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EX-32.1 - JOHN D. OIL & GAS COv178873_ex32-1.htm
EX-99.1 - JOHN D. OIL & GAS COv178873_ex99-1.htm
EX-31.2 - JOHN D. OIL & GAS COv178873_ex31-2.htm
EX-31.1 - JOHN D. OIL & GAS COv178873_ex31-1.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2009

OR

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

Commission file no.  0-30502

JOHN D. OIL AND GAS COMPANY
(Exact name of Registrant as specified in its charter)

MARYLAND
94-6542723
(State or other jurisdiction of  incorporation or organization)
(I.R.S. Employer Identification No.)

8500 STATION STREET, SUITE 345, MENTOR, OHIO 44060
(Address of principal executive office)

Registrant’s telephone number, including area code:   (440) 255-6325

Securities registered pursuant to Section 12(b) of the Exchange Act:  NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:  SHARES OF COMMON STOCK

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act. Yes ¨  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes o No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

Large accelerated filer ¨    Accelerated filer ¨    Non-accelerated filer ¨    Smaller reporting company x

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

On March 18, 2010, the aggregate market value of the voting and non-voting common equity held by non-affiliates was $427,644 computed as the average bid and asked price of $.08 per share times the total shares held by non-affiliates of 5,345,549.  The Registrant had 9,067,090 shares of common stock outstanding on March 18, 2010.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 15, 2010 are incorporated by reference into Part III of this 10-K.

 
 

 

JOHN D. OIL AND GAS COMPANY
INDEX TO ANNUAL REPORT
ON FORM 10-K

   
Page
PART I
   
     
 
Glossary of Terms
3
Item 1.
Business
5
Item 1A.
Risk Factors
7
Item 2.
Properties
13
Item 3.
Legal Proceedings
15
     
PART II
   
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer’s Purchases of Equity Securities
16
Item 7.
Management's Discussion and Analysis of Financial Condition  and Results of Operations
17
Item 8.
Consolidated Financial Statements and Supplementary Data
25
Item 9A(T).
Controls and Procedures
25
Item 9B.
Other Information
27
     
PART III
   
     
Item 10.
Directors, Executive Officers and Corporate Governance
27
Item 11.
Executive Compensation
27
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
27
Item 13.
Certain Relationships and Related Transactions, and Director Independence
27
Item 14.
Principal Accountant Fees and Services
27
     
PART 1V
   
     
Item 15.
Exhibits and Financial Statement Schedules
28

 
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PART I

Glossary of Terms

As commonly used in the natural gas and oil industry and as used in this Annual Report on Form 10-K, the following terms have the following meanings:

Bbl. One stock tank barrel or 42 U.S. gallons liquid volume.

Development well.  A well drilled within the proved area of a natural gas or oil reservoir to the depth of a stratigraphic horizon known to be productive.

Developed acres.  Acres spaced or assigned to productive wells.

Dry hole or well.  A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production would exceed production expenses and taxes.

Field.  An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structure feature and/or stratigraphic condition.

Gross acres or gross wells.  The total acres or wells, as the case may be, in which a working interest is owned.

Mcf.  One thousand cubic feet.

Mcfe.   One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.

Net acres or net wells.  The sum of the fractional working interests owned in gross acres or gross wells, as the case may be.

Oil.  Crude oil, condensate and natural gas liquids.

Productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceeds production expenses and taxes.

Proved developed reserves. Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.  Additional natural gas and oil expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery are included in “proved developed reserves” only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.

Proved reserves.  Proved natural gas and oil reserves are the estimated quantities of natural gas, natural gas liquids and crude oil which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e. prices based on the average of the first day of each month in the previous year and costs as of the date the estimate is made.  Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based on future conditions.

Proved undeveloped drilling location.  A site on which a development well can be drilled consistent with spacing rules for purposes of recovering proved undeveloped reserves.

 
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Proved undeveloped reserves or PUDs.  Reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion.  Reserves on undrilled acreage are limited to those drilling units offsetting productive units that are reasonably certain of production when drilled.  Proved reserves for other undrilled units are claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation.  Estimates for proved undeveloped reserves are not attributed to any acreage from which an application of fluid injection or other improved recovery techniques is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir.

Reservoir.  A porous and permeable underground formation containing a natural accumulation of produce-able natural gas and/or oil that is confined by impermeable rock or water barriers and is individual and separate from other reserves.

Standardized Measure.  Standardized Measure is the present value of estimated future net revenues to be generated from the production of proved reserves, determined in accordance with the rules and regulations of the SEC (using prices and costs in effect as of the date of estimation) without giving effect to non-property related expenses such as general and administrative expense, debt service and future income tax expenses or to depreciation, depletion and amortization and discounted using an annual discount rate of 10%.  Our Standardized Measure does not include future income tax expenses.

Successful well.  A well capable of producing natural gas and/or oil in commercial quantities.

Undeveloped acreage.  Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of natural gas and oil regardless of whether such acreage contains proved reserves.

Working interest.  The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production.

Workover.  Operations on a producing well to restore or increase production.

 
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Item 1.  Business

John D. Oil and Gas Company, formerly Liberty Self-Stor, Inc. (the “Company”), is a corporation organized under the laws of the State of Maryland.

The Company was originally a self-storage company from 1999 to 2005 when it sold all but two of its facilities.  By May 2007, one self-storage facility in Painesville remained which generated revenue through self-storage rentals and retail leases. In 2006, the Company entered into the business of extracting and producing oil and natural gas products, drilling oil and natural gas wells in Northeast Ohio.  The Company currently has fifty-eight producing wells.  The Company cannot guarantee success under the new business plan as drilling wells for oil and natural gas is a high-risk enterprise and there is no guarantee the Company will become profitable.

Oil and Natural Gas Overview.

The Company had redirected its efforts to oil and natural gas exploration to increase cash flow and enhance shareholder value.  At December 31, 2009, the Company had fifty-eight wells in production.  The Company’s wells are mostly operator-owned by John D. Oil and Gas Company, although there are a limited number of joint interest wells.

We are also an owner and the managing member of Kykuit Resources, LLC (“Kykuit”), which leases natural gas and oil rights to 203,842 net acres located in the Montana Breaks area of Montana.  The partnership has drilled eight wells which have not shown any production to date.

Oil and Natural Gas Competition. The industry is intensely competitive, and we compete with other companies that have significantly greater resources.  Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. Many of our larger competitors not only drill for and produce natural gas and oil, but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis. These companies may be able to pay more for natural gas and oil properties and evaluate, bid for and purchase a greater number of properties than our financial or human resources permit. In addition, these companies may have a greater ability to continue drilling activities during periods of low natural gas and oil prices and to absorb the burden of present and future federal, state, local and other laws and regulations. Our inability to compete effectively with larger companies could have a material adverse impact on our business activities, financial condition and results of operations.

Oil and Natural Gas Environmental and Other Regulations.  The oil and natural gas business is regulated extensively at the federal, state and local levels.  Environmental and other governmental laws and regulations have increased the costs to plan, design, drill, install, operate and abandon natural gas and oil wells.  Under these laws and regulations, industry participants could be liable for personal injuries, property damage and other damages.  These laws and regulations may:

 
·
require the acquisition of various permits before drilling commences;
 
·
require the installation of expensive pollution control equipment;
 
·
restrict the types, quantities and concentration of various substances that can be released into the environment in connection with drilling and production activities;
 
·
limit or prohibit drilling activities on lands lying within wilderness, wetland and other protected areas;
 
·
require remedial measures to prevent pollution from former operations, such as pit closure and plugging of abandoned wells;
 
·
impose substantial liabilities for pollution resulting from operations; and
 
·
with respect to operations affecting federal lands or leases, require preparation of a resource management plan, an environmental assessment, and/or an environmental impact statement.

Failure to comply with these laws and regulations could result in the suspension or termination of operations and subject companies to administrative, civil and criminal penalties.  Moreover, public interest in environmental protection has increased in recent years, and environmental organizations have opposed, with some success, certain drilling projects.

 
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The environmental laws and regulations applicable to the Company and its operations include, among others, the following United States federal laws and regulations:

 
·
Clean Air Act, and its amendments, which governs air emissions;
 
·
Clean Water Act, which governs discharges to waters of the United States;
 
·
Comprehensive Environmental Response, Compensation and Liability Act, which imposes liability where hazardous releases have occurred or are threatened to occur;
 
·
Energy Independence and Security Act of 2007, which prescribes new fuel economy standards and other energy saving measures;
 
·
National Environmental Policy Act, which governs oil and gas production activities on federal lands;
 
·
Resource Conservation and Recovery Act, which governs the management of solid waste;
 
·
Safe Drinking Water Act, which governs the underground injection and disposal of wastewater; and
 
·
U.S. Department of Interior regulations, which impose liability for pollution cleanup and damages.

On the state level, significant change in the Ohio oil and natural gas industry occurred in September 2004.  House bill 278 became the effective law of Ohio, which recognizes the Ohio Division of Mineral Resources Management, or “DMRM,” as the sole and exclusive authority to regulate the permitting, location and spacing of oil and gas wells.  The result was the effective elimination of township and municipal regulation that significantly disrupted new oil and natural gas development.  The change streamlines previously cumbersome permitting and regulation imposed by townships and municipalities, since a centralized agency, the DMRM now handles all permitting and enforces the laws regulating drilling and producing activities.

Self-Storage Overview.

As of December 31, 2009, the Company owned and operated one self-storage facility which includes retail and office space located in Painesville, Ohio.  The Painesville self-storage facility was acquired in October of 2000 with 31,660 of rentable square footage situated on 3.20 acres including 363 units with outside space available for parking vehicles.  The self-storage units are inside and difficult to rent due to limited accessibility by using an elevator or stairs.  In addition, the Painesville building facility has 21,985 square feet of office and retail space to lease.

The self-storage facility is operated through a partnership agreement between Liberty Self-Stor Ltd. (“Ltd”) and John D. Oil and Gas Company.  Ltd has a 70.1% equity interest and the Company has a 29.9% equity interest in the operating partnership of LSS I Limited Partnership (“LSS I”).  The members of Ltd consist of Richard M. Osborne, Chairman and Chief Executive Officer of the Company, Thomas J. Smith, a director and the former President and Chief Operating Officer of the Company, and Retirement Management Company, an Ohio corporation owned by Mr. Osborne.  These members have Class A limited partnership interests that are redeemable for cash or, at the election of the Company, convertible into shares of the Company’s stock based on an exchange factor.   The current exchange factor is .1377148 of a share for each unit. LSS I’s losses reduced the initial investment to a receivable and therefore the Company wrote-off the minority interest in 2006 as it was deemed not to be collectible.

Investment Policy.

Management, in its sole discretion, may change or modify the Company’s investment objective.  The Company is taxed as a C Corp.

Activities of the Company.  Subject to Maryland law, the Company has the ability to:

 
·
issue senior securities;
 
·
borrow money;
 
·
make loans;
 
·
underwrite securities of other issuers;
 
·
engage in the purchase or sale of investments;
 
·
offer securities in exchange for property;

 
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·
repurchase or otherwise reacquire its shares or other securities; and
 
·
provide annual reports and other reports to stockholders which contain annual audited financial statements.

The Company could borrow money necessary to acquire properties, could offer preferred senior securities, could offer interests of the operating partnership in exchange for properties, and prepare annual reports with audited financial statements. The Company has no current plans to engage in any of the other listed activities. During each of the last three years, the Company filed annual and quarterly reports with the SEC.  The Company’s ability to engage in any of the above activities is subject to change without the approval of stockholders.

Subsequent Events.

As previously disclosed, on August 20, 2009, RBS Citizens, N.A., d/b/a Charter One (“Charter One”), the holder of the Company’s $9.5 million line of credit, received a judgment in its favor against the Company, Mr. Osborne and the Richard M. Osborne Trust, jointly and severally, for the amount of $9.5 million plus interest and late charges as well as attorneys’ fees, costs and other amounts payable under the line of credit.  Charter One has requested that the court appoint a receiver for the Company.  A hearing on the appointment of a receiver for the Company is currently scheduled for April 16, 2010.

During the month of February 2010, LSS I received a letter from the Lake County Board of Revision and Lake County Auditor reducing the taxable values on two parcels at the Painesville facility from 2006 through 2009.  The Company will record approximately $157,000 of other income in 2010 from the receipt of a cash refund and reduction in accrued real estate taxes.

Principal Offices.

The Company’s principal executive offices are located at 8500 Station Street, Suite 345, Mentor, Ohio 44060 and its telephone number is 440-255-6325.

Federal Income Tax.

Effective January 1, 2006, the Company became a “C” Corporation for tax purposes.

Employees.

The Company currently employs six full-time and one part-time employee.  None of the Company’s employees are covered by a collective bargaining agreement.  The Company considers its employee relations to be excellent.

Item 1A.  Risk Factors
 
Risks Related to Our Oil and Natural Gas Business
 
The report of our independent registered public accounting firm questions our ability to continue as a going concern.
 
Our independent auditors have indicated in their audit report for the year ended December 31, 2009 in an explanatory paragraph that, due to our recurring losses and our outstanding debt of $10.6 million that is currently due and in default, there is substantial doubt about our ability to continue as a going concern.  Our financial statements do not include any adjustment that might result from the outcome of this uncertainty.  See Note 2 - Going Concern of the Company’s Consolidated Financial Statements for more information.  If the Company is unable to continue as a going concern you will lose your investment.

 
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In the event we are unable to refinance our line of credit which is currently due and in default or obtain substitute financing, we may not be able to continue as a going concern.
 
At December 31, 2009, our outstanding debt totaled over $10.6 million, including a $9.5 million line of credit with Charter One.  The line of credit is guaranteed by Mr. Osborne, our CEO and Chairman of the Board.  Our line of credit matured on August 1, 2009.  On August 20, 2009, Charter One received a judgment in its favor against the Company, Mr. Osborne and the Richard M. Osborne Trust, jointly and severally, for the amount of $9.5 million plus interest and late charges as well as attorneys’ fees, costs and other amounts payable under the line of credit.  We do not have the available cash to repay the line of credit.  If we are unsuccessful in refinancing the line of credit or if we are unsuccessful in obtaining substitute financing, there is substantial doubt about our ability to continue as a going concern.  The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.  If we cannot continue as a going concern, your investment in the Company could become devalued or even worthless.
 
Charter One, the holder of the Company’s $9.5 million line of credit, has requested that a receiver be appointed for the Company.
 
