UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2011
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ____________ to ____________
Commission File No. 333-158721
TOPAZ RESOURCES, INC.
(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
P.O. Box 2057
Denton, TX 76207-2057
(Address of principal executive offices) (Zip Code)
(940) 243-7744
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act 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 at least the
past 90 days. Yes [X] No [ ]
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 "accelerated filer, large accelerated filer and smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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]
There were 518,175,000 shares of the Registrant's $0.0001 par value common stock
outstanding as of May 13, 2011.
TOPAZ RESOURCES, INC.
INDEX
Page
No.
----
Part I. Financial Information
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets
March 31, 2011 (Unaudited) and December 31, 2010 3
Condensed Consolidated Statements of Operations
Three months ended March 31, 2011 and 2010 (Unaudited) 4
Condensed Consolidated Statements of Stockholders' Deficit
Three months ended March 31, 2011 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2011 and 2010 (Unaudited) 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4T. Controls and Procedures 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3. Default Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 18
Signatures 19
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2
PART I - FINANCIAL INFORMATION
Topaz Resources, Inc.
(formerly Kids Germ Defense Corp.)
(A Development Stage Company)
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
2011 2010
---------- ----------
ASSETS
CURRENT ASSETS:
Cash $ 64,612 $ 337,168
Other receivables 1,661 --
---------- ----------
TOTAL CURRENT ASSETS 66,273 337,168
---------- ----------
Deposit on Investment in unevaluated oil and natural gas properties 660,908 661,708
Investment in unevaluated oil and natural gas properties 649,803 84,406
---------- ----------
TOTAL ASSETS $1,376,984 $1,083,282
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 36,657 $ 21,815
Accounts payable-related party 63,386 28,164
Accrued expenses 2,848 --
Deposit 348,909 300,000
Note payable, net of unamortized discount
of $1,140 and $1,338, respectively 113,860 38,612
Due to related party 275,000 275,000
---------- ----------
TOTAL CURRENT LIABILITIES 840,660 663,591
---------- ----------
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;
518,175,000 and 508,175,000 shares issued and outstanding at
March 31, 2011 and December 31, 2010, respectively 50,893 50,818
Common stock payable 157,500 157,500
Additional paid in capital 515,614 366,189
Stock subscription receivable -- --
Accumulated deficit during Development Stage (187,683) (154,816)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 536,324 419,691
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,376,984 $1,083,282
========== ==========
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The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
Topaz Resources, Inc.
(Formerly Kids Germ Defense Corp.)
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(Unaudited)
Period
January 16, 2009
(Date of Inception)
Three Months Ended through
March 31, March 31, March 31,
2011 2010 2011
------------ ------------ ------------
REVENUE $ -- $ -- $ --
OPERATING EXPENSES:
Professional fees expense 17,383 8,363 123,238
General and administrative expenses 11,588 4,344 61,655
------------ ------------ ------------
Loss from operations (28,971) (12,707) (184,893)
Net loss before taxes (28,971) (12,707) (184,893)
OTHER (EXPENSE) INCOME:
Interest expense (3,896) -- (6,317)
Interest income -- -- 3,527
Income tax expense -- -- --
------------ ------------ ------------
TOTAL OTHER (EXPENSE) INCOME (3,896) -- (2,790)
NET LOSS $ (32,867) $ (12,707) $ (187,683)
============ ============ ============
Net loss per share $ (0.00) $ (0.00)
============ ============
Weighted average number of common
shares outstanding 513,744,444 499,800,000
============ ============
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The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
Topaz Resources, Inc.
(Formerly Kids Germ Defense Corp.)
(A Development Stage Company)
Condensed Consolidated Statements of Stockholders' Equity
For the Three Months Ended March 31, 2011 and
For Each of the Years From January 16, 2009 (Date of Inception)
through March 31, 2011
(Unaudited)
Common Stock Deficit
-------------------- Common Stock Accumulated
Amount Payable 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 ($0.00001587,
January 16, 2009) 378,000,000 37,800 -- -- (31,800) -- -- 6,000
Issuance of common stock
for cash ($0.000238,
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 -- -- -- -- -- 500 -- 500
subscription receivables
(January 14, 2010)
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 -- -- -- -- -- -- (92,182) (92,182)
----------- ------- --------- -------- -------- ----- --------- --------
BALANCE, DECEMBER 31, 2010 508,175,000 50,818 3,000,000 157,500 366,189 -- (154,816) 419,691
Issuance of common stock
for oil and gas investment
properties ($0.0129,
January 13, 2011) 5,000,000 37 -- -- 64,463 -- -- 64,500
Issuance of common stock
for oil and gas investment
properties ($0.017,
March 1, 2011) 5,000,000 38 -- -- 84,962 -- -- 85,000
Net loss for the three
months ended March 31, 2011 -- -- -- -- -- -- (32,867) (32,867)
----------- ------- --------- -------- -------- ----- --------- --------
BALANCE, MARCH 31, 2011 518,175,000 $50,893 3,000,000 $157,500 $515,614 $ -- $(187,683) $536,324
=========== ======= ========= ======== ======== ===== ========= ========
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The accompanying notes are an integral part of
the condensed consolidated financial statements.
