UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 26, 2011
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RED MOUNTAIN RESOURCES, INC.
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(Exact Name of Registrant as Specified in Charter)
Florida 000-164968 27-1739487
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(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
2515 McKinney Avenue, Suite 900, Dallas, Texas 75201
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(Address of Principal Executive Offices) (Zip Code)
(214) 871-0400
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e 4(c))
Explanatory Note
Red Mountain Resources, Inc. ("Red Mountain") is filing this Current Report on
Form 8-K/A to reflect in the financial statements for Black Rock Capital, Inc.
(formerly Black Rock Capital, LLC) ("Black Rock") for the fiscal year ended May
31, 2011 the effect of a retrospective application of a voluntary election it
has made in 2011 to change its method of accounting for its oil and gas
operations from full cost to successful efforts. For an explanation of the
changes in accounting method and a summary of the impacts of all adjustments
made to the financial statements see Note 2 "Summary of Significant Accounting
Policies - Changes in Accounting Policy" regarding oil and gas operations in the
Notes to the Financial Statements.
The information in this second amendment to the Current Report on Form 8-K has
not been updated for any other events or information subsequent to the date of
filing of the original Current Report on Form 8-K on June 28, 2011 or the
subsequent amendment to the Current Report on Form 8-K filed on September 26,
2011, except as set forth above. Accordingly, this second amendment to the
Current Report on Form 8-K should be read in conjunction with Red Mountain's
other filings with the SEC subsequent to the filing of its original Curret
Report on Form 8-K. The other information previously included in the Current
Report on Form 8-K on June 28, 2011 or the first amedment to the Current Report
on Form 8-K filed on September 26, 2011 is incorporated herein by reference.
Background
In connection with the acquisition by Red Mountain of Black Rock that occurred
on June 22, 2011, Red Mountain filed a Current Report on Form 8-K on June 28,
2011 to include required financial statements and other financial information
required in connection with the acquisition by Red Mountain of Black Rock.
Since Red Mountain was a publicly traded shell company and Black Rock was an
operating company, the merger transaction was treated as a recapitalization of
Black Rock and the historical financial statements of Black Rock superseded and
became those of Red Mountain. Since the financial statements for Black Rock for
the full year ended May 31, 2011 were not available when the original Current
Report was filed on June 28, 2011, Red Mountain filed an amendment to the
Current Report on Form 8-K on September 26, 2011 to provide the full-year
financial statements as of and for the fiscal year ended May 31, 2011 to be in
compliance with Exchange Act Rules 13a-1 and/or 15d-1.
This second amendment to the Current Report on Form 8-K presents retrospective
application of the change of the method of accounting for its oil and gas
operations from full cost to successful efforts in the financial statements for
Black Rock for the fiscal year ended May 31, 2011.
A preferability letter is not required and therefore has not been presented as
the Securities and Exchange Commission staff has indicated in Accounting Series
Release No. 300, that:
The Securities and Exchange Commission announced that it would allow
registrants to change methods of accounting for oil and gas producing
activities so long as such changes were in accordance with GAAP.
Accordingly, the Commission stated that changes from the full cost
method to the successful efforts method would not require a
preferability letter.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements.
o Black Rock Capital, Inc., financial statements of May 31, 2011 and for the
year then ended
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
INDEX TO FINANCIAL STATEMENTS
Page
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Report of Independent Registered Public Accounting Firm F-2
Balance Sheet F-3
Statement of Operations F-4
Statement of Changes in Members' Equity F-5
Statement of Cash Flows F-6
Notes to Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholder
Black Rock Capital, Inc.
We have audited the accompanying balance sheets of Black Rock Capital,
Inc.(formerly Black Rock Capital, LLC) as of May 31, 2011, and the related
statements of operations, members' equity and comprehensive income, and cash
flows for the year then ended. Black Rock Capital, LLC's management is
responsible for these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Black Rock Capital, Inc. as of
May 31, 2011, and the results of its operations and its cash flows for the year
then ended in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 2 to the financial statements, the Company changed the
manner in which it accounts for its oil and gas operations retrospectively
effective as of June 1, 2010.
L J Soldinger Associates LLC
Deer Park, Illinois
September 22, 2011 (except with respect to our opinion on the financial
statements insofar as it relates to the effects of the changes in accounting for
oil and gas operations discussed in Notes 2 and 3, as to which the date is
October 21, 2011)
F-2
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Balance Sheet
May 31, 2011
ASSETS
Current assets
Cash and cash equivalents 120,860
Accounts receivable - trade 536,190
Other current assets 5,001
------------
Total current assets 662,051
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Proved oil and gas properties 9,292,797
Unproved property 239,393
Less: Accumulated depletion (716,655)
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Oil and gas properties, net of accumulated depletion 8,815,535
------------
Investment in Cross Border Resources, Inc. 6,042,869
Due from related party 25,090
Other assets 10,805
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Total investment and other assets 6,078,764
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Total assets 15,556,350
============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities
Accounts payable 487,558
Accounts payable - related party 3,079
Accrued expenses 126,874
Stock issuance liability 600,000
Line of credit 2,003,594
Notes payable 2,052,857
Notes payable - Red Mountain Resources, Inc. 5,750,000
------------
Total current liabilities 11,023,962
------------
Asset retirement obligation 239,536
------------
Total liabilities 11,263,498
Members' equity 4,292,852
------------
Total liabilities and members' equity $ 15,556,350
============
The accompanying notes are an integral part of these financial statements.