Charter One has requested that the court appoint a receiver for the Company and a hearing on the appointment of a receiver is currently scheduled for April 16, 2010.  If a receiver is appointed, the receiver would oversee the Company’s operations and assets.
 
In the event that LSS I is unable to cure the defaults with respect to the First Merit mortgage or obtain substitute financing, we may lose our investment in LSS I, including the Painesville property.
 
At December 31, 2009, LSS I had a $1.1 million mortgage outstanding on the Painesville self-storage facility.  On August 24, 2009, the Company received a letter from First Merit Bank, N.A., the holder of the $1.2 million mortgage on the Painesville self-storage property in which the Company has a 29.9% interest.  The letter constituted formal notice to LSS I that, pursuant to certain cross-default provisions, certain defaults, including Mr. Osborne’s debt with First Merit and the Charter One judgments, must be cured within five days or the mortgage would become accelerated, without further notice or demand, and fully due and payable.  LSS I does not have the available cash to repay the First Merit mortgage.  If the defaults with respect to the First Merit mortgage are not cured, the Company could lose its investment in LSS I, including the Painesville property.
 
If we are unable to refinance our existing debt or obtain financing in the amounts and on terms acceptable to us or we are unable to meet our future cash commitments, we may be unable to continue our business and as a result may be required to scale back or cease operations of our business, the result of which would be that you could lose some or all of your investment.

In addition, we require substantial capital expenditures to maintain and/or grow oil and gas production and reserves.  To date, we have been dependent on debt financing to meet our cash requirements and have incurred losses totaling approximately $2.7 million for the year ended December 31, 2009, our fourth consecutive year of net losses.  As of December 31, 2009, we reported negative net working capital.  We do not expect to be profitable in 2010.  We can provide no assurance that actual cash requirements will not exceed our estimates.  In particular, additional capital may be required in the event that:

 
·
drilling and completion costs for further wells increase beyond our expectations;
 
·
market prices for our production decline beyond our expectations;
 
·
production levels do not meet our expectations; or
 
·
we encounter greater costs associated with general and administrative expenses.

The occurrence of any of these events could adversely affect our ability to meet our business plans.

At December 31, 2009 and December 31, 2008, our outstanding debt totaled over $10.6 million, including our $9.5 million line of credit with Charter One.  The line of credit is guaranteed by Mr. Osborne, our CEO and Chairman of the Board.  Our line of credit matured on August 1, 2009.  On August 20, 2009, Charter One received a judgment in its favor against the Company, Mr. Osborne and the Richard M. Osborne Trust, jointly and severally, for the amount of $9.5 million plus interest and late charges as well as attorneys’ fees, costs and other amounts payable under the line of credit.  We do not have the available cash to repay the line of credit.

 
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We depend on debt or equity financing to pay for our exploration and operations.  The current economic environment makes it more difficult to obtain equity financing on acceptable terms to address our liquidity issues.  Capital may not continue to be available if necessary to meet these continuing costs, or if capital is available that it will be on terms acceptable to us.  In addition, we may not be able to meet our future cash commitments.

If we are unable to obtaining financing in the amounts and on terms acceptable to us or if we are unable to meet our future cash commitments, we may be unable to continue our business and as a result may be required to scale back or cease operations of our business, the result of which would be that you could lose some or all of your investment.  In addition, if we are unsuccessful in refinancing the line of credit or obtaining substitute financing, we may be unable to continue our business and as a result may be required to scale back or cease operations of our business, the result of which would be that you could lose some or all of your investment.

We had a material weakness in our internal control over financial reporting and therefore, we may not be able to accurately report our financial results or prevent fraud.

In our annual report on Form 10-K, we are required to furnish a report by our management on our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002.  Such report contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting was effective.  A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Our size and staff limitations have prevented us from being able to employ sufficient resources to enable us to have an adequate level of supervision and segregation of duties within the internal control system.  At times, we have one person responsible for processing transactions and reporting them.  This lack of segregation of duties led our management to conclude that as of December 31, 2009:

 
·
our internal controls over financial reporting were not effective, and
 
·
our disclosure controls and procedures are not effective to give reasonable assurance that the information required to be disclosed in reports that we file under the Exchange Act are recorded, processed and reported as and when required.

Our failure to maintain effective internal controls could harm our operating results or cause us to fail to meet certain reporting obligations.  Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on our stock.
 
Our Revenues will depend on natural gas prices.
 
Our revenue, profitability and cash flow depend upon the prices and demand for natural gas.  The natural gas market is very volatile and the current drop in market prices has significantly affected our financial results and may impede our growth.  This decline in the current market price severely affects the viability of drilling in this market, because the lower cash flow makes it economically difficult to incur the high costs of drilling a well.  Developments in federal regulation pertaining to the sale, transportation and marketing of natural gas also will continue to impact future pricing and natural gas contracts.

The price we receive for our natural gas production will be determined by the availability of favorable purchase contracts, market forces, as well as short and long-term volume commitments.  Our current plan will be to analyze available markets, with consideration of both price and terms, and to enter into those arrangements we believe to be in the best interest of the Company.  We believe market fluctuations can be partly stabilized by effectively combining long-term gas purchase agreements and spot market sales.  We expect that we will be able to sell all natural gas produced from our wells to either utility companies, marketing affiliates of pipeline companies, natural gas marketing firms, or a variety of industrial or commercial consumers of natural gas.  However, we cannot guarantee our strategy will be effective.

 
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Natural gas markets are subject to many factors.
 
The deliverability and price of natural gas are subject to supply and demand market forces as well as the effects of state and federal regulatory policies and developments.  Prices for natural gas may fluctuate widely in response to relatively minor changes in the supply of and demand for natural gas, market uncertainty and a variety of additional factors that are beyond our control, such as:

·
the domestic and foreign supply of and demand for natural gas;
 
·
the price and level of foreign imports;
 
·
the level of consumer product demand;
 
·
weather conditions;
 
·
overall domestic and global economic conditions;
 
·
political and economic conditions in natural gas and oil producing countries, including those in the Middle East and South America;
 
·
the ability of members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls;
 
·
the impact of the U.S. dollar exchange rates on natural gas and oil prices;
 
·
technological advances affecting energy consumption;
 
·
domestic and foreign governmental regulations and taxation;
 
·
the impact of energy conservation efforts;
 
·
the proximity and capacity of natural gas pipelines and other transportation facilities; and
 
·
the price and availability of alternative fuels.

Prices received for natural gas produced in the Appalachian Basin are generally higher than national averages due to the proximity to markets in the Northeast but remain subject to the seasonal market forces.  In the past, the prices of natural gas have been extremely volatile, and we expect this volatility to continue.
 
Locations that we decide to drill may not be productive.
 
The cost of drilling, completing and operating a well is often uncertain, and cost factors can adversely affect the economics of a well.  Our efforts will be uneconomic if we drill dry holes or wells that are productive but do not produce enough to be commercially viable after drilling, operating and other costs.  These wells may need to be written-down.  The Company expects to conduct its drilling programs in the Appalachian Basin into sandstone formations of the Clinton group and similar formations.  These formations frequently are characterized by low permeability, rapid production decline assuming unrestricted production, and other geological characteristics which may limit the profit potential of wells drilled to these target formations.  Although many wells drilled to these formations are completed, it is possible for a productive well to provide an amount of revenue which is insufficient to return the costs incurred in drilling and completing the well.
 
Actual quantities and present value of our proved reserves may prove to be lower than we have estimated.

This report contains estimates of our proved reserves and the estimated future net revenue from our proved reserves.  Determining these estimates is a complex process with estimates based upon various assumptions relating to review and decisions about engineering and geological data for each well. These estimates are particularly sensitive to lower market prices which tend to reduce reserves since average or lower producing wells may not produce enough to offset the expenses needed to operate the wells.  At December 31, 2009 and 2008, the Company was significantly affected by lower market prices and showed higher depletion expense than in prior years.

 
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Our development operations require substantial capital expenditures.
 
The natural gas and oil industry is capital intensive.  We make and expect to continue to make substantial capital expenditures in our business for the development, production and acquisition of natural gas reserves.  We have financed capital expenditures primarily with equity infusions from existing investors, cash flow from operations and proceeds from loans.  We cannot guarantee that these sources of funds will be adequate to fund our capital needs.
 
We face significant competition.

The natural gas and oil industry is intensely competitive, and we compete with other companies that have significantly greater resources.  Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment.  Many of our larger competitors not only drill for and produce natural gas and oil, but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis.  These companies may be able to pay more for natural gas and oil properties and evaluate, bid for and purchase a greater number of properties than our financial or human resources permit.  In addition, these companies may have a greater ability to continue drilling activities during periods of low natural gas and oil prices and to absorb the burden of present and future federal, state, local and other laws and regulations.  Our inability to compete effectively with larger companies could have a material adverse impact on our business activities, financial condition and results of operations.
 
We depend on a third party to manage our business.

We have an agreement with Great Plains Exploration, LLC (“Great Plains”) to manage our oil and natural gas operations.  Great Plains is owned by Richard M. Osborne, our Chairman and CEO.  Great Plains assists in the drilling process, tends our wells, transports our natural gas and purchases and resells our production as well.  On August 20, 2009,  Charter One received a judgment in its favor against Great Plains, Oz Gas, Ltd. and Mr. Osborne, jointly and severally, for the amount of $21.2 million plus interest and late charges as well as attorneys’ fees, costs and other amounts payable under those loan agreements.  Charter One has asked for the appointment of a receiver for Great Plains and the hearing is currently scheduled for March 25, 2010.  If Great Plains fails to provide us with these services, or if the timeliness and quality of Great Plains’ services are not adequate, our business would be negatively impacted.
 
Our business depends on gathering and transportation facilities owned by others.
 
The marketability of our natural gas production depends in part on the availability, proximity and capacity of gathering and pipeline systems owned by third parties.  The amount of natural gas that can be produced and sold is subject to curtailment in certain circumstances, such as pipeline interruptions due to scheduled and unscheduled maintenance, excessive pressure, physical damage to the gathering or transportation system, or lack of contracted capacity in the system.  The curtailments arising from these and similar circumstances may last from a few days to several months.  To the extent that the Company’s wells are shut-in, even temporarily, revenues otherwise available to the Company will be reduced accordingly.
 
We depend on a key customer for sales of our natural gas.
 
We sell all of our natural gas production to Great Plains, which in turn sells a significant portion of our production volume to a limited number of customers.  To the extent these customers reduce the volume of natural gas that they purchase from Great Plains, we might not be able to advantageously sell all of our production.

 
11

 
 
Our business is hazardous.
 
Hazards such as geological unconformities, unexpected pressures and other unforeseen conditions are sometimes encountered in drilling wells.  On occasion, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could reduce funds available for drilling, resulting in the loss of properties of the Company.  We may be subjected to liability for pollution and other damages or may lose a significant portion of our properties due to hazards against which we cannot insure or may not elect to insure because of prohibitive premium costs or for other reasons.  Government regulations relating to environmental matters also could increase our costs of doing business or require us to cease operations in certain areas.  We will require an independent drilling contractor to insure against hazards and other risks normally encountered in its business.  However, there can be no assurance as to the extent and the cost of such coverage.  An uninsured claim against us could reduce our capital significantly or cause us to alter or terminate our drilling program.
 
The oil and natural gas industry is highly regulated.
 
Our operations are regulated extensively at the federal, state and local levels.  Environmental and other governmental laws and regulations have increased the costs to plan, design, drill, install, operate and abandon natural gas and oil wells.  Under these laws and regulations, we could also be liable for personal injuries, property damage and other damages.  Failure to comply with these laws and regulations could result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties.  Moreover, public interest in environmental protection has increased in recent years, and environmental organizations have opposed, with some success, certain drilling projects.

Risks Related to the Company
 
We need to raise additional capital, which may not be available to us and may limit our operations or growth.

We need additional capital to fund the implementation of our business plan.  We cannot provide assurances that any necessary subsequent financing will be obtained.  The Company’s future liquidity and capital requirements are difficult to predict as they depend upon many factors, including the success of its drilling operations and competing market developments.  We may need to raise additional funds in order to meet working capital requirements or additional capital expenditures or to take advantage of other opportunities.  We cannot be certain that the Company will be able to obtain additional financing on favorable terms or at all.  If we are unable to raise needed capital, our growth and operations may be impeded.  In addition, if we raise additional capital by selling additional shares of common or preferred stock, your percentage ownership in the Company will be diluted.
 
We have a limited history of operating the oil and natural gas assets we have acquired.
 
In considering whether to invest in the Company, an investor should consider that we commenced our oil and gas operations in January 2006 and there is only limited historical financial and operating information available on which to base an evaluation of our performance.  We may fail to implement our business model and strategy successfully or revise our business model and strategy should industry conditions and the competition within the industry change.
 
Our management team owns a controlling interest in the Company.
 
Richard M. Osborne, our Chairman and CEO, and Thomas J. Smith, former president and a current board member, own or control an aggregate 41.0% of our outstanding shares, or 52.3% if their partnership units in LSS I were converted into shares.  Accordingly, management possesses a near controlling vote on all matters submitted to a vote of our shareholders and has the ability to elect all members of our board of directors and to control our management and affairs.  This concentration of ownership may have the effect of preventing or discouraging transactions involving an actual or a potential change of control of our Company, regardless of whether a premium is offered over then-current market prices.

 
12

 
 
Our management team is subject to various conflicts of interest.
 
Great Plains, a company owned by Richard M. Osborne, our Chairman and CEO, manages our oil and natural gas business and purchases all of our natural gas production.  Great Plains loaned the Company $600,000 in the first quarter of 2009 which was repaid in the third quarter of 2009 to fund the Company’s ongoing capital requirements.  We lease our executive offices from OsAir, Inc., a company owned by Mr. Osborne.  Mr. Osborne is the sole manager of Liberty Self-Stor II, Ltd., which makes trucks available for short-term rental to the public at our self-storage facility and also provides other merchandise at this facility.
 
These arrangements create inherent conflicts of interest, although we believe that the terms we receive from Mr. Osborne’s companies are competitive with those we would receive from unaffiliated companies.  In addition, members of our management team are participating in other affiliated oil and natural gas drilling enterprises or organizations or associations formed for the development of oil and natural gas properties, some of which may be competitive with the Company.  The Company may compete with these other companies for drill sites and customers to purchase their products, creating further conflicts of interest.  Management is not restricted in the conduct of any of these additional activities.  No specific method for the resolution of these or other conflicts of interest has been devised.

