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EX-31.2 - EXHIBIT 31.2 - JOHN D. OIL & GAS CO | c17332exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - JOHN D. OIL & GAS CO | c17332exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - JOHN D. OIL & GAS CO | c17332exv32w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
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
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 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
The number of shares outstanding of the registrants common stock as of May 1, 2011 was
9,067,090 shares.
Except as otherwise indicated, the information contained in this Report is as of March 31, 2011.
JOHN D. OIL AND GAS COMPANY
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
Page | ||||||||
3 | ||||||||
21 | ||||||||
27 | ||||||||
27 | ||||||||
27 | ||||||||
28 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Consolidated Financial Statements |
John D. Oil and Gas Company and Subsidiary
Consolidated Balance Sheets
Consolidated Balance Sheets
March 31, 2011 | December 31, 2010 | |||||||
(Unaudited) | (Audited) | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash |
$ | 60,776 | $ | 20,016 | ||||
Accounts Receivable |
44,536 | 47,312 | ||||||
Accounts Receivable from Related Parties |
507,221 | 848,395 | ||||||
Other Current Assets |
2,697 | 4,610 | ||||||
Total Current Assets |
615,230 | 920,333 | ||||||
Property and Equipment, Net |
7,200,689 | 7,465,911 | ||||||
Investment in Unconsolidated Affiliate |
714,530 | 736,953 | ||||||
TOTAL ASSETS |
$ | 8,530,449 | $ | 9,123,197 | ||||
LIABILITIES AND EQUITY |
||||||||
Current Liabilities: |
||||||||
Line of Credit |
$ | 9,480,187 | $ | 9,480,187 | ||||
Current Maturities of Long Term Debt |
136,812 | 136,812 | ||||||
Accounts Payable |
199,488 | 276,452 | ||||||
Accounts Payable to Related Parties |
732,463 | 627,425 | ||||||
Accrued Expenses |
177,777 | 190,038 | ||||||
Total Current Liabilities |
10,726,727 | 10,710,914 | ||||||
Long Term Debt, Net of Current Maturities |
893,330 | 927,593 | ||||||
Asset Retirement Obligation |
660,638 | 654,493 | ||||||
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 |
30,278,924 | 30,277,787 | ||||||
Accumulated Deficit |
(33,321,306 | ) | (32,746,986 | ) | ||||
Total John D. Oil and Gas Company Shareholders Equity |
(3,033,314 | ) | (2,460,131 | ) | ||||
Non-Controlling Interest |
(716,932 | ) | (709,672 | ) | ||||
Total Equity |
(3,750,246 | ) | (3,169,803 | ) | ||||
TOTAL LIABILITIES AND EQUITY |
$ | 8,530,449 | $ | 9,123,197 | ||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
3
Table of Contents
John D. Oil and Gas Company and Subsidiary
Consolidated Statements of Operations
(Unaudited)
Consolidated Statements of Operations
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Revenues |
||||||||
Oil and Natural Gas Sales |
$ | 407,574 | $ | 582,448 | ||||
Self-Storage Operation Revenues |
84,862 | 79,115 | ||||||
Interest and Other |
| 158,008 | ||||||
Total Revenues |
492,436 | 819,571 | ||||||
Operating Expenses |
||||||||
Interest |
157,152 | 62,209 | ||||||
Accretion |
6,145 | 5,000 | ||||||
Oil and Natural Gas Production Costs |
262,873 | 113,934 | ||||||
Self-Storage Property Operating Expense |
34,698 | 35,528 | ||||||
Legal and Professional Fees |
63,290 | 54,739 | ||||||
Property Taxes and Insurance |
20,325 | 16,490 | ||||||
General and Administrative |
167,171 | 149,733 | ||||||
Loss from Unconsolidated Affiliate |
59,623 | 18,970 | ||||||
Depreciation, Depletion and Amortization |
276,109 | 455,327 | ||||||
Total Operating Expenses |
1,047,386 | 911,930 | ||||||
Net Loss |
(554,950 | ) | (92,359 | ) | ||||
Net Income (Loss) attributable to Non-controlling Interest |
(7,260 | ) | 95,705 | |||||
Net Loss attributable to John D. Oil and Gas Company |
$ | (547,690 | ) | $ | (188,064 | ) | ||
Weighted Average Shares Outstanding Basic |
9,067,090 | 9,067,090 | ||||||
Weighted Average Shares Outstanding Diluted |
9,067,090 | 9,067,090 | ||||||
Loss per Common Share Basic and Diluted |
$ | (0.06 | ) | $ | (0.02 | ) | ||
The accompanying notes to consolidated financial statements are an integral part of these statements.
