with the changes required by
the SEC final rule ASC 2010-03, as discussed above. ASU 2010-03 expands the
disclosures required for equity method investments, revises the definition of
oil and natural gas-producing activities to include nontraditional resources in
reserves unless not intended to be upgraded into synthetic oil or natural gas,
amends the definition of proved oil and natural gas reserves to require 12-month
average pricing in estimating reserves, amends and adds definitions in the
Master Glossary that is used in estimating proved oil and natural gas quantities
and provides guidance on geographic area with respect to disclosure of
information about significant reserves. ASU 2010-03 must be applied
prospectively as a change in accounting principle that is inseparable from a
change in accounting estimate and is effective for entities with annual
reporting periods ending on or after a change in accounting estimate and is
effective for entities with annual reporting periods ending on or after December
31, 2009. The impact on the Company's operating results, financial position and
cash flows has been recorded in the financial statements.
In April 2010, the FASB issued Accounting Standards Update 2010-14 (ASU
2010-14), Accounting for Extractive Activities - Oil & Gas - Amendments to
Paragraph 932-10-S99-1 (SEC Update). The Amendments are designed to modernize
and update the oil and gas disclosure requirements to align them with current
practices and changes in technology. The Company's adoption of ASU 2010-14 did
not have a material effect on the financial position, results of operations or
cash flows of the Company.
NOTE 2--GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. For the year ended December
31, 2010 and since inception through December 31, 2010, the Company has had a
net loss of $92,182 and $154,816, respectively. As of December 31, 2010, the
Company has not emerged from the development stage. In view of these matters,
the Company's ability to continue as a going concern is dependent upon the
Company's ability to begin operations and to achieve a level of profitability.
Since inception, the Company has financed its activities principally from term
notes and the sale of public equity securities. The Company intends on financing
its future development activities and its working capital needs largely from the
sale of public equity securities with some additional funding from other
traditional financing sources, including term notes until such time that funds
provided by operations are sufficient to fund working capital requirements. The
financial statements of the Company do not include any adjustments relating to
the recoverability and classification of recorded assets, or the amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern.
NOTE 3--INVESTMENT IN OIL AND NATURAL GAS PROPERTIES
The amounts capitalized as oil and natural gas properties were incurred for the
purchase, exploration and ongoing development of properties.
Acquisition Evaluation
Costs Costs Total
-------- -------- --------
Balance at January 9, 2009 $ -- $ -- $ --
Costs incurred during the period from inception to
December 31, 2009 -- -- --
-------- -------- --------
Balance at December 31, 2009 -- -- --
Costs incurred on exploratory activities during year ended
December 31, 2010 25,000 59,406 84,406
-------- -------- --------
Balance at December 31, 2010 $ 25,000 $ 59,406 $ 84,406
======== ======== ========
|
33
December 31,
2010 2009
--------- ----------
Oil and natural gas properties (using full cost method)
Unevaluated properties $ 84,406 $ --
Proved properties -- --
--------- ----------
Total oil and natural gas properties $ 84,406 $ --
========= ==========
Total investment in oil and natural gas properties $ 84,406
Accumulated depletion and depreciation --
--------- ----------
Net investment in oil and natural gas properties $ 84,406 $ --
========= ==========
|
NOTE 4--DEPOSIT ON OIL AND NATURAL GAS PROPERTIES
During the year ended December 31, 2010 the Company acquired the right to a
working interest in a lease in north Texas and drilled an exploratory well. The
completion of the assignment of the working interest is pending the consent of
the trustee for the landowners, such consent not to be unreasonably withheld.
The Company assigned, subject to completion of the well, a portion of its
working interest in the exploratory well. In addition, the Company assigned a
portion of its right to a working interest in the remaining lease.
December 31,
2010
----------
Lease acquisition costs $ 457,261
Exploratory well drilling costs 607,857
Less proceeds from sale of working interests (403,410)
----------
$ 661,708
==========
|
NOTE 5--RELATED PARTY TRANSACTIONS
On October 23, 2010 the Company entered into an agreement to acquire from Dark
Horse Operating Co., L.L.C. (DHOC"), an affiliate of the Company, its interest
in 766,562 net acres in north central Texas. In consideration of this the
Company agreed to pay $275,000, committed to issue 3,000,000 shares of its
Common Stock, which is recorded as common stock payable of $157,500 in the
accompanying balance sheet and assumed liabilities of $21,234. The property was
assigned by Dark Horse Operating Co., L.L.C. to the Company on April 13, 2011.
DHOC is an affiliate of the Company because two of the officers, one of whom is
also a director of the Company, own DHOC. The Company has adopted a policy that
requires that the two officers not participate in discussions or votes regarding
matters involving DHOC.
The Company has retained an individual consultant, who is the adult son of an
officer of the Company, to provide title research services on an as needed
basis. The Company recognized expense of approximately $24,000 for the year
ended December 31, 2010. At December 31, 2010, $6,930 was included in accounts
payable-related party for amounts owed to this individual.
NOTE 6-- DEPOSIT
The Company has agreed to sell a working interest in an oil and natural gas well
at such time as the Company has acquired and completed that well for production
of oil and natural gas. The Company received a $300,000 deposit and is using the
cash to fund the completion of the well.
34
NOTE 7-- NOTES PAYABLE
On December 21, 2010, the Company issued a secured note payable in the amount of
$40,000. This note matures on June 21, 2011, bears interest 12% on the face
value of the note and is secured by a first position lien on certain oil and
natural gas assets of the Company.