Item 2.  Properties

The Company’s principal executive offices are located at 8500 Station Street, Suite 345, Mentor, Ohio 44060.  These offices are leased from OsAir, Inc., a company owned by Mr. Osborne.  The lease was extended for a three year term on March 26, 2009 at $2,000 per month from $1,350 per month, through April 1, 2012.

Oil and Natural Gas Wells

At December 31, 2009, the Company had fifty-eight wells in production.  The wells are mostly operator-owned by John D. Oil and Gas Company, although there are a limited number of wells in which we own a joint interest.  All of our wells are located in Northeast Ohio.  Reports were filed in 2009 to federal authorities providing total proved net oil and natural gas reserves and production, although no reports were filed in 2008.

The following table presents the net oil and natural gas production, net sales, average sale price and average unit costs per mcfe for the periods indicated:

   
2009
   
2008
 
Net Production
           
Natural Gas  (mcf)
    698,731       515,106  
Oil (bbl)
    9,186       9,685  
Natural Gas Equivalent (mcfe)
    753,847       573,216  
                 
Net Sales
               
Natural Gas
  $ 3,348,750     $ 3,915,208  
Oil
    362,918       652,879  
Total Sales
  $ 3,711,668     $ 4,568,087  
                 
Average Sale Price
               
Natural Gas   (mcf)
  $ 4.79     $ 7.60  
Oil (bbl)
  $ 39.51     $ 67.41  
Natural Gas Equivalent (mcfe)
  $ 4.92     $ 7.97  
                 
Average Unit Costs per mcfe
               
Well operating expenses
  $ 687,182     $ 575,675  
Average Cost/mcfe
  $ 0.91     $ 1.00  
 
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Estimated Proved Reserves.  The preparation of our natural gas and oil reserve estimates were completed in accordance with our prescribed internal control procedures, which include verification of input data delivered to our third-party reserve specialist, as well as a multi-functional management review.
 
The following table presents the Company’s estimated gross proved oil and natural gas reserves, which are all located in the continental United States, based on reserve reports prepared by Schlumberger Data and Consulting Services in 2009 and Wright & Company, Inc. in 2008.  The reserves calculated at December 31, 2009 were impacted by lower pricing as was true in the prior year.  Effective for the year end 2009, SEC reporting rules require that year-end reserve calculations and future cash inflows be based on the simple average of the first day of the month price for the previous twelve month period.  The prices for 2009 used in the above table were $3.867 per MMBTU and $61.18 per BBL.  The prices used for 2008 were based on the spot price at December 31, 2008 of $5.710 per MMBTU and $44.60 per BBL.  Additionally production was up in 2009 with 5 wells going online in 2009 and one very strong producing well in late 2008.
 
The technical person responsible for review of our reserve estimates at Schlumberger Data and Consulting Services and Wright & Company, Inc. meets the requirements regarding qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Neither of these firms own an interest in our properties or is employed on a contingent fee basis. The Schlumberger report was prepared in accordance with generally accepted petroleum engineering and evaluation principles and is attached as Exhibit 99.1 to this Annual Report on Form 10-K.
 
   
2009
   
2008
 
   
Natural Gas
   
Oil
   
Natural Gas
   
Oil
 
   
(MCF)
   
(BBLs)
   
(MCF)
   
(BBLs)
 
Proved developed and undeveloped reserves:
                       
Beginning of year
    2,146,600       17,500       2,646,000       37,300  
                                 
Revision of previous estimates, extensions and other additions
    792,000       17,600       (699,900 )     (13,900 )
Net reserve additions
    272,900       2,900       715,600       3,800  
Production
    (698,700 )     (9,200 )     (515,100 )     (9,700 )
End of year
    2,512,800       28,800       2,146,600       17,500  
                                 
Proved developed reserves:
                               
Beginning of year
    2,146,600       17,500       2,646,000       37,300  
End of year
    2,512,800       28,800       2,146,600       17,500  

Productive Wells. The following table presents the information relating to the productive wells in which we owned a working interest during the periods indicated.  Productive wells consist of producing wells and wells capable of production.  The Company’s wells are drilled to produce natural gas with oil being a by-product.  Gross wells are the total number of producing wells in which we have an interest, and net wells are the sum of our fractional working interests owned in gross wells.
   
2009
   
2008
 
   
Gross
   
Net
   
Gross
   
Net
 
Productive Wells:
                       
Operated
    53       51       49       47  
Non-Operated Properties
    5       2       5       2  
Total
    58       53       54       49  

Drilling Activity. The Company began its drilling activity in 2006, concentrating its efforts on development properties.  The following table presents information relating to wells completed during the periods indicated:

   
2009
   
2008
 
   
Gross
   
Net
   
Gross
   
Net
 
Gross wells:
                       
Productive
    4       4       12       12  
Dry
    1       1       1       1  
Total
    5       5       13       13  

The Company’s drilling activity significantly declined in 2009 due to less available cash.  The Company anticipates a continued slowing of its drilling program in 2010.  The decline in the current market price severely affects the viability of drilling, and our lower cash flow makes it economically difficult to incur the high costs of drilling a well.

 
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Developed and Undeveloped Acreage. The following presents information relating to developed and undeveloped acreage that the Company currently has leased.  Developed are those properties that are currently drilled and undeveloped acreage relates to lease acres on which wells have not been drilled or completed.

   
Developed Acreage
   
Undeveloped Acreage
 
   
Gross
   
Net
   
Gross
   
Net
 
Geographic Area:
                       
Ohio
    2,806       2,806       2,914       2,914  

Present Activities. As of December 31, 2009, the Company’s drilling activities have become minimal until it has cash flow to handle the drilling costs.

Leases.  The rights to drill an oil and natural gas well on a parcel of property are dependent on the producer securing a land lease for the mineral rights to drill for the oil and natural gas.  Typically the lease agreement will rent the rights to the minerals on the property for a specific time frame, varying from one to ten years. An executed lease with a producer gives exclusive rights for drilling on the property and another agreement cannot be signed until it has expired.

Insurance.  The Company has purchased a commercial liability policy to cover its oil and natural gas activities.  The Company’s management uses its discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to acquiring appropriate insurance on the Company’s investments at a reasonable cost and on suitable terms.

Depreciation.  Development costs of proved oil and natural gas properties, including estimated dismantlement, restoration and abandonment costs and acquisition costs, are depreciated and depleted on a well by well basis by the units-of-production method using estimated proved developed reserves.

Item 3.  Legal Proceedings.

On August 20, 2009, the Company received a declaration of default with respect to the $9.5 million line of credit under the Loan and Security Agreement, as amended, dated March 28, 2008, by and among the Company, Richard M. Osborne and Charter One (the “Loan Agreement”).  The notice of default demanded immediate payment of all amounts outstanding under the Loan Agreement.

In addition, on August 20, 2009, Charter One  received a judgment in its favor against the Company, Mr. Osborne and the Richard M. Osborne Trust (of which Mr. Osborne is the sole trustee), jointly and severally, for the amount of $9.5 million plus interest as of August 14, 2009 in the amount of $7,026, plus interest at the rate of $543 per diem from August 14, 2009, plus late charges in the amount of $475,842 as of August 14, 2009, plus attorneys’ fees, costs and other amounts payable under the Loan Agreement.  Additional information is available in the Company’s Form 8-K, dated August 20, 2009, and filed with the SEC on August 26, 2009.
 
The Loan Agreement is guaranteed by Richard M. Osborne, the Company’s Chairman of the Board and Chief Executive Officer.  As of December 31, 2009, the Company was current with its interest payments on the line of credit.
 
The Company is still negotiating with Charter One with respect to the $9.5 million line of credit.  However, if the Company is unsuccessful in refinancing the line of credit or if the Company is unsuccessful in obtaining substitute financing, there is substantial doubt about the Company’s ability to continue as a going concern.

In addition, Charter One has asked the court to appoint a receiver for the Company.  A hearing is currently scheduled for April 16, 2010.

 
15

 

Charter One also received a judgment in its favor against Great Plains Exploration, LLC, Oz Gas, Ltd. and Richard M. Osborne, jointly and severally, for the amount of $21,211,495, plus interest and late charges as well as attorneys’ fees, costs and other amounts payable under those loan agreements.  Great Plains Exploration, LLC and OzGas, Ltd are companies owned or controlled by Mr. Osborne.  The Company has an agreement, dated January 1, 2006, with Great Plains Exploration, LLC for well operations and to sell natural gas and oil production net of pipeline transportation costs.

Additionally, LSS I received a letter dated August 24, 2009 from First Merit Bank, N.A., the holder of the $1.2 million mortgage on the Painesville self-storage property in which the Company has 29.9% minority interest.  The letter from First Merit Bank, N.A. constituted formal notice to LSS I that, pursuant to cross-default provisions contained in the mortgage documents, certain defaults, including defaults under Mr. Osborne’s debt with First Merit and the Charter One judgments discussed above, must be cured within five days or the mortgage would become accelerated, without further notice or demand, and fully due and payable.  LSS I has been current with its payments on the mortgage.  LSS I is still negotiating with First Merit but does not have the available cash to repay the mortgage.  If the defaults with the First Merit mortgage are not cured, the Company could lose its investment in LSS I including the Painesville property.

PART II

Item 5. 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information. The Company’s shares of common stock, $0.001 par value per share, trade on the Over-the-Counter Bulletin Board Market, or OTCBB, under the symbol “JDOG.”

The following table sets forth the high and low closing sale prices as reported on the OTCBB for the Company’s common stock for each quarter within the Company’s last two fiscal years.  Because the Company’s common stock is traded on the OTCBB, these quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

2009
 
HIGH
   
LOW
 
First Quarter
  $ 0.40     $ 0.15  
Second Quarter
    0.20       0.10  
Third Quarter
    0.20       0.05  
Fourth Quarter
    0.18       0.07  
                 
2008
 
HIGH
   
LOW
 
First Quarter
  $ 0.89     $ 0.57  
Second Quarter
    1.50       0.57  
Third Quarter
    1.10       0.60  
Fourth Quarter
    0.85       0.17  

Holders.  As of February 22, 2010, the Company’s shares of common stock were held of record by approximately 1,622 shareholders.  We estimate that an additional 700 stockholders own stock in their accounts at brokerage firms and other financial institutions.

Dividends. The Company paid no cash distributions to its stockholders during 2009 and 2008.  However, the Company declared and paid $108,000 and $85,140 in preferred stock dividends for the year ended December 31, 2009 and 2008, respectively.  The Company is restricted by its loan agreement with RBS Citizens d/b/a Charter One from paying dividends on its common stock or making cash distributions to its stockholders and from paying dividends in excess of those regularly accruing on not more than two million dollars of preferred stock.

 
16

 

Issuance of Common Stock.  In December of 2008, the Board of Directors of the Company granted each of its five outside board members 9,615 shares of common stock valued at $0.26 per share.  The total shares awarded of 48,075 were issued as partial compensation for their board participation in 2008.  The Company did not issue common stock to its directors during 2009.

Issuance of Preferred Stock.  The Company sold an aggregate of 1,350 shares of its Series A Convertible Preferred Shares in a private placement to a total of nine accredited investors during the first six months of 2008.  All Series A Preferred Shares were sold at a price of $1,000 per share for a total of $1,350,000 with no underwriting discounts or commissions, as no underwriters were used to facilitate the transactions.  The Company did not issue Preferred Shares during 2009.

Warrant to Purchase Stock.  On June 20, 2008, the Company granted a warrant to purchase 50,000 shares of common stock to Richard M. Osborne in return for Mr. Osborne providing collateral for the Company’s credit facility with Charter One.
 
Purchases of Common Stock.  The Company did not purchase any shares of its common stock in 2009 or 2008.
 
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

John D. Oil and Gas Company, formerly Liberty Self-Stor, Inc. is a corporation organized under the laws of the State of Maryland.

The Company was originally a self-storage company from 1999 to 2005 when it sold all but two of its facilities.  By May 2007, one self-storage facility in Painesville remained which generates revenue through self-storage rentals and retail leases. In 2006, the Company entered into the business of extracting and producing oil and natural gas products, drilling oil and natural gas wells in Northeast Ohio.  The Company currently has two segments: one composed of the remaining self-storage facility located in Painesville, Ohio and one that is drilling oil and natural gas wells in Northeast Ohio.

The Company anticipates continuing to slow its drilling program in 2010.  The decline in the current market price severely affects the viability of our drilling because our lower cash flow makes it economically difficult to incur the high costs of drilling a well.  The Company cannot guarantee success under our business plan as drilling wells for oil and natural gas is a high-risk enterprise and there is no guarantee the Company will become profitable.
 
The Company recorded a loss on its books of $588,309 to the Kykuit equity investment.  This loss represents an 85% impairment of the exploratory wells on Kykuit’s books with the Company’s partnership percentage applied before tax.  The Company believes that the Kykuit investment may be profitable, and it could recoup this write-down.
 
The Company has been and still is in the process of attempting to renegotiate its $9.5 million and in default line of credit for the Charter One loan that matured August 1, 2009.  However, as discussed in “Legal Proceedings” in this Form 10-K and in Note 5 “Line of Credit and Long Term Debt” to the Consolidated Financial Statements, Charter One has received a judgment against the Company.

Critical Accounting Policies

The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  A “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  The Company believes the following critical accounting policies present our more significant judgments and estimates used in the preparation of our consolidated financial statements.

 
17

 

Principles of Consolidation

Pursuant to the terms of the partnership agreement of LSS I, the Company, as sole general partner, controls LSS I.  Accordingly, the Company accounts for its investment in LSS I utilizing the consolidation method.  The investment in an unconsolidated affiliate, Kykuit, is accounted for using the equity method.  All significant inter-company transactions and balances have been eliminated.

Accounts Receivable

The Company has certain trade receivables consisting of oil and natural gas sale obligations due under normal trade terms.  The Company currently sells its production to a related party through an oil and natural gas agreement, extending credit on an unsecured basis to them.  In evaluating its allowance for possible losses, the Company performs a review of outstanding receivables.  The trade receivables outstanding are typically three months of natural gas production due to the timing and accounting treatment by the main distribution pipeline company in Northeast Ohio.  At December 31, 2009 and 2008, the Company’s credit evaluation indicated that it has no need for an allowance for possible losses.

The Company’s accounts receivable, arising from the self-storage business, are due from individuals as well as business entities.  Tenants are required to pay their rent on the first of each month.  Past due amounts are those that are outstanding longer than the contractual payment terms.  If an account is more than 75 days past due, the Company generally writes off the balance directly to expense.  For such past due accounts, the Company has the right to auction the contents of the rented space, which allows for recovery of written-off balances.  Any such recoveries are credited to income when received.