5
Topaz Resources, Inc.
(Formerly Kids Germ Defense Corp.)
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Period
January 16, 2009
Date of Inception
For the Three Months Ended through
March 31, March 31, (March 31,
2010 2010 2011)
---------- ---------- ----------
OPERATING ACTIVITIES:
Net loss $ (32,867) $ (12,707) $ (187,683)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of discount on notes payable 248 -- 380
Stock issued for expenses -- -- 17,280
Contribution from shareholder -- 38,207 38,207
Increase in other receivables (1,661) -- (1,661)
Increase (decrease) in:
Accounts payable 15,542 (33,280) 36,657
Accounts payable, related party (3,019) -- 25,845
Accrued interest 2,848 -- 2,848
---------- ---------- ----------
NET CASH USED BY OPERATING ACTIVITIES (18,909) (7,780) (68,127)
---------- ---------- ----------
INVESTING ACTIVITIES:
Acquisition of oil and gas properties (378,356) -- (462,761)
Deposit on oil and gas properties 800 -- (789,318)
Proceeds from sale of oil and gas properties -- 403,409
---------- ---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (377,556) -- (848,670)
---------- ---------- ----------
FINANCING ACTIVITIES:
Proceeds from advances from stockholder -- -- 18,000
Repayment of advances from stockholder -- (18,000) (18,000)
Proceeds from issuance of notes payable 75,000 -- 115,000
Deposit for sale of working interest 48,909 -- 348,909
Increase in common stock payable -- 200,000 157,500
Proceeds from sale of common stock for cash -- 500 360,000
---------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 123,909 182,500 981,409
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH (272,556) 174,720 64,612
CASH, BEGINNING OF PERIOD 337,168 25,254 --
---------- ---------- ----------
CASH, END OF PERIOD $ 64,612 $ 199,974 $ 64,612
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND
NONCASH INVESTING AND FINANCING ACTIVITIES:
Cash paid for interest $ 0 $ 0 $ 0
========== ========== ==========
Issuance of common stock for acquisition of oil
and gas properties $ 149,500 $ 0 $ 149,500
========== ========== ==========
Acquisition of oil and gas investments for accounts payable $ 37,541 $ 0 $ 37,541
========== ========== ==========
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The accompanying notes are an integral part of
the condensed consolidated financial statements.
6
Topaz Resources, Inc.
(Formerly Kids Germ Defense Corp.)
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Three Months Ended March 31, 2011
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 March 31, 2011, 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 condensed 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.
ACCOUNTING BASIS
In the opinion of management, all adjustments consisting only of normal
recurring adjustments necessary for a fair statement of (a) the results of
operations for the three month periods ended March 31, 2011 and
2010 and the Period January 16, 2009 (Date of Inception) through March 31, 2011,
(b) the financial position at March 31, 2011 and December 31, 2010, and (c) cash
flows for the periods ended March 31, 2011 and 2010, and the Period January 16,
2009 (Date of Inception) through March 31, 2011, have been made.
The unaudited condensed financial statements and notes are presented in
accordance with SEC Form 10-Q. Accordingly, certain information and note
7
disclosures normally included in the financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted. The accompanying condensed financial statements and notes
should be read in conjunction with the audited financial statements and notes of
the Company for the fiscal year ended December 31, 2010. The results of
operations for the three month period ended March 31, 2011 are not necessarily
indicative of those to be expected for the entire year.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
There were no new accounting pronouncements that had a significant impact on the
Company's operating results or financial position.
NOTE 2 - GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. For the three months
ended March 31, 2011 and since inception through March 31, 2011, the Company has
had a net loss of $32,867 and $187,683, respectively. As of March 31, 2011, 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, all of which are
unevaluated properties. The Company has no proved reserves.
Acquisition Evaluation
Costs Costs Total
-------- -------- --------
Balance at December 31, 2010 25,000 59,406 84,406
Costs incurred on exploratory activities during
the three months ended March 31, 2011 399,500 165,897 565,397
-------- -------- --------
Balance at March 31, 2011 $424,500 $225,303 $649,303
======== ======== ========
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8
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.
