Attached files
file | filename |
---|---|
EX-4.1 - Southfield Energy CORP | v169328_ex4-1.htm |
EX-5.1 - Southfield Energy CORP | v169328_ex5-1.htm |
EX-23.1 - Southfield Energy CORP | v169328_ex23-1.htm |
EX-10.6 - Southfield Energy CORP | v169328_ex10-6.htm |
EX-23.2 - Southfield Energy CORP | v169328_ex23-2.htm |
As
filed with the Securities and Exchange Commission on December 17,
2009
(Registration
No. 333-162029)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment
No. 2 to
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
Southfield
Energy Corporation
(Exact
name of registrant as specified in its charter)
Nevada
|
1311
|
20-5361270
|
||
(State
or other jurisdiction of
incorporation
or organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer
Identification
Number)
|
1240
Blalock Road, Suite 150
Houston,
Texas 77055
( 713) 266-3700
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
Ben
Roberts
Chief
Executive Officer
Southfield
Energy Corporation
1240
Blalock Road, Suite 150
Houston,
Texas 77055
Telephone:
(713) 266-3700
Facsimile:
(713) 266-3701
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Copies
to:
Locke
Lord Bissell & Liddell LLP
600
Travis Street, Suite 3400
Houston,
Texas 77002
(713)
226-1249
Attn:
J. Eric Johnson
Approximate date of commencement of
proposed sale to the public: As soon as practicable after this
Registration Statement becomes effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933,
check the following box. x
If this
Form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, please check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
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. (Check
one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
(Do
not check if a smaller reporting company)
|
CALCULATION
OF REGISTRATION FEE
Title of Each Class of
Securities To Be
Registered
|
Amount to be
Registered
|
Proposed
Maximum Offering
Price Per Unit
|
Proposed Maximum
Aggregate
Offering Price
|
Amount of
Registration Fee
|
||||||||||||
Three
Year 10% Notes
|
$ | 10,000,000 | 100 | % | $ | 10,000,000 | $ | 558 |
The registrant hereby amends this
registration statement on such date or dates as may be necessary to delay its
effective date until the registrant shall file a further amendment which
specifically states that
this registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may
determine.
The information in
this prospectus is not complete and may be changed. We may not sell these
securities until the registration statement filed with the Securities and
Exchange Commission is effective. This prospectus is
not an offer to sell these securities and it is not soliciting an offer to
buy these securities in any state where the offer or sale is not
permitted.
|
PROSPECTUS
Southfield
Energy Corporation
$10,000,000
Three Year 10% Notes
We are
offering up to $10,000,000 in aggregate principal amount of our Three Year Notes
(“3 Year Notes”) in a direct public offering on a continuous basis (the
“Offering”). A minimum initial investment of $1,000 is required. The
Offering will end upon the earlier of the receipt of the maximum aggregate
principal amount of $10,000,000 or one year from the effective date of this
prospectus (the “Closing”).
We will
issue the 3 Year Notes in denominations of at least $1,000, subject to the
initial investment requirement of $1,000. The 3 Year Notes shall mature
three years from the date of issuance. The 3 Year Notes shall bear
interest at a fixed rate (calculated based on a 365-day year) of ten percent
(10%) per annum. We will pay interest on a 3 year Note on a quarterly
basis in arrears; simple interest will accrue from the date of
purchase.
We are
offering the 3 Year Notes on a “self-underwritten” basis, with no minimum.
The officers and directors of the Company intend to sell the 3 Year Notes
directly, who will not be separately compensated therefor. The intended
methods of communication include, without limitation, telephone and personal
contact. For more information, see the section titled “Plan of
Distribution” herein. However, we reserve the right to utilize
broker-dealers, placement agents and/or finders (“Placement Agent”), where
permitted by law, to assist us in locating potential investors, in which case we
will pay commissions and non-accountable expenses of up to 11% of the gross
offering price of the 3 Year Notes. The Placement Agent will not be
required to sell any specific number or dollar amount of securities but will use
their best efforts to sell the 3 Year Notes.
We do not
have to sell any minimum amount of 3 Year Notes to accept and use the proceeds
from this Offering. We cannot assure you that all or any portion of the 3
Year Notes we are offering will be sold. If we fail to raise the maximum
aggregate principal amount of $10,000,000, we may not be able to
execute our business plan. You will not be entitled to the return
of your investment. The 3 Year Notes are not listed on any securities
exchange and there is no public trading market for the 3 Year Notes. We
have the right to reject any subscription, in whole or in part, for any or no
reason. We may redeem the 3 Year Notes in whole or in part and from time
to time after one year from the closing, but upon at least 15 days prior written
notice to you.
You
should read this prospectus and any applicable prospectus supplement carefully
before you invest in the 3 Year Notes. These 3 Year Notes are our general
unsecured obligations and will rank junior and be subordinate in right of
payment to all future senior debt. The 3 Year Notes will not be secured by
liens on any of our assets. Payment of the 3 Year Notes is not insured or
guaranteed by the Federal Deposit Insurance Corporation (“FDIC”), any
governmental or private insurance fund, or any other entity. We will
establish an initial interest reserve equal to five percent of the gross
proceeds from the Offering and will deposit such reserve with a third party as
subscriptions are accepted. With the exception of the interest reserve account,
we have not made any arrangements to place any of the proceeds from this
Offering in an escrow, trust or similar account.
We are
issuing the 3 Year Notes pursuant to an Indenture that contains provisions
related to events of default, the collective rights of the 3 Year Note holders,
and the servicing and administration of the 3 Year Notes.
2
See “Risk Factors” beginning
on page 12 for certain factors you should consider before buying the 3 Year
Notes .
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
Per 3 Year Note
|
Total
|
|||||||
Public
offering price
|
$ | 1,000 | $ | 10,000,000 | ||||
Underwriting
Commission and Non-Accountable Expense Allowance (1)
|
$ | 110 | $ | 1,100,000 | ||||
Other
Expenses (2)
|
$ | 100 | $ | 100,000 | ||||
Proceeds,
before expenses, to Southfield Energy Corporation
|
$ | 880 | $ | 8,800,000 |
(1)
Assuming a Placement Agent is retained, represents the maximum amount of
commissions and non-accountable expenses to be paid assuming the maximum
aggregate principal amount of $10,000,000 is raised.
(2)
Includes professional services fees, printing and distribution costs and
Offering related travel and communication costs.
The
date of this prospectus is [●], 2009.
3
TABLE
OF CONTENTS
About
this Prospectus
|
5
|
||
Where
You Can Find More Information
|
5
|
||
Cautionary
Statement Concerning Forward-Looking Statements
|
6
|
||
Prospectus
Summary
|
8
|
||
Risk
Factors
|
12
|
||
Use
of Proceeds
|
22
|
||
Description
of 3 Year Notes
|
23
|
||
Summary
of Indenture
|
23
|
||
Material
Tax Consequences
|
26
|
||
Capitalization
|
31
|
||
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
32
|
||
Quantitative
and Qualitative Disclosures About Market Risk
|
39
|
||
Business
|
40
|
||
Management
|
52
|
||
Director
and Executive Officer Compensation
|
55
|
||
Certain
Relationships and Related Party Transactions
|
57
|
||
Security
Ownership of Certain Beneficial Owners and Management
|
58
|
||
Plan
of Distribution
|
59
|
||
Legal
Matters
|
60
|
||
Experts
|
60
|
||
Changes
In and Disagreements With Accountants On Accounting and Financial
Disclosure
|
60
|
||
Index
to Financial Statements
|
F-1
|
4
ABOUT
THIS PROSPECTUS
This
prospectus highlights selected information about us and our 3 Year Notes but
does not contain all the information that you should consider before investing
in the 3 Year Notes. You should read this entire prospectus carefully,
including the information included under the heading “Risk
Factors.”
You
should rely only on the information contained in this prospectus or to which we
have referred you. We a have not authorized anyone to provide you with
different information. If anyone provides you with different or inconsistent
information, you should not rely on it. We are not making an offer to sell
these securities in any jurisdiction where such offer or sale is not permitted.
You should assume that the information appearing in this prospectus is accurate
as of the date on the front cover of this prospectus only. Our business,
financial condition, results of operations and prospects may have changed since
that date.
WHERE
YOU CAN FIND MORE INFORMATION
We have
filed with the SEC, under the Securities Act of 1933, as amended (the
“Securities Act”), a registration statement on Form S-1 with respect to the
3 Year Notes offered in this prospectus. This prospectus, which constitutes part
of the registration statement, does not contain all the information set forth in
the registration statement or the exhibits and schedules which are part of the
registration statement, portions of which are omitted as permitted by the rules
and regulations of the U.S. Securities and Exchange Commission (“SEC”).
Statements made in this prospectus regarding the contents of any contract or
other document are summaries of the material terms of the contract or document.
With respect to each contract or document filed as an exhibit to the
registration statement, reference is made to the corresponding exhibit.
For further information pertaining to us and to the 3 Year Notes offered by this
prospectus, reference is made to the registration statement, including the
exhibits and schedules thereto, copies of which may be inspected, without
charge, at the public reference facilities of the SEC at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. Copies of all or any portion of the
registration statement may be obtained from the SEC at prescribed rates.
Information on the public reference facilities may be obtained by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site that contains
reports, proxy and information statements, and other information that is filed
electronically with the SEC. The web site can be accessed at www.sec.gov
.
After
effectiveness of the registration statement, which includes this prospectus, we
will be required to comply with the informational requirements of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), and, accordingly, will
file current reports on Form 8-K, quarterly reports on Form 10-Q,
annual reports on Form 10-K, proxy statements and other information with
the SEC. Those reports, proxy statements and other information will be
available for inspection and copying at the public reference facilities, the SEC
web site referred to above and our own website at www.southfieldenergy.com
.
5
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This
prospectus and the documents incorporated by reference in this prospectus
contain or incorporate by reference certain statements that are, or may be
deemed to be, “forward-looking statements” within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange
Act. Forward-looking statements include statements regarding our plans,
beliefs or current expectations and may be signified by the words “could,”
“should,” “expect,” “project,” “estimate,” “believe,” “anticipate,” “intend,”
“budget,” “plan,” “forecast,” “predict” and other similar expressions.
Forward-looking statements appear in a number of places throughout this
prospectus and the documents incorporated by reference into this prospectus with
respect to, among other things: profitability; planned capital
expenditures; estimates of oil and gas production; estimates of future oil and
gas prices; estimates of oil and gas reserves; our future financial condition or
results of operations; and our business strategy and other plans and objectives
for future operations.
By their
nature, forward-looking statements involve risks and uncertainties because they
relate to events and depend on circumstances that may or may not occur in the
future. We caution you that forward-looking statements are not guarantees
of future performance and that our actual results of operations, financial
condition and liquidity, and the development of the industry in which we
operate, may differ materially from those made in or suggested by the
forward-looking statements made in this prospectus. In addition, even if
our results of operations, financial condition and liquidity and the development
of the industry in which we operate are consistent with the forward-looking
statements contained in this prospectus, those results or developments may not
be indicative of results or developments in subsequent periods.
The
following listing represents some, but not necessarily all, of the risk factors
that may cause actual results to differ from those anticipated or
predicted:
|
•
|
the volatility of oil, natural
gas and natural gas liquid
prices;
|
|
•
|
estimation, development and
acquisition of oil and gas
reserves;
|
|
•
|
cash flow, liquidity and
financial condition;
|
|
•
|
business and financial
strategy;
|
|
•
|
amount, nature and timing of
capital expenditures;
|
|
•
|
availability and terms of
capital;
|
|
•
|
timing and amount of future
production of oil and gas;
|
|
•
|
availability of drilling,
production and well service equipment for our
operators;
|
|
•
|
operating costs and other
expenses;
|
|
•
|
prospect development and property
acquisitions;
|
|
•
|
marketing of oil, natural gas and
natural gas liquids;
|
|
•
|
competition in the oil and gas
industry;
|
|
•
|
the impact of weather and the
occurrence of natural disasters such as fires, earthquakes and other
catastrophic events;
|
|
•
|
governmental regulation of the
oil and gas industry;
|
|
•
|
developments in oil-producing and
gas-producing countries;
|
6
|
•
|
strategic plans, expectations and
objectives for future
operations;
|
|
•
|
the costs and legal liabilities
associated with being a “public”
company;
|
|
•
|
the amount of time required by
management to comply with being a public
company;
|
|
•
|
the depletion of our oil and gas
assets at a rate faster than
anticipated;
|
|
•
|
our ability to generate
sufficient revenues and cash flow to meet our short and long term
obligations;
|
|
•
|
our ability to hire and retain
qualified personnel to execute our operations;
and
|
|
•
|
global demand for and supply of
oil & natural gas.
|
You should also read carefully the
factors described in the “Risk factors” section beginning on page 12 to better understand the risks and
uncertainties inherent in our business and underlying any forward-looking
statements .
7
PROSPECTUS
SUMMARY
This
summary highlights information about us and the Offering contained elsewhere in
this prospectus. Because it is a summary, it does not contain all the
information that you should consider before investing in our 3 Year Notes.
You should read the entire prospectus carefully before making an investment
decision, including the information presented under the heading “Risk Factors”
and the historical financial statements and the accompanying notes thereto
included elsewhere in this prospectus.
All
references in this prospectus to “we,” “us,” “our,” “Company” and “Southfield”
refer to Southfield Energy Corporation.
Overview
We are an
independent energy company based in Houston, Texas that invests in the
exploration, development, and production of moderate risk, oil and gas wells in
the United States. We focus on partnering alongside proven operators
with strong track records of success. The Company’s core strategy is to
earn revenue from existing non-operated working interests while investing in new
opportunities to increase our oil and gas production and reserves; primarily
through acquisitions of existing production and working interest investments in
drilling programs of experienced and successful oil and gas operators active in
Texas, Louisiana and Oklahoma.
We
currently focus our efforts on our oil and natural gas properties on the Mary
King Estell lease in the Richard King Field of Nueces County, Texas. We
intend on building our business by acquiring additional non-operated working
interests in productive oil and natural gas wells and other oil and gas
interests. A non-operated working interest grants us a proportionate share
of the property’s oil and gas production, and requires us to pay a proportionate
share of the costs associated with drilling and production without acting as the
operator of the property’s wells.
We have a
non-operated working interest in five gas wells in the Richard King Field of
Nueces County, Texas. Durango Resources Corporation is the operator of the
wells.
Our
Properties
We
currently have the following oil and gas property interests:
Property
|
Non-Operated Working
Interest
|
Net Revenue
Interest
|
Area (acres)
|
|||||||||
Richard
King Field
|
15 | % | 11.25 | % (1) | 160 |
(1) Based
on a 75% net revenue interest for all working interest owners.
We are
mainly focused on the following activities:
|
·
|
Identifying attractive investment
opportunities in the oil and gas industry with moderate risk and favorable
upside potential;
|
|
·
|
Negotiating the acquisition of
working interests on terms that we feel are favorable to
us;
|
|
·
|
Acquiring non-operated working
interests in oil and gas wells and mineral interests that we can exploit
for the benefit of our
stockholders;
|
|
·
|
Earning secure and reliable
revenue from non-operated working interests while engaging in the
exploration and development of oil and gas properties to generate
additional revenue; and
|
|
·
|
Managing the return on our
investments to replace reserves and increase revenue through re-investment
activities.
|
8
The
following table sets forth summary information about our net oil and gas assets
as of December 31, 2008:
Estimated Proved Reserves at
December 31, 2008(1)
|
Production
for
the
Year
Ended
December 31,
|
Reserve-to-
Production
|
Estimated 2008
Production
|
|||||||||||||||||||||
Oil
(Bbl)
|
NGL
(Bbl)
|
Gas
(MMcf)
|
Total
(BOE)(2)
|
2008
(BOE)(2)
|
Ratio
(Years)(3) |
Decline
Rate(4)
|
||||||||||||||||||
5,690
|
1,780 | 217 | 43,637 | 7,127 | 6.12 | 14 | % |
(1)
|
Proved Reserves are those
quantities of petroleum which, by analysis of geological and engineering
data, can be estimated with reasonable certainty to be commercially
recoverable, from a given date forward, from known reservoirs and under
current economic conditions, operating methods, and government
regulations.
|
(2)
|
Barrels of oil Equivalent (BOE)
is a unit of energy that approximates the energy released by burning one
barrel of oil. A BOE is typically 6,000 cubic feet of natural gas. BOE
calculations are estimates due to the variance of btu content amongst
barrels of oil and cubic feet of natural gas. BOE’s in the above table are
used as an approximation for measuring the total energy contained in oil
and natural gas either produced or remaining as
reserves.
|
(3)
|
This ratio estimates the number
of years that it would require to produce our remaining reserves assuming
that production rates are held
constant.
|
(4)
|
Estimated production decline
measures the petroleum produced as a percentage of the total reserves
remaining at the end of the period plus production in that
period.
|
Aldwell Unit
|
Mary King Estell
|
|||||||||||||||
Oil (bbl)
|
Gas (MMcf)
|
Oil (bbl)
|
Gas (MMcf)
|
|||||||||||||
PDP
|
4,094 | 10.8 | 40 | 38.6 | ||||||||||||
PBP
|
0 | 0 | 129 | 75.6 | ||||||||||||
PUD
|
1,279 | 4.6 | 149 | 87.8 | ||||||||||||
Total
|
5,372 | 15.4 | 318 | 202 |
Engineering
abbreviations are as follows: Proved Developed Reserves (PDP), Proved Behind
Pipe Reserves (PBP), and Proved Undeveloped Reserves (PUD)
We also
make equity investments in other oil and gas companies. In September and
October 2008, we purchased an aggregate of 350,000 shares of common stock of
Meridian Resources Corporation, an exploration and production company whose
shares trade on the New York Stock Exchange under the ticker symbol “TMR.”
As of December 31, 2008, we incurred an unrealized holding loss of $325,465 on
our investment. As of December 31, 2008 the net market value of our
investment was $199,500, comprising approximately 22.2% of total assets.
In June 2009, we sold an aggregate of 100,000 shares of common stock of Meridian
Resources and realized a loss of $134,096. Although we do not own equity
investments in any other company, we may buy such equities in the future.
We do not have any current plans, proposals or arrangements, written or
otherwise, to increase our equity investment in Meridian Resources Corporation
or any other company. As of September 30, 2009 we determined the decline in
value of the Meridian shares to be other than temporary. Based on this
determination the shares were adjusted to their market value as of September 30,
2009 of $102,500. The difference between the cost and market value of the shares
was recorded as impairment expense for $243,095.
In the
future, we may expand the scope of our investments depending on whether we find
any unique investment opportunities and if we have sufficient capital to execute
such plans. Our future business plans may include the acquisition of
mineral lease interests, purchase of existing production and infrastructure and
equipment.
Our
principal office is located at 1240 Blalock Road, Suite 150, Houston, Texas
77055. We currently lease approximately 3,000 square feet and incurred
approximately $25,000 in rent expense for 2008. We believe the size of our
office space is sufficient for our business purposes.
The
Offering
Securities
Offered
|
We
are offering up to $10,000,000 in aggregate principal amount of our 3 Year
Notes. The Company will establish an initial interest reserve equal to
five percent of gross proceeds from the Offering and deposit with a third
party as subscriptions are received. See “Description of 3 Year
Notes.”
|
||
Denominations
|
Increments
of at least $1,000.
|
||
Minimum
Investment
|
A
minimum initial investment of $1,000 is required.
|
||
Form of
Investment
|
Investments
in 3 Year Notes may be made by check or wire.
|
||
Interest
Rate
|
Fixed
interest rate, calculated using 365-day year, of 10% per
annum.
|
9
Payment
of Interest
|
Interest
is payable on a quarterly basis in arrears.
|
||
3
Year Maturity
|
3
Year Notes shall mature 3 years from the date of your
purchase.
|
||
Redemption
by Us
|
We
may redeem the 3 Year Notes at any time after one year from the date of
purchase and upon 15 days prior written notice to you for a price equal to
principal plus interest accrued to the date of
redemption.
|
||
Subordinated
|
3
Year Notes are general unsecured obligations and will rank junior and be
subordinate in right of payment to all future senior debt. The 3
Year Notes will not be secured by liens on any of our assets. This means
that if we are unable to pay our debts when due, the 3 Year Notes would
all be paid, if at all, after any payment would be made on any senior
debt.
|
||
Event
of Default
|
An
event of default on the 3 Year Notes is generally defined as a default in
the payment of principal, or a default in the payment of interest, our
becoming subject to certain events of bankruptcy or insolvency, or our
failure to comply with any covenant contained in the
Indenture.
|
||
Indenture
and Trustee
|
The
3 Year Notes will be governed by an Indenture and a trustee will represent
the interest of holders of 3 Year Notes.
|
||
Use
of Proceeds
|
If
all the 3 Year Notes offered by this prospectus are sold, we expect to
receive approximately $8,800,000 in net proceeds after deducting all costs
and expenses associated with this Offering, assuming a Placement Agent is
retained. We intend to use the net proceeds from this Offering to first
pay for operating expenses, including management compensation related to
the operation of the Company. We then plan on using the proceeds to
purchase working interests in existing oil and gas production and new
drilling opportunities. Further, we will reserve an amount of money
equal to 5% of the gross proceeds from the Offering for payment of
interest. See “Use of Proceeds” for more
information.
|
||
Material
Tax Consequences
|
For
a discussion of material federal income tax consequences that may be
relevant to prospective 3 Year Note holders who are individual citizens or
residents of the United States, please read “Material Tax
Consequences.”
|
||
Listing
and Trading Symbol
|
Our
3 Year Notes have not been approved for trading on any exchange and we
have no current plans to request such a listing.
|
||
Risk
Factors
|
See
“Risk Factors” on page 12 and other information included in this
prospectus and any prospectus supplement for a discussion of factors you
should carefully consider before investing in the 3 Year
Notes.
|
10
Our
Company
We were
incorporated in the State of Nevada on July 5, 2005 with the objective to own
and acquire producing oil and gas properties and to participate in the drilling
of new oil & gas wells. Our principal office is located at 1240
Blalock Road, Suite 150, Houston, Texas 77055. Our telephone number is
(713) 266-3700. Information about us can be found at www.southfieldenergy.com.
Information contained in our website does not constitute part of this
prospectus.
Other
Information
We expect
to make our periodic reports and other information filed or furnished to the SEC
available, free of charge, through our website, as soon as reasonably
practicable after those reports and other information are electronically filed
with or furnished to the SEC. Information on our website or any other
website is not incorporated by reference into this prospectus and does not
constitute a part of this prospectus.
11
RISK
FACTORS
The nature of our business
activities subjects us to certain hazards and risks. You should consider
carefully the following risk factors together with all of the other information
included in this prospectus in evaluating an investment in our 3 Year Notes.
The risk factors set forth below are
not the only risks that may affect our business. Our business could also be
impacted by additional risks not currently known to us or that we currently deem
to be immaterial. If any of the following risks were
actually to occur, our business, financial condition or results of operations
could be materially adversely affected. In that case, we might not be able to
pay the principal and
interest on our
3 Year Notes, and you could
lose part or all of your investment .
Risks
Related to Our Business
We may not have
sufficient cash flow from operations to pay interest on the 3
Year Notes when due or to repay principal upon maturity.
Revenue
and profit from oil and gas is uncertain. Prices may drop lower than they
are today. We expect to invest in working interests in new oil and gas
wells. These investments may not be profitable and we may lose our entire
investment. Oil and gas properties are depleting assets and we will have
to successfully continue to find additional oil and gas to offset the natural
decline of producing wells in which we own an interest. These
uncertainties are a material risk of investing in oil and gas and may materially
affect our ability to make interest payments when due and to repay principal
upon maturity.
The
amount of cash we actually generate will depend upon numerous factors related to
our business including, among other things:
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the amount of oil and gas our
operators produce;
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the prices at which our operators
sell our oil and gas
production;
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the level of our operating costs,
including fees and reimbursement of expenses expended to operate the
company and to compensate its management team, board of directors and
employees;
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our ability to replace declining
reserves;
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prevailing economic
conditions;
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the level of competition we
face;
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fuel conservation measures and
alternate fuel
requirements; and
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government regulation and
taxation.
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In
addition, the actual amount of cash that we will have available to make payments
on the principal and interest of the 3 Year Notes will depend on other factors,
including:
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the level of our expenditures for
acquisitions of additional oil and gas
investments;
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our ability to make borrowings or
to raise additional capital in the
future;
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sources of cash used to fund
acquisitions;
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debt service requirements
of our 3 Year Notes or future financing
agreements;
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fluctuations in our working
capital needs;
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general and administrative
expenses;
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timing and collectability of any
receivables; and
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the amount of cash reserves
established by our management team for the proper conduct of our
business.
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All of
our current revenues are generated by our interest in the Richard King
Field. Delays or interruptions in our interests in the Richard King Field
natural gas and production operations including, but not limited to, the failure
of third parties on which we rely to provide key services, could negatively
impact our revenues.
Approximately
80% of our oil and natural gas revenue for the year ended December 31, 2008 and
the nine months ended September 30, 2009 was derived from the Richard King
Field. As of September 30, 2009, 100% of our oil and natural gas
properties were derived from the Richard King Field. Should the production in
this field decrease at a rate faster than anticipated, our revenues and cash
flow to make payments on the 3 Year Notes could be adversely affected. In
connection with the Richard King Field, we have partnered with Durango Resources
Corporation as operator. The failure of Durango Resources to perform its
duties as operator in the Richard King Field could prevent us from generating
revenues. In addition, events referred to as force majeure, such as an act
of God, act of a public enemy, fire, flood, lightning, etc. could prevent us
from generating revenues.
Effective
September 2009, we sold our assets located in the Aldwell Unit to Mariner
Energy, Inc., the operator, for approximately $300,000, excluding a six percent
sales commission. The Aldwell Unit accounted for the remaining balance of
our oil and natural gas revenue for the year ended December 31, 2008 and the
nine months ended September 30, 2009. As such, for the remainder of the
fiscal year, our future revenues will be derived primarily from our Richard King
Field properties.
Our
business may be harmed by failures of third party operators on which we
rely.
Our
ability to manage and mitigate the various risks associated with our operations
in Nueces County, Texas, is limited since we rely on third parties to operate
our projects. We are a non-operating interest owner in our properties. With
respect to our non-operated working interests, we have entered into agreements
with third party operators for the conduct and supervision of drilling,
completion and production operations. In the event that commercial
quantities of oil and natural gas are discovered on one of our properties, the
success of the oil and natural gas operations on that property depends in large
measure on whether the operator of the property properly performs its
obligations. The failure of such operators and their contractors to
perform their services in a proper manner could result in materially adverse
consequences to the owners of interests in that particular property, including
us.
We
cannot control activities on properties we do not operate. Our inability to fund
required capital expenditures with respect to non-operated properties may result
in a reduction or forfeiture of our interests in those properties.
Other
companies operated all of our production as of September 30, 2009. We have
limited ability to exercise influence over operations for these properties or
their associated costs. Our dependence on the operator and other working
interest owners for these projects and our limited ability to influence
operations and associated costs could prevent the realization of our targeted
returns on capital with respect to exploration, exploitation, development or
acquisition activities. The success and timing of exploration, exploitation and
development activities on properties operated by others depend upon a number of
factors determined by the operator, including:
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the timing and amount of capital
expenditures;
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the operator's expertise and
financial resources;
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approval of other participants in
drilling wells; and
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selection of drilling, completion
and production equipment.
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Where we
are not the majority owner or operator of a particular oil and natural gas
project, we may have no control over the timing or amount of capital
expenditures associated with the project. If we are not willing and able
to fund required capital expenditures relating to a project when required by the
majority owner or operator, our interests in the project may be reduced or
forfeited.
13
Because oil and
gas properties are depleting
assets we must
drill new
wells or make acquisitions
in order to maintain our production and reserves and sustain our payments of
principal and interest to the 3 Year Note holders over
time.
Producing
oil and gas reservoirs are characterized by declining production rates.
Because our reserves and production decline continually over time, we will
need to drill additional wells or make acquisitions to sustain revenue over
time. We may be unable to accomplish this if:
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Sellers do not agree to sell any
assets to us;
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we are unable to identify
attractive drilling or acquisition opportunities in our area of
operations;
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we are unable to agree on
investment terms or a purchase price for assets that are attractive to us;
or
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we are unable to obtain financing
for acquisitions on economically acceptable
terms.
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We will require
substantial capital expenditures to replace our production and reserves, which
will reduce our available cash
for interest and principal payments. We may be unable
to obtain needed capital or financing due to our financial
condition, which could
adversely affect our ability to replace our production and proved
reserves.
To fund
our projects, we will be required to use cash generated from our operations in
addition to the proceeds of this Offering. We may also engage in
additional borrowings or obtain financing from the issuance of additional equity
interests in the Company, or some combination thereof. To the extent our
production declines faster than we anticipate or the cost to acquire additional
reserves is greater than we anticipate, we will require a greater amount of
capital to maintain our production and proved reserves. The use of cash
generated from operations to fund oil and gas investments will reduce cash
available to pay interest and principal on our 3 Year Notes. Our ability
to obtain bank financing or to access the capital markets for future equity or
debt offerings may be limited by our financial condition at the time of any such
financing or offering, the covenants in our 3 Year Notes or future financing
agreements, adverse market conditions or other contingencies and uncertainties
that are beyond our control. Our failure to obtain the funds necessary for
future oil and gas investments could materially affect our business, results of
operations, financial condition and ability to pay interest and principal on the
3 Year Notes.
Any new wells in
which we participate are subject to
substantial risks that could reduce our ability to make profits from
operations.
Investments
that we believe will increase revenue, may nevertheless result in losses.
Any oil and gas investment involves potential risks, including, among
other things:
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the validity of our assumptions
about reserves, future production, revenues and costs, including
synergies;
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a decrease in our liquidity by
using a significant portion of our available cash to finance
investments;
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a significant increase in our
interest expense or financial leverage if we incur additional debt to
finance investments;
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the diversion of management’s
attention from other business concerns;
and
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an inability to hire, train or
retain qualified personnel to manage and operate our growing business and
assets.
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We
could lose our ownership interests in our properties due to a title defect of
which we are not presently aware.
As is
customary in the oil and gas industry, only a perfunctory title examination, if
any, is conducted at the time properties believed to be suitable for drilling
operations are first acquired. Before starting drilling operations, a more
thorough title examination is usually conducted and curative work is performed
on known significant title defects. We typically depend upon title opinions
prepared at the request of the operator of the property to be drilled. The
existence of a title defect on one or more of the properties in which we have an
interest could render it worthless and could result in a large expense to our
business. Industry standard forms of operating agreements usually provide that
the operator of an oil and natural gas property is not to be monetarily liable
for loss or impairment of title. The operating agreements to which we are a
party provide that, in the event of a monetary loss arising from title failure,
the loss shall be borne by all parties in proportion to their interest
owned.
The prices
of oil and
gas have
reached historic highs in
recent years and are highly
volatile. A sustained decline in these commodity prices would
cause a
decline in our cash flow from operations, which may force us to reduce
principal
and interest payments on the 3 Year Notes or cease
paying them altogether.