Property and Equipment

All property and equipment is depreciated using the straight-line method over estimated useful lives of twenty five years for buildings and improvements and five to seven years for furniture and equipment.
 
The Company uses the successful efforts method of accounting for oil and natural gas producing activities. Under this method, acquisition costs for proved and unproved properties are capitalized when incurred. Exploration costs, including geological and geophysical costs, the costs of carrying and retaining unproved properties and exploratory dry hole drilling costs, are expensed. Development costs, including the costs to drill and equip development wells and successful exploratory drilling costs to locate proved reserves, are capitalized.  Upon sale or retirement of a proved property, the cost and accumulated depreciation and depletion and amortizations are eliminated from property accounts and the resultant gain or loss is recognized.
 
Exploratory drilling costs are capitalized when incurred pending the determination of whether a well has found proved reserves. If a well is determined to be successful, the capitalized drilling costs will be reclassified as part of the cost of the well. If a well is determined to be unsuccessful, the capitalized drilling costs will be charged to expense in the period the determination is made.  The Company is involved in exploratory drilling only to the extent that it is a partner of Kykuit, which is doing exploratory drilling in Montana.  The Company is an owner and managing member of Kykuit, an unconsolidated affiliate.
 
Development costs of proved oil and natural gas properties, including estimated dismantlement, restoration, abandonment costs and acquisition costs, are depreciated and depleted on a well by well basis by the units-of-production method using estimated proved developed reserves.  The costs of oil and natural gas properties are periodically assessed for impairment.

Asset Impairment

The Company reviews its self-storage property and capitalized well costs for impairment when events or changes in circumstances indicate the carrying amounts of the properties may not be recoverable.  When such conditions exist, management estimates future cash flows from operations and ultimate disposition of the individual properties.  If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related property’s estimated fair market value would be recorded and an impairment loss would be recognized.  The Company wrote off the costs related to one well amounting to $145,444 in 2009 and two wells amounting to $491,224 in 2008.

 
18

 

Asset Retirement Obligation

The Company accounts for its asset retirement obligations in accordance with generally accepted accounting principles in the United States of America (“GAAP”) which requires the fair value of an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made.  For the Company, asset retirement obligations primarily relate to the abandonment, dismantling and plugging of oil and natural gas wells.  The present value of the estimated asset retirement cost is capitalized as part of the long-lived asset.  The capitalized asset retirement cost is depreciated and the asset retirement obligation is accreted over the estimated life of the well.  The current portion of the asset retirement obligation as of December 31, 2009 and 2008, was $0 and $30,000, respectively and is included in accrued expenses.  The Company plugged two wells during 2009 and four wells during 2008.

Revenue Recognition

The Company recognizes revenue from its oil and natural gas interests in producing wells as oil and natural gas is sold to a purchaser at a fixed or determinable price when delivery has occurred, title and risk of loss have transferred to the purchaser and the collectability of revenue is reasonably assured.  The Company has a management agreement with a related party to transport the Company’s natural gas production through the related party’s pipeline and include this natural gas with the related party’s natural gas in order to fulfill production contracts they currently have in place.  The actual funds are typically received within three months due to the accounting treatment by the main distribution pipeline company in Northeast Ohio.

Income Taxes

Effective January 1, 2006, the Company became a “C” Corporation for tax purposes.

In establishing a provision for income taxes, the Company must estimate when in the future certain items will affect taxable income.  Deferred taxes are recorded for future tax consequences of events that have been recognized in the financial statements or tax returns, based upon enacted tax laws and rates.  Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not.

The Company has net operating loss carry forwards (NOLS) and a valuation allowance to offset any tax effects.  The Company has no unrecognized tax benefits and therefore, there was no effect on the Company’s effective tax rate.  Any tax penalties or interest expense will be recognized in income tax expense.  No interest and penalties were accrued as of December 31, 2009 or 2008, or paid during the periods then ended.  The Company does not anticipate a significant change over the next twelve months to any tax liability.

The Company is open to federal and state tax audits until the applicable statute of limitations expire.  There are currently no federal or state income tax examinations underway for the Company.  The tax years 2006 through 2009 remain open to examination by the major taxing jurisdictions in which we operate, although no material changes to unrecognized tax positions are expected within the next twelve months.  The Company does, however, have prior year net operating losses which remain open for examination.

Liquidity and Capital Resources

Liquidity represents the Company's ability to generate sufficient amounts of cash to meet its financial commitments.  The Company believes that cash flow from operating and financing activities will not be sufficient to meet its anticipated operating requirements on a short-term basis.

The Company requires substantial capital expenditures to maintain and/or grow production and reserves.  We depend on debt or equity financing to pay for exploration and operations.  The current economic environment makes it more difficult to obtain debt or equity financing on acceptable terms to address our liquidity issues.  Capital may not continue to be available if necessary to meet these continuing costs, or if capital is available, it may not be on terms acceptable to us.

 
19

 

The Company’s $9.5 million line of credit with Charter One matured on August 1, 2009.  On August 20, 2009, Charter One received a judgment in its favor against the Company, Mr. Osborne and the Richard M. Osborne Trust, jointly and severally for $9.5 million plus interest and late charges.  If the Company is unsuccessful in refinancing the line of credit or if it is unsuccessful in obtaining substitute financing, there is substantial doubt about the Company’s ability to continue as a going concern. Charter One has requested that the court appoint a receiver for the Company.  A hearing on the appointment of a receiver is currently scheduled for April 16, 2010.

Additionally, the Company received a letter dated August 24, 2009 from First Merit Bank, N.A., the holder of the $1.2 million mortgage on the Painesville self-storage property owned by LSS I in which the Company has 29.9% minority interest.  The letter from First Merit Bank, N.A. constituted formal notice to LSS I that, pursuant to cross-default provisions contained in the mortgage documents, certain defaults, including defaults under Mr. Osborne’s debt with First Merit and the Charter One judgment discussed above, must be cured within five days or the mortgage would become accelerated, without further notice or demand, and fully due and payable.  LSS I had been current with its payments on the mortgage.  However, LSS I does not have the available cash to repay the mortgage.

The Company is still negotiating with Charter One and First Merit.  However, if the defaults with the First Merit mortgage are not cured, the Company could lose its investment in LSS I, including the Painesville property.  If the Company is unsuccessful in refinancing the line of credit or if the Company is unsuccessful in obtaining substitute financing, there is substantial doubt about the Company’s ability to continue as a going concern.

The items affecting operating cash flow and cash and cash equivalents are discussed more fully in the “Material Changes in Results of Operations” section.

The Company’s current assets decreased $1,030,934 or 64.7%, to $562,127 at December 31, 2009 from $1,593,061 at December 31, 2008.  Current assets at December 31, 2009 were lower than at December 31, 2008 largely due to the decrease in accounts receivable from related parties which was affected by the lower pricing of natural gas and oil production in 2009 and the receipt of advance funds from Great Plains toward production receivables.

The Company’s current liabilities decreased $767,247, or 6.4% to $11,261,976 at December 31, 2009, from $12,029,223 at December 31, 2008.  The decrease is largely the result of payment of outstanding accounts payable.

The Company had a positive cash flow from operating activities of $865,896 for the year ended December 31, 2009 compared to a positive cash flow of $1,920,860 for the year ended December 31, 2008. The decrease in cash flow provided by operating activities was largely due to payment of outstanding accounts payable.

The Company had a negative cash flow from investing activities of $696,252 for the year ended December 31, 2009 compared to a negative cash flow of $2,994,016 for the year ended December 31, 2008. The year ended 2008 was higher due to higher expenditures for drilling new oil and natural gas wells.

The Company had a negative cash flow from financing activities of $225,873 for the year ended December 31, 2009 compared to a positive cash flow of $1,120,978 for the year ended December 31, 2008.  The positive cash flow for the year ended December 31, 2008 was largely due to the receipt of proceeds from a private stock offering.

The following table sets forth the maturity dates and the total of the Company’s long-term debt and line of credit as of December 31, 2009, as well as future commitments under the Company’s office space lease.
   
Payments Due by Period
 
Contractual Obligations
 
Less than 1 year
   
1-3 years
   
4-5 years
   
Total
 
Long-Term Debt
  $ 1,145,174     $ -     $ -     $ 1,145,174  
Line of Credit
    9,497,024       -       -       9,497,024  
Operating Lease*
    24,000       30,000       -       54,000  
                                 
Total Contractual Cash Obligations
  $ 10,666,198     $ 30,000     $ -     $ 10,696,198  

 
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*The operating lease for office space is leased from OsAir, Inc., a company owned by Mr. Osborne.  The lease was extended for a three year term on March 26, 2009 at $2,000 per month from $1,350 per month, through April 1, 2012, which is reflected in the above table.

The items affecting operating cash flow and cash and cash equivalents are discussed more fully in the “Material Changes in Results of Operations” section.

Material Changes in Results of Operations

Revenues from Operations

Total revenues from operations decreased $838,268, or 17.2%, to $4,045,245 for the year ended December 31, 2009, compared to $4,883,513 for the same period in 2008.  Although the Company has contracts for prices higher than the current market, the current contracts are lower than the previous year’s contracts.  Therefore, the decrease is due to lower prices for natural gas and oil production in 2009 offset partially by increased production from more wells going on line.

Expenses from Operations

Total operating expenses decreased $352,630, or 5.0%, to $6,741,490 for the year ended December 31, 2009 from $7,094,120 for the same period in 2008.  This decrease is primarily attributable to a decrease in depreciation, depletion and amortization and impairment expenses compared to the same period in 2008.  Additionally interest expense decreased with the swap maturing and lower interest rates in 2009 than 2008, as well as, salary expense decreasing in general and administrative expenses due to staff reductions in 2009.  These decreases were partially offset by increased legal and professional expense in 2009 compared to 2008 due to the payment to Charter One of $50,000 for a third party to review the books and operations of the Company and legal fees as part of the line of credit loan negotiations.  Also, the loss for the unconsolidated affiliate, Kykuit, included a write-down on the equity investment of $588,309.

Interest expense decreased $133,396, or 22.9%, to $448,558 for the year ended December 31, 2009 compared to $581,954 for the same period in 2008.  Interest expense was lower in 2009 partially due to the maturity of the swap agreement in August 2009 and lower interest rates in 2009 compared to 2008.

Accretion expense for the year ended December 31, 2009 was $45,905 compared to $44,742 for the same period in 2008.

Oil and natural gas production costs increased $111,507, or 19.4%, to $687,182 for the year ended December 31, 2009 compared to $575,675 for the same period in 2008.  The increase is primarily the result of an increase in water hauling and payment of county production taxes in 2009 compared to 2008.

Legal and professional fees increased $122,912, or 50.2%, to $367,854 for the year ended December 31, 2009 compared to $244,942 for the same period in 2008. The increase is partially due to the payment to Charter One of $50,000 for a third party to review the books and operations of the Company as part of the line of credit loan audit and partially due to additional legal expenses relating to the Charter One loan negotiations.  

Property taxes and insurance expenses decreased $22,109, or 13.9%, to $137,492 for the year ended December 31, 2009 compared to $159,601 for the same period in 2008.  While property taxes increased, insurance expense decreased when the Company did not renew its Directors and Officers insurance plan in 2009.

General and administrative expenses decreased $122,754, or 13.9%, to $762,982 for the year ended December 31, 2009 compared to $885,736 for the same period in 2008. The decrease in general and administrative expenses is largely due to a decrease in employees, although corporate office rent, meals and entertainment and travel expense increased slightly.

On June 20, 2008, the Company granted a warrant to purchase 50,000 shares of common stock (the “Warrant”) to Richard M. Osborne in return for Mr. Osborne providing collateral for the Company’s credit facility with Charter One.  The Warrant has an exercise price of $1.00 per share and a term of five years.  The fair value of the warrant was approximately $48,000 at the date of grant, estimated using the Black-Scholes-Merton option pricing model. The Company has not granted any other warrants during 2009.

 
21

 

Loss from unconsolidated affiliate expense increased $621,793 to $650,420 for the year ended December 31, 2009 compared to $28,627 for the same period in 2008.  Kykuit expenses increased $33,484 largely due to expensing expired leases in Montana.  The remainder of the increase was due to recording a loss on the investment of $588,309.

Bad debt expense for the year ended December 31, 2009 was $2,157 compared to $43,517 for the same period in 2008.  The Company typically writes off a minimal amount of receivables in the self-storage business.  However, the Company wrote off a receivable of $40,027 for a retail lease in the Painesville facility in the second quarter of 2008 that appeared unlikely the Company would be able to collect.

Impairment and dry well costs from operations for the year ended December 31, 2009 was $145,444 compared to $491,224 for the same period in 2008.  The Company wrote off the costs related to one well amounting to $145,444 in 2009 and two wells amounting to $491,224 in 2008.  Impairments and dry wells could happen in future years, particularly in an aggressive drilling program or when market prices of production is very low, as is the current case.

Depreciation, depletion and amortization expenses decreased $493,744, or 12.7%, to $3,381,114 for the year ended December 31, 2009 compared to $3,874,858 for the same period in 2008.  The decrease is partially the result of new increased reserve remaining life information calculated by a third party petroleum engineer.

Net Loss

The Company had a net loss from operations of $2,696,245, for the year ended December 31, 2009 compared to a net loss of $2,210,607 for the same period in 2008. Although production quantities were higher in 2009 with more wells on line, the net loss increased partially due to lower prices for production and partially due to the decrease in the value of the Kykuit investment.

Net Loss attributable to Non-Controlling Interest

The Company had a net loss attributable to its non-controlling interest in LSS I of $81,544 for the year ended December 31, 2009 and a net loss of $170,567 for the same period in 2008.  The self storage facility typically has a loss due to its difficulty in renting units that have limited access through the use of an elevator.  In 2008 the Company had a bad debt write-off of $40,027.  In 2009, the Company increased revenue by approximately $21,000 with new retail renters and renewed lease contracts.  Additionally the Company reduced staff, lowering payroll expense by approximately $46,000.  Lower interest rates on the First Merit Loan decreased interest expense by $38,000, only slightly offsetting the lower expenses were $19,000 of higher legal expenses relating to the Charter One loan negotiations.

Net Loss attributable to John D. Oil and Gas Company

The Company had a net loss attributable to John D. interests of $2,614,701 for the year ended December 31, 2009 compared to a net loss of $2,040,040 for the same period in 2008.  The net loss for both years was significant due to the market price for natural gas steadily decreasing, causing revenues to drop and reserve calculations to increase depletion expense.  The loss in 2009 was also increased due to the loss incurred on the Kykuit equity investment.

