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EX-31.1 - EX-31.1 - JOHN D. OIL & GAS CO | c14830exv31w1.htm |
EX-32.1 - EX-32.1 - JOHN D. OIL & GAS CO | c14830exv32w1.htm |
EX-99.1 - EX-99.1 - JOHN D. OIL & GAS CO | c14830exv99w1.htm |
EX-31.2 - EX-31.2 - JOHN D. OIL & GAS CO | c14830exv31w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
OR
o | 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)
(Address of principal executive office)
Registrants 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 o No þ
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 o No þ
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 þ No o
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 o
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 registrants 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. þ
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 o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
On March 12, 2011, the aggregate market value of the voting and non-voting common equity held by
non-affiliates was $213,822 computed as the average bid and asked price of $.04 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 12, 2011.
DOCUMENTS INCORPORATED BY REFERENCE: None
JOHN D. OIL AND GAS COMPANY
INDEX TO ANNUAL REPORT
ON FORM 10-K
INDEX TO ANNUAL REPORT
ON FORM 10-K
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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
drilling natural gas wells in Northeast Ohio, and extracting and producing natural gas with oil as
a by-product of the process. The Company currently has fifty-eight producing wells. The Company
cannot guarantee success under its 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 natural gas exploration to increase cash flow and enhance
shareholder value. At December 31, 2010, the Company had fifty-eight producing wells. The
Companys wells are mostly operator-owned by John D. Oil and Gas Company, although there are a
limited number of joint interest wells.
The Company is also an owner and the managing member of Kykuit Resources, LLC (Kykuit), which
leases natural gas and oil rights to 166,745 net acres located in the Montana Breaks area of
Montana. The partnership has drilled eight wells which have not shown any production to date.
Therefore, Kykuit decided in 2010 to write-off the remaining balance of the intangibles for these
wells. The Company had previously written-off a portion of the intangibles in 2009.
The Company is also an owner and managing member of Lucky Brothers LLC, which had drilled one well
in 2008.
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. |
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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.
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, 2010, 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 32,495 of rentable square footage situated on 3.20 acres including
366 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 22,285 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 Companys stock based on an exchange factor. The current
exchange factor is .1377148 of a share for each unit. LSS Is 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 Companys investment objective.
Activities of the Company. Subject
to Maryland law, the Company has the ability to:
| issue senior securities; |
| borrow money; |
| make loans; |
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| underwrite securities of other issuers; |
| engage in the purchase or sale of investments; |
| offer securities in exchange for property; |
| 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 Companys ability to engage in any of the
above activities is subject to change without the approval of stockholders.
Principal Offices.
The Companys 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 employees. None of the Companys 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, 2010
in an explanatory paragraph that, due to our recurring losses and our outstanding debt of $10.5
million that is largely due and being held by a forbearance agreement, 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 Companys Consolidated Financial Statements for more information. If the Company is unable to
continue as a going concern you will lose your investment.
In the event we are unable to refinance our line of credit which is currently due and being held by
a forbearance agreement until July of 2011 or obtain substitute financing, we may not be able to
continue as a going concern.
At December 31, 2010, our outstanding debt totaled over $10.5 million, including a $9.5 million
line of credit with RBS Citizens, N.A. dba 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, the Company received a declaration of default with respect to its line of credit
with Charter One. On August 24, 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 and late charges as well as
attorneys fees, costs and other amounts payable under the loan agreement.
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On June 18, 2010, the Company, along with Mr. Osborne, the Richard M. Osborne Trust, Great Plains
Exploration, LLC and Oz Gas Ltd. (companies owned by Mr. Osborne), entered into a Forbearance
Agreement with Charter One pursuant to which Charter One agreed to forbear from enforcing its
rights and remedies under the Companys fully-drawn $9.5
million line of credit as well as the other parties loan agreements until July 1, 2011, subject to
no further events of default including the payments due under the Forbearance Agreement. Pursuant
to the Forbearance Agreement and during the forbearance period, the parties must pay Charter One
$400,000 per month, including a $40,000 per month forbearance fee, until all amounts under the loan
agreements have been paid in full. See Note 5 Line of Credit and Long-Term Debt to the Companys
consolidated financial statements for more information.
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.
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 $1.4 million for the year ended
December 31, 2010, our fifth consecutive year of net losses. As of December 31, 2010, we reported
negative net working capital. We do not expect to be profitable in 2011. 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.
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 will likely 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.
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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 companys 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, 2010 and 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 may have also caused
investors to lose confidence in our reported financial information, which may have negatively
affected 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 the current market pricing is too low to allow for long-term gas purchase agreements and
that spot market sales are the only pricing available at this time. 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.
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; |
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| 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 to the estimated fair value. 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, 2010 and 2009, the Company was significantly affected
by lower market prices compared to the previous few years.
Our development operations require substantial capital expenditures.
The natural gas and oil industry is capital intensive. We have made, and if we are to continue
operations would have 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.
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We depend on a related 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. 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 Companys 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 and oil.
We sell all of our natural gas and oil production from the wells we operate 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.
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.
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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 and to repay our debt.
We cannot provide assurances that any necessary subsequent financing will be obtained. The
Companys 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. We have been
unable to raise needed capital and our growth and operations may have been impeded. In addition,
if we are able to raise additional capital by selling additional shares of common or preferred
stock, your percentage ownership in the Company will be diluted.
We have been unable to profitably operate 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 that we have been unable to earn a profit since then.
To date, we have failed to implement our business model and strategy successfully.
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.
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. 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. The Company purchases
well supplies from Big Oats Oilfield Supply Company, a company owned by Mr. Osborne. The Company
has borrowed money from Oz Gas Ltd., a company owned by Mr. Osborne, for payments made on the
Companys behalf to Charter One during 2010. The Companys wells are serviced by Great Plains
Exploration, LLC, also a company owned by Mr. Osborne and also the primary customer for natural gas
and oil production from the wells operated by the Company. Orwell Trumbull Pipeline Co, LLC owns
the gathering lines for the wells operated by the Company and is in turn owned by Mr. Osborne.
These arrangements create inherent conflicts of interest, although we believe that the terms we
receive from Mr. Osbornes 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.
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Item 2. | Properties |
The Companys 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, 2010, the Company had fifty-eight producing wells. 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 2010 and 2009 to federal authorities providing total proved net oil and natural gas reserves and
production.
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:
2010 | 2009 | |||||||
Net Production |
||||||||
Natural Gas (mcf) |
383,503 | 698,731 | ||||||
Oil (bbl) |
8,876 | 9,186 | ||||||
Natural Gas Equivalent (mcfe) |
436,757 | 753,847 | ||||||
Net Sales |
||||||||
Natural Gas |
$ | 1,647,951 | $ | 3,348,750 | ||||
Oil |
455,898 | 362,918 | ||||||
Total Sales |
$ | 2,103,849 | $ | 3,711,668 | ||||
Average Sale Price |
||||||||
Natural Gas (mcf) |
$ | 4.30 | $ | 4.79 | ||||
Oil (bbl) |
$ | 51.36 | $ | 39.51 | ||||
Natural Gas Equivalent (mcfe) |
$ | 4.82 | $ | 4.92 | ||||
Average Unit Costs per mcfe |
||||||||
Well operating expenses |
$ | 664,699 | $ | 687,182 | ||||
Average Cost/mcfe |
$ | 1.52 | $ | 0.91 |
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 Companys 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 2010 and 2009. The reserves calculated at December
31, 2010 and 2009 were impacted by lower pricing compared to the previous few years. 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 12-month average pricing for 2010 used in the above table for natural gas sold at the
Henry Hub, Louisiana was $4.376 and Ergon West Virginia Oil was $73.73. The 12-month average
pricing for 2009 used in the above table for natural gas sold at the Henry Hub, Louisiana was
$3.867 and West Texas Intermediate oil at Cushing, Oklahoma was $61.18. Additionally five wells
went online in 2009.
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The technical person responsible for review of our reserve estimates at Schlumberger Data and
Consulting Services 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. This firm does not 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.
2010 | 2009 | |||||||||||||||
Natural Gas | Oil | Natural Gas | Oil | |||||||||||||
(MCF) | (BBLs) | (MCF) | (BBLs) | |||||||||||||
Proved developed and undeveloped reserves: |
||||||||||||||||
Beginning of year |
2,512,800 | 28,800 | 2,146,600 | 17,500 | ||||||||||||
Revision of previous estimates,
extensions and other additions |
347,800 | 13,400 | 792,000 | 17,600 | ||||||||||||
Net reserve additions |
| | 272,900 | 2,900 | ||||||||||||
Production |
(383,500 | ) | (8,900 | ) | (698,700 | ) | (9,200 | ) | ||||||||
End of year |
2,477,100 | 33,300 | 2,512,800 | 28,800 | ||||||||||||
Proved developed reserves: |
||||||||||||||||
Beginning of year |
2,512,800 | 28,800 | 2,146,600 | 17,500 | ||||||||||||
End of year |
2,477,100 | 33,300 | 2,512,800 | 28,800 | ||||||||||||
Productive Wells. The following table presents the information relating to the productive
wells in which we owned a working interest during the years ended December 31, 2010 and 2009.
Productive wells consist of producing wells and wells capable of production. The Companys 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.
Gross | Net | |||||||
Productive Wells: |
||||||||
Operated |
53 | 51 | ||||||
Non-Operated Properties |
5 | 2 | ||||||
Total |
58 | 53 | ||||||
Drilling Activity. The Company began its drilling activity in 2006, concentrating its efforts on
development properties. During 2010, the Company ceased its drilling program. The Companys
drilling activity significantly declined in 2009 due to the lack of availability of cash resources.
The following table presents information relating to wells completed during the year ended 2009:
2009 | ||||||||
Gross | Net | |||||||
Gross wells: |
||||||||
Productive |
4 | 4 | ||||||
Dry |
1 | 1 | ||||||
Total |
5 | 5 | ||||||
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The decline in the overall market price over the last couple of years severely affected the viability of drilling, and our lower
cash flow makes it economically difficult to incur the high costs of drilling a well. The Company
anticipates commencing the drilling program as soon as cash resources are available for drilling.
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 |
2,558 | 2,558 | 2,745 | 2,745 |
Present Activities. As of December 31, 2010, the Companys 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 Companys management uses its discretion in determining amounts, coverage
limits and deductibility provisions of insurance, with a view to acquiring appropriate insurance on
the Companys investments at a reasonable cost and on suitable terms that are at or above the
current state requirement listed in State Senate Bill 165 which was passed in 2010.
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. |
As previously reported, on August 20, 2009, the Company received a declaration of default with
respect to its $9.5 million line of credit with RBS Citizens, N.A. dba Charter One. On August 24,
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 and late charges as well as attorneys fees, costs and other
amounts payable under the loan agreement.
On June 18, 2010, the Company, along with Mr. Osborne, the Richard M. Osborne Trust, Great Plains
Exploration, LLC and Oz Gas Ltd. (companies owned by Mr. Osborne), entered into a Forbearance
Agreement with Charter One pursuant to which Charter One agreed to forbear from enforcing its
rights and remedies under the Companys fully-drawn $9.5 million line of credit as well as the
other parties loan agreements until July 1, 2011, subject to no further events of default
including the payments due under the Forbearance Agreement. Pursuant to the Forbearance Agreement
and during the forbearance period, the parties must pay Charter One $400,000 per month, including a
$40,000 per month forbearance fee, until all amounts under the loan agreements have been paid in
full. See Note 5 Line of Credit and Long-Term Debt to the Companys consolidated financial
statements for more information.
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PART II
Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market Information. The Companys 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 Companys common stock for each quarter within the Companys last two fiscal years. Because
the Companys 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.
2010 | HIGH | LOW | ||||||
First Quarter |
$ | 0.15 | $ | 0.04 | ||||
Second Quarter |
0.06 | 0.03 | ||||||
Third Quarter |
0.06 | 0.03 | ||||||
Fourth Quarter |
0.10 | 0.03 |
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 |
Holders. As of February 18, 2011, the Companys shares of common stock were held of record by
approximately 1,595 shareholders. Since the Company has not recently mailed a proxy requesting a
reply from the stockholders, the number of additional stockholders owning stock held by brokerage
firms and other financial institutions is difficult to determine at this time.
Dividends. The Company paid no cash distributions to its stockholders during 2010 and 2009.
However, the Company declared and paid $108,000 in preferred stock dividends for each of the years
ended December 31, 2010 and 2009. The Company is restricted by its loan agreement with 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.
Issuance of Common Stock. The Company did not issue common stock to its directors or employees
during 2010 or 2009.
Issuance of Preferred Stock. The Company did not issue preferred shares during 2010 or 2009.
Purchases of Common Stock. The Company did not purchase any shares of its common stock in 2010 or
2009.
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Table of Contents
Item 7. | Managements 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 entered into the business of extracting and producing oil and natural gas products
during 2006. The Company currently has two segments: one that is drilling and operating natural
gas wells with oil as a by-product in Northeast Ohio and one composed of the remaining self-storage
facility located in Painesville, Ohio. The Company cannot guarantee success under its 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. To date, the Companys oil and gas operations have not been
profitable. The decline in the overall market price of natural gas over the last couple of years severely affected the viability
of any future drilling because our lower cash flow makes it economically difficult to incur the
high costs of drilling a well. Additionally, our production will continue to decline if the
Company is not drilling any new wells. Although the oil production is profitable with the higher
oil market pricing, this revenue is not enough to offset the lower natural gas production and
operating expenses.