4
Table of Contents
John D. Oil and Gas Company and Subsidiary
Consolidated Statements of Shareholders Equity
For The Three Months Ended March 31, 2011 and 2010
Consolidated Statements of Shareholders Equity
For The Three Months Ended March 31, 2011 and 2010
Non- | ||||||||||||||||||||||||
Preferred | Common | Paid-in | Accumulated | Controlling | ||||||||||||||||||||
Stock | Stock | Capital | Deficit | Interest | Total | |||||||||||||||||||
Balance at December 31, 2009
(audited) |
$ | 1 | $ | 9,067 | $ | 30,273,239 | $ | (31,151,171 | ) | $ | (813,644 | ) | $ | (1,682,508 | ) | |||||||||
Restricted Common Stock Award |
1,137 | 1,137 | ||||||||||||||||||||||
Dividends Declared |
(26,630 | ) | (26,630 | ) | ||||||||||||||||||||
Net Income (Loss) |
(188,064 | ) | 95,705 | (92,359 | ) | |||||||||||||||||||
Balance at March 31, 2010
(unaudited) |
$ | 1 | $ | 9,067 | $ | 30,274,376 | $ | (31,365,865 | ) | $ | (717,939 | ) | $ | (1,800,360 | ) | |||||||||
Balance at December 31, 2010
(audited) |
$ | 1 | $ | 9,067 | $ | 30,277,787 | $ | (32,746,986 | ) | $ | (709,672 | ) | $ | (3,169,803 | ) | |||||||||
Restricted Common Stock Award |
1,137 | 1,137 | ||||||||||||||||||||||
Dividends Declared |
(26,630 | ) | (26,630 | ) | ||||||||||||||||||||
Net Loss |
(547,690 | ) | (7,260 | ) | (554,950 | ) | ||||||||||||||||||
Balance at March 31, 2011
(unaudited) |
$ | 1 | $ | 9,067 | $ | 30,278,924 | $ | (33,321,306 | ) | $ | (716,932 | ) | $ | (3,750,246 | ) | |||||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
5
Table of Contents
John D. Oil and Gas Company and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net Loss |
$ | (554,950 | ) | $ | (92,359 | ) | ||
Adjustments to Reconcile Net Loss to Net Cash Provided By Operating Activities |
||||||||
Accretion |
6,145 | 5,000 | ||||||
Loss from Unconsolidated Affiliate |
59,623 | 18,970 | ||||||
Depreciation, Depletion and Amortization |
276,109 | 455,327 | ||||||
Restricted Common Stock Award |
1,137 | 1,137 | ||||||
Changes in Operating Assets and Liabilities: |
||||||||
Accounts Receivable |
343,950 | (234,254 | ) | |||||
Other Current Assets |
1,913 | 7,379 | ||||||
Other Assets |
| 5,495 | ||||||
Accounts Payable |
28,074 | 9,421 | ||||||
Accrued Expenses |
(12,261 | ) | (62,637 | ) | ||||
Net Cash Provided By Operating Activities |
149,740 | 113,479 | ||||||
Cash Flows from Investing Activities: |
||||||||
Purchases of Property and Equipment |
(10,887 | ) | (101,135 | ) | ||||
Expenditures for Unconsolidated Affiliate |
(37,200 | ) | (60,440 | ) | ||||
Net Cash Used In Investing Activities |
(48,087 | ) | (161,575 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Dividends Paid to Preferred Stockholders |
(26,630 | ) | (26,630 | ) | ||||
Bank Overdraft |
| 31,170 | ||||||
Proceeds from Long Term Debt |
| 63,956 | ||||||
Principal Payments on Long Term Debt |
(34,263 | ) | (42,472 | ) | ||||
Net Cash Provided by (Used In) Financing Activities |
(60,893 | ) | 26,024 | |||||
Net (Decrease) Increase in Cash |
40,760 | (22,072 | ) | |||||
Cash, Beginning of Period |
20,016 | 22,072 | ||||||
Cash, End of Period |
$ | 60,776 | $ | | ||||
Supplemental Disclosure of Cash flow Information: |
||||||||
Interest Paid on Borrowings |
$ | 157,223 | $ | 39,803 | ||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
6
Table of Contents
John D. Oil and Gas Company and Subsidiary
Notes to Unaudited Consolidated Financial Statements
Notes to Unaudited Consolidated Financial Statements
Note 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 the new business plan as
drilling wells for oil and natural gas is a high-risk enterprise and there is no guarantee the
Company will become profitable.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with
the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial
information and with the instructions to Form 10-Q and, accordingly, do not include all information
and footnotes required under accounting principles generally accepted in the United States of
America (GAAP) for complete financial statements. In the opinion of management, these interim
consolidated financial statements contain all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the consolidated financial position of