Interest Rate Risk

Interest rate risk is the risk that interest rates will increase, which will result in an increase in the Company’s interest expense on its variable rate loans.

The loan on the Painesville facility and the Charter One line of credit, totaling approximately $10.6 million, are tied to variable interest rates.  If the Company’s interest rates on the loans were to increase by 1% per year, the Company’s interest expense would increase approximately $106,000 on an annual basis.  The Company’s line of credit was previously fixed through the use of an interest rate swap until August 2009 which had minimized the risk.  However if interest rates increase, the Company’s results of operations may be materially and adversely affected.

 
22

 

Off-Balance Sheet Arrangements

The Company had one off-balance sheet arrangement at December 31, 2009, with respect to its investment in Kykuit.  While the Company is not liable for the contribution obligations of other members of Kykuit, the Company is investing additional funds since other members are not investing at this time.  During 2009 and 2008, the Company invested $514,414 and $466,950, respectively, in Kykuit as part of their cash calls and to make up the difference for members not investing.

Forward-Looking Statements

Statements that are not historical facts, including statements about the Company’s confidence in its prospects and strategies and its expectations about growth, are forward-looking statements that involve risks and uncertainties.  These risks and uncertainties, many of which are beyond our control, may include statements about our:

·
our ability to continue as a going concern;
 
·
liquidity and our ability to meet our debt obligations;
 
·
business strategy;
 
·
financial strategy;
 
·
drilling locations;
 
·
natural gas and oil reserves;
 
·
realized natural gas and oil prices;
 
·
production volumes;
 
·
lease operating expenses, general and administrative expenses and finding and development costs;
 
·
future operating results; and
 
·
plans, objectives, expectations and intentions.

All of these types of statements, other than statements of historical fact, included in this report are forward-looking statements.  In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” the negative of these terms or other comparable terminology.

The forward-looking statements contained in this report are largely based on our expectations, which reflect estimates and assumptions made by our management.  These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors.  Although we believe these estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control.  In addition, management’s assumptions about future events may prove to be inaccurate. We caution all readers that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur.  Actual results may differ materially from those anticipated or implied in the forward-looking statements due to factors listed in the “Risk Factors” section and elsewhere in this report.  All forward-looking statements speak only as of the date of this report.  We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise.  These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

Income Taxes

Effective January 1, 2006, the Company became a “C” Corporation for tax purposes.

 
23

 

At December 31, 2009 and 2008, the Company had net operating loss carry forwards (NOLS) for future years of approximately $15.9 million and $15.4 million, respectively.  These NOLS will expire at various dates through 2028.  Utilization of the NOLs could be limited if there is a substantial change in ownership of the Company and is contingent on future earnings.  In addition, the Company has a $41,187 alternative minimum tax (AMT) credit that carries forward indefinitely.

The Company has provided a valuation allowance equal to 100% of the total net deferred asset in recognition of the uncertainty regarding the ultimate amount of the net deferred tax asset that will be realized.

Recently Issued Accounting Pronouncements

Accounting Standards Codification

In June 2009, the Financial Accounting Standards Board (“FASB”) approved the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“the Codification”) or (“ASC”) as the single source of authoritative nongovernmental GAAP.  All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”), and other related accounting literature have been superseded by the Codification.  Rules and interpretive releases of the United States Securities and Exchange Commission (“SEC”) under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  All other accounting literature is considered non-authoritative. The Codification reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure.  The FASB will not issue new standards in the form of Statements, FASB Staff Position, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates.  The FASB will not consider Accounting Standards Updates as authoritative in their own right; these updates will serve only to update the Codification, provide background information about the guidance, and provide the basis for conclusions on the change(s) in the Codification.  The switch to the ASC affects the way companies refer to GAAP in financial statements and accounting policies.  Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.  This Codification is effective for financial statements issued for reporting periods that ended after September 15, 2009.  At this time the Company has decided to present new accounting pronouncements with no standard references.

Oil and Gas Reporting

In December 2008, the SEC released a final rule, "Modernization of Oil and Gas Reporting," which amends the oil and gas reporting requirements. The key revisions to the reporting requirements include: using a 12-month average price to determine reserves; including nontraditional resources in reserves if they are intended to be upgraded to synthetic oil and gas; ability to use new technologies to determine and estimate reserves; and permitting the disclosure of probable and possible reserves. In addition, the final rule includes the requirements to report the independence and qualifications of the reserve preparer or auditor; file a report as an exhibit when a third party is relied upon to prepare reserve estimates or conduct reserve audits; and to disclose the development of any proved undeveloped reserves (PUDs), including the total quantity of PUDs at year-end, material changes to PUDs during the year, investments and progress toward the development of PUDs and an explanation of the reasons why material concentrations of PUDs have remained undeveloped for five years or more after disclosure as PUDs. The accounting changes resulting from changes in definitions and pricing assumptions should be treated as a change in accounting principle that is inseparable from a change in accounting estimate, which is to be applied prospectively. The final rule is effective for annual reports for fiscal years ending on or after December 31, 2009. Early adoption was not permitted.  The adoption of this standard had an impact on the Company’s financial position and results of operations.  The 12-month average pricing for the year for natural gas sold at the Henry Hub, LA was $3.867 and West Texas Intermediate oil at Cushing, OK was $61.18, where the previous calculations would have been higher based on the last day of December 2009.  The lower pricing increased our depletion expense in 2009.  The Company’s depletion rate continues to be extremely high.

Effective upon its issuance in September 2009, the Company adopted an accounting standards update on “Extractive Activities – Oil and Gas”.  This accounting standards update represents a technical correction to an existing SEC Observer comment regarding “Accounting for Gas-Balancing Arrangements”.  The adoption of this accounting standard update did not have a material impact on the Company’s financial statements.

 
24

 

In January 2010, an accounting standard update was issued on “Oil and Gas Estimations and Disclosures.  This update aligns the current oil and natural gas reserve estimation and disclosure requirements of the Extractive Activities for Oil and Gas with the changes required by the SEC final rule, as discussed above.  This update expands the disclosures required for equity method investments, revises the definition of oil and natural gas producing activities to include nontraditional resources in reserves unless not intended to be upgraded into synthetic oil or natural gas producing activities.  This update also amends the definition of proved oil and natural gas reserves to require 12-month average pricing in estimating reserves, amends and adds definitions in the Master glossary that is used in estimating proved oil and natural gas quantities and provides guidance on geographic area with respect to disclosure of information about significant reserves.  It is effective for entities with annual reporting periods ending on or after December 31, 2009.  The Company adopted this update on December 31, 2009.

Other-Than-Temporary Impairments

In April 2009, a new accounting standard was issued regarding the recognition of other-than-temporary impairments of investments in debt securities, as well as financial statement presentation and disclosure requirements, for when to recognize a write-down through earnings versus other comprehensive income.  The standard was effective for interim and annual periods ending after June 15, 2009.  The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

Consolidation of Variable Interest Entities

In June 2009, a new accounting standard was issued in order to change financial reporting by enterprises involved with variable interest entities (“VIEs”).  The standard replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a VIE with an approach focused on identifying which enterprise has the power to direct the activities of a VIE and the obligation to absorb losses of the entity or the right to receive the entity’s residual returns.  This standard is effective for fiscal years beginning after November 15, 2009.  The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

Measuring Liabilities at Fair Value

In August 2009, a new accounting standard was issued concerning measuring liabilities at fair value.  The new standard provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain valuation techniques.  Additionally, it clarifies that a reporting entity is not required to adjust the fair value of a liability for the existence of a restriction that prevents the transfer of the liability.  This new guidance is effective for the first reporting period after its issuance, however earlier application is permitted.  The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

The Company reviewed all other recently issued, but not yet effective, accounting pronouncements and does not believe any such pronouncements will have a material impact on the financial statements.

Item 8.  Financial Statements and Supplementary Data

The Company’s Report of Independent Registered Public Accounting Firm and Consolidated Financial Statements are filed as part of this report.

Item 9A(T).  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

 
25

 

As of December 31, 2009, the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended.  Based on this evaluation, our chief executive officer and chief financial officer each concluded that the Company’s disclosure controls and procedures were not effective in light of the identification of a material weakness in the Company’s internal controls over financial reporting as discussed below.

Management’s Report on Internal Control over Financial Reporting

The management of the Company is responsible for establishing and maintaining an adequate system of internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f) .  The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our Consolidated Financial Statements for external purposes in accordance with generally accepted accounting principles defined in the Exchange Act.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis.

We carried out an evaluation under the direction of our chief executive officer and chief financial officer, of the effectiveness of our internal control over financial reporting. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control over Financial Reporting - Guidance for Smaller Public Companies (2006).”  Based on that evaluation, our management concluded that our internal controls over financial reporting were not effective as of December 31, 2009 due to control deficiencies that constitute a material weakness.

In connection with management’s assessment of our internal control over financial reporting described above, management has identified the following material weakness in our internal control over financial reporting as of December 31, 2009:

The Company’s size and staff limitations have prevented it from being able to employ sufficient resources to enable the Company to have an adequate level of supervision and segregation of duties within the internal control system.  At times, the Company has one person responsible for processing transactions and reporting them.  This creates certain incompatible duties and a lack of review over the financial reporting process that would likely fail to detect errors in spreadsheets, calculation or other documentation.  Existing management attempts to provide oversight for most functions but lack of personnel makes the task virtually impossible in some situations.  In addition this lack of segregation of duties led management to conclude that the Company’s disclosure controls and procedures were not effective to give reasonable assurance that the information required to be disclosed in reports that the Company files under the Exchange Act are recorded, processed and reported as and when required.  These control deficiencies could result in a material misstatement in our interim or annual financial statements that would not be prevented or detected on a timely basis.

In order to mitigate this material weakness, all financial reports are reviewed by two of the Company’s Board members for reasonableness.  All unexpected results are investigated.  As soon as our finances allow, we anticipate hiring additional accounting staff and implementing appropriate procedures for monitoring and reviewing the work performed by the Chief Financial Officer.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Notwithstanding the material weakness described above, to the best of their knowledge, the Company’s management believes that the financial statements included in this Annual Report on Form 10-K fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles.

 
26

 

Changes in Internal Control over Financial Reporting

During the quarter ended December 31, 2009, the Company reduced office staff which hampered the Company’s ability to maintain adequate segregation of duties which led to control deficiencies that constitute a material weakness in our internal control over financial reporting.

Attestation Report of Independent Registered Public Accounting Firm

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Item 9B.  Other Information

None.

PART III

Item 10.  Directors, Executive Officers and Corporate Governance

The information required by this Item 10 is incorporated herein by reference to the Registrant’s definitive Proxy Statement, relating to its 2010 Annual Meeting (“Proxy Statement,”) under the captions “Board of Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Code of Ethics,” and “Audit Committee Report.”  The Proxy Statement will be filed with the SEC no later than April 30, 2010.

Item 11.  Executive Compensation

The information required by Item 11 is contained under the caption “Executive and Director Compensation” in the Proxy Statement and is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by Item 12 is contained under the caption “Equity Compensation Plan Information” and  “Principal Stockholders” in the Proxy Statement and is incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions, and Director Independence

The information required by Item 13 is contained under the caption “Certain Relationships and Related Transactions” and “Director Independence” in the Proxy Statement and is incorporated herein by reference.

Item 14.  Principal Accountant Fees and Services

The information required by Item 14 is contained under the caption “Principal Accounting Firm Fees” and “Audit Committee Pre-approval Policies and Procedures” in the Proxy Statement and is incorporated herein by reference.

 
27

 

PART IV

Item 15.  Exhibits and Financial Statement Schedules

Exhibit No.
 
Description
     
2.1
 
Agreement and Plan of Merger, dated as of December 28, 1999, by and among Meridian Point Realty Trust ‘83, the Company and Liberty Self-Stor Limited Partnership (Exhibits A and B to the Agreement and Plan of Merger are Exhibits 3.1 and 3.2, respectively) (Filed as Exhibit 2.1 to Registrant’s Form 8-K dated January 12, 2000 and incorporated herein by reference.)
     
3.1
 
Articles of Incorporation of the Company (Filed as Exhibit 3.1 to Registrant’s Form 8-K dated January 12, 2000 and incorporated herein by reference.)
     
3.2
 
Articles of Amendment of Articles of Incorporation of the Company dated June 27, 2005(Filed as Exhibit 3.1 to Registrant’s Form 8-K dated July 1, 2005 and incorporated herein by reference.)
     
3.3
 
Articles Supplementary to John D. Oil and Gas Company’s Articles of Incorporation, as amended, restated and supplemented dated February 12, 2008 (Filed as Exhibit 3.1 to Registrant’s Form 8-K dated February 12, 2008 and incorporated herein by reference.)
     
3.4
 
Bylaws of the Company (Filed as Exhibit 3.2 to Registrant’s Form 8-K dated January 12, 2000 and incorporated herein by reference.)
     
4.1
 
Registration Rights Agreement between the Company and the Richard M. Osborne Trust dated February 28, 2006 (Filed as Exhibit 4.1 to Registrant’s Form 8-K dated February 24, 2006 and incorporated herein by reference.)
     
9.1
 
Voting Trust Agreement between the Company, Richard M. Osborne and Gregory J. Osborne dated February 16, 2006 (Filed as Exhibit 7.1 to Registrant’s Form SC 13D/A dated April 11, 2006 and incorporated herein by reference.)
     
10.1†
 
Amended and Restated 1999 Stock Option and Award Plan of the Company (Filed as Annex A to Registrant’s Definitive Proxy Statement filed on April 30, 2009 and incorporated herein by reference.)
     
10.2
 
Lease between OsAir, Inc. and the Company (Filed as Exhibit 10.2 to Registrant’s Form 8-K dated January 12, 2000 and incorporated herein by reference.)
     
10.3
 
Lease between OsAir, Inc and the Company dated March 26, 2009 (Filed as Exhibit 10.4 to Registrant’s Form 10-K dated December 31, 2008 and incorporated herein by reference.)
     
10.4
 
Agreement of Limited Partnership of LSS I Limited Partnership, dated December 29, 1999.  (Filed as Exhibit 10.3 to Registrant’s Form 8-K dated January 12, 2000 and incorporated herein by reference.)
     