NOTE 8--STOCKHOLDER'S EQUITY
The Company's Board of Directors has authorized 10,000,000 shares of preferred
stock, par value of $0.0001 and 700,000,000 shares of common stock with a par
value of $0.0001 to be issued in accordance with the terms and conditions as
determined by the Board. The Preferred Stock ranks senior to the common stock as
to dividends and liquidation. As of December 31, 2010, the Company has no
preferred stock issued or outstanding and has 508,175,000 common shares
(499,800,000 at December 31, 2009) issued and outstanding.
On January 16, 2009, the Company issued 378,000,000 shares of common stock at
$0.00001587 per share for a total of $6,000.
On January 16, 2009, the Company authorized a Private Placement Offering of up
to 126,000,000 shares of common stock at a price of $0.000238 per share. The
total amount raised in this financing was $29,000. As of December 31, 2009, the
Company had issued 121,800,000 common shares and had received $28,500 in cash
proceeds and $500 was recorded as a subscription receivable. The $500
subscription receivable was received during the year ended December 31, 2010.
On April 16, 2010, the Company also effected a forward stock split of the
Company's common stock on a seven for one basis, such that it's authorized
shares of common stock has increased from 100,000,000 to 700,000,000. All shares
of the Company's common stock have been adjusted to reflect the forward stock
split.
Effective April 22, 2010, the Company and an investor signed a subscription
agreement to purchase a total of 4,800,000 shares of the Company's common stock
at $0.04167 per share plus 180,000,000 warrants to purchase shares of the
Company's common stock at an exercise price of $0.0833 per share for a total
amount of $200,000.
The warrant entitles the holder to purchase 180,000,000 shares of the Company's
common stock, at any time, at an exercise price of $0.0833 per share, provided,
however, that in no event shall the holder be entitled to exercise this warrant
for a number of shares in excess of the number of shares which, upon giving
effect to such exercise, would cause the aggregate number of shares of common
stock beneficially owned by the holder and its affiliates to exceed 4.99% of the
outstanding shares of common stock. The holder may exercise the warrant on
either a cash or cashless exercise as determined by the holder of the warrant.
The warrants expire in 2015.
Weighted
Range of Average
Exercise Exercise
Shares Prices Price
------ ------ -----
Outstanding at December 31, 2009 0
Warrants granted 180,000,000 $0.0833 $0.0833
Warrants cancelled or expired 0
-----------
Outstanding at December 31, 2010 180,000,000 $0.0833 $0.0833
===========
|
35
The value of each award is estimated at the grant date using the Black-Scholes
option model with the following assumptions for awards granted during the year
ended December 31, 2010:
Year Ended
December 31, 2010
-----------------
Dividend rate 0%
Risk free interest rate 2.57%
Expected term 5 years
Expected volatility 182%
|
The basis for the above assumptions are as follows: the dividend rate is based
upon the Company's history of dividends; the risk-free interest rate for periods
within the expected term of the option is based on the U.S. Treasury yield curve
in effect at the time of grant; the expected term was calculated based on the
Company's historical pattern of options granted and the period of time they are
expected to be outstanding; and expected volatility was calculated by review of
a peer company's historical activity.
As of December 31, 2010, the fair value of the 180,000,000 warrants was
calculated to be $5,631,326 using the Black Scholes option model and the above
assumptions. The cost of the warrant was treated as "share issue costs"
resulting in the fair market value being debited and credited to Additional Paid
in Capital, resulting in a null journal entry.
During August 2010, the Company and an investor signed a subscription agreement
to purchase a total of 3,000,000 shares of the Company's common stock at
$0.04167 per share for a total amount of $125,000, which has been recorded as
Common Stock Payable in the accompanying balance sheet. The Company issued the
3,000,000 shares of common stock during November 2010.
In November 2010, the Financial Industry Regulatory Authority (FINRA) has
approved the Company's share dividend of 5 additional shares of common stock for
each share of common stock held by each shareholder of record as of the close of
business November 12, 2010 with a payment date of November 15, 2010. All shares
of the Company's common stock have been adjusted to reflect the forward stock
split.
Effective December 21, 2010, the Company issued 120,000 shares of common stock
to a Company that assisted in the closing of a secured note payable (Note 7).
These shares were valued at the fair market value of $0.019 or $2,280 and are
recorded as debt issue costs at December 31, 2010. The costs were included in
interest expense.
Effective December 21, 2010 and in connection with the issuance of a secured
note payable (Note 7), the Company issued the lender 80,000 shares of common
stock at the fair market value of $0.019 or $1,520. The amount is recorded as a
discount on the related Note and will be amortized over the 6 month term and
expensed as interest.
During the year ended December 31, 2010, the Company received marketing and
advertising services valued at $15,000. In exchange for those services, the
Company issued 375,000 shares of common stock at $0.04 per share.
NOTE 9--EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are computed using the basic and diluted calculations
on the face of the statement of operations. Basic earnings (loss) per share are
calculated by dividing net income (loss) available to common shareholders by the
weighted average number of shares of common stock outstanding for the period.
Diluted earnings (loss) per share is calculated by dividing the net income
(loss) by the weighted average number of shares of common stock outstanding for
the period, adjusted for the dilutive effect of common stock equivalents, using
36
the treasury stock method. There were no items that were considered potentially
dilutive related to the fully diluted share calculation at December 31, 2010.