the Company as of March 31, 2011 and the results of its operations and cash flows for the three
months ended March 31, 2011 and 2010. Interim results of operations are not necessarily indicative
of the results to be expected for the year ended December 31, 2011. Certain prior year amounts
have been reclassified to conform to the March 31, 2011 presentation. These reclassifications had
no effect on net loss or shareholders equity as previously reported.
Accounting estimates were revised as necessary during the quarter based on new information and
changes in facts and circumstances. These unaudited consolidated financial statements should be
read in conjunction with the comprehensive discussion of the Companys management estimates and
significant accounting policies in the Companys Form 10-K for the year ended December 31, 2010.
The accompanying unaudited interim consolidated financial statements have been prepared in
conformity with GAAP, which contemplate continuation of the Company as a going concern. See Note 2
to these consolidated financial statements.
7
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 Resources LLC
(Kykuit), is accounted for using the equity method. All significant inter-company transactions and
balances have been eliminated.
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.
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 treatment. At March 31, 2011 and December 31, 2010, the Companys credit evaluation
indicated that it has no need for an allowance for possible losses.
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 other income when received. Approximately $1,200 and $1,100 of bad debt expense was incurred in
the three months ended March 31, 2011 and 2010, respectively.
8
Table of Contents
Property and Equipment
All property and equipment is depreciated using the straight-line method over the 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 related accumulated depreciation, depletion and amortization are
eliminated from the 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 annually
and when events or changes in circumstances indicate the carrying amounts of the properties may not
be recoverable. When such conditions exist, management estimates future cash flows from operations
and ultimate disposition of the individual properties. If the estimated undiscounted future cash
flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount
to the related propertys estimated fair market value would be recorded and an impairment loss
would be recognized.
Asset Retirement Obligation
The Company accounts for its asset retirement obligations in accordance with 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.
9
Table of Contents
The following table presents the Companys asset retirement obligation activity.
For the Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Asset retirement obligations, beginning of the period |
$ | 654,493 | $ | 680,056 | ||||
Liabilities incurred during the period |
| 6,095 | ||||||
Revisions in estimated cash flows |
| | ||||||
Liabilities settled during the period |
| | ||||||
Accretion expense |
6,145 | 5,000 | ||||||
Asset retirement obligations, end of the period |
660,638 | 691,151 | ||||||
Less current liabilities |
| | ||||||
Asset retirement obligations, net of current maturities |
$ | 660,638 | $ | 691,151 | ||||
At March 31, 2011 and December 31, 2010, the Companys current portion of the asset retirement
obligations was $0.
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 March 31, 2011 and December 31,
2010.
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 1, 2020. Total lease revenue related to these leases was $54,767 and
$49,387 for the three months ended March 31, 2011 and 2010, 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 March 31 and thereafter are as follows:
2012 |
219,660 | |||
2013 |
203,182 | |||
2014 |
197,085 | |||
2015 |
183,288 | |||
2016 |
104,454 | |||
Thereafter |
149,750 | |||
$ | 1,057,419 | |||
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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 March 31, 2011 and
2010. 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 three months ended March 31, 2011
and 2010 was $1,137.
