Attached files
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EX-31.1 - Glen Rose Petroleum CORP | v194937_ex31-1.htm |
EX-32.2 - Glen Rose Petroleum CORP | v194937_ex32-2.htm |
EX-32.1 - Glen Rose Petroleum CORP | v194937_ex32-1.htm |
EX-31.2 - Glen Rose Petroleum CORP | v194937_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2010.
|
¨
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For
the transition period from ___________ to
___________.
|
Commission
File No. 001-10179
Glen Rose Petroleum
Corporation
(Exact
name of registrant as specified in charter)
Delaware
|
87-0372864
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification
No.)
|
22762
Westheimer Parkway, Suite 515, Katy, Texas 77450
|
(Address
of principal executive
offices)
|
(832)
437-0329
|
(Issuer’s
telephone number)
|
(Former
name, former address and former fiscal year if changed since last
report)
|
Copies of
all communications to:
Marc
Ross, Esq.
Andrew
Smith, Esq.
Sichenzia
Ross Friedman Ference LLP
61
Broadway, 32 nd Floor
New York,
New York 10006
Phone:
(212) 930-9700
Fax:
(212) 930-9725
Securities registered pursuant to
Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(b) of the Act: Common Stock, $0.001 par
value
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. x Yes ¨ 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 ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
See the
definitions of “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 (Do not check if a smaller reporting company)
|
x Smaller
reporting company
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨Yes xNo
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. As of August 17, 2010, the Company had
17,006,941 shares outstanding.
GLEN
ROSE PETROLEUM CORPORATION—FORM 10-Q
TABLE
OF CONTENTS
Page Number
|
|
P ART I - FINANCIAL
INFORMATION
|
|
Item
1 - Financial Statements
|
F-1
|
Condensed
Consolidated Balance Sheets at June 30, 2010 (unaudited) and March 31,
2010
|
F-1
|
Condensed
Consolidated Statements of Operations (unaudited) for the three months
ended June 30, 2010 and June 30, 2009
|
F-3
|
Condensed
Consolidated Statements of Cash Flows (unaudited) for the three months
ended June 30, 2010 and June 30, 2009
|
F-4
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
F-6
|
Item
2 - Management’s Discussion and Analysis or Plan of
Operation
|
1
|
Item
4T - Controls and Procedures
|
6
|
PART
II - OTHER INFORMATION
|
|
Item
1 - Legal Proceedings
|
8
|
Item
2 - Unregistered Sales of Equity Securities and Use of
Proceeds
|
8
|
Item
3 - Defaults Upon Senior Securities
|
8
|
Item
4 – Removed and Reserved
|
8
|
Item
5 - Other Information
|
8
|
Item
6 – Exhibits
|
8
|
SIGNATURES
|
11
|
Ex.
31.1
Ex.
31.2
Ex.
32.1
Ex.
32.2
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS.
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
June 30,
|
March 31,
|
|||||||
2010
|
2010
|
|||||||
(Unaudited)
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
|
$ | 228,088 | $ | 455,233 | ||||
Cash
held in escrow
|
1,650,000 | 2,750,000 | ||||||
Accounts
receivable
|
14,463 | - | ||||||
Security
Deposits
|
1,000 | - | ||||||
Notes
receivable
|
206,819 | 197,808 | ||||||
Inventory
|
69,113 | 54,947 | ||||||
Prepaid
expenses
|
177,696 | 121,667 | ||||||
Total
current assets
|
2,347,179 | 3,579,655 | ||||||
OIL
AND GAS PROPERTIES, accounted for using the full cost
method
|
||||||||
Unproven
|
1,116,150 | 1,050,000 | ||||||
Proven
|
4,222,094 | 4,096,039 | ||||||
5,338,244 | 5,146,039 | |||||||
|
||||||||
PROPERTY
AND EQUIPMENT, at cost
|
||||||||
Asset
held under capital lease
|
26,571 | - | ||||||
Field
Equipment
|
453,460 | 123,666 | ||||||
Computer
equipment
|
27,693 | 15,833 | ||||||
Vehicles
|
79,472 | 41,281 | ||||||
|
587,196 | 180,780 | ||||||
Less
accumulated depreciation
|
(47,909 | ) | (36,981 | ) | ||||
|
539,287 | 143,799 | ||||||
|
||||||||
OTHER
ASSETS:
|
||||||||
Equipment
deposit
|
- | 8,907 | ||||||
TOTAL
ASSETS
|
$ | 8,224,710 | $ | 8,878,400 |
F-1
GLEN ROSE PETROLEUM
CORPORATION AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (Continued)
June 30,
|
March 31,
|
|||||||
2009
|
2010
|
|||||||
(Unaudited)
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$ | 852,674 | $ | 752,133 | ||||
Accounts
payable and accrued expense– related parties
|
71,141 | - | ||||||
Accrued
interest
|
128,206 | 53,675 | ||||||
Note
payable – related party
|
29,512 | 28,935 | ||||||
Note
payable – other
|
79,440 | 39,258 | ||||||
Current
portion of obligation under capital lease
|
18,965 | - | ||||||
Total
current liabilities
|
1,179,938 | 874,001 | ||||||
|
||||||||
Asset
retirement obligation
|
71,167 | 71,686 | ||||||
Convertible
notes payable, net of unamortized discount and loan
fee
|
2,127,527 | 1,906,908 | ||||||
Notes
payable - other
|
2,549,950 | 2,489,780 | ||||||
Total
liabilities
|
5,928,582 | 5,342,375 | ||||||
SHAREHOLDERS’
EQUITY
|
||||||||
Preferred
stock, $.0001 par value, 5,000,000 shares authorized, none issued or
outstanding
|
- | - | ||||||
Common
stock, $.001 par value, 125,000,000 shares authorized; 17,006,941 shares
issued and outstanding at June 30, 2010, and 16,659,641 shares issued
and outstanding at March 31, 2010
|
17,006 | 16,660 | ||||||
Common
stock subscription receivable
|
(89,675 | ) | (88,912 | ) | ||||
Additional
paid-in capital
|
54,877,047 | 54,550,837 | ||||||
Accumulated
deficit
|
(52,508,250 | ) | (50,942,560 | ) | ||||
Total
shareholders’ equity
|
2,296,128 | 3,536,025 | ||||||
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$ | 8,224,710 | $ | 8,878,400 |
See
notes to the condensed consolidated financial
statements.
F-2
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
(Unaudited)
Three Months Ended
|
||||||||
June 30,
|
||||||||
2010
|
2009
|
|||||||
OPERATING
REVENUES
|
||||||||
Oil
and gas sales
|
$ | 27,560 | $ | 35,210 | ||||
TOTAL
OPERATING REVENUES
|
27,560 | 35,210 | ||||||
OPERATING
COSTS AND EXPENSES
|
||||||||
Production
and operating
|
140,845 | 38,373 | ||||||
Impairment
of long-term asset
|
66,739 | - | ||||||
Depreciation,
depletion and accretion
|
17,598 | 17,225 | ||||||
General
and administrative
|
727,421 | 254,483 | ||||||
Stock
compensation expense
|
326,557 | 2,669 | ||||||
TOTAL
OPERATING COSTS AND EXPENSES
|
1,279,160 | 312,750 | ||||||
LOSS
FROM OPERATIONS
|
(1,251,600 | ) | (277,540 | ) | ||||
OTHER
INCOME (EXPENSE)
|
||||||||
Interest
income
|
9,858 | 7,613 | ||||||
Gain
(loss) on cancellation of indebtedness
|
34,860 | - | ||||||
Gain
on disposal of asset
|
- | 600 | ||||||
Interest
expense
|
(358,807 | ) | (9,677 | ) | ||||
NET
LOSS
|
(1,565,690 | ) | (279,004 | ) | ||||
Loss
per share (basic and diluted)
|
$ | (0.12 | ) | (0.03 | ) | |||
Weighted
average number of shares outstanding (basic and diluted)
|
12,887,703 | 10,816,200 |
F-3
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
|
||||||||
June
30,
|
||||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$ | (1,565,690 | ) | $ | (279,004 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Loss
on impairment of long-term asset
|
66,739 | - | ||||||
Depreciation,
depletion and accretion
|
17,598 | 17,225 | ||||||
Net
gain on settlement of debt
|
34,860 | - | ||||||
Stock
compensation expense
|
326,557 | 2,865 | ||||||
Changes
in assets and liabilities:
|
||||||||
Trade
and other receivables
|
(14,463 | ) | 4,755 | |||||
Short
term notes receivable
|
(9,773 | ) | (7,545 | ) | ||||
Inventory
|
(14,166 | ) | 271 | |||||
Prepaid
expenses and other assets
|
(1,384 | ) | 8,877 | |||||
Accounts
payable and accrued expenses
|
136,821 | 197,461 | ||||||
Interest
added to note payable
|
201,607 | - | ||||||
Interest
on amortization of discount
|
156,077 | - | ||||||
Net
cash used in operating activities
|
(665,217 | ) | (55,095 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Additions
to oil and gas properties
|
(266,133 | ) | (80,880 | ) | ||||
Proceeds
from sale of property, plant and equipment
|
- | (6,500 | ) | |||||
Additions
to equipment
|
(372,397 | ) | - | |||||
Loan
repayments
|
- | 19,937 | ||||||
Net
cash used in investing activities
|
(638,530 | ) | (67,443 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from borrowings
|
- | 119,000 | ||||||
Reduction
in capital lease obligation
|
(6,146 | ) | - | |||||
Payments
on notes payable
|
(17,252 | ) | (12,000 | ) | ||||
Net
cash provided (used) in financing activities
|
(23,398 | ) | 107,000 | |||||
NET
DECREASE IN CASH
|
(1,327,145 | ) | (15,538 | ) | ||||
CASH, beginning of
year
|
3,205,233 | 18,867 | ||||||
CASH, end of
year
|
$ | 1,878,088 | $ | 3,329 |
-
Continued -
See
notes to the condensed consolidated financial
statements.