The following sets forth the computation of basic and diluted net earnings
(loss) per common share for year ended December 31, 2010 and the period January
16, 2009 through December 31, 2009:
For the Period
For the Year January 16, 2009
Ended through
December 31, December 31,
2010 2009
------------- -------------
Numerator:
Net loss $ (92,182) $ (62,634)
Less preferred stock dividend and accreted dividends -- --
------------- -------------
Net loss available to common stockholders $ (92,182) $ (62,634)
============= =============
Denominator:
Weighted average basic shares outstanding 503,568,219 385,677,936
Stock options -- --
Warrants -- --
------------- -------------
Weighted average fully diluted shares outstanding 503,568,219 385,677,936
============= =============
Net loss per common share--Basic and diluted $ (0.00) $ (0.00)
|
NOTE 10--INCOME TAXES
The Company operates in the United States ("U.S."); accordingly, federal and
state income taxes have been provided based upon the tax laws and rates of the
U.S. as they apply to the Company's current ownership structure.
The Company accounts for income taxes pursuant to Accounting Standards
Codification No. 740, ACCOUNTING FOR INCOME TAXES, which requires recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. The Company provides for deferred taxes on temporary
differences between the financial statements and tax basis of assets using the
enacted tax rates that are expected to apply to taxable income when the
temporary differences are expected to reverse.
The Company recognizes interest and penalties related to unrecognized tax
benefits within the provision for income taxes on continuing tax benefits. There
are no unrecognized tax benefits that if recognized would affect the tax rate.
There were no interest or penalties recognized as of the date of adoption or for
37
the twelve months ended December 31, 2010. The Company files tax returns in the
U.S. and states in which it has operations and is subject to taxation. Each of
the Company's tax years from 2009 remains open to examination by taxing
authorities.
The Company's effective tax rate for continuing operations for the twelve months
ended December 31, 2010 and 2009 was approximately 0% and 0%, respectively
because the Company had no taxable income in either year.
NOTE 11--FAIR VALUE MEASUREMENTS
The Company follows FASB ASC 820-10-05--Fair Value Measurements and Disclosures
for financial assets and liabilities measured on a recurring basis. The
statement applies to all financial assets and financial liabilities that are
being measured and reported on a fair value basis. As defined in the statement,
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). The statement requires disclosure that
establishes a framework for measuring fair value and expands disclosure about
fair value measurements. It requires fair value measurements be classified and
disclosed in one of the following categories:
Level 1 Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities. We
consider active markets as those in which transactions for the assets
or liabilities occur in sufficient frequency and volume to provide
pricing information on an ongoing basis.
Level 2 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. This category includes those derivative
instruments that we value using observable market data. Substantially
all of these inputs are observable in the marketplace throughout the
full term of the derivative instrument, can be derived from observable
data or supported by observable levels at which transactions are
executed in the marketplace. Instruments in this category include
non-exchange traded derivatives such as over-the-counter commodity
price swaps, investments and interest rate swaps.
Level 3 Measured based on prices or valuation models that require inputs that
are both significant to the fair value measurement and less observable
from objective sources (i.e. supported by little or no market
activity). Our valuation models are primarily industry-standard models
that consider various inputs including: (a) quoted forward prices for
commodities, (b) time value, (c) volatility factors and (d) current
market and contractual prices for the underlying instruments, as well
as other relevant economic measures. Level 3 instruments primarily
include derivative instruments, such as basic swaps, commodity price
collars and floors, as well as investments. Although we utilize third
party broker quotes to assess the reasonableness of our prices and
valuation techniques, we do not have sufficient corroborating market
evidence to support classifying these assets and liabilities as Level
2.
|
As required by FASB ASC 820-10-05, financial assets and liabilities are
classified based on the lowest level of input that is significant to the fair
value measurement. Our assessment of the significance of a particular input to
the fair value measurement requires judgment and may affect the valuation of the
fair value of assets and liabilities and their placement within the fair value
hierarchy levels.
NOTE 12--COMMITMENTS AND CONTINGENCIES
The Company, as an owner or lessee and operator of oil and gas properties, is
subject to various federal, state and local laws and regulations relating to
discharge of materials into, and protection of, the environment. These laws and
regulations may, among other things, impose liability on the lessee under an oil
38
and gas lease for the cost of pollution clean-up resulting from operations and
subject the lessee to liability for pollution damages. In some instances, the
Company may be directed to suspend or cease operations in the affected area.
NOTE 13--SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
The Company did not retain the services of an independent oil and
natural gas reserve engineering firm to prepare a report on its oil and natural
gas reserves, as the Company has no proved reserves.
COSTS INCURRED IN OIL AND GAS ACTIVITIES
Costs incurred in connection with the Company's crude oil and natural gas
acquisition, exploration and development activities for each of the years are
shown below:
Year Ended December 31,
---------------------------
2010 2009
-------- --------
(in thousands)
Unproved property costs $ 0 $ 0
Development costs 84,406 0
ARO Costs 0 0
-------- --------
Total consolidated operations $ 84,406 $ 0
======== ========
Asset retirement obligation (non-cash) $ 0 $ 0
======== ========
|
AGGREGATE CAPITALIZED COSTS
Aggregate capitalized costs relating to the Company's crude oil and natural gas
producing activities, including asset retirement costs and related accumulated
depreciation, depletion and amortization are as follows:
Period
January 16, 2009
(Date of Inception)
Year Ended through
December 31, December 31,
2010 2009 2010
-------- -------- --------
(in thousands)
Proved oil and gas properties $ 0 $ 0 $ 0
Accumulated DD&A 0 0 0
-------- -------- --------
Net capitalized costs $ 0 $ 0 $ 0
======== ======== ========
|
39
NOTE 14--SUBSEQUENT EVENTS
In January 2011, the Company entered into an agreement to lease oil and gas
property contiguous with existing leased oil and gas properties held by the
Company. The Company is currently drilling a new oil and gas well on this newly
leased property. Immediately prior to commencing the drilling of this well, the
Company received $75,000 of proceeds from the issuance of three (3) separate 12%
Senior Secured Notes. The Notes bear 12% interest and are due and payable on
January 26, 2012. Upon payout of the Notes, the Company has agreed to assign to
each of the lenders, a 5% working interest in the oil and natural gas well
described above. In January 2011, the Company also sold an interest in this well
to another third party company.