Without additional wells being drilled and the Companys substantial debt financing, the Company
will continue to show losses and be unprofitable. Therefore, the Company is concerned about its
viability as a going concern.
As previously disclosed in the Companys Form 8-K filed on June 25, 2010 with the Securities and
Exchange Commission, on June 18, 2010, the Company, along with Mr. Osborne, the Richard M. Osborne
Trust, Great Plains and Oz Gas Ltd. (companies owned by Mr. Osborne), have entered into a
Forbearance Agreement with Charter One pursuant to which Charter One agreed to forbear from
enforcing its rights and remedies under the Companys fully-drawn $9.5 million line of credit as
well as the other parties loan agreements until July 1, 2011, subject to no further events of
default including the payments due under the Forbearance Agreement. Pursuant to the Forbearance
Agreement and during the forbearance period, the parties must pay Charter One $400,000 per month,
including a $40,000 per month forbearance fee, until all amounts under the loan agreements have
been paid in full. At December 31, 2010, the Loan Parties were in compliance with the required
payments. See Note 5 Line of Credit and Long-Term Debt to the Companys consolidated financial
statements for more information.
Discussions with Charter One are ongoing and there is no certainty that these discussions will
result in satisfactory terms of a revised loan agreement or a revised loan agreement at all. If
Charter One demands repayment of the outstanding amounts payable at the end of the forbearance
period, the Company does not have the available cash to repay the line of credit and will need
financing from other sources to repay Charter One. If alternative financing is not available, the
Company will default and may be unable to continue operations.
During August 2009, Liberty Self Stor, LTD defaulted on its $1.2 million loan from First Merit
Bank, N.A. On May 11, 2010, Liberty Self Stor, LTD and First Merit Bank signed a loan
modification agreement which waived the prior defaults. The terms of the mortgage include a five
year term, maturing on June 1, 2014, with a ten year amortization period at a variable rate of the
30 day LIBOR plus 250 basis points. Monthly payments include principal of $10,370 plus interest.
Critical Accounting Policies
The Companys 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 companys financial condition and
results, and requires managements 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.
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Table of Contents
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. The well in Lucky Brothers is accounted for as a joint interest venture.
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 and related party
accounting treatments. At December 31, 2010 and 2009, the Companys credit evaluation indicated
that it has no need for an allowance for possible losses and had no such losses in 2010 and 2009.
The Companys 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. Approximately, $2,000 of bad debt expense was incurred in 2010 and 2009.
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. This income approach to determine the fair value of
these assets is based on level 3 inputs, including estimated reserve
quantities, gas prices, operating costs and discount rates. 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 propertys estimated fair market value would be recorded and an impairment
loss would be recognized. The Company wrote off $-0- in 2010 and the costs related to one
well amounting to $145,444 in 2009.
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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 Company plugged no wells in 2010 and two wells during
2009.
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
Companys natural gas production through the related partys pipeline and include this natural gas
with the related partys natural gas in order to fulfill production volume contracts they currently
have in place. The Company utilizes the sales method to account for gas production volume
imbalances. Under this method, revenue is recognized only when gas is produced and sold on the
Companys behalf. The Company had no material gas imbalances at December 31, 2010.
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 managements 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 Companys 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, 2010 or 2009, 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 after 2007 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 Companys ability to generate sufficient amounts of cash to meet its
financial commitments. The Companys cash flow from operating and financing activities will not be
sufficient to meet its anticipated operating requirements in the foreseeable future.
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 be available to meet these continuing costs, or if capital is available, it may not be on
terms acceptable to us.
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Table of Contents
The Companys $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.
On June 18, 2010, the Company, along with Richard M. Osborne, the Trust, Great Plains and Oz Gas
Ltd. (companies owned by Mr. Osborne), have entered into a Forbearance Agreement with Charter One
pursuant to which Charter One will forbear from enforcing its rights and remedies under the
Companys line of credit as well as the other parties loan agreements until July 1, 2011, subject
to no further events of default including the payments due under the Forbearance Agreement.
The Company, Mr. Osborne, the Trust, Great Plains and Oz Gas are collectively referred to in the
Forbearance Agreement and herein as the Loan Parties.
Under the Forbearance Agreement, Charter Ones agreement to forbear is conditioned upon and subject
to the following conditions:
| Payment by the Loan Parties of a forbearance fee of $40,000 per month during the forbearance period; |
| No material adverse change in the condition of the Loan Parties; |
| An assignment and grant of a security interest by the Company and Great Plains of each of their ownership interests in the Alpha and Panzica wells; |
| A pledge by the Loan Parties of their ownership interests in Kykuit Resources LLC ; and |
| A pledge by Mr. Osborne of not less than 800,000 shares of common stock of Gas Natural Inc. with such stock having a market value of not less than $9.6 million pursuant to a pledge agreement. |
In addition, commencing July 1, 2010 and each month thereafter until all amounts under the
judgments and loan agreements have been paid in full, the Loan Parties shall pay Charter One
$400,000, including the $40,000 forbearance fee. The Company had previously felt they would pay
one third of the $400,000, but due to lack of cash, they have decided to accrue interest and one
third of the $40,000 monthly fee and legal fees. The monthly $400,000 is being paid by the other
Loan Parties. Such payments by the Loan Parties shall be applied first to Charter Ones fees and
expenses, second to accrued but unpaid interest due under the judgments, and third to principal
amounts due under the judgments. Charter One has applied a default rate to the loan from January
4, 2010 thru June 18, 2010. The Company does not agree with the default rate and therefore has not
booked approximately $171,000 of additional interest expense. It is the Companys position that
the interest for the period from judgment date to forbearance date should remain at the original
contract rate at the date of judgment, based upon the per diem interest amount expressly stated in
that judgment. Attorneys for the Company also support that position and have so stated in letters
to Charter One and for purposes of the annual audit. Charter One contends that the judgments will
bear interest at LIBOR plus 1.75% with a LIBOR floor of 3.00%. The Company believes that there is
an interest rate cap of 3.00%. The parties are in discussions regarding the applicable interest
rate. If the Loan Parties repay $10 million and if after application of such repayment the
outstanding balance of the judgments does not exceed 65% of the current producing reserve value (as
that term is defined in the Loan Agreements) of the Company, Great Plains and Oz Gas, then the
pledge of Mr. Osbornes Kykuit interests and his Gas Natural Inc. shares shall be released. In
addition, the Company must deposit all proceeds of its operations into accounts maintained by
Charter One but during the forbearance period Charter One will not take any action to set off funds
in any such account.
The forbearance period is effective until July 1, 2011, subject to the earlier termination upon the
occurrence of any events of default by any of the Loan Parties, including non-payment of any
amounts due by any of the Loan Parties under the Forbearance Agreement. See Note 5 Line of Credit
and Long-Term Debt to the Companys consolidated financial statements for more information.
Discussions with Charter One are ongoing but there is no certainty that these discussions will
result in satisfactory terms for a revised loan agreement.
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Because the Company does not have the available cash to repay the line of credit, if the required
payments are not made by the Company or any of the other Loan Parties, or other events of default
occur, under the Forbearance Agreement or if prior to the end of the forbearance period the Company
is unsuccessful in refinancing its line of credit with Charter One or if the Company is
unsuccessful in obtaining substitute financing, there is substantial doubt about the Companys
ability to continue as a going concern.
During August 2009, Liberty Self Stor, LTD defaulted on its $1.2 million loan from First Merit
Bank, N.A.
On May 11, 2010, Liberty and First Merit signed a loan modification agreement which waived the
prior defaults and continued the terms set forth under the original loan commitment letter dated
March 25, 2009 for the Painesville facility. Those terms include a five year term, maturing on
June 1, 2014, with a ten year amortization period at a variable rate of the 30 day LIBOR plus 250
basis points. Monthly payments include principal of $10,370 plus interest.
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 Companys current assets decreased $46,487 or 8.3%, to $515,640 at December 31, 2010 from
$562,127 at December 31, 2009. Current assets at December 31, 2010 were lower than at December 31,
2009 largely due to the decrease in accounts receivable.
The Companys current liabilities decreased $955,755, or 8.5% to $10,306,221 at December 31, 2010,
from $11,261,976 at December 31, 2009. The decrease is primarily due to moving the Painesville
property loan from current liabilities to long term debt after settling with First Merit Bank N.A..
The Company had a positive cash flow from operating activities of $426,710 for the year ended
December 31, 2010 compared to a positive cash flow of $865,896 for the year ended December 31,
2009. The decreased positive cash flow is a result of less cash collected on accounts receivable
in 2010 as compared to 2009, net of fewer accounts payable paid in 2010 than in 2009.
The Company had a negative cash flow from investing activities of $223,160 for the year ended
December 31, 2010 compared to a negative cash flow of $696,252 for the year ended December 31,
2009. The year ended 2010 improved compared to 2009 largely due to reduced cash investments in
Kykuit and in oil and natural gas wells, net of additional property and equipment purchases in 2010
as compared to 2009.
The Company had a negative cash flow from financing activities of $205,606 for the year ended
December 31, 2010 compared to a negative cash flow of $225,873 for the year ended December 31,
2009. The negative cash flow for the year ended December 31, 2010 decreased largely due to the
receipt of loan funds for a new vehicle.
The following table sets forth the maturity dates and the total of the Companys long-term debt and
line of credit as of December 31, 2010, as well as future commitments under the Companys office
space lease.
Payments Due by Period | ||||||||||||||||
Less than 1 | ||||||||||||||||
Contractual Obligations | Year | 1-3 years | 4-5 years | Total | ||||||||||||
Long-Term Debt |
$ | 136,812 | $ | 274,709 | $ | 652,884 | $ | 1,064,405 | ||||||||
Line of Credit |
9,480,187 | | | 9,480,187 | ||||||||||||
Operating Lease* |
24,000 | 6,000 | | 30,000 | ||||||||||||
Total Contractual
Cash Obligations |
$ | 9,640,999 | $ | 280,709 | $ | 652,884 | $ | 10,574,592 | ||||||||
* | 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.
21
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Material Changes in Results of Operations
Revenues from Operations
Total revenues from operations decreased $1,408,463, or 34.8%, to $2,636,782 for the year ended
December 31, 2010, compared to $4,045,245 for the same period in 2009. The decrease is due to
lower natural gas production, since new wells are not being drilled and production from existing
wells is decreasing, and lower contract pricing in 2010, offset by the real estate property tax
refund received.
Expenses from Operations
Total operating expenses decreased $2,720,865, or 40.4%, to $4,020,625 for the year ended December
31, 2010 from $6,741,490 for the same period in 2009. This decrease is primarily attributable to a
decrease in depreciation, depletion and amortization and impairment expenses on our wells and a
decrease in loss from our unconsolidated affiliate compared to the same period in 2009.
Interest expense increased $24,744, or 5.5%, to $473,302 for the year ended December 31, 2010
compared to $448,558 for the same period in 2009. Interest expense was slightly higher in 2010 due
to the higher default rate being charged during part of the year, while 2009 was also high due to
eight months of charges for a swap agreement which matured in August 2009.
Accretion expense for the year ended December 31, 2010 was $24,580 compared to $45,905 for the same
period in 2009.
Oil and natural gas production costs decreased $22,483, or 3.3%, to $664,699 for the year ended
December 31, 2010 compared to $687,182 for the same period in 2009. The decrease is primarily the
result of a decrease in water hauling, service rig rental and well repairs and maintenance,
partially offset by higher payments and accruals for county production taxes and telemeter charges.
Self-storage property operating expenses increased $23,985, or 20.9%, to $138,524 for the year
ended December 31, 2010 compared to $114,539 for the same period in 2009. The increase is largely
due to repairs, utility payments and snowplowing expenses.
Legal and professional fees decreased $11,196, or 3.0%, to $356,658 for the year ended December 31,
2010 compared to $367,854 for the same period in 2009. Although the legal and professional fees
decreased for the year ended December 31, 2010 compared to the same period in 2009, both years are
significantly higher than is usual for the Company. The large expenses are directly related to the
forbearance settlement on June 18, 2010 with RBS Citizens, N.A. whereby the Company has had to pay
its attorney expenses and the banks as part of the court settlement.
Property taxes and insurance expenses decreased $61,262, or 44.6%, to $76,230 for the year ended
December 31, 2010 compared to $137,492 for the same period in 2009. The decrease is due to a
reduction in the property values, and consequently the property taxes, on two parcels at the
Painesville storage facility and the non-renewal of the Directors and Officers insurance plan
during 2009. The reduction in property values and property taxes resulted from a reassessment
requested by the Company.
General and administrative expenses decreased $157,959, or 20.7%, to $605,023 for the year ended
December 31, 2010 compared to $762,982 for the same period in 2009. The decrease in general and
administrative expenses for the year ended December 31, 2010 is largely due to a decrease in
employees and benefits, director meeting expense, and fewer expenditures in most categories.