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 March 31, 2011 or
December 31, 2010, 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.
Generally, the three previous tax years 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 March 31, 2011 and March 31, 2010.
Recently Issued Accounting Pronouncements
The Company reviewed all recently issued, but not yet effective, accounting pronouncements and does
not believe any such pronouncements will have a material impact on the financial statements.
11
Table of Contents
Reclassifications
Certain reclassifications of prior period comparative amounts have been made to conform to the
current period presentation. These reclassifications had no effect on net loss or equity as
previously reported.
Note 2. Going Concern
The Companys independent registered accounting firm indicated, in the Companys Form10-K for
the year ended December 31, 2010, in their audit report in an explanatory paragraph that, due to
the Companys recurring losses and the Companys outstanding debt of $9.5 million currently due
and subject to a forbearance agreement there was substantial doubt about the Companys ability to
continue as a going concern at December 31, 2010. The Companys unaudited consolidated financial
statements as of March 31, 2011 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 March 31, 2011. 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. There is
no guarantee that the Company will be successful with these efforts. See Note 5 Line of Credit
and Long Term Debt to these consolidated financial statements for more information.
Note 3. Property and Equipment
Property and equipment consists of the following:
March 31, 2011 | December 31, 2010 | |||||||
(Unaudited) | (Audited) | |||||||
Oil and Natural Gas Properties: |
||||||||
Proved Properties |
$ | 16,474,301 | $ | 16,473,401 | ||||
Unproved Properties |
79,308 | 79,308 | ||||||
Well Material Inventory |
50,349 | 50,349 | ||||||
Accumulated Depletion |
(10,851,749 | ) | (10,613,130 | ) | ||||
Total Oil and Natural Gas Properties |
5,752,209 | 5,989,928 | ||||||
Other Property and Equipment: |
||||||||
Land |
307,780 | 307,780 | ||||||
Building and Improvements |
2,402,983 | 2,402,983 | ||||||
Furniture and Equipment |
257,270 | 248,120 | ||||||
Accumulated Depreciation |
(1,519,553 | ) | (1,482,900 | ) | ||||
Total Other Property and Equipment |
1,448,480 | 1,475,983 | ||||||
Property and Equipment, Net |
$ | 7,200,689 | $ | 7,465,911 | ||||
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Note 4. Investment in Unconsolidated Affiliate
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
21.93% and a 21.79% ownership in Kykuit at March 31, 2011 and December 31, 2010, respectively. On
June 18, 2010, the Company pledged its partnership interest in Kykuit to Charter One in connection
with the Forbearance Agreement. During the third quarter of 2010, the Company borrowed funds
totaling $39,789 from Kykuit. For the three months ended March 31, 2011, the Company made cash
investments totaling $161,200 to Kykuit, including $124,000 previously recorded in accounts
payable. During the first quarter of 2010, the Company made cash investments totaling $60,440 to
Kykuit, including $10,940 previously recorded in accounts payable. The investment by the Company in
this venture is $714,530 which includes cash totaling $1,657,530 and a cumulative net book loss of
$943,000 at March 31, 2011. At March 31, 2010 the investment by the Company in this venture was
$736,495 which included cash totaling $1,463,330 and a cumulative net book loss of $726,835.
The following table displays the unaudited balance sheets of Kykuit at March 31, 2011 and December
31, 2010 and the unaudited statements of operations for the three months ended March 31, 2011 and
2010, respectively.
Kykuit Resources LLC
Balance Sheet
Balance Sheet
March 31, 2011 | December 31, 2010 | |||||||
Current Assets |
$ | 19,898 | $ | 429,656 | ||||
Unproved Leaseholds and Development Costs |
3,647,721 | 3,647,721 | ||||||
Furniture and Fixtures, Net of Depreciation |
17,529 | 20,373 | ||||||
Other Assets |
12,969 | 15,726 | ||||||
$ | 3,698,117 | $ | 4,113,476 | |||||
Current Liabilities |
$ | 415,597 | $ | 677,331 | ||||
Paid in Capital |
7,556,675 | 7,436,674 | ||||||
Accumulated Deficit |
(4,274,155 | ) | (4,000,529 | ) | ||||
$ | 3,698,117 | $ | 4,113,476 | |||||
Kykuit Resources LLC.