The oil
and gas markets are highly volatile, and future oil and gas prices are
uncertain. Oil and gas prices reached historically high levels in mid 2008, when
oil sold for over $140 per barrel and natural gas sold for over $12 per thousand
cubic feet (mcf). However, as of the date of this Offering, prices for oil and
natural gas are currently fluctuating between $60-80 per barrel and $3-5 per
mcf, less than 50% of their previous highs. Prices for oil and gas may fluctuate
widely in response to relatively minor changes in the supply of and demand for
oil and gas, market uncertainty and a variety of additional factors, such
as:
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domestic and foreign supply of
and demand for oil and gas;
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weather
conditions;
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overall domestic and global
political and economic conditions, including those in the Middle East,
Africa and South America;
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actions of the Organization of
Petroleum Exporting Countries and other state-controlled oil companies
relating to oil price and production
controls;
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the impact of increasing
liquefied natural gas, or LNG, deliveries to the United
States;
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technological advances affecting
energy consumption and energy
supply;
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domestic and foreign governmental
regulations and taxation;
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the impact of energy conservation
efforts;
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the capacity, cost and
availability of oil and gas pipelines and other transportation facilities,
and the proximity of these facilities to our wells;
and
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the price and availability of
alternative fuels.
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Our
revenue, profitability and cash flow depend upon the prices and demand for oil
and gas, and a drop in prices can significantly affect our financial results and
impede our growth. We may not be able to sustain payments of principal and
interest to the 3 Year Note holders during periods of lower commodity
prices.
Future price
declines may result in another write-down of our asset carrying values, which
could adversely affect our results of operations and limit our ability to borrow
and make payments on the
principal and interest to the 3 Year Note holders.
Due to
low commodity prices for oil and gas at December 31, 2008, we were required to
impair our assets located in the Aldwell Unit. An impairment test was conducted
using data in a reserve report prepared by a reserve engineering firm. While
conducting the impairment test, management determined that the estimated
undiscounted future net cash flow provided in the reserve report was less that
the carrying value of the Aldwell Unit on the Company’s Balance Sheet on
December 31, 2008 and that the assets were subject to impairment. The assets
were subsequently impaired.
Further
declines in oil and gas prices may result in our having to make substantial
downward adjustments to our estimated proved reserves. If this occurs, or if our
estimates of production or economic factors change, accounting rules may require
us to write down, as a noncash expense, the carrying value of our oil and gas
properties for impairments. We are required to perform impairment tests on our
assets whenever events or changes in circumstances warrant a review of our
assets. To the extent such tests indicate a reduction of the estimated useful
life or estimated future cash flows of our assets, the carrying values may not
be recoverable and therefore require write-downs. We may incur further
impairment charges in the future, which could materially affect our results of
operations in the period incurred and our ability to borrow funds, which in turn
may adversely affect our ability to generate revenues.
Our future
hedging
activities could result in financial losses or could reduce our income, which
may adversely affect our ability to repay
interest
and principal on the 3 Year Notes when due.
To
achieve more predictable cash flow and to reduce our exposure to adverse
fluctuations in the prices of oil and gas, we may enter into derivative
arrangements covering a significant portion of our oil and gas production that
could result in both realized and unrealized hedging losses.
Our
estimated proved reserves are based on many assumptions that may prove to be
inaccurate. Any material inaccuracies in these reserve estimates or underlying
assumptions will materially affect the quantities and present value of our
proved reserves.
It is not
possible to measure underground accumulations of oil or gas in an exact way. Oil
and gas reserve engineering requires subjective estimates of underground
accumulations of oil and gas and assumptions concerning future oil, natural gas
and natural gas liquid (“NGL”) prices, production levels, and operating and
development costs. In estimating our level of proved oil and gas reserves, we
and our independent reservoir engineers make certain assumptions that may prove
to be incorrect, including assumptions relating to:
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a constant level of future oil,
NGL and gas prices;
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future production
levels;
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capital
expenditures;
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operating and development
costs;
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the effects of regulation;
and
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availability of
funds.
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If these
assumptions prove to be incorrect, our estimates of proved reserves, the
economically recoverable quantities of oil, NGL and gas attributable to any
particular group of properties, the classifications of reserves based on risk of
recovery and our estimates of the future net cash flows from our proved reserves
could change significantly. Over time, we may make material changes to reserve
estimates to take into account changes in our assumptions and the results of
actual drilling and production.
The
present value of future net cash flows from our estimated proved reserves is not
necessarily the same as the current market value of our estimated proved oil and
gas reserves. We base the estimated discounted future net cash flows from our
estimated proved reserves on prices and costs in effect on the day of estimate.
However, actual future net cash flows from our oil and gas properties also will
be affected by factors such as:
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the actual prices we receive for
oil, NGL and gas;
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our actual operating costs in
producing oil, NGL and gas;
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the amount and timing of actual
production;
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the amount and timing of our
capital expenditures;
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supply of and demand for oil, NGL
and gas; and
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changes in governmental
regulations or taxation.
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The
timing of both our production and our incurrence of expenses in connection with
the production and development of oil and gas properties will affect the timing
of actual future net cash flows from proved reserves, and thus their actual
present value. In addition, the 10% discount factor we use when calculating
discounted future net cash flows in compliance with the Financial Accounting
Standards Board’s Statement of Financial Accounting Standards No. 69 may not be
the most appropriate discount factor based on interest rates in effect from time
to time and risks associated with us or the oil and gas industry in
general.
Producing oil and
gas involves numerous risks and uncertainties that could adversely affect our
financial condition or results of operations and, as a result, limit
our ability
to pay principal and
interest payments to our
3 Year Note
holders.
As
non-operated working interest owners we do not operate wells; however, we share
in the costs of production for these wells. The operating cost of a well
includes variable costs, and increases in these costs can adversely affect the
economics of a well. Furthermore, our producing operations may be curtailed or
delayed or become uneconomical as a result of other factors,
including:
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high costs, shortages or delivery
delays of equipment, labor or other
services;
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unexpected operational events
and/or conditions;
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reductions in oil, NGL and gas
prices;
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limitations in the market for
oil, NGL and gas;
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adverse weather
conditions;
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facility or equipment
malfunctions;
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equipment failures or
accidents;
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title
problems;
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pipe or cement failures or casing
collapses;
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compliance with environmental and
other governmental
requirements;
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environmental hazards, such as
gas leaks, oil spills, pipeline ruptures and discharges of toxic
gases;
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lost or damaged oilfield work
over and service tools;
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unusual or unexpected geological
formations or pressure or irregularities in
formations;
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fires;
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natural disasters;
and
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uncontrollable flows of oil, gas
or well fluids.
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If any of
these factors were to occur with respect to a particular field, we could lose
all or a part of our investment in the field, or we could fail to realize the
expected benefits from the field, either of which could materially and adversely
affect our revenue and profitability.
We may incur debt
to enable us to pay our interest and
principal payments, which may negatively affect our ability to execute our
business plan.
If we use
borrowings under a credit facility to meet 3 Year Note obligations for an
extended period of time rather than toward funding future investments and other
matters relating to our operations, we may be unable to support or grow our
business. Such a curtailment of our business activities, combined with our
payment of principal and interest on our future indebtedness to pay these
distributions, will reduce our cash available to make payments of principal and
interest on our 3 Year Notes and will materially affect our business, financial
condition and results of operations.
Our
operations are subject to operational hazards and unforeseen interruptions for
which we may not be adequately insured.
Operators
of our wells are subject to a variety of operating risks in our wells, gathering
systems and associated facilities, such as leaks, explosions, mechanical
problems and natural disasters, all of which could cause substantial financial
losses. Any of these or other similar occurrences could result in the disruption
of our operations, substantial repair costs, personal injury or loss of human
life, significant damage to property, environmental pollution, impairment of our
operations and substantial revenue losses.
We
currently possess a Business Owners insurance policy which includes property,
business interruption and general liability insurance at levels we believe are
appropriate for an early stage company; however, insurance against all
operational risk is not available to us. We are not fully insured against all
risks. In addition, pollution and environmental risks generally are not fully
insurable.
Shortages of
drilling rigs, supplies, oilfield services, equipment and crews could delay our
operations and reduce our available
cash.
To the
extent that in the future we acquire and develop undeveloped properties, higher
commodity prices generally increase the demand for drilling rigs, supplies,
services, equipment and crews, and can lead to shortages of, and increasing
costs for, drilling equipment, services and personnel. Shortages of, or
increasing costs for, experienced drilling crews and equipment and services
could restrict our future ability to drill wells and conduct operations. Any
delay in the drilling of new wells or significant increase in drilling costs
could reduce our future revenues and cash available for
distribution.
18
The
third parties on whom we rely for gathering and transportation services are
subject to complex federal, state and other laws that could adversely affect the
cost, manner or feasibility of conducting our business.
The
operations of the third parties on whom we rely for gathering and transportation
services are subject to complex and stringent laws and regulations that require
obtaining and maintaining numerous permits, approvals and certifications from
various federal, state and local government authorities. These third parties may
incur substantial costs in order to comply with existing laws and regulation. If
existing laws and regulations governing such third party services are revised or
reinterpreted, or if new laws and regulations become applicable to their
operations, these changes may affect the costs that we pay for such services.
Similarly, a failure to comply with such laws and regulations by the third
parties on whom we rely could have a material adverse effect on our business,
financial condition, and results of operations.
If third-party
pipelines and other facilities interconnected to our gas pipelines and
processing facilities become partially or fully unavailable to transport gas,
our revenues from
operations could be
adversely affected.
We depend
upon third party pipelines and other facilities that provide delivery options to
and from pipelines and processing facilities that our operators utilize. If any
of these third-party pipelines and other facilities become partially or fully
unavailable to transport gas, or if the gas quality specifications for these
pipelines or facilities change so as to restrict our operators’ ability to
transport gas on these pipelines or facilities, our revenues and cash available
to make principal and interest payments to the 3 Year Note holders could be
adversely affected.
Our
operations are subject to various litigation risks that could increase our
expenses, impact our profitability and lower the value of your investment in
us.
We are
not currently involved in any litigation; however, the nature of our operations
exposes us to possible future litigation claims. There is a risk that any claim
could be adversely decided against us, which could harm our financial condition
and results of operations. Similarly, the costs associated with defending
against any claim could dramatically increase our expenses, as litigation is
often very expensive. Possible litigation matters may include, but are not
limited to, environmental damage and remediation, insurance coverage, property
rights and easements and the maintenance of oil and gas leases. Should we become
involved in any litigation we will be forced to direct our limited resources to
defending against or prosecuting the claim(s), which could impact our
profitability and lower the value of your investment in us.
Our
business is subject to environmental legislation and any changes in such
legislation could prevent us from earning revenues.
The oil
and gas industry is subject to many laws and regulations that govern the
protection of the environment, health and safety and the management,
transportation and disposal of hazardous substances. These laws and regulations
may require the removal or remediation of pollutants and may impose civil and
criminal penalties for any violations thereof. Some of the laws and regulations
authorize the recovery of natural resource damages by the government, injunctive
relief and the imposition of stop, control, remediation and abandonment
orders.
Complying
with environmental and natural resource laws and regulations may increase our
operating costs as well as restrict the scope of our operations. Any regulatory
changes that impose additional environmental restrictions or requirements on us
could affect us in a similar manner. If the costs of such compliance or changes
exceed our budgeted costs, we may not be able to earn revenues.
19
We
may become an “investment company” as defined in the Investment Company Act of
1940.
Under the
Investment Company Act of 1940 (the “Act”), as amended, we may be deemed to be
an inadvertent investment company if it is determined that the value of the
Company’s equity investment in Meridian Resources Corporation account for more
than 40% of the total value of the Company’s assets, and no other exemption is
available. As of September 30, 2009 our investment in Meridian Resources
Corporation comprised only approximately 12.4% of total assets but this
percentage can increase in the future if the price per share of Meridian
Resources common stock increases. As well, if we make other equity investments
in other oil and gas companies, these investments will be aggregated with our
Meridian Resources investment to determine if we surpass the 40% threshold. If
so, and if we were to be deemed an inadvertent investment company, we believe
that we may be eligible for temporary relief from the application of the Act if
we have a bona fide intent to be engaged primarily, as soon as reasonably
possible (in any event within one year), in a business other than that of
investing, reinvesting, owning, holding or trading in securities. We may also
sell a number of shares of common stock of Meridian Resources or any other
future equity investments in other companies to lower the percentage below 40%.
However, we may sell such stock at times that may not be ideal for us which
adversely affect the price we receive. We do not have any current plans,
proposals or arrangements, written or otherwise, to increase our equity
investment in Meridian Resources Corporation or any other company.
Investment
companies are subject to substantial regulation concerning management,
operations, transactions with affiliated persons, portfolio composition,
including restrictions with respect to diversification and industry
concentration and other restrictions, and, unless we complied with the Act, we
would be prohibited from engaging in transactions involving interstate commerce.
To comply, we would be required to significantly modify our operating structure
and file reports with the SEC regarding various aspects of our business. The
cost of such compliance would result in the Company incurring substantial
additional annual expenses. In addition, compliance with the Act may not be
consistent with the Company’s current business strategies.
Risks
Related to this Offering
We may issue
additional debt, including notes
that are
senior to the current 3 Year Notes , without your
approval.
The
amount of additional debt that can be raised by us is not limited. We may issue
an unlimited number of notes that are senior to the 3 Year Notes without your
approval.
3
Year Note Holders will not have the same rights to vote on matters submitted to
the shareholders for consideration and approval as the holders of common
shares.
Certain
matters, such as the appointment of directors, amendment of corporate documents,
etc. must be submitted to a vote of the shareholders for approval. The 3 Year
Note Holders will not have voting rights on such matters as do the common
shareholders.
3
Year Note Holders will have very limited liquidity for their 3 Year Notes. We do
not intend nor expect to request that Southfield be listed for trading on any
exchange.
The
Company does not intend nor expect to list the 3 Year Notes registered in this
Offering for trading on any exchange or over-the-counter listing service. As a
result, the Holders of the 3 Year Notes are not expected to have any market
liquidity in their investment and should be prepared to hold the 3 Year Notes to
Maturity.
As a result of
investing in our 3 Year Notes, you
may become subject to state and local taxes.
Interest
earned on the 3 Year Notes will be taxed by the Federal and state governments in
accordance with current and future tax laws. You should expect to pay taxes at
your marginal rate for investments of this type.
Some
of our officers and directors have relationships with other companies in the oil
and natural gas industry that could result in conflicts of
interest.
Some of
our officers and directors serve as officers and directors of other companies
engaged in the oil and natural gas industry and may have other relationships
with such companies. For example, Chet Gutowsky and Tyson Rohde both serve as
officers and directors of Biotricity Corporation, an alternative energy company
located in Houston, Texas. To the extent those companies are involved in
ventures in which we may participate, or compete for acquisitions or financial
resources with us, the relevant director will face a conflict of interest. In
the event such a conflict arises, the relevant director will be required to
disclose the nature and extent of the conflict and abstain from voting for or
against any action of the board of directors that is or could be affected by the
conflict.
20
We
are dependent upon our key officers and employees and our inability to retain
and attract key personnel could significantly hinder our growth strategy and
cause our business to fail.
A loss of
one or more of our current directors, officers or key employees could severely
and negatively impact our operations and delay or preclude us from achieving our
business objectives. Our executive officers have a combined experience of
approximately 50 years in the oil and gas industry. We have not entered into
employment agreements with our officers, and we could suffer the loss of key
individuals for one reason or another at any time in the future. There is no
guarantee that we could attract or locate other individuals with similar skills
or experience to carry out our business objectives.
Our
directors and officers hold significant positions in our shares of common stock
and their interests may not always be aligned with those of our other
shareholders.
As of
September 30, 2009 our directors and officers beneficially own 18.9% of our
outstanding common stock. See “Security Ownership of Certain Beneficial Owners
and Management.” This shareholding level will allow the directors, officers and
certain beneficial owners to have a significant degree of influence on matters
that are required to be approved by shareholders, including the election of
directors and the approval of significant transactions. The short-term interests
of our directors, officers and certain beneficial owners may not always be
aligned with the long-term interests of our shareholders, and vice versa.
Because our directors, officers and certain beneficial owners have a significant
degree of influence on matters that are required to be approved by our
shareholders, they could influence the approval of transactions.
The 3 Year Notes
will not be issued under the protections of the Trust Indenture Act of
1939.
You should be aware that the Indenture is not a trust indenture qualified under
the Trust Indenture Act of 1939, as amended
(the “Indenture Act”). A qualified
trust indenture is often required for public offerings of debt securities in
principal amounts of more than $10 million. A non-qualified trust indenture may
also be required in public offerings of debt securities in principal amounts
less than $10 million. The term “qualified” relates
to mandatory provisions of a trust indenture and the requirements of
independence of the indenture trustee in relation to the entity offering the
debt securities. The presence of a qualified trust indenture and independent
indenture trustee is generally intended to provide for the collective
representation of debt investors through the monitoring activities of the
indenture trustee as to:
|
·
|
The authentication and issuance of debt
securities;
|
|
·
|
The monitoring of events of default and the taking
of remedial action by the trustee for the collective benefit of the
investors;
|
|
·
|
The maintenance of collateral which may secure the
debt security obligations;
and
|
|
·
|
Other matters relating to the terms of the debt
security issuance intended to protect investor initially and on a
continuous basis.
|
While we believe the Indenture contains some of the
terms and provisions of a qualified trust
indenture, you do not have all the protective aspects of a trust indenture and
an independent trustee and may be required to act individually on your own
behalf if we fail to make a required principal or interest payment on your 3 Year
Note.
We
have not deposited any collateral with the Trustee to secure payment of any
interest of principal on the 3 Year Notes.
We are
offering unsecured, general obligation 3 Year Notes. As such, we are not
required and have not deposited any collateral with the Trustee to secure
payment of interest and principal on 3 Year Notes. We will only reserve an
amount equal to 5% of gross proceeds from the Offering for payment of
interest.
There
may not be any money available to pay your respective 3 Year Note.
We will
issue 3 Year Notes as subscriptions are accepted by us. Each 3 Year Note will be
issued as of the acceptance date, and will mature 3 years from the date of
issuance. Your 3 Year Note may have a later maturity date than investors who
subscribed before you. It is possible that some investors who subscribed before
you will receive principal and interest payments before you, by virtue of them
subscribing to the Offering before you. We may run out of money to fulfill our
principal and interest obligations to you and other investors who subscribed at
the same time or later than you.
21
USE
OF PROCEEDS
We expect
to receive net proceeds from this Offering of approximately $8.8 million,
assuming the maximum offering of $10.0 million is raised and further assuming
that we will engage the services of a Placement Agent to assist in selling the 3
Year Notes. In such event, we estimate that we would pay Placement Agent
commissions of up to $800,000 and a non-accountable expense allowance of up to
$300,000. In addition, we will incur Other Expenses of up to $100,000. Other
Expenses below include legal, accounting and engineering fees, printing and
distribution costs for the Offering and Offering related travel and
communication costs. From the Net proceeds to Company, an amount of money will
be reserved equal to five percent of gross proceeds from the Offering for
interest payments due on the 3 Year Notes. Such interest payments will be
managed by a third party trustee (the “Trustee”), and paid as due to the 3 Year
Note holders.
Estimated
Offering expenses:
Total
Offering Amount
|
$
|
10,000,000
|
||
Sales
Commissions
|
800,000
|
|||
Non-Accountable
Expense Allowance
|
300,000
|
|||
Other
Expenses
|
100,000
|
|||
Net
Proceeds to Company
|
$
|
8,800,000
|
We intend
to use the estimated net proceeds of the Offering to first pay for operating
expenses, including management compensation related to the operation of the
Company. We then intend to use the proceeds to purchase non-operated working
interests in new and existing oil and gas projects. We may also make equity
investments in other oil and gas companies. Further, we may acquire mineral
lease interests, purchase interests in oil and gas properties with existing
production, make investments in the drilling and completion of new wells,
purchase certain oil and gas infrastructure and equipment, and use the proceeds
for other general corporate purposes. Additionally, we may also use a portion of
the proceeds of the Offering to address future capital requirements to convert
proved behind pipe reserves and proved undeveloped reserves into proved
developed producing reserves.
The goal
of management will be to maximize the returns available from the investment of
the capital raised in this Offering through an investment strategy designed to
manage risk through portfolio diversification. In order to achieve that goal,
management will reserve the right to make related investments outside of the
scope of our primary current expectations as market conditions change and as
unique opportunities present themselves. This discretion by management may allow
for the use of proceeds in ways other than those described above when management
and the Board of Directors finds it is in the best interests of the shareholders
and 3 Year Note holders to do so.
22
DESCRIPTION
OF 3 YEAR NOTES
The
complete terms of the 3 Year Notes are set forth under this Description of 3
Year Notes, Summary of Indenture the Trust Indenture and, together with the
Subscription Agreement provided to prospective investors with this prospectus,
constitute the entire agreement between us and any prospective investor with
respect to the 3 Year Notes. See “Risk
Factors” beginning on page
12 for
certain factors you should consider before buying the 3 Year Notes .
The 3 Year Notes
The 3
Year Notes that we are offering by means of this Prospectus have been authorized
by our board of directors. The 3 Year Notes are general obligation instruments
and are issued as such. The following are the terms under which the 3 Year Notes
are offered.
General
The
Offering of the 3 Year Notes pursuant to this Prospectus is limited to the
aggregate principal amount of $10,000,000. The 3 Year Notes will be issued in
denominations of at least $1,000 and multiples thereof as may be authorized by
the Company. A minimum purchase of $1,000 is required. The 3 Year Notes will
mature three years from the date of purchase.
Principal,
Interest and Type of 3 Year Notes
The 3
Year Notes will mature three years from the date of issuance. The interest rate
on the 3 Year Notes will be fixed at 10% per annum calculated based on a 365-day
year. Interest due on the 3 Year Notes will be paid to the holder of record on
the last day of each quarter on a quarterly basis in arrears. Simple interest
will accrue on the 3 Year Notes from the date of purchase when an executed
Subscription Agreement and payment is received and accepted by us or at the
office of the Placement Agent, if applicable. The issue date will be the same as
the date of purchase. Principal and interest will be paid to the holder of the 3
Year Note specified by the subscriber in the Subscription
Agreement.
The total
pay out to an investor on a $10,000 investment in a 3 Year Note will be $13,000
over its term. All payments of principal and interest will be made in U.S.
dollars.
Subordination
The 3
Year Notes are general unsecured liabilities of the Company, and will rank
junior and be subordinate in right of payment to all future senior debt. The 3
Year Notes will not be secured by liens on any of our assets. This means that if
we are unable to pay our debts when due, the 3 Year Notes would all be paid, if
at all, after any payment would be made on any senior debt.
Acceptance
An offer
of the 3 Year Notes will be accepted by the Company upon the receipt by you of a
countersigned signature page to the Subscription Agreement.
Rejection
The
Company may reject your offer of 3 Year Notes for any reason or no reason at
all. Any rejection will result in any funds tendered by you to be promptly
returned, without deduction of interest.
Restrictions
on Transfer
The
Company does not expect to list the 3 Year Notes for trading on any exchange or
listing service. It is not expected that there will be any liquid market for the
sale of the 3 Year Notes. 3 Year Note Holders should expect to hold their 3 Year
Notes until maturity.
No
personal liability of directors, officers, employees and
stockholders
No
director, officer, employee, incorporator or stockholder of the Company shall
have any liability for any obligations of the Company under the 3 Year Notes,
the prospectus for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each 3 Year Note holder waives and releases all
such liability. The waiver and release are part of the consideration for
issuance of the 3 Year Notes. Such waiver may not be effective to waive
liabilities under the federal securities laws and it is the view of the
Securities and Exchange Commission that such a waiver is against public
policy.
Voting
Rights
3 Year
Note holders will not have voting rights like those held by the owners of common
stock and will not be able to vote on the election of directors or on other
matters submitted to the shareholders for a vote by the
Corporation.
Issuance
of Additional Securities
The
Company is not restricted by the terms of the 3 Year Notes from issuing
additional equity or debt securities. As needed in the future, the Company may
sell common or preferred stock to raise capital. It may also retain additional
senior secured or subordinated debt to finance future operations. 3 Year Note
holders could be affected by future issuances of securities by the Company and
no approval by the 3 Year Note holders will be required.
Information
Returns and Audit Procedures
We intend
to furnish to each 3 Year Note Holder a copy of our annual report, upon request,
as filed with the SEC for as long as any of the 3 Year Notes remain
outstanding.
Governing
Law
The 3
Year Notes and Indenture shall be interpreted, construed and governed by and in
accordance with the laws of the state of Texas, without regard to conflicts of
laws.
SUMMARY
OF INDENTURE
The 3
Year Notes are being issued pursuant to the provisions of an Indenture which we
have entered into with an Attorney at Law licensed to practice in the State of
Texas who will act as the trustee under the Indenture. The features of the
Indenture are as follows:
Trustee
The
Company has entered into an Indenture that appoints a trustee to assist in
managing the payment of the interest and principal to the 3 Year Note holders.
Under the Indenture, the Company will establish an initial interest reserve
equal to 5% of the gross proceeds from the Offering and deposit with the Trustee
as subscriptions are received. The trustee will be obligated to facilitate
interest payments to the 3 Year Note holders, including payment under the
initial interest reserve, among other duties. In exchange, we will pay the
trustee and/or the trustee’s agents cash and/or the value of our common stock
not exceeding an aggregate of $100,000 per year. The Trustee may contract with a
Servicing Agent to assist with the administration of the 3 Year Notes including;
payment of principal and interest, registration and transfer of holders of 3
Year Notes, and administration of the interest reserve account.
Registrar
The
trustee shall cause to be kept at an office or agency, to be maintained by the
trustee or one of its agents, a register that provides for the ownership of the
3 Year Notes and any transfer thereof.
Reregistration
Upon
written request, submission of legal authorization, payment of transfer charges
and subject to Company approval, you may reregister 3 Year Notes to be held in
the name of a related entity.
23
No
Mandatory Redemption
The 3
Year Notes are not subject to any mandatory redemption. No holder of a 3 Year
Note shall have any right whatsoever to require the Company to purchase or to
redeem any 3 Year Note prior to the stated maturity date.
Optional
Redemption
The 3
Year Notes are subject to redemption at the option of the Company in whole or in
part from time to time of the principal amount plus accrued interest to such
redemption date. After one year from the date of purchase, the Company may elect
to redeem or call any or all of the 3 Year Notes at its discretion with fifteen
(15) days prior written notice to the investor.
Limitations
On Mergers
The
Company will not consolidate with or merge into any corporation or convey or
transfer its assets in their entirety or substantial entirety unless the
successor corporation expressly assumes in writing the payment of principal and
interest on all 3 Year Notes as they come due, in accordance with the covenants
in this Offering. Upon any such consolidation, merger, conveyance or transfer,
the successor corporation will succeed to and be substituted for the Company
under this prospectus and, thereafter, the Company will be relieved of all
obligations under the prospectus and 3 Year Notes.
Default
and Notice Thereof
The
occurrence of only any of the following events will constitute an event of
default:
·
|
failure for 60 days to pay the
interest when due on any of the 3 Year
Notes;
|
·
|
failure for 60 days to pay the
principal when due on any of the 3 Year
Notes;
|
·
|
failure for 60 days after notice
to perform any other covenant or agreement contained in this prospectus;
or
|
·
|
the occurrence of acts of
bankruptcy, insolvency or
reorganizations.
|
The
Company is not required to notify the 3 Year Note holders of the occurrence of
any of the above events of default known to it. Upon the occurrence of default,
the trustee may elect to send notice of said event of default to the Company.
The trustee may then pursue any available remedy granted in the Indenture and/or
by suit at law or take any other action to enforce payment of principal and
interest on the 3 Year Notes. Holders of 3 Year Notes may institute a proceeding
at law or in equity to enforce its rights under the Indenture in only limited
circumstances.
Waiver
of Default
The
trustee shall waive any event of default and rescind any declaration of maturity
of principal upon the written request of the holders of a majority in aggregate
principal amount of the 3 Year Notes then outstanding in respect of which such
default exists; provided, however, that the same shall not be waived without the
consent of the holder of each 3 Year Note so affected.
Notice
Within
ninety days after the occurrence of any event of default of which the trustee
has actual knowledge or notice, the trustee shall unless such default has been
cured or waived, mail notice thereof to each registered owner of 3 Year
Notes.
24
Amendments
Without Consent of 3 Year Note Holders
The
Indenture may be amended and supplemented from time to time when authorized by
resolution of the board of directors, without any notice to or action on the
part of the 3 Year Note holders to enter into a supplemental indenture as may or
shall be deemed necessary for any of the following purposes, among
others:
(a)
|
to
correct scrivener’s errors; and
|
(b)
|
to
add to the covenants of the Issuer for the protection of the 3 Year Note
holders.
|
Amendments
and Supplements with Consent of 3 Year Note holders.
The
Indenture may be amended or supplemented for any purpose other than those
described above, when authorized by resolution of the board of directors
provided that no such amendment or supplement shall occur without the consent of
the holder of any 3 Year Note affected thereby to extend
the maturity of such 3 Year Note, reduce the rate of interest, or otherwise
change the terms of payment of principal or interest, or impair the right of a
holder of a 3 Year Note holder to institute suit for the enforcement of payment
of principal or interest on or after the respective due date
thereof.
Notwithstanding the foregoing, anytime
that the trustee is required or requested to obtain the consent of the 3 Year
Note holders to any matter, the trustee may do so in such a manner that the
failure of a 3 Year Note holder to deliver an objection to the trustee within
twenty (20) days from the date of notice to the 3 Year Note holder shall be
deemed as the consent of such 3 Year Note holder.
Limitations
of Trustee’s Liability
The
trustee shall not be liable except in connection with the performance of such
duties as are specifically set out in the Indenture. The Company by its
execution of the Indenture and the 3 Year Note holders by their subscriptions of
the 3 Year Notes agree that the trustee shall not be responsible for any act or
omission hereunder unless due to its own gross negligence or willful
neglect.
25
MATERIAL
TAX CONSEQUENCES
The
following is a summary of certain material United States federal income tax
considerations relating to the purchase, ownership and disposition of the 3 Year
Notes, but does not purport to be a complete analysis of all the potential tax
considerations relating thereto. This summary is based upon the provisions of
the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations
promulgated or proposed thereunder, administrative pronouncements and judicial
decisions, each as of the date hereof. These authorities may be changed, perhaps
retroactively, so as to result in United States federal income tax consequences
different from those set forth below. We have not sought any ruling from the
Internal Revenue Service or an opinion of counsel with respect to the statements
made and the conclusions reached in the following summary, and there can be no
assurance that the Internal Revenue Service will agree with such statements and
conclusions. We will treat the 3 Year Notes as indebtedness for federal income
tax purposes, and the following discussion assumes that this treatment is
correct.