F-4
For the Three Months Ended
|
||||||||
June 30,
|
||||||||
2010
|
2009
|
|||||||
|
(Unaudited)
|
(Unaudited)
|
||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
Cash
paid during the year for:
|
||||||||
Interest
|
$ | 486 | $ | - | ||||
Taxes
|
$ | - | $ | - | ||||
SUPPLEMENTAL
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
||||||||
Equipment
held under capital lease
|
$ | 25,111 | $ | - | ||||
Receivable on common stock issuance
|
$ | - | $ | 50,000 |
See
notes to the condensed consolidated financial
statements.
F-5
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 – BASIS OF PRESENTATION
Glen Rose
Petroleum Corporation’s (the “Company,” “we” or “our”) interim condensed
consolidated financial statements are unaudited. They contain all necessary
adjustments (consisting only of normal recurring adjustments) for a fair
statement of the referenced interim period results. These interim
period results do not indicate expected full-year results or results for future
quarters/periods, due to several factors, including price volatility of crude
oil and natural gas, price volatility of commodity derivatives, volatility of
interest rates, estimates of reserves, drilling risks, geological risks,
transportation restrictions, timing of acquisitions, product demand, market
competition, interruption(s) in production, our ability to obtain additional
capital, and the success of proposed enhanced oil recovery work (EOR). These
consolidated interim financial statements should be read in conjunction with the
audited consolidated financial statements and related notes included in Glen
Rose Petroleum Corporation’s Form 10-K and Form 10-K/A for the year ended
March 31, 2010.
We
prepared the accompanying financial statements in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) and
included the accounts of Glen Rose Petroleum Corporation and its wholly-owned
subsidiaries. We eliminated intercompany accounts and
transactions. Management has made certain estimates and assumptions
that affect reported amounts in the financial statements and disclosures of
contingencies. Actual results may differ from those
estimates. We made significant assumptions in valuing the Company’s
unproved oil reserves, which may affect the amounts at which oil properties are
recorded. We have computed the Company’s stock-based compensation expense
using assumptions such as volatility, expected life and the risk-free interest
rate. Those assumptions may be revised in the near term, in which
case these estimates will revised, and these revisions could be
material.
We
prepared the Company’s financial statements on a going concern basis which
contemplates the realization of assets and the liquidation of liabilities in the
ordinary course of business. The Company has incurred substantial
losses from operations and has a working capital deficit, which history and
circumstance raise substantial doubt as to the Company’s ability to continue as
a going concern. The Company had a net loss of $1,565,690 for the three months
ended June 30, 2010 and a net loss of $2,509,790 for the fiscal year ended March
31, 2010 and, as of the same periods, the Company had an accumulated deficit of
$52,508,250, and $50,942,560,
respectively. During the quarter ended June 30,
2010, the Company did not raise any gross proceeds of additional equity
financing. The Company is currently seeking additional capital to
develop its properties and expand its operations. However; the
Company can provide no assurance that it will be able to obtain the needed
funds. Until such funds are obtained and/or positive results from
planned property development materialize, doubt about its ability to continue as
a going concern may remain.
Currently
we have one customer who buys 100% of our production.
Principles
of Consolidation and Presentation
The
consolidated financial statements include the accounts of Glen Rose Petroleum
Corporation (the “Company”, “we” or “our”) and its wholly-owned subsidiaries,
Glen Rose Petroleum Services, UHC Petroleum Corporation, UHC Petroleum Services
Corporation and National Heritage Sales Corporation.
In
February 2010, UHC New Mexico Corporation (“New Mexico”), a wholly-owned
non-operating subsidiary of the Company was transferred to Blackwood Capital
Limited, a company controlled by our Chief Executive Officer. The transfer was a
requirement of the Iroquois financing (See Note 6),
The name
of the Company was changed from United Heritage Corporation to Glen Rose
Petroleum Corporation in May, 2008.
F-6
Concurrent
with the name change, the Company entered into a statutory merger whereby it
moved its state of incorporation from Utah to Delaware and United Heritage
Corporation, the Utah Corporation, merged into the newly formed Delaware
Corporation, Glen Rose Petroleum Corporation.
All
significant intercompany transactions and balances were eliminated in
consolidation.
Nature
of Operations
Glen Rose
Petroleum Corporation owns contiguous oil and gas properties located in Edwards
County, Texas. The Company began production of the Texas properties during the
year ended March 31, 2000. The Company sold a significant portion of its
oil and gas properties in 2007. The Company continues to operate its remaining
contiguous oil properties located in Edwards County, Texas and does not operate
oil or gas properties in any other fields or areas.
Revenue
Recognition
Oil and
gas production revenues are recognized at the point of sale. Production not sold
at the end of the fiscal year is included as inventory in the accompanying
consolidated financial statements.
Inventory
Inventory
consists of oil in tanks, which is valued at the lower of the cost to produce
the oil or the current available sales price.
Oil
and Gas Properties
The
Company uses the full cost method of accounting under which all costs incurred
in the acquisition, exploration and development of oil and natural gas reserves,
including costs related to unsuccessful wells and estimated future site
restoration and abandonment, are capitalized until such time as the aggregate of
such costs net of accumulated depletion and oil and natural gas related deferred
income taxes, on a country-by-country basis, equals the sum of 1) the
discounted present value (at 10%), using prices as of the end of each reporting
period on a constant basis, of the Company’s estimated future net cash flows
from estimated production of proved oil and natural gas reserves as determined
by independent petroleum consultants, less estimated future expenditures to be
incurred in developing and producing the proved reserves but excluding future
cash outflows associated with settling asset retirement obligations accrued on
the balance sheet; plus 2) the cost of major development projects and
unproven properties not subject to depletion, if any; plus 3) the lower of
cost or estimated fair value of unproven properties included in costs subject to
depletion; less 4) related income tax effects. If net capitalized
costs exceed this limit, the excess is expensed unless subsequent market price
changes eliminate or reduce the indicated write-down in accordance with U.S. SEC
Staff Accounting Bulletin (“SAB”) Topic 12D. Depletion is computed using
the units-of-production method whereby capitalized costs, net of estimated
salvage values, plus estimated future costs to develop proved reserves and
satisfy asset retirement obligations, are amortized over the total estimated
proved reserves on a country-by-country basis. Investments in major development
projects are not depleted until either proved reserves are associated with the
projects or impairment has been determined.
During
the quarter ended June 30, 2010, the Company’s oil and gas properties exceeded
the ceiling test limit and $66,739 was charged to operations as an impairment
expense.
F-7
GLEN
ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation. Depreciation is
provided over the estimated useful lives of the assets primarily by the
straight-line method as follows:
Equipment
|
3-14
years
|
|
Vehicles
|
3-5
years
|
Gains and
losses resulting from sales and dispositions of property and equipment are
included in current operations. Maintenance and repairs are charged to
operations as incurred. During the three months ended June 30, 2010 and June 30,
2009, the Company recorded depreciation expense of $10,928 and $6,340
respectively, which was charged to operations as incurred.