F-3
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Statement of Operations
Year Ended May 31, 2011
Revenues
Oil and gas sales $ 3,711,815
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Operating expenses
Production taxes 160,634
Leasehold operating expenses 165,180
Gas transportation and marketing charge 236,476
Depletion 716,655
General and administrative 293,392
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Total operating expenses 1,572,337
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Operating income 2,139,478
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Other income (expense)
Interest income 91
Interest expense (236,657)
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Total other income (expense) (236,566)
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Net income $ 1,902,912
============
Pro forma information (unaudited)
Net income $ 1,902,912
Pro forma tax provision (647,000)
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Pro forma net income $ 1,255,912
============
Pro forma basic and diluted earnings per share $ 0.05
============
Pro forma basic and diluted weighted average
common shares outstanding 27,000,000
============
The accompanying notes are an integral part of these financial statements.
F-4
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Statement of Changes in Members' Equity
Year Ended May 31, 2011
Accumulated Other Total
Members' Comprehensive Members'
Equity Income Equity
----------------- ----------------- -----------------
Members' equity, beginning of year $ 133 $ -- $ 133
----------------- ----------------- -----------------
Net income 1,902,912 -- 1,902,912
Other Comprehensive income - unrealized
Gain on Cross Border Resources, Inc.
investment -- 2,838,608 2,838,608
-----------------
Comprehensive income 4,741,653
Distributions to member (448,801) -- (448,801)
----------------- ----------------- -----------------
Members' equity, end of year $ 1,454,244 $ 2,838,608 $ 4,292,852
================= ================= =================
The accompanying notes are an integral part of these financial statements.
F-5
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Statement of Cash Flows
Cash flows from operating activities
Net income $ 1,902,912
Adjustments to reconcile net income to cash used in
operations
Depletion 716,655
Non-cash interest expense related to asset retirement
obligation 9,319
Non-cash interest expense relating to notes payable 42,857
Non-cash direct repayment of line of credit and note payable
from proceeds of oil and gas sales paid directly to bank (556,563)
Changes in assets and liabilities
Increase in accounts receivable (536,190)
Increase in other assets (40,896)
Increase in accounts payable 48,020
Increase in accounts payable - related party 3,079
Increase in accrued expenses 126,874
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Net cash provided by operations 1,716,067
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Cash flows used in investing activities
Investment in developed oil and gas properties (400,184)
Investment in Cross Border Resources Inc. (3,204,261)
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Cash used in investing activities (3,604,445)
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Cash flows provided by (used) in financing activities
Proceeds from notes payable and lines of credit 2,693,892
Proceeds from notes payable - Red Mountain Resources, Inc. 1,240,913
Repayment of notes payable (1,476,899)
Distribution to member (448,801)
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Cash provided by financing activities 2,009,105
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Increase in cash and cash equivalents 120,727
Cash and cash equivalents, at inception of operations 133
-----------
Cash and cash equivalents, end of period $ 120,860
===========
Supplemental cash flow disclosures:
Non-cash investing and financial transactions:
Financing of acquisition of developed oil and gas properties $ 8,462,251
Asset retirement obligation at inception included in oil and
gas properties 230,217
Debt discount recorded for stock issuable to note holders (600,000)
Oil and gas properties included in accounts payable
439,538
Cash paid for:
Interest expense $ 178,606
The accompanying notes are an integral part of these financial statements.
F-6
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Notes to Financial Statements
NOTE 1. DESCRIPTION OF BUSINESS
Black Rock Capital, LLC, an Arkansas limited liability company formed on October
28, 2005 and based in Little Rock, Arkansas. From inception through May 2010,
Black Rock Capital, LLC had no operations. In June 2011, Black Rock Capital, LLC
filed Articles of Conversion with the Secretary of State for the State of
Arkansas to convert Black Rock Capital, LLC into a corporation. The conversion
became effective July 1, 2011 and accordingly Black Rock Capital, LLC was
converted to Black Rock Capital, Inc. As a result of the conversion, all the
membership interest holders of Black Rock Capital, LLC became shareholders of
Black Rock Capital, Inc. ("we," "us" or the "Company"). The Company has adopted
a fiscal year end of May 31.
The Company is engaged in the business of investing in oil and gas producing
properties in Duval and Zapata Counties in Texas and Lea County, in New Mexico.
The Company is a passive investor and does not operate these properties.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("US GAAP") and have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business
Change in Accounting Principle
The Company has voluntarily elected to adopt the "Successful Efforts Method of
Accounting" for accounting of its oil & gas activities, retrospectively back to
June 1, 2010. The change from the Full Cost Method to Successful