This
summary only applies to 3 Year Notes that meet all of the following
conditions:
·
|
they are purchased by those
initial holders who purchase the 3 Year Notes at the “issue price,” which
will equal the first price to the public (not including bond houses,
brokers or similar persons or organizations acting in the capacity of
underwriters, placement agents or wholesalers) at which a substantial
amount of the 3 Year Notes is sold for money;
and
|
·
|
they are held as capital assets
within the meaning of Section 1221 of the Code (generally, for
investment).
|
This
summary also does not address United States federal estate or gift tax laws or
the tax considerations arising under the laws of any foreign, state or local
jurisdiction. In addition, this discussion does not address all tax
considerations that may be applicable to a holder’s particular circumstances or
to holders that may be subject to special tax rules, including, without
limitation:
·
|
holders subject to the
alternative minimum tax;
|
·
|
banks, insurance companies or
other financial
institutions;
|
·
|
tax-exempt
organizations;
|
·
|
regulated investment
companies;
|
·
|
real estate investment
trusts;
|
·
|
dealers in securities,
commodities of foreign
currencies;
|
·
|
traders in securities that elect
to use a market-to-market method of accounting for their securities
holdings;
|
·
|
foreign persons or entities
(except to the extent specifically set forth
below);
|
·
|
S-corporations, partnerships or
other pass-through entities (except to the extent specifically set forth
below);
|
·
|
expatriates and certain former
citizens or long-term residents of the United
States;
|
·
|
U.S. holders (as defined below)
whose “functional currency” is not the United States
dollar;
|
·
|
persons holding 3 Year Notes as
part of a hedge, straddle or other integrated transaction for United
States federal income tax purposes;
or
|
·
|
persons deemed to sell the 3 Year
Notes under the constructive sale provisions of the
Code.
|
26
If a
partnership (or other entity taxable as a partnership for United States federal
income tax purposes) holds 3 Year Notes, the tax treatment of a partner in a
partnership generally will depend upon the status of the partner and the
activities of the partnership. If you are a partner in a partnership holding our
3 Year Notes, you should consult your tax advisor regarding the tax consequences
of the purchase, ownership and disposition of the 3 Year Notes.
THIS
SUMMARY OF CERTAIN MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS IS
FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. YOU ARE URGED TO CONSULT
YOUR TAX ADVISOR WITH RESPECT TO THE APPLICATION OF UNITED STATES FEDERAL INCOME
TAX LAWS TO YOUR PARTICULAR SITUATION AS WELL AS ANY TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE 3 YEAR NOTES ARISING UNDER UNITED
STATES FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY STATE, LOCAL,
FOREIGN OR OTHER TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX
TREATY.
Consequences
to U.S. Holders
The
following is a summary of certain material United States federal income tax
consequences that will apply to you if you are a U.S. holder of the 3 Year
Notes. As used herein, the term “U.S. holder” means a beneficial owner of the
note that is, for United States federal income tax purposes:
·
|
an individual who is a citizen or
resident of the United
States;
|
·
|
a corporation, or other entity
taxable as a corporation, created or organized in or under the laws of the
United States or of any political subdivision
thereof;
|
·
|
an estate, the income of which is
subject to United States federal income taxation regardless of its source;
or
|
·
|
a trust that: (1) is subject to
the primary supervision of a United States court and the control of one or
more United States persons; or (2) has a valid election in effect under
applicable Treasury Regulations to be treated as a United States
person.
|
Payment
of Interest
The 3
Year Notes will be issued without original issue discount for United States
federal income tax purposes. Accordingly, you generally will be required to
recognize any stated interest as ordinary income at the time it is paid or
accrued on the 3 Year Notes in accordance with your method of accounting for
United States federal income tax purposes.
Sale,
Exchange, Redemption or Other Taxable Disposition of 3 Year Notes
You
generally will recognize capital gain or loss upon the sale, exchange,
redemption or other taxable disposition of a note in an amount equal to the
difference between: (1) the sum of cash plus the fair market value of all other
property received on such disposition (except to the extent such cash or
property is attributable to accrued but unpaid interest not previously included
in income, which generally will be taxable as ordinary income) and (2) your
adjusted tax basis in the note. Your adjusted tax basis in a note generally will
equal the amount you paid for the note. Under current law, if you are a
non-corporate U.S. holder, including an individual, and have held the note for
more than one year at the time of disposition, such capital gain generally will
be subject to tax at a maximum rate of 15%, which maximum tax rate currently is
scheduled to increase to 20% for dispositions occurring during taxable years
beginning on or after January 1, 2011. Your ability to deduct capital losses may
be limited.
27
Backup
Withholding and Information Reporting
Payments
of interest and principal on 3 Year Notes held by U.S. holders and the proceeds
received upon the sale, exchange, redemption or other disposition of such 3 Year
Notes may be subject to information reporting and backup withholding. Payments
to certain holders (including, among others, corporations and certain tax-exempt
organizations) are generally not subject to information reporting or backup
withholding. If you are a U.S. holder and you are not otherwise exempt from
information reporting and backup withholding, payments to you will be subject to
information reporting and backup withholding if:
·
|
you fail to furnish your taxpayer
identification number (“TIN”), which, for an individual, is ordinarily his
or her social security number, in the manner required by the Code and
applicable Treasury
Regulations;
|
·
|
we or our agent (or other payor)
are notified by the Internal Revenue Service that the TIN you furnished is
incorrect;
|
·
|
there has been a “notified payee
underreporting” with respect to interest or dividends paid to you, as
described in the Code; or
|
·
|
you have failed to certify under
penalty of perjury that you have furnished a correct TIN and that you are
not subject to backup withholding under the
Code.
|
The
amount of any reportable payments, including interest, made to you (unless you
are an exempt recipient) and the amount withheld, if any, with respect to such
payments will be reported to and the Internal Revenue Service for each calendar
year.
You
should consult your tax advisor regarding your qualification for an exemption
from backup withholding and information reporting and the procedures for
obtaining such an exemption, if applicable. Backup withholding is not an
additional tax, and you may use amounts withheld under the backup withholding
rules as a credit against your United States federal income tax liability or may
claim a refund as long as you provide the required information to the Internal
Revenue Service in a timely manner.
Consequences
to Non-U.S. Holders
The
following is a summary of certain material United States federal income tax
consequences that will apply to you if you are a non-U.S. holder of 3 Year
Notes. The term “non-U.S. holder” means a beneficial owner of a note that is not
a U.S. holder.
Special
rules may apply to certain non-U.S. holders such as “controlled foreign
corporations” and “passive foreign investment companies.” Such entities should
consult their tax advisors to determine the United States federal, state, local
and other tax consequences that may be relevant to them.
Payment
of Interest
The 30%
United States federal withholding tax will not apply to any payment to you of
interest on a note provided that:
·
|
you do not own, actually or
constructively, 10% or more of the total combined voting power of all
classes of our stock entitled to
vote;
|
·
|
you are not a “controlled foreign
corporation” with respect to which we are, directly or indirectly, a
“related person” within the meaning of the
Code;
|
·
|
you are not a bank receiving
interest pursuant to a loan agreement entered into in the ordinary course
of your trade or business;
and
|
28
·
|
(1) you provide your name and
address, and certify, under penalties of perjury, that you are not a
United States person (which certification may be made on an Internal
Revenue Service Form W-8BEN (or successor form)); or (2) a securities
clearing organization, bank, or other financial institution that holds
customers’ securities in the ordinary course of its business holds the
note on your behalf and certifies, under penalties of perjury, that it has
received Internal Revenue Service Form W-8BEN from you or form another
qualifying financial institution intermediary, and, in certain
circumstances, provides a copy of the Internal Revenue Service Form
W-8BEN. If you hold your 3 Year Notes through certain foreign
intermediaries or certain foreign partnerships, such foreign
intermediaries or partnerships must also satisfy the certification
requirements of applicable Treasury
Regulations.
|
If you
cannot satisfy the requirements described above, you will be subject to the 30%
United States federal withholding tax with respect to payments of interest on
the 3 Year Notes, unless you provide us with a properly executed (1) Internal
Revenue Service Form W-8BEN (or successor form) claiming an exemption from or
reduction in withholding under the benefit of an applicable United States income
tax treaty or (2) Internal Revenue Service Form W-8ECI (or successor form)
stating that the interest paid on the note is not subject to withholding tax
because it is effectively connected with your conduct of a trade or business in
the United States.
If you
are engaged in a trade or business in the United States and interest on a note
is effectively connected with your conduct of that trade or business, you will
be subject to United States federal income tax on that interest on a net income
basis (although you will be exempt from the 30% withholding tax, provided the
certification requirements described above are satisfied) in the same manner as
if you were a United States person as defined under the Code, except as
otherwise provided by an applicable United States income tax treaty. In
addition, if you are a foreign corporation, you may be subject to a branch
profits tax equal to 30% (or lower applicable treaty rate) of your earnings and
profits for the taxable year, subject to adjustments, that are effectively
connected with your conduct of a trade or business in the United States. For
this purpose, interest will be included in the earnings and profits of such
foreign corporation.
Sale,
Exchange, Redemption or Other Taxable Disposition of 3 Year Notes
Any gain
realized upon the sale, exchange, redemption or other taxable disposition of a
note (except with to accrued and unpaid interest, which would be taxable as
described above) generally will not be subject to United States federal income
tax unless:
·
|
that gain is effectively
connected with your conduct of a trade or business in the United States;
or
|
·
|
you are an individual who is
present in the Unites States for 183 days or more in the taxable year of
that disposition, and certain other conditions are
met.
|
If your
gain is effectively connected with your conduct of a United States trade or
business, you generally will be subject to United States federal income tax on
the net gain derived from the sale, exchange, redemption or other disposition,
except as otherwise required by an applicable United States income tax treaty.
If you are a corporation, any such effectively connected gain received by you
may also, under certain circumstances, be subject to the branch profits tax at a
30% rate (or such lower rate as may be prescribed under an applicable United
States income tax treaty). If you are described in the second bullet point
above, you will be subject to a 30% United States federal income tax on the gain
derived from the sale, exchange, redemption or other disposition, which may be
offset by United States source capital losses, even though you are not
considered a resident of the United States.
Backup
Withholding and Information Reporting
If you
are a non-U.S. holder, in general, you will not be subject to backup withholding
and information reporting with respect to payments that we make to you provided
that we do not have actual knowledge or reason to know that you are a United
States person, as defined under the Code, and you have given us the statement
described above under “Consequences to Non-U.S. Holders – Payments of Interest.”
In addition, you will not be subject to backup withholding or information
reporting with respect to the proceeds of the sale of a note within the United
States or conducted through certain United States-related financial
intermediaries, if the payor receives the statement described above and does not
have actual knowledge or reason to know that you are a United States person, as
defined under the Code, or you otherwise established an
exemption. However, we may be required to report annually to the
Internal Revenue Service and to you the amount of, and the tax withheld with
respect to, any interest paid to you, regardless of whether any tax was actually
withheld. Copies of these information returns may also be made
available under the provisions of a specified treaty or agreement to the tax
authorities of the country in which you reside.
29
You
generally may be entitled to credit any amount withheld under the backup
withholding rules against your United States federal income tax liability
provided that the required information is furnished to the Internal Revenue
Service in a timely manner.
CIRCULAR
230: ANY DISCUSSION OF UNITED STATES FEDERAL TAX ISSUES SET FORTH
HEREIN WAS WRITTEN IN CONNECTION WITH THE PROMOTION AND MARKETING OF THE
OFFERING DESCRIBED HEREIN. SUCH DISCUSSION IS NOT INTENDED OR WRITTEN
TO BE LEGAL OR TAX ADVICE TO ANY PERSON AND IS NOT INTENDED OR WRITTEN TO BE
USED, AND IT CANNOT BE USED, BY ANY PERSON FOR THE PURPOSE OF AVOIDING UNITED
STATES FEDERAL TAX PENALTIES THAT MAY BE IMPOSED ON SUCH PERSON. EACH
PROSPECTIVE PURCHASER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES
FROM AN INDEPENDENT TAX ADVISOR.
30
CAPITALIZATION
The
following table sets forth (i) our capitalization at September 30, 2009 and (ii)
our pro forma capitalization giving effect to the receipt of the gross proceeds
from the sale of the 3 Year Notes, assuming no subscriptions and assuming the
maximum aggregate Offering of $10 million is raised, as if the sale of the 3
Year Notes occurred on September 30, 2009. The 3 Year
Notes are being offered on a no-minimum, best efforts basis. This table is based
on, and is qualified in its entirety by, our historical financial statements,
including the related notes, which are included elsewhere in this
prospectus. This table should be read in conjunction with these
financial statements.
Actual
|
Pro Forma
No
Subscriptions
|
Pro Forma
Fully
Subscribed
|
||||||||||
Total
Liabilities:
|
$ | 2,040,575 | $ | 2,040,575 | $ | 12,040,575 | ||||||
Stockholders’
equity:
|
||||||||||||
Common
stock, par value $0.001 per share; 50,000,000 shares
authorized;
7,410,000
shares issued and outstanding
|
$ | 7,410 | $ | 7,410 | $ | 7,410 | ||||||
Additional
paid-in capital
|
$ | 99,373 | $ | 99,373 | $ | 99,373 | ||||||
Deficit
accumulated during the development stage
|
$ | (24,718 | ) | $ | (24,718 | ) | $ | (24,718 | ) | |||
Accumulated
deficit
|
$ | (1,296,522 | ) | $ | (1,296,522 | ) | $ | (1,296,522 | ) | |||
Total
stockholders’ deficit
|
$ | (1,214,457 | ) | $ | (1,214,457 | ) | $ | (1,214,457 | ) | |||
Total
capitalization
|
$ | 826,118 | $ | 826,118 | $ | 10,826,118 |
31
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and
analysis should be read in conjunction with the financial statements and related
notes included elsewhere in this prospectus. The following discussion and
analysis contains forward-looking statements that reflect our future plans,
estimates, beliefs and expected performance. The forward-looking statements are
dependent upon events, risks and uncertainties that may be outside our control.
Our actual results could differ materially from those discussed in these
forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, the volatility
of oil, NGL and
gas prices, production timing
and volumes, estimates of proved reserves, operating costs and capital
expenditures, economic and
competitive conditions, regulatory changes and other uncertainties, as well as
those factors discussed below and elsewhere in this prospectus, particularly in
“Risk Factors” and “Cautionary Statement Regarding Forward-Looking
Statements,” all of which are difficult to predict. As a result of these risks,
uncertainties and assumptions, the forward-looking events discussed may not
occur.
Overview
Southfield
Energy Corporation, a Nevada corporation formed in July 2005, is a Houston,
Texas based company engaged in the investment in acquisition, exploration and
development of moderate risk, oil and gas wells in the United
States. The Company’s core strategy is to earn revenue from existing
non-operated working interests while investing in new opportunities to increase
our oil and gas production and reserves; primarily through acquisitions of
existing production and working interest investments in drilling programs of
experienced and successful oil and gas operators active in Texas, Louisiana and
Oklahoma.
Recent
Developments
Equity
Investment
In
September and October 2008, we purchased an aggregate of 350,000 shares of
common stock of Meridian Resources Corporation, an exploration and production
company whose shares trade on the New York Stock Exchange under the ticker
symbol “TMR.” As of December 31, 2008, we incurred an unrealized
holding loss of $325,465 on our investment. As of December 31, 2008, the net
market value of our TMR investment was $199,500, comprising approximately 22.2%
of total assets. In June 2009, we sold an aggregate of 100,000 shares
of common stock of Meridian Resources Corporation and realized a loss of
$134,096. We currently have 250,000 shares of common stock of
Meridian Resources Corporation remaining. We do not have any current plans,
proposals or arrangements, written or otherwise, to increase our equity
investment in Meridian Resources Corporation or any other company. As of
September 30, 2009 we determined the decline in value of the Meridian shares to
be other than temporary. Based on this determination the shares were adjusted to
their market value as of September 30, 2009 of $102,500. The difference between
the cost and market value of the shares was recorded as impairment expense for
$243,095.
Aldwell
Unit
Due to
low commodity prices for oil and gas at December 31, 2008, we were required to
impair our assets located in the Aldwell Unit. An impairment test was conducted
using data in a reserve report prepared by a reserve engineering firm. While
conducting the impairment test, management determined that the estimated
undiscounted future net cash flow provided in the reserve report was less that
the carrying value of the Aldwell Unit on the Company’s Balance Sheet on
December 31, 2008 and that the assets were subject to impairment. The assets
were subsequently impaired by taking the difference between the discounted
future net cash flow, using a 10% discount rate, which was estimated by the
reserve engineer and the carrying value of the assets on the Company’s Balance
Sheet. Management found the difference to be $116,553 and impaired the Aldwell
Unit by that amount.
Effective
September 2009, we sold our assets located in the Aldwell Unit to Mariner
Energy, Inc., the operator, for approximately $300,000, excluding a six percent
sales commission. The Aldwell Unit accounted for approximately 20% of
our oil and natural gas revenue for the year ended December 31, 2008 and the
nine months ended September 30, 2009. As such, for the remainder of
the fiscal year, our future revenues will be derived primarily from our Richard
King Field properties.
32
Durango
Resources
Since
partnering with Durango Resources, we have participated in the drilling and
completion of five commercially viable oil and gas wells on the Mary King Estell
lease in the Richard King Field in Nueces County, Texas. All of the wells were
drilled to depths less than 6,500 feet, and are currently producing natural gas
at various rates. We have not made any unsuccessful investments in this field
and have thus far completed all of the wells that we have drilled. These wells
produce gas from the Frio formation and constitute all of our
revenues. Our share of production from these wells was 486 barrels of
oil equivalent in 2007 and 5,970 barrels of oil equivalent in 2008. Durango
Resources has identified additional drilling locations that are adjacent to our
current producing wells and has plans for additional drilling over the next
twelve to twenty four months. We anticipate investing in additional
wells with Durango should the opportunity arise.
Results
of Operation
Three
and Nine Months Ended September 30, 2009 Compared to September 30,
2008
Revenues. Total
revenues before the inclusion of Discontinued Operations decreased by $98,202
and $209,246 for the three and nine months ended September 30, 2009
respectively, as compared to the three and nine months ended September 30, 2008,
due to a decrease in oil and gas prices and as a result of a decrease in our
total oil and gas production from the Aldwell Unit and the Richard King Field.
Details of production and oil and gas prices are listed in the Revenues and
Production table below.
Production costs.
Production costs before the inclusion of Discontinued Operations
decreased by $16,277 and increased by $7,235 for the three and nine months
ended September 30, 2009 respectively, as compared to the three and nine months
ended September 30, 2008. As a percentage of revenue, however, our
production costs increased from 21% to 51% and from 9% to 67% for the three
and nine months ended September 30, 2009 respectively, as compared to the three
and nine months ended September 30, 2008. Because of reductions in oil and gas
prices and our production rates, the decrease in our revenues was much larger
than any change in our production costs, and therefore our production costs as a
percentage of revenue increased for the respective periods.
Depreciation, depletion and
amortization (“DD&A”) expense. For the nine months ended
September 30, 2008 and September 30, 2009, the company incurred depreciation,
depletion and amortization on its remaining proved property, the Richard King
Field lease, of $10,078 and 24,834, respectively. This was due to an increase in
our capitalized expenses in proved properties. Depreciation, depletion, and
amortization have been calculated using the units of production
method.
G&A expense.
G&A expense increased from $172,034 for the nine months ended
September 30, 2008 to $347,887 for the nine months ended September 30, 2009.
This increase was primarily due to increases in rent and salaries &
benefits, which increased by approximately $12,300 and $119,300 respectively. In
these periods the rent increased because we were utilizing more office space;
and salaries increased to provide management with remuneration that more closely
reflected market values. G&A expense also increased from $86,884
for the three months ended September 30, 2008 to $120,201 for the three months
ended September 30, 2009. This increase can be attributed primarily to increases
in legal and accounting expenses related to costs associated with this offering
totaling approximately $37,800.
Income taxes.
Southfield experienced losses during these periods and was not
subject to federal income taxes.
Year
Ended December 31, 2008 Compared to December 31, 2007
Revenues and production.
The following table illustrates the primary components of revenues,
production volumes and realized prices for the periods noted.
2007
|
2008
|
|||||||||||||||||||||||
Production
(BOE)
|
Avg. Price
per BOE ($)
|
Total
Revenues ($)
|
Production
(BOE)
|
Avg. Price
per BOE ($)
|
Total
Revenues ($)
|
|||||||||||||||||||
Aldwell
Unit
|
1,064 | 50.50 | 53,732 | 1,157 | 55.49 | 64,200 | ||||||||||||||||||
Richard
King
|
486 | 50.50 | 24,544 | 5,970 | 55.49 | 331,274 | ||||||||||||||||||
TOTAL
|
1,550 | 50.50 | 78,276 | 7,127 | 55.49 | 395,474 |
33
Revenues. Total
revenues increased by $317,198 for the year ended December 31, 2008, as
compared to the year ended December 31, 2007, due to an increase in oil and
gas prices and as a result of an increase in our total oil and gas production
from successfully drilling developmental wells in the Aldwell Unit and the
Richard King Field. Production in the Aldwell Unit increased from 1,064 barrels
of oil equivalent (BOE) to 1,157 BOE; and production in the Richard King Field
increased from 486 BOE to 5,970 BOE. Addtionally, the average price per BOE
increased from $50.50 in 2007 to $55.49 in 2008.
Production. Our
average monthly production increased from 129 Barrels of Oil Equivalent (“BOE”)
in 2007 to 594 BOE in 2008. Most wells produce at higher initial rates and their
production declines as they deplete over time. Our monthly production increased
because we participated in the successful drilling and completion of 27 new
wells in the Aldwell Unit and 2 wells in the Richard King Field in
2008.
Production costs.
Production costs increased from $20,090 to $54,218 during
the years ended December 31, 2007 and 2008, respectively. As a
percentage of revenue, however, our production costs decreased from 26% to 14%.
Because of increases in oil and gas prices and our production rates, our
revenues increased over the respective periods by more than the increase in our
production costs, and therefore our production costs as a percentage of revenue
decreased for the respective periods.
Depreciation, depletion and
amortization (“DD&A”) expense. DD&A expense increased
from $9,896 to $56,572 during the years ended December 31, 2007
and 2008, respectively. This was due to an increase in our
capitalized expenses in proved properties and a higher depletion rate of our
production in 2008 as compared to 2007.
G&A expense.
Our general and administrative expense was $85,256 for 2007 and
$273,143 for 2008. These expenses include rent, office expenses, travel
expenses, salaries for employees, and benefits for employees. This increase can
be attributed primarily to increases in rent and salaries, which increased by
approximately $15,000 and $201,000 respectively. In these periods the rent
increased because we were utilizing more office space; and salaries increased to
provide management with remuneration necessary for their
retention.
34
Income taxes.
Southfield experienced losses in 2007 and 2008 and was not subject
to federal income taxes.
During
May 2006, the State of Texas enacted legislation that changed the existing Texas
franchise tax from a tax based on net income or taxable capital to an income tax
based on a defined calculation of taxable margin (the Texas Margin tax).
Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting
for Income Taxes,” requires that deferred tax balances be adjusted to reflect
tax rate changes during the periods in which the tax rate changes are
enacted.
Liquidity
and Capital Resources
Historically,
we have financed our operations through the sale of debt and equity securities
and cash generated from operations. As of September 30, 2009 we had
$293,046 of cash and cash equivalents, a working capital deficit of $77,529 and
a total stockholders’ deficit of $1,214,457. Our expenses exceeded
our revenues for the nine months ended September 30, 2009; thus, we have
incurred a net loss of $818,925 for the nine months ended September 30,
2009..
Our
current burn rate is approximately $30,000 per month. Our available
cash will support our operations at current levels through March
2010. We will need to raise money through the Offering to fund our
business plan and support our operations after March 2010. The
length of time we are able to operate is contingent on the amount of money we
raise through our Offering. We offer no assurance that we will be
able to raise any amount of money through the Offering. To the extent
we are able to raise an amount of money in the Offering to cover our operating
expenses, we plan to invest the proceeds in additional working interests in
existing oil and gas production as well as new oil and gas
wells. Because our proved reserves and production decline continually
over time, we will need to make additional investments in oil and gas projects
to sustain our level of revenue. The report of our independent auditors with
regard to our financial statements for the fiscal year ended December 31, 2008
includes a going concern qualification. Although we have successfully
funded our operations to date by attracting investors to our equity and debt,
there is no assurance that our capital raising efforts will be able to attract
additional necessary capital for our operations. If we are unable to
obtain additional funding for operations at any time now or in the future, we
may not be able to continue operations as proposed, requiring us to modify our
business plan, curtail various aspects of our operations, sell our assets or
cease operations.
From
September 2009 through the date of this Offering, the Company provided existing
Debenture holders the option of extending the maturity dates on their Debentures
by either one or two years. The following table provides the dollar amount of
debentures due in the next five years after taking into account the debenture
extensions:
Maturities of Notes over the next five
years ended September 30, 2009
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
|||||||||||||||||||
Debenture
Maturities
|
0 | 164,000 | 577,000 | 650,000 | 305,000 | 138,000 |
Cash
Flows
Operating activities . Net
cash used in operating activities for the nine months ended September 30, 2009
as compared to the nine months ended September 30, 2008 was $354,174 and
$340,945, respectively. We incurred an impairment of available for sale
securities of $243,095; a loss on the sale of available for sale securities of
$134,096; amortization of loan and debenture costs of $105,753; depreciation,
depletion and amortization costs of $24,834; a reduction in accounts payable of
$26,598; and increases in accrued expenses, receivables, and prepaid expenses of
$96,738, $41,226, and $30,933, respectively.
Investing activities
. Net cash provided / (used) in investing activities for the nine
months ended September 30, 2009 as compared to the nine months ended September
30, 2008 was $202,725 and $(384,010), respectively. Our capitalized investment
in proved leaseholds increased from $50,286 to $133,147. The primary reason for
the increase in cash flows from investing activities was due to the sale of our
discontinued operations, the Aldwell Unit, which provided us $300,000. Additions
to the Aldwell unit prior to its disposal accounted for negative cash flows
related to investing of $9,401 during the nine months ended September 30,
2009.
Financing activities
. Net cash provided from financing activities for the nine months
ended September 30, 2009 as compared to the nine months ended September 30, 2008
was $300,891 and $493,983, respectively. This change was primarily due to a
decrease in debenture sales from $590,000 to $352,000 for the respective
periods.
Outlook
Significant
factors that may impact future commodity prices include developments in the
issues currently impacting the Middle East, Africa and South America in general;
the extent to which members of the Organization of Petroleum Exporting Countries
(“OPEC”) and other oil exporting nations are able to continue to manage oil
supply through export quotas; and overall North American gas supply and demand
fundamentals, including the impact of increasing liquefied natural gas (“LNG”)
deliveries to the United States and political and regulatory changes by the U.S.
government. Generally, the prices for any commodity that we produce
will approximate market prices in the geographic region of the
production.
35
Our
future oil and gas reserves, production, cash flow and ability to make
principal and interest payments on the 3 Year Notes depend on our
success in producing our current reserves efficiently and acquiring additional
proved reserves economically. We expect to pursue acquisitions of
producing oil and gas properties, invest in working interests in new wells and
to acquire lease rights and royalty rights to oil and gas
properties.
Contractual
Obligations
Payments Due By Period
|
||||||||||||||||||||
Contractual Obligations
at December 31, 2008
|
Total
|
Less than
1 year
|
1-3 years
|
3-5 years
|
More than
5 years
|
|||||||||||||||
Convertible
Debentures
|
$ | 1,482,000 | $ | 304,000 | $ | 1,178,000 | $ | 0 | $ | 0 | ||||||||||
Total
|
$ | 1,482,000 | $ | 304,000 | $ | 1,178,000 | $ | 0 | $ | 0 |
Off-Balance
Sheet Arrangements
We have
no significant off-balance sheet arrangements that have or are
reasonably likely to have a current or future affect on our financial condition,
revenues or expense, results of operations, liquidity, capital expenditures or
capital resources that are material to our shareholders.
Critical
Accounting Estimates
We
prepared our financial statements in accordance with GAAP. GAAP represents
a comprehensive set of accounting and disclosure rules and requirements, the
application of which requires management judgments and estimates including, in
certain circumstances, choices between acceptable GAAP alternatives. Following
is a discussion of our most critical accounting estimates, judgments and
uncertainties that are inherent in the application of GAAP.
Asset retirement obligations.
We have significant obligations to remove tangible equipment and
facilities and to restore land at the end of oil and gas production operations.
Our removal and restoration obligations are primarily associated with plugging
and abandoning wells. Estimating the future restoration and removal costs is
difficult and requires management to make estimates and judgments because most
of the removal obligations are many years in the future and contracts and
regulations often have vague descriptions of what constitutes removal. Asset
removal technologies and costs are constantly changing, as are regulatory,
political, environmental, safety and public relations
considerations.
Inherent
in the present value calculation are numerous assumptions and judgments
including the ultimate settlement amounts, inflation factors, credit adjusted
discount rates, timing of settlement and changes in the legal, regulatory,
environmental and political environments. Changes in any of these estimates can
result in revisions to the estimated asset retirement obligation. Revisions to
the estimated asset retirement obligation are recorded with an offsetting change
to the carrying amount of the related oil and gas properties, resulting in
prospective changes to depletion and accretion expense. Because of the
subjectivity of assumptions and the relatively long life of most of our oil and
gas properties, the costs to ultimately retire these assets may vary
significantly from our estimates.
Successful efforts method of
accounting. We utilize the successful efforts method of
accounting for oil and gas producing activities as opposed to the full cost
method. The critical difference between the successful efforts method of
accounting and the full cost method is as follows: under the successful efforts
method, exploratory dry holes and geological and geophysical exploration costs
are charged against earnings during the periods in which they occur, whereas,
under the full cost method of accounting, such costs and expenses are
capitalized as assets, pooled with the costs of successful wells and charged
against the earnings of future periods as a component of depletion
expense.
36
Proved reserve estimates.
Estimates of our proved reserves included in this prospectus are
prepared in accordance with GAAP and SEC guidelines. The accuracy of a reserve
estimate is a function of:
|
•
|
The quality and quantity of
available data;
|
|
•
|
The interpretation of that
data;
|
|
•
|
The accuracy of various mandated
economic
assumptions; and
|
|
•
|
the judgment of the persons
preparing the estimate.
|
Proved
reserve information included in this prospectus as of December 31, 2007,
and 2008 was prepared by Huddleston and Company, an independent engineering
firm. Estimates prepared by Huddleston and Company may be higher or lower than
actual reserves. Because these estimates depend on many assumptions,
all of which may substantially differ from future actual results, reserve
estimates will be different from the quantities of oil and gas that are
ultimately recovered. In addition, results of drilling, testing and production
after the date of an estimate may justify, positively or negatively, material
revisions to the estimate of proved reserves.
It should
not be assumed that the standardized measure included in this prospectus as of
December 31, 2008 is the current market value of our estimated proved
reserves. In accordance with SEC requirements, we based the standardized measure
on prices and costs on the date of the estimate. Actual future prices and costs
may be materially higher or lower than the prices and costs as of the date of
the estimate.
Our
estimates of proved reserves materially impact depletion expense. If the
estimates of proved reserves decline, the rate at which we recognize depletion
expense will increase, reducing future net income. Such a decline may result
from lower market prices, which may make it uneconomical to drill for and
produce higher cost fields. In addition, a decline in proved reserve estimates
may impact the outcome of our assessment of our proved properties for
impairment.
Impairment of proved oil and gas
properties. We review our proved properties to be held and
used whenever management determines that events or circumstances indicate that
the recorded carrying value of the properties may not be recoverable. Management
assesses whether or not an impairment provision is necessary based upon its
outlook of future commodity prices and net cash flows that may be generated by
the properties and if a significant downward revision has occurred to the
estimated proved reserves. If the sum of the undiscounted future net cash flows
of a proved producing property is less than the carrying value of the proved
producing property, then an impairment is made to reduce the value at which
those assets are carried on our balance sheet.