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Loss from unconsolidated affiliate expense decreased $474,908 for the year ended December 31, 2010
compared to for the same period in 2009. The Company recorded impairment losses of $143,197 and
$588,309 in 2010 and 2009, respectively.
Impairment and dry well costs from operations for the year ended December 31, 2010 was $0 compared
to $145,444 for one well during the same period in 2009. 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 $1,875,017, or 55.5%, to $1,506,097 for
the year ended December 31, 2010 compared to $3,381,114 for the same period in 2009. The current
depletion expense is lower than the same period in 2009 largely due to the reduction in the
Companys depletable base from prior year expense.
Net Loss
The Company had a net loss from operations of $1,383,843, for the year ended December 31, 2010
compared to a net loss of $2,696,245 for the same period in 2009. The large reduction in the net
loss was due to decreased depreciation, depletion, and amortization expenses, that were partially
offset by a reduction in production revenue; decreased impairment loss on Kykuit; a refund of real
estate taxes in 2010; and lower operating expenses as compared to 2009.
Net Loss attributable to Non-Controlling Interest
The Company had net income attributable to its non-controlling interest in LSS I of $103,972 for
the year ended December 31, 2010 and a net loss of $81,544 for the same period in 2009. Although
LSS I has usually recorded a loss in prior periods, during the year ended December 31, 2010, it had
income due to the decrease in the property values on the Painesville property in which a refund
payment was received.
Net Loss attributable to John D. Oil and Gas Company
The Company had a net loss attributable to John D. interests of $1,487,815 for the year ended
December 31, 2010 compared to a net loss of $2,614,701 for the same period in 2009. The loss in
2010 is less compared to 2009 largely due to reduced operating expenses and depletion expense,
while 2010 also had reduced natural gas production revenue from decreased production volumes and
lower pricing than 2009.
Interest Rate Risk
Interest rate risk is the risk that interest rates will increase, which will result in an increase
in the Companys interest expense on its variable rate loans.
The loan on the Painesville facility and the Charter One line of credit, totaling approximately
$10.5 million, are tied to variable interest rates. If the Companys interest rates on the loans
were to increase by 1% per year, the Companys interest expense would increase approximately
$105,000 on an annual basis. The Companys line of credit was previously fixed through the use of
an interest rate swap until August 2009 which had minimized the risk. Additionally the line of
credit interest rate is fixed at 4.75% for one year until July 2011. However if interest rates
increase, the Companys results of operations may be materially and adversely affected.
Off-Balance Sheet Arrangements
The Company had one off-balance sheet arrangement at December 31, 2010, 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 2010 and 2009, the
Company invested cash of $93,440 and $514,414, respectively, in Kykuit as part of their cash calls
and to make up the difference for other members not investing.
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Forward-Looking Statements
Statements that are not historical facts, including statements about the Companys 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:
| 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, managements
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.
At December 31, 2010 and 2009, the Company had net operating loss carry forwards (NOLS) for future
years of approximately $16.6 million and $15.9 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.
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Recently Issued Accounting Pronouncements
Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses
In July 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. This ASU amends disclosure requirements with
respect to the credit quality of financing receivables and the related allowance for credit losses.
Entities will be required to disaggregate by portfolio segment or class certain existing
disclosures and provide certain new disclosures about their financing receivables and related
allowance for credit losses. Disclosures to be made as of the end of a reporting period are
effective for the Companys reporting period ending December 31, 2010; and the disclosures about
activity that occurs during a reporting period will be effective for the Companys reporting period
ending March 31, 2011. Since this ASU will only amend disclosure requirements, not accounting
practice, the adoption of this ASU did not have a material impact on the Companys 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 Companys Report of Independent Registered Public Accounting Firm and Consolidated Financial
Statements are filed as part of this report.
Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of December 31, 2010, the Companys principal executive officer and principal financial
officer, evaluated the effectiveness of the design and operation of the Companys 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 Companys disclosure controls and procedures were not effective in light of the
identification of a material weakness in the Companys internal controls over financial reporting
as discussed below.
Managements 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 Companys 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 registrants 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, 2010 due to
control deficiencies that constitute a material weakness.
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In connection with managements 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, 2010:
The Companys 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, calculations 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 Companys 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
Companys board members for reasonableness. All unexpected results are investigated.
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
Companys management believes that the financial statements included in this Annual Report on Form
10-K fairly present, in all material respects, the Companys financial condition, results of
operations and cash flows for the periods presented in conformity with U.S. generally accepted
accounting principles.
Changes in Internal Control over Financial Reporting
The Company has reduced its office staff which hampers the Companys 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 Companys registered public
accounting firm regarding internal control over financial reporting. Managements report is not
subject to attestation by the Companys registered public accounting firm pursuant to rules of the
Securities and Exchange Commission that require the Company to provide only managements report in
this annual report.
Item 9B. | Other Information |
None.
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PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
Directors and Executive Officers. Below are the names, ages, positions and certain other
information concerning our current directors and executive officers:
Richard M. Osborne, 65, has been chairman, chief executive officer and a director of John D. Oil
and Gas since September 1999. He has been a director since 2003, chairman of the board since 2005
and chief executive officer since November 2007 of Gas Natural Inc., a publicly-held public utility
company. He is the president and chief executive officer of OsAir, Inc., a company he founded in
1963, which operates as a property developer and manufacturer of industrial gases for pipeline
delivery. From 2006 to February 2009 he was a director of Corning Natural Gas Corporation, a
publicly-held public utility company in Corning, New York and from September 2008 to January 2009
he was a director of PVF Capital Corp., a publicly-held holding company for Park View Federal
Savings Bank in Solon, Ohio. Richard Osbornes background as chairman and chief executive officer
of various public companies and many years of experience owning and managing companies in energy
and utility related industries provides the board with invaluable management and operational
direction.
Gregory J. Osborne, 32, has been president and chief operating officer of John D. Oil and Gas since
April 2006 and a director since February 2006. From 2003 until joining John D. Oil and Gas, he was
president of Great Plains Exploration LLC, an oil and gas exploration company based in Mentor, Ohio
that owns and operates oil and gas wells. From 2001 until joining Great Plains, he served as
executive vice president of Orwell Natural Gas Company, a regulated gas public utility company
operating in Ohio. He is a director of Gas Natural Inc., a publicly-held public utility company.
He is the son of Richard Osborne, our chairman and chief executive officer. Gregory Osbornes
managerial experience and service on the board of various energy related companies provides the
board with a wide range of industry specific knowledge.
Thomas J. Smith, 66, has been a director of John D. Oil and Gas since 1998. In November 2007, he
was appointed vice president and chief financial officer of Gas Natural Inc., a publicly-held
public utility company. He also served as Gas Natural Inc.s interim president from August 2007 to
November 2007 and has been a director of Gas Natural Inc. since 2003. From 1999 to 2006, he served
as our president and chief operating officer. Mr. Smiths financial and disclosure experience
gained as the chief financial officer of publicly-held companies, as well as his experience as a
director of energy and utility related companies provides extensive specialized knowledge and
expertise to our board.
Carolyn Coatoam, 65, was appointed chief financial officer and assistant secretary of John D. Oil
and Gas on December 31, 2010. Ms. Coatoam has been employed as a consultant to Richard M. Osborne,
the Companys Chief Executive Officer, since June 2009. From 1996 to 2009, she worked for the
consulting firm of Niche Systems & Support, Inc., on an assignment to a publicly-held distributor
of industrial products. Ms. Coatoam began her career with Deloitte & Touche. Subsequently, she
served as the chief financial officer for Mr. Concrete Inc. and Coatoam & Co. Inc. until 2005. She
is an inactive certified public accountant.
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of the Securities Exchange
Act of 1934 requires our directors and executive officers, and persons who own more than 10% of our
common stock, to file with the Securities and Exchange Commission (SEC) initial reports of
ownership and reports of changes in ownership of our common stock. Our officers, directors and
greater than 10% stockholders are required by the SEC to furnish us with copies of all Section
16(a) forms they file. Based solely on review of copies of reports furnished to us or written
representations that no reports were required, we believe that all Section 16(a) filing
requirements were met timely in 2010.
Code of Business Conduct and Ethics. The Company has adopted a code of conduct and ethics that
applies to all officers, directors and employees of John D. Oil and Gas, including our principal
executive officer, principal financial officer, principal accounting officer, and any person
performing similar functions. A copy of the code is available on our website at
www.johndoilandgas.com. Any amendments or waivers to our code of conduct and ethics that
apply to our chief executive officer or chief financial officer will be promptly disclosed to our
stockholders.
Audit Committee. Following the resignations of the audit committee members and most of the
remaining directors on August 26, 2009, the Company was left with only three directors (Richard M.
Osborne, Gregory J. Osborne and Thomas J. Smith), none of whom are independent pursuant to
applicable laws and regulations and listing standards of NASDAQ. Currently, our board does not
have a separately-designated audit committee and the entire board acts as the audit committee. Mr.
Smith would qualify as an audit committee financial expert but he is not independent.
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Table of Contents
Item 11. | Executive Compensation |
Director and Executive Officer Compensation Decisions. Our chairman and chief executive officer
generally determines the compensation for our executive officers and compensation is then approved
by the full board. We do not have a compensation committee. Our board believes a compensation
committee is not necessary because of the level and type of compensation paid to our executive
officers and because executive officer compensation is approved by our full board. The
compensation of our outside directors was also approved by our full board. The board also
administers our Amended and Restated 1999 Stock Option and Award Plan.
Summary Compensation Table. The following table summarizes the compensation paid by us to our
chairman and chief executive officer and any other executive officer receiving more than $100,000
in total compensation annually. We do not believe that our compensation practices are reasonably
likely to have a material adverse effect on the Company.
All Other | ||||||||||||||||||||
Name and | Salary | Bonus | Compensation | Total | ||||||||||||||||
Principal Position | Year | ($) | ($) | ($) | ($) | |||||||||||||||
Richard M. Osborne, Chairman and Chief Executive Officer* |
2010 | | | | | |||||||||||||||
2009 | | | | | ||||||||||||||||
Gregory J. Osborne, President and Chief Operating Officer |
2010 | 110,000 | | | 110,000 | |||||||||||||||
2009 | 110,000 | 2,000 | | 112,000 |
* | Richard Osborne does not receive compensation for serving as our chairman and chief executive officer. |
Executive Officer Outstanding Equity Awards at December 31, 2010. None of our executive officers
had any outstanding equity awards at December 31, 2010.
Executive Officer Employment Agreements. None of our executive officers has an employment
agreement with us.
Director Compensation. Richard M. Osborne, Gregory J. Osborne and Thomas J. Smith did not receive
compensation for serving on our board during 2010.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The following table sets forth the amount and nature of the beneficial ownership of our common
stock as of March 29, 2010 by each person known by us to own more than 5% of the outstanding
shares, each director, each executive officer in our summary compensation table, and all our
current directors and executive officers as a group.
Beneficial Ownership(1) | ||||||||||||||||
Name and Address(2) | Shares | Convertible Securities | Total | Percent | ||||||||||||
Richard M. Osborne |
3,654,541 | (3) | 1,021,966 | (4) | 4,676,507 | (5) | 46.4 | % | ||||||||
Richard A. Bonner |
500,000 | (6) | 250,000 | (7) | 750,000 | (6)(7) | 8.0 | % | ||||||||
PO Box 1359 Middlefield, Ohio 44062 |
||||||||||||||||
S&A Investments |
| 500,000 | (8) | 500,000 | (8) | 5.2 | % | |||||||||
10474 Broadview Road Broadview Heights, Ohio 44147 |
||||||||||||||||
Gregory J. Osborne |
151,000 | | 151,000 | 1.7 | % | |||||||||||
Thomas J. Smith |
62,000 | 6,852 | (9) | 68,852 | (9) | * | ||||||||||
All directors and officers as a group (4 individuals) |
* | less than 1% |
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(1) | Unless otherwise indicated, we believe that all persons named in the table have sole investment and voting power over the shares of common stock owned. | |
(2) | Unless otherwise indicated, the address of each of the beneficial owners identified is c/o John D. Oil and Gas Company, 8500 Station Street, Suite 345, Mentor, Ohio 44060. | |
(3) | Includes (1) 3,503,541 shares owned by the Richard M. Osborne Trust, an Ohio trust of which Richard Osborne is the sole trustee, and (2) 151,000 shares owned by Gregory Osborne which Richard Osborne has the right to vote. | |
(4) | Includes (1) 5,188,528 limited partnership interests of LSS I Limited Partnership, a Delaware limited partnership, owned by Richard Osborne that are presently convertible into 714,537 shares of our common stock, (2) 1,869,292 limited partnership interests of LSS I owned by Retirement Management Company, of which Richard Osborne is the sole stockholder, that are presently convertible into 257,429 shares of our common stock and (3) 50,000 warrants to purchase 50,000 shares of common stock that are presently exercisable. | |
(5) | Includes (1) 3,503,541 shares owned by the Richard M. Osborne Trust, (2) 151,000 shares owned by Gregory Osborne which Richard Osborne has the right to vote, (3) limited partnership interests of LSS I owned by Richard Osborne that are presently convertible into 714,537 shares of our common stock, (4) limited partnership interests of LSS I owned by Retirement Management Company that are presently convertible into 257,429 shares of our common stock, and (5) warrants to purchase 50,000 shares of common stock that are presently exercisable. | |
(6) | Based solely on information in the Schedule 13D filed with the SEC on May 11, 2006. | |
(7) | Includes 250 shares of our Series A convertible preferred stock that are presently convertible into 250,000 shares of our common stock. | |
(8) | Includes 500 shares of our Series A convertible preferred stock that are presently convertible into 500,000 shares of our common stock. Based solely on information in the Schedule 13D filed with the SEC on February 21, 2007. | |
(9) | Includes 49,753 limited partnership interests of LSS I owned by Mr. Smith that are presently convertible into 6,852 shares of our common stock. |
Equity Compensation Plan Information
The following table summarizes information, as of December 31, 2010, relating to our Amended and
Restated 1999 Stock Option and Award Plan. The plan provides for the issuance of up to 300,000
shares of common stock to key employees, officers and directors. As of December 31, 2010, there
were 35,000 shares of restricted stock and no options outstanding and the maximum number of shares
available for future grant under the plan was 265,000 shares. Under the plan, the option price may
not be less than 100% of the common stock fair market value on the date of grant (in the event of
incentive stock options, 110% of the fair market value if the employee owns more than 10% of our
outstanding common stock).