Statement of Operations
For The Three Months Ended March 31, 2011 and 2010
Statement of Operations
For The Three Months Ended March 31, 2011 and 2010
2011 | 2010 | |||||||
Total Revenues |
$ | | $ | | ||||
Total Expenses |
273,626 | 89,910 | ||||||
Net Loss |
$ | (273,626 | ) | $ | (89,910 | ) | ||
13
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Note 5. Line of Credit and Long-Term Debt
On September 28, 2006, the Company along with Mr. Richard M. Osborne, the Companys Chairman
and CEO entered into an unsecured loan agreement for a line of credit with a one year term with
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, 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 strongly 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.
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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 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. |
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 March 31, 2011 was 2.74%. The principal amount of the loan as of March 31, 2011
and December 31, 2010 were $979,254 and $1,010,364, respectively.
15
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The repayment terms for the Painesville loan includes the following principal payments over the
next four years ending March 31 are as follows:
2012 |
$ | 124,440 | ||
2013 |
124,440 | |||
2014 |
730,374 | |||
979,254 | ||||
Less current portion |
(124,440 | ) | ||
$ | 854,814 | |||
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 2.9%. The outstanding principal amount of the
loan at March 31, 2011 was $50,888.
The future minimum loan payments over the remaining term of the loan for the years ended March 31
are as follows:
2012 |
$ | 12,372 | ||
2013 |
12,929 | |||
2014 |
13,188 | |||
2015 |
12,399 | |||
50,888 | ||||
Less current portion |
(12,372 | ) | ||
$ | 38,516 | |||
Interest expense on debt instruments was $157,152 and $62,209 for the three months ended March
31, 2011 and 2010, respectively.
Note 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 March 31, 2011 and December 31, 2010 was 3.25%.
There were no outstanding balances under the note at March 31, 2011 and December 31, 2010,
respectively.
Interest expense on the related party note was $0 for each of the three months ended March 31, 2011
and 2010.
Note 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.
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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.
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 2011 or 2010.
Note 8. Interest and Other Revenue
Interest and other revenue for the three months ended March 31, 2010 includes a refund for
real estate property tax of $156,918 for tax years 2006 through 2009 on the Painesville self
storage facility.
Note 9. Earnings/Loss Per Share
Basic income (loss) per share of common stock 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 three
months ended March 31, 2011 and March 31, 2010 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 for the three months ended March
31, 2011 and 2010. However, the Company declared and paid $26,630 in preferred stock dividends for
the three months ended March 31, 2011 and for the three months ended March 31, 2010.
Note 10. Income Taxes
At December 31, 2010, the Company had net operating loss carry forwards (NOLS) for future
years of approximately $16.6 million. 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.
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Table of Contents
Note 11. 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. The
current lease has a three year term maturing on April 1, 2012 for $2,000 per month. Rent expense
totaled $6,000 for each of the three months ending March 31, 2011 and 2010, 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 March
31, 2011. 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 March 31, 2011 and December
31, 2010.
The Company purchases well supplies from Big Oats Oilfield Supply Company, a company owned by Mr.
Osborne.
At March 31, 2011, 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.
The Company paid Orwell Trumbull Pipeline, LLC, a company owned by Mr. Osborne, for telemeter
charges $1,875 and $0 for the three months ended March 31, 2011 and March 31, 2010, respectively.
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 had a 21.93% interest in
Kykuit at March 31, 2011 and a 21.79% interest at December 31, 2010. On June 18, 2010, the Company
pledged its interest in Kykuit to Charter One in connection with the Forbearance Agreement. For
the three months ended March 31, 2011, the Company paid $161,200, including $124,000 previously
recorded in accounts payable. Additionally, the Company had $30,000 in accounts payable for
borrowed funds owed to Kykuit at March 31, 2011. The investment by the Company in this venture is
$714,530 which includes cash totaling $1,657,530 and a cumulative net book loss of $943,000 at
March 31, 2011. Additional information is disclosed in Note 4 to these financial statements.