Environmental contingencies.
Our management makes judgments and estimates in recording
liabilities for ongoing environmental remediation. Actual costs can vary from
such estimates for a variety of reasons. Environmental remediation liabilities
are subject to change because of changes in laws and regulations, developing
information relating to the extent and nature of site contamination and
improvements in technology. Under GAAP, a liability is recorded for these
types of contingencies if we determine the loss to be both probable and
reasonably estimable.
New
Accounting Pronouncements
We
adopted the Financial Accounting Standards Board’s (FASB) Standard related to
fair value measurement at inception. The standard defines fair value,
establishes a framework for measuring fair value and expands disclosure of fair
value measurements. The standard applies under other accounting pronouncements
that require or permit fair value measurements and accordingly, does not require
any new fair value measurements. The standard clarifies that fair value is an
exit price, representing the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement that should be
determined based on assumptions that market participants would use in pricing an
asset or liability. As a basis for considering such assumptions, the standard
established a three-tier fair value hierarchy, which prioritizes the inputs used
in measuring fair value as follows.
37
|
•
|
Level 1. Observable inputs such
as quoted prices in active
markets;
|
|
•
|
Level 2. Inputs, other than the
quoted prices in active markets, that are observable either directly or
indirectly; and
|
|
•
|
Level 3. Unobservable inputs in
which there is little or no market data, which require the reporting
entity to develop its own
assumptions.
|
38
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
primary objective of the following information is to provide forward-looking
quantitative and qualitative information about our potential exposure to market
risks. The term “market risks” refers to the risk of loss arising from changes
in commodity prices and interest rates. The disclosures are not meant to be
precise indicators of expected future losses, but rather indicators of
reasonably possible losses. This forward-looking information provides indicators
of how we view and manage our ongoing market risk exposures.
Due to
the historical volatility of commodity prices, we may elect to enter into
various derivative instruments to manage our exposure to volatility of commodity
market prices. We may use options (including floors and collars) and fixed price
swaps to mitigate the impact of downward swings in commodity prices on our cash
available for distributions. All contracts will be settled with cash and do not
require the delivery of physical volumes to satisfy settlement. While in times
of higher commodity prices this strategy may result in our having lower net cash
inflows than we would otherwise have if we had not utilized these instruments,
management believes the risk reduction benefits of this strategy outweigh the
potential costs. As of the date of this prospectus, we have not entered into any
derivative instruments.
We may
borrow under fixed rate and variable rate debt instruments that give rise to
interest rate risk. Our objective in borrowing under fixed or variable rate debt
would be to satisfy capital requirements while minimizing our costs of capital
. If we borrow under
variable rate debt, any increase in interest rates would increase our future
interest expense. We may thus enter into various derivative instruments to
manage our exposure to such interest rate risk. As of the date of this
prospectus, we have not entered into any derivative
instruments.
39
BUSINESS
Overview
We are an
independent energy company based in Houston, Texas that invests in the
exploration, development, and production of moderate risk oil and gas projects
in the United States. We focus on partnering alongside operators with
substantial experience. The Company’s core strategy is to earn revenue from
existing non-operated working interests while investing in proven producing
fields and drilling programs primarily in Texas, Louisiana and
Oklahoma. We do not have any subsidiaries.
We
currently focus our efforts on investments in oil and natural gas properties
under the Mary King Estell lease in the Richard King Field area of Nueces
County, Texas. We intend on building our business by acquiring additional
non-operated working interests in productive oil and natural gas wells and other
oil and gas interests. A non-operated working interest grants us a proportionate
share of the property’s oil and gas production, and requires us to pay a
proportionate share of the costs associated with drilling and production without
acting as the operator of the property’s wells.
Non-operated
Working Interest
We will
generally invest as a non-operated working interest owner. A working interest
owner pays its pro-rata portion of the cost of leasing, drilling, completing,
and operating the well. Collectively, the working interest owners pay 100% of
these costs. We expect to invest in projects under common industry terms often
referred to as “a third for a quarter.” Under this structure, non-operated
working interest investors typically incur 100% of the leasing, drilling and
completion costs and receive 75% of the leasehold or “working” interest of the
project. The structure is so named because, in the case where a single operator,
acting as a “promoter,” transfers 75% of the working interest in equal
proportion to three non-operating working interest owners, each such
non-operating working interest owner would pay one third of the expenses in
exchange for one-fourth of the working interest in each well. For example, if
the net revenue interest attributable to the entire leasehold estate is 75% ,
then the non-operating working interest owners would receive three quarters of
75% or 56.25%, which would usually be divided pro-rata among such owners in
proportion to their respective working interests.
This
investment strategy provides us with multiple advantages as we build the value
of Southfield. First, it allows us to balance the risk of failure in any one
well (i.e., drilling a dry hole) by investing a smaller amount in a larger
number of wells. In the oil and gas business, results of drilling programs can
vary significantly. We plan to participate in wells that we determine have a
high probability of successfully finding and producing oil or gas.
Because
we are a small, early stage oil and gas company, we will invest in the drilling
of wells that are relatively inexpensive compared to the projects undertaken by
the major oil companies. While some wells cost tens of millions of dollars to
drill and complete, we will invest in wells that are far less costly to exploit.
This limits the amount that we would potentially lose from any individual,
unsuccessful well.
We will
generally use outside consultants to evaluate each potential investment prior to
making an investment decision. These consultants will consist of petroleum
engineers, industry professionals and geologists who will assist
with:
|
·
|
evaluation of the geological
characteristics of the drilling
target;
|
|
·
|
analysis of the reservoir
characteristics for the prospective
well;
|
|
·
|
evaluation of other nearby,
analogous wells and production
zones;
|
|
·
|
synthesis of costs and revenue
projections to determine economic viability,
and
|
|
·
|
overall financial evaluation of
the project to determine its expected
return.
|
40
Equity
Investments
We also
make equity investments in other oil and gas companies. In September
and October 2008, we purchased an aggregate of 350,000 shares of common stock of
Meridian Resources Corporation, an exploration and production company whose
shares trade on the New York Stock Exchange under the ticker symbol
“TMR.” As of December 31, 2008, we incurred an unrealized holding
loss of $325,465 on our investment. As of December 31, 2008, the net
market value of our TMR investment was $199,500, comprising approximately 22.2%
of total assets. Although we do not own equity investments in any
other company, we may buy such equities we feel are undervalued in the
future. In June 2009, we sold an aggregate of 100,000 shares of
Meridian Resources Corporation and realized a loss of $134,096. We
currently have 250,000 shares of common stock of Meridian Resources Corporation
remaining. We make no assurance that we will realize a profit on our
TMR investment or in any of our future equity investments. We do not have any
current plans, proposals or arrangements, written or otherwise, to increase our
equity investment in Meridian Resources Corporation or any other company. As of
September 30, 2009 we determined the decline in value of the Meridian shares to
be other than temporary. Based on this determination the shares were adjusted to
their market value as of September 30, 2009 of $102,500. The difference between
the cost and market value of the shares was recorded as impairment expense for
$243,095.
Our
Strategy
We
believe that several factors that currently exist in this industry have created
a good opportunity for investors to realize attractive returns from well-managed
investments in oil and gas. Factors that we consider important to our
operations include:
|
•
|
Rising world demand for oil and
gas products over the next
decade;
|
|
•
|
Rapidly depleting world reserves
of oil and gas;
|
|
•
|
The need for the U.S. to import
significant amounts of both oil and
gas;
|
|
•
|
Political instability in oil
producing countries that tends to increase the cost of
energy;
|
|
•
|
Limited production and refining
capacity which will prevent the industry from over producing in the
foreseeable future; and
|
|
•
|
Growing world population combined
with the increased worldwide use of
energy.
|
Our plan
includes an investment strategy that we believe will significantly reduce risk
while creating profits for our shareholders. Our investment strategy
manages risk by the implementation of the following investment
guidelines:
•
|
We will diversify our investment
in oil and gas projects by typically investing between five to twenty five
percent in the cost of any individual
project;
|
|
•
|
We have focused our early
investments on lower-cost drilling opportunities in the U.S. for shallow
gas and oil;
|
|
•
|
Our investment per well is
expected to continue to range from $50,000 to
$250,000;
|
|
•
|
We will typically invest in
non-operated interests in wells so that we do not have to hire
technical operating personnel or manage the day-to-day operation of
our wells; and
|
|
•
|
Investments will typically be
reviewed by outside consultants consisting of seasoned petroleum
engineers, geologists and oil & gas
investors.
|
Competition
and markets
The oil
and gas industry is a mature, well developed industry with several major
companies and hundreds of independent companies competing for
opportunities. The projects in which we will invest are not typically
projects that would be large enough to attract the major oil
companies. Therefore, the major oil companies are generally not our
competition. There were approximately 1,500 drilling rigs operating
onshore in the United States in 2006. Today, there are about 1,100 to
1,200 drilling rigs operating. We will partner with proven
independent oil and gas companies to participate in the exploration and
development of moderate-risk, oil and gas reserves. By investing as a
non-operated working interest owner, we turn potential competitors into
partners. In other words, our business model is to find successful
operators and invest in five to twenty five percent of their
projects. We expect they will welcome us as investment partners
because this allows them to develop their properties more quickly by drilling
more wells and diversifying their risk.
41
Although
Southfield competes directly and indirectly with all exploration, development
and production companies; we experience heightened competition from other
non-operated working interest investors. Because there are a finite number of
oil and gas investments that are available at any given time to non-operated
working interest investors, we compete directly with other investment capital
derived from private and corporate sources. Some of the larger non-operated
working interest investors in Texas include Five States Energy Capital, LLC;
Limerock Resources and Quantum Energy Partners.
The oil
and gas industry as a whole competes with other industries in supplying the
energy and fuel requirements of industrial, commercial and individual
consumers. Alternative energy sources are generally more expensive
per British thermal unit (“BTU”) than fossil fuels and still represent a very
small percentage of the energy market.
Business
strengths
Concentrated
focus on core areas
We have
concentrated our business model such that we do not require any personnel for
day-to-day field operations. The essential expertise core to our success is the
ability to identify and evaluate potential projects and make intelligent
investment decisions. We expect to be a minority working interest
owner in most of the wells in which we invest. This means that we
will be partnering with other oil and gas investors in the development of our
prospects. This broadened pool of expertise will provide us with both
better data on our investments and expanded opportunities to invest with our
partners.
Mitigation
of risk by diversifying investments
Because
we are spreading our investment over a large number of wells in which we will
typically own a minority interest, the risks associated with oil and gas
exploration and production can be reduced. In addition, we will be
investing in relatively inexpensive drilling prospects that will reduce the
amount of loss we will experience from any well that is not
successful. We expect to invest from $50,000-$250,000 in any given
well. We may, however, invest substantially more in a group of wells
or other oil and gas project if management believes that the project is
beneficial to its shareholders.
Experienced
and motivated management team
Our
entire senior management team has extensive business and finance
experience. We believe that this team will deliver the leadership we
need to generate attractive returns from our investment
strategy. See, “Management,” below.
Technical
expertise
We plan
to engage as consultants oil and gas technical professionals, including
geophysicists, geologists, petroleum engineers, production and reservoir
engineers and land men who have extensive experience in their respective fields
to assist us in evaluating potential investments and divestitures. We
anticipate that we will be able to retain high-quality experts as needed, and
not be required to hire full time staff professionals for the technical
expertise needed. This approach should significantly reduce our
operating costs while giving us the desired access to top tier
talent.
Partnering
with proven operators
We have
been successful in partnering with high quality operators that are able to
effectively find oil and gas reserves at reasonable costs. In an
industry that has high rates of failures in the exploration and development of
hydrocarbons, partnering with experienced operators is beneficial to our
operations.
42
Our
Properties
Richard
King Field
We have
participated in the drilling and completion of five wells in Nueces County,
Texas in a prolific natural gas trend. Our lease is located on the Mary King
Estell lease in the Richard King Field. We participated in the drilling and
completion of the C-31 well in 2007, and the C-32 and C-33 wells in 2008, and
the C-34 and C-35 in 2009. All of the wells are commercially viable and generate
the majority of our natural gas revenues. Each of the wells was drilled between
5,000 and 6,500 feet and encountered multiple layers of hydrocarbons in
commercially viable quantities.
The first
well that we invested in was the C-31 well. The well was connected to the
pipelines as a “Dual Completion” meaning we are producing natural gas from two
separate reservoirs. The other wells were each completed in one reservoir. All
of the wells have additional zones of oil and/or gas that the operator can bring
on line at a later date. Over time, perhaps five to seven years, the existing
reservoirs will deplete to a point below which they are not economically viable
to produce. When this happens, we plan to complete the other zones of oil and/or
natural gas that are behind pipe in order to bring new production back on line
in the existing wells.
This
method of reentering wells and completing different zones for new production is
less costly than drilling a new well since the infrastructure is already in
place. All of these wells contain untapped resources that will provide us with
revenues in the future.
There are
also additional drilling opportunities on this lease that can be exploited in
the future. We expect to encounter multiple pay zones, as with the previous
wells, and anticipate the combined gross production from all five wells to
exceed 500,000 cubic feet of gas per day. This project has been our most
successful endeavor to date and still contains additional reserves.
Aldwell
Unit
Effective
December 31, 2006, the Company acquired a non-operated working interest in 130
producing oil and gas wells located in Reagan County, Texas. On January 23, 2007
the Company paid for the acquisition and received an assignment of leases. The
operator of the wells is Mariner Energy Inc., a publicly traded company under
the symbol “ME.” Since we acquired our interest, we have participated in
the drilling 70 additional wells with Mariner Energy.
Effective
September 2009, we sold our assets located in the Aldwell Unit to Mariner
Energy, for approximately $300,000, excluding a six percent sales
commission. The Aldwell Unit accounted for approximately 20% of our oil
and natural gas revenue for the year ended December 31, 2008 and the nine months
ended September 30, 2009. As such, for the remainder of the fiscal year,
our future revenues will be derived primarily from our Richard King Field
properties.
Proved
Reserves
Huddleston
& Co., Inc., an independent reservoir engineering firm that reports to our
board of directors, provided a report related to its estimates of reserves as of
January 1, 2008 and January 1, 2009. The service performed by Huddleston
included the preparation of an independent estimate of proved natural gas and
oil reserves estimates for our properties in the Richard King Field and Aldwell
Unit. Based on the amount of proved reserves determined by Huddleston, we
believe our reported reserve amounts are reasonable.
There are
numerous uncertainties inherent in estimating quantities of proved reserves,
projecting future rates of production, and projecting the timing and costs of
development expenditures, including many factors beyond our control. Reservoir
engineering is a subjective process of estimating underground accumulations of
natural gas and oil that cannot be measured in an exact manner. The reserve data
represents only estimates which are often different from the quantities of
natural gas and oil that are ultimately recovered. The accuracy of any reserve
estimate is highly dependent on the quality of available data, the accuracy of
the assumptions on which they are based, and on engineering and geological
interpretations and judgment.
43
All
estimates of proved reserves are determined according to the rules currently
prescribed by the SEC. These rules indicate that the standard of “reasonable
certainty” be applied to proved reserve estimates. This concept of reasonable
certainty implies that as more technical data becomes available, a positive or
upward revision is more likely than a negative or downward revision. Estimates
are subject to revision based upon a number of factors, including reservoir
performance, prices, economic conditions and government restrictions. In
addition, results of drilling, testing and production subsequent to the date of
an estimate may justify revision of that estimate.
In
general, the volume of production from natural gas and oil properties declines
as reserves are depleted. Except to the extent we acquire additional
non-operated working interests in properties with proved reserves, our proved
reserves will decline as reserves are produced. Recovery of proved undeveloped
reserves requires significant capital expenditures and successful drilling
operations. The reserve data assumes that we can and will make these
expenditures and conduct these operations successfully, but future events,
including commodity price changes, may cause these assumptions to change. In
addition, estimates of proved undeveloped reserves and proved non-producing
reserves are subject to greater uncertainties than estimates of proved producing
reserves.
Our
Production, Price and Cost History
Annual
oil, gas and natural gas liquid (NGL) production
Aldwell Unit
|
Mary King Estell
|
|||||||||||||||||||||||
Oil (bbl)
|
Gas (mcf)
|
NGL (bbl)
|
Oil (bbl)
|
Gas (mcf)
|
NGL (bbl)
|
|||||||||||||||||||
2007
|
494 | 1,580 | 307 | 0 | 2,918 | 0 | ||||||||||||||||||
2008
|
550 | 1,852 | 299 | 0 | 35,622 | 33 |
The
following table sets forth the historical information for our proved producing
leases for the periods indicated, regarding net production of oil, NGL and gas
and certain price and cost information.
Total
Production
(BOE)
|
Average Price
per BOE, ($)
|
Total Sales
($)
|
Average Cost
of Sales per
BOE, ($)
|
Total Cost of
Sales ($)
|
Total Net
Revenues ($)
|
|||||||||||||||||||
2007
|
1,550 | 50.50 | 78,276 | 12.96 | 20,090 | 58,186 | ||||||||||||||||||
2008
|
7,127 | 55.49 | 395,474 | 7.61 | 54,218 | 341,256 |
Our
Productive Wells
The
following table sets forth historical information relating to the productive
wells in which we owned a working interest for the periods indicated. Productive
wells consist of producing wells and wells capable of production, including
shut-in wells.
44
Gross and
Net Productive oil and gas wells as of 12/31/2007 and 12/31/2008 (A)
(B)
2007
|
2008
|
|||||||||||||||
Gross
|
Net
|
Gross
|
Net
|
|||||||||||||
Aldwell
Unit – Oil
|
163 | .29 | 190 | .33 | ||||||||||||
Richard
King Field – Gas
|
1 | .15 | 3 | .45 | ||||||||||||
Total
|
164 | .44 | 193 | .78 |
Our
Developed and Undeveloped Acreage
Gross and
Net, Developed and Undeveloped Acreage as of 12/31/2008 (A)
Developed Acreage
|
Undeveloped Acreage
|
|||||||||||||||
Gross
|
Net
|
Gross
|
Net
|
|||||||||||||
Aldwell
Unit – Oil
|
16,000 | 22.72 | 840 | 1.47 | ||||||||||||
MKE
– Gas
|
160 | 24 | 64 | 9.6 | ||||||||||||
Total
|
7,160 | 46.72 | 904 | 11.07 |
(A) The
Mary King Estell Lease (MKE) contains all of our gas wells, and the Alwell Unit
contained all of our oil wells. Wells in the Aldwell Unit that produce both oil
and gas have been classified as oil wells. Southfield’s working interest in the
Aldwell Unit was .1749% and our working interest in the Mary King Estell Lease
is 15%.
All of
Southfield’s properties are considered to contain proved reserves. Proved
reserves are those quantities of petroleum which, by analysis of geological and
engineering data, can be estimated with reasonable certainty to be commercially
recoverable, from a given date forward, from known reservoirs and under current
economic conditions, operating methods, and government regulations. Proved
reserves can be categorized as developed or undeveloped.
Developed
reserves are expected to be recovered from existing wells including reserves
behind pipe. Improved recovery reserves are considered developed only after the
necessary equipment has been installed, or when the costs to do so are
relatively minor.
Undeveloped
reserves are expected to be recovered: (1) from new wells on undrilled acreage,
(2) from deepening existing wells to a different reservoir, or (3) where a
relatively large expenditure is required to (a) recomplete an existing well or
(b) install production or transportation facilities for primary or improved
recovery projects.
(B)
Effective September 2009, the Company sold its assets in the Aldwell Unit to
Mariner Energy.
As of
December 31, 2007 and December 31, 2008 we had the following proved developed
and proved undeveloped reserves as a percentage of our future net revenue
discounted at 10%:
Our
Drilling Activities
The
following tables set forth the historical number of gross and net productive and
dry hole wells for exploratory and development wells in which Southfield had a
working interest
that were drilled during the years ended December 31, 2007 and 2008. This
information should not be considered indicative of future performance, nor
should it be assumed that there was any correlation between the number of
productive wells drilled and the oil and gas reserves generated thereby or the
costs to Southfield of productive wells compared to the costs of dry
holes.
Gross
Productive and Dry Exploratory Wells Drilled
2007
|
2008
|
|||||||||||||||
Gross Productive
Wells
|
Gross
Dry Holes
|
Gross Productive
Wells
|
Gross
Dry Holes
|
|||||||||||||
Aldwell
Unit
|
0 | 0 | 0 | 0 | ||||||||||||
Richard
King Field
|
1 | 0 | 0 | 0 | ||||||||||||
McManus
#2 Well
|
0 | 0 | 0 | 1 |
Net
Productive and Dry Exploratory Wells Drilled
2007
|
2008
|
|||||||||||||||
Net Productive
Wells
|
Net
Dry Holes
|
Net Productive
Wells
|
Net
Dry Holes
|
|||||||||||||
Aldwell
Unit
|
0 | 0 | 0 | 0 | ||||||||||||
Richard
King Field
|
.15 | 0 | 0 | 0 | ||||||||||||
McManus
#2 Well
|
0 | 0 | 0 | .02 |
Gross
Productive and Dry Development Wells Drilled
2007
|
2008
|
|||||||||||||||
Gross Productive
Wells
|
Gross
Dry Holes
|
Gross Productive
Wells
|
Gross
Dry Holes
|
|||||||||||||
Aldwell
Unit
|
33 | 0 | 27 | 0 | ||||||||||||
Richard
King Field
|
0 | 0 | 2 | 0 | ||||||||||||
McManus
#2 Well
|
0 | 0 | 0 | 0 |
Net
Productive and Dry Development Wells Drilled
2007
|
2008
|
|||||||||||||||
Net Productive
Wells
|
Net
Dry Holes
|
Net Productive
Wells
|
Net
Dry Holes
|
|||||||||||||
Aldwell
Unit
|
.06 | 0 | .05 | 0 | ||||||||||||
Richard
King Field
|
0 | 0 | .3 | 0 | ||||||||||||
McManus
#2 Well
|
0 | 0 | 0 | 0 |
45
On
November 11, 2008 the Company elected to invest in a non-operated working
interest in the McManus #2 well with Quatro D Exploration. BD Production,
an affiliate of Quatro D Exploration, was the operator of the well. The prospect
was located in Lavaca County, Texas and targeted multiple gas formations. We
agreed to pay the sum of the turnkey lease acquisition cost of $7,250 and the
dry hole cost of $23,683, which amounted to 2.416667% of the total costs through
the casing point. We funded our pro rata portion of the well of $30,933 in
November of 2008. A test well was drilled in March of 2009 to a terminal depth
of 10,300 feet and did not encounter commercially viable amounts of
hydrocarbons. The well resulted in a dry hole and was plugged and
abandoned.
Title
to Properties
We
believe that we have satisfactory title to our wellbore interests in accordance
with standards generally accepted in the oil and gas industry. Our wellbore
interests are subject to customary royalty and other interests, liens under
operating agreements, liens for current taxes, and other burdens, easements,
restrictions and encumbrances customary in the oil and gas industry that we
believe do not materially interfere with the use of or affect our carrying value
of the wellbore interests.
Some of
our easements, rights-of-way, permits, licenses and franchise ordinances require
the consent of the current landowner to transfer these rights, which in some
instances can be a governmental entity. We believe that we have obtained or will
obtain sufficient third-party consents, permits and authorizations for the
transfer of the assets necessary for us to operate our business in all material
respects as described in this prospectus. Record title to some of our assets
will continue to be held by our affiliates until we have made the appropriate
filings in the jurisdictions in which such assets are located and obtained any
consents and approvals that are not obtained prior to transfer. With respect to
any consents, permits or authorizations that have not been obtained, we believe
that these consents, permits or authorizations generally will be obtained after
the closing of this offering, or that the failure to obtain these consents,
permits or authorizations will have no material adverse effect on the operation
of our business.
Environmental
Matters and Regulation
General. Our
operations are subject to stringent and complex federal, state and local laws
and regulations governing environmental protection as well as the discharge of
materials into the environment. These laws and regulations may, among other
things:
•
|
require the acquisition of
various permits before drilling
commences;
|
•
|
enjoin some or all of the
operations of facilities deemed in non-compliance with
permits;
|
•
|
restrict the types, quantities
and concentration of various substances that can be released into the
environment in connection with oil and gas drilling, production and
transportation
activities;
|
•
|
limit or prohibit drilling
activities on certain lands lying within wilderness, wetlands and other
protected
areas; and
|
•
|
require remedial measures to
mitigate pollution from former and ongoing operations, such as
requirements to close pits and plug abandoned
wells.
|
These
laws, rules and regulations may also restrict the rate of oil and gas production
below the rate that would otherwise be possible. The regulatory burden on the
oil and gas industry increases the cost of doing business in the industry and
consequently affects profitability. Additionally, Congress and state
legislatures and federal and state agencies frequently revise environmental laws
and regulations, and the clear trend in environmental regulation is to place
more restrictions and limitations on activities that may affect the environment.
Any changes that result in more stringent and costly waste handling, disposal
and cleanup requirements for the oil and gas industry could have a significant
impact on our operating costs.
The
following is a summary of some of the existing laws, rules and regulations to
which our business operations are subject.
46
Waste Handling. The
Resource Conservation and Recovery Act, or RCRA, and comparable state statutes
regulate the generation, transportation, treatment, storage, disposal and
cleanup of hazardous and non-hazardous wastes. Under the auspices of the federal
Environmental Protection Agency, or EPA, the individual states administer some
or all of the provisions of RCRA, sometimes in conjunction with their own, more
stringent requirements. Drilling fluids, produced waters, and most of the other
wastes associated with the exploration, development, and production of crude oil
or gas are currently regulated under RCRA’s non-hazardous waste provisions.
However, it is possible that certain oil and gas exploration and production
wastes now classified as non-hazardous could be classified as hazardous wastes
in the future. Any such change could result in an increase in our costs to
manage and dispose of wastes, which could have a material adverse effect on our
results of operations and financial position. Also, in the course of our
operations, we generate some amounts of ordinary industrial wastes, such as
paint wastes, waste solvents, and waste oils, that may be regulated as hazardous
wastes.
Wastes
containing naturally occurring radioactive materials, or NORM, may also be
generated in connection with our operations. Certain processes used to produce
oil and gas may enhance the radioactivity of NORM, which may be present in
oilfield wastes. NORM is not subject to regulation under the Atomic Energy Act
of 1954, or the Low Level Radioactive Waste Policy Act. NORM is subject
primarily to individual state radiation control regulations. In addition, NORM
handling and management activities are governed by regulations promulgated by
the Occupational Safety and Health Administration, or OSHA. These state and OSHA
regulations impose certain requirements concerning worker protection; the
treatment, storage and disposal of NORM waste; the management of waste piles,
containers and tanks containing NORM; as well as restrictions on the uses of
land with NORM contamination.
Comprehensive Environmental
Response, Compensation and Liability Act. The Comprehensive
Environmental Response, Compensation and Liability Act, or CERCLA, also known as
the Superfund law, imposes joint and several liability, without regard to fault
or legality of conduct, on classes of persons who are considered to be
responsible for the release of a hazardous substance into the environment. These
persons include the current and past owner or operator of the site where the
release occurred, and anyone who disposed or arranged for the disposal of a
hazardous substance released at the site. Under CERCLA, such persons may be
subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment, for damages
to natural resources and for the costs of certain health studies. In addition,
it is not uncommon for neighboring landowners and other third-parties to file
claims for personal injury and property damage allegedly caused by the hazardous
substances released into the environment.
We
currently own or lease numerous properties that have been used for oil and gas
exploration and production for many years. Although we believe that Southfield
has utilized operating and waste disposal practices that were standard in the
industry at the time, hazardous substances, wastes, or hydrocarbons may have
been released on or under the properties owned or leased by us, or on or under
other locations, including off-site locations, where such substances have been
taken for disposal. In addition, some of our properties have been operated by
third parties or by previous owners or operators whose treatment and disposal of
hazardous substances, wastes, or hydrocarbons was not under our control. In
fact, there is evidence that petroleum spills or releases have occurred in the
past at some of the properties owned or leased by us. These properties and the
substances disposed or released on them may be subject to CERCLA, RCRA, and
analogous state laws. Under such laws, we could be required to remove previously
disposed substances and wastes, remediate contaminated property, or perform
remedial plugging or pit closure operations to prevent future
contamination.
Water Discharges. The
Clean Water Act, or the CWA, and analogous state laws impose restrictions and
strict controls with respect to the discharge of pollutants, including spills
and leaks of oil and other substances, into waters of the United States. The
discharge of pollutants into regulated waters is prohibited, except in
accordance with the terms of a permit issued by EPA or an analogous state
agency. The CWA and regulations implemented thereunder also prohibit the
discharge of dredge and fill material into regulated waters, including wetlands,
unless authorized by an appropriately issued permit. Spill prevention, control
and countermeasure requirements of federal laws require appropriate containment
berms and similar structures to help prevent the contamination of navigable
waters in the event of a petroleum hydrocarbon tank spill, rupture, or leak.
Federal and state regulatory agencies can impose administrative, civil and
criminal penalties for non-compliance with discharge permits or other
requirements of the CWA and analogous state laws and
regulations.
47
The
primary federal law imposing liability for oil spills is the Oil Pollution Act,
or OPA, which sets minimum standards for prevention, containment, and cleanup of
oil spills. OPA applies to vessels, offshore facilities, and onshore facilities,
including exploration and production facilities that may affect waters of the
United States. Under OPA, responsible parties, including owners and operators of
onshore facilities, may be subject to oil spill cleanup costs and natural
resource damages as well as a variety of public and private damages that may
result from oil spills.
Operations
associated with our properties also produce wastewaters that are disposed via
injection in underground wells. These activities are regulated by the Safe
Drinking Water Act, or the SDWA, and analogous state and local laws. The
underground injection well program under the SDWA classifies produced
wastewaters and imposes restrictions on the drilling and operation of disposal
wells as well as the quality of injected wastewaters. This program is designed
to protect drinking water sources and requires permits from the EPA or analogous
state agency for our disposal wells. Currently, we believe that disposal well
operations on our properties comply with all applicable requirements under the
SDWA. However, a change in the regulations or the inability to obtain permits
for new injection wells in the future may affect our ability to dispose of
produced waters and ultimately increase the cost of our operations.
Air Emissions. The
Federal Clean Air Act, or the CAA, and comparable state laws regulate emissions
of various air pollutants through air emissions permitting programs and the
imposition of other requirements. Such laws and regulations may require a
facility to obtain pre-approval for the construction or modification of certain
projects or facilities expected to produce air emissions or result in the
increase of existing air emissions; obtain or strictly comply with air permits
containing various emissions and operational limitations; or utilize specific
emission control technologies to limit emissions of certain air pollutants. In
addition, EPA has developed, and continues to develop, stringent regulations
governing emissions of toxic air pollutants at specified sources. Moreover,
states can impose air emissions limitations that are more stringent than the
federal standards imposed by EPA. Federal and state regulatory agencies can also
impose administrative, civil and criminal penalties for non-compliance with air
permits or other requirements of the federal CAA and associated state laws and
regulations.