Number of | ||||||||||||
Number of | securities | |||||||||||
securities | Weighted- | remaining available | ||||||||||
to be issued upon | average | for future issuance | ||||||||||
exercise of | exercise price of | under equity | ||||||||||
outstanding | outstanding | compensation plans | ||||||||||
options, warrants | options, warrants | (excluding securities | ||||||||||
Plan category | and rights | and rights | reflected in column (a)) | |||||||||
Equity compensation plans approved by security holders |
35,000 | $ | 0.65 | 265,000 | ||||||||
Equity compensation plans not approved by security holders |
0 | | 0 | |||||||||
Total |
35,000 | $ | 0.65 | 265,000 |
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Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Richard M. Osborne, our chairman and chief executive officer, is the sole manager of Liberty
Self-Stor II, Ltd., an Ohio limited liability company, which owns a truck rental business that
provides trucks for short-term rental to the general public, including tenants of our self-storage
facility, and provides for the retail sale of locks, boxes, packing materials, propane gas and
related merchandise at the self-storage facility. John D. Oil and Gas has a cost sharing agreement
with Liberty Self-Stor II with respect to the sharing of employees and space at the offices of the
self-storage facility for the benefit of both companies. As of December 31, 2010, Liberty
Self-Stor II owed us $3,806 associated with these transactions, as well as for cash advances
between the companies.
On December 28, 1999, our stockholders approved the lease of our executive offices from OsAir,
Inc., a company owned by Mr. Osborne. The lease had a three year term maturing on March 31, 2009
for $1,350 per month. The lease was extended on March 25, 2009 for a three year term at $2,000 per
month. As of December 31, 2010, $24,000 of this expense is included in our general and
administrative expenses.
On September 28, 2006, the Company entered into an unsecured loan agreement for a line of credit
with a one year term with Mr. Osborne and Charter One Bank for up to $5.0 million dollars in total
borrowings with interest at a rate of 1.75% over LIBOR adjusted monthly. The Charter One liability
was jointly loaned, so the Company and Mr. Osborne were each liable for the debt of the other.
The loan was subsequently revised several times until on March 28, 2008, the Company entered into
the First Amended and Restated Loan and Security Agreement (the Loan Agreement) between the
Company, Mr. Osborne (the Company and Mr. Osborne together, the Borrowers), and Charter One. The
Loan Agreement extended the maturity date to August 1, 2009, continuing with the original interest
rate calculation of 1.75% over LIBOR adjusted monthly. Under the agreement, only the Company could
borrow on the line of credit when any amounts are paid down against the $9.5 million outstanding on
the loan. The Company and Great Plains Exploration LLC, a company owned by Mr. Osborne (Great
Plains), agreed that the related party loan of $3.8 million from Great Plains was satisfied in
full and terminated upon the Companys entry into the new Charter One loan and assumption of the
$3.8 million portion of the line of credit drawn by Mr. Osborne. Therefore, the Company had $9.5
million in outstanding debt to Charter One and $0 in outstanding debt to Great Plains at March 31,
2008. As part of this loan agreement, Mr. Osborne has pledged several real estate properties that
he personally owns, to provide sufficient collateral allowing the Company to enter into the loan
agreement. The Company did not meet the reserve collateral requirements for a $9.5 million loan
without additional collateral.
The Companys $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 and Mr. Osborne, related
to the $9.5 million line of credit. The average balance during 2010 was $9.5 million and the
weighted average interest rate was 3.55%. The average balance during 2009 was $9.5 million and the
weighted average interest rate was 2.12%.
On June 18, 2010, the Company, Mr. Osborne, the Richard M. Osborne Trust (the Trust), Great
Plains, and Oz Gas, Ltd. (companies owned by Mr. Osborne) entered into a Forbearance Agreement with
Charter One regarding the Companys $9.5 million line of credit under the Loan Agreement and
regarding the $25.0 million loan agreement between Great Plains, Oz Gas and Mr. Osborne and Charter
One, dated August 2, 2007 (together, the Loan Agreements). The Company, Mr. Osborne, the Trust,
Great Plains and Oz Gas are collectively referred to in the Forbearance Agreement and herein as the
Loan Parties.
Pursuant to the Forbearance Agreement and during the forbearance period, Charter One agreed to,
among other things, forbear from exercising its rights and remedies arising out of the judgments
and the Loan Agreements and to stay any action on its motion for the appointment of a receiver.
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Under the Forbearance Agreement, Charter Ones agreement to forbear is conditioned upon and subject
to the following conditions:
| Payment by the Loan Parties of a forbearance fee of $40,000 per month during the forbearance period; |
| No material adverse change in the condition of the Loan Parties; |
| An assignment and grant of a security interest by the Company and Great Plains Exploration of each of their ownership interests in the Alpha and Panzica wells; |
| A pledge by the Loan Parties of their ownership interests in Kykuit Resources LLC; and |
| A pledge by Mr. Osborne of not less than 800,000 shares of common stock of Gas Natural Inc. with such stock having a market value of not less than $9.6 million pursuant to a pledge agreement. |
In addition, commencing July 1, 2010 and each month thereafter until all amounts under the
judgments and loan agreements have been paid in full, the Loan Parties shall pay Charter One
$400,000, including the $40,000 forbearance fee. The Company had previously planned to pay one
third of the $400,000, but due to lack of cash, they have decided to accrue interest and one third
of the $40,000 monthly fee and legal fees. The monthly $400,000 is being paid by the other Loan
Parties. Such payments by the Loan Parties shall be applied first to Charter Ones fees and
expenses, second to accrued but unpaid interest due under the judgments, and third to principal
amounts due under the judgments. Charter One contends that the judgments will bear interest at
LIBOR plus 1.75% with a LIBOR floor of 3.00%. The Company believes that there is an interest rate
cap of 3.00%. The parties are in discussions regarding the applicable interest rate. If the Loan
Parties repay $10 million and if after application of such repayment the outstanding balance of the
judgments does not exceed 65% of the current producing reserve value (as that term is defined in
the Loan Agreements) of the Company, Great Plains and Oz Gas, then the pledge of Mr. Osbornes
Kykuit interests and his Gas Natural Inc. shares shall be released. In addition, the Company must
deposit all proceeds of its operations into accounts maintained by Charter One but during the
forbearance period Charter One will not take any action to set off funds in any such account.
The forbearance period is effective until July 1, 2011, subject to the earlier termination upon the
occurrence of any events of default by any of the Loan Parties, including non-payment of any
amounts due by any of the Loan Parties under the Forbearance Agreement.
Because the Company does not have the available cash to repay the line of credit, if the required
payments are not made by the Company or any of other Loan Parties, or other events of default
occur, under the Forbearance Agreement or if prior to the end of the forbearance period the Company
is unsuccessful in refinancing the line of credit with Charter One or if the Company is
unsuccessful in obtaining substitute financing, there is substantial doubt about the Companys
ability to continue as a going concern.
Discussions with Charter One are ongoing but there is no certainty that these discussions will
result in satisfactory terms of a revised loan agreement or a revised loan agreement at all. If
Charter One demands repayment of the outstanding amounts payable at the end of the forbearance
period, the Company does not have the available cash to repay the line of credit and will need
financing from other sources to repay Charter One.
Effective January 1, 2006, the Company entered into a contract with Great Plains for well
operations and sale of natural gas and oil production, net of pipeline costs. The term of the
agreement was one year from the effective date. It was extended as of January 1, 2007 and shall be
extended for consecutive one year periods unless terminated earlier.
The Company is a fifty percent partner and the operating manager of Lucky Brothers LLC, a company
whose other partners are almost all related to Mr. Osborne. The partnership owned one well at
December 31, 2010. The purpose of Lucky Brothers LLC is to engage in a joint venture for drilling
wells. The Company has invested $174,392 in well tangibles and intangibles at December 31, 2010
and 2009.
The Company purchases well supplies from Big Oats Oilfield Supply Company, a company owned by Mr.
Osborne.
At December 31, 2010, the Company had a $12,000 invoice outstanding to Oz Gas Ltd., a company owned
by Mr. Osborne, for payments made on the Companys behalf to Charter One during 2010.
The Company paid Orwell Trumbull Pipeline, LLC, a company owned by Mr. Osborne, for telemeter
charges in 2010.
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On August 3, 2007, Kykuit Resources, LLC purchased from Hemus, Ltd. a 75% interest in certain oil,
natural gas and mineral rights located in the Montana Breaks area of Montana. At the same time,
Kykuit and Hemus executed a joint venture development agreement pursuant to which Kykuit agreed to
develop and operate all of their joint leasehold interests in the Montana Breaks. On May 1, 2008,
Kykuit entered into an assignment pursuant to which Hemus assigned all of its remaining rights,
title and interest in certain oil and natural gas and mineral leases located in Montana to Kykuit
for $250,000. John D. Oil and Gas is the managing member of Kykuit and currently owns 21.79% of
Kykuit. The current investment by John D. Oil and Gas in this venture was $736,953 at December 31,
2010.
Richard Osborne owns interests in Kykuit. Gas Natural, Inc., a publicly-held public utility
company of which Richard Osborne is the chairman and chief executive officer and a significant
stockholder, also owns an interest in Kykuit. Thomas J. Smith, a director of John D. Oil and Gas,
is also vice president, chief financial officer and a director of Gas Natural, Inc.
On February 28, 2006, we entered into a registration rights agreement with the Richard M. Osborne
Trust, of which Richard Osborne is the sole trustee, and any other stockholders who become parties
to the agreement pursuant to its terms, which provides, among other things, certain piggyback
registration rights to the stockholders who are parties to the agreement and that we will file a
registration statement with the SEC upon the demand of the Osborne Trust.
The following tables summarize the related party transactions for accounts receivable of oil and
natural gas production, capitalized costs for wells, outstanding accounts payable, revenues
received and payments paid for expenses to related parties for the periods indicated. The accounts
receivable from various companies owned by Mr. Osborne in the accompanying consolidated balance
sheets represent amounts owed to the Company for minor cost sharing transactions and are listed in
the following table for the years ended December 31, 2010 and 2009.
2010 | 2009 | |||||||
Accounts Receivable Oil and Gas Sales: |
||||||||
Great Plains Exploration, LLC. |
$ | 435,268 | $ | 423,566 | ||||
Liberty Self Stor II |
3,806 | 727 | ||||||
Lucky Brothers |
| 38,983 | ||||||
Various Related Companies |
4,628 | 1,308 | ||||||
$ | 443,702 | $ | 464,584 | |||||
Accounts Payable: |
||||||||
Great Plains Exploration, LLC. |
$ | 14,012 | $ | 47,144 | ||||
Big Oats Oilfield Supply Company |
23,111 | | ||||||
Kykuit Resources LLC |
160,391 | |||||||
Orwell Natural Gas |
1,296 | |||||||
Osair, Inc. |
11,922 | | ||||||
OzGas Ltd. |
12,000 | | ||||||
$ | 222,732 | $ | 47,144 | |||||
2010 | 2009 | |||||||
Great Plains Exploration, LLC: |
||||||||
Capitalized Costs for Well Property and Equipment |
$ | | $ | 140,410 | ||||
Revenues |
||||||||
Revenue From the Sale of Oil and Natural Gas
Production, net of pipeline transportation
costs |
$ | 1,828,647 | $ | 3,519,851 | ||||
Operating expenses |
||||||||
Well Management, Water Hauling and Service Rig |
$ | 395,892 | $ | 506,337 | ||||
Big Oats Oilfield Supply Company: |
||||||||
Purchases |
$ | 22,193 | $ | | ||||
Orwell Trumbull Pipeline, LLC |
||||||||
Operating expenses |
$ | 2,000 | $ | |
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We believe that the terms of the transactions and the agreements described above are on terms
at least as favorable as those which we could have obtained from unrelated parties. On-going and
future transactions with related parties will be:
| on terms at least as favorable as those that we could obtain from unrelated parties, |
| for bona fide business purposes, and |
| approved by a majority of disinterested and non-employee directors, if any. |
Director Independence. Following the resignations of the audit committee members and most of the
remaining directors on August 26, 2009, the Company was left with only three directors (Richard M.