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, own interests in Kykuit. Mr. Osbornes personal interests in Kykuit
were pledged to Charter One in connection with the Forbearance Agreement.
18
Table of Contents
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.
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Accounts Receivable Oil and Gas Sales: |
||||||||
Great Plains Exploration, LLC. |
$ | 497,137 | $ | 839,961 | ||||
Liberty Self Stor II |
4,648 | 3,806 | ||||||
Various Related Companies |
5,436 | 4,628 | ||||||
$ | 507,221 | $ | 848,395 | |||||
Accounts Payable: |
||||||||
Great Plains Exploration, LLC. |
$ | 608,862 | $ | 418,705 | ||||
Big Oats Oilfield Supply Company |
81,551 | 23,111 | ||||||
Kykuit Resources LLC |
30,000 | 160,391 | ||||||
Orwell Natural Gas |
50 | 1,296 | ||||||
Osair, Inc. |
| 11,922 | ||||||
OzGas Ltd. |
12,000 | 12,000 | ||||||
$ | 732,463 | $ | 627,425 | |||||
For the Three Months Ended March 31, | ||||||||
Great Plains Exploration, LLC: | 2011 | 2010 | ||||||
Revenues |
||||||||
Revenue From the Sale of Oil and Natural Gas Production, net of pipeline transportation costs |
$ | 305,546 | $ | 361,400 | ||||
Operating expenses |
||||||||
Well Management, Water Hauling and Service Rig |
$ | 126,682 | $ | 71,928 |
Note 12. 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.
19
Table of Contents
The Companys operations are classified into two principal industry segments. The following tables
present the three months ended March 31, 2011 and 2010.
Oil and Gas | Self-Storage | |||||||||||
Three Months ended March 31, 2011 | Production | Facilities | Total | |||||||||
Revenues from external customers |
$ | 407,574 | $ | 84,862 | $ | 492,436 | ||||||
Interest Expense |
150,244 | 6,908 | 157,152 | |||||||||
Accretion Expense |
6,145 | | 6,145 | |||||||||
Property Operating Costs |
262,873 | 34,698 | 297,571 | |||||||||
Other Operating expenses |
227,897 | 22,889 | 250,786 | |||||||||
Loss from Unconsolidated Affiliate |
59,623 | | 59,623 | |||||||||
Depreciation, depletion and amortization |
245,386 | 30,723 | 276,109 | |||||||||
Total Operating Expenses |
952,168 | 95,218 | 1,047,386 | |||||||||
Net Loss |
$ | (544,594 | ) | $ | (10,356 | ) | $ | (554,950 | ) | |||
Property and Equipment additions |
$ | 3,398 | $ | 7,489 | $ | 10,887 | ||||||
Total Assets |
$ | 7,204,504 | $ | 1,325,945 | $ | 8,530,449 | ||||||
Oil and Gas | Self-Storage | |||||||||||
Three Months ended March 31, 2010 | Production | Facilities | Total | |||||||||
Revenues from external customers |
$ | 582,448 | $ | 79,115 | $ | 661,563 | ||||||
Interest and other revenue |
1,090 | 156,918 | 158,008 | |||||||||
Total Revenue |
583,538 | 236,033 | 819,571 | |||||||||
Interest expense |
49,034 | 13,175 | 62,209 | |||||||||
Accretion expense |
5,000 | | 5,000 | |||||||||
Property Operating Costs |
113,934 | 35,528 | 149,462 | |||||||||
Other Operating expenses |
200,083 | 20,879 | 220,962 | |||||||||
Loss from Unconsolidated Affiliate |
18,970 | | 18,970 | |||||||||
Depreciation, depletion and amortization |
425,403 | 29,924 | 455,327 | |||||||||
Total Operating Expenses |
812,424 | 99,506 | 911,930 | |||||||||
Net Income (Loss) |
$ | (228,886 | ) | $ | 136,527 | $ | (92,359 | ) | ||||
Property and Equipment additions |
$ | 64,013 | $ | 37,122 | $ | 101,135 | ||||||
Total Assets |
$ | 8,686,775 | $ | 1,454,490 | $ | 10,141,265 | ||||||
13. 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.