Permits
and related compliance obligations under the CAA, as well as changes to state
implementation plans for controlling air emissions in regional non-attainment
areas, may require us to incur future capital expenditures in connection with
the addition or modification of existing air emission control equipment and
strategies for gas and oil exploration and production operations. In addition,
some gas and oil production facilities may be included within the categories of
hazardous air pollutant sources, which are subject to increasing regulation
under the CAA. Failure to comply with these requirements could subject a
regulated entity to monetary penalties, injunctions, conditions or restrictions
on operations and enforcement actions. Gas and oil exploration and production
facilities may be required to incur certain capital expenditures in the future
for air pollution control equipment in connection with obtaining and maintaining
operating permits and approvals for air emissions.
Health and Safety.
Operations associated with our properties are subject to the requirements of the
federal Occupational Safety and Health Act, or OSH Act, and comparable state
statutes. These laws and the implementing regulations strictly govern the
protection of the health and safety of employees. The OSH Act hazard
communication standard, EPA community right-to-know regulations under
Title III of CERCLA and similar state statues require that we organize
and/or disclose information about hazardous materials used or produced in our
operations. We believe that we are in substantial compliance with these
applicable requirements and with other OSH Act and comparable
requirements.
Global Warming and Climate
Change. Recent scientific studies have suggested that emissions of
certain gases, commonly referred to as “greenhouse gases” and including carbon
dioxide and methane, may be contributing to warming of the Earth’s atmosphere.
In response to such studies, the U.S. Congress is actively considering
legislation to reduce emissions of greenhouse gases. In addition, several states
(not including Texas) have already taken legal measures to reduce emissions of
greenhouse gases. Also, as a result of the U.S. Supreme Court’s decision on
April 2, 2007 in Massachusetts, et al. v. EPA
, the EPA may be required to regulate greenhouse gas emissions from mobile
sources ( e.g. , cars
and trucks) even if Congress does not adopt new legislation specifically
addressing emissions of greenhouse gases. Other nations have already agreed to
regulate emissions of greenhouse gases, pursuant to the United Nations Framework
Convention on Climate Change, also known as the “Kyoto Protocol,” an
international treaty pursuant to which participating countries (not including
the United States) have agreed to reduce their emissions of greenhouse gases to
below 1990 levels by 2012. Passage of climate control legislation or other
regulatory initiatives by Congress or various states of the U.S. or the adoption
of regulations by the EPA and analogous state agencies that restrict emissions
of greenhouse gases in areas in which we conduct business could have an adverse
effect on our operations and demand for oil and gas.
48
We
believe that we are in compliance with all existing environmental laws and
regulations applicable to our current operations and that our continued
compliance with existing requirements will not have a material adverse impact on
our financial condition and results of operations. For instance, we did not
incur any material capital expenditures for remediation or pollution control
activities for the year ended December 31, 2008. Additionally, as of the
date of this prospectus, we are not aware of any environmental issues or claims
that will require material capital expenditures during 2009. However, accidental
spills or releases may occur in the course of our operator’s operations, and we
cannot assure you that we will not incur substantial costs and liabilities as a
result of such spills or releases, including those relating to claims for damage
to property and persons. Moreover, we cannot assure you that the passage of more
stringent laws or regulations in the future will not have a negative impact on
our business, financial condition, results of operations or ability to make
distributions to you.
Other
Regulation of the Oil and Gas Industry
The oil
and gas industry is regulated by numerous federal, state and local authorities.
Legislation affecting the oil and gas industry is under constant review for
amendment or expansion, frequently increasing the regulatory burden. Also,
numerous departments and agencies, both federal and state, are authorized by
statute to issue rules and regulations binding on the oil and gas industry and
its individual members, some of which carry substantial penalties for failure to
comply. Although the regulatory burden on the oil and gas industry may increase
our cost of doing business by increasing the cost of transporting our production
to market, these burdens generally do not affect us any differently or to any
greater or lesser extent than they affect other companies in the industry with
similar types, quantities and locations of production.
The
Department of Homeland Security Appropriations Act of 2007 requires the
Department of Homeland Security, or DHS, to issue regulations establishing
risk-based performance standards for the security of chemical and industrial
facilities, including oil and gas facilities that are deemed to present “high
levels of security risk.” The DHS is currently in the process of adopting
regulations that will determine whether some of our facilities or operations
will be subject to additional DHS-mandated security requirements. Presently, it
is not possible to accurately estimate the costs we could incur, directly or
indirectly, to comply with any such facility security laws or regulations, but
such expenditures could be substantial.
Development and Production.
Development and production operations are subject to various types of
regulation at federal, state and local levels. These types of regulation include
requiring permits for the drilling of wells, the posting of bonds in connection
with various types of activities and filing reports concerning operations. Most
states, and some counties and municipalities, in which we operate also regulate
one or more of the following:
|
•
|
the location of
wells;
|
|
•
|
the method of drilling and casing
wells;
|
|
•
|
the surface use and restoration
of properties upon which wells are
drilled;
|
|
•
|
the plugging and abandoning of
wells; and
|
|
•
|
notice to surface owners and
other third parties.
|
49
State
laws regulate the size and shape of drilling and spacing requirements
governing the pooling of oil and gas properties. Some states allow forced
pooling or integration of tracts to facilitate exploration while other states
rely on voluntary pooling of lands and leases. In some instances, forced pooling
or unitization may be implemented by third parties and may reduce our interest
in the unitized properties. In addition, state conservation laws establish
maximum rates of production from oil and gas wells, generally prohibit the
venting or flaring of gas and impose requirements regarding the ratability of
production. These laws and regulations may limit the amount of oil and gas we
can produce from our wells or limit the number of wells or the locations at
which we can drill. Moreover, each state generally imposes a production or
severance tax with respect to the production and sale of oil, NGL and gas within
its jurisdiction. States do not regulate wellhead prices or engage in other
similar direct regulation, but there can be no assurance that they will not do
so in the future. The effect of such future regulations may be to limit the
amounts of oil, NGL and gas that may be produced from our wells, and/or to limit
the number of locations we can drill.
Regulation of Transportation and
Sale of Gas. The availability, terms and cost of transportation
significantly affect sales of gas. Federal and state regulations govern the
price and terms for access to gas pipeline transportation. The interstate
transportation and sale for resale of gas is subject to federal regulation,
including regulation of the terms, conditions and rates for interstate
transportation, storage and various other matters, primarily by the Federal
Energy Regulatory Commission, or FERC. The FERC’s regulations for interstate gas
transmission in some circumstances may also affect the intrastate transportation
of gas.
Gas
prices are currently unregulated, however Congress historically has been active
in the area of gas regulation. We cannot predict whether new legislation to
regulate gas might be proposed, what proposals, if any, might actually be
enacted by Congress or the various state legislatures, and what effect, if any,
the proposals might have on the operations of the underlying properties. Sales
of condensate and gas liquids are not currently regulated and are made at market
prices.
Gas Gathering. While
we do not own or operate any gas gathering facilities, we depend on gathering
facilities owned and operated by third parties to gather production from our
reservoirs, and therefore we are impacted by the rates charged by such third
parties for gathering services. To the extent that changes in federal and/or
state regulation affect the rates charged for gathering services, we also may be
affected by such changes. However, we do not anticipate that we would be
affected any differently than similarly situated gas producers.
Plan
of Operation
Our
current business plan is to acquire additional non-operated working interests;
however, our future business plans may include the following depending on
whether we find any unique investment opportunities and if we have sufficient
capital to execute such plans:
Acquisition
of Mineral Lease Interests
A future
investment strategy we may pursue involves the identification and leasing of
mineral rights that can be developed by drilling for oil and gas. Mineral
rights are generally sold separately from the surface rights held by the land
owner. We will work with entities and individuals in the future that we
know to identify areas that can be leased where there appear to be commercially
viable oil or gas reserves. Working with geologists and petroleum
engineers, we will then put together a data package on the project and its
potential to produce profits through the drilling, completion and development of
these reserves.
The
minerals are leased from the “mineral owner” who is often different from the
owner of the surface rights to the land. Leases are most often for one to
three years and are typically extended as long as oil or gas is being produced
from the property. When appropriate, we expect to use a “land man” to
negotiate leases, review title and assist us in securing all proper rights to
the leases we acquire.
After
acquiring the lease, we plan to sell the rights to drill and develop these
reserves to third-party oil and gas companies that will drill and produce the
oil and gas reserves we purchased under the mineral lease. This is called
“farming out” the lease. When this happens, we expect to retain a 25%
interest in the wells’ NRI (net revenue interest) as the leaseholder. This
means that we will generally retain 25% of the revenue available to the working
interest owners without having to invest in the drilling and completing costs of
the well.
50
Purchase
of Existing Production
Purchasing
interests in wells that are already producing oil or gas is a far less risky
investment strategy than investing in the drilling of new wells because there is
little risk of not receiving revenues from the investment. However, this
reduced risk is factored into the price generally required to acquire existing
production, so it typically provides less return per dollar invested. We
expect opportunities to arise where we can make attractive, safe acquisitions of
small oil and gas assets with existing production that would be beneficial to
our shareholders. In this category, we may also purchase operated
interests or royalty interests when we find the terms are
attractive.
Infrastructure
and Equipment
In
conjunction with our other investments, we may need to invest from time to time
in distribution systems, or equipment related to the exploration and development
of the oil and gas assets in which we invest.
Employees
The
Company currently has three employees: its President, Ben Roberts, its
Chief Financial Officer, Chet Gutowsky, and its Chief Operating Officer, Tyson
Rohde. The Company also has a consultant who provides business development
services. In the next twelve months, we will consider hiring a consulting
geologist and/or petroleum engineer. The board of directors may approve
employment agreements for the management team.
Our
Office
Our
principal office is located at 1240 Blalock Road, Suite 150, Houston, Texas
77055. We currently lease approximately 3,000 square feet and incurred
approximately $25,000 in rent expense for 2008. We believe the size of our
office space is sufficient for our business purposes.
Legal
Proceedings
We are
not currently a party to any material legal proceedings. In addition, we
are not aware of any material legal or governmental proceedings against us, or
contemplated to be brought against us, under the various environmental
protection statutes or any other statutes to which we are
subject.
51
MANAGEMENT
Directors
and Executive Officers
The
following sets forth the names of our executive officers and directors, their
ages as of September 30 2009, and their current position and
offices.
Name
|
Age
|
Position
|
||
Ben
L. Roberts
|
63
|
Chief
Executive Officer and
Director
|
||
Chet
Gutowsky
|
62
|
Chief
Financial Officer and
Director
|
||
Tyson
Rohde
|
29
|
Chief
Operating Officer and
Director
|
Ben L. Roberts. Mr.
Roberts has served as our Chief Executive Officer and as a director since our
inception in July 2005. He has been instrumental in developing high-level
relationships with oil and gas operators and originating investment
opportunities for Southfield. Mr. Roberts served as a principal of
Goldbridge Capital, LLC from 2001 until co-founding Southfield in July
2005. Goldbridge Capital is a boutique investment advisory firm that
provides financial consulting and business development services to private and
small public companies. Mr. Roberts has over 26 years of experience in energy
and related businesses which includes 17 years oil & gas exploration and
production as well as nine years in oil services and petrochemicals. Over
half of his experience has been in senior management positions. Mr. Roberts
holds an M.B.A. from the University of Texas in Austin and a B.S. in Physics and
Mathematics from Baylor University. Mr. Roberts is a Certified Public
Accountant licensed in the State of Texas.
Chet Gutowsky. Mr.
Gutowsky has served as our Chief Financial Officer and as a director since our
inception in July 2005. His primary role at Southfield is to facilitate
the capitalization of our operations, review potential oil and gas investments
and assist in the preparation of our financial reporting. Mr. Gutowsky has
also served as the Chief Financial Officer and director of Biotricity
Corporation, an alternative energy company, since December 2008. From
September 2004 to July 2005, Mr. Gutowsky served as a principal of Brewer
Capital Group, LLC, a boutique business that focused on mergers and
acquisitions, and the
Chief Financial Officer of Mobil Steel International, a steel products
manufacturer. At Brewer Capital Group, Mr. Gutowsky provided financial
consulting and advisory services related to mergers, acquisitions and small
business development. Since May 2005, Mr. Gutowsky has been a managing member in
Goldbridge Energy Partners, LLC a boutique investment advisory firm that
facilitates capital formation and provides financial consulting to the energy
sector. Goldbridge Energy Partners, LLC is not affiliated with Goldbride
Capital. Mr. Gutowsky holds an M.B.A. from the University of Texas and a B.A. in
Economics from Southwestern University. Mr. Gutowsky is a Chartered
Financial Analyst.
Tyson Rohde . Mr. Rohde
has served as our Chief Operating Officer and as a director since our inception
in July 2005. His primary role at Southfield is to assist with the
origination and management of oil and gas investments. Mr. Rohde has also
been the Chief Executive Officer and director of Biotricity Corporation
since December of 2008 where he oversees technological and business development
activities. From February 2005 to July 2005, Mr. Rohde joined the
executive management team of Mobil Steel International where he assisted in
restarting operations and facilitated business development. Mr. Rohde has
also been a managing member of Goldbridge Energy Partners, LLC since May
2005. In November 2003, Mr. Rohde founded Onyx, an importer and wholesaler
of men’s apparel. Mr. Rohde holds a B.A. in Economics from the University
of Texas.
Composition
of the Board of Directors
The board
of directors has responsibility for establishing broad corporate policies and
reviewing our overall performance rather than day-to-day operations. The
primary responsibility of our board of directors is to oversee the general
direction and management of our Company and, in doing so, serve the best
interests of the Company and our shareholders. The board of directors
selects, evaluates and provides for the succession of executive officers and,
subject to shareholder election, directors. It reviews and approves
corporate objectives and strategies, and evaluates significant policies and
proposed major commitments of corporate resources. Our board of directors
also participates in decisions that have a potential major economic impact on
our company. Management keeps the directors informed of Company activity
through regular communication.
Our board
of directors currently consists of three members: Messrs. Ben Roberts,
Chet Gutowsky and Tyson Rohde. Each of our directors is elected annually
at our annual meeting. All board action requires the approval of a
majority of the directors in attendance at a meeting at which a quorum is
present. We will increase the size of our board of directors as we deem
necessary to accommodate the growth of our business.
52
Independence
As of the
date hereof, the Company has not adopted a standard of independence nor does it
have a policy with respect to independence requirements for its board members or
that a majority of its board be comprised of “independent directors.” As
of the date hereof, none of our directors would qualify as “independent” under
any recognized standards of independence.
Board
Committees
We do not
currently have a standing audit, nominating or compensation committee of the
board of directors, or any committee performing similar functions. Our
board of directors performs the functions of audit, nominating and compensation
committees. As of the date of this prospectus, no member of our board of
directors qualifies as an “audit committee financial expert” as defined in
Item 407(d)(5) of Regulation S-K promulgated under the Securities
Act of 1933, as amended. Since the board of directors currently consists
of three members, it does not believe that establishing separate audit,
nominating or compensation committees are necessary for effective
governance.
Shareholder
Communications
Shareholders
who wish to communicate with any or all members of the board of directors may
write to them in care of the Corporate Secretary, Southfield Energy Corporation,
1240 Blalock Road, Suite 150, Houston, Texas 77055. All such communications
which raise issues of significant interest to all shareholders generally, as
determined by the Company in consultation with counsel when appropriate, will be
referred to the appropriate director or directors as specified in the
communication.
Code
of Ethics
We have
adopted a Code of Business Conduct and Ethics (“Code”) applicable to all of the
Company's directors, officers and employees. The purpose of the Code is to
advise individuals of their obligations to comply with applicable law as well as
the fundamental principles of business ethics to which they must adhere, such as
avoidance of conflicts of interests or misuse of corporate opportunities and
confidential information. A copy of the Code is available on our website
at www.southfieldenergy.com
.
Family
Relationships
There are
no family relationships among our directors, executive officers or persons
nominated to become executive officers or directors.
Involvement
in Certain Legal Proceedings
During
the past five (5) years, none of our directors, persons nominated to become
directors, executive officers, promoters or control persons:
|
·
|
was a general partner or
executive officer of any business against which any bankruptcy petition
was filed, either at the time of the bankruptcy or two (2) years prior to
that time;
|
|
·
|
was convicted in a criminal
proceeding or named subject to a pending criminal proceeding (excluding
traffic violations and other minor
offenses);
|
|
·
|
was subject to any order,
judgment or decree, not subsequently reversed, suspended or vacated, of
any court of competent jurisdiction, permanently or temporarily enjoining,
barring, suspending or otherwise limiting his involvement in any type of
business, securities or banking activities;
or
|
53
|
·
|
was found by a court of competent
jurisdiction (civil action), the SEC or the Commodity Futures Trading
Commission to have violated a federal or state securities or commodities
law, and the judgment has not been reversed, suspended or
vacated.
|
Arrangements
There are
no arrangements or understandings between an executive officer, director or
nominee and any other person pursuant to which he was or is to be selected as an
executive officer or director.
Compensation
Committee Interlocks and Insider Participation
The
entire board of directors performs the functions that would be performed by a
compensation committee. Chet Gutowsky is the Chief Financial Officer and a
director of Southfield. He is also the Chief Financial Officer and a
director of Biotricity Corporation. Tyson Rohde is the Chief Operating
Officer and a director of Southfield. He is also the Chief Executive
Officer and director of Biotricity Corporation. Both Mr. Gutowsky and Mr.
Rohde participated in deliberations concerning the compensation paid to
executive officers during the year 2008, including Messrs. Gutowsky and
Rohde.
54
DIRECTOR
AND EXECUTIVE OFFICER COMPENSATION
Summary
Compensation Table
NAME AND PRINCIPAL
POSITION
|
FISCAL
YEAR
|
SALARY
($)
|
BONUS
($)
|
STOCK
AWARDS
($)
|
ALL OTHER
COMPENSATION
($)(1)(2)
|
TOTAL
($)
|
||||||||||||||||
Ben
Roberts
|
2008
|
$ | 12,000 | $ | — | $ | — | $ | 2,327 | $ | 14,327 | |||||||||||
Chief
Executive Officer and
|
2007
|
— | — | — | — | — | ||||||||||||||||
Director
|
2006
|
— | — | — | — | — | ||||||||||||||||
Chet
Gutowsky
|
2008
|
$ | 66,000 | $ | — | $ | — | $ | 2,318 | $ | 68,318 | |||||||||||
Chief
Financial Officer and
|
2007
|
14,600 | — | — | — | 14,600 | ||||||||||||||||
Director
|
2006
|
— | — | — | — | — | ||||||||||||||||
Tyson
Rohde
|
2008
|
$ | 66,000 | $ | — | $ | — | $ | 2,497 | $ | 68,497 | |||||||||||
Chief
Operating Officer and
|
2007
|
14,600 | — | — | — | 14,600 | ||||||||||||||||
Director
|
2006
|
— | — | — | — | — |
(1)
|
Represents payments of health,
dental, vision, disability and life insurance premiums and other ancillary
benefits.
|
(2)
|
Above benefits were administered
commencing July 2008.
|
Incentive
Plans
No
deferred compensation or long-term incentive plan awards were issued or granted
to our management during the last two fiscal years. We do not have a stock
option plan, but we intend on adopting one in the near future.
Option
Grants in Last Fiscal Year
We have
never granted options to purchase our common stock to our executive officers or
directors.
Employment
None of
our executive officers are subject to employment agreements, but we may enter
into such agreements with them in the future.
Director
Compensation
We
reimburse our directors for all reasonable ordinary and necessary business
related expenses, but we did not pay director's fees or other
cash compensation for services rendered as a director in the year ended
December 31, 2008. We have no standard arrangement pursuant to which our
directors are compensated for their services in their capacity as
directors. We expect to pay fees for services rendered as a director
when and if additional directors are appointed to the board of
directors.
55
Compensation
Discussion and Analysis
Our
compensation approach is necessarily tied to our stage of development.
During the initial stages of the Company’s business following the Offering, the
duties of the executive officers will not require their full-time
attention. While it is expected that they will devote such time and
attention to their duties as is appropriate to discharge their duties fully and
properly, it is also expected that they may undertake duties to other entities,
so long as such duties do not conflict with or otherwise impede their
performance of their duties to the Company. Therefore, our compensation
program currently consists solely of cash compensation for the services
provided.
The
entire board of directors performs the functions that would be performed by a
compensation committee. Chet Gutowsky is the Chief Financial Officer and a
director of Southfield. He is also the Chief Financial Officer and a
director of Biotricity Corporation. Tyson Rohde is the Chief Operating
Officer and a director of Southfield. He is also the Chief Executive
Officer and director of Biotricity Corporation. Each Mr. Rohde and Mr.
Gutowsky spend approximately 30 hours per week working for Southfield. Mr.
Roberts does not maintain employment outside of Southfield Energy. All of the
directors participate in deliberations concerning the compensation paid to
executive officers, including Messrs. Gutowsky and Rohde. The
directors of Southfield determine the compensation of its executives by
assessing the value of each of its executives and collectively determine what
amounts of compensation are required to retain the services of the company’s
executives.
The
Company does not currently have or provide, and does not currently have any
plans to adopt or provide in the future, any bonus or other cash incentive
awards, equity-based compensation, or retirement or other executive benefits or
perquisites, other than health benefits. The board of directors, which
consists of our executive officers, will review and approve the compensation of
our named executive officers and consultants and oversee and administer our
executive compensation programs and initiatives. As we gain experience as
a public company, we expect that the specific direction, emphasis and components
of executive compensation programs will continue to evolve. Factors that may
influence our decision to change our compensation policies include the hiring of
full-time employees, our future revenue growth and profitability, the
implementation of our business plan and strategy and increasing complexity of
our business.
In
approving compensation necessary to attract and retain our present executive
officers, the board of directors concluded that the present annual salaries
provided for Messrs. Roberts, Rohde and Gutowsky are reasonable considering
management’s experience and unique skill sets. The objective of the executive
compensation plan is to provide our executives with competitive remuneration for
their skills such that we can retain our personnel for an extended period of
time. Southfield’s board of directors will review its executive compensation
plans from time to time and take Company performance as well as general labor
market conditions into account when implementing executive compensation
plans.
56
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Transactions
with Officers and Directors
From July
2005 to present, we shared office space with Goldbridge Energy Partners, LLC,
whose principals include our officers and directors. Goldbridge Energy
Partners is an investment advisory and consulting group that facilitates
financing and assists with business development for companies in the energy
sector. We paid approximately $25,000 and $9,200 in rent expense for
2008 and 2007, respectively, for our portion of the office
space. Other than the sharing of office space, there have been no
material transactions between us and Goldbridge Energy Partners.
On
September 4, 2008 the Company loaned $2,000 to one of its
officers. The loan was repaid in full on October 30,
2009.
Transactions
with our Founders
On August
14, 2006 The Internet Business Factory, one of our founders, loaned to us
$20,000 evidenced by a promissory note bearing interest at an annual rate of six
percent. As partial consideration for the promissory note, we agreed
to issue The Internet Business Factory 300,000 shares of our common
stock. In November 2006, the promissory note was paid in
full.
57
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth, as of September 30, 2009, the number and percentage
of outstanding shares of our common stock owned by: (a) each person who is known
by us to be the beneficial owner of more than 5% of our outstanding shares of
common stock; (b) each of our directors; (c) the named executive officers as
defined in Item 402 of Regulation S-K; and (d) all current directors and
executive officers, as a group. As of September 30, 2009, there were
7,410,000 shares of Company common stock issued and outstanding.
Beneficial
ownership has been determined in accordance with Rule 13d-3 under the Exchange
Act. Under this rule, certain shares may be deemed to be beneficially
owned by more than one person (if, for example, persons share the power to vote
or the power to dispose of the shares). In addition, shares are
deemed to be beneficially owned by a person if the person has the right to
acquire shares (for example, upon exercise of an option or warrant) within sixty
days of the date as of which the information is provided. In
computing the percentage ownership of any person, the amount of shares is deemed
to include the amount of shares beneficially owned by such person by reason of
such acquisition rights. As a result, the percentage of outstanding
shares of any person as shown in the following table does not necessarily
reflect the person's actual voting power at any particular date.
To our
knowledge, except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them. Unless otherwise indicated, the business
address of the individuals listed is 1240 Blalock Rd., Suite 150, Houston, Texas
77055.
Name and Address of Beneficial Owner
|
Number of Shares of
Common Stock
Beneficially Owned
|
Percentage
Of Class
(%)
|
||||||
Beneficial
Owners of more than 5% :
|
||||||||
Oklahoma Ventures,
Inc. (1)
|
2,025,000 | 27.33 | ||||||
Amyclare Gutowsky
(2)
|
600,000 | 8.10 | ||||||
Mary E. Gutowsky
(2)
|
600,000 | 8.10 | ||||||
Carew Rohde (3)
|
600,000 | 8.10 | ||||||
Drexel Rohde (3)
|
600,000 | 8.10 | ||||||
Officers
and Directors :
|
||||||||
Chet
Gutowsky
|
600,000 | 8.10 | ||||||
Ben
Roberts
|
200,000 | 2.70 | ||||||
Tyson
Rohde
|
600,000 | 8.10 | ||||||
All
named directors & executive officers as a group
(3 persons)
|
1,400,000 | 18.89 | % |
(1)
|
The mailing address is Centro
Commercial Bal Harbour - M-38, Panama City,
Panama
|
(2)
|
The mailing address is 302
Pinesap Drive, Houston, Texas
77079.
|
(3)
|
The mailing address is 7508 Chevy
Chase Drive, Houston, Texas
77063.
|
58
PLAN
OF DISTRIBUTION
The
Company is offering up to the aggregate offering amount of $10,000,000. There is
no minimum amount of 3 Year Notes that must be sold in this
Offering. Therefore, proceeds of the Offering will not be placed in
escrow. They will be available to the Company upon acceptance of the
subscription. Once the Company has accepted one or more
subscriptions, the Company may have periodic closings for the issuance of such 3
Year Notes. The Company reserves the right, with or without cause, and at its
sole discretion to accept or reject any subscription for the 3 Year Notes. The
Offering Period will end upon the earlier of the receipt and acceptance of
subscriptions for the maximum Offering Amount of $10,000,000 or one year from
the effective date of this prospectus. We reserve the right to
terminate this Offering at any time and to refuse to sell 3 Year Notes to any
person.
The
Company is offering the 3 Year Notes pursuant to registration under the
Securities Act. The Company will offer the 3 Year Notes on a
“self-underwritten” basis, with no minimum. This means that the
Offering does not involve the participation of an underwriter to market,
distribute or sell the 3 Year Notes offered under this
prospectus. The officers and directors of the Company intend to sell
the 3 Year Notes directly, who will not be separately compensated therefore,
except for the reimbursement of actual out-of-pocket expenses incurred in
connection with the sale of 3 Year Notes. The intended methods of
communication include, without limitation, telephone and personal
contact. In connection with their efforts, our officers and directors
will rely on the safe harbor provisions of Rule 3a4-1 of the Securities Exchange
Act of 1934. Rule 3a4-1 provides an exemption from the broker/dealer
registration requirements of the Securities Exchange Act of 1934 for persons
associated with an issuer provided that they meet certain
requirements.
Notwithstanding
the above, we reserve the right to utilize a Placement Agent, where permitted by
law, to assist us in locating potential investors, in which case we will pay
commissions and non-accountable expenses of up to 11% of the gross offering
price of the 3 Year Notes. The Company will pay the Placement
Agent(s) a commission of up to eight percent (8%) of the offering price of the 3
Year Notes subscribed to and sold and non-accountable expenses in an amount
equal to three percent (3%) of the 3 Year Notes sold for its technical
assistance. The Placement Agent will not be required to sell any
specific number or dollar amount of securities but will use their best efforts
to sell the 3 Year Notes. At this time we do not have any bidding
commitments, agreements or understandings with any broker/dealers, placement
agents or finders. We may use, however, MMR Investment Bankers, Inc.
who served as placement agent with our prior private placements of
debt. We provide no assurance that all or any of the 3 Year Notes
will be sold by us or any future Placement Agent(s).
The 3
Year Notes may not be offered or sold in certain jurisdictions unless they are
registered or otherwise comply with the applicable securities laws of such
jurisdiction by exemption, qualification or otherwise. We intend to
sell the 3 Year Notes only in the states in which this Offering has been
qualified or an exemption from the registration requirements is available, and
purchases of 3 Year Notes may be made only in those states.
How
to Subscribe
Included
with this prospectus is a “Subscription Agreement” which, along with this
prospectus and Indenture, forms the contractual basis for your investment in the
3 Year Notes described in this prospectus. The Subscription Agreement
will be delivered along with the prospectus to prospective investors by
us. The Subscription Agreement requires prospective investors of the
3 Year Notes to furnish personal and financial information so that such
purchaser may be deemed eligible by the Company. The Subscription
Agreement is self-explanatory.
Payment
for the 3 Year Notes may be made by check or money orders made payable to
“Southfield Energy Corporation.” The funds will be deposited in a
bank account until the subscription is approved by the Company.
59
LEGAL
MATTERS
The
validity of the 3 Year Notes will be passed upon for us by Jack Chapline
Vaughan, Attorney at Law.
EXPERTS
The
financial statements included in this prospectus have been audited by M&K
CPAS, PLLC, an independent registered public accounting firm, as set forth in
their reports appearing herein and elsewhere in the registration statement, and
are included in reliance upon such reports given upon their authority as experts
in accounting and auditing.
Estimated
quantities of our proved oil and gas reserves as of December 31, 2007 and
2008 and the net present value of such proved reserves set forth in this
prospectus, are based upon reserve reports prepared by Huddleston &
Company.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
We have
no changes in, or disagreements with, our auditors.
60
INDEX
TO FINANCIAL STATEMENTS
Page
|
||
Southfield
Energy Corporation, Inc. Audited Financial Statements:
|
||
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Statements
of Operations for the years ended December 31, 2008 and
2007
|
F-3
|
|
Balance
Sheets as of December 31, 2008 and 2007
|
F-4
|
|
Statements
of Cash Flows for the years ended December 31, 2008 and
2007
|
F-5
|
|
Statements
of Changes in Stockholders’ Deficit for the years ended December 31, 2008
and 2007
|
F-6
|
|
Notes
to Financial Statements
|
F-7
|
|
Southfield
Energy Corporation, Inc. Financial Statements (Unaudited):
|
||
Statements
of Operations for the three and nine months ended September 30, 2009 and
September 30, 2008
|
F-20
|
|
Balance
Sheets as of September 30, 2009 and as of December 31,
2008
|
F-21
|
|
Statements
of Cash Flows for the nine months ended September 30, 2009 and
2008
|
F-22
|
|
Statements
of Changes in Stockholders’ Deficit for the nine months ended September
30, 2009
|
F-23
|
|
Notes
to Financial Statements
|
F-24
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Southfield
Energy Corporation
Houston,
Texas
We have
audited the accompanying balance sheets of Southfield Energy Corporation (the
“Company”) as of December 31, 2008 and 2007, and the related statements of
operations, changes in stockholders’ deficit, and cash flows for the years ended
December 31, 2008 and 2007. 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 audit.
We
conducted our audits in accordance with the 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 Southfield Energy Corporation as of
December 31, 2008 and 2007 and the results of its operations and cash flows for
the period described above 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 suffered a net loss from operations and has a net
capital deficiency, which raises substantial doubt about its ability to continue
as a going concern. Management’s plans regarding those matters also are
described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
As
discussed in Note 14 to the financial statements, the 2008 and 2007 financial
statements have been restated to correct misstatements in the financial
statements.