Osborne, Gregory J. Osborne and Thomas J. Smith), none of whom are independent pursuant to
applicable laws and regulations and listing standards of NASDAQ. Currently, our board does not
have a separately-designated audit committee and the entire board acts as the audit committee. Mr.
Smith would qualify as an audit committee financial expert but he is not independent.
Item 14. | Principal Accountant Fees and Services |
Maloney + Novotny, our independent auditors, billed $91,520 in 2010 and $96,648 in 2009 for audit
fees for the audit of our annual consolidated financial statements, the review of financial
statements included in our quarterly reports on Form 10-Q, and services that are typically rendered
in connection with statutory and regulatory filings or engagements. Maloney + Novotny did not
render any other services to us in 2010 and 2009.
Audit Committee Pre-Approval Policies and Procedures. The Companys directors approved the
engagement of the auditors engaged by John D. Oil and Gas to render audit or permissible non-audit
services for the year ended December 31, 2010. The directors also reviewed the scope of any audit
and other assignments given to our auditors to assess whether these assignments would affect their
independence. In 2010, the Companys directors reviewed all services provided by Maloney + Novotny
to ensure that they were within the scope previously approved.
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 Registrants 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 Registrants 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 Registrants Form 8-K dated July 1, 2005 and incorporated herein by
reference.) |
|||
3.3 | Articles Supplementary to John D. Oil and Gas Companys Articles of Incorporation, as
amended, restated and supplemented dated February 12, 2008 (Filed as Exhibit 3.1 to
Registrants Form 8-K dated February 12, 2008 and incorporated herein by reference.) |
|||
3.4 | Bylaws of the Company (Filed as Exhibit 3.2 to Registrants Form 8-K dated January 12, 2000
and incorporated herein by reference.) |
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Exhibit No. | Description | |||
4.1 | Registration Rights Agreement between the Company and the Richard M. Osborne Trust dated
February 28, 2006 (Filed as Exhibit 4.1 to Registrants 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 Registrants 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
Registrants 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 Registrants 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
Registrants 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 Registrants 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 Registrants 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
Registrants Form 8-K dated September 10, 2004 and incorporated herein by reference.) |
|||
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 Registrants 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 Registrants 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 Registrants 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 Registrants 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
Registrants 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 Registrants 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 Registrants
Form 10-QSB dated September 30, 2006 and incorporated by reference.) |
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Exhibit No. | Description | |||
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
Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants Form 8-K dated August
3, 2007 and incorporated herein by reference.) |
|||
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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants Form 8-K dated May 1, 2008 and incorporated herein by
reference.) |
|||
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Table of Contents
Exhibit No. | Description | |||
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 Registrants 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
Registrants 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
Registrants 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
Registrants 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
Registrants 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
Registrants 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
Registrants 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
Registrants 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
Registrants 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
Registrants Form 8-K dated February 13, 2009 and incorporated herein by reference.) |
|||
10.36 | Letter from Richard M. Osborne guaranteeing Charter One loan debt dated March 26, 2009
(Filed as Exhibit 10.37 to Registrants 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 Registrants 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 Registrants Form 8-K dated May 27, 2009 and incorporated herein by
reference.) |
|||
10.39 | Forebearance Agreement dated June 18, 2010 between RBS Citizens, N.A., dba Charter One, the
Company, Great Plains Exploration, LLC, OzGas LTD., Richard M. Osborne and The Richard M.
Osborne Trust (Filed as Exhibit 10.1 to the Registrants Form 8-K dated June 25, 2010 and
incorporated herein by reference.) |
|||
10.40 | Assignment & Security Agreement dated June 18, 2010 between RBS Citizens, N.A., dba Charter
One, the Company and Great Plains Exploration, LLC (Filed as Exhibit 10.2 to the Registrants
Form 8-K dated June 25, 2010 and incorporated herein by reference.) |
|||
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Table of Contents
Exhibit No. | Description | |||
10.41 | Pledge Agreement dated June 18, 2010 between RBS Citizens, N.A., dba Charter One, the
Company and Richard M. Osborne (Filed as Exhibit 10.3 to the Registrants Form 8-K dated June
25, 2010 and incorporated herein by reference.) |
|||
10.42 | 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 Registrants Form 8-K dated December
28, 2007 and incorporated herein by reference.) |
|||
10.43 | Operating Agreement of Lucky Brothers, LLC dated October 7, 2008 (Filed as Exhibit 10.1 to
Registrants Form 10-Q dated September 30, 2008 and incorporated herein by reference.) |
|||
10.44 | Operating Contract between the Company, Lucky Brothers, LLC and Great Plains Exploration,
LLC dated October 7, 2008 (Filed as Exhibit 10.2 to Registrants Form 10-Q dated September 30,
2008 and incorporated herein by reference.) |
|||
10.45 | Drilling Contract between the Company and Great Plains Exploration, LLC dated October 7,
2008 (Filed as Exhibit 10.3 to Registrants 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 |
37
Table of Contents
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 31, 2011 | 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
Chairman, Chief Executive Officer and Director (Principal Executive Officer) |
Dated: March 31, 2011 | |
/s/ Carolyn Coatoam
Chief Financial Officer (Principal Financial and Accounting Officer) |
Dated: March 31, 2011 | |
/s/ Gregory J. Osborne
|
Dated: March 31, 2011 | |
/s/ Thomas J. Smith
|
Dated: March 31, 2011 |
38
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
John D. Oil and Gas Company
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, 2010 and 2009, 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, 2010. These financial statements are the
responsibility of the Companys 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 Companys 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, 2010 and 2009, and the results of their operations and their cash flows for each of
the two years in the period ended December 31, 2010, in conformity with accounting principles
generally accepted in the United States of America.
As more fully described in Note 2, to the consolidated financial statements, the Company has
suffered recurring losses and has $9.5 million of debt currently due and subject to a
forbearance that raises substantial doubt about its ability to continue as a going concern.
Managements plans in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Maloney + Novotny LLC
Cleveland, Ohio
March 31, 2011
March 31, 2011
39
Table of Contents
John D. Oil and Gas Company and Subsidiary
Consolidated Balance Sheets
Consolidated Balance Sheets
December 31, 2010 | December 31, 2009 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash |
$ | 20,016 | $ | 22,072 | ||||
Accounts Receivable |
47,312 | 57,748 | ||||||
Accounts Receivable from Related Parties |
443,702 | 464,584 | ||||||
Other Current Assets |
4,610 | 17,723 | ||||||
Total Current Assets |
515,640 | 562,127 | ||||||
Property and Equipment, Net |
7,465,911 | 8,985,937 | ||||||
Investment in Unconsolidated Affiliate |
736,953 | 705,965 | ||||||
Other Assets |
| 5,495 | ||||||
TOTAL ASSETS |
$ | 8,718,504 | $ | 10,259,524 | ||||
LIABILITIES AND EQUITY |
||||||||
Current Liabilities: |
||||||||
Line of Credit |
9,480,187 | 9,497,024 | ||||||
Current Maturities of Long Term Debt |
136,812 | 1,145,174 | ||||||
Accounts Payable |
276,452 | 370,675 | ||||||
Accounts Payable to Related Parties |
222,732 | 47,144 | ||||||
Accrued Expenses |
190,038 | 201,959 | ||||||
Total Current Liabilities |
10,306,221 | 11,261,976 | ||||||
Long Term Debt, Net of Current Maturities |
927,593 | | ||||||
Asset Retirement Obligation |
654,493 | 680,056 | ||||||
Commitments and Contingencies |
| | ||||||
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 |
30,277,787 | 30,273,239 | ||||||
Accumulated Deficit |
(32,746,986 | ) | (31,151,171 | ) | ||||
Total John D. Oil and
Gas Company Equity |
(2,460,131 | ) | (868,864 | ) | ||||
Non-Controlling Interest |
(709,672 | ) | (813,644 | ) | ||||
Total Equity |
(3,169,803 | ) | (1,682,508 | ) | ||||
TOTAL LIABILITIES AND EQUITY |
$ | 8,718,504 | $ | 10,259,524 | ||||
The accompanying notes to consolidated financial statements are an integral part of these
statements.
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Table of Contents
John D. Oil and Gas Company and Subsidiary
Consolidated Statements of Operations and Comprehensive Income
For The Years Ended December 31, 2010 and 2009
Consolidated Statements of Operations and Comprehensive Income
For The Years Ended December 31, 2010 and 2009
2010 | 2009 | |||||||
Revenues |
||||||||
Oil and Natural Gas Sales |
$ | 2,103,849 | $ | 3,711,668 | ||||
Self-Storage Operation Revenues |
339,345 | 333,569 | ||||||
Interest and Other |
193,588 | 8 | ||||||
Total Revenues |
2,636,782 | 4,045,245 | ||||||
Operating Expenses |
||||||||
Interest |
473,302 | 448,558 | ||||||
Accretion |
24,580 | 45,905 | ||||||
Oil and Natural Gas Production Costs |
664,699 | 687,182 | ||||||
Self-Storage Property Operating Expense |
138,524 | 114,539 | ||||||
Legal and Professional Fees |
356,658 | 367,854 | ||||||
Property Taxes and Insurance |
76,230 | 137,492 | ||||||
General and Administrative |
605,023 | 762,982 | ||||||
Loss from Unconsolidated Affiliate |
175,512 | 650,420 | ||||||
Impairment |
| 145,444 | ||||||
Depreciation, Depletion and Amortization |
1,506,097 | 3,381,114 | ||||||
Total Operating Expenses |
4,020,625 | 6,741,490 | ||||||
Net Loss |
(1,383,843 | ) | (2,696,245 | ) | ||||
Net Income (Loss) attributable to Non-controlling Interest |
103,972 | (81,544 | ) | |||||
Net Loss attributable to John D. Oil and Gas Company |
$ | (1,487,815 | ) | $ | (2,614,701 | ) | ||
Other Comprehensive Income All attributable to John D.
Oil and Gas Company: |
||||||||
Change in Fair Value of Cash Flow Hedge |
| 133,880 | ||||||
Comprehensive Loss |
$ | (1,487,815 | ) | $ | (2,480,821 | ) | ||
Weighted Average Shares Outstanding- Basic and Diluted |
9,067,090 | 9,067,090 | ||||||
Loss per Common Share Basic and Diluted |
$ | (0.16 | ) | $ | (0.31 | ) | ||
The accompanying notes to consolidated financial statements are an integral part of these
statements.
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Table of Contents
John D. Oil and Gas Company and Subsidiary
Consolidated Statements of Shareholders Equity
For The Years Ended December 31, 2010 and 2009
Consolidated Statements of Shareholders Equity
For The Years Ended December 31, 2010 and 2009
Accumulated | ||||||||||||||||||||||||||||
Other | Non- | |||||||||||||||||||||||||||
Preferred | Common | Paid-in | Accumulated | Comprehensive | Controlling | |||||||||||||||||||||||
Stock | Stock | Capital | Deficit | Income (Loss) | Interest | Total | ||||||||||||||||||||||
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 and Paid |
(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 | ) | |||||||||||
Restricted Common Stock Award |
4,548 | 4,548 | ||||||||||||||||||||||||||
Dividends Declared and Paid |
(108,000 | ) | (108,000 | ) | ||||||||||||||||||||||||
Net Income (Loss) |
(1,487,815 | ) | 103,972 | (1,383,843 | ) | |||||||||||||||||||||||
Balance at December 31, 2010
|
$ | 1 | $ | 9,067 | $ | 30,277,787 | $ | (32,746,986 | ) | $ | | $ | (709,672 | ) | $ | (3,169,803 | ) | |||||||||||
The accompanying notes to consolidated financial statements are an integral part of these
statements.