10.5
 
Cost Sharing Agreement, by and between Liberty Self-Stor, Ltd. and Liberty Self-Stor II, Ltd. dated December 28, 1999 (Filed as Exhibit 10.7 to Registrant’s Form 10-KSB, dated March 15, 2000 and incorporated herein by reference.)
     
10.6
 
Contract among Acquiport/Amsdell I Limited Partnership and/or its nominee, Liberty Self-Stor, Ltd. and Liberty Self-Stor II, Ltd dated September 7, 2004 (Filed as Exhibit 10.1 to Registrant’s Form 8-K dated September 10, 2004 and incorporated herein by reference.)

 
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10.7
 
Amended and Restated First Amendment to Agreement of Limited Partnership of LSS I Limited Partnership dated March 29, 2006 (Filed as Exhibit 10.9 to Registrant’s form 10-KSB, dated March 31, 2006 and incorporated herein by reference)
     
10.8
 
Stock Subscription Agreement between the Company and the Richard M. Osborne Trust dated February 28, 2006 (Filed as Exhibit 10.1 to Registrant’s Form 8-K dated March 2, 2006 and incorporated herein by reference.)
     
10.9
 
Stock Subscription Agreement between the Company and Terence P. Coyne dated February 28, 2006 (Filed as Exhibit 10.2 to Registrant’s Form 8-K dated March 2, 2006 and incorporated herein by reference.)
     
10.10
 
Common Stock Purchase Warrant granted to Richard M. Osborne dated June 20, 2008 (Filed as Exhibit 10.1 to Registrant’s Form 8-K dated June 20, 2008 and incorporated herein by reference.)
     
10.11
 
Letter agreement between the Company and Great Plains Exploration, LLC relating to the transfer of oil and natural gas wells dated as of January 1, 2006 (Filed as Exhibit 10.1 to Registrant’s Form 10-QSB dated March 31, 2006 and incorporated herein by reference.)
     
10.12
 
Oil and Gas Operations and Sale Agreement between the Company and Great Plains Exploration, LLC dated as of January 1, 2006 (Filed as Exhibit 10.2 to Registrant’s Form 10-QSB dated March 31, 2006 and incorporated herein by reference.)
     
10.13
 
Amendment No 1 to Oil and Gas Operations and Sale Agreement between the Company and Great Plains Exploration, LLC dated as of November 14, 2006 (Filed as Exhibit 10.4 to Registrant’s Form 10-QSB dated September 30, 2006 and incorporated by reference.)
     
10.14
 
Amendment No. 2 to Oil and Gas Operations and Sale Agreement dated as of January 12, 2009 by and between the Company and Great Plains Exploration, LLC (Filed as Exhibit 10.1 to the Registrant’s 8-K dated January 12, 2009 and incorporated herein by reference.)
     
10.15
 
Revolving Demand Note of the Company payable to the Richard M. Osborne Trust dated as of January 1, 2006 (Filed as Exhibit 10.3 to Registrant’s Form 10-QSB dated March 31, 2006 and incorporated herein by reference.)
     
10.16
 
Purchase and Sale Agreement between the Company and Buckeye Storage of Gahanna LLC dated as of October 5, 2006 (Filed as Exhibit 10.1 to Registrant’s Form 8-K dated October 12, 2006 and incorporated herein by reference.)
     
10.17
 
First Amended and Restated Loan and Security Agreement between RBS Citizens, N.A., d/b/a Charter One, Richard M. Osborne and the Company, dated as of March 28, 2008 (Filed as Exhibit 10.1 to Registrant’s Form 8-K dated March 28, 2008 and incorporated herein by reference.)
     
10.18
 
Revolving Credit Note of the Company and Richard M. Osborne in favor of RBS Citizens, N.A., d/b/a Charter One, dated as of March 28, 2008 (Filed as Exhibit 10.2 to Registrant’s Form 8-K dated March 28, 2008 and incorporated herein by reference.)
     
10.19
 
Loan Amendment Agreement between the Company, Great Plains Exploration, LLC and Richard M. Osborne dated March 28, 2008 (Filed as Exhibit 10.1 to Registrant’s Form 10-Q dated March 28, 2008 and incorporated herein by reference.)
     
10.20
 
Assignment and Assumption of Lease Purchase and Sale Agreement and First Amendment of Lease Purchase and Sale Agreement entered into as of August 3, 2007 between Great Plains Exploration, LLC and Kykuit Resources, LLC (Filed as Exhibit 10.1 to Registrant’s Form 8-K dated August 3, 2007 and incorporated herein by reference.)

 
29

 

10.21
 
Lease Purchase and Sale Agreement dated March 21, 2007 between Hemus, Ltd. and Great Plains Exploration, LLC and First Amendment to Lease Purchase and Sale Agreement dated July 24, 2007 (Filed as Exhibit 10.2 to Registrant’s Form 8-K dated August 3, 2007 and incorporated herein by reference.)
     
10.22
 
Joint Venture Development Agreement between Kykuit Resources, LLC and Hemus, Ltd, effective August 3, 2007 (Filed as Exhibit 10.3 to Registrant’s Form 8-K dated August 3, 2007 and incorporated herein by reference.)
     
10.23
 
Assignment of Oil, Gas and Mineral Leases dated May 1, 2008 between Hemus, Ltd. and Kykuit Resources, LLC (Filed as Exhibit 10.1 to Registrant’s Form 8-K dated May 1, 2008 and incorporated herein by reference.)
     
10.24
 
Transfer and Acceptance of Membership Interest dated May 29, 2008 between the Company and Geis Coyne Oil and Gas, LLC (Filed as Exhibit 10.2 to Registrant’s Form 8-K dated May 1, 2008 and incorporated herein by reference.)
     
10.25
 
Second Amended and Restated Operating Agreement of Kykuit Resources, LLC dated May 29, 2008 (Filed as Exhibit 10.3 to Registrant’s Form 8-K dated May 1, 2008 and incorporated herein by reference.)
     
10.26
 
Purchase and Sale Agreement dated June 11, 2008 between Macum Energy, Inc., Harold and Eva Holden Living Trust dated 1995, Harold and Eva Holden, Trustees, Winifred Gas Partnership, Goodridge Resources, Inc., Vincent T. Larse, Dr. David T. Larsen, Pic Productions, Inc., Stanley and Beverly Stott Living Trust dated 4/30/96, Stanley and Beverly Stott, Trustees, Faith Drilling Inc., and Kykuit Resources, LLC (Filed as Exhibit 10.4 to Registrant’s Form 8-K dated May 1, 2008 and incorporated herein by reference.)
     
10.27
 
Cognovit Promissory Note of the Company dated August 3, 2007 (Filed as Exhibit 10.4 to Registrant’s Form 8-K dated August 3, 2007 and incorporated herein by reference.)
     
10.28
 
Cognovit Promissory Note of the Company dated August 28, 2007 (Filed as Exhibit 10.1 to Registrant’s Form 8-K dated August 28, 2007 and incorporated herein by reference.)
     
10.29
 
Cognovit Promissory Note of the Company dated September 12, 2007 (Filed as Exhibit 10.1 to Registrant’s Form 8-K dated September 12, 2007 and incorporated herein by reference.)
     
10.30
 
Cognovit Promissory Note of the Company dated October 10, 2007 (Filed as Exhibit 10.1 to Registrant’s Form 8-K dated October 10, 2007 and incorporated herein by reference.)
     
10.31
 
Cognovit Promissory Note of the Company dated November 20, 2007 (Filed as Exhibit 10.1 to Registrant’s Form 8-K dated November 20, 2007 and incorporated herein by reference.)
     
10.32
 
Cognovit Promissory Note of the Company dated November 30, 2007 (Filed as Exhibit 10.1 to Registrant’s Form 8-K dated November 30, 2007 and incorporated herein by reference.)
     
10.33
 
Cognovit Promissory Note of the Company dated May 23, 2008 (Filed as Exhibit 10.5 to Registrant’s Form 8-K dated May 1, 2008 and incorporated herein by reference.)
     
10.34
 
Cognovit Promissory Note of the Company dated May 27, 2008 (Filed as Exhibit 10.6 to Registrant’s Form 8-K dated May 1, 2008 and incorporated herein by reference.)
     
10.35
 
Cognovit Promissory Note of the Company dated February 13, 2009 (Filed as Exhibit 10.1 to Registrant’s Form 8-K dated February 13, 2009 and incorporated herein by reference.)

 
30

 

10.36
 
Letter from Richard M. Osborne guaranteeing Charter One loan debt dated March 26, 2009 (Filed as Exhibit 10.37 to Registrant’s Form 10-K dated December 31, 2008 and incorporated herein by reference.)
     
10.37
 
Cognovit Promissory Note of John D Oil and Gas Company dated April 7, 2009 (Filed as Exhibit 10.38 to Registrant’s Form 10-K dated December 31, 2008 and incorporated herein by reference.)
     
10.38
 
Cognovit Promissory Note of John D Oil and Gas Company (amended) dated May 22, 2009 (Filed as Exhibit 10.1 to Registrant’s Form 8-K dated May 27, 2009 and incorporated herein by reference.)
     
10.39
 
Purchase and Sale Agreement effective as of January 30, 2008 between Liberty Self Stor, Ltd. and Richard M. Osborne, Trustee (Filed as Exhibit 10.1 to Registrant’s Form 8-K dated December 28, 2007 and incorporated herein by reference.)
     
10.40
 
Operating Agreement of Lucky Brothers, LLC dated October 7, 2008 (Filed as Exhibit 10.1 to Registrant’s Form 10-Q dated September 30, 2008 and incorporated herein by reference.)
     
10.41
 
Operating Contract between the Company, Lucky Brothers, LLC and Great Plains Exploration, LLC dated October 7, 2008 (Filed as Exhibit 10.2 to Registrant’s Form 10-Q dated September 30, 2008 and incorporated herein by reference.)
     
10.42
 
Drilling Contract between the Company and Great Plains Exploration, LLC dated October 7, 2008 (Filed as Exhibit 10.3 to Registrant’s Form 10-Q dated September 30, 2008 and incorporated herein by reference.)
     
31.1*
 
Section 302 Certification of Chairman of the Board and Chief Executive Officer (principal executive officer) pursuant to the Sarbanes-Oxley Act of 2002
     
31.2*
 
Section 302 Certification of Chief Financial Officer (principal financial officer) pursuant to the Sarbanes-Oxley Act of 2002
     
32.1*
 
Certification of Chairman of the Board and Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
99.1*
 
Letter from Schlumberger Data & Consulting Services about Reserve Economics

* Filed herewith
† Management agreement or compensatory plan or arrangement

 
31

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: March 26, 2010
JOHN D. OIL AND GAS COMPANY
 
     
 
By: /s/ Richard M. Osborne
 
 
Richard M. Osborne
 
 
Chairman and Chief Executive Officer
 
 
(Principal Executive Officer)
 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ Richard M. Osborne
 
Dated:  March 26, 2010
Richard M. Osborne
   
Chairman, Chief Executive Officer and Director
   
(Principal Executive Officer)
   
     
/s/ C. Jean Mihitsch
 
Dated:  March 26, 2010
C. Jean Mihitsch
   
Chief Financial Officer
   
(Principal Financial and Accounting Officer)
   
     
/s/Gregory J. Osborne
 
Dated:  March 26, 2010
Gregory J. Osborne, President and Director
   
     
/s/Thomas J. Smith
 
Dated:  March 26, 2010
Thomas J. Smith, Director
   

 
32

 
 
Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of
John D. Oil and Gas Company

We have audited the accompanying consolidated balance sheets of John D. Oil and Gas Company (a Maryland corporation) and Subsidiary as of December 31, 2009 and 2008, and the related consolidated statements of operations and comprehensive loss, shareholders' equity, and cash flows for each of the two years in the period ended December 31, 2009.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of John D. Oil and Gas Company and Subsidiary as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

As more fully described in Note 2, to the financial statements, the Company has suffered recurring losses and has $10.6 million of debt currently due and in default that raises substantial doubt about its ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 2.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Maloney + Novotny LLC

Cleveland, Ohio
March 26, 2010

 
33

 

John D. Oil and Gas Company and Subsidiary
Consolidated Balance Sheets

   
December 31, 2009
   
December 31, 2008
 
ASSETS
           
Current Assets:
           
Cash
  $ 22,072     $ 78,301  
Accounts Receivable
    44,197       40,879  
Accounts Receivable from Related Parties
    478,135       1,417,679  
Other Current Assets
    17,723       56,202  
Total Current Assets
    562,127       1,593,061  
                 
Property and Equipment, Net
    8,985,937       12,173,673  
Investment in Unconsolidated Affiliate
    705,965       989,258  
Other Assets
    5,495       60,624  
                 
TOTAL ASSETS
  $ 10,259,524     $ 14,816,616  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current Liabilities:
               
Line of Credit
  $ 9,497,024     $ 9,500,000  
Current Maturities of Long Term Debt
    1,145,174       100,504  
Accounts Payable
    370,675       1,332,504  
Accounts Payable to Related Parties
    47,144       697,377  
Accrued Expenses
    201,959       398,838  
Total Current Liabilities
    11,261,976       12,029,223  
                 
Long Term Debt, Net of Current Maturities
    -       1,159,567  
Asset Retirement Obligation
    680,056       644,517  
Commitments and Contingencies
    -       -  
                 
Shareholders’ Equity:
               
Serial Preferred Stock - $.001 par value: 2,000,000 shares authorized, 1,350 shares issued and outstanding
    1       1  
Common Stock - $.001 par value: 50,000,000 shares authorized; 9,067,090 shares issued and outstanding
    9,067       9,067  
Paid-in Capital
    30,273,239       30,268,691  
Accumulated Deficit
    (31,151,171 )     (28,428,470 )
Accumulated Other Comprehensive Loss
    -       (133,880 )
Total John D. Oil and Gas Company Shareholders’ Equity
    (868,864 )     1,715,409  
Non-Controlling Interest
    (813,644 )     (732,100 )
Total Shareholders’ Equity
    (1,682,508 )     983,309  
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 10,259,524     $ 14,816,616  
 
The accompanying notes to consolidated financial statements are an integral part of these statements.