In two separate transactions in January 2011 and February 2011, a wholly owned
subsidiary of the Company acquired a working interest in an oil and natural gas
property and natural gas well for $250,000 and 10 million shares of the
Company's common stock.
In March 2011, the Company entered into an agreement with a third party company
to sell an interest in one of the Company's oil and gas properties. This
agreement also provides for participation of this third party and funding by
this third party company of drilling of new oil and gas wells on Company held
properties. As of April 12, 2011 this has not closed pending transfer of the
required cash consideration by the third party company.
No other material subsequent events have occurred since December 31, 2010 that
requires recognition or disclosure in these financial statements.
40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
There have been no changes in or disagreements with accountants with respect to
accounting and/or financial statements.
ITEM 9A(T). CONTROLS AND PROCEDURES
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term
refers to the controls and procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified by the Securities and Exchange
Commission.
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting and for the assessment of the
effectiveness of internal control over financial reporting. As defined by the
Securities and Exchange Commission, internal control over financial reporting is
a process designed by, or under the supervision of, the Company's principal
executive and principal financial officers and effected by the Company's Board
of Directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
consolidated financial statements in accordance with U.S. generally accepted
accounting principles.
The Company's internal control over financial reporting is not supported by
written policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the Company's
transactions and dispositions of the Company's assets; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
the consolidated financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of the Company's management
and directors; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the consolidated financial
statements.
As a consequence of its inherent limitation, 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 of compliance with the policies and procedures may deteriorate.
In connection with the preparation of the Company's annual consolidated
financial statements, management undertook an assessment of the effectiveness of
the Company's internal control over financial reporting as of December 31, 2010.
Management's assessment included an evaluation of the design of the Company's
internal control over financial reporting but did not include testing of the
operational effectiveness of those controls because our evaluation concluded
that our system of internal controls was not effective in preventing or
detecting misstatements.
Based on this assessment, management has concluded that as of December 31, 2010,
the Company's internal control over financial reporting was not effective enough
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
41
with U.S. generally accepted accounting principles. Seale & Beers, CPAs our
independent registered public accounting firm, which audited our financial
statements included in this annual report on Form 10-K, has not audited the
effectiveness of our internal control over financial reporting as of December
31, 2010.
If we are unable to remediate the identified material weaknesses, there is a
more than remote likelihood that a material misstatement to our SEC reports will
not be prevented or detected, in which case investors could lose confidence in
the accuracy and completeness of our financial reports, which could have an
adverse effect on our ability to raise additional capital and could also have an
adverse effect on our stock price. We have not been as successful in this
initiative as we had hoped.
As required by the SEC rules, we have evaluated the effectiveness of the design
and operation of our disclosure controls and procedures as of the end of the
period covered by this Report. This evaluation was performed under the
supervision and with the participation of our President and Chief Executive
Officer, who is also the Chief Financial Officer and Treasurer. Based upon that
evaluation, our President and Chief Executive Officer has concluded that our
controls and procedures were not effective as of the end of the period covered
by this Report due to existence of the significant internal control deficiencies
described above.
There has been no change in internal control over financial reporting during the
year ended December 31, 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
Certain information required by Part III is omitted from this Annual Report on
Form 10-K because we will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement"), not later than 120 days after the end of
the fiscal year covered by this Form 10-K, and certain information to be
included therein is incorporated herein by reference.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The following table sets forth certain information concerning our director and
executive officer as of December 31, 2010:
Name Age Position
---- --- --------
Edward J. Munden 60 Director, President, Chief Executive Officer,
Chief Financial Officer, Secretary
|
Effective February 17, 2010, the Board of Directors of the Company appointed
Edward J. Munden to the positions of Director, President, Chief Executive
Officer, Chief Financial Officer and Secretary of the Company. Mr. Munden plays
a major role in making key management and strategic decisions for the Company.
He is a professional geological engineer with an MBA and is a co-founder of a
private boutique investment banking organization that since 1989 has provided
and/or arranged early and mid stage venture capital and hands-on managerial
assistance to a portfolio of energy, mining and technology software companies.
From 2001 to present, Mr. Munden has focused on development and financing of oil
42
and gas leasing and drilling projects in the Barnett Shale play in north-central
Texas with a strategy of accumulating a significant mineral lease position and
building a strong operational capability. In 1994, Mr. Munden co-founded a
Dallas based independent NASDAQ-traded public energy company engaged in the
exploration, development and acquisition of oil and natural gas properties and
held senior level positions including Director, Chairman, President and CEO
until it was sold for over in December 2001. Mr. Munden has held positions in
the energy, mining, manufacturing and technology industries for more than 30
years.