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Table of Contents
John D. Oil and Gas Company and Subsidiary
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
For The Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net Loss |
$ | (1,383,843 | ) | $ | (2,696,245 | ) | ||
Adjustments to Reconcile Net Loss to Net Cash
Provided By Operating Activities |
||||||||
Accretion |
24,580 | 45,905 | ||||||
Loss from Unconsolidated Affiliate |
175,512 | 650,420 | ||||||
Loss from Uncompleted wells |
93,506 | | ||||||
Impairment |
| 145,444 | ||||||
Depreciation, Depletion and Amortization |
1,506,097 | 3,381,114 | ||||||
Restricted Common Stock Award |
4,548 | 4,548 | ||||||
Changes in Operating Assets and Liabilities: |
||||||||
Accounts Receivable |
31,318 | 940,895 | ||||||
Other Current Assets |
13,113 | 38,479 | ||||||
Other Assets |
5,495 | 55,129 | ||||||
Accounts Payable |
(31,695 | ) | (1,612,062 | ) | ||||
Accrued Expenses |
(11,921 | ) | (87,731 | ) | ||||
Net Cash Provided By Operating Activities |
426,710 | 865,896 | ||||||
Cash Flows from Investing Activities: |
||||||||
Purchases of Property and Equipment |
(119,642 | ) | | |||||
Expenditures for Unconsolidated Affiliate |
(93,440 | ) | (367,127 | ) | ||||
Expenditures for Oil and Natural Gas Wells |
(10,078 | ) | (329,125 | ) | ||||
Net Cash Used In Investing Activities |
(223,160 | ) | (696,252 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Dividends Paid to Preferred Stockholders |
(108,000 | ) | (108,000 | ) | ||||
Proceeds from Related Party Note Payable |
| 600,000 | ||||||
Proceeds from Long Term Debt |
63,956 | | ||||||
Payments on Line of Credit |
(16,837 | ) | | |||||
Principal Payments on Related Party Debt |
| (600,000 | ) | |||||
Principal Payments on Long Term Debt |
(144,725 | ) | (117,873 | ) | ||||
Net Cash Used In Financing Activities |
(205,606 | ) | (225,873 | ) | ||||
Net Decrease in Cash |
(2,056 | ) | (56,229 | ) | ||||
Cash, Beginning of Period |
22,072 | 78,301 | ||||||
Cash, End of Period |
$ | 20,016 | $ | 22,072 | ||||
Supplemental Disclosure of Cash flow Information: |
||||||||
Interest Paid on Borrowings |
$ | 473,576 | $ | 443,549 | ||||
The accompanying notes to consolidated financial statements are an integral part of these
statements.
43
Table of Contents
John D. Oil and Gas Company and Subsidiary
Notes to Consolidated Financial Statements
For The Years Ended December 31, 2010 and 2009
Notes to Consolidated Financial Statements
For The Years Ended December 31, 2010 and 2009
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 Companys 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 its 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, 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. The well in Lucky Brothers is accounted for as a
joint interest venture.
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.
The Company bases 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 Companys 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. Estimated oil
and natural gas reserve quantities are the basis for the calculation of depreciation, depletion and
impairment of oil and natural gas properties.
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Table of Contents
The Companys 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.
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 and related party
accounting treatments. At December 31, 2010 and 2009, the Companys credit evaluation indicated
that it has no need for an allowance for possible losses and had no such losses in 2010 and 2009.
The Companys 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. Approximately $2,000 of bad debt expense was incurred in 2010 and 2009.
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. This income approach to determine the fair value of
these assets is based on level 3 inputs, including estimated reserve quantities, gas prices,
operating costs and discount rates. 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
propertys estimated fair market
value would be recorded and an impairment loss would be recognized. The Company wrote off $-0-
in 2010 and the costs related to one well amounting to $145,444 in 2009.
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Table of Contents
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 Companys asset retirement obligation activity for the years ended
December 31:
2010 | 2009 | |||||||
Asset retirement obligations, beginning of the year |
$ | 680,056 | $ | 674,517 | ||||
Liabilities incurred during the year |
4,551 | | ||||||
Revisions in estimated cash flows |
(54,694 | ) | (14,366 | ) | ||||
Liabilities settled during the year |
| (26,000 | ) | |||||
Accretion expense |
24,580 | 45,905 | ||||||
Asset retirement obligations, end of the year |
$ | 654,493 | $ | 680,056 | ||||
The Company plugged no wells in 2010 and two wells in 2009.
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
Companys natural gas production through the related partys pipeline and include this natural gas
with the related partys natural gas in order to fulfill production contracts they currently have
in place. The Company uses the sales method to account for any gas production volume imbalances.
Under this method, revenue is recognized only when gas is produced and sold on the Companys
behalf. The Company had no material gas imbalances at December 31, 2010 and 2009.
The Companys 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 $214,469 and
$199,029 for the years ended December 31, 2010 and 2009, respectively. Revenue under these
long-term lease agreements is recognized on a straight-line basis over the respective lease terms.
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:
2011 |
$ | 219,210 | ||
2012 |
207,676 | |||
2013 |
201,684 | |||
2014 |
183,288 | |||
2015 |
137,916 | |||
Thereafter |
162,110 | |||
$ | 1,111,884 | |||
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Table of Contents
Stock-Based Compensation
On June 16, 2009 at the Companys Annual Meeting, of the stockholders who voted, 81.7% voted to
approve amendments to the Companys stock option plan. The plan was extended another ten years.
Of the 300,000 stock options that may be granted, none were outstanding as of December 31, 2010 and
2009. Stock options totaling 25,000 shares at a weighted average price of $0.56 were terminated in
the second quarter of 2009 when an employee was 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, 2010 and
2009 was $4,548.
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 Companys credit facility
with RBS Citizens, N.A., d/b/a Charter One (Charter One). The fair value of the warrant was
expensed in 2008. The warrant has an exercise price of $1.00 per share and a term of five years.
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 managements 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 Companys 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, 2010
or 2009, 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 after 2007 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.
Fair Value of Financial Instruments
The fair value of the Companys financial instruments is determined by using available market
information and appropriate valuation methodologies. The Companys 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 Companys book value
approximated the fair value of its debt at December 31, 2010 and December 31, 2009.
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Table of Contents
Recently Issued Accounting Pronouncements
In July 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. This ASU amends disclosure requirements with
respect to the credit quality of financing
receivables and the related allowance for credit losses. Entities will be required to disaggregate
by portfolio segment or class certain existing disclosures and provide certain new disclosures
about their financing receivables and related allowance for credit losses. Disclosures to be made
as of the end of a reporting period are effective for the Companys reporting period ending
December 31, 2010; and the disclosures about activity that occurs during a reporting period will be
effective for the Companys reporting period ending March 31, 2011. Since this ASU will only amend
disclosure requirements, not accounting practice, the adoption of this ASU did not have a material
impact on the Companys 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 reclassifications of prior year comparative amounts have been made to conform to the
December 31, 2010 presentation. These reclassifications had no effect on net loss or equity as
previously reported.
2. Going Concern
The Companys independent registered accounting firm has indicated in their audit report in an
explanatory paragraph that the Company has suffered recurring losses and has $9.5 million of debt
currently due and subject to a forbearance agreement that raises substantial doubt about its
ability to continue as a going concern at December 31, 2010. The Companys audited consolidated
financial statements as of December 31, 2010 have been prepared on the assumption that the Company
will continue as a going concern and do not include any adjustments that might result from the
outcome of this uncertainty. The Company has incurred substantial losses, which have strained its
financial resources, and the Companys liabilities exceed its assets at December 31, 2010. The
Companys $9.5 million line of credit with RBS Citizens, N.A. d/b/a Charter One (Charter One) was
due August 1, 2009 and was in default. On August 24, 2009, Charter One received a judgment in its
favor against the Company and Mr. Osborne related to this debt. On June 18, 2010, the Company, and
other parties, and Charter One entered into a forbearance agreement, (the Forbearance Agreement)
pursuant to which Charter One will forbear from enforcing its rights and remedies under the
Companys line of credit as well as the other parties loan agreements until July 1, 2011, subject
to no further events of default including the payments due under the Forbearance Agreement. The
Company does not have the available cash to repay the line of credit with Charter One. The Company
is meeting with Charter One on a regular basis to reach a loan agreement satisfactory to both
parties. Additionally, the Company is seeking funds from other financial institutions. See Note 5
Line of Credit and Long Term Debt to these consolidated financial statements for more
information.
3. Property and Equipment
Property and equipment consists of the following at December 31:
2010 | 2009 | |||||||
Oil and Natural Gas Properties: |
||||||||
Proved Properties |
$ | 16,473,401 | $ | 16,516,743 | ||||
Unproved Properties |
79,308 | 169,536 | ||||||
Well Material Inventory |
50,349 | 50,349 | ||||||
Accumulated Depletion |
(10,613,130 | ) | (9,250,963 | ) | ||||
Total Oil and
Natural Gas Properties |
5,989,928 | 7,485,665 | ||||||
Other Property and Equipment: |
||||||||
Land |
307,780 | 307,780 | ||||||
Building and Improvements |
2,402,983 | 2,357,822 | ||||||
Furniture and Equipment |
248,120 | 173,640 | ||||||
Accumulated Depreciation |
(1,482,900 | ) | (1,338,970 | ) | ||||
Total Other Property
and Equipment |
1,475,983 | 1,500,272 | ||||||
Property
and Equipment, Net |
$ | 7,465,911 | $ | 8,985,937 | ||||
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Table of Contents
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 Companys ownership percentage at December 31, 2009 to 20.83%. The Companys
investment was further increased to 21.79% at December 31, 2010.
At December 31, 2010, the investment by the Company in this venture was $736,953 which included a
loss in the investment of $143,197; an account payable of $124,000; and a cumulative net book loss
of $883,377. At December 31, 2009, 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. The Companys recorded loss of $143,197 in 2010 represented 21.79% of a
reduction in on undrilled leases, which was also recorded by Kykuit. 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 at December 31, 2009. Kykuit recorded an impairment expense on its
books at December 31, 2010 which had the same affect after the 85% reduction to the Company. The
Company did not record any additional loss for this transaction in 2010. The following table
displays the balance sheet of Kykuit at December 31, 2010, and 2009 and the income statement for
the same years ended:
Kykuit Resources LLC
Balance Sheet
Balance Sheet
December 31, 2010 | December 31, 2009 | |||||||
Current Assets |
$ | 429,656 | $ | 115,893 | ||||
Unproved Leaseholds and Development Costs |
3,647,721 | 6,957,065 | ||||||
Furniture and Fixtures, Net of Depreciation |
20,373 | 31,747 | ||||||
Other Assets |
15,726 | 24,087 | ||||||
$ | 4,113,476 | $ | 7,128,792 | |||||
Current Liabilities |
$ | 677,331 | $ | 832,728 | ||||
Paid in Capital |
7,436,674 | 6,786,675 | ||||||
Accumulated Deficit |
(4,000,529 | ) | (490,611 | ) | ||||
$ | 4,113,476 | $ | 7,128,792 | |||||
Kykuit Resources LLC.
Statement of Operations
For The Years Ended December 31, 2010 and 2009
Statement of Operations
For The Years Ended December 31, 2010 and 2009
2010 | 2009 | |||||||
Total Revenues |
$ | | $ | | ||||
Total Expenses |
3,509,918 | 304,543 | ||||||
Net Loss |
$ | (3,509,918 | ) | $ | (304,543 | ) | ||
5. Line of Credit and Long-Term Debt
On September 28, 2006, the Company entered into an unsecured loan agreement for a line of
credit with a one year term with Mr. Richard M. Osborne, the Companys Chairman and CEO, and
Charter One Bank for up to $5.0 million dollars in total borrowings with interest at a rate of
1.75% over LIBOR adjusted monthly. The Charter One liability was jointly loaned, so the Company
and Mr. Osborne were each liable for the debt of the other.
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The loan was subsequently revised several times until on March 28, 2008, the Company entered into
the First Amended and Restated Loan and Security Agreement (the Loan Agreement) between the
Company, Richard M. Osborne (the Company and Mr. Osborne together, the Borrowers), and Charter
One. The Loan Agreement extended the maturity date to August 1, 2009, continuing with the original
interest rate calculation of 1.75% over LIBOR adjusted monthly. Under the agreement, only the
Company could borrow on the line of credit when any amounts are paid down against the $9.5 million
outstanding on the loan. The Company and Great Plains Exploration LLC a company owned by Mr.
Osborne (Great Plains), agreed that the related party loan of $3.8 million from Great Plains was
satisfied in full and terminated upon the Companys entry into the new Charter One loan and
assumption of the $3.8 million portion of the line of credit drawn by Mr. Osborne. Therefore, the
Company had $9.5 million in outstanding debt to Charter One and $0 in outstanding debt to Great
Plains at March 31, 2008. As part of this loan agreement, Mr. Osborne has pledged several real
estate properties that he personally owns, to provide sufficient collateral allowing the Company to
enter into the loan agreement. The Company did not meet the reserve collateral requirements for a
$9.5 million loan without additional collateral.
The Companys $9.5 million line of credit matured on August 1, 2009. On August 20, 2009, Charter
One received a judgment in its favor against the Company and Mr. Osborne related to the $9.5
million line of credit. The average balance during 2010 was $9.5 million and the weighted average
interest rate was 3.55%. The average balance during 2009 was $9.5 million and the weighted average
interest rate was 2.12%.
The Companys line of credit with Charter One was almost fully drawn for $9.5 million at December
31, 2010 at a rate of 4.75%. Charter One contends that the interest rate at December 31, 2010 is
LIBOR plus 1.75% with a LIBOR floor of 3.00%. The Company believes that there is an interest rate
cap of 3.00%. The parties are in discussions regarding the applicable interest rate. Also,
Charter One has applied a default rate to the loan from January 4, 2010 thru June 18, 2010. The
Company does not agree with the default rate and therefore has not booked approximately $171,000 of
additional interest expense. It is the Companys position that the interest for the period from
judgment date to forbearance date should remain at the original contract rate at the date of
judgment, based upon the per diem interest amount expressly stated in that judgment. Attorneys for
the Company also support that position and have so stated in letters to Charter One and
for purposes of the annual audit.