Earnings
(Loss) per Common Share
The
Company adopted the provisions of ASC Topic 260-10, Earnings Per Share (“EPS”).
ACS Topic 260-10 provides for the calculation of basic and diluted earnings per
share. Basic EPS includes no dilution and is computed by dividing income
or loss available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution of securities that could share in the earnings or losses of the entity.
For the three months ended June 30, 2010 and June 30, 2009, basic and diluted
loss per share are the same since the calculation of diluted per share amounts
would result in an anti-dilutive calculation that is not permitted and therefore
not included. At June 30, 2010, the Company had potential common shares
consisting of options and warrants exercisable into 26,966,420 shares, debt
of $3,350,000 convertible into 11,666,667 shares, and an option
granted to convert a 12.5% working interest in the Company’s Wardlaw lease into
2,222,222 shares. At June 30, 2009, the Company had potential common shares
consisting of options and warrants exercisable
into 24,036,420 shares.
Cash
Flows Presentation
For
purposes of the consolidated statement of cash flows, the Company considers all
highly liquid investments purchased with original maturities of three months or
less to be cash equivalents.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Estimates of oil and gas reserves, the asset retirement obligation and
impairment on unproved properties are inherently imprecise and may change
materially in the near term.
Financial
Instruments
Financial
instruments consist of cash and cash equivalents, accounts receivable, accounts
payable and notes payable. Recorded values of cash, receivables, payables and
short-term debt approximate their respective fair values due to short maturities
of these instruments. Recorded values of long-term notes payable approximate
fair values, since their effective interest rates are commensurate with
prevailing market rates for similar obligations.
F-8
Issuance
of Stock for Non-Cash Consideration
All
issuances of the Company's stock for non-cash consideration have been assigned a
per share amount equaling either the market value of the shares issued or the
value of consideration received, whichever is more readily determinable. The
majority of the non-cash consideration received pertains to services rendered by
consultants and others and has been valued at the market value of the shares on
the dates issued.
The
Company's accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions ASC Topic
505-10 Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services and EITF 00-18,
Accounting Recognition for Certain Transactions Involving Equity Instruments
Granted to Other Than Employees. The measurement date for the fair value of the
equity instruments issued is determined at the earlier of (i) the date at which
a commitment for performance by the consultant or vendor is reached or (ii) the
date at which the consultant or vendor's performance is complete. In the case of
equity instruments issued to consultants, the fair value of the equity
instrument is recognized over the term of the consulting agreement. In
accordance with ASC Topic 505-10, an asset acquired in exchange for the issuance
of fully vested, nonforfeitable equity instruments should not be presented or
classified as an offset to equity on the grantor's balance sheet once the equity
instrument is granted for accounting purposes. Accordingly, the Company records
the fair value of the fully vested non-forfeitable common stock issued for
future consulting services as prepaid services in its consolidated balance
sheet.
Long-Lived
Assets
Long-lived
assets to be held and used by the Company are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company periodically evaluates the recoverability of
its long-lived assets based on estimated future cash flows and the estimated
fair value of such long-lived assets, and provides for impairment if such
undiscounted cash flows are insufficient to recover the carrying amount of the
long-lived assets. At June 30, 2010, under the ceiling test pertaining to its
oil properties, the Company recognized an impairment loss of
$66,739.
Income
Taxes
Provisions
for income taxes are based on taxes payable or refundable for the current year
and deferred taxes on temporary differences between the amount of taxable income
and pretax financial income and between the tax bases of assets and liabilities
and their reported amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently enacted income
tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled as prescribed in ASC Topic
740-10, Accounting for Income Taxes. As changes in tax laws or rate are enacted,
deferred tax assets and liabilities are adjusted through the provision for
income taxes.
Reclassifications
Certain
reclassifications have been made to conform the March 31, 2009 amounts to the
March 31, 2010 presentation for comparative purposes.
NOTE
2 – RECENT ACCOUNTING PRONOUNCEMENTS
In April
2010, the FASB issued ASU 2010-17, Revenue Recognition – Milestone Method (Topic
605). ASU 2010-17 provides guidance on applying the milestone method of revenue
recognition in arrangements with research and development activities. The
Company does not expect this ASU to have a material impact on its revenue
recognition when adopted for our fiscal year beginning January 1,
2011.
F-9
In March
2010, the FASB (Financial Accounting Standards Board) issued Accounting
Standards Update 2010-11 (ASU 2010-11), “Derivatives and Hedging (Topic 815):
Scope Exception Related to Embedded Credit Derivatives.” The amendments in
this Update are effective for each reporting entity at the beginning of its
first fiscal quarter beginning after June 15, 2010. Early adoption is
permitted at the beginning of each entity’s first fiscal quarter beginning after
issuance of this Update. The Company does not expect the provisions of ASU
2010-11 to have a material effect on the financial position, results of
operations or cash flows of the Company.
In
February 2010, the FASB Accounting Standards Update 2010-10 (ASU 2010-10),
“Consolidation (Topic 810): Amendments for Certain Investment Funds.” The
amendments in this Update are effective as of the beginning of a reporting
entity’s first annual period that begins after November 15, 2009 and for interim
periods within that first reporting period. Early application is not
permitted. The Company’s adoption of provisions of ASU 2010-10 did not
have a material effect on the financial position, results of operations or cash
flows.
In
February 2010, the FASB issued ASU No. 2010-09 “Subsequent Events (ASC Topic
855) “Amendments to Certain Recognition and Disclosure Requirements” (“ASU No.
2010-09”). ASU No. 2010-09 requires an entity that is an SEC filer to evaluate
subsequent events through the date that the financial statements are issued and
removes the requirement for an SEC filer to disclose a date, in both issued and
revised financial statements, through which the filer had evaluated subsequent
events. The adoption did not have an impact on the Company’s financial position
and results of operations.
In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures
about Fair Value Measurements.” ASU No. 2010-06 amends FASB Accounting
Standards Codification (“ASC”) 820 and clarifies and provides additional
disclosure requirements related to recurring and non-recurring fair value
measurements and employers’ disclosures about postretirement benefit plan
assets. This ASU is effective for interim and annual reporting periods beginning
after December 15, 2009. The adoption of ASU 2010-06 did not have a
material impact on the Company’s financial statements.
NOTE
3 – INVENTORY
Inventory
consists of oil in tanks of $69,113 and $54,947 at June 30, 2010 and March 31,
2010, respectively. Inventory is valued at the lower of cost to
produce the oil or the current available sales price.
NOTE
4 – INCOME TAXES
Included
in Company’s net deferred tax assets are approximately $4,760,000 of potential
future tax benefits from prior unused tax losses. Realization of these tax
assets depends on sufficient future taxable income before the benefits expire.
It is not certain that the Company will have sufficient future taxable income to
utilize the loss carry-forward benefits before they expire. Therefore, an
allowance has been provided for the full amount of the net deferred tax asset.
The Company’s recent change of majority ownership significantly reduced its
ability to utilize its net operating losses.
F-10
NOTE
5 – STOCK OPTIONS
The
following table summarizes pertinent information with regard to our stock option
Plans for the three months ended June 30, 2010:
Weighted Average
|
||||||||
Option and
|
Exercise
|
|||||||
Rights
|
Price
|
|||||||
Outstanding
at beginning of year, April 1, 2010
|
1,020,000 | $ | 1.63 | |||||
Granted
|
||||||||
Exercised
|
||||||||
Forfeited
|
||||||||
Expired
|
||||||||
Outstanding
at June 30, 2010
|
1,020,000 | $ | 1.63 | |||||
Exercisable
at June 30, 2010
|
1,020,000 | $ | 1.63 |
The
weighted average contractual life of options outstanding and exercisable at June
20, 2010 was 1.15 years. The weighted average grant date fair value for options
granted was $1.14 for the three months ended June 30, 2010.
During
the quarter ended June 30, 2010, the Company did not grant any
options.
NOTE
6 – NOTES PAYABLE
Blackwood
Ventures LLC
During
the three months ended June 30, 2010 and 2009, the Company accrued interest in
the amount of $577 and $3,515 respectively, which was charged to
operations. As of June 30, 2010, the note balance, including accrued
interest remaining, was $29,512. Blackwood Ventures LLC was a
related party at the inception of the note. This note is currently subject to a
lawsuit with a former officer of the Company.