Name Age Position
---- --- --------
Robert P. Lindsay 68 Director, Chief Operating Officer
|
Effective February 17, 2010, the Board of Directors of the Company appointed
Robert P. Lindsay to the positions of Director and Chief Operating Officer of
the Company. Mr. Lindsay plays a major role in making key management and
strategic decisions for the Company and oversees oil and gas development and
drilling operations of the Company. Mr. Lindsay is a second-generation oil and
gas professional with over 43 years experience in the petroleum industry. He has
planned and executed drilling and rework programs in Texas, Louisiana, Kentucky
and New Mexico. From 2001 to present, Mr. Lindsay has focused on locating,
evaluating and securing mineral leases in the Barnett Shale play in north
central Texas, wherein he has drilled or participated in over 250 oil & gas
wells in the immediate region; has assembled, drilled and sold over 10,000 acres
with dollar values approaching $100 million; and has built and sold six Barnett
Shale drilling rigs. Prior to this, Mr. Lindsay was Chief Operating Officer of a
NASDAQ energy company responsible for all administrative and operational aspects
of the company's producing and development properties. From 1973 until 1995, Mr.
Lindsay managed over 200 employees and 10 drilling rigs concentrating on
drilling oil and gas wells throughout north Texas. Prior to 1973, Mr. Lindsay
held senior positions with an international oil and natural gas drilling and
exploration company headquartered in Tulsa, Oklahoma.
Name Age Position
---- --- --------
S. Rand Stinnett 53 Vice President and General Legal Counsel
|
Effective March 31, 2010, the Board of Directors of the Company appointed S.
Rand Stinnett to the positions of Vice President and General Legal Counsel of
the Company. Mr. Stinnett plays a major role in making key management and
strategic decisions for the Company and oversees all legal matters pertaining to
the oil and gas operations of the Company. Mr. Stinnett is a fourth-generation
oil and gas professional, having focused full-time on Barnett projects since
2000. Through various entities, Mr. Stinnett has executed a successful,
disciplined leasing strategy that has resulted in the acquisition and
development of over 10,000 acres of quality mineral leases within the Barnett in
and around Wise, Denton, Montague and Tarrant Counties, Texas. Mr. Stinnett is a
commercial/business attorney and petroleum landman who has represented clients
in all aspects of the oil and gas business, including financial institutions,
mineral owners, working interest owners, operators, drillers and contractors.
Since 1982, he has engaged in a general civil legal practice involving title
examination, commercial litigation, transactional work and regulatory/corporate
matters, both as a sole practitioner and in association with law firms, in Hurst
and Austin, Texas. Mr. Stinnett is licensed to practice law in both Texas and
Oklahoma and holds B.S. and J.D. degrees.
43
Name Age Position
---- --- --------
Bill A. Williamson 55 Vice President
|
Effective March 31, 2010, the Board of Directors of the Company appointed Bill
A. Williamson to the position of Vice President of the Company. Mr. Williamson
plays a major role in making key management and strategic decisions for the
Company and oversees all land and lease title, permitting and due diligence in
the acquisition and operation of oil and gas properties and leases of the
Company. Mr. Williamson is a certified petroleum landman with over 28 years
experience in the oil and gas industry including eight years experience in
operating and building oil and gas drilling rigs. In 2005, Mr. Williamson
co-founded a company to build and operate land drilling rigs, completing
construction of three drilling rigs. Prior to this from 2002, he worked for an
independent drilling contractor located in Denton, Texas. From 1998 to 2002, Mr.
Williamson was VP, Land for a NASDAQ energy company responsible for all land,
acquisition and divestiture transactional contracts and agreements. Prior to
1998, Mr. Williamson provided clients with oil and gas asset management,
acquisition and divestiture services from a land and legal perspective.
AUDIT COMMITTEE FINANCIAL EXPERT
The SEC has adopted rules to implement certain requirements of the
Sarbanes-Oxley Act of 2002 pertaining to public company audit committees. One of
the rules adopted by the SEC requires a company to disclose whether it has an
"audit committee financial expert" serving on its audit committee. We do not
have an audit committee financial expert. The Company and its Board of Directors
have experienced difficulties in identifying a suitable candidate to serve as
its audit committee financial expert because of the size of the Company, the
perceived additional liability to the public by prospective candidates and the
excessive additional costs associated with the selection of a candidate,
including director fees for the audit committee financial expert and director
liability insurance.
CODE OF ETHICS POLICY
We have adopted a code of ethics that applies to our officers, directors and
employees in accordance with applicable federal securities laws. We have filed a
copy of our code of ethics as an exhibit to our Annual Report on Form 10-K as
filed on April 15, 2011. This document may be reviewed by accessing our public
filings at the SEC's web site at www.sec.gov. In addition, a copy of the code of
ethics will be provided without charge upon request to us. We intend to disclose
any amendments to or waivers of certain provisions of our code of ethics in a
Current Report on Form 8-K
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
To our knowledge, based solely on a review of such materials as are required by
the Securities and Exchange Commission, none of our officers, directors or
beneficial holders of more than ten percent of our issued and outstanding shares
of common stock failed to timely file with the Securities and Exchange
Commission any form or report required to be so filed pursuant to Section 16(a)
of the Securities Exchange Act of 1934, during the year ended December 31, 2010.