On June 18, 2010, the Company, Mr. Osborne, the Richard M. Osborne Trust (the Trust), Great
Plains, and Oz Gas, Ltd. (companies owned by Mr. Osborne) entered into a Forbearance Agreement with
Charter One regarding the Companys $9.5 million line of credit under the Loan Agreement and
regarding the $25.0 million loan agreement between Great Plains, Oz Gas and Mr. Osborne and Charter
One, dated August 2, 2007 (together, the Loan Agreements). The Company, Mr. Osborne, the Trust,
Great Plains and Oz Gas are collectively referred to in the Forbearance Agreement and herein as the
Loan Parties.
Pursuant to the Forbearance Agreement and during the forbearance period, Charter One agreed to,
among other things, forbear from exercising its rights and remedies arising out of the judgments
and the Loan Agreements and to stay any action on its motion for the appointment of a receiver.
Under the Forbearance Agreement, Charter Ones agreement to forbear is conditioned upon and subject
to the following conditions:
| Payment by the Loan Parties of a forbearance fee of $40,000 per month during the
forbearance period; |
| No material adverse change in the condition of the Loan Parties; |
| An assignment and grant of a security interest by the Company and GPE of each of
their ownership interests in the Alpha and Panzica wells; |
| A pledge by the Loan Parties of their ownership interests in Kykuit Resources
LLC; and |
||
| A pledge by Mr. Osborne of not less than 800,000 shares of common stock of Gas
Natural Inc. with such stock having a market value of not less than $9.6 million
pursuant to a pledge agreement. |
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In addition, commencing July 1, 2010 and each month thereafter until all amounts under the
judgments and loan agreements have been paid in full, the Loan Parties shall pay Charter One
$400,000, including the $40,000 forbearance fee. The Company had previously felt they would pay
one third of the $400,000, but due to lack of cash, they have decided to accrue interest and one
third of the $40,000 monthly fee and legal fees. The monthly $400,000 is being paid by the other
Loan Parties. Such payments by the Loan parties shall be applied first to Charter Ones fees and
expenses, second to accrued but unpaid interest due under the judgments, and third to principal
amounts due under the judgments. Charter One contends that the judgments will bear interest at
LIBOR plus 1.75% with a LIBOR floor of 3.00%. The Company believes that there is an interest rate
cap of 3.00%. The parties are in discussions regarding the applicable interest rate. If the Loan
Parties repay $10 million and if after application of such repayment the outstanding balance of the
judgments does not exceed 65% of the current producing reserve value (as that term is defined in
the Loan Agreements) of the Company, Great Plains and Oz Gas, then the pledge of Mr. Osbornes
Kykuit interests and his Gas Natural Inc. shares shall be released. In addition, the Company must
deposit all proceeds of its operations into accounts maintained by Charter One but during the
forbearance period Charter One will not take any action to set off funds in any such account.
The forbearance period is effective until July 1, 2011, subject to the earlier termination upon the
occurrence of any events of default by any of the Loan Parties, including non-payment of any
amounts due by any of the Loan Parties under the Forbearance Agreement.
Because the Company does not have the available cash to repay the line of credit, if the required
payments are not made by the Company or any of other Loan Parties, or other events of default
occur, under the Forbearance Agreement or if prior to the end of the forbearance period the Company
is unsuccessful in refinancing the line of credit with Charter One or if the Company is
unsuccessful in obtaining substitute financing, there is substantial doubt about the Companys
ability to continue as a going concern.
Discussions with Charter One are ongoing but there is no certainty that these discussions will
result in satisfactory terms of a revised loan agreement or a revised loan agreement at all. If
Charter One demands repayment of the outstanding amounts payable at the end of the forbearance
period, the Company does not have the available cash to repay the line of credit and will need
financing from other sources to repay Charter One.
The Painesville facility was encumbered by a mortgage with First Merit Bank, N.A. by agreement
dated June 9, 2009. The loan was deemed to be in default by First Merit Bank, N.A in August 2009
when Charter One sought judgments against the Company regarding its line of credit.
On May 11, 2010, Liberty Self Stor, LTD and First Merit Bank, N.A signed a loan modification
agreement which waived the prior defaults. The terms of the mortgage include a five year term,
maturing on June 1, 2014, with a ten year amortization period at a variable rate of the 30 day
LIBOR plus 250 basis points. Monthly payments include principal of $10,370 plus interest. The
current rate on December 31, 2010 was 2.76%. The principal amount of the loan as of December 31,
2010 and 2009 were $1,010,364 and $1,145,174, respectively.
The repayment terms for the Painesville loan includes the following principal payments over the
next four years ending December 31 are as follows:
2011 |
$ | 124,440 | ||
2012 |
124,440 | |||
2013 |
124,440 | |||
2014 |
637,044 | |||
1,010,364 | ||||
Less current portion |
(124,440 | ) | ||
$ | 885,924 | |||
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In February 2010, the Company entered into a loan for the purchase of a vehicle which matures
in February 2015. The interest rate is fixed at 2.90%. The outstanding principal amount of the
loan as of December 31, 2010 was $54,041. The future minimum loan payments over the next five
years ending December 31 are as follows:
2011 |
$ | 12,372 | ||
2012 |
12,730 | |||
2013 |
13,099 | |||
2014 |
13,479 | |||
2015 |
2,361 | |||
54,041 | ||||
Less current portion |
(12,372 | ) | ||
$ | 41,669 | |||
For the years ended December 31, 2010 and 2009 respectively, the Company expensed $473,302 and
$427,122 in interest on its debt instruments.
6. Notes Payable to Related Party
The Company entered into an agreement with Mr. Osborne for an unsecured revolving demand note
dated January 1, 2006. Interest is payable annually at the prime rate with principal being due on
demand. The revolving demand note does not include an expiration date or a limit on the amount
that the Company may borrow. The prime rate at December 31, 2010 was 3.25%. There were no
outstanding balances under the note at December 31, 2010 and 2009, respectively.
On February 13, 2009, Great Plains loaned the Company $600,000 to fund the Companys ongoing
capital requirements. On July 25, 2009, the Note and interest outstanding on the $600,000 loan
from Great Plains were fully paid. The Company used the receipt of currently owed production funds
and additional advance monies against the production receivable to make the payment.
Interest expense on related party notes payable, included in total interest was $0 and $21,436 for
the years ended December 31, 2010 and 2009, respectively.
7. Stockholders Equity
Effective February 12, 2008, the Company filed Articles Supplementary to its Articles of
Incorporation, as amended, restated and supplemented with the State Department of Assessment and
Taxation of Maryland designating 5,000 Series A Preferred Shares, par value $0.001 per share.
Dividends accumulate on the Series A Preferred Shares at the rate of 8% per annum and must be paid
on a quarterly basis. Failure to pay dividends on a timely basis results in the imposition of a
default rate of 10% per annum that continues until the default is cured by the Company by payment
of all accrued dividends. Further, the initial default by the Company entitles the holders of the
Series A Preferred Shares to elect, as a class, one director to the Companys Board of Directors
who shall serve until the Series A Preferred Shares are liquidated or converted.
The Series A Preferred Shares have voting rights only with respect to certain extraordinary actions
that would impair the rights of holders of the Series A Preferred Shares, such as a merger,
reorganization or issuance of a class or series of stock on parity with or senior to the Series A
Preferred Shares. Each of the Series A Preferred Shares is convertible into common shares by
dividing the sum of $1,000 and any accrued but unpaid dividends on the Series A Preferred Shares by
the conversion price of $1.00 (the Conversion Price). The Conversion Price is proportionately
increased (or decreased, as the case may be) for combinations, stock splits and similar events that
would affect the number of shares of the Companys common stock outstanding. The Series A
Preferred Shares have a liquidation preference of $1,000 per share, plus any accrued but unpaid
dividends.
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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 stock in 2010 or 2009.
8. Earnings/Loss Per Share
Basic income (loss) per share of common stock for the years ended December 31, 2010 and 2009
is determined by dividing net income (loss) less declared preferred stock dividends by the weighted
average number of shares of common stock outstanding during the period.
The restricted stock awards, Class A Limited Partnership conversion and warrants for the years
ended December 31, 2010 and 2009 were anti-dilutive and had no effect on diluted earnings per
share. The Companys Class A Limited Partnership exchange factor is .1377148 per share.
The Company paid no cash distributions to its common stockholders during 2010 and 2009. However,
the Company declared and paid $108,000 in preferred stock dividends for both of the years ended
December 31, 2010 and 2009.
9. Income Taxes
The reconciliation of the federal statutory income tax rate to the Companys effective income
tax rate applicable to income from continuing operations is as follows:
2010 | 2009 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Provision (benefit) based on the federal statutory rate |
$ | (506,000 | ) | (34.0 | ) | $ | (889,000 | ) | (34.0 | ) | ||||||
Increase in valuation allowance |
506,000 | 34.0 | 889,000 | 34.0 | ||||||||||||
$ | | | $ | | | |||||||||||
The following table represents the Companys significant deferred tax assets and liabilities at
December 31, 2010 and 2009:
2010 | 2009 | |||||||
Deferred tax assets |
||||||||
Net operating loss carry forwards |
$ | 5,645,000 | $ | 5,420,000 | ||||
AMT credit |
41,100 | 41,100 | ||||||
Total Deferred assets |
5,686,100 | 5,461,100 | ||||||
Deferred tax liabilities |
||||||||
Oil and natural gas properties, principally due to differences in depreciation,
depletion and amortization |
(1,425,000 | ) | (1,750,000 | ) | ||||
Net Deferred tax assets |
4,261,100 | 3,711,100 | ||||||
Valuation allowance |
(4,261,100 | ) | (3,711,100 | ) | ||||
Net Deferred tax assets |
$ | | $ | | ||||
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At December 31, 2010 and 2009, the Company had net operating loss carry forwards (NOLS) for future
years of approximately $16.6 and $15.9 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 paid
$41,187 for alternative minimum tax (AMT) in 2006, creating a tax 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. In 2006, the Company began operating in the oil and natural gas business, which
is subject to many risks. The Company also expects to continue generating tax losses in the next
few years due to timing differences.
10. Other Related Party Transactions
Mr. Osborne is the sole manager of Liberty Self-Stor II, Ltd., an Ohio limited liability
company, which is the owner of a truck rental business, which makes trucks available for short-term
rental to the general public, including tenants of the Companys self-storage facility, and
provides for the retail sale of locks, boxes, packing materials and related merchandise at the
self-storage facility. The Company has entered into a cost sharing agreement with Liberty
Self-Stor II, Ltd. with respect to the sharing of employees and space at the office of the
self-storage facility for the benefit of both companies. Liberty Self-Stor II, Ltd. owed the
Company funds associated with these transactions, as well as for cash advances between the
companies, which are included in accounts receivable from related parties in the accompanying
consolidated balance sheets and listed in the table below.
The Company leases its executive offices from OsAir, Inc., a company owned by Mr. Osborne for
$2,000 per month. The current lease has a three year term maturing on April 1, 2012. Rent expense
totaled $24,000 and $22,050 for the years ending December 31, 2010 and 2009, respectively, and is included
in general and administrative expenses.
Effective January 1, 2006, the Company entered into a contract with Great Plains for well
operations and sale of natural gas and oil production, net of pipeline costs. The term of the
agreement was one year from the effective date. It was extended as of January 1, 2007 and shall be
extended for consecutive one year periods unless terminated earlier.
The Company is a fifty percent partner and the operating manager of Lucky Brothers LLC, a company
whose other partners are almost all related to Mr. Osborne. The partnership owns one well at
December 31, 2010. The purpose of Lucky Brothers LLC is to engage in a joint venture for drilling
wells. The Company has invested $174,392 in well tangibles and intangibles at December 31, 2010
and 2009.
The Company purchases well supplies from Big Oats Oilfield Supply Company, a company owned by Mr.
Osborne.
At December 31, 2010, the Company had a $12,000 invoice outstanding to Oz Gas Ltd., a company owned
by Mr. Osborne, for payments made on the Companys behalf to Charter One. See Note 5 Line of
Credit and Long Term Debt to these consolidated financial statements for more information.
In 2010, the Company paid Orwell Trumbull Pipeline, LLC, a company owned by Mr. Osborne, for
telemeter charges.
The Company is an owner and managing member of an unconsolidated affiliate, Kykuit Resources LLC
(Kykuit), which is accounted for using the equity method of accounting. The Company had a 21.79%
and a 20.83% ownership in Kykuit at December 31, 2010 and 2009, respectively. On June 18, 2010,
the Company pledged its interest in Kykuit to Charter One in connection with the Forbearance
Agreement. For the year ended December 31, 2010, the Company paid $93,440, including $10,940
previously recorded in accounts payable. Additionally the Company had $124,000 in accounts
payable for a cash call and $36,391 in accounts payable for borrowed funds owed to Kykuit. The
investment by the Company in this venture is $736,953 which includes cash totaling $1,496,330, an
accounts payable of $124,000 and a cumulative net book loss of $883,377 at December 31, 2010.