Buccaneer
Energy Corporation
During
the three months ended June 30, 2010 and 2009, the Company accrued interest in
the amount of $1,788 and $1,228, which was charged to operations. The
balance of this note at June 30, 2010 was $41,047. Buccaneer Energy Corporation
was a related party at the inception of the note. This note is
currently subject to a lawsuit with a former officer of the
Company.
Installment
Obligation
The
Company is financing premiums on certain insurance policies . The obligation is
paid in three quarterly installments of $19,196 including interest assessed at
an annual rate of 6.91%... The first installment was due and paid in June 2010.
The balance of this obligation at June 30, 2010 was $38,393. Interest charged to
operations on this obligation during the three months ended June 30, 2010
totaled $486.
Lothian
Put Option Holders
In
February 2010, the Company entered into novation agreements with the option
holders to convert the put option liabilities into unsecured notes payable
totaling $2,489,780. These notes are assessed an interest at an
annual rate of 4% and mature on September 30, 2011, when the
principal balances and accrued interest thereon are
due; however, the Company has the right to extend the maturity
dates to September 30, 2012 with an increase in the interest rate charged on the
notes to 6% per annum. Interest accrued on these notes and charged
to operations for the quarter ended June 30, 2010 amounted to $37,762. The
balance of this obligation at June 30, 2010, including accrued interest of
$60,170, totaled $2,549,950.
F-11
Iroquois
Capital Opportunity Fund, LP
Convertible
Debt
On March
3, 2010, the Company issued secured convertible notes and warrants to Iroquois
Capital Opportunity Fund and 12 other investors in exchange for $3,350,000. The
notes mature in two years and accrue interest at an annual rate of 8%. The
Company, at its election during the first 180 days and, with the Note holder’s
permission, thereafter, can elect to defer the required quarterly interest
payments by calculating accrued interest for the quarter using the rate of
12% per annum and agreeing to add the accrued interest amount to the principal
amount of the notes. The outstanding principal and interest on the
notes is convertible into Company common stock at the option of each note holder
at $0.30 per share with the Company having the right to force conversion once
the Company achieves a greater than $1.25 share price and minimum daily volume
of $2,000,000. The maximum number of conversion common stock shares
for the notes’ principal amounts, assuming all shares are converted, is
11,666,667 common stock shares. The notes are secured by all of the
Company’s and its subsidiaries’ assets. The investors are also
receiving a total of 11,666,667 warrants exercisable at $0.60 per share with
five year terms. The warrants have cashless exercise
provisions. Should the Company issue common stock to third parties
for consideration less than the note conversion price or the warrant exercise
price during the term of the notes or warrants, the note conversion price and
the warrant exercise price shall be adjusted downward to equal the price at
which the Company issued that common stock. The Company incurred loans fees of
$239,071, which is being netted against the balance of the notes.
The
subscription agreement also calls for the Company to have a director nominated
by Iroquois Capital Opportunity Fund LP or its assignee. Accordingly,
the Company has amended its bylaws to provide for such a “Nominated
Director.” Further, under the amended bylaws, the Nominated Director
must approve certain business decisions without regard to the vote of the other
Directors, including (i) the Company’s or Subsidiary’s annual budget; (ii)
acquisition or disposition of material assets, outside the ordinary course of
business; (iii) formation or dissolution of the Company or Subsidiary; (iv)
expenditure of or incurring of an obligation of $20,000 or more for a single
purpose during any consecutive twelve month period unless such expenditure has
been approved in a budget approved by the board of directors of the Company or
Subsidiary (“single purpose” may include an approved general plan of operations
relating to oil and gas production and shall not be a reference to the
engagement of any single vendor in connection with such approved general plan of
operations relating to oil and gas production), provided such expenditure has
been approved in a budget approved by the board of directors of the Company and
Subsidiary, as applicable; (v) open or close any account with any
financial institution; (vi) initiation or settlement of any litigation,
arbitration or judicial proceeding; and (vii) the issuance of any equity of the
Company or right to receive or acquire any equity of the Company, or
modification of any of the foregoing outstanding at any time. The
Nominated Director bylaw provision ceases to be effective when the notes are
paid.
In
accordance with terms of the loan, the $3,350,000 was placed in escrow. Pursuant
to the terms of the Escrow Agreement, funds held in escrow are released at the
Company’s written request promptly after the Escrow Agent receives a certified
resolution of the Company’s board of directors which must include the
affirmative approval of the Nominated Director. Request for disbursements from
escrow may not be made more frequently than once every thirty days. Any funds
retained in escrow after one year from the date of the Agreement may be
deposited by the Escrow Agent, in his absolute discretion with a court of
competent jurisdiction in the state of New York. As of June 30,
2010, the Company had cash that was held in escrow amounting to
$1,650,000.
Pursuant
to ASC Topic 470-20, “Debt with Conversion and Other Options,” the
convertible notes were recorded net of discounts that include the relative fair
value of the warrants amounting to $1,999,257. The discounts are
amortized and charged to operations over the two year life of the debt using the
effective interest method. The initial value of the warrants of
$1,999,257 was calculated using the Black Scholes Option Model with a risk free
interest rate of 2.27%, volatility of 121.39%, and trading price of $0.24 per
share.
Pursuant
to the terms of the promissory notes, for the first 180 days after delivery of
the promissory notes, the Company is to either pay accrued interest by the end
of each calendar quarter or deliver each note holder an Allonge which increases
the principal amount of the holder’s note by adding the accrued
interest. The promissory notes also provide that if the Company pays
by cash the interest rate for calculating interest due is at the rate of 8% per
annum and if the Company elects to deliver an Allonge to each of the note
holders a 12% interest rate shall be applied to the interest
accrued. A default interest rate of 15% will be applicable during any
event of default and until the default is cured.
F-12
As of
June 30, 2010 the Company was in default for having failed to send the Allonges
to the note holders. The Company accrued interest for the three
months ended June 30, 2010 at the 15% default rate. Interest charged
to operations on the cumulative principal of the notes for quarter ended June
30, 2010 totaled $128,206. The balance of the notes at June 30, 2010,
net of discounts and loan fees totaling $1,253,740, was $2,127,527.
NOTE
7 - NOTE RECEIVABLE
Bowie
Operating Company LLC
The loan
due from Bowie Operating Company, LLC is assessed interest at rate of
18% per annum. The loan is evidenced by a secured promissory note, which is
currently in default, and was due on demand after September 1, 2009.
Interest accruing on the note and credited to operations during the quarter
ended June 30, 2010 and 2009 was $7,536 and $6,317, respectively. The
balance of the principal and interest on the note as of June 30, 2010 was
$172,973. Bowie Operating Company LLC was a related party at the inception of
this note. This note is currently subject to a lawsuit with a former officer of
the Company. The Company continues to record interest on the note as well as the
notes principal on its financials until the lawsuit dispute is
resolved.
Buccaneer
Energy Corporation
The loan
due from Buccaneer Energy Corporation is assessed interest at rate of 18% per
annum. The loan is evidenced by a secured promissory note, which is currently in
default, and was due on demand after December 31, 2009. Interest accruing on the
note and credited to operations during the quarter ended June 30, 2010 was
$1,475. The balance of the principal and interest on the note as of
June 30, 2010 was $33,846. Buccaneer Energy Corporation was a
related party at the inception of this note. This note is currently
subject to a lawsuit with a former officer of the Company. The Company continues
to record interest on the note as well as the notes principal on its financials
until the lawsuit dispute is resolved.
NOTE
8– STOCK HOLDERS' EQUITY
On June
30, 2008, the Company amended its Directors’ compensation plan. At
the end of each month, each director has the option of receiving $5,000 in the
form of shares of the Company’s common stock or stock options to purchase 5,000
shares of the Company’s common stock. The price per share assigned to
each issuance is equal to the closing average bid price of the Company’s common
stock for the previous quarter. The previous agreement provided for
the grand to 5,000 stock purchase options per month, with the price to be
calculated on the average closing bid price for the month. In
addition to the option grant indicated above, the Company also granted its
President options to purchase 500,000 shares of the Company’s common stock at a
price per share of $0.99. These 500,000 options fully vested on
December 31, 2008.
Director’s
compensation was amended on April 8, 2010. Under the revised plan, commencing on
April 1, 2010 each director will receive a fixed amount of 20,000 shares of the
Company’s common stock per month paid and delivered in certificate form
quarterly in advance.
During
the quarter ended June 30, 2010, the Company issued 240,000 shares of common
stock to certain directors as compensation for their services
rendered. The shares were valued at $91,200 which was charged to
operations.