/s/
M&K CPAS, PLLC
www.mkacpas.com
Houston,
Texas
April 20,
2009, except for Note 14 which is December 17, 2009
F-2
SOUTHFIELD
ENERGY CORPORATION
STATEMENTS
OF OPERATIONS
For the
years ended December 31, 2008 and 2007
Year Ended
|
Year Ended
|
|||||||
|
December
|
December
|
||||||
|
31, 2008
|
31, 2007
|
||||||
REVENUES:
|
||||||||
Oil
and Gas Production
|
$
|
395,474
|
$
|
78,276
|
||||
Cost
of Sales
|
120,686
|
29,986
|
||||||
GROSS
MARGIN
|
274,788
|
48,290
|
||||||
EXPENSES:
|
||||||||
Amortization
of Loan and Debenture Costs
|
98,827
|
41,799
|
||||||
Impairment
of proved reserves
|
116,553
|
-
|
||||||
General
and Administrative Expenses
|
273,143
|
85,256
|
||||||
TOTAL
OPERATING EXPENSES
|
488,523
|
127,055
|
||||||
OPERATING
LOSS
|
(213,735
|
)
|
(78,765
|
)
|
||||
Other
Income (Expense)
|
||||||||
Interest
Income
|
3,870
|
532
|
||||||
Gain
on Sale of Securities
|
14,479
|
-
|
||||||
Interest
Expense
|
(128,431
|
)
|
(75,547
|
)
|
||||
Total
Other Income (Expenses)
|
(110,082
|
)
|
(75,015
|
)
|
||||
|
|
|
|
|||||
Net
Loss
|
$
|
(323,817
|
)
|
$
|
(153,780
|
)
|
||
Other
Comprehensive Income:
|
||||||||
Unrealized
loss on available for sale securities
|
(325,465
|
)
|
-
|
|||||
Total
Comprehensive Loss
|
(649,282
|
)
|
(153,780)
|
|||||
Weighted
average common shares outstanding
|
7,363,005
|
7,026,397
|
||||||
Basic
and diluted net loss per common share
|
$
|
(0.04
|
)
|
$
|
(0.02
|
)
|
*See
accompanying notes to the financial statements.
F-3
SOUTHFIELD
ENERGY CORPORATION
BALANCE
SHEETS
As of
December 31, 2008 and 2007
December
|
December
|
|||||||
31, 2008
|
31, 2007
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
|
$
|
123,104
|
$
|
353,112
|
||||
Accounts
Receivable
|
59,726
|
20,569
|
||||||
Accounts
Receivable - Related Party
|
2,000
|
4,163
|
||||||
Prepaid
Expenses
|
30,933
|
-
|
||||||
TOTAL
CURRENT ASSETS
|
215,763
|
377,844
|
||||||
Property
& Equipment:
|
||||||||
Oil
& Gas, on the basis of successful efforts accounting
|
||||||||
Gross
Proved Properties
|
336,499
|
296,126
|
||||||
Less:
Accumulated Depletion and Depreciation
|
(76,364
|
)
|
(9,896
|
)
|
||||
Net
Proved Properties
|
260,135
|
286,230
|
||||||
Office
Equipment
|
427
|
-
|
||||||
Other
Long Term Assets:
|
||||||||
Gross
Capitalized Loan and Debenture Costs
|
370,353
|
267,240
|
||||||
Less:
Accumulated Amortization
|
(148,739
|
)
|
(49,912
|
)
|
||||
Net
Capitalized Loan and Debenture Costs
|
221,614
|
217,328
|
||||||
Available
for Sale Securities
|
524,965
|
-
|
||||||
Less:
Valuation Allowance
|
(325,465
|
)
|
-
|
|||||
Net
(market value)
|
199,500
|
-
|
||||||
TOTAL
ASSETS
|
$
|
897,439
|
$
|
881,402
|
||||
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||
LIABILITIES:
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
Payable
|
$
|
27,449
|
$
|
43,390
|
||||
Accrued
interest on Debentures
|
108,987
|
48,727
|
||||||
Current
Portion of Debentures Payable
|
304,000
|
-
|
||||||
TOTAL
CURRENT LIABILITIES
|
440,436
|
92,117
|
||||||
Long
Term Liabilities:
|
||||||||
Convertible
Debentures Payable
|
1,178,000
|
866,000
|
||||||
TOTAL
LONG TERM LIABILITIES
|
1,178,000
|
866,000
|
||||||
TOTAL
LIABILITIES
|
1,618,436
|
958,117
|
||||||
STOCKHOLDERS'
DEFICIT:
|
||||||||
Common
stock, $0.001 par value; 50,000,000 shares authorized, 7,410,000 and
7,360,000 issued and outstanding at 12/31/08 and 12/31/2007,
respectively
|
7,410
|
7,360
|
||||||
Additional
Paid-in Capital
|
99,373
|
94,423
|
||||||
Deficit
accumulated during the development stage
|
(24,718
|
)
|
(24,718
|
)
|
||||
Accumulated
deficit
|
(477,597
|
)
|
(153,780
|
)
|
||||
Accumulated
other comprehensive income (loss)
|
(325,465
|
)
|
-
|
|||||
TOTAL
STOCKHOLDERS' DEFICIT
|
(720,997
|
)
|
(76,715
|
)
|
||||
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$
|
897,439
|
$
|
881,402
|
*See
accompanying notes to the financial statements.
F-4
SOUTHFIELD
ENERGY CORPORATION
STATEMENTS
OF CASH FLOWS
For the
years ended December 31, 2008 and 2007
Year Ended
|
Year Ended
|
|||||||
|
December
|
December
|
||||||
|
31, 2008
|
31, 2007
|
||||||
Cash
Flows From Operating Activities
|
||||||||
Net
Loss
|
$
|
(323,817
|
)
|
$
|
(153,780
|
)
|
||
Adjustments
to reconcile net loss to net cash (used) provided by operating
activities
|
||||||||
Stock
based consulting expense
|
5,000
|
76,500
|
||||||
Impairment
of oil and gas properties
|
116,553
|
-
|
||||||
Gain
on trading securities
|
(14,479
|
)
|
-
|
|||||
Amortization
of Loan & Debenture Costs
|
98,827
|
41,799
|
||||||
Depreciation,
Depletion and Amortization
|
66,468
|
9,896
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Payables
|
(15,941
|
)
|
(126,043
|
)
|
||||
Accrued
Interest
|
60,260
|
48,727
|
||||||
Receivables
|
(36,997
|
)
|
(24,732
|
)
|
||||
Prepaid
Expenses
|
(30,933
|
)
|
-
|
|||||
Net
cash (used) provided by operating activities
|
(75,059)
|
(127,633
|
)
|
|||||
Cash
Flows From Investing Activities
|
||||||||
Capitalized
Investment in Proved Leaseholds
|
(156,926
|
)
|
(131,126
|
)
|
||||
Purchase
of Available for Sale Securities
|
(510,486
|
)
|
-
|
|||||
Purchase
of fixed assets
|
(427
|
)
|
-
|
|||||
Net
cash used by investing activities
|
(667,839
|
)
|
(131,126
|
)
|
||||
Cash
Flows From Financing Activities
|
||||||||
Capital
Contributions from Shareholders
|
-
|
9,183
|
||||||
Deferred
financing costs
|
(103,110
|
)
|
(174,064
|
)
|
||||
Debentures
Payable
|
616,000
|
562,000
|
||||||
Net
cash provided from financing activities
|
512,890
|
397,119
|
||||||
Net
increase in cash
|
(230,008
|
)
|
138,360
|
|||||
Cash,
beginning of period
|
353,112
|
214,752
|
||||||
Cash,
end of period
|
$
|
123,104
|
$
|
353,112
|
||||
Supplemental
disclosure of non-cash items:
|
||||||||
Unrealized
loss on available for sale securities
|
(325,465
|
)
|
-
|
|||||
Income
taxes paid in cash
|
-
|
-
|
||||||
Interest
expense paid in cash
|
$
|
101,449
|
$
|
30,952
|
*See
accompanying notes to the financial statements.
F-5
STATEMENT
OF CHANGES IN STOCKHOLDERS' DEFICIT
For the
years ended December 31, 2008 and 2007
Deficit
|
||||||||||||||||||||||||||||
Accumulated
|
Accumulated
|
|||||||||||||||||||||||||||
Additional
|
During
|
Other
|
||||||||||||||||||||||||||
Common Stock
|
Paid-in
|
Development
|
Accumulated
|
Comprehensive
|
||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Stage
|
Deficit
|
Income
|
Total
|
||||||||||||||||||||||
Balance,
December 31, 2006
|
6,595,000
|
$
|
6,595
|
$
|
9,505
|
$
|
(24,718
|
)
|
$
|
-
|
$
|
-
|
$
|
(8,618
|
)
|
|||||||||||||
Issuance
of common stock at
$0.10 per share to Don Ellison
on February 22, 2007
|
|
|
50,000
|
50
|
4,950
|
-
|
-
|
|
|
|
-
|
|
|
5,000
|
||||||||||||||
Issuance
of common stock at
$0.10 per share to Sunflower
Management Group
on June 15, 2007
|
|
|
705,000
|
705
|
69,795
|
-
|
-
|
|
|
|
-
|
|
|
70,500
|
||||||||||||||
Issuance
of common stock at
$0.10 per share to Jack Arnold
on October 12, 2007
|
|
|
10,000
|
10
|
990
|
-
|
-
|
|
|
|
-
|
|
|
1,000
|
||||||||||||||
Rent
contributed by shareholder
|
-
|
-
|
9,183
|
-
|
-
|
-
|
9,183
|
|||||||||||||||||||||
Net
Loss
|
-
|
-
|
-
|
-
|
(153,780
|
)
|
-
|
(153,780
|
)
|
|||||||||||||||||||
Balance,
December 31, 2007
|
7,360,000
|
$
|
7,360
|
$
|
94,423
|
$
|
(24,718
|
)
|
$
|
(153,780
|
)
|
$
|
-
|
$
|
(76,715
|
)
|
||||||||||||
Issuance
of common stock at
$0.10 per share to John Brewster
on December 10, 2008
|
|
|
50,000
|
50
|
4,950
|
-
|
-
|
|
|
|
-
|
|
|
5,000
|
||||||||||||||
Net
Loss
|
-
|
-
|
-
|
-
|
(323,817
|
)
|
-
|
(323,817
|
)
|
|||||||||||||||||||
Unrealized
loss on available
for sale securities
|
|
|
-
|
-
|
-
|
-
|
-
|
|
|
|
(325,465
|
)
|
|
|
(325,465
|
)
|
||||||||||||
Balance,
December 31, 2008
|
7,410,000
|
$
|
7,410
|
$
|
99,373
|
$
|
(24,718
|
)
|
$
|
(477,597
|
)
|
$
|
(325,465
|
)
|
$
|
(720,997
|
)
|
*See
accompanying notes to financial statements
F-6
SOUTHFIELD
ENERGY CORPORATION
NOTES
TO FINANCIAL STATEMENTS
For the
years ended December 31, 2008 and 2007
NOTE
1 – Nature of Operations and Basis of Reporting
SOUTHFIELD
ENERGY CORPORATION (the "Company" or “Southfield”), a development stage company
through December 31, 2006, was incorporated in Nevada on July 5, 2005 with the
objective to acquire oil and gas interests in the United
States. On July 6, 2005, the Company sold 6,200,000 shares of
its common stock at par value for $6,200. On December 31, 2006 the Company
exited the Development Stage with its first acquisition of oil and gas
interests. The Company selected December 31 as its year-end.
Southfield
is an oil and gas investment company. It invests in the exploration,
development, and production of oil & gas in the United
States. The focus of its activity is in Texas, Louisiana, Oklahoma,
Colorado and the Gulf of Mexico. The
Company intends to invest its funds primarily as a working interest owner,
royalty interest owner or mineral lease owner. Generally, the Company will be a
minority owner in each well. The Company expects most of its investments to
range from 5-25% of the total investment required for any given project, and
anticipates that its investment in each project will range from $50,000 to
$250,000.
NOTE
2 – Going Concern
These
financial statements have been prepared on a going concern basis and do not
include any adjustments to the measurement and classification of the recorded
asset amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company has
experienced losses and incurred negative cash flows in the periods and since
inception. The Company’s ability to realize its assets and discharge its
liabilities in the normal course of business is dependent upon continued
support. The Company is currently attempting to obtain additional financing
through its debenture offering to continue its operations. However, there can be
no assurance that the Company will obtain sufficient additional funds from these
sources.
These
conditions cause substantial doubt about the Company’s ability to continue as a
going concern. A failure to continue as a going concern would require that
stated amounts of assets and liabilities be reflected on a liquidation basis
that could differ from the going concern basis.
NOTE
3 - Summary of Significant Accounting Policies
OIL AND
GAS PROPERTIES (SUCCESSFUL EFFORTS) – The Company follows the successful efforts
method of accounting for oil and gas property acquisition, exploration,
development and production activities.
Capitalization Policies: Oil
and gas property acquisition costs, exploration well costs, and development
costs are capitalized as incurred. Net capitalized costs of unproved property
and exploration well costs are reclassified as proved property and well costs
when related proved reserves are found. If an exploration well is unsuccessful
in finding proved reserves, the capitalized well costs are charged to
exploration expense. Other exploration costs, including geological and
geophysical costs, and the costs of carrying unproved property are charged to
exploration expense as incurred. Costs to operate and maintain wells and field
equipment are expensed as incurred.
F-7
Sales and retirement
Policies: Gains and losses on the sale or abandonment of oil and gas
properties are generally reflected in income. Costs of retired equipment, net of
salvage value, are usually charged to accumulated amortization. Unusual
retirements are reflected in income. As of December 31, 2008,
management has determined that the asset retirement obligation related to the
plugging and abandonment of wells is immaterial individually and to the
financial statements taken as a whole. As such, no asset retirement
obligation is recorded in the statements presented. Management will
review the potential obligation on an on-going basis and will record the
obligation in the period it becomes material, either individually or in
aggregate, to the financial statements.
Impairment Policies:
Long-lived assets used in operations are assessed for impairment whenever
changes in facts and circumstances indicate a possible significant deterioration
in the future cash flows expected to be generated by an asset group. If, upon
review, the sum of the undiscounted pretax cash flows are less than the carrying
value of the asset group, the carrying value is written down to the estimated
fair value. Individual assets are grouped for impairment purposes at the lowest
level for which there are identifiable cash flows that are largely independent
of the cash flows of other groups of assets – generally on a field-by-field
basis. The fair value of impaired assets is
determined
based on quoted market prices in active markets, if available, or upon the
present values of the expected future cash flows using discount rates
commensurate with the risks involved in the asset group. Long-lived assets
committed by management for disposal are accounted for at the lower of amortized
cost or fair value less cost to sell.
EARNINGS
PER SHARE – Southfield’s loss per share has been calculated by dividing the net
loss for the period by the weighted average number of shares outstanding. There
are no potentially dilutive securities outstanding; therefore basic loss per
share equals the fully diluted loss per share.
DEFERRED
FINANCING COSTS – Southfield incurred Deferred Financing Costs in connection
with raising capital through the sale of debentures. The costs have been
capitalized as incurred and amortized over the three year life of the debentures
using the effective interest method.
STOCK
BASED COMPENSATION – On January 1, 2006, the Company adopted SFAS 123 (revised
2004), Share-Based Payment (“SFAS 123(R)”), which requires the measurement and
recognition of compensation expense for all share-based awards made to employees
and directors, including employee stock options and shares issued through its
employee stock purchase plan, based on estimated fair values. In March 2005, the
Securities and Exchange Commission issued Staff Accounting Bulletin 107 (“SAB
107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107
in its adoption of SFAS 123(R). The Company adopted SFAS 123(R) using the
modified prospective transition method, which requires the application of the
accounting standard as of the beginning in 2006. The Company’s financial
statements as of and for the years ended December 31, 2007 and 2008 reflect the
impact of SFAS 123(R). In accordance with the modified prospective transition
method, the Company’s financial statements for prior periods do not include the
impact of SFAS 123(R).
FAIR
VALUE OF FINANCIAL INSTRUMENTS – Southfield includes fair value information in
the Notes to the Financial Statements when the fair value of its financial
instruments can be determined and is different from the carrying amounts
reflected in the accompanying statements. Southfield generally assumes that the
carrying amounts of cash, short-term debt and long-term debt approximate fair
value. For non-current financial instruments, Southfield uses quoted market
prices or, to the extent that there are no available quoted market prices,
market prices for similar instruments. Management believes that the carrying
amounts of the financial instruments are fairly represented in the financial
statements.
F-8
USE OF
ESTIMATES – The
preparation of financial statements in conformity with accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Southfield’s most significant
financial estimates are based on the valuation of remaining proved oil and gas
reserves, impairment of its long-lived assets, valuation of its assets using
successful efforts accounting, and revenue recognition. Because of the nature of
these estimates and the nature of exploration, development and production of oil
and gas reserves, actual results could differ from these estimates and losses
and reductions in value could occur. These possible losses and reductions in
values which have not been reflected in the accompanying financial statements
could be material to the Company’s revenues/earnings or losses and stockholders’
equity (deficit). Due to the nature of the Company’s business plan to acquire
additional properties to explore for oil and gas reserves, additional losses and
reductions in value of the Company may occur in the future both related to
properties currently being developed and new properties not yet acquired and
those amounts could be substantial with respect to the Company’s financial
position and operations. To be successful, the Company must acquire properties
that result in significant amounts of recoverable amounts of oil and gas
reserves and be successful in the marketing of those reserves over a long period
of time in order to pay its acquisition, development, production and operating
costs, to cover its credit and debt obligations, and to provide a return to its
shareholders.
INCOME
TAXES – The Company has incurred losses since inception and, therefore, has not
been subject to federal income taxes. As of December 31, 2007 and December 31,
2008, the Company estimates an accumulated net operating loss (“NOL”)
carryforward of approximately $169,000 and $493,000, respectively, resulting in
deferred tax assets of approximately $64,000 and $172,550, respectively. These
carryforwards begin to expire in 2026 if not previously utilized. Because U.S.
tax laws limit the time during which NOL and tax credit carryforwards may be
applied against future taxable income and tax liabilities, the Company may not
be able to take full advantage of its NOL and tax credits for federal income tax
purposes. Because the company determined that it will not likely realize the
deferred tax asset, a full valuation allowance has been taken to reduce the
deferred tax asset to zero as of December 31, 2008, and 2007,
respectively.
CONCENTRATIONS
OF CREDIT RISK – Financial instruments that may potentially subject the Company
to concentration of risk in the future consist primarily of cash which will be
placed with high credit quality financial institutions at amounts that may at
times exceed FDIC limits.
ACCOUNTS
RECEIVABLE – Accounts receivable represent the amounts due from the sale of oil
and gas. Based on collections history and review of accounts receivable aging,
management does not believe that any allowance for doubtful accounts is
necessary as of December 31, 2008 or 2007.
REVENUE
RECOGNITION – Southfield recognizes oil, gas and natural gas condensate revenue
in the period of delivery. Settlement for oil sales occurs 30 days after the oil
has been sold; and settlement for gas sales occurs 60 days after the gas has
been sold. Southfield has reviewed the revenue recognition requirements in
SAB104, which state that revenue should be recognized when an arrangement
exists, the product or service has been provided, the sales price is fixed or
determinable, and collectability is reasonably assured, and concludes that the
revenue policies in place meet these criteria.
CASH AND
CASH EQUIVALENTS – Southfield considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents. Cash
and cash equivalents at December 31, 2007 and December 31, 2008 are $353,112 and
$123,104, respectively.
F-9
Recent
Accounting Pronouncements
In
September 2006, the SEC staff issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements
(“SAB 108”). SAB 108 establishes an approach that requires
quantification of financial statement misstatements based on the effects of the
misstatements on each of the Company’s consolidated financial statements and the
related financial statement disclosures. SAB 108 is effective for the year
ending February 28, 2009.
In
December 2007, the Financial Accounting Standards Board issued FASB Statement
No. 141 (Revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R
provides additional guidance on improving the relevance, representational
faithfulness, and comparability of the financial information that a reporting
entity provides in its financial reports about a business combination and its
effects. This Statement applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.
We
adopted the Financial Accounting Standards Board’s (FASB) Statement of Financial
Accounting Standard (SFAS) No. 157, Fair Value Measurement at inception. SFAS
157 defines fair value, establishes a framework for measuring fair value and
expands disclosure of fair value measurements. SFAS 157 applies under other
accounting pronouncements that require or permit fair value measurements and
accordingly, does not require any new fair value measurements. SFAS No. 157
clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that market
participants would use in pricing an asset or liability. As a basis for
considering such assumptions, SFAS No. 157 established a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair value as
follows.
¨
|
Level 1. Observable inputs such
as quoted prices in active
markets;
|
|
|
¨
|
Level 2. Inputs, other than the
quoted prices in active markets, that are observable either directly or
indirectly; and
|
|
|
¨
|
Level 3. Unobservable inputs in
which there is little or no market data, which require the reporting
entity to develop its own
assumptions.
|
The
Company values Proved Properties at their fair value if impairment is identified
in accordance with FAS 144. The inputs that are used in determining the fair
value of these assets are Level 3 inputs. These inputs consist of but are not
limited to the following: estimates of reserve quantities, estimates of future
production costs and taxes, estimates of consistent pricing of commodities, 10%
discount rate, etc. In 2008, the company recognized impairment on one of the oil
and gas fields, the Aldwell Unit. This field was written down to the fair value
of the field, and all other unimpaired fields were carried at cost.
The
following table presents assets that are measured and recognized at fair value
as of December 31, 2008 and the year then ended on a non-recurring basis
:
Total
|
||||||||||||||||
Unrealized
|
||||||||||||||||
Description
|
Level 1
|
Level 2
|
Level 3
|
(losses)
|
||||||||||||
Convertible
note (net)
|
$
|
-
|
$
|
-
|
$
|
1,482,000
|
$
|
-
|
||||||||
Available
for Sale Securities
|
199,500
|
-
|
-
|
(325,465
|
)
|
|||||||||||
Proved
Properties (net)
|
-
|
-
|
260,135
|
-
|
||||||||||||
Total
|
$
|
199,500
|
$
|
-
|
$
|
1,742,135
|
$
|
(325,465
|
)
|
The
FASB’s SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, including an Amendment of SFAS 115 became effective for us as of
January 1, 2008. SFAS 159 establishes a fair value option that permits entities
to choose to measure eligible financial instruments and certain other items at
fair value at specified election dates. A business entity shall report
unrealized gains and losses on items for which the fair value options have been
elected in earnings at each subsequent reporting date. For the period ended
December 31, 2008, there were no applicable items on which the fair value option
was elected.
F-10
NOTE
4 - Related Party Transactions
In 2007
the Company paid business expenses on behalf of one of its officers in the
amount of $4,163. These expenses were repaid to the Company on August 14,
2008. In 2008, Southfield loaned $2,000 dollars to one of its
officers which was classified as a receivable on the Balance Sheet as of
December 31, 2008. The $2,000 loan that was made to one of our officers while we
were a private company has been repaid. In 2008 and 2007, shared
office space with a related party, Goldbridge Energy Partners, LLC. Southfield
used 50% of the office space 50% of the time; therefore, we took the monthly
rent for the entire space of $3,061, annualized it, and then divided by four.
Therefore the rent expense that should be recognized by Southfield for 2007 is
$9,183. In the first half of 2008, Southfield used 50% of the space 100% of the
time and paid roughly $1,500 per month. For the second half of 2008, Southfield
used 100% of the office space 100% of the time and therefore paid the entire
rent of roughly $3,100 per month. The company that manages the administration of
the office rent granted a waiver for the rent due in the month of August
and therefore Southfield did not pay rent for the month of August.
The total rent expense for 2008 was $24,483.
NOTE
5 – Convertible Debentures Payable
We have
retained the services of MMR Investment Bankers, Inc. to represent the Company
in a convertible Debenture offering of $10 million. We also engaged Sunflower
Management Group, a third party administrator for interest payments and
technical compliance with the repayment requirements of the Debentures that have
been sold.
MMR
Investment Bankers, Inc. has created an account to reserve from the gross
offering proceeds the first six months of interest payments due to any investor.
Sunflower Management Group is managing the interest reserve account and is
responsible for accruing and funding interest to investors as it becomes due. On
June 15, 2007, the Company issued 705,000 shares to Sunflower Management Group
as consideration for providing financial management services. These shares were
valued at $70,500 by the company and included in its deferred financing
costs.
As of
December 31, 2008 and 2007, the Company has issued $866,000 and $1,482,000 of
three-year convertible Debentures to investors, respectively. The Debentures
bear interest at a rate of 10% and mature three years from the date of purchase.
The investors may elect to have simple interest paid on a monthly basis, or may
have the interest compounded semiannually and paid at maturity. The investors
may convert the face value of the Debenture to common stock in the Company at
any time during the term of the Debenture at a conversion price of $5.00 per
share. The Company has the right to call for the conversion of the Debentures
when the common stock of the Company trades on a public market for 20
consecutive days at a price higher than $7.50 per share and upon notice, unless
the Debenture holder elects not to accept the conversion offer.
After
review of FAS 133 and EITF 00-27, the Company concluded that there is not a
derivative or beneficial conversion option associated with the debentures that
is in-the-money and therefore the Company is not required to calculate the
intrinsic value of such conversion option.
Maturities
of the notes over the next five years are as follows:
2009
|
2010
|
2011
|
2012
|
2013
|
||||||||||
$
|
304,000
|
$
|
454,000
|
$
|
724,000
|
$
|
0
|
$
|
0
|
F-11
NOTE
6 – Acquisitions & Capital Investments
On
January 23, 2007 the Company paid for the acquisition and received an assignment
of leases. The operator of the wells is Mariner Energy Inc., a publicly traded
company under the symbol ME. On August 8, 2007, the Company approved the capital
investment of $91,100 for the drilling and completion of a well located in the
Mary King Estell lease in Nueces County, Texas. The operator of this lease is
Durango Resources, a private company with offices located in Houston,
Texas.
In 2008
the Company invested $156,926 in oil and gas exploration and production
projects. The Company successfully drilled the C-32 and C-33 wells located on
the Mary King Estell Lease and spent approximately $61,000 and $65,000,
respectively. The remainder of the capital investment in proved leaseholds was
in the Aldwell Unit for roughly $31,000. This capital investment was used to
drill and complete new wells and to recomplete existing production wells to
enhance production in the field.
In 2008
the Company invested approximately $510,000 in the common stock of Meridian
Resources, a publicly traded exploration and production company on the New York
Stock Exchange listed under the symbol TMR. In 2008 the market price of the
stock decreased such that the Company incurred an unrealized holding loss of
$325,465.
NOTE
7 – Non-cash Compensation
Don
Ellison was issued 50,000 shares on February 22, 2007 for engineering services
related prospect evaluation. Sunflower Management Group was issued 705,000
shares on June 15, 2007 for financial management services. Jack
Arnold was issued 10,000 shares October 12, 2007 for designing and implementing
our website and providing information technology services. John Brewster was
issued 50,000 shares on December 10, 2008 for providing consulting services to
the Company. The equity that was issued in 2007 and 2008 was valued by the
Company at $0.10 per share based upon management’s discounted cash flow
analysis.
NOTE
8 – Depletion and Depreciation
For 2007
and 2008, the Company incurred depreciation, depletion and amortization of its
proved producing properties of $9,896 and $66,468, respectively. When the
company purchased the Aldwell Unit, it allocated 25% of the purchase price to
tangible well costs and 75% to intangible well costs. Depreciation, depletion
and amortization has been calculated using the units of production
method.
NOTE
9 – Capitalized Expenses
The
Company is capitalizing expenses related to the Debenture Offering and
amortizing them over the three year life of the Debentures. The gross
capitalized loan and debenture costs were $267,240 and $370,353 as of December
31, 2007 and December 31, 2008, respectively. The accumulated amortization was
$49,912 and $148,739; and the net capitalized loan and debenture costs were
$217,328 and $221,614 for the same periods respectively.
F-12
NOTE
10 – Impairment of Proved Properties
Due to
the low commodity prices for oil and gas at December 31, 2008, the Company was
required to impair its assets located in the Aldwell Unit. An impairment test
was conducted using data in a reserve report compiled by Huddleston and Company,
a Houston based petroleum engineering company. While conducting the impairment
test, management determined that the estimated undiscounted future net cash flow
provided in the reserve report was less that the carrying value of the Aldwell
Unit on the Company’s Balance Sheet on December 31, 2008 and that the assets
were subject to impairment. The assets were subsequently impaired by taking the
difference between the discounted future net cash flow, using a 10% discount
rate, which was estimated by Huddleston and Company and the carrying value of
the assets on our Balance Sheet. Management found the difference to be $116,553
and impaired the Aldwell Unit by that amount.
NOTE
11 – Commitments and Contingencies
Litigation
In the
normal course of business, the Company may become subject to lawsuits and other
claims and proceedings. Such matters are subject to uncertainty and outcomes are
not predictable with assurance. Management is not aware of any pending or
threatened lawsuits or proceedings which would have a material effect on the
Company’s financial position, liquidity, or results of operations.
Concentrations
The
Company’s sales are dependent upon the performance of its producing wells and
our ability to successfully partner with high quality oil and gas operators; any
impacts to this industry could have a significant impact to the Company. For the
years ended December 31, 2007 and 2008, two leases represented 100% of the total
revenues of the company and 100% of the accounts receivable. The Company
generally does not require collateral to support accounts receivable or
financial instruments subject to credit risk.
Fair Value of assets and
liabilities
Total
|
||||||||||||||||
Gains
|
||||||||||||||||
Description
|
Level 1
|
Level 2
|
Level 3
|
(losses)
|
||||||||||||
Convertible
note (net)
|
$
|
-
|
$
|
-
|
$
|
1,482,000
|
$
|
-
|
||||||||
Available
for Sale Securities
|
199,500
|
-
|
-
|
(325,465
|
)
|
|||||||||||
Proved
Properties (net)
|
-
|
-
|
260,135
|
-
|
||||||||||||
Total
|
$
|
199,500
|
$
|
-
|
$
|
1,742,135
|
$
|
(325,465
|
)
|
NOTE
12 – Oil and Gas Properties
The
Company owns non-operated working interests in the Aldwell Unit located in
Reagan County and in the Mary King Estell Lease which are operated by Mariner
Energy and Durango Resources, respectively. As of December 31, 2008 the company
owns an interest in approximately 200 wells. According to the reserve report
prepared by Huddleston and Company and the Company’s estimate of future income
taxes, as of December 31, 2007 and December 31, 2008 the Company had proved
reserves with estimated discounted net cash flows after taxes of $805,815 and
$609,427, respectively. Estimated future net cash flows of the properties were
discounted at 10% consistent with FAS 69.
F-13
NOTE
13 – Supplementary Financial Information on Oil and Natural Gas Exploration,
Development and Production Activities
The
following disclosures provide unaudited information required by SFAS No. 69,
“Disclosures About Oil and Gas Producing Activities.”
Results of operation from
oil and natural gas producing activities
The
Company’s oil and natural gas properties are located in Texas. The Company
currently has no oil and gas investments or operations in foreign jurisdictions.