20
Table of Contents
Item 2. | 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 a 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 current market price of natural gas severely affects 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
future 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. Richard M.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 March 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.
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Table of Contents
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 consist of principal at $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. These interim financial
statements contain certain amounts that were based upon the Companys best estimates, judgments,
and assumptions that were believed to be reasonable under the circumstances. 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. A comprehensive discussion of the Companys critical accounting policies and management
estimates and significant accounting policies followed in the preparation of the financial
statements is included in Managements Discussion and Analysis of Financial Condition and Results
of Operations and in Note 1, in the Companys Form 10-K for the year ended December 31, 2010.
There have been no significant changes in critical accounting policies, management estimates or
accounting policies followed since the year ended December 31, 2010.
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.
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.
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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 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 Companys 2010 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.
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.
The Companys current assets decreased $305,103 to $615,230 at March 31, 2011 from $920,333 at
December 31, 2010, largely due to an increase in the companys cash position offset by a decrease
in related party accounts receivable.
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The Companys current liabilities increased $15,813, to $10,726,727 at March 31, 2011, from
$10,710,914 at December 31, 2010, primarily due to an increase in accounts payable to related
parties, offset by a decrease in accounts payable and accrued expenses.
The Company had a positive cash flow from operating activities of $149,740 for the three months
ended March 31, 2011 compared to a positive cash flow of $113,479 for the same period in 2010. The
positive cash flow is largely the result of improved collections in accounts receivable and an
increase in accounts payable, offset by a greater loss for the current period over the prior years
period.
The Company had a negative cash flow from investing activities of $48,087 for the three months
ended March 31, 2011 compared to a negative cash flow of $161,575 for the same period in 2010. The
three months ended March 31, 2011 improved from the same period in the prior year largely due to
reduced cash investments in Kykuit and purchases of property and equipment.
The Company had a negative cash flow from financing activities of $60,893 for the three months
ended March 31, 2011 compared to a positive cash flow of $26,024 for the same period in 2010. The
reduction is largely due to no loan proceeds in the current period.
The items affecting operating cash flow and cash are discussed more fully in the Material Changes
in Results of Operations section.
Material Changes in Results of Operations
Revenues from Operations
Total revenues from operations and interest income decreased $327,135, or 39.9%, to $492,436 for
the three months ended March 31, 2011, compared to $819,571 for the same period in 2010. The
decrease is due to lower natural gas production in 2011 through depletion and by the real estate
property tax refund received and the reduction in accrued real estate taxes related to the
Painesville self-storage facility in 2010.
Operating Expenses
Total operating expenses increased $135,456, or 14.9%, to $1,047,386 for the three months ended
March 31, 2011 from $911,930 for the same period in 2010. This is largely due to an increase in
interest expense that was due to the change in interest rate brought about by the forbearance
agreement with Charter One, expenses associated with attempting to improve well production, an
increase in Kykuit losses, and an increase in payroll costs; only partially offset by a decrease in
depreciation, depletion, and amortization expense.
Interest expense increased $94,943, or 152.6%, to $157,152 for the three months ended March 31,
2011 compared to $62,209 for the same period in 2010. Interest expense was higher for the three
months ended March 31, 2011 largely due to the change in interest rate on the Charter One line of
credit brought about by the forbearance agreement.
Accretion expense increased $1,145, or 22.9%, to $6,145 for the three months ended March 31, 2011
compared to $5,000 for the same period in 2010.
Oil and natural gas production costs increased $148,939, or 130.7%, to $262,873 for the three
months ended March 31, 2011 compared to $113,934 for the same period in 2010. The increase in 2011
is due mostly to expenses associated with attempting to improve well production.
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Self-storage property operating expenses decreased $830, or 2.3%, to $34,698 for the three months
ended March 31, 2011 compared to $35,528 for the same period in 2010. The decrease is mostly due
to less snowfall for the three months ended March 31, 2011 which decreased snowplowing and snow
removal expenses.