During
the quarter ended June 30, 2010, the Company issued 107,000 shares of common
stock to its Chief Financial Officer as incentive compensation for services
rendered under his contract. The shares were valued at $36,800 which was charged
to operations.
During
the quarter ended June 30, 2010, the Company granted options to purchase 566,668
shares of common stock to certain officers and employees as compensation for
their services. The options were valued at $137,818 which was
charged to operations. The exercise prices of these options were
range from $0.75 per share to $1.50 per share. In addition, during
the quarter ended June 30, 2010, the Company granted options to certain
consultants to purchase 250,000 shares of the Company’s common
stock. These options were valued at $61,159.
F-13
NOTE
9 – RELATED PARTY TRANSACTIONS
In June
2010, we entered into an agreement with Compagnie Ressources Naturelles et
D’Investissment SA. (a company wholly-owned by Mr. Taylor-Kimmins)
for Mr. Taylor-Kimmins’ services. Pursuant to this agreement we will pay
Compagnie Ressources $15,000 per month for Mr. Taylor-Kimmins’ services. In
addition to the compensation to be paid, we have agreed to issue to Compagnie
Ressources Naturelles et D’Investissment SA. a signing bonus of 100,000 warrants
priced at $0.75, 20,000 common shares per month and warrants to purchase up to
900,000 shares of our common stock, with exercise prices between $0.75 and
$1.50, upon the achievement of certain stated production
milestones.
NOTE
10 – COMMITMENTS AND CONTINGENCIES
The
Company is involved in various claims incidental to the conduct of our business.
Based on consultation with legal counsel, we do not believe that any claims,
either individually or in the aggregate, to which the Company is a party will
ultimately have a material adverse effect on our financial condition or results
of operations.
For a
current report regarding ongoing legal proceedings involving the Company and
other material claims, reference is made to Item 3 of Part I of the Company’s
Annual Report on Form 10-K, filed with the Securities and Exchange Commission on
July 14, 2010, which is incorporated herein.
F-14
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The
following discussion and analysis of our financial condition, plan of operation
and liquidity should be read in conjunction with our unaudited condensed
consolidated financial statements and the notes thereto included in Part I, Item
1 of this quarterly report on Form 10-Q, and our audited financial statements
and the notes thereto and our Management’s Discussion and Analysis or Plan of
Operation contained in our annual report on Form 10-K for the fiscal years ended
March 31, 2010 and 2009.
OVERVIEW
Glen Rose
Petroleum Corporation (“Glen Rose”) is a Delaware corporation formed in
2008. The Company was previously United Heritage Corporation, a Utah
corporation that was formed in 1981 and was reincorporated in Delaware in 2008.
The reincorporation entailed a reincorporation merger agreement between Glen
Rose Petroleum Company and United Heritage Corporation, but there were no
substantive changes in assets or personnel and we also have continuous financial
reporting through the reincorporation.
Glen Rose
owns UHC Petroleum Corporation (“Petroleum”), a Texas corporation, which is a
licensed operator with the Texas Railroad Commission. Petroleum is an
independent producer of crude oil based in Katy, Texas. Petroleum operates
the Wardlaw Field. The Wardlaw Field lies in Edwards County, Texas in the
southeast portion of the Val Verde Basin and is approximately 28 miles west of
Rocksprings and 550 miles west of Dallas. Current oil production from the
field comes from the Glen Rose formation at a depth of less than 600 feet.
The Company’s petroleum leaseholds consist of approximately 10,502 gross acres,
of which more than 10,000 acres are
undeveloped. The leaseholds include 85 wellbores. Of these, 75 are
capable of producing. With one swabbing unit, we are daily producing 45 wells.
We are in the process of evaluating the remaining wells. Petroleum has a gross
working interest of 100% and a net revenue interest of 75% of the current
Wardlaw Field production. The original lease term was extended by a period of 90
days each time a well was drilled; therefore, based on prior drilling, the
primary lease term is currently extended to 2014.
The
Company entered into a new lease on June 14, 2010 with Carol Ann Adamson, who is
Trustee of the Sandra Jym Adamson Trust, as well as the agent and
attorney-in-fact for Sandra Jym Adamson. The lease is adjacent to the
Company’s Wardlaw lease and consists of 665 acres. The term is for 3
years, which will pay royalties in the amount of 20% of the gross
production.
1
We
produce a raw commodity. Currently one purchaser buys 100% of our
production. However, we believe that other purchasers are available for
our production. Our customer risk primarily stems from the purchaser’s solvency
relating to outstanding balances. The purchaser has historically paid in a
timely manner and we have no information that would indicate that it would be
unable to continue paying in the future.
We have
no patents, trademarks, material intellectual property license agreements,
franchises, or labor contracts.
In
addition to Petroleum, Glen Rose also owns, UHC Petroleum Services Corporation
(“Services”) a Texas corporation. Our other subsidiary is National Heritage
Sales Corporation, a Texas corporation. National Heritage Sales Corporation has
not operated for a number of years, and the Company plans to wind up this
corporation in the coming year. Until recently, UHC New Mexico Corporation was a
non-operating subsidiary of Glen Rose. Pursuant to a Common Stock Purchase
Agreement dated February 12, 2010, it was sold to Blackwood Capital Limited, a
company controlled by our Chief Executive Officer. At the time of the sale, it
had no assets but was subject to a current UCC filing and ongoing expenses
relating to maintaining its corporate existence. Glen Rose determined that the
expense of enforcing and collecting the indebtedness of UHC New Mexico
Corporation owing to Glen Rose likely would exceed the proceeds realized by Glen
Rose from such enforcement and collection activities. Accordingly, Glen Rose
approved the cancellation and forgiveness of such indebtedness effective as of
the date of the closing on the sale to Blackwood Capital Limited.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
quarterly report on Form 10-Q and other reports filed from time to time with the
Securities and Exchange Commission by Glen Rose Petroleum Corporation (referred
to as the “Company”, “we”, “us” or “our”), contains certain forward-looking
statements and information based upon the beliefs of, and data currently
available to, our management, as well as estimates and assumptions made by our
management regarding the Company’s financial condition, future operating
performance, results of operations and other statements that are not statements
of historical fact. The words “expect,” “project,” “estimate,” “believe,”
“anticipate,” “intend,” “plan” “forecast” or the negative of these terms and
similar expressions and variations thereof are intended to identify such
forward-looking statements. These forward-looking statements appear in a number
of places in this Form 10-Q and reflect the current view of our management with
respect to future events. Such forward-looking statements are not guarantees of
future performance and are subject to certain important risks, uncertainties,
assumptions and other factors relating to our industry and operations which
could cause results to differ materially from those anticipated, believed,
estimated, expected intended or planned. Some of these risks include, among
other things:
|
·
|
whether we will be able to find
financing/produce cash flows to continue/expand our
operations;
|
|
·
|
whether changes in regulatory
requirements will adversely affect our
business;
|
|
·
|
environmental
risks;
|
|
·
|
volatility in commodity prices,
supply of, and demand for, oil and natural
gas;
|
|
·
|
whether the recovery methods that
we use in or will use in our oil and gas operations
succeed;
|
|
·
|
the ability of our management to
execute its plans to meet its
goals;
|
|
·
|
general economic conditions,
whether internationally, nationally, or in the regional and local markets
in which we operate, which may be less favorable than
expected;
|
|
·
|
the difficulty of estimating the
presence or recoverability of oil and natural gas resources and future
production rates and associated
costs;
|
|
·
|
the ability to retain key members
of management and key employees and to attract additional talent as
required;
|
|
·
|
drilling and operating risks and
expense cost escalations;
and
|
|
·
|
other uncertainties, all of which
are difficult to predict and many of which are beyond our
control.
|
Except as
otherwise required by law, we undertake no obligation to update any of the
forward-looking statements contained in this quarterly report Form 10-Q after
the date of this report.
2
GOING
CONCERN STATUS
Our
financial statements have been prepared on a going concern basis which
contemplates the realization of assets and the liquidation of liabilities in the
ordinary course of business. As of the filing date of this quarterly
report on Form 10-Q, we have incurred substantial losses from our operations and
we have a working capital deficit which raises substantial doubt as to our
ability to continue as a going concern. We had net loss of $1,565,690 for
the three months ended June 30, 2010 and a net loss of $2,509,790 for the fiscal
year ended March 31, 2010. As of the same periods, we had an accumulated
deficit of $52,508,250 and $50,942,560, respectively. Unless we are able
to attract the financing needed to develop our properties, there can be no
assurance that we will be able to continue as a going concern.