 
34

 

John D. Oil and Gas Company and Subsidiary
Consolidated Statements of Operations and Comprehensive Loss
For The Years Ended December 31, 2009 and 2008

   
2009
   
2008
 
Revenues
           
Oil and Natural Gas Sales
  $ 3,711,668     $ 4,568,087  
Self-Storage Operation Revenues
    333,569       312,108  
Interest and Other
    8       3,318  
Total  Revenues
    4,045,245       4,883,513  
                 
Operating Expenses
               
Interest
    448,558       581,954  
Accretion
    45,905       44,742  
Oil and Natural Gas Production Costs
    687,182       575,675  
Self-Storage Property Operating Expense
    112,382       115,671  
Legal and Professional Fees
    367,854       244,942  
Property Taxes and Insurance
    137,492       159,601  
General and Administrative
    762,982       885,736  
Warrant
    -       47,573  
Loss from Unconsolidated Affiliate
    650,420       28,627  
Bad Debt
    2,157       43,517  
Impairments
    145,444       491,224  
Depreciation, Depletion and Amortization
    3,381,114       3,874,858  
Total Operating Expenses
    6,741,490       7,094,120  
Net Loss
    (2,696,245 )     (2,210,607 )
Net Loss attributable to Non-controlling Interest
    (81,544 )     (170,567 )
Net Loss attributable to John D. Oil and Gas Company
  $ (2,614,701 )   $ (2,040,040 )
                 
Other Comprehensive Income (Loss):
               
Change in Fair Value of Cash Flow Hedge
    133,880       (133,880 )
                 
Comprehensive Loss
  $ (2,562,365 )   $ (2,344,487 )
                 
Weighted Average Basic and Diluted Shares Outstanding
    9,067,090       9,020,859  
Loss per Common Share – Basic and Diluted
  $ (0.31 )   $ (0.25 )

The accompanying notes to consolidated financial statements are an integral part of these statements.

 
35

 

John D. Oil and Gas Company and Subsidiary
Consolidated Statements of Shareholders’ Equity
For The Years Ended December 31, 2009 and 2008

   
Preferred
Stock
   
Common
Stock
   
Paid-in
Capital
   
Accumulated
Deficit
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Non-
Controlling
Interest
   
Total
 
                                           
Balance at December 31, 2007
  $ -     $ 9,019     $ 28,871,616     $ (26,303,290 )   $ -     $ (561,533 )   $ 2,015,812  
                                                         
Preferred Stock Issued in Private
                                                       
Placement, Net of Offering Costs
    1               1,332,503                               1,332,504  
Common Stock Issued for Director Compensation
            48       12,451                               12,499  
Restricted Common Stock Award
                    4,548                               4,548  
Dividends Declared
                            (85,140 )                     (85,140 )
Director Warrant Issued
                    47,573                               47,573  
Net Loss
                            (2,040,040 )             (170,567 )     (2,210,607 )
Change in Fair Value of Cash Flow Hedge
                                    (133,880 )             (133,880 )
                                                         
Balance at December 31, 2008
  $ 1     $ 9,067     $ 30,268,691     $ (28,428,470 )   $ ( 133,880 )   $ (732,100 )   $ 983,309  
                                                         
Restricted Common Stock Award
                    4,548                               4,548  
Dividends Declared
                            (108,000 )                     (108,000 )
Net Loss
                            (2,614,701 )             (81,544 )     (2,696,245 )
Change in Fair Value of Cash Flow Hedge
                                    133,880               133,880  
                                                         
Balance at December 31, 2009
  $ 1     $ 9,067     $ 30,273,239     $ (31,151,171 )   $ -     $ (813,644 )   $ (1,682,508 )

The accompanying notes to consolidated financial statements are an integral part of these statements.

 
36

 

John D. Oil and Gas Company and Subsidiary
Consolidated Statements of Cash Flows
   
For The Years Ended December 31,
 
   
2009
   
2008
 
Cash Flows from Operating Activities:
           
Net Loss
  $ (2,696,245 )   $ (2,210,607 )
Adjustments to Reconcile Net Loss to Net Cash Provided By Operating Activities
               
Accretion
    45,905       44,742  
Loss from Unconsolidated Affiliate
    650,420       28,627  
Bad Debt
    2,157       43,517  
Impairments
    145,444       491,224  
Depreciation, Depletion and Amortization
    3,381,114       3,874,858  
Gain on Sale of Equipment
    -       (199 )
Common Stock Issued as Compensation
    -       12,499  
Restricted Common Stock Award
    4,548       4,548  
Director Warrant Issued
    -       47,573  
Changes in Operating Assets and Liabilities:
               
Accounts Receivable
    938,738       (518,794 )
Other Current Assets
    38,479       182,633  
Other Assets
    55,129       (46,730 )
Accounts Payable
    (1,612,062 )     (57,385 )
Accrued Expenses
    (87,731 )     24,354  
Net Cash Provided By Operating Activities
    865,896       1,920,860  
                 
Cash Flows from Investing Activities:
               
Purchases of Property and Equipment
    -       (1,437 )
Proceeds from Sale of Equipment
    -       830  
Proceeds from Sale of Interest in Unconsolidated Affiliate
    -       731,747  
Expenditures for Unconsolidated Affiliate
    (367,127 )     (480,222 )
Expenditures for Oil and Natural Gas Wells
    (329,125 )     (3,244,934 )
Net Cash Used In Investing Activities
    (696,252 )     (2,994,016 )
                 
Cash Flows from Financing Activities:
               
Proceeds from Preferred Stock Private Placement
    -       1,332,504  
Dividends Paid to Preferred Stockholders
    (108,000 )     (85,140 )
Proceeds from Related Party Note Payable
    600,000       500,000  
Principal Payments on Related Party Debt
    (600,000 )     (500,000 )
Principal Payments on Long Term Debt
    (117,873 )     (126,386 )
Net Cash (Used In) Provided By Financing Activities
    (225,873 )     1,120,978  
                 
Net (Decrease) Increase in Cash
    (56,229 )     47,822  
Cash,  Beginning of Period
    78,301       30,479  
Cash,  End of Period
  $ 22,072     $ 78,301  
                 
Supplemental Disclosure of Cash flow Information:
               
Interest Paid on Borrowings
  $ 443,549     $ 562,083  

The accompanying notes to consolidated financial statements are an integral part of these statements.

 
37

 

John D. Oil and Gas Company and Subsidiary
Notes to Consolidated Financial Statements
For The Years Ended December 31, 2009 and 2008

1. Summary of Significant Accounting Policies

General

John D. Oil and Gas Company, formerly Liberty Self-Stor, Inc. (the “Company”), is a corporation organized under the laws of the State of Maryland.

The Company was originally a self-storage company from 1999 to 2005 when it sold all but two of its facilities.  By May 2007, one self-storage facility in Painesville remained which generates revenue through self-storage rentals and retail leases. The self-storage facility is operated through a partnership agreement between Liberty Self-Stor Ltd. (“Ltd”) and the Company.  Ltd has a 70.1% equity interest and the Company has a 29.9% equity interest in the operating partnership of LSS I Limited Partnership (“LSS I”).  The members of Ltd consist of Richard M. Osborne, Chairman and Chief Executive Officer of the Company, Thomas J. Smith, a director and the former President and Chief Operating Officer of the Company, and Retirement Management Company, an Ohio corporation owned by Mr. Osborne.  These members have Class A limited partnership interests that are redeemable for cash or, at the election of the Company, convertible into shares of the Company’s stock based on an exchange factor.   The current exchange factor is .1377148 of a share for each unit.

In 2006, the Company entered into the business of extracting and producing oil and natural gas products, drilling oil and natural gas wells in Northeast Ohio.  The Company currently has fifty-eight producing wells.  The Company cannot guarantee success under the new business plan as drilling wells for oil and natural gas is a high-risk enterprise and there is no guarantee the Company will become profitable.

Principles of Consolidation

Pursuant to the terms of the partnership agreement of LSS I Limited Partnership (“LSS I”), the Company, as sole general partner, controls LSS I.  Accordingly, the Company accounts for its investment in LSS I utilizing the consolidation method.  The investment in an unconsolidated affiliate, Kykuit Resources LLC (Kykuit) is accounted for using the equity method.  All significant inter-company transactions and balances have been eliminated.

Accounts Receivable

The Company has certain trade receivables consisting of oil and natural gas sale obligations due under normal trade terms.  The Company currently sells its production to a related party through an oil and natural gas agreement, extending credit on an unsecured basis to them.  In evaluating its allowance for possible losses, the Company performs a review of outstanding receivables.  The trade receivables outstanding are typically three months of natural gas production due to the timing and accounting treatment by the main distribution pipeline company in Northeast Ohio.  At December 31, 2009 and 2008, the Company’s credit evaluation indicated that it has no need for an allowance for possible losses.

The Company’s accounts receivable, arising from the self-storage business, are due from individuals as well as business entities.  Tenants are required to pay their rent on the first of each month.  Past due amounts are those that are outstanding longer than the contractual payment terms.  If an account is more than 75 days past due, the Company generally writes off the balance directly to expense.  For such past due accounts, the Company has the right to auction the contents of the rented space, which allows for recovery of written-off balances.  Any such recoveries are credited to income when received.

Property and Equipment

All property and equipment is depreciated using the straight-line method over estimated useful lives of twenty five years for buildings and improvements and five to seven years for furniture and equipment.

 
38

 
 
John D. Oil and Gas Company and Subsidiary
Notes to Consolidated Financial Statements
For The Years Ended December 31, 2009 and 2008
 
The Company uses the successful efforts method of accounting for oil and natural gas producing activities. Under this method, acquisition costs for proved and unproved properties are capitalized when incurred. Exploration costs, including geological and geophysical costs, the costs of carrying and retaining unproved properties and exploratory dry hole drilling costs, are expensed. Development costs, including the costs to drill and equip development wells and successful exploratory drilling costs to locate proved reserves, are capitalized.  Upon sale or retirement of a proved property, the cost and accumulated depreciation and depletion and amortizations are eliminated from property accounts and the resultant gain or loss is recognized.
 
Exploratory drilling costs are capitalized when incurred pending the determination of whether a well has found proved reserves. If a well is determined to be successful, the capitalized drilling costs will be reclassified as part of the cost of the well. If a well is determined to be unsuccessful, the capitalized drilling costs will be charged to expense in the period the determination is made.  The Company is involved in exploratory drilling only to the extent that it is a partner of Kykuit, which is doing exploratory drilling in Montana.  The Company is an owner and managing member of Kykuit, an unconsolidated affiliate.
 
Development costs of proved oil and natural gas properties, including estimated dismantlement, restoration, abandonment costs and acquisition costs, are depreciated and depleted on a well by well basis by the units-of-production method using estimated proved developed reserves.  The costs of oil and natural gas properties are periodically assessed for impairment.

Asset Impairment

The Company reviews its self-storage property and capitalized well costs for impairment when events or changes in circumstances indicate the carrying amounts of the properties may not be recoverable.  When such conditions exist, management estimates future cash flows from operations and ultimate disposition of the individual properties.  If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related property’s estimated fair market value would be recorded and an impairment loss would be recognized.  The Company wrote off the costs related to one well amounting to $145,444 in 2009 and two wells amounting to $491,224 in 2008.

Asset Retirement Obligation

The Company accounts for its asset retirement obligations in accordance with generally accepted accounting principles in the United States of America (“GAAP”) which requires the fair value of an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made.  For the Company, asset retirement obligations primarily relate to the abandonment, dismantling and plugging of oil and natural gas wells.  The present value of the estimated asset retirement cost is capitalized as part of the long-lived asset.  The capitalized asset retirement cost is depreciated and the asset retirement obligation is accreted over the estimated life of the well.

The following table presents the Company’s asset retirement obligation activity for the years ended December 31:

   
2009
   
2008
 
             
Asset retirement obligations, beginning of the year
  $ 674,517     $ 241,777  
Liabilities incurred during the year
    -       169,623  
Revisions in estimated cash flows
    (14,366 )     243,375  
Liabilities settled during the year
    (26,000 )     (25,000 )
Accretion expense
    45,905       44,742  
Asset retirement obligations, end of the year
    680,056       674,517  
Less current liabilities
    -       30,000  
Asset retirement obligations, net of current maturities
  $ 680,056     $ 644,517  

At December 31, 2009 and December 31, 2008, the Company’s current portion of the asset retirement obligations was $0 and $30,000, respectively and is included in accrued expenses.  The Company plugged two wells during 2009 and plugged four wells during 2008.

 
39

 
 
John D. Oil and Gas Company and Subsidiary
Notes to Consolidated Financial Statements
For The Years Ended December 31, 2009 and 2008
 
Revenue Recognition

The Company recognizes revenue from its oil and natural gas interests in producing wells as oil and natural gas is sold to a purchaser at a fixed or determinable price when delivery has occurred, title and risk of loss have transferred to the purchaser and the collectability of revenue is reasonably assured.  The Company has a management agreement with a related party to transport the Company’s natural gas production through the related party’s pipeline and include this natural gas with the related party’s natural gas in order to fulfill production contracts they currently have in place.  The company uses the sales method to account for any gas imbalances recognizing revenue based on gas delivered rather than its working interest of the gas produced.  Gas imbalances at December 31, 2009 and 2008 were not significant.

The Company’s revenue from self-storage operations is derived primarily from monthly rentals of self-storage units.  Rental revenue is recognized in the period the rent is earned which is typically on a monthly basis.

The Company also leases certain commercial space in its Painesville property under long-term lease agreements through December 31, 2019.  Total lease revenue related to these leases was $199,029 and $172,998 for the years ended December 31, 2009 and 2008, respectively.  Revenue under these long-term lease agreements is recognized on a straight-line basis over the respective lease terms.  In June of 2008, the Company decided to write-off an outstanding receivable of $40,027 for a leased vacant space to bad debt expense.  While the Company has received a court judgment against the lease holder, as of December 31, 2009, the Company had not collected the outstanding receivable.

Future minimum lease revenue from operations under non-cancelable leases excluding options to renew for each of the five succeeding annual periods ending December 31 and thereafter are as follows:

2010
  $ 215,286  
2011
    220,506  
2012
    208,972  
2013
    202,980  
2014
    184,584  
Thereafter
    300,782  
    $ 1,333,110  

Comprehensive Income

The Company accounts for its comprehensive income in accordance with GAAP which requires disclosure of comprehensive income and its components in a full set of financial statements.  Comprehensive income is defined as changes in shareholders’ equity from non-owner sources and, for the Company, includes gains and losses recognized on derivative instruments accounted for as cash flow hedges.

Stock-Based Compensation

On June 16, 2009 at the Company’s Annual Meeting, of the stockholders who voted, 81.7% voted to approve amendments to the Company’s stock option plan.  The plan was extended another ten years.