Additional information is disclosed in Note 4 to these financial statements.
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Mr. Osborne, the Companys Chairman and Chief Executive Officer, and Gas Natural Inc., a
publicly-held public utility company of which Mr. Osborne is the Chairman, Chief Executive Officer
and a significant stockholder, owns interests in Kykuit. Mr. Osbornes personal interests in
Kykuit were pledged to Charter One in connection with the Forbearance Agreement.
The following tables summarize the related party transactions for accounts receivable of oil and
natural gas production, capitalized costs for wells, outstanding accounts payable, revenues
received and payments paid for expenses to related parties for the periods indicated. The accounts
receivable from various companies owned by Mr. Osborne in the accompanying consolidated balance
sheets represent amounts owed to the Company for minor cost sharing transactions and are listed in
the following table for the years ended December 31:
2010 | 2009 | |||||||
Accounts Receivable Oil and Gas Sales: |
||||||||
Great Plains Exploration, LLC. |
$ | 435,268 | $ | 423,566 | ||||
Liberty Self Stor II |
3,806 | 727 | ||||||
Lucky Brothers |
| 38,983 | ||||||
Various Related Companies |
4,628 | 1,308 | ||||||
$ | 443,702 | $ | 464,584 | |||||
Accounts Payable: |
||||||||
Great Plains Exploration, LLC. |
$ | 14,012 | $ | 47,144 | ||||
Big Oats Oilfield Supply Company |
23,111 | | ||||||
Kykuit Resources LLC |
160,391 | |||||||
Orwell Natural Gas |
1,296 | |||||||
Osair, Inc. |
11,922 | | ||||||
OzGas Ltd. |
12,000 | | ||||||
$ | 222,732 | $ | 47,144 | |||||
Great Plains Exploration, LLC: | 2010 | 2009 | ||||||
Capitalized Costs for Well Property and Equipment |
$ | | $ | 140,410 | ||||
Revenues |
||||||||
Revenue From the Sale of
Oil and Natural Gas
Production, net of
pipeline transportation
costs |
$ | 1,828,647 | $ | 3,519,851 | ||||
Operating expenses |
||||||||
Well Management, Water Hauling and Service Rig |
$ | 395,892 | $ | 506,337 | ||||
Big Oats Oilfield Supply Company: |
||||||||
Purchases |
$ | 22,193 | $ | | ||||
Orwell Trumbull Pipeline, LLC
Operating expenses |
$ | 2,000 | $ | |
Marc C. Krantz, a director and secretary of the Company until August 26, 2009, is the managing
partner of the law firm of Kohrman Jackson & Krantz PLL, which provides legal services to the
Company.
J. R. Smail, a director of the Company until August 26, 2009, is the operator of five wells in
which the Company has joint interest. At December 31, 2009, the consolidated financial statements
included accounts receivable for oil and gas sales of $13,551; revenue from oil and gas sales of
$84,265; and operating expenses of $41,708 from Smail.
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11. Financial Information Relating to Industry Segments
The Company reports operating segments and reportable segments by business activity according
to GAAP, Disclosure about Segments of an Enterprise and Related Information. The Company
includes revenues from external customers, interest revenue and expense, depreciation, depletion
and amortization and other operating expenses in its measure of segment profit or loss.
The Companys operations are classified into two principal industry segments. The following table
presents the twelve months ended December 31, 2010 and 2009:
Oil and Gas | Self-Storage | |||||||||||
Twelve Months ended December 31, 2010 | Production | Facilities | Total | |||||||||
Revenues from external customers |
$ | 2,103,849 | $ | 339,345 | $ | 2,443,194 | ||||||
Interest and other revenue |
15,670 | 177,918 | 193,588 | |||||||||
Total Revenue |
2,119,519 | 517,263 | 2,636,782 | |||||||||
Interest Expense |
437,497 | 35,805 | 473,302 | |||||||||
Accretion Expense |
24,580 | | 24,580 | |||||||||
Property Operating Costs |
664,699 | 138,524 | 803,223 | |||||||||
Other Operating expenses |
933,909 | 104,002 | 1,037,911 | |||||||||
Loss from Unconsolidated Affiliate |
175,512 | | 175,512 | |||||||||
Impairments |
| | | |||||||||
Depreciation, depletion and amortization |
1,384,450 | 121,647 | 1,506,097 | |||||||||
Total Operating Expenses |
3,620,647 | 399,978 | 4,020,625 | |||||||||
Net Income (Loss) |
$ | (1,501,128 | ) | $ | 117,285 | $ | (1,383,843 | ) | ||||
Property and Equipment additions |
$ | 83,173 | $ | 46,547 | $ | 129,720 | ||||||
Total Assets |
$ | 7,346,068 | $ | 1,372,436 | $ | 8,718,504 | ||||||
Oil and Gas | Self-Storage | |||||||||||
Twelve Months ended December 31, 2009 | Production | Facilities | Total | |||||||||
Revenues from external customers |
$ | 3,711,668 | $ | 333,569 | $ | 4,045,237 | ||||||
Interest and other revenue |
8 | | 8 | |||||||||
Total Revenue |
3,711,676 | 333,569 | 4,045,245 | |||||||||
Interest Expense |
412,637 | 35,921 | 448,558 | |||||||||
Accretion Expense |
45,905 | | 45,905 | |||||||||
Property Operating Costs |
687,182 | 114,539 | 801,721 | |||||||||
Other Operating expenses |
1,089,434 | 178,894 | 1,268,328 | |||||||||
Loss from Unconsolidated Affiliate |
650,420 | | 650,420 | |||||||||
Impairments |
145,444 | | 145,444 | |||||||||
Depreciation, depletion and amortization |
3,260,576 | 120,538 | 3,381,114 | |||||||||
Total Operating Expenses |
6,291,598 | 449,892 | 6,741,490 | |||||||||
Net Loss |
$ | (2,579,922 | ) | $ | (116,323 | ) | $ | (2,696,245 | ) | |||
Property and Equipment additions |
$ | 329,125 | $ | | $ | 329,125 | ||||||
Total Assets |
$ | 8,790,619 | $ | 1,468,905 | $ | 10,259,524 | ||||||
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12. Commitments and Contingencies
Environmental Matters
The oil and gas industry is subject, by its nature, to environmental hazards and clean-up costs.
At this time, management knows of no substantial costs from environmental accidents or events for
which it may be currently liable.
Oil and Gas Contracts
Effective January 1, 2006, the Company entered into a contract with Great Plains Exploration, LLC
for well operations and sale of natural gas and oil production to third parties. The term of the
agreement was one year from the effective date. It was extended as of January 1, 2007 and shall be
extended for consecutive one year periods unless terminated earlier. The original contract was
amended November 14, 2006 and filed as exhibit 10.4 to our Form 10-QSB for the quarter ended
September 30, 2006. The Amendment No. 1 to the Oil and Gas Operations and Sale Agreement modified
the original terms to create less cumbersome paperwork in tracking cost sharing between the
companies.
13. Supplemental Disclosures About Oil and Natural Gas Producing Activities
Unaudited
Estimated Proved Reserves
Users of this information should be aware that the process of estimating quantities of proved
crude oil and natural gas reserves is very complex. There are numerous uncertainties inherent in
estimating quantities of proved reserves, including many factors beyond the control of the Company,
such as additional development activity, evolving production history and reassessment of the
viability of production under varying prices and other economic conditions. As a result, revision
to existing estimates may occur.
There are numerous uncertainties inherent in estimating quantities of proved reserves and in
projecting future rates of production and timing of development expenditures including many factors
beyond the control of the Company. In December 2008, the SEC announced that it had approved
revisions designed to modernize the oil and gas company reserves reporting requirements. In
addition, in January 2010 the FASB issued an accounting standard update to provide consistency with
the SEC rules. We adopted the rules effective December 31, 2009 and the rule changes, including
those related to pricing and technology, which are included in our reserves estimates.
Application of the new rules resulted in the use of lower prices at December 31, 2010 and 2009 for
both oil and gas than would have resulted under the previous rules, which required use of year-end
oil and gas prices. Because of the changes in assumptions, the 2010 and 2009 reserve valuations
below may not be comparable to those of prior years. The estimated future cash flows are
determined based on the prior 12 month average prices for crude oil, current allowable prices
(adjusted for periods beyond the contract period to prior 12 month average prices) applicable to
expected natural gas production, estimated production of proved crude oil and natural gas reserves,
estimated future production and development costs of reserves and future retirement obligations
(net of salvage), based on current economic conditions, and the estimated future income tax
expense, based on year-end statutory tax rates (with consideration of future tax rates already
legislated) to be incurred on pretax net cash flows less the tax basis of the properties involved.
Such cash flows are then discounted using a 10% rate.
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The following table presents the Companys estimated gross proved oil and natural gas reserves,
which are all located in the continental United States and all are based on reserve reports
prepared by Schlumberger Data and Consulting Services for the years ended December 31:
2010 | 2009 | |||||||||||||||
Natural Gas | Oil | Natural Gas | Oil | |||||||||||||
(MCF) | (BBLs) | (MCF) | (BBLs) | |||||||||||||
Proved developed and undeveloped
reserves: |
||||||||||||||||
Beginning of year |
2,512,800 | 28,800 | 2,146,600 | 17,500 | ||||||||||||
Revision of previous estimates,
extensions and other additions |
347,800 | 13,400 | 792,000 | 17,600 | ||||||||||||
Net reserve additions |
| | 272,900 | 2,900 | ||||||||||||
Production |
(383,500 | ) | (8,900 | ) | (698,700 | ) | (9,200 | ) | ||||||||
End of year |
2,477,100 | 33,300 | 2,512,800 | 28,800 | ||||||||||||
Proved developed reserves: |
||||||||||||||||
Beginning of year |
2,512,800 | 28,800 | 2,146,600 | 17,500 | ||||||||||||
End of year |
2,477,100 | 33,300 | 2,512,800 | 28,800 | ||||||||||||
Capitalized Costs Relating to Oil and Natural Gas Producing Activities for the years ended December
31.
2010 | 2009 | |||||||
Proved oil and natural gas properties |
$ | 16,473,401 | $ | 16,516,743 | ||||
Unproved oil and natural gas properties |
79,308 | 169,536 | ||||||
Well Material inventory |
50,349 | 50,349 | ||||||
Total |
16,603,058 | 16,736,628 | ||||||
Accumulated depreciation, depletion and amortization |
(10,613,130 | ) | (9,250,963 | ) | ||||
Net capitalized costs |
$ | 5,989,928 | $ | 7,485,665 | ||||
Costs Incurred in Oil and Natural Gas Producing Activities for the years ended December 31.
2010 | 2009 | |||||||
Property acquisition costs
|
$ | 317 | $ | 3,047 | ||||
Development costs
|
$ | 10,626 | $ | 340,443 |
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Standardized Measure of Discounted Future Net Cash Flows at December 31, (in thousands of dollars).
2010 | 2009 | |||||||
Future cash inflows from sales of oil and gas |
$ | 15,439 | $ | 13,794 | ||||
Future production and development costs |
(8,661 | ) | (8,207 | ) | ||||
Future asset retirement obligations |
(1,635 | ) | (1,449 | ) | ||||
Future income tax expense |
(1,749 | ) | (1,407 | ) | ||||
Future net cash flows |
3,349 | 2,731 | ||||||
Future net cash flows 10% annual discount for estimated
timing of cash flows |
(1,390 | ) | (1,186 | ) | ||||
Standardized measure of discounted future net cash flows |
$ | 2,004 | $ | 1,545 | ||||
Effective for the year ended 2009, SEC reporting rules required 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 12-month average pricing for 2010 used in the above table for
natural gas sold at the Henry Hub, Louisiana was $4.376 and Ergon West Virginia Oil was $73.73. The
12-month average pricing for 2009 used in the above table for natural gas sold at the Henry Hub,
Louisiana was $3.867 and West Texas Intermediate oil at Cushing, Oklahoma was $61.18.
Future operating expenses are based on year end costs and assume continuation of existing economic
conditions.
Changes in the Standardized Measure of Discounted Future Net Cash Flow at December 31, (in
thousands of dollars).
2010 | 2009 | |||||||
Balance, beginning of year |
$ | 1,545 | $ | 3,522 | ||||
Extensions, discoveries and other additions |
| 412 | ||||||
Revision of quantity estimates |
974 | 985 | ||||||
Sales of oil and gas, net of production costs |
(445 | ) | (1,936 | ) | ||||
Net change in prices and production costs |
471 | (1,668 | ) | |||||
Net change in income taxes |
(342 | ) | 1,004 | |||||
Accretion of discount |
155 | 352 | ||||||
Other |
(354 | ) | (1,126 | ) | ||||
Balance, end of year |
$ | 2,004 | $ | 1,545 | ||||
The methodology and assumptions used in calculating the standardized measure are those required by
GAAP. It is not intended to be representative of the fair market value of the Companys proved
reserves. The valuation of revenues and costs does not necessarily reflect the amounts to be
received or expended by the Company. In addition to the valuations used, numerous other factors are
considered in evaluating known and prospective oil and gas reserves.
59