Management
is currently reviewing the Company’s operations with the intent of increasing
revenue and reducing expenses. In addition, Management is also seeking funding
with third parties through the issuance of debt and equity and through
attracting tax-benefitted investment. In addition, we are also in discussions
with third parties regarding sharing arrangements relating to our interest in
the Wardlaw Field including farm outs. There is no assurance that our attempts
to obtain funding or find a suitable party in connection with the further
development of the Wardlaw Field will be successful.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our
critical accounting policies, including the assumptions and judgments underlying
those policies, are more fully described in the notes to our audited financial
statements contained in our annual reports on Forms 10-K for the fiscal years
ended March 31, 2010 and March 31, 2009. We have consistently applied
these policies in all material respects. Investors are cautioned, however, that
these policies are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially. Set forth
below are the accounting policies that we believe most critical to an
understanding of our financial condition and liquidity.
Oil
and Gas Properties
Proved Reserves - Proved
reserves are defined by the Securities and Exchange Commission as those volumes
of crude oil; condensate, natural gas liquids and natural gas that geological
and engineering data demonstrate with reasonable certainty are recoverable from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are volumes expected to be recovered through existing wells
with existing equipment and operating methods. Although our engineers are
knowledgeable of and follow the guidelines for reserves established by the
Securities and Exchange Commission, the estimation of reserves requires
engineers to make a significant number of assumptions based on professional
judgment. Reserve estimates have been updated at least annually and
consider recent production levels and other technical information about each
well. Estimated reserves are often subject to future revision, which could be
substantial, based on the availability of additional information including:
reservoir performance; new geological and geophysical data, including that
provided by additional drilling; technological advancements; price and cost
changes; and other economic factors. Changes in oil and gas prices can
lead to a decision to start-up or shut-in production, which can lead to
revisions to reserve quantities. Reserve revisions in turn cause adjustments in
the depletion rates utilized by the Company. The Company cannot predict
what reserve revisions may be required in future periods.
Depletion
rates are determined based on reserve quantity estimates and the capitalized
costs of producing properties. As the estimated reserves are adjusted, the
depletion expense for a property will change, assuming no change in production
volumes or in the costs capitalized. Estimated reserves are used as the
basis for calculating the expected future cash flows from a property, which are
used to determine whether that property’s reported value may be
impaired. Reserves are also used to estimate the supplemental disclosure
of the standardized measure of discounted future net cash flows relating to oil
and gas producing activities and reserve quantities in Note 15 to the
consolidated financial statements in our March 31, 2010 Form 10-K. Changes in
the estimated reserves are considered changes in estimates for accounting
purposes and are reflected on a prospective basis.
3
We employ
the full cost method of accounting for our oil and gas production assets, which
are located in the southwestern United States. Under the full cost method,
all costs associated with the acquisition, exploration and development of oil
and gas properties are capitalized and accumulated in cost centers on a
country-by-country basis. The sum of net capitalized costs and estimated
future development and dismantlement costs for each cost center is depleted on
the equivalent unit-of-production basis using proved oil and gas reserves as
determined by independent petroleum engineers.
Net
capitalized costs are limited to the lower of unamortized cost net of related
deferred tax or the cost center ceiling. The cost center ceiling is
defined as the sum of (i) estimated future net revenues, discounted at 10% per
annum, from proved reserves, based on un-escalated year-end prices and costs;
(ii) the cost of properties not being amortized; (iii) the lower of cost or
market value of unproved properties included in the costs being amortized; less
(iv) income tax effects related to differences between the book and tax basis of
the oil and gas properties.
The
ceiling test is affected by a decrease in net cash flow from reserves due to
higher operating or finding costs or reduction in market prices for natural gas
and crude oil. These changes can reduce the amount of economically
producible reserves. If the cost center ceiling falls below the
capitalized cost for the cost center, we would be required to report an
impairment of the cost center’s oil and gas assets at the reporting
date.
Impairment of Properties - We
will continue to monitor our long-lived assets recorded in oil and gas
properties in our consolidated balance sheet to ensure they are fairly
presented. We must evaluate our properties for potential impairment when
circumstances indicate that the carrying value of an asset could exceed its fair
value. A significant amount of judgment is involved in performing these
evaluations since the results are based on estimated future events. Such
events include a projection of future oil and natural gas sales prices, an
estimate of the ultimate amount of recoverable oil and gas reserves that will be
produced from a field, the timing of future production, future production costs,
and future inflation. The need to test a property for impairment can be
based on several factors, including a significant reduction in sales prices for
oil and/or gas, unfavorable adjustment to reserves, or other changes to
contracts, environmental regulations or tax laws. All of these factors
must be considered when testing a property's carrying value for impairment.
We cannot predict whether impairment charges may be required in the
future.
Revenue Recognition - Oil and
gas production revenues are recognized at the point of sale. Production not sold
at the end of the fiscal year is included as inventory at the lower of cost or
market value.
Income Taxes - Included in our
net deferred tax assets are approximately $4,760,000 of potential future
tax benefits from prior unused tax losses (“net operating loss carry-forwards”).
Realization of these tax assets depends on sufficient future taxable
income before the benefits expire. We are unsure if we will have
sufficient future taxable income to utilize the benefits from net operating
loss carry-forwards before the losses expire. Therefore, we have provided
an allowance for the full amount of the net deferred tax asset. Moreover, our
recent change of majority ownership significantly reduced our ability to utilize
our net operating losses carry-forwards.
Accounting Estimates -
Management uses estimates and assumptions in preparing financial statements in
accordance with accounting principles generally accepted in the United States of
America. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses. In particular, there is significant judgment
required to estimate oil and gas reserves, impairment of unproved properties and
asset retirement obligations. Actual results could vary significantly from
the results that are obtained by using management’s estimates as well as those
of independent third-party petroleum engineering firms.
Convertible Debentures - If
the conversion feature of conventional convertible debt provides for a rate of
conversion that is below market value, this feature is characterized as a
beneficial conversion feature (“BCF”). A BCF is recorded as a debt
discount pursuant to EITF Issue No. 98-5 (“EITF 98-05”), Accounting for
Convertible Securities with Beneficial Conversion Features or Contingency
Adjustable Conversion Ratio, and EITF Issue No. 00-27, Application of EITF Issue
No. 98-5 to Certain Convertible Instruments. In those circumstances, the
convertible debt will be recorded net of the discount related to the BCF.
The Company amortizes the discount to interest expense over the life of the debt
using the effective interest method.
4
RESULTS
OF OPERATIONS
The
following comparison of selected financial data for the three months ended June
30, 2010 and financial data for the three months ended June 30, 2009 are derived
from our unaudited consolidated condensed financial statements included in Part
I, Item 1 of this quarterly report on Form 10-Q. This information is
qualified in its entirety by, and should be read in conjunction with, such
financial statements and related notes contained therein.
Three
Months Ended
|
||||||||
June
30,
|
||||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
Income
Data
|
||||||||
Revenues
|
$ | 27,560 | $ | 35,210 | ||||
Depreciation
and depletion
|
17,598 | 17,225 | ||||||
Total
operating costs and expenses
|
1,279,160 | 312,750 | ||||||
Loss
from operations
|
(1,251,600 | ) | (277,540 | ) | ||||
Income
tax
|
||||||||
Net
loss
|
$ | (1,565,690 | ) | $ | (279,004 | ) | ||
Basic
and diluted loss per share
|
$ | (0.12 | ) | $ | (0.03 | ) | ||
Weighted
average number of shares outstanding
|
12,887,703 | 10,816,200 |
Oil
and Gas Results
Our
revenues decreased $7,650, or approximately 22%, to $27,560 for the three months
ended June 30, 2010, as compared to $35,210 for the three months ended June 30,
2009. The decrease in revenue in 2010 compared to 2009 was due to no oil sales
in April 2010 due to the reworking of our wells.
Our total
operating costs and expenses increased $966,410 or approximately 309%, to
$1,279,160 for the three months ended June 30, 2010, as compared to $312,750 for
the three months ended June 30, 2009. The increase in our operating expenses was
primarily attributable to adding new employees, increases in production
activities, increases in stock based compensation, and increases in other
general and administrative expenses for the three months ended June 30,
2010.
Our
depreciation and depletion increased by $373, or approximately 2%, to $17,598
for the three months ended June 30, 2010, as compared to $17,225 for the three
months ended June 30, 2009. Substantially all of our increase pertained to
the depletion and accretion expenses incurred in our oil
properties.