March 31,
2011
--------
Beginning balance $661,708
Lease acquisition costs --
Exploratory well drilling costs (reclassification) (800)
Less proceeds from sale of working interests --
--------
$660,908
========
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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.
NOTE 6 - DEPOSIT
The Company has agreed to sell working interests in oil and natural gas wells at
such time as the Company has acquired and completed those wells for production
of oil and natural gas. The Company has received a $348,909 in total deposits
and is using the cash to fund the completion of the wells.
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 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.
On January 26, 2011, the Company issued a secured note payable in the amount of
$25,000. This note matures on January 26, 2012, 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.
9
On January 28, 2011, the Company issued secured notes payable in the amount of
$50,000. These notes matures on January 26, 2012, bear interest at 12% on the
face value of the notes and are secured by a first position lien on certain oil
and natural gas assets of the Company.
NOTE 8 - STOCKHOLDER'S EQUITY
On January 13, 2011, the Company issued 5,000,000 shares of common stock at
$0.0129 per share (the underlying fair market value of the common stock), for a
total of $64,500, for the acquisition of oil and gas properties.
On March 1, 2011, the Company issued 5,000,000 shares of common stock at
$0.017 per share (the underlying fair market value of the common stock), for a
total of $85,000, for the acquisition of oil and gas properties.
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 (the underlying fair market value of the common stock)
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, 2010 180,000,000 $0.0833 $0.0833
Warrants granted -- $ -- $ --
Warrants cancelled or expired -- $ -- $ --
----------- ------- -------
Outstanding at March 31, 2011 180,000,000 $0.0833 $0.0833
=========== ======= =======
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Effective 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.
NOTE 9 - 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.
10
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
the three months ended March 31, 2011. 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 three months
ended March 31, 2011 and 2010 was approximately 0% and 0%, respectively because
the Company had no taxable income in either year.
NOTE 10 - 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
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.
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 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 May 10, 2011 this has not closed pending transfer of the
required cash consideration by the third party company.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE
NOTES THERETO INCLUDED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q AND IN
OUR ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON APRIL 15, 2011.
THIS FILING, INCLUDING BUT NOT LIMITED TO "MANAGEMENT'S DISCUSSION AND
ANALYSIS", CONTAINS FORWARD-LOOKING STATEMENTS. THE WORDS "ANTICIPATED,"
"BELIEVE," "EXPECT," "PLAN," "INTEND," "SEEK," "ESTIMATE," "PROJECT," "WILL,"
"COULD," "MAY," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS INCLUDE, AMONG OTHERS, INFORMATION REGARDING FUTURE
OPERATIONS, FUTURE CAPITAL EXPENDITURES, AND FUTURE NET CASH FLOW. SUCH
STATEMENTS REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND
FINANCIAL PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT
LIMITATION, GENERAL ECONOMIC AND BUSINESS CONDITIONS, CHANGES IN FOREIGN,
POLITICAL, SOCIAL, AND ECONOMIC CONDITIONS, REGULATORY INITIATIVES AND
COMPLIANCE WITH GOVERNMENTAL REGULATIONS, THE ABILITY TO ACHIEVE FURTHER MARKET
PENETRATION AND ADDITIONAL CUSTOMERS, AND VARIOUS OTHER MATTERS, MANY OF WHICH
ARE BEYOND THE COMPANY'S CONTROL. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD- LOOKING STATEMENTS AS A RESULT OF
SEVERAL FACTORS, INCLUDING THE RISKS FACED BY US AS DESCRIBED BELOW AND
ELSEWHERE IN THIS FORM 10-Q AS WELL AS IN OUR FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 2011. IN LIGHT OF THESE RISKS
AND UNCERTAINTIES THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS FORM 10-Q WILL OCCUR. WE HAVE NO OBLIGATION TO PUBLICLY UPDATE
OR REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT NEW INFORMATION, FUTURE
EVENTS, OR OTHERWISE, EXCEPT AS REQUIRED BY FEDERAL SECURITIES LAWS AND WE
CAUTION YOU NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. WE
MAY NOT UPDATE THESE FORWARD-LOOKING STATEMENTS, EVEN THOUGH OUR SITUATION MAY
CHANGE IN THE FUTURE.
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 three months ended March 31, 2011, are not comparable to the
results of operations for the three months ended to March 31, 2010, nor are the
assets, liabilities and stockholders' equity at March 31, 2011 comparable to the
assets, liabilities and stockholders' equity at March 31, 2010.
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.
12
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 our 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.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED MARCH 31, 2011 COMPARED TO THE SAME PERIOD ENDED MARCH
31, 2010
The following table presents a summary of our results of operations.