Legal and professional fees increased $8,551, or 15.6%, to $63,290 for the three months ended March
31, 2011 compared to $54,739 for the same period in 2010 due to the engagement of a consulting firm
to assist us in our discussions with Charter One.
Property taxes and insurance expenses increased $3,835, or 23.3%, to $20,325 for the three months
ended March 31, 2011 compared to $16,490 for the same period in 2010. This increase is largely due
to an increase in liability insurance premiums and increased property taxes on the Painesville
self-storage facility.
General and administrative expenses increased $17,438, or 11.6%, to $167,171 for the three months
ended March 31, 2011 compared to $149,733 for the same period in 2010. The increase in general and
administrative expenses is largely due to an increase in employees for the three months ended March
31, 2011.
Loss from unconsolidated affiliate expense increased $40,653 to $59,623 for the three months ended
March 31, 2011 compared to $18,970 for the same period in 2010. Kykuit expenses increased in 2011
due to recording delayed rental costs as expense instead of as capitalized costs.
Depreciation, depletion and amortization expenses decreased $179,218, or 39.4%, to $276,109 for the
three months ended March 31, 2011 compared to $455,327 for the same period in 2010. The current
depletion expense is lower than the same period in 2010 largely due to the reduction in the
Companys depletable base from prior year and lower reserve pricing.
Net Loss
The Company had a net loss from operations of $554,950, for the three months ended March 31, 2011
compared to net loss of $92,359 for same period in 2010. The large reduction in natural gas
production revenue was due to decreased production volumes for the three months ended March 31,
2011, as compared to 2010. This revenue decrease was also partially caused by the Company
receiving a refund of real estate taxes in 2010 which it did not receive in 2011.
Net Income (Loss) attributable to Non-Controlling Interest
The Company had net loss attributable to its non-controlling interest in LSS I of $7,260 for the
three months ended March 31, 2011 and a net income of $95,705 for the same period in 2010.
Although LSS I has usually recorded a loss in prior periods, during the three months ended March
31, 2010 it had income due to the decrease in the property values on the Painesville property in
which a tax refund payment was received.
Net Income (Loss) attributable to John D. Oil and Gas Company
The Company had a net loss attributable to John D. interests of $547,690 for the three months ended
March 31, 2011 compared to a net loss of $188,064 for the same period in 2010. The loss for the
three months ended March 31, 2011 is largely due to the large reduction in natural gas production
revenue due to depletion.
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.
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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. 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 March 31, 2011, 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 Kykuit currently does not have production
revenue but has incurred expenses. For the three months ended March 31, 2011 and 2010, the Company
paid $161,200 (including $124,000 previously recorded in accounts payable) and $60,440 (including
$10,940 previously recorded in accounts payable), respectively, into Kykuit as part of their cash
calls and to make up the difference for members not investing.
Forward-Looking Statements
Statements that are not historical facts, including statements about the 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.
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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 of our annual
report on Form 10-K for the year ended December 31, 2010 and elsewhere in our annual report and
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.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of March 31, 2011, the Companys management under the supervision of and with participation
of 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 and
reported in the Companys Form 10-K filed on March 31, 2011 for the year ended December 31, 2010.
Notwithstanding the material weakness described in the 2010 Form 10-K filed on March 31, 2011 for
the year ended December 31, 2010, to the best of their knowledge, the Companys management
believes that the financial statements included in this Quarterly Report on Form 10-Q 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. GAAP.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during our last fiscal
quarter that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. The previous years reduction in staff continues to hamper the
Companys ability to maintain adequate segregation of duties.
PART II OTHER INFORMATION
Item 1. | Legal Proceedings |
There were no material developments in legal proceedings to which the Company is a party during the
quarter ended March 31, 2011.
Item 6. | Exhibits |
Exhibit No. | Description | |||
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. |
* | Filed herewith |
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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.
JOHN D. OIL AND GAS COMPANY |
||
/s/ Richard M. Osborne
|
Dated: May 16, 2011 | |
Chairman of the Board and Chief Executive Officer |
||
(Principal Executive Officer) |
||
/s/ Carolyn T. Coatoam
|
Dated: May 16, 2011 | |
Chief Financial Officer |
||
(Principal Financial and Accounting Officer) |
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