General
and administrative expenses increased $472,938, or approximately 186%, to
$727,421 for the three months ended June 30, 2010, as compared to $254,483 for
the three months ended June 30, 2009. This increase in our general and
administrative expenses during the current three month period is primarily
attributable the addition of new employees, legal and other professional
fees.
Our loss
from operations increased from $277,540 for the three months ended June 30,
2009, to $1,251,600 for the three months ended June 30, 2010. This change in our
loss from operations is primarily attributable to an increase in stock
compensation expenses, professional fees and the other factors discussed
above.
Interest
expense increased from $9,677 for the three months ended June 30, 2009 to
$358,807 for the three months ended June 2010. Interest expenses in 2010
included $128,206 that accrued on our debt due Iroquois and also included
amortization of the discount on this debt totaling $156,077.
Our net
loss increased $1,286,686 from $279,004 for the three months ended June 30,
2009, to $1,565,690 for the three months ended June 30, 2010.
5
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
Our
revenues have not been adequate to support our operations. We anticipate
that this will change in the near future as a result of our capital raising and
development efforts, combined with operating changes.
Current
liabilities increased from $874,001 at March 31, 2010 to $1,179,938 at June 30,
2010, an increase of $305,937 or approximately 35%. Increases during the
three months ended June 30, 2010 included $100,541 in accounts payable,($852,674
at June 30, 2010 compared to $752,133 due at March 31, 2010), and an
increase in accrued interest of $74,531 ($128,206 at June 30, 2010 compared to
$53,675 due at March 31, 2010).
We had
working capital of $1,167,241 at June 30, 2010, as compared to working capital
of $2,705,654 at March 31, 2010, a working capital decrease of $1,598,583 or
approximately 59%. The decrease in our working capital resulted primarily from
the cost outlaid to increase the overall operations and production of the
Company.
Cash
Flow
Our
operations used $662,242 of cash in the three months ended June 30, 2010. This
is primarily due to a net loss of $1,565,690, net of non-cash operating expenses
totaling $900,473. Cash of $638,530 was used in investing activities
during the same three month period, which consisted of $269,108 in expenditures
relating to our oil properties, and $372,397 incurred in the purchases of
property and equipment. Cash used in our financing activity during the
three months in 2010 included $6,146 in payments used to reduce our capital
lease obligation and $17,252 in principal debt reduction on our insurance
financing obligation.
During
the three months ended June 30, 2009, we used $55,095 of cash in our operations
which consisted of a net loss from operations of $279,004, net of non-cash
operating expenses totaling $223,909. Cash of $67,443 was used in
investing activities during the same three month period, which consisted of
$80,880 in expenditures relating to our oil properties, $6,500 incurred in the
purchases of property and equipment, and a receipt of $19,937 on a repayment of
debt due us. Cash provided by our financing activities during the three months
ended June 30, 2009 amounted to $107,000 included $119,000 from loan advances
net of $12,000 in debt payments.
At June
30, 2010, we had cash on hand in the amount of $1,878,088 as compared to $3,329
at June 30, 2009.
Glen Rose
will incur significant costs through its planned development program for its
Wardlaw Field leases and related opportunities, cash flow permitting. The
program will begin by reworking many of the existing well bores, as well as
begin to drill new wells, which will be completed upon deploying the necessary
funding. There can be no assurance of success, and unless production and
sales of oil and gas significantly increase, we may not be able to attain
profitability, or even be able to continue as a going concern. We will
require additional funding to attempt to significantly increase our production
and have been attempting to secure such funding.
Except as
otherwise discussed in this quarterly report, we know of no trends, events or
uncertainties that have, or are reasonably likely to have, a material impact on
our short-term or long-term liquidity or on our net sales or revenues from
continuing operations. We do not currently have any significant
commitments for capital expenditures for the next twelve months, but do have
significant plans, depending upon success of the pilot flooding program and our
success in attracting capital.
ITEM 4T. CONTROLS AND
PROCEDURES
Glen Rose
carried out an evaluation, under the supervision and with the participation of
management, of the effectiveness of the design and operation of the Company’s
financial controls and procedures for the period April 1, 2010 through June 30,
2010 in accordance with the standards set forth by the Public Company Accounting
Oversight Board (“PCAOB“) in the United States. This evaluation was
undertaken in consultation with internal and external accountants. Based
on the evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our internal controls and reporting procedures were effective to
ensure that information required to be disclosed by us in the reports that we
filed or submitted under the Securities Exchange Act of 1934 was recorded,
processed, summarized and reported in compliance with internal controls
ordinarily required of publicly-traded firms in the manner specified in the
Securities and Exchange Commission’s rules and forms.
6
Glen Rose
Petroleum Corporation’s management is responsible for establishing and
maintaining systems of adequate internal control over financial reporting, as
such term is defined in Exchange Act Rules 13a-15(f). Because of its inherent
limitations, internal control over and outside independent audit of financial
reporting may not prevent or detect misstatements.
We
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of June 30, 2010. The evaluation was undertaken in
consultation with our accounting personnel in accordance with the standards set
forth by the Public Company Accounting Oversight Board (“PCAOB“) in the United
States. Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that, due to the loss of a number of employees, we
no longer have the capacity to ensure that information required to be disclosed
by us in the reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and
forms.
In
management's opinion, based on the assessment completed for the period ended
June 30, 2010, the internal controls over financial reporting are not operating
effectively. Further, in management’s opinion, based on the assessment completed
for the three-months ended June 30, 2010, the disclosure controls and
procedures are not operating effectively.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There
were no changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the date of their above
evaluation.
7
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS.
For a
current report regarding ongoing legal proceedings involving the Company and
other material claims, reference is made to Item 3 of Part I of the Company’s
Annual Report on Form 10-K, filed with the Securities and Exchange Commission on
July 14, 2010, which is incorporated herein.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
There
were no reportable events under this Item 2 during the quarterly period ended
June 30, 2010.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES.
Buccaneer
Energy Corporation
The
Company is involved in a litigation with Buccaneer Energy Corporation
with regard to its liability owed to Buccaneer as well as Buccaneers receivable
owed the Company. The Company believes the amounts related to the notes
payable and receivable recorded in its financials could be in default depending
on the resolution of the dispute. The Company continues to record the
principal balances of the note payable and note receivable as well as the
interest accruals on both in its financials until this dispute is resolved
between the parties.
Bowie
Operating Company LLC
The
Company is involved in a litigation with Bowie Operating Company LLC with
regard to its liability owed. The Company believes the amounts related to
the notes payable in its financials could be default depending on the resolution
of the dispute. The Company continues to record the principal balances
notes and receivables as well as the interest accruals until this dispute is
resolved between the parties.
Iroquois
Capital Opportunity Fund, LP
As of the
quarter ending date June 30, 2010, the Company was in default for having failed
to send the Allonges to the note holders, which default continues until the
Allonges are delivered. The Company accrued interest for the quarter ended
at the 15% default rate. Interest charged to operations on the cumulative
principal of the notes for quarter ended June 30, 2010 totaled $128,206.
The balance of the notes at June 30, 2010, net of discounts and loan fees
totaling $1,253,740, was $2,127,527. The principal balance on the notes at
June 30, 2010 was adjusted to include $31,267 in accrued interest for the prior
quarter as stipulating in the promissory notes. By August 20, 2010, the
Company had delivered the Allonges to the note holders.
ITEM
4. REMOVED AND RESERVED.
ITEM
5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits
3.1 Certificate
of Incorporation filed in Delaware on May 22, 2008, incorporated by
reference to Exhibit 3.1 to Registrant’s Form 10-K for period ending
March 31, 2008 filed July 14, 2008.
3.3 Bylaws
of Corporation, incorporated by reference to Exhibit 3.1 to Registrant’s
Form 10-K for period ending March 31, 2008 filed July 14,
2008.
3.3(a)
Amendment to By-Laws, incorporated by reference to Exhibit 3.3(a) to
Registrant’s Form 10-K/A for period ending March 31, 2010 filed
July22, 2010.
8
4.1 Secured
Convertible Note (Iroquois) (see Exhibit 10.11).
4.2 Form
of Common Stock Purchase Warrant issued to Iroquois Capital Opportunity Fund,
LLC and other investors on March 3, 2010 (see Exhibit 10.13).
4.3 Form
of Common Stock Purchase Warrant issued to DK True Energy Development Ltd.,
incorporated by reference to Exhibit 4.3 to Registrant’s Form 10-K/A
for period ending March 31, 2010 filed July 22, 2010.