For the For the
three months three months
ended ended
March 31, March 31,
2011 2010
-------- --------
Oil and gas sales $ -- $ --
Professional fees 17,383 8,363
General and administrative expenses 11,588 4,344
Interest expense 3,896 --
-------- --------
Net loss $ 32,867 $ 12,707
======== ========
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PROFESSIONAL FEES
The professional fees of $17,383 incurred during the three months ended March
31, 2011 were comprised predominantly of engineering fees associated with
properties that the Company decided not to pursue and accounting fees.
GENERAL AND ADMINISTRATIVE EXPENSES
The Company incurred $11,588 in general and administrative expenses during the
three months ended March 31, 2011. These expenses were comprised of costs
associated with operations, such as utilities.
During the three months ended March 31, 2011 the Company focused on acquiring
drilling rights in north central Texas. This entailed:
13
* 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 one well.
As of May 10, 2011 the Company has not completed the well and has not determined
whether it is commercially viable. The Company had no sales of oil and natural
gas during the three months ended March 31, 2011.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
March 31, March 31,
2011 2010
-------- --------
Current assets $ 66,273 $337,168
Current liabilities 840,660 663,591
Working capital deficit $795,621 $326,423
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The Company had $64,612 in cash at March 31, 2011.
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; (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,
14
assuming these loans would be available, will increase the Company's liabilities
and future cash commitments.
NOTES PAYABLE
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. All of the notes mature on January 26, 2012 and bear interest
at 12% of the face value of the note. These notes payable are secured by a first
position lien on certain oil and 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 March 31, 2011, any producing wells, nor does it at
May 10, 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 $18,909 in operating activities during the three months ended
March 31, 2011. This is the result of an increase in accounts payable and a
decrease accounts payable related party coupled with the net loss of $32,867
attributable to the professional fees and general administrative expenses.
15
CASH FLOW PROVIDED BY INVESTING ACTIVITIES
The Company invested $377,556 related to the acquisition and deposits on oil and
natural gas properties.
CASH FLOW PROVIDED BY FINANCING ACTIVITIES
The Company raised a net of $123,909 from its financing activities, including
$75,000 from the issuance of secured notes payable and $48,909 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.
CAPITAL EXPENDITURES
As of March 31, 2011 the Company had committed approximately $50,000 to
work-over a well.
OFF-BALANCE SHEET ARRANGEMENTS
As of March 31, 2011, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLSOURES ABOUT MARKET RISK
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (collectively the
"Certifying Officers") maintain a system of disclosure controls and procedures
that is designed to provide reasonable assurance that information, which is
required to be disclosed, is accumulated and communicated to management timely.
The Certifying Officers have concluded that the disclosure controls and
procedures are effective at the "reasonable assurance" level. Under the
supervision and with the participation of management, as of the end of the
period covered by this report, the Certifying Officers evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act).
Furthermore, the Certifying Officers concluded that our disclosure controls and
procedures in place are designed to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is (i)
recorded, processed, summarized and reported on a timely basis in accordance
with applicable Commission rules and regulations; and (ii) accumulated and
communicated to our management, including our Certifying Officers and other
persons that perform similar functions, if any, to allow us to make timely
decisions regarding required disclosure in our periodic filings.
16
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change in the Company's internal control over financial reporting occurred
during the three months ended March 31, 2011, that materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The status of our legal proceedings, as disclosed in our Annual Report remains
unchanged. The Company may be party to lawsuits from time to time arising in the
ordinary course of its business. The Company provides for costs relating to
these matters when a loss is probable and the amount is reasonably estimable.
The effect of the outcome of these matters on the Company's future results of
operations cannot be predicted because any such effect depends on future results
of operations and the amount and timing of the resolution of such matters.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 13, 2011, the Company issued 5,000,000 shares of common stock valued
at $64,500 for the purchase of oil and gas investment properties.
On March 1, 2011, the Company issued 5,000,000 shares of common stock valued at
$85,000 for the purchase of oil and gas investment properties.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
There have been no defaults in any material payments during the covered period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the three months ended March 31, 2011, the Company did not submit any
matters to a vote of its security holders.
ITEM 5. OTHER INFORMATION
The Company does not have any other material information to report with respect
to the three months ended March 31, 2011.
17
ITEM 6. EXHIBITS
No. Exhibit
--- -------
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
----------
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* Incorporated by reference to the exhibits included with the Company's Form
10K, as filed on April 15, 2011.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOPAZ RESOURCES, INC.
(Registrant)
/s/ Edward J. Munden Dated: May 16, 2011
---------------------------------------------
Edward J. Munden
President and Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
|
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