44
ITEM 11. EXECUTIVE COMPENSATION
The following table shows all the cash compensation paid or to be paid by us or
our subsidiaries, as well as certain other compensation paid or accrued, during
the fiscal years indicated, to our chief executive officer and other executive
officers who received total annual salary and bonus in excess of $100,000 during
the past fiscal year in all capacities in which the person served. The Company
has no qualified or nonqualified stock option plans and has no outstanding stock
options and as such has not awarded any stock options.
SUMMARY COMPENSATION TABLE
Non-Equity
Incentive Non-qualified
Name and Stock Option Plan Deferred All Other
Principal Salary Bonus Award Award Compensation Compensation Compensation Total
Position Year ($) ($) ($) ($) ($) Earnings ($) ($) ($)
--------- ---- ------ ----- ----- ----- ------------ ------------ ------------ -----
Munden, 2010 0 0 0 0 0 0 0 0
Edward J. (1) 2009 0 0 0 0 0 0 0 0
Lindsay, 2010 0 0 0 0 0 0 0 0
Robert P. (2) 2009 0 0 0 0 0 0 0 0
Stinnett, S. 2010 0 0 0 0 0 0 0 0
Rand (3) 2009 0 0 0 0 0 0 0 0
Williamson, 2010 0 0 0 0 0 0 0 0
Bill A. (4) 2009 0 0 0 0 0 0 0 0
Nicholas, 2010 0 0 0 0 0 0 0 0
Mark (5) 2009 0 0 0 0 0 0 0 0
|
(1) Became Director, President, Chief Executive Officer, Chief Financial
Officer and Secretary in February 2010.
(2) Became Director and Chief Operating Officer in February 2010.
(3) Became Vice President in March 2011.
(4) Became Vice President in March 2011.
(5) Became sole officer and director in January 2009 until his resignation in
February 2010.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information as of March 31, 2011, with respect to
any person known by us to own beneficially more than 5% of our common stock;
common stock beneficially owned by each of our officers and directors named in
Item 10; and the amount of common stock beneficially owned by our officers and
directors as a group.
45
Approximate Percent
Name & Address of Number of Shares of Common Stock
Beneficial Owner Beneficially Owned Outstanding(1)
---------------- ------------------ --------------
Edward J. Munden * (2) 46,200,000 8.9%
4 Sellers Court
Ottawa, Ontario
Canada K2H 7Y7
Robert P. Lindsay * 46,200,000 8.9%
1149 Hickory Hill Road
Argyle, TX 76226
S. Rand Stinnett * 46,200,000 8.9%
351 Regency Court
Denton, Tx 76210
Bill A. Williamson * 46,200,000 8.9%
812 Green Brook Drive
Allen, Tx 75002
Bruce Benn 46,200,000 8.9%
20 Inverness Avenue
Ottawa, Canada K2E 6N7
All Executive Officers and Directors
As a Group 184,800,000 35.68%
----------
|
* Executive Officer and/or a Director.
(1) Based upon 518,175,000 shares of common stock issued and outstanding as of
April 8, 2011 and includes for each person the shares issuable upon
exercise of the options and warrants owned by them.
(2) Includes 46,200,000 shares owned of record by Nexxt Capital Corp.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
On June 3, 2010 the Company advanced $150,000 to Dark Horse Operating Co.,
L.L.C. ("DHOC"), an affiliate of the Company, under a Promissory Note, which
bears 3.50% interest per annum and is due on demand. This advance was made
during the normal course of business and DHOC is to use these funds to pay for
the drilling of a well, of which DHOC is the operator.
46
On July 27, 2010 the Company advanced $100,000 to Dark Horse Operating Co.,
L.L.C. ("DHOC"), an affiliate of the Company, under a Promissory Note, which
bears 3.50% interest per annum and is due on demand. This advance was made
during the normal course of business and DHOC is to use these funds to pay for
the drilling of a well, of which DHOC is the operator.
On August 24, 2010 the Company advanced $15,000 to Dark Horse Operating Co.,
L.L.C. ("DHOC"), an affiliate of the Company, under a Promissory Note, which
bears 3.50% interest per annum and is due on demand. This advance was made
during the normal course of business and DHOC is to use these funds to pay for
the drilling of a well, of which DHOC is the operator.
On September 22, 2010 the Company advanced $45,000 to Dark Horse Operating Co.,
L.L.C. ("DHOC"), an affiliate of the Company, under a Promissory Note, which
bears 3.50% interest per annum and is due on demand. This advance was made
during the normal course of business and DHOC is to use these funds to pay for
the drilling of a well, of which DHOC is the operator.
On September 29, 2010 the Company advanced $38,403 to Dark Horse Operating Co.,
L.L.C. ("DHOC"), an affiliate of the Company, under a Promissory Note, which
bears 3.50% interest per annum and is due on demand. This advance was made
during the normal course of business and DHOC is to use these funds to pay for
the drilling of a well, of which DHOC is the operator.
On October 23, 2010 the Company entered into an agreement to acquire from Dark
Horse Operating Co., L.L.C. its interest in 766,562 net acres in north central
Texas. In consideration of this the Company agreed to pay $275,000, committed to
issue 3,000,000 shares of its Common Stock and assumed liabilities of $21,234.
The property was assigned by Dark Horse Operating Co., L.L.C. to the Company on
April 13, 2011.
On November 3, 2010 the Company advanced $20,491 to Dark Horse Operating Co.,
L.L.C. ("DHOC"), an affiliate of the Company, under a Promissory Note, which
bears 3.50% interest per annum and is due on demand. This advance was made
during the normal course of business and DHOC is to use these funds to pay for
the drilling of a well, of which DHOC is the operator.