4.4 Form
of Common Stock Purchase Warrant issued to RTP Secure Energy Corp., incorporated
by reference to Exhibit 4.4 to Registrant’s Form 10-K/A for period
ending March 31, 2010 filed July 22, 2010.
4.4(a)
Registration Rights Agreement for Warrant issued to RTP, incorporated by
reference to Exhibit 4.4(a) to Registrant’s Form 10-K/A for period
ending March 31, 2010 filed July 22, 2010.
4.5 Form
of Common Stock Purchase Warrants issued to Joseph Tovey, incorporated by
reference to Exhibit 4.5 to Registrant’s Form 10-K/A for period ending
March 31, 2010 filed July 22, 2010.
4.5(a)
Registration Rights Agreement for Warrant issued to Tovey, incorporated by
reference to Exhibit 4.5(a) to Registrant’s Form 10-K/A for period
ending March 31, 2010 filed July 22, 2010.
10.1 1995
Stock Option Plan, incorporated by reference to Exhibit 10.3 of the
Registrant’s Form SB-2 Registration Statement filed May 4,
2004.
10.2 1998
Stock Option Plan, incorporated by reference to Exhibit 99.01 the
Registrant’s Form S-8 registration statement filed on September 30,
1998 as document number 333-64711.
10.3 2000
Stock Option Plan, incorporated by reference to Exhibit 4.01 of
Registrant’s Form S-8 Registration Statement filed on December 6,
2000.
10.4 2008
Stock Option Plan, incorporated by reference to Exhibit 10-1 to
Registrant’s Form S-8 Registration Statement filed May 30,
2008.
10.5
Amended Agreement with Joseph F. Langston, incorporated by reference to Exhibit
10.5 to Registrant’s Form 10-K filed July 13, 2009.
10.7 Debenture
issued to Blackwood Ventures, LLC dated January 28, 2009, incorporated by
reference to Exhibit 10.6 to Registrant’s Form 10-Q filed November 20,
2009.
10.8 Consulting
Agreement with DK True Energy Development Ltd. and RTP Secure Energy Corp. dated
November 27, 2007, incorporated by reference to Exhibit 10-1 to
Registrant’s Form 8-K filed December 3, 2007.
10.8a
Termination of Consulting Agreement with DK True EnergyDevelopment Ltd. and
Mutual Release, incorporated by reference to Exhibit 10.8a to the Registrant’s
Form 10-K, filed on July 14, 2010.
10.9 Consulting
Agreement with Blackwood Capital, Ltd. dated January 15, 2008, incorporated
by reference to Exhibit 10-2 to Registrant’s Form 8-K filed
January 22, 2008.
10.9(a)
Amendment to Consulting Agreement with Blackwood Capital, Ltd., incorporated by
reference to Exhibit 10.5 to Registrant’s Form 10-Q filed November 20,
2009.
10.9(b)
8.5% Senior Secured Convertible Debenture and Warrant Purchase Agreement,
incorporated by reference to Exhibit 10.6 to Registrant’s Form 10-Q filed
November 20, 2009.
10.10
Subscription Agreement (Iroquois), incorporated by reference to Exhibit 10.10 to
the Registrant’s Form 10-K, filed on July 14, 2010.
9
10.11
Form of Secured Convertible Promissory Note (Iroquois), incorporated by
reference to Exhibit 10.11 to the Registrant’s Form 10-K, filed on July 14,
2010.
10.12
Security Agreement (Iroquois), incorporated by reference to Exhibit 10.12 to the
Registrant’s Form 10-K, filed on July 14, 2010.
10.13
Form of Warrant (Iroquois), incorporated by reference to Exhibit 10.13 to the
Registrant’s Form 10-K, filed on July 14, 2010.
10.14
Working Interest Purchase and Sale Agreement (Iroquois), incorporated by
reference to Exhibit 10.14 to Registrant’s Form 10-K/A for period
ending March 31, 2010 filed July 22, 2010.
10.15
Consulting Agreement with Blackwood Ventures, LLC dated January 28, 2009,
incorporated by reference to Exhibit 10.5 to Registrant’s Form 10-Q filed
November 20, 2009.
10.16
Consulting Agreement with Iromad, LLC (Iroquois), incorporated by reference to
Exhibit 10.16 to the Registrant’s Form 10-K, filed on July 14,
2010.
10.17
Form of Option Holder Novation Agreement, incorporated by reference to Exhibit
10.17 to the Registrant’s Form 10-K, filed on July 14, 2010.
10.18
Termination and Settlement Agreement with Joseph Tovey, incorporated by
reference to Exhibit 10.18 to the Registrant’s Form 10-K, filed on July 14,
2010.
10.19
Employment Agreement with Ruben Alba, incorporated by reference to
Exhibit 10.19 to Registrant’s Form 10-K/A for period ending
March 31, 2010 filed July 22, 2010.
10.20
Employment Agreement with Kenneth E. Martin, incorporated by reference to
Exhibit 10.20 to the Registrant’s Form 10-K, filed on July 14,
2010.
10.21(a) Agreement
for short-term financing with Dr. Howard Berg, incorporated by reference to
Exhibit 10.21(a) to Registrant’s Form 10-K/A for period ending
March 31, 2010 filed July 22, 2010.
10.21(b)
Senior Secured Note in the principal amount of $250,000, incorporated by
reference to Exhibit 10.21(b) to Registrant’s Form 10-K/A for period
ending March 31, 2010 filed July 22, 2010.
10.21(c)
Security Agreement, incorporated by reference to Exhibit 10.21(c) to
Registrant’s Form 10-K/A for period ending March 31, 2010 filed
July 22, 2010.
10.21( d
) Warrant s issued to Dr. Howard Berg, incorporated by reference to
Exhibit 10.21(d) to Registrant’s Form 10-K/A for period ending
March 31, 2010 filed July 22, 2010.
10.21(e)
Registration Rights Agreement for Warrants issued to Dr. Howard Berg, ,
incorporated by reference to Exhibit 10.21(e) to Registrant’s
Form 10-K/A for period ending March 31, 2010 filed July 22,
2010.
10.22 Second
Addendum to Amended and Restated Promissory Note made by World Link
Partners, LLC in favor of Registrant, incorporated by reference to Exhibit 10.22
to the Registrant’s Form 10-K, filed on July 14, 2010.
10.23
Management Consulting Services Agreement with Weisshorn Management Services,
Inc., incorporated by reference to Exhibit 10.23 to the Registrant’s Form 10-K,
filed on July 14, 2010.
10.24
Employment Agreement with Sam Smith, incorporated by reference to Exhibit 10.24
to the Registrant’s Form 10-K, filed on July 14, 2010.
10
10.25
Consulting Agreement with Compagnie Ressources Naturelles et D’Investissment SA,
incorporated by reference to Exhibit 10.25 to the Registrant’s Form 10-K, filed
on July 14, 2010.
10.26(a)
Adamson-Glen Rose Lease, June 2010, incorporated by reference to
Exhibit 10.26(a) to Registrant’s Form 10-K/A for period ending
March 31, 2010 filed July 22, 2010.
10.26(b)
Adamson-Memorandum of Lease to UHC Petroleum, incorporated by reference to
Exhibit 10.26(b) to Registrant’s Form 10-K/A for period ending
March 31, 2010 filed July 22, 2010.
10.26(c)
Adamson Option, July 2010, incorporated by reference to Exhibit 10.26(c) to
Registrant’s Form 10-K/A for period ending March 31, 2010 filed
July 22, 2010.
21 Subsidiaries
of the Company, incorporated by reference to Exhibit 21 to
Registrant’s Form 10-K for period ending March 31, 2008 filed
July 14, 2008.
31.1
Certification of Principal Executive Officer*
31.2
Certification of Principal Accounting and Financial Officer*
32 .1
Certification of Principal Executive Officer pursuant to Section 906 of the
Sarbanes Oxley Act*
32.2 Certification
of Principal Accounting and Financial Officer pursuant to Section 906 of
the Sarbanes Oxley Act*
*Filed
herewith.
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GLEN
ROSE PETROLEUM CORPORATION
|
||
Date:
August 23, 2010
|
By:
|
/s/
Andrew Taylor-Kimmins
|
Andrew Taylor-Kimmins
|
||
President and Chief Executive
Officer
|
||
Date:
August 23, 2010
|
By:
|
/s/
Kenneth E. Martin
|
Kenneth
E. Martin
|
||
Chief
Financial Officer
|
11