As of December 31, 2008, 25,000 stock options of the 300,000 that may be granted were outstanding.  No stock options were outstanding as of December 31, 2009.  Stock options totaling 10,000 were terminated in the third quarter of 2008 and 25,000 were terminated in the second quarter of 2009 when the employees were no longer employed by the Company.  Additionally, the former President and Chief Operating Officer of the Company was granted 35,000 restricted shares that amortize ratably over a five year vesting period until August of 2011.  The compensation expense recorded for the restricted shares for the years ended December 31, 2009 and 2008 was $4,548.

 
40

 
 
John D. Oil and Gas Company and Subsidiary
Notes to Consolidated Financial Statements
For The Years Ended December 31, 2009 and 2008
 
The following table presents the stock options outstanding at December 31:

   
2009
   
2008
 
   
Shares
   
Weighted
Average
Price
   
Shares
   
Weighted
Average
Price
 
Outstanding at beginning of year
    25,000     $ 0.56       35,000     $ 0.56  
Granted
    -               -          
Exercised
    -               -          
Forfeited
    25,000       0.56       10,000       0.56  
Outstanding at end of year
    -     $ 0.56       25,000     $ 0.56  
Options available for grant
    300,000               275,000          
Exercisable at end of year
    -       -       25,000     $ 0.56  

On June 20, 2008, the Company granted a warrant to purchase 50,000 shares of common stock to Richard M. Osborne in return for Mr. Osborne providing collateral for the Company’s credit facility with RBS Citizens, N.A., d/b/a Charter One (“Charter One”).  The warrant has an exercise price of $1.00 per share and a term of five years.  The fair value of the warrant was approximately $48,000 at the date of grant, estimated using the Black-Scholes-Merton option pricing model.  Determining the fair value of the warrant charge requires us to make highly subjective assumptions, including expected contractual life of the warrant and the price volatility of the underlying shares.  We estimate stock price volatility based on the historical volatility of our stock.  The assumptions used in calculating the fair value of the warrant represent our management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment.

Use of Estimates

The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues, costs and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, the Company evaluates all of these estimates, including those related to the provision for possible losses, deferred tax assets and liabilities, depreciation and depletion, and certain accrued liabilities.  We base estimates on historical experience and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

The Company’s financial statements are based on a number of significant estimates, including collectability of receivables, selection of useful lives for property and equipment and timing and costs associated with its retirement obligations.  Estimates of economically recoverable oil and natural gas reserve quantities and future net cash flows depend on a number of variable factors and assumptions that are hard to predict and may vary considerably from actual results.  In addition reserve estimates for wells with limited or new production history are less reliable than those based on actual production.  Estimated reserve quantities are the basis for the calculation of depreciation, depletion and impairment of oil and natural gas properties.

The Company’s oil and natural gas business makes it vulnerable to changes in wellhead prices of crude oil and natural gas.  Such prices have been volatile in the past and can be expected to continue to be volatile.  Proved reserves are based on current oil and natural gas prices and estimated reserves, which is considered a significant estimate by the Company, and is subject to change.

Fair Value of Financial Instruments

The fair value of the Company’s financial instruments is determined by using available market information and appropriate valuation methodologies. The Company’s principal financial instruments are cash, accounts receivable, accounts payable and debt. Cash, accounts receivable and accounts payable, due to their short maturities and liquidity, are carried at amounts which reasonably approximate fair value. Based upon rates available for similar borrowings, the Company’s book value approximated the fair value of its debt at December 31, 2009 and December 31, 2008.

 
41

 
 
John D. Oil and Gas Company and Subsidiary
Notes to Consolidated Financial Statements
For The Years Ended December 31, 2009 and 2008
 
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

GAAP establishes a three-level hierarchy for disclosure to show the extent and level of judgment used to estimate fair value measurements.

Level 1 – Uses unadjusted quoted prices that are available in active markets for identical assets or liabilities as of the reporting date.  Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Uses inputs other than Level 1 that are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active.  Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data.  Instruments in this category include non-exchange-traded derivatives, including interest rate swaps.

Level 3 – Uses inputs that are unobservable and are supported by little or no market activity and reflect the use of significant management judgment.  These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

The tables below set forth the Company’s financial assets and liabilities that were accounted for at fair value as of December 31, 2009 and December 31, 2008.  The tables do not include cash on hand or assets and liabilities that are measured at historical cost or any basis other than fair value.

   
Fair Value at December 31, 2009
 
   
Level 1
   
Level 2
   
Level 3
 
Item measured at fair value on a recurring basis:                  
Interest rate swap
  $ 0     $ 0     $ 0  

   
Fair Value at December 31, 2008
 
   
Level 1
   
Level 2
   
Level 3
 
Item measured at fair value on a recurring basis:                  
Interest rate swap
  $ 0     $ (133,880 )   $ 0  

The Company’s derivative financial instrument is an interest rate cash flow hedge in which the Company pays a fixed rate and receives a variable interest rate that is observable based upon a forward interest rate curve and is therefore considered a Level 2 input.

Income Taxes

Effective January 1, 2006, the Company became a “C” Corporation for tax purposes.

In establishing a provision for income taxes, the Company must estimate when in the future certain items will affect taxable income.  Deferred taxes are recorded for future tax consequences of events that have been recognized in the financial statements or tax returns, based upon enacted tax laws and rates.  Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not.

The Company has net operating loss carry forwards (NOLS) and a valuation allowance to offset any tax effects.  The Company has no unrecognized tax benefits and therefore, there is no anticipated effect on the Company’s effective tax rate.  Any tax penalties or interest expense will be recognized in income tax expense.  No interest and penalties were accrued as of December 31, 2009 or 2008, or paid during the periods then ended.  The Company does not anticipate a significant change over the next twelve months to any tax liability.

 
42

 
 
John D. Oil and Gas Company and Subsidiary
Notes to Consolidated Financial Statements
For The Years Ended December 31, 2009 and 2008
 
The Company is open to federal and state tax audits until the applicable statute of limitations expire.  There are currently no federal or state income tax examinations underway for the Company.  The tax years 2006 through 2009 remain open to examination by the major taxing jurisdictions in which we operate, although no material changes to unrecognized tax positions are expected within the next twelve months.  The Company does, however, have prior year net operating losses which remain open for examination.

Recently Issued Accounting Pronouncements

Accounting Standards Codification

In June 2009, the Financial Accounting Standards Board (“FASB”) approved the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“the Codification”) or (“ASC”) as the single source of authoritative nongovernmental GAAP.  All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”), and other related accounting literature have been superseded by the Codification.  Rules and interpretive releases of the United States Securities and Exchange Commission (“SEC”) under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  All other accounting literature is considered non-authoritative. The Codification reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure.  The FASB will not issue new standards in the form of Statements, FASB Staff Position, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates.  The FASB will not consider Accounting Standards Updates as authoritative in their own right; these updates will serve only to update the Codification, provide background information about the guidance, and provide the basis for conclusions on the change(s) in the Codification.  The switch to the ASC affects the way companies refer to GAAP in financial statements and accounting policies.  Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.  This Codification is effective for financial statements issued for reporting periods that ended after September 15, 2009.  At this time the Company has decided to present new accounting pronouncements with no standard references.

Oil and Gas Reporting

In December 2008, the SEC released a final rule, "Modernization of Oil and Gas Reporting," which amends the oil and gas reporting requirements. The key revisions to the reporting requirements include: using a 12-month average price to determine reserves; including nontraditional resources in reserves if they are intended to be upgraded to synthetic oil and gas; ability to use new technologies to determine and estimate reserves; and permitting the disclosure of probable and possible reserves. In addition, the final rule includes the requirements to report the independence and qualifications of the reserve preparer or auditor; file a report as an exhibit when a third party is relied upon to prepare reserve estimates or conduct reserve audits; and to disclose the development of any proved undeveloped reserves (PUDs), including the total quantity of PUDs at year-end, material changes to PUDs during the year, investments and progress toward the development of PUDs and an explanation of the reasons why material concentrations of PUDs have remained undeveloped for five years or more after disclosure as PUDs. The accounting changes resulting from changes in definitions and pricing assumptions should be treated as a change in accounting principle that is inseparable from a change in accounting estimate, which is to be applied prospectively. The final rule is effective for annual reports for fiscal years ending on or after December 31, 2009. Early adoption is not permitted. The adoption of this standard had an impact on the Company’s financial position and results of operations. The 12-month average pricing for the year for natural gas sold at the Henry Hub, LA was $3.867 and West Texas Intermediate oil at Cushing, OK was $61.18, where the previous calculations would have been higher based on the last day of December 2009.  The lower pricing increased our depletion expense in 2009.  The Company’s depletion rate continues to be extremely high.

Effective upon its issuance in September 2009, the Company adopted an accounting standards update on “Extractive Activities – Oil and Gas”.  This accounting standards update represents a technical correction to an existing SEC Observer comment regarding “Accounting for Gas-Balancing Arrangements”.  The adoption of this accounting standard update did not have a material impact on the Company’s financial statements.

 
43

 
 
John D. Oil and Gas Company and Subsidiary
Notes to Consolidated Financial Statements
For The Years Ended December 31, 2009 and 2008
 
In January 2010, an accounting standard update was issued on “Oil and Gas Estimations and Disclosures.  This update aligns the current oil and natural gas reserve estimation and disclosure requirements of the Extractive Activities for Oil and Gas with the changes required by the SEC final rule, as discussed above.  This update expands the disclosures required for equity method investments, revises the definition of oil and natural gas producing activities to include nontraditional resources in reserves unless not intended to be upgraded into synthetic oil or natural gas producing activities.  This update also amends the definition of proved oil and natural gas reserves to require 12-month average pricing in estimating reserves, amends and adds definitions in the Master glossary that is used in estimating proved oil and natural gas quantities and provides guidance on geographic area with respect to disclosure of information about significant reserves.  It is effective for entities with annual reporting periods ending on or after December 31, 2009.  The Company adopted this update on December 31, 2009.

Other-Than-Temporary Impairments

In April 2009, a new accounting standard was issued regarding the recognition of other-than-temporary impairments of investments in debt securities, as well as financial statement presentation and disclosure requirements, for when to recognize a write-down through earnings versus other comprehensive income.  The standard was effective for interim and annual periods ending after June 15, 2009.  The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

Consolidation of Variable Interest Entities

In June 2009, a new accounting standard was issued in order to change financial reporting by enterprises involved with variable interest entities (“VIEs”).  The standard replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a VIE with an approach focused on identifying which enterprise has the power to direct the activities of a VIE and the obligation to absorb losses of the entity or the right to receive the entity’s residual returns.  This standard is effective for fiscal years beginning after November 15, 2009.  The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

Measuring Liabilities at Fair Value

In August 2009, a new accounting standard was issued concerning measuring liabilities at fair value.  The new standard provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain valuation techniques.  Additionally, it clarifies that a reporting entity is not required to adjust the fair value of a liability for the existence of a restriction that prevents the transfer of the liability.  This new guidance is effective for the first reporting period after its issuance, however earlier application is permitted.  The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

The Company reviewed all other recently issued, but not yet effective, accounting pronouncements and does not believe any such pronouncements will have a material impact on the financial statements.

Reclassifications

Certain prior year amounts have been reclassified to conform to the December 31, 2009 presentation.  These reclassifications had no effect on net loss or shareholders’ equity as previously reported.

 
44

 
 
John D. Oil and Gas Company and Subsidiary
Notes to Consolidated Financial Statements
For The Years Ended December 31, 2009 and 2008
 
2.  Going Concern

The Company’s independent registered accounting firm have indicated in their audit report in an explanatory paragraph that, due to the Company’s recurring losses and outstanding debt of $10.6 million that is currently due and in default, there is substantial doubt about the Company’s ability to continue as a going concern.  The Company’s consolidated financial statements have been prepared on the assumption that the Company will continue as a going concern.  The Company has incurred substantial losses, which have strained its financial resources, and the Company’s liabilities exceed its assets at December 31, 2009.  As described more fully in Note 5 “Line of Credit and Long-Term Debt”, the Company’s $9.5 million line of credit with Charter One was due August 1, 2009 and is in default and the Company does not have the available cash to repay the line of credit.  The Company is still negotiating with Charter One to refinance the line of credit or obtaining substitute financing.  If the Company is unsuccessful, there is substantial doubt about the Company’s ability to continue as a going concern.

3.  Property and Equipment

Property and equipment consists of the following at December 31:

   
2009
   
2008
 
Oil and Natural Gas Properties:
           
Proved Properties
  $ 15,667,171     $ 13,859,634  
Unproved Properties
    2,260,896       3,652,790  
Well Material Inventory
    50,349       122,502  
Accumulated Depletion
    (10,492,751 )     (7,103,584 )
Total Oil and Natural Gas Properties
    7,485,665       10,531,342  
Other Property and Equipment:
               
Land
    307,780       307,780  
Building and Improvements
    2,357,822       2,357,822  
Furniture and Equipment
    173,640       199,657  
Accumulated Depreciation
    (1,338,970 )     (1,222,928 )
Total Other Property and Equipment
    1,500,272       1,642,331  
Property and Equipment, Net
  $ 8,985,937     $ 12,173,673  

4.  Investment in Unconsolidated Affiliates

The Company is an owner and managing member of an unconsolidated affiliate, Kykuit Resources LLC, which is accounted for using the equity method of accounting.  The Company began investing in Kykuit during the third quarter of 2007.  In 2008, the Company sold 25% of its interest in Kykuit at cost for approximately $1.4 million.  The Company had an 18.8% ownership in Kykuit at December 31, 2008.  Some of the Kykuit partners opted out of further cash investments during 2009, increasing the Company’s ownership percentage at December 31, 2009 to 20.83%.

The investment by the Company in this venture was $989,258 which included an account payable of $158,225 and a cumulative net book loss of $57,444 at December 31, 2008.  The investment by the Company in this venture was $705,965 which included a loss in the investment of $588,309, an account payable of $10,490 and a cumulative net book loss of $119,556 at December 31, 2009.  The Company recorded a loss of $588,309 on the investment representing 20.83% of an 85% reduction in the value of the exploratory wells in Kykuit.  The following table displays the balance sheet of Kykuit at December 31, 2009, and 2008 and the income statement for the same years ended.

 
45

 
 
John D. Oil and Gas Company and Subsidiary
Notes to Consolidated Financial Statements
For The Years Ended December 31, 2009 and 2008

 
Kykuit Resources LLC
Balance Sheet
           
   
December 31, 
2009
   
December 31,
2008
 
Current Assets
  $ 115,893     $ 210,978  
Unproved Leaseholds and Development Costs
    6,957,065       6,320,929  
Furniture and Fixtures, Net of Depreciation