Results of operations from oil and natural gas producing activities are
summarized below for the years ended December 31:
Results
of Operations
As of December 31,
|
||||||||
2008
|
2007
|
|||||||
Sales
of oil and gas
|
$
|
395,474
|
$
|
78,276
|
||||
Production
costs
|
(54,218
|
)
|
(20,090
|
)
|
||||
Depreciation,
depletion and amortization
|
(66,468
|
)
|
(9,896
|
)
|
||||
Accretion
of asset retirement obligation
|
-
|
-
|
||||||
Results
of producing activities
|
$
|
274,788
|
$
|
48,290
|
Supplemental reserve
information
The
Company emphasizes that reserve estimates are inherently imprecise. Our reserve
estimates were generally based upon extrapolation of historical production
trends, analogy to similar properties, and volumetric calculations. Accordingly,
these estimates are expected to change and such changes could be material and
occur in the near term as future information becomes available.
The
Company retained the service of an independent petroleum consultant Huddleston
and Company, Inc. to estimate its proved oil and gas reserves at December 31,
2008 and 2007.
The
following table sets forth a summary of changes in estimated reserves for 2008
and 2007:
2008
|
2007
|
|||||||||||||||||||||||
Proved developed and undeveloped reserves
|
(1)
|
Oil (bbl)
|
Gas (Mcf)
|
(1)
|
Oil (bbl)
|
Gas (Mcf)
|
||||||||||||||||||
Beginning
of year
|
15,768 | 174,510 | - | - | ||||||||||||||||||||
Revisions
of previous estimates
|
(7,417 | ) | 79,091 | 16,402 | 39,493 | |||||||||||||||||||
Purchases
of minerals in place
|
- | - | 247 | 146,680 | ||||||||||||||||||||
Production
|
(881 | ) | (36,241 | ) | (881 | ) | (11,663 | ) | ||||||||||||||||
End
of year
|
7,470 | 217,360 | 15,768 | 174,510 | ||||||||||||||||||||
Proved
developed reserves:
|
||||||||||||||||||||||||
Beginning
of year
|
77,550 | 9,909 | - | - | ||||||||||||||||||||
End
of year
|
5,512 | 125,010 | 77,550 | 9,909 |
(1) Includes natural gas liquids expressed
in measurements of bbl.
Costs
incurred
Costs
incurred in oil and natural gas property acquisition, exploration and
development activities are summarized below for the years ended December
31:
Capitalized
Costs Related to Oil Producing Activities
As
of December 31,
|
||||||||
2008
|
2007
|
|||||||
Cumulative
net capitalized costs
|
286,230 | |||||||
Acquisitions
of proved properties
|
- | 190,600 | ||||||
Exploration
costs
|
- | 70,983 | ||||||
Development
costs
|
156,926 | 34,543 | ||||||
Total
capitalized costs
|
443,156 | 296,126 | ||||||
Less:
accumulated DD&A
|
(66,468 | ) | (9,896 | ) | ||||
Less:
impairment of proved reserves
|
(116,553 | ) | - | |||||
Oil
producing properties, net
|
260,135 | 286,230 |
F-14
Standardized
Measure
The
standardized measure of discounted future net cash flows relating to the
Company’s ownership interests in proved oil and natural gas reserves for the
years ended December 31 are shown below:
Standardized
Measure of Discounted Future Net Cash Flow Relating to Proved Oil
Reserves
2008
|
2007
|
|||||||
Future
cash inflows
|
1,549,473 | 2,571,650 | ||||||
Future
production costs
|
(431,453 | ) | (711,093 | ) | ||||
Future
development costs
|
(165,765 | ) | (194,685 | ) | ||||
Future
income tax expenses
|
(62,340 | ) | (164,061 | ) | ||||
Future
net cash flows
|
889,915 | 1,501,811 | ||||||
10%
annual discount for estimated timing of cash flows
|
(280,488 | ) | (695,996 | ) | ||||
Standardized
measure of discounted future net cash flows
|
609,427 | 805,815 |
Year
end oil and gas price information
|
2008
|
2007
|
||||||
Year
end oil price per barrel
|
45 | 96 | ||||||
Year
end oil price per mcf
|
$ | 5.66 | $ | 6.73 |
From 2007
to 2008, the PV10 value was reduced significantly primarily as a result of the
sharp decline in the prices of oil and natural gas. Future cash flows are
computed by applying current year-end prices of oil and natural gas to future
estimates of year-end quantities of proved oil and natural gas reserves. The
year-end prices used in computing future cash flows as of December 31, 2007 and
2008 were $95.98 and $44.60 for oil, respectively, and $6.73 and $5.66 for gas,
respectively. Future operating expenses and development costs were estimated by
engineers from Huddleston and Company, a Houston based petroleum engineering
company, based on year-end costs and assuming continuation of existing economic
conditions.
Future
income taxes are based on year-end statutory rates, adjusted for tax basis of
oil and natural gas properties. A discount factor of 10% was used to reflect the
timing of future net cash flows.
The
standardized measure of discounted future net cash flows is not intended to
represent the replacement cost or fair market value of the Company’s oil and
natural gas properties. An estimate of fair value may also take into
account, among other things, the recovery of reserves not presently classified
as proved, anticipated changes in future prices and costs, and may require a
discount factor more representative of the time value of money and the risks
inherent in reserve estimates.
F-15
Changes in Standard
Measure
Included
within standard measure are reserves purchased in place. The purchase of
reserves in place includes undeveloped reserves that were acquired at minimal
value which have been estimated by independent reserve engineers to be
recoverable through existing wells utilizing equipment and operating methods
available to the Company and that are expected to be developed in the near term
based on an approved plan of development contingent on available
capital.
Changes
in the standardized measure of future net cash flows relating to proved oil and
natural gas reserves for the years ended December 31 are summarized
below:
Changes
in Standardized Measure of Discounted Future Cash Flows
As of December 31,
|
||||||||
2008
|
2007
|
|||||||
Beginning
Balance
|
$
|
988,653
|
$
|
-
|
||||
Accretion
of Discount
|
98,865
|
-
|
||||||
Sales
of oil and gas net of production costs
|
(341,256
|
)
|
(58,186
|
)
|
||||
Development
cost changes
|
25,901
|
(35,120
|
)
|
|||||
Previously
estimated development costs incurred during period
|
(40,373
|
)
|
-
|
|||||
Revisions
in previous price estimates
|
(893,457
|
)
|
-
|
|||||
Revisions
in quantity estimates
|
266,753
|
792,177
|
||||||
Net
changes in prices and production costs
|
191,713
|
(225,755
|
)
|
|||||
Changes
in estimated future severance & ad valorem taxes
|
58,731
|
(55,439
|
)
|
|||||
Purchases
of minerals property
|
-
|
512,791
|
||||||
Other-Unspecified
|
(6,782
|
)
|
58,185
|
|||||
Net
change in standardized measure of discounted cash flows
|
348,746
|
988,653
|
||||||
Ending
Balance
|
$
|
639,907
|
$
|
988,653
|
NOTE
14 – Correction of Errors
The
Company intends to restate its previously issued December 31, 2008 and 2007
financial statements for matters related to the following previously reported
items: 1. Impairment on oil and gas properties was moved from other expenses
shown below operating loss to operating expenses above operating loss within the
Statements of Operations for the year ended December 31, 2008. 2. Depreciation,
depletion, and amortization have been moved from operating expenses to cost of
sales in the Statements of Operations for the years ended December 31, 2008 and
2007. 3. Basic and diluted net loss per share was originally calculated based on
the total comprehensive loss for the year ended December 31, 2008 on the
Statements of Operations. This was revised to show the net loss per share for
net loss only. 4. The net loss per share on the Statements of Operations was
rounded to the nearest penny rather than the nearest tenth of a penny to provide
more precision. 5. The Statement of Cash Flows originally showed a
portion of cash flows related to debenture offerings as an operating activity
rather than financing activity for the year ended December 31, 2008. The cash
flow has been re-classified to financing activities. The accompanying financial
statements for the years ended December 31, 2008 and 2007 have been restated to
reflect these corrections. The aforementioned errors required no accounting
entries to adjust any balances. The errors were all related exclusively to
presentation on the financial statements.
F-16
The
following is a summary of the restatements for December 31, 2008 and December
31, 2007.
Statement
of Operations for the year ended December 31, 2008:
|
Previously
|
Net
|
||||||||||
|
Reported
|
Change
|
Restated
|
|||||||||
REVENUES:
|
||||||||||||
Oil
and Gas Production
|
$ | 395,474 | - | $ | 395,474 | |||||||
Cost
of Sales
|
54,218 | 66,468 | 120,686 | |||||||||
GROSS
MARGIN
|
341,256 | 66,468 | 274,788 | |||||||||
EXPENSES:
|
||||||||||||
Amortization
of Loan and Debenture Costs
|
98,827 | - | 98,827 | |||||||||
Depreciation,
Depletion and Amortization
|
66,468 | (66,468 | ) | - | ||||||||
Impairment
of proved reserves
|
- | 116,553 | 116,553 | |||||||||
General
and Administrative Expenses
|
273,143 | - | 273,143 | |||||||||
TOTAL
OPERATING EXPENSES
|
438,438 | 50,085 | 488,523 | |||||||||
OPERATING
LOSS
|
(97,182 | ) | (116,553 | ) | (213,735 | ) | ||||||
Other
Income (Expense)
|
||||||||||||
Interest
Income
|
3,870 | - | 3,870 | |||||||||
Gain
on Sale of Securities
|
14,479 | - | 14,479 | |||||||||
Interest
Expense
|
(128,431 | ) | - | (128,431 | ) | |||||||
Impairment
of Proved Reserves
|
(116,553 | ) | 116,553 | - | ||||||||
Total
Other Income (Expenses)
|
(226,553 | ) | 116,553 | (110,082 | ) | |||||||
Net
Loss
|
$ | (323,817 | ) | 116,553 | $ | (323,817 | ) | |||||
Other
Comprehensive Income:
|
||||||||||||
Unrealized
loss on available for sale securities
|
(325,465 | ) | - | (325,465 | ) | |||||||
Total
Comprehensive Loss
|
(649,282 | ) | - | (649,282 | ) | |||||||
Weighted
average common shares outstanding
|
7,363,005 | - | 7,363,005 | |||||||||
Basic
and diluted net loss per common share
|
$ | (0.088 | ) | 0.128 | $ | (0.04 | ) |
F-17
Statement
of Operations for the year ended December 31, 2007:
|
Previously
|
Net
|
||||||||||
|
Reported
|
Change
|
Restated
|
|||||||||
REVENUES:
|
||||||||||||
Oil
and Gas Production
|
$ | 78,276 | - | $ | 78,276 | |||||||
Cost
of Sales
|
20,090 | 9,896 | 29,986 | |||||||||
GROSS
MARGIN
|
58,186 | 9,896 | 48,290 | |||||||||
EXPENSES:
|
||||||||||||
Amortization
of Loan and Debenture Costs
|
41,799 | - | 41,799 | |||||||||
Depreciation,
Depletion and Amortization
|
9,896 | (9,896 | ) | - | ||||||||
Impairment
of proved reserves
|
- | - | - | |||||||||
General
and Administrative Expenses
|
85,256 | - | 85,256 | |||||||||
TOTAL
OPERATING EXPENSES
|
136,951 | - | 127,055 | |||||||||
OPERATING
LOSS
|
(78,765 | ) | - | (78,765 | ) | |||||||
Other
Income (Expense)
|
||||||||||||
Interest
Income
|
532 | - | 532 | |||||||||
Gain
on Sale of Securities
|
- | - | - | |||||||||
Interest
Expense
|
(75,547 | ) | - | (75,547 | ) | |||||||
Impairment
of Proved Reserves
|
- | - | - | |||||||||
Total
Other Income (Expenses)
|
(75,015 | ) | - | (75,015 | ) | |||||||
Net
Loss
|
$ | (153,780 | ) | - | $ | (153,780 | ) | |||||
Other
Comprehensive Income:
|
||||||||||||
Unrealized
loss on available for sale securities
|
- | - | ||||||||||
Total
Comprehensive Loss
|
- | - | ||||||||||
Weighted
average common shares outstanding
|
7,026,397 | - | 7,026,397 | |||||||||
Basic
and diluted net loss per common share
|
$ | (0.022 | ) | 0.002 | $ | 0.02 |
F-18
Statement
of Cash Flows for the year ended December 31, 2008
Previously
|
Net
|
|||||||||||
Reported
|
Change
|
Restated
|
||||||||||
Cash
Flows From Operating Activities
|
||||||||||||
Net
Loss
|
$ | (323,817 | ) | - | $ | (323,817 | ) | |||||
Adjustments
to reconcile net loss to net cash (used)
|
||||||||||||
provided
by operating activities
|
||||||||||||
Stock
based consulting expense
|
5,000 | - | 5,000 | |||||||||
Impairment
of oil and gas properties
|
116,553 | - | 116,553 | |||||||||
Gain
on trading securities
|
(14,479 | ) | - | (14,479 | ) | |||||||
Amortization
of Loan & Debenture Costs
|
98,827 | - | 98,827 | |||||||||
Depreciation,
Depletion and Amortization
|
66,468 | - | 66,468 | |||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Payables
|
(15,941 | ) | - | (15,941 | ) | |||||||
Current
Portion of Debentures Payable
|
304,000 | (304,000 | ) | - | ||||||||
Accrued
Interest
|
60,260 | - | 60,260 | |||||||||
Receivables
|
(36,997 | ) | - | (36,997 | ) | |||||||
Prepaid
Expenses
|
(30,933 | ) | - | (30,933 | ) | |||||||
Net
cash (used) provided by operating activities
|
228,941 | (304,000 | ) | (75,059 | ) | |||||||
Cash
Flows From Investing Activities
|
||||||||||||
Capitalized
Investment in Proved Leaseholds
|
(156,926 | ) | - | (156,926 | ) | |||||||
Purchase
of Available for Sale Securities
|
(510,486 | ) | - | (510,486 | ) | |||||||
Purchase
of fixed assets
|
(427 | ) | - | (427 | ) | |||||||
Net
cash used by investing activities
|
(667,839 | ) | - | (667,839 | ) | |||||||
Cash
Flows From Financing Activities
|
||||||||||||
Capital
Contributions from Shareholders
|
- | |||||||||||
Deferred
financing costs
|
(103,110 | ) | - | (103,110 | ) | |||||||
Debentures
Payable
|
312,000 | 304,000 | 616,000 | |||||||||
Net
cash provided from financing activities
|
208,890 | 304,000 | 512,890 | |||||||||
Net
increase in cash
|
(230,008 | ) | - | (230,008 | ) | |||||||
Cash,
beginning of period
|
353,112 | - | 353,112 | |||||||||
Cash,
end of period
|
$ | 123,104 | - | $ | 12,104 | |||||||
Supplemental
disclosure of non-cash items:
|
||||||||||||
Unrealized
loss on available for sale securities
|
(325,465 | ) | - | (325,465 | ) | |||||||
Income
taxes paid in cash
|
- | - | - | |||||||||
Interest
expense paid in cash
|
$ | 101,449 | - | $ | 101,449 |
F-19
SOUTHFIELD
ENERGY CORPORATION
STATEMENTS
OF OPERATIONS
For the
three and nine months ended
September
30, 2009 and September 30, 2008
Three Months
|
Three Months
|
Nine Months
|
Nine Months
|
|||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
9/30/2009
|
9/30/2008
|
9/30/2009
|
9/30/2008
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||||
REVENUES:
|
||||||||||||||||
Oil
and Gas Production
|
$ | 15,511 | $ | 113,713 | $ | 47,361 | $ | 256,607 | ||||||||
Cost
of Sales
|
7,919 | 24,196 | 31,549 | 24,314 | ||||||||||||
GROSS
MARGIN
|
7,592 | 89,517 | 15,812 | 232,293 | ||||||||||||
EXPENSES:
|
||||||||||||||||
Amortization
of Loan and Debenture Costs
|
38,919 | 38,243 | 105,753 | 79,970 | ||||||||||||
Unsuccessful
Exploratory Wells
|
- | - | 30,933 | - | ||||||||||||
General
and Administrative Expenses
|
120,201 | 86,884 | 347,887 | 172,034 | ||||||||||||
TOTAL
OPERATING EXPENSES
|
159,120 | 125,127 | 484,573 | 252,004 | ||||||||||||
OPERATING
INCOME (LOSS)
|
(151,528 | ) | (35,610 | ) | (468,761 | ) | (19,711 | ) | ||||||||
Other
Income (Expense)
|
||||||||||||||||
Interest
Income
|
18 | 1,476 | 119 | 3,623 | ||||||||||||
Gain
(Loss) on Sale of Securities
|
- | 13,921 | (134,096 | ) | 13,921 | |||||||||||
Permanent
Impairment of Securities
|
(243,095 | ) | - | (243,095 | ) | - | ||||||||||
Interest
Expense
|
(48,844 | ) | (44,547 | ) | (138,170 | ) | (89,882 | ) | ||||||||
Total
Other Income (Expenses)
|
(291,921 | ) | (29,150 | ) | (515,242 | ) | (72,338 | ) | ||||||||
Net
Loss before Discontinued Operations
|
(443,449 | ) | (64,760 | ) | (984,003 | ) | (92,049 | ) | ||||||||
Gain
from Discontinued Operations
|
169,097 | 15,799 | 165,078 | 21,238 | ||||||||||||
Net
Loss
|
$ | (274,352 | ) | $ | (48,961 | ) | $ | (818,925 | ) | $ | (70,811 | ) | ||||
Other
Comprehensive Income:
|
||||||||||||||||
Unrealized
gain on available for sale securities
|
- | 3,563 | - | 3,563 | ||||||||||||
Total
Comprehensive Income/(Loss)
|
- | (45,398 | ) | - | (67,248 | ) | ||||||||||
Net
loss per common share from continuing operations
|
||||||||||||||||
(Basic
and Diluted)
|
$ | (0.06 | ) | $ | (0.01 | ) | $ | (0.13 | ) | $ | (0.01 | ) | ||||
Net
Income per common share from discontinued
|
||||||||||||||||
operations
(Basic and Diluted)
|
$ | 0.02 | $ | 0.00 | $ | 0.02 | $ | 0.00 | ||||||||
Weighted
average common shares outstanding
|
7,410,000 | 7,360,000 | 7,410,000 | 7,360,000 |
*See
accompanying notes to the financial statements.
F-20
SOUTHFIELD
ENERGY CORPORATION
BALANCE
SHEETS
As of
September 30, 2009, and
As of
December 31, 2008
September
|
December
|
|||||||
30, 2009
|
31, 2008
|
|||||||
|
(unaudited)
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
|
$ | 272,546 | $ | 123,104 | ||||
Accounts
Receivable
|
18,500 | 59,726 | ||||||
Accounts
Receivable - Related Party
|
2,000 | 2,000 | ||||||
Prepaid
Expenses
|
- | 30,933 | ||||||
TOTAL
CURRENT ASSETS
|
293,046 | 215,763 | ||||||
Property
& Equipment:
|
||||||||
Oil
& Gas, on the basis of successful efforts accounting
|
||||||||
Gross
Proved Properties
|
356,035 | 232,271 | ||||||
Less:
Accumulated Depletion and Depreciation
|
(92,860 | ) | (76,364 | ) | ||||
Net
Proved Properties
|
263,175 | 155,907 | ||||||
Office
Equipment
|
427 | 427 | ||||||
Other
Long Term Assets:
|
||||||||
Gross
Capitalized Loan and Debenture Costs
|
438,513 | 370,353 | ||||||
Less:
Accumulated Amortization
|
(271,543 | ) | (148,739 | ) | ||||
Net
Capitalized Loan and Debenture Costs
|
166,970 | 221,614 | ||||||
Available
for Sale Securities
|
102,500 | 524,965 | ||||||
Less:
Valuation Allowance
|
- | (325,465 | ) | |||||
Net
(market value)
|
102,500 | 199,500 | ||||||
Long
term assets discontinued operations
|
- | 104,228 | ||||||
TOTAL
ASSETS
|
$ | 826,118 | $ | 897,439 | ||||
LIABILITIES
AND STOCKHOLDERS' DEFECIT
|
||||||||
LIABILITIES:
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
Payable
|
$ | 24,235 | $ | 27,449 | ||||
Accrued
interest on Debentures
|
182,340 | 108,987 | ||||||
Current
portion of Debentures Payable
|
164,000 | 304,000 | ||||||
TOTAL
CURRENT LIABILITIES
|
370,575 | 440,436 | ||||||
Long
Term Liabilities:
|
||||||||
Convertible
Debentures Payable
|
1,670,000 | 1,178,000 | ||||||
TOTAL
LONG TERM LIABILITIES
|
1,670,000 | 1,178,000 | ||||||
TOTAL
LIABILITIES
|
2,040,575 | 1,618,436 | ||||||
STOCKHOLDERS'
DEFICIT:
|
||||||||
Common
stock, $0.001 par value; 50,000,000 shares
|
||||||||
authorized,
7,410,000 issued and
|
||||||||
outstanding
at 9/30/09 and 12/31/08, respectively
|
7,410 | 7,410 | ||||||
Additional
Paid-in Capital
|
99,373 | 99,373 | ||||||
Deficit
accumulated during the development stage
|
(24,718 | ) | (24,718 | ) | ||||
Accumulated
deficit
|
(1,296,522 | ) | (477,597 | ) | ||||
Accumulated
other comprehensive income (loss)
|
- | (325,465 | ) | |||||
TOTAL
STOCKHOLDERS' DEFICIT
|
(1,214,457 | ) | (720,997 | ) | ||||
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$ | 826,118 | $ | 897,439 |
*See
accompanying notes to the financial statements.
F-21
SOUTHFIELD
ENERGY CORPORATION
STATEMENTS
OF CASH FLOWS
For the
nine months ended September 30, 2009, and September 30, 2008
Nine Months
|
Nine Months
|
|||||||
Ended
|
Ended
|
|||||||
9/30/2009
|
9/30/2008
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
Cash
Flows From Operating Activities
|
||||||||
Net
loss from operations
|
$ | (984,003 | ) | $ | (92,049 | ) | ||
Net
gain from discontinued operations
|
$ | 165,078 | $ | 21,238 | ||||
Net
Loss
|
$ | (818,925 | ) | $ | (70,811 | ) | ||
Adjustments
to reconcile net loss to net cash (used) provided
|
||||||||
by
operating activities
|
||||||||
Impairment
of AFS - Securities
|
243,095 | - | ||||||
Loss
on sale of AFS - Securities
|
134,096 | - | ||||||
Gain
on sale of AFS - Securities
|
- | (13,921 | ) | |||||
Amortization
of Loan & Debenture Costs
|
105,753 | 79,970 | ||||||
Depreciation,
Depletion and Amortization
|
24,834 | 26,740 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Payables
|
(26,598 | ) | 2,833 | |||||
Accrued
expenses
|
96,738 | 40,788 | ||||||
Receivables
|
41,226 | (97,591 | ) | |||||
Prepaid
Expenses
|
30,933 | - | ||||||
Cash
flows from discontinued operations
|
(185,326 | ) | (308,953 | ) | ||||
Net
cash used by operating activities
|
(354,174 | ) | (340,945 | ) | ||||
Cash
Flows From Investing Activities
|
||||||||
Capitalized
Investment in Proved Leaseholds
|
(133,147 | ) | (50,286 | ) | ||||
Sale
of AFS - Securities
|
45,273 | - | ||||||
Purchase
of fixed assets
|
- | (427 | ) | |||||
Purchase
of AFS - Securities
|
- | (302,297 | ) | |||||
Cash
flows from discontinued operations
|
290,599 | (31,000 | ) | |||||
Net
cash provided / (used) by investing activities
|
202,725 | (384,010 | ) | |||||
Cash
Flows From Financing Activities
|
||||||||
Deferred
financing costs
|
(51,109 | ) | (96,017 | ) | ||||
Debentures
Payable
|
352,000 | 590,000 | ||||||
Net
cash provided from financing activities
|
300,891 | 493,983 | ||||||
Net
increase (decrease) in cash
|
149,442 | (230,972 | ) | |||||
Cash,
beginning of period
|
123,104 | 353,112 | ||||||
Cash,
end of period
|
$ | 272,546 | $ | 122,140 | ||||
Supplemental
disclosure of non-cash items:
|
||||||||
Unrealized
gain on available for sale securities prior to impairment
|
- | 3,563 | ||||||
Income
taxes paid in cash
|
$ | - | $ | - | ||||
Interest
expense paid in cash
|
- | - |
*See
accompanying notes to the financial statements.
F-22
SOUTHFIELD
ENERGY CORPORATION
STATEMENT
OF CHANGES IN STOCKHOLDERS' DEFICIT
For the
nine months ended September 30, 2009
(unaudited)
Deficit
|
||||||||||||||||||||||||||||
Accumulated
|
Accumulated
|
|||||||||||||||||||||||||||
Additional
|
During
|
Other
|
||||||||||||||||||||||||||
Common Stock
|
Paid-in
|
Development
|
Accumulated
|
Comprehensive
|
||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Stage
|
Deficit
|
Income
|
Total
|
||||||||||||||||||||||
Balance,
December 31, 2008
|
7,410,000
|
$
|
7,410
|
$
|
99,373
|
$
|
(24,718
|
)
|
$
|
(477,597
|
)
|
$
|
(325,465
|
)
|
$
|
(720,997
|
)
|
|||||||||||
Sale
of Available for sale securities
|
-
|
-
|
-
|
-
|
-
|
134,096
|
134,096
|
|||||||||||||||||||||
Impairment
of Available for Sale Securities
|
-
|
-
|
-
|
-
|
-
|
191,369
|
191,369
|
|||||||||||||||||||||
Net
Loss
|
-
|
-
|
-
|
-
|
(818,925
|
)
|
-
|
(818,925
|
)
|
|||||||||||||||||||
Balance,
September 30, 2009
|
7,410,000
|
$
|
7,410
|
$
|
99,373
|
$
|
(24,718
|
)
|
$
|
(1,296,522
|
)
|
$
|
-
|
$
|
(1,214,457
|
)
|
*See
accompanying notes to financial statements
F-23
NOTE
1 – Nature of Operations
SOUTHFIELD
ENERGY CORPORATION (the "Company" or “Southfield”), is an oil and gas investment
company. It invests in the exploration, development, and production
of oil & gas in the United States. The focus of its activity is
in Texas, Louisiana, Oklahoma, Colorado and the Gulf of Mexico. The Company
intends to invest its funds primarily as a working interest owner, royalty
interest owner or mineral lease owner. Generally, the Company will be a minority
owner in each well. The Company expects most of its investments to range from
5-25% of the total investment required for any given project, and anticipates
that its investment in each project will range from $50,000 to
$250,000.
NOTE
2 – Basis of Presentation
The
accompanying unaudited financial statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission,
and U.S. GAAP. The information furnished in the interim financial statements
includes normal recurring adjustments and reflects all adjustments which, in the
opinion of management, are necessary for a fair presentation of such financial
statements.
The
Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on its results of operation,
financial position or cash flow.
Although
management believes the disclosures and information presented are adequate to
not make the information misleading, it is suggested that these interim
financial statements be read in conjunction with the Company's most recent
audited financial statements and notes thereto included in its December 31, 2008
Annual Report in the S-1 registration statement. Operating results for the nine
months ended September 30, 2009 are not necessarily indicative of the results
that may be expected for the entire year or any other period.
NOTE
3 – Going Concern
These
financial statements have been prepared on a going concern basis and do not
include any adjustments to the measurement and classification of the recorded
asset amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company has
experienced losses and incurred negative cash flows in the periods and since
inception. The Company’s ability to realize its assets and discharge its
liabilities in the normal course of business is dependent upon continued
support. The Company is currently attempting to obtain additional financing
through its debenture offering to continue its operations. However, there can be
no assurance that the Company will obtain sufficient additional funds from these
sources.
These
conditions cause substantial doubt about the Company’s ability to continue as a
going concern. A failure to continue as a going concern would require that
stated amounts of assets and liabilities be reflected on a liquidation basis
that could differ from the going concern basis.
NOTE
4 - Summary of Significant Accounting Policies
OIL AND
GAS PROPERTIES (SUCCESSFUL EFFORTS) – The Company follows the successful efforts
method of accounting for oil and gas property acquisition, exploration,
development and production activities.
Capitalization Policies: Oil
and gas property acquisition costs, exploration well costs, and development
costs are capitalized as incurred. Net capitalized costs of unproved property
and exploration well costs are reclassified as proved property and well costs
when related proved reserves are found. If an exploration well is unsuccessful
in finding proved reserves, the capitalized well costs are charged to
exploration expense. Other exploration costs, including geological and
geophysical costs and the costs of carrying unproved property are charged to
exploration expense as incurred. Costs to operate and maintain wells and field
equipment are expensed as incurred.
Sales and retirement
Policies: Gains and losses on the sale or abandonment of oil and gas
properties are generally reflected in income. Costs of retired equipment, net of
salvage value, are usually charged to accumulated amortization. Unusual
retirements are reflected in income. As of September 30, 2009,
management has determined that the asset retirement obligation related to the
plugging and abandonment of wells is immaterial individually and to the
financial statements taken as a whole. As such, no asset retirement
obligation is recorded in the statements presented. Management will
review the potential obligation on an on-going basis and will record the
obligation in the period it becomes material, either individually or in
aggregate, to the financial statements.
Impairment Policies:
Long-lived assets used in operations are assessed for impairment whenever
changes in facts and circumstances indicate a possible significant deterioration
in the future cash flows expected to be generated by an asset group. If, upon
review, the sum of the undiscounted pretax cash flows are less than the carrying
value of the asset group, the carrying value is written down to the estimated
fair value. Individual assets are grouped for impairment purposes at the lowest
level for which there are identifiable cash flows that are largely independent
of the cash flows of other groups of assets – generally on a field-by-field
basis. The fair value of impaired assets is determined based on quoted market
prices in active markets, if available, or upon the present values of the
expected future cash flows using discount rates commensurate with the risks
involved in the asset group. Long-lived assets committed by management for
disposal are accounted for at the lower of amortized cost or fair value less
cost to sell.
F-24
EARNINGS
PER SHARE – Southfield’s net
income/loss per share has been calculated by dividing the net income/
loss for the period by the weighted average number of shares outstanding. There
are no potentially dilutive securities outstanding; therefore basic loss per
share equals the fully diluted loss per share. Earnings per share
from discontinued operations for the three months ended September 30, 2008 and
September 30, 2009 respectively are ($0.00) and $0.02; earnings per share from
continuing operations for the three months ended September 30, 2008 and
September 30, 2009 respectively are ($0.01) and ($0.06). Earnings per
share from discontinued operations for the nine months ended September 30, 2008
and September 30, 2009 respectively are ($0.00) and $0.02; earning per share
from continuing operations for the nine months ended September 30, 2008 and
September 30, 2009 respectively are ($0.01) and ($0.13).
DEFERRED
FINANCING COSTS – Southfield incurred Deferred Financing Costs in connection
with raising capital through the sale of debentures. The costs have been
capitalized as incurred and amortized over the three year life of the debentures
using the effective interest method.