On November 15, 2010 the Company advanced $51,538 to Dark Horse Operating Co.,
L.L.C. ("DHOC"), an affiliate of the Company, under a Promissory Note, which
bears 3.50% interest per annum and is due on demand. This advance was made
during the normal course of business and DHOC is to use these funds to pay for
the drilling of a well, of which DHOC is the operator.
On November 22, 2010 the Company advanced $131,726 to Dark Horse Operating Co.,
L.L.C. ("DHOC"), an affiliate of the Company, under a Promissory Note, which
bears 3.50% interest per annum and is due on demand. This advance was made
during the normal course of business and DHOC is to use these funds to pay for
the drilling of a well, of which DHOC is the operator.
On December 2, 2010 the Company advanced $25,000 to Dark Horse Operating Co.,
L.L.C. ("DHOC"), an affiliate of the Company, under a Promissory Note, which
bears 3.50% interest per annum and is due on demand. This advance was made
during the normal course of business and DHOC is to use these funds to pay for
the drilling of a well, of which DHOC is the operator.
On December 9, 2010 the Company advanced $400 to Dark Horse Operating Co.,
L.L.C. ("DHOC"), an affiliate of the Company, under a Promissory Note, which
bears 3.50% interest per annum and is due on demand. This advance was made
during the normal course of business and DHOC is to use these funds to pay for
the drilling of a well, of which DHOC is the operator.
47
On December 22, 2010 the Company advanced $28,400 to Dark Horse Operating Co.,
L.L.C. ("DHOC"), an affiliate of the Company, under a Promissory Note, which
bears 3.50% interest per annum and is due on demand. This advance was made
during the normal course of business and DHOC is to use these funds to pay for
the drilling of a well, of which DHOC is the operator.
On December 31, 2010 the Company advanced $1,098 to Dark Horse Operating Co.,
L.L.C. ("DHOC"), an affiliate of the Company, under a Promissory Note, which
bears 3.50% interest per annum and is due on demand. This advance was made
during the normal course of business and DHOC is to use these funds to pay for
the drilling of a well, of which DHOC is the operator.
As of December 31, 2010, the Company has advanced DHOC a total of approximately
$608,000 of which $0 remains due and payable to the Company, as all amounts have
been applied to the deposit on the investment in unevaluated oil and natural gas
properties.
DHOC is the operator of the wells that are being acquired and/or drilled by the
Company. DHOC was created in 2003-04 and is owned by Robert P. Lindsay and Rand
Stinnett, minority shareholders and officers of the Company. Lindsay is also a
director of the Company. There are two additional officers of the Company
(Edward Munden and Bill Williamson) who have no interest in DHOC and can out
vote Lindsay and Stinnett on any and all matters relating to DHOC, noting
Lindsay and Stinnett are prevented from voting on any of the Company matters
related to DHOC to prevent a possible conflict of interest.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets out fees billed by the Company's principal accountant
for audit and related services for each of the previous two fiscal years:
Fees billed for Fees billed for
Description of services 2010 fiscal year 2009 fiscal year
----------------------- ---------------- ----------------
Audit fees $ 12,750 $12,750.00
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We do not currently have an audit committee, however it is our policy to have
all audit and audit-related fees pre-approved by the board of directors. All of
the above fees were pre-approved by the board of directors.
There were no tax-related, audit-related or other fees incurred during the year.
48
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following Exhibits are filed as part of the report:
4.01 Form of Warrant
4.02 Form of Stock Grant Agreement
4.03 Form of Note
4.04 Form of Promissory Note
10.01 Form of Subscription Agreement
10.02 Form of Deed Of Trust, Security Agreement And Assignment Of Production
10.03 RMJ Subscription Agreement-Montague Well
10.04 RMJ Subscription Agreement-Montague Lease
10.05 RMJ Participation Agreement-Witchita Well
10.06 RMJ Subscription Agreement-Denton Well
10.07 Viejo Letter Agreement
10.08 EEI Purchase Agreement
10.09 EEI Amendment to Purchase Agreement
10.10 Polar Participation Agreement
10.11 Asset Purchase and Sale Agreement
14.01 Code of Ethics
31.1 Certification of Chief Financial Officer and Principal Financial
Officer as required pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2 Certification of President, Chief Executive Officer and Principal
Executive Officer as required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of President, Chief Executive Officer and Principal
Executive Officer as required pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer and Principal Financial
Officer as required pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
49
GLOSSARY OF TERMS
The following are abbreviations and definitions of terms commonly used in the
oil and gas industry and this Form 10-K.
3-D SEISMIC. An advanced technology method of detecting accumulations of
hydrocarbons identified by the collection and measurement of the intensity and
timing of sound waves transmitted into the earth as they reflect back to the
surface.
BOE. Means a barrel of oil equivalent and is a standard convention used to
express oil and gas volumes on a comparable oil equivalent basis. Gas
equivalents are determined under the relative energy content method by using the
ratio of 6.0 Mcf of gas to 1.0 Bbl of oil or natural gas liquid.
BBL. One barrel, or 42 U.S. gallons of liquid volume.
COMPLETION. The installation of permanent equipment for the production of oil
or gas.
DD&A. Refers to depreciation, depletion and amortization of the Company's
property and equipment.
DEVELOPMENT WELL. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
DRY HOLE. A well found to be incapable of producing hydrocarbons in sufficient
quantities to justify completion as an oil or gas well.
EXPLORATORY WELL. A well drilled to find a new field or to find a new reservoir
in a field previously found to be productive of oil or natural gas in another
reservoir.
GROSS ACRES OR WELLS. Refers to the total acres or wells in which the Company
has a working interest.
HORIZONTAL DRILLING. A drilling technique that permits the operator to contact
and intersect a larger portion of the producing horizon than conventional
vertical drilling techniques and may, depending on the horizon, result in
increased production rates and greater ultimate recoveries of hydrocarbons.
NET ACRES OR WELLS. Refers to gross the sum of fractional ownership working
interest in gross acres or wells.
NET PRODUCTION. Oil and gas production that is owned by the Company, less
royalties and production due others.
NYMEX. New York Mercantile Exchange, the exchange on which commodities,
including crude oil and natural gas futures contracts, are traded.
OIL. Crude oil or condensate.
50
OPERATOR. The individual or company responsible for the exploration,
development and production of an oil or gas well or lease.
PRODUCTIVE WELLS. Producing wells and wells mechanically capable of production.
PROVED DEVELOPED RESERVES. Proved reserves that can be expected to be recovered
(i) through existing wells with existing equipment and operating methods or in
which the cost of the required equipment is relatively minor compared to the
cost of a new well, and (ii) through installed extraction equipment and
infrastructure operational at the time of the reserves estimate if the
extraction is by means not involving a well.
PROVED RESERVES. Proved oil and gas reserves are those quantities of oil and
gas, which, by analysis of geoscience and engineering data, can be estimated
with reasonable certainty to be economically producible - from a given date
forward from known reservoirs, and under existing economic conditions, operating
methods, and government regulations - prior to the time at which contracts
providing the right to operate expire, unless evidence indicates that renewal is
reasonably certain, regardless of whether deterministic or probabilistic methods
are used for the estimation. The project to extract the hydrocarbons must have
commenced or the operator must be reasonably certain that it will commence the
project within a reasonable time. (i) The area of the reservoir considered as
proved includes: (A) The area identified by drilling and limited by fluid
contacts, if any, and (B) Adjacent undrilled portions of the reservoir that can,
with reasonable certainty, be judged to be continuous with it and to contain
economically producible oil or gas on the basis of available geoscience and
engineering data. (ii) In the absence of data on fluid contacts, proved
quantities in a reservoir are limited by the lowest known hydrocarbons (LKH) as
seen in a well penetration unless geoscience, engineering, or performance data
and reliable technology establishes a lower contact with reasonable certainty.
(iii) Where direct observation from well penetrations has defined a highest
known oil (HKO) elevation and the potential exists for an associated gas cap,
proved oil reserves may be assigned in the structurally higher portions of the
reservoir only if geoscience, engineering, or performance data and reliable
technology establish the higher contact with reasonable certainty. (iv) Reserves
which can be produced economically through application of improved recovery
techniques (including, but not limited to, fluid injection) are included in the
proved classification when: (A) Successful testing by a pilot project in an area
of the reservoir with properties no more favorable than in the reservoir as a
whole, the operation of an installed program in the reservoir or an analogous
reservoir, or other evidence using reliable technology establishes the
reasonable certainty of the engineering analysis on which the project or program
was based; and (B) The project has been approved for development by all
necessary parties and entities, including government entities.
PROVED UNDEVELOPED RESERVES (PUD). Undeveloped oil and gas reserves are
reserves of any category that are expected to be recovered from new wells on
undrilled acreage, or from existing wells where a relatively major expenditure
is required for recompletion. (i) Reserves on undrilled acreage shall be limited
to those directly offsetting development spacing areas that are reasonably
certain of production when drilled, unless evidence using reliable technology
exists that establishes reasonable certainty of economic productibility at
greater distances. (ii) Undrilled locations can be classified as having
undeveloped reserves only if a development plan has been adopted indicating that
they are scheduled to be drilled within five years, unless the specific
circumstances, justify a longer time. (iii) Under no circumstances shall
estimates for undeveloped reserves be attributable to any acreage for which an
application of fluid injection or other improved recovery technique is
contemplated, unless such techniques have been proved effective by actual
projects in the same reservoir or an analogous reservoir, or by other evidence
using reliable technology establishing reasonable certainty.
51
ROYALTY. An interest in an oil and gas lease that gives the owner of the
interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating the wells on
the leased acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding royalties, which are usually reserved by an owner of the leasehold in
connection with a transfer to a subsequent owner.
SEC. The United States Securities and Exchange Commission.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS. Present value of
proved reserves, as adjusted to give effect to (i) estimated future abandonment
costs, net of the estimated salvage value of related equipment, and (ii)
estimated future income taxes.
UNDEVELOPED ACREAGE. Leased acreage on which wells have not been drilled or
completed to a point that would permit the production of economic quantities of
oil or gas, regardless of whether such acreage contains proved reserves.
WORKING INTEREST. An interest in an oil and gas lease that gives the owner of
the interest the right to drill for and produce oil and gas on the leased
acreage and requires the owner to pay a share of the costs of drilling and
production operations. The share of production to which a working interest is
entitled will be smaller than the share of costs that the working interest owner
is required to bear to the extent of any royalty burden.
WORKOVER. Operations on a producing well to restore or increase production.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
By: /s/ Edward J. Munden
----------------------------------
Edward J. Munden, its
President, Chief Executive Officer
and Chief Financial Officer
Date: April 15, 2011
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53
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