STOCK
BASED COMPENSATION – On January 1, 2006, the Company adopted the FASB standard
which requires the measurement and recognition of compensation expense for all
share-based awards made to employees and directors, including employee stock
options and shares issued through its employee stock purchase plan, based on
estimated fair values. In March 2005, the Securities and Exchange Commission
issued a bulletin related to the aforementioned FASB standard. The
Company has applied the provisions of the SEC bulletin in its adoption of the
FASB standard. The Company adopted the standard using the modified prospective
transition method, which requires the application of the accounting standard
beginning in 2006. The Company’s financial statements as of and for the years
ended December 31, 2008 and nine months ended September 30, 2009 reflect the
impact of this standard. In accordance with the modified
prospective transition method, the Company’s financial statements for prior
periods do not include the impact of the standard.
FAIR
VALUE OF FINANCIAL INSTRUMENTS – Southfield includes fair value information in
the Notes to the Financial Statements when the fair value of its financial
instruments can be determined and is different from the carrying amounts
reflected in the accompanying statements. Southfield generally assumes that the
carrying amounts of cash, short-term debt and long-term debt approximate fair
value. For non-current financial instruments, Southfield uses quoted market
prices or, to the extent that there are no available quoted market prices,
market prices for similar instruments. Management believes that the carrying
amounts of the financial instruments are fairly represented in the financial
statements.
We
adopted the Financial Accounting Standards Board’s (FASB) standard on fair value
measurements at inception. The standard defines fair value, establishes a
framework for measuring fair value and expands disclosure of fair value
measurements. The standard applies under other accounting pronouncements that
require or permit fair value measurements and accordingly, does not require any
new fair value measurements. It clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. As
such, fair value is a market-based measurement that should be determined based
on assumptions that market participants would use in pricing an asset or
liability. As a basis for considering such assumptions, the standard established
a three-tier fair value hierarchy, which prioritizes the inputs used in
measuring fair value as follows.
¨
|
Level
1. Observable inputs such as quoted prices in active
markets;
|
¨
|
Level
2. Inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly;
and
|
¨
|
Level
3. Unobservable inputs in which there is little or no market data, which
require the reporting entity to develop its own
assumptions.
|
The
Company values Proved Properties at their fair value if impairment is identified
in accordance with FAS 144. The inputs that are used in determining the fair
value of these assets are Level 3 inputs. These inputs consist of but are not
limited to the following: estimates of reserve quantities, estimates of future
production costs and taxes, estimates of consistent pricing of commodities, 10%
discount rate, etc. No impairment was recorded during the nine months ended
September 30, 2009.
The
following table presents assets that are measured and recognized at fair value
as of September 30, 2009 and for the nine months then ended on a recurring basis
:
Total
|
Total
|
|||||||||||||||||||
Realized (Loss
|
Unrealized
|
|||||||||||||||||||
Description
|
Level 1
|
Level 2
|
Level 3
|
due to valuation)
|
(Loss)
|
|||||||||||||||
Available
for Sale Securities
|
102,500 | - | - | (234,095 | ) | - | ||||||||||||||
Totals
|
$ | 102,500 | $ | - | $ | - | $ | (234,095 | ) | $ | - |
F-25
The
following table presents assets that are measured and recognized at fair value
as of September 30, 2009 and for the nine months then ended on a non-recurring
basis :
Total
|
Total
|
|||||||||||||||||||
Realized (Loss
|
Unrealized
|
|||||||||||||||||||
Description
|
Level 1
|
Level 2
|
Level 3
|
due to valuation)
|
(Loss)
|
|||||||||||||||
Proved
Properties (net)
|
- | - | 263,175 | - | - | |||||||||||||||
Totals
|
$ | - | $ | - | $ | 263,175 | $ | - | $ | - |
USE OF
ESTIMATES – The
preparation of financial statements in conformity with accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Southfield’s most significant
financial estimates are based on the valuation of remaining proved oil and gas
reserves, impairment of its long-lived assets, valuation of its assets using
successful efforts accounting, and revenue recognition. Because of the nature of
these estimates and the nature of exploration, development and production of oil
and gas reserves, actual results could differ from these estimates and losses
and reductions in value could occur. These possible losses and reductions in
values which have not been reflected in the accompanying financial statements
could be material to the Company’s revenues/earnings or losses and stockholders’
equity (deficit). Due to the nature of the Company’s business plan to acquire
additional properties to explore for oil and gas reserves, additional losses and
reductions in value of the Company may occur in the future both related to
properties currently being developed and new properties not yet acquired and
those amounts could be substantial with respect to the Company’s financial
position and operations. To be successful, the Company must acquire properties
that result in significant amounts of recoverable amounts of oil and gas
reserves and be successful in the marketing of those reserves over a long period
of time in order to pay its acquisition, development, production and operating
costs, to cover its credit and debt obligations, and to provide a return to its
shareholders.
CONCENTRATIONS
OF CREDIT RISK – Financial instruments that may potentially subject the Company
to concentration of risk in the future consist primarily of cash which will be
placed with high credit quality financial institutions at amounts that may at
times exceed FDIC limits.
ACCOUNTS
RECEIVABLE – Accounts receivable represent the amounts due from the sale of oil
and gas. Based on collections history and review of accounts receivable aging,
management does not believe that any allowance for doubtful accounts is
necessary as of December 31, 2008 or September 30, 2009.
REVENUE
RECOGNITION – Southfield recognizes oil, gas and natural gas condensate revenue
in the period of delivery. Settlement for oil sales occurs 30 days after the oil
has been sold; and settlement for gas sales occurs 60 days after the gas has
been sold. Southfield recognizes revenue when an arrangement exists, the product
or service has been provided, the sales price is fixed or determinable, and
collectability is reasonably assured.
CASH AND
CASH EQUIVALENTS – Southfield considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents. Cash
and cash equivalents at December 31, 2008 and September 30, 2009 were $123,104
and 275,546, respectively.
INVESTMENTS
– We account for securities available for sale in accordance with Financial
Accounting Standards Board (“FASB”) guidance regarding accounting for certain
investments in debt and equity securities, which requires that
available-for-sale and trading securities be carried at fair value. Unrealized
gains and losses deemed to be temporary on available-for-sale securities are
reported as other comprehensive income (“OCI”) within shareholders’ investment.
Realized gains and losses and decline in value deemed to be other than temporary
on available-for-sale securities are included in “(Gain) loss on short- and
long-term investments” and “Other income” on our consolidated statements of
operations. Trading gains and losses also are included in “(Gain) loss on short-
and long-term investments.” Fair value of the securities is based upon quoted
market prices in active markets or estimated fair value when quoted market
prices are not available. The cost basis for realized gains and losses on
available-for-sale securities is determined on a specific identification basis.
We classify our securities available-for-sale as short- or long-term based upon
management’s intent and ability to hold these investments. In addition,
throughout 2009, the FASB issued various authoritative guidance and enhanced
disclosures regarding fair value measurements and impairments of securities
which helps in determining fair value when the volume and level of activity for
the asset or liability have significantly decreased and identifying transactions
that are not orderly.
Recent
Accounting Pronouncements
On
January 1, 2009, the FASB issued a new accounting standard related to the
disclosure of derivative instruments and hedging activities. This
standard expanded the disclosure requirements about an entity’s derivative
financial instruments and hedging activities including qualitative disclosures
about objectives and strategies for issuing derivatives, quantitative
disclosures about fair value amounts of any gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative instruments. Southfield had no instruments that fell within the scope
of this pronouncement as of September 30, 2009.
F-26
Effective
January 1, 2009, a new accounting standard was issued related to determining
whether an instrument (or an embedded feature) is indexed to an entity’s own
stock, which would qualify as a scope exception from hedge
accounting. Southfield had no instruments that fell within the scope
of this pronouncement as of September 30, 2009.
In August
2009, the FASB issued an amendment to the accounting standards related to the
measurement of liabilities that are recognized or disclosed at fair value on a
recurring basis. This standard clarifies how a company should measure
the fair value of liabilities and that restrictions preventing the transfer of a
liability should not be considered as a factor in the measurement of liabilities
within the scope of this standard. This standard is
effective on October 1, 2009. Southfield had no
instruments that fall within the scope of this pronouncement as of September 30,
2009.
In
October 2009, the FASB issued an amendment to the accounting standards related
to the accounting for revenue in arrangements with multiple deliverables
including how the arrangement consideration is allocated among delivered and
undelivered items of the arrangement. Among the amendments, this
standard eliminates the use of the residual method for allocating arrangement
consideration and requires an entity to allocate the overall consideration to
each deliverable based on an estimated selling price of each individual
deliverable in the arrangement in the absence of having vendor-specific
objective evidence or other third party evidence of fair value of the
undelivered items. This standard also provides further guidance on
how to determine a separate unit of accounting in a multiple-deliverable revenue
arrangement and expands the disclosure requirements about the judgments made in
applying the estimated selling price method and how those judgments affect the
timing or amount of revenue recognition. This standard, which
Southfield is currently assessing the impact of, will become effective for the
Company on January 1, 2011.
In
October 2009, the FASB issued an amendment to the accounting standards related
to certain revenue arrangements that include software elements. This standard
clarifies the existing accounting guidance such that tangible products that
contain both software and non-software components that function together to
deliver the product’s essential functionality, shall be excluded from the scope
of the software revenue recognition accounting standards. Accordingly, sales of
these products may fall within the scope of other revenue recognition accounting
standards or may now be within the scope of this standard and may require an
allocation of the arrangement consideration for each element of the arrangement.
This standard, which Southfield is currently assessing the impact of, will
become effective for the Company on January 1, 2011.
NOTE
5 - Related Party Transactions
In the
first half of 2008, Southfield used 50% of its office space 100% of the time and
paid roughly $1,500 per month. For the second half of 2008, Southfield used 100%
of the office space 100% of the time and therefore paid the entire rent of
roughly $3,100 per month. The company that manages the administration of the
office rent granted a waiver for the rent due in the month of August and,
therefore Southfield did not pay rent for the month of August. The total rent
expense for 2008 was $24,483. The total rent expense for the nine months ended
September 30, 2009 was $27,549.
NOTE
6 – Convertible Debentures Payable
We have
retained the services of MMR Investment Bankers, Inc. to represent the Company
in a $10 million private placement of Debentures under Reg. D, 506. We also
engaged Sunflower Management Group, a third party administrator for interest
payments and technical compliance with the repayment requirements of the
Debentures that have been sold.
MMR
Investment Bankers, Inc. has created an account to reserve from the gross
offering proceeds the first six months of interest payments due to any investor.
Sunflower Management Group is managing the interest reserve account and is
responsible for accruing and funding interest to investors as it becomes due. As
of December 31, 2008 and September 30, 2009, the Company has issued $1,482,000
and $1,834,000 of three-year convertible Debentures to investors, respectively.
The Debentures bear interest at a rate of 10% and mature three years from the
date of purchase.
The
investors may elect to have simple interest paid on a monthly basis, or may have
the interest compounded semiannually and paid at maturity. The investors may
convert the face value of the Debenture to common stock in the Company at any
time during the term of the Debenture at a conversion price of $5.00 per
share.
The
Company reviewed accounting literature related to embedded derivatives and
beneficial conversion features and its application to the Company’s convertible
debentures. The Company concluded that there is not a derivative or beneficial
conversion option associated with the debentures that is in-the-money and
therefore the Company is not required to calculate the intrinsic value of such
conversion option.
Maturities
of the notes over the next five years ending September 30 are as
follows:
2010 |
2011
|
2012
|
2013
|
2014
|
|||||||||||||
$
|
164,000
|
$
|
577,000
|
$
|
650,000
|
$
|
305,000
|
$
|
138,000
|
NOTE
7 – Acquisitions & Capital Investments
In 2008
the Company invested $156,926 in oil and gas exploration and production
projects. The Company successfully drilled the C-32 and C-33 wells located on
the Mary King Estell Lease and spent approximately $61,000 and $65,000,
respectively. The remainder of the capital investment in proved leaseholds was
in the Aldwell Unit for roughly $31,000. This capital investment was used to
drill and complete new wells and to recomplete existing production wells to
enhance production in the field.
F-27
In 2009,
the Company successfully drilled the C-34 and C-35 wells located on the Mary
King Estell Lease and invested approximately $71,231 and $61,916, respectively.
The remainder of the capital investment in proved leaseholds was in the Aldwell
Unit for roughly $7,057. This capital investment was used to drill and complete
new wells and to recomplete existing production wells to enhance production in
the field.
Note
8 – Available for Sale Securities
In 2008
the Company invested approximately $510,000 in the common stock of Meridian
Resources, a publicly traded exploration and production company on the New York
Stock Exchange listed under the symbol TMR. During the nine months ended
September 30, 2008 the company had an unrealized gain of $3,563
related to this investment. As of December 31, 2008 the value of the stock
declined significantly consistent with the overall stock market at that time. As
of September 30, 2009, the Company determined the decline in the value of the
stock to be other than temporary according to the applicable SEC Staff
Accounting Bulletin. Due to this determination, the difference between the cost
of the securities and the market value was recorded as a loss on the income
statement for the nine months ended September 30, 2009, rather than in other
comprehensive income. The impairment expense was $243,095 for the nine months
ended September 30, 2009.
Note
9 – Discontinued Operations
On August
12, 2009, the Company sold its interest in the Aldwell Unit to the operator of
the unit, Mariner Energy Inc., for $300,000. Southfield divested the
asset through an intermediary that charged the company 6% of the sales price to
list the property, find qualified buyers and execute the sale. The effective
date of the sale is September 1, 2009. The carrying amount of the
Aldwell Unit at the time of the sale was $239,566 less DDA of $132, 699. The
realized gain on the sale was $193,134. Commissions and fees of $18,389 were
paid related to the sale. Prior to the sale, the Aldwell Unit had
revenues of $71,276 and $21,704 for the nine months ended September 30, 2008 and
2009. Net income related to the Aldwell unit was $21,238 for the nine months
ended September 30, 2008. Net loss for the nine months ended September 30, 2009
from the Aldwell Unit prior to the gain related to disposal was
$28,052.
NOTE
10 – Non-cash Compensation
A
consultant was issued 50,000 shares on December 10, 2008 for providing services
to the Company. The equity that was issued in 2008 was valued by the Company at
$0.10 per share based upon management’s discounted cash flow analysis. There
have been no additional issuances of equity for the nine months ended September
30, 2009.
NOTE
11 – Depletion and Depreciation
For the
nine months ended September 30, 2008 and September 30, 2009, the Company
incurred depreciation, depletion and amortization on its remaining proved
producing property, the Mary King Estell Lease, of $10,078 and $24,834,
respectively. Depreciation, depletion and amortization have been calculated
using the units of production method.
NOTE
12 – Capitalized Expenses
The
Company is capitalizing expenses related to the Debenture Offering and
amortizing them over the three year life of the Debentures according to the
effective interest method. The gross capitalized loan and debenture costs were
$370,353 and $438,513 as of December 31, 2008 and September 30, 2009,
respectively. The accumulated amortization was $148,739 and $271,543; and the
net capitalized loan and debenture costs were $221,614 and $166,970 for the same
periods respectively.
NOTE
13 – Impairment of Proved Properties
Due to
the low commodity prices for oil and gas at December 31, 2008, the Company was
required to impair its assets located in the Aldwell Unit. An impairment test
was conducted using data in a reserve report compiled by Huddleston and Company,
a Houston based petroleum engineering company. While conducting the impairment
test, management determined that the estimated undiscounted future net cash flow
provided in the reserve report was less that the carrying value of the Aldwell
Unit on the Company’s Balance Sheet on December 31, 2008 and that the assets
were subject to impairment.
The
assets were subsequently impaired by taking the difference between the
discounted future net cash flow, using a 10% discount rate, which was estimated
by Huddleston and Company and the carrying value of the assets on our Balance
Sheet. Management found the difference to be $116,553 and impaired the Aldwell
Unit by that amount. The remaining unimpaired balance of the property has been
included in discontinued operations on the balance sheet as of December 31, 2008
due to the disposal of the property in September of 2009. There were no
impairment indicators and therefore no impairment on oil and gas producing
properties during the nine months ended September 30, 2009.
F-28
NOTE
14 – Commitments and Contingencies
Litigation
In the
normal course of business, the Company may become subject to lawsuits and other
claims and proceedings. Such matters are subject to uncertainty and outcomes are
not predictable with assurance. Management is not aware of any pending or
threatened lawsuits or proceedings which would have a material effect on the
Company’s financial position, liquidity, or results of operations.
Concentrations
The
Company’s sales are dependent upon the performance of its producing wells and
our ability to successfully partner with high quality oil and gas operators; any
impacts to this industry could have a significant impact to the Company. For the
year ended December 31, 2008, two leases represented 100% of the total revenues
of the company and 100% of the accounts receivable. After September 1, 2009 100%
of the company’s revenues were derived from the Mary King Estell lease. The
Company generally does not require collateral to support accounts receivable or
financial instruments subject to credit risk.
NOTE
15 – Oil and Gas Properties
The
Company owns non-operated working interests in the Mary King Estell Lease which
is operated by Durango Resources. As of December 31, 2008 the company owned an
interest in approximately 200 wells, and as of September 30, 2009 the company
owned an interest in five wells. According to the reserve report prepared by
Huddleston and Company, the Company’s estimate of future income taxes, as of
December 31, 2008 the Company had proved reserves with estimated discounted net
cash flows after taxes of $565,092 from the Mary King Estell Unit. Estimated
future net cash flows of the properties were discounted at 10% consistent with
FAS 69. A reserve analysis has not been conducted for the nine months ended
September 30, 2009.
NOTE
16 – Subsequent Events
In 2008,
the company made a $2,000 loan to one of our officers. This loan was repaid on
November 3, 2009.
After
September 30, 2009, $351,000 of convertible debentures due on or prior to
September 30, 2010 were extended for a period of two years. An additional
$867,000 of convertible debentures due after September 30, 2010 were extended
for a period of two years. The financial statements and footnotes have been
presented according to the extended maturity dates.
The
Company evaluated all subsequent events through the filing date of December 17,
2009.
F-29
Southfield
Energy Corporation
$10,000,000
Three Year Notes
Prospectus
[.],
2009
Until
[●], 2009 (25 days after the commencement of the Offering), all dealers that
effect transactions in the 3 Year Notes, whether or not participating in this
Offering, may be required to deliver a prospectus. This is in addition to the
dealers’ obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
61
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The
following table sets forth an estimate of the costs and expenses, other than the
underwriting discounts and commissions, payable by the registrant in connection
with the issuance and distribution of the 3 Year Notes being
registered.
SEC
registration fee
|
$
|
558
|
||
Legal
fees and expenses
|
55,498
|
|||
Accounting
fees and expenses
|
37,689
|
|||
Engineer
fees and expenses
|
16,681
|
|||
Printing
and engraving expenses
|
*6,802
|
|||
Total
|
$
|
117,228
|
* The
Company incurred $4,302 of printing fees before filing this Amendment, and
estimates an additional $2,500 of printing fees through the date of this
filing.
ITEM
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our
officers and directors are indemnified as provided by the Nevada Revised
Statutes and by our bylaws.
Under the
Nevada Revised Statutes, director immunity from liability to a company or its
stockholders for monetary liabilities applies automatically unless it is
specifically limited by a company’s Articles of Incorporation. Our
Articles of Incorporation do not specifically limit our directors’
immunity. Excepted from that immunity are: (a) a willful failure to
deal fairly with the company or its stockholders in connection with a matter in
which the director has a material conflict of interest; (b) a violation of
criminal law, unless the director had reasonable cause to believe that his or
her conduct was lawful or no reasonable cause to believe that his or her conduct
was unlawful; (c) a transaction from which the director derived an improper
personal profit; and (d) willful misconduct.
Our
bylaws provide that we will indemnify our directors and officers as
follows: (a) Every director or officer of the Company shall be
indemnified by the Company to the full extent allowed by law against all
expenses and liabilities in connection with any threatened, pending or completed
action, suit or proceeding, to which he may be made a party, or in which he may
become involved, by reason of his being or having been a director or officer of
the Company or any settlement thereof, whether or not he is a director or
officer at the time such expenses are incurred, except in such cases wherein the
director or officer is adjudged guilty of willful misfeasance or malfeasance in
the performance of his duties; provided that in the event of a settlement the
indemnification herein shall apply only when the board of directors approves
such settlement and reimbursement as being for the best interests of the
Company; (b) The Company shall provide to any person who is or was a director or
officer of the Company or is or was serving at the request of the Company as a
director or officer of the corporation, partnership, joint venture, trust or
enterprise, the indemnity against expenses of suit, litigation or other
proceedings which is specifically permissible under applicable law; (c) The
board of directors may, in its discretion, direct the purchase of liability
insurance.
The
Company has purchased director and officer liability insurance for its officers
and directors.
62
ITEM
15. RECENT SALES OF UNREGISTERED SECURITIES.
In the
three years preceding the filing of this registration statement, we have issued
and sold the following securities that were not registered under the Securities
Act.
On July
5, 2005, our date of incorporation, we sold an aggregate of 6.2 million shares
of our common stock to our four founders: Ben Roberts, Chet Gutowsky,
Tyson Rohde and The Internet Business Factory, Inc. Each of
Messrs. Gutowsky and Rohde and The Internet Business Factory
purchased 2,000,000 shares, and Mr. Roberts purchased 200,000
shares. Such shares were sold to the founders at $0.001 per share for
a total consideration of $6,200. Each of the four founders issued
promissory notes to us in the aggregate principal amount of $6,200 which they
paid on August 14, 2006. The issuance of these shares of common stock
to our founders was exempt from the registration requirements of the Securities
Act under Reg. D and Section 4(2) of the Securities Act due to the fact
that it did not involve a public offering of securities. These issuances were
made to accredited investors.
On August
14, 2006 The Internet Business Factory, one of our founders, loaned to us
$20,000 evidenced by a promissory note bearing interest at an annual rate of
6%. As partial consideration for the promissory note, we agreed to
issue The Internet Business Factory an additional 300,000 shares of common
stock. The issuance of these shares of common stock to The Internet
Business Factory was exempt from the registration requirements of the Securities
Act under Reg. D and Section 4(2) of the Securities Act due to the fact
that it did not involve a public offering. This issuance was made to an
accredited investor.
On
October 19, 2006 we issued 50,000 shares of common stock to a consultant for the
development and review of oil and gas prospects. On December 10,
2008, we issued 50,000 shares of our common stock to the same consultant for
providing business development services to the Company. The issuance
of these shares of common stock to this consultant was exempt from the
registration requirements of the Securities Act under Reg. D and
Section 4(2) of the Securities Act due to the fact that it did not involve
a public offering. These issuances were made to accredited
investors.
On
December 31, 2006 we issued 45,000 shares of common stock to a consultant for
financial management services. On June 15, 2007, we issued 705,000
shares of common stock to the same consultant for additional financial
management services. The issuance of these shares of common stock to this
consultant was exempt from the registration requirements of the Securities Act
under Reg. D and Section 4(2) of the Securities Act due to the fact that it
did not involve a public offering. The owner of the financial management company
is an accredited investor.
On
February 22, 2007, we issued 50,000 shares of common stock to a consultant for
engineering services related to prospect evaluation. The issuance of
these shares of common stock to this consultant was exempt from the registration
requirements of the Securities Act under Reg. D and Section 4(2) of the
Securities Act due to the fact that it did not involve a public offering. This
issuance was made to an accredited investor.
On
October 12, 2007 we issued 10,000 shares of common stock to a consultant for
designing and implementing our website and providing information technology
services. The issuance of these shares of common stock to this
consultant was exempt from the registration requirements of the Securities Act
under Reg. D and Section 4(2) of the Securities Act due to the fact that it
did not involve a public offering. This issuance was made to an unaccredited
investor with access to information about the company.
The
shares of common stock that were issued to the aforementioned consultants were
valued by us at $0.10 per share based upon management’s discounted cash flow
analysis.
As of
December 31, 2008 and 2007, the Company had issued $866,000 and $1,482,000,
respectively, of three-year 10% convertible debentures to
investors. The investors may elect to have simple interest paid on a
monthly basis, or may have the interest compounded semiannually and paid at
maturity. The investors may convert the face value of the debenture to shares of
common stock in the Company at any time during the term of the debenture at a
conversion price of $5.00 per share. The Company has the right to call for the
conversion of the debentures when the common stock of the company trades on a
public market for 20 consecutive days at a price higher than $7.50 per share and
upon notice, unless the debenture holder elects not to accept the conversion
offer.
MMR
Investment Bankers, Inc. served as placement agent for these debentures
offerings and received a placement fee of eight percent of the gross proceeds
raised and a non-accountable expense allowance of three percent of the gross
proceeds. The issuance of the three-year 10% convertible debentures to the
aforementioned investors was exempt from the registration requirements of the
Securities Act under Reg. D, 506 and Section 4(2) of the Securities Act due to
the fact that it did not involve a public offering. The Company has
made periodic filings of Form D that detail the classification of investors
subscribed to the private placement of Debentures. The Company used the net
proceeds from these debenture offerings to make oil and gas investments, and
fund the general operations of our business including general and administrative
and offering expenses.
63
ITEM
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The
following exhibits are filed on behalf of the registrant as part of this
Registration Statement:
Exhibit Number
|
Description
|
|
3.1
|
Articles
of Incorporation of Southfield Energy Corporation (1)
|
|
3.2
|
Bylaws
of Southfield Energy Corporation (1)
|
|
4.1*
|
Southfield
Trust Indenture
|
|
4.2
|
Book
Entry Specimen Three Year 10% Note (1)
|
|
5.1*
|
Legal
Opinion of Jack Chapline Vaughan, Attorney at Law
|
|
10.1
|
Mary
King Estell Lease Assignment (1)
|
|
10.2
|
Durango
Letter Agreement (1)
|
|
10.3
|
B D
Production Co., Inc. Letter Agreement (1)
|
|
10.4
|
Aldwell
Unit Purchase Letter Agreement and Assignment (1)
|
|
10.5
|
Listing
Agreement with Oil & Gas Asset Clearinghouse and Assignment
(1)
|
|
10.6*
|
Form
of Subscription Agreement
|
|
23.1*
|
Consent
of M&K CPAS, PLLC
|
|
23.2*
|
Consent
of Huddleston & Co., Inc.
|
|
23.3*
|
Consent of of Jack Chapline Vaughan, Attorney at Law (included in Exhibit 5.1) |
*
|
Filed
herewith.
|
(1)
|
Incorporated by reference to the
comparable exhibit filed with the Company’s Registration Statement on Form
S-1 (File No. 333-162029).
|
(b)
|
Financial Statement
Schedules:
|
All
financial statement schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are either
included in the financial information set forth in the prospectus or
are inapplicable and therefore have been omitted.
64
ITEM
17. UNDERTAKINGS
The
undersigned registrant hereby undertakes:
(1)
|
To file, during any period in
which offers or sales are being made, a post-effective amendment to this
registration statement:
|
(i)
|
To include any prospectus
required by section 10(a)(3) of the Securities
Act;
|
(ii)
|
To reflect in the prospectus any
facts or events which, individually or together, represent a fundamental
change in the information in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a twenty percent (20%) change in the
maximum aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective registration statement;
and
|
(iii)
|
To include any material
information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration
statement.
|
(2)
|
For determining liability under
the Securities Act, to treat each post-effective amendment as a new
registration statement of the securities offered, and the offering of the
securities at that time to be the initial bona fide offering
thereof.
|
(3)
|
To file a post-effective
amendment to remove from registration any of the securities that remain
unsold at the end of the
offering.
|
(4)
|
For determining liability of the
undersigned issuer under the Securities Act to any investor in the initial
distribution of the securities, the undersigned issuer undertakes that in
a primary offering of securities of the undersigned issuer pursuant to
this registration statement, regardless of the underwriting method used to
sell the securities to the investor, if the securities are offered or sold
to such investor by means of any of the following communication, the
undersigned issuer will be a seller to the investor and will be considered
to offer or sell such securities to such
investor:
|
(i)
|
Any preliminary prospectus or
prospectus of the undersigned issuer relating to the offering required to
be filed pursuant to
Rule 424;
|
(ii)
|
Any free writing prospectus
relating to the offering prepared by or on behalf of the undersigned
issuer or used or referred to by the undersigned
issuer;
|
(iii)
|
The portion of any other free
writing prospectus relating to the offering containing material
information about the undersigned issuer or its securities provided by or
on behalf of the undersigned issuer;
and
|
(iv)
|
Any other communication that is
an offer in the offering made by the undersigned issuer to the
Investor.
|
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling the registrant pursuant
to the foregoing provisions, the registrant has been informed that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
In the
event that a claim for indemnification against such liabilities (other than the
payment by the issuer of expenses incurred or paid by a director, officer or
controlling person of the issuer in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the issuer will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such
issue.
65
That for
the purpose of determining any liability under the Securities Act to any
Investor:
|
(i)
|
Each prospectus filed by the
undersigned issuer pursuant to Rule 424(b)(3) shall be deemed to be
part of the registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement;
and
|
(ii)
|
Each prospectus required to be
filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a
registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for
the purpose of providing the information required by section 10(a) of the
Securities Act shall be deemed to be part of and included in the
registration statement as of the earlier of the date such form of
prospectus is first used after effectiveness or the date of the first
contract of sale of securities in the offering described in the
prospectus. As provided in Rule 430B, for liability purposes of the issuer
and any person that is at that date an underwriter, such date shall be
deemed to be a new effective date of the registration statement relating
to the securities in the registration statement to which that prospectus
relates, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is part of
the registration statement will, as to a Investor with a time of contract
of sale prior to such effective date, supersede or modify any statement
that was made in the registration statement or prospectus that was part of
the registration statement or made in any such document immediately prior
to such effective date.
|
66
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Houston, State of Texas,
on December 17, 2009.
SOUTHFIELD
ENERGY CORPORATION
|
|
By:
|
/s/ Ben Roberts
|
Ben
Roberts
|
|
Chief
Executive Officer and
Director
|
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated.
Signature
|
Capacity
|
Date
|
||
/s/ Chet Gutowsky
|
Chief
Financial Officer and Director
|
December
17, 2009
|
||
/s/ Tyson Rohde
|
Chief
Operating Officer and Director
|
December
17, 2009
|
67
EXHIBIT INDEX
Exhibit Number
|
Description
|
|
3.1
|
Articles
of Incorporation of Southfield Energy Corporation (1)
|
|
3.2
|
Bylaws
of Southfield Energy Corporation (1)
|
|
4.1*
|
Southfield
Trust Indenture
|
|
4.2
|
Book
Entry Specimen Three Year 10% Note (1)
|
|
5.1*
|
Legal Opinion
of Jack Chapline Vaughan, Attorney at Law
|
|
10.1
|
Mary
King Estell Lease Assignment (1)
|
|
10.2
|
Durango
Letter Agreement (1)
|
|
10.3
|
B D
Production Co., Inc. Letter Agreement (1)
|
|
10.4
|
Aldwell
Unit Purchase Letter Agreement and Assignment (1)
|
|
10.5
|
Listing
Agreement with Oil & Gas Asset Clearinghouse and Assignment
(1)
|
|
10.6*
|
Form
of Subscription Agreement
|
|
23.1*
|
Consent
of M&K CPAS, PLLC
|
|
23.2*
|
Consent
of Huddleston & Co., Inc.
|
|
23.3*
|
Consent of of Jack Chapline Vaughan, Attorney at Law (included in Exhibit 5.1) |
*
|
Filed
herewith.
|
(1)
|
Incorporated by reference to the
comparable exhibit filed with the Company’s Registration Statement on Form
S-1 (File No. 333-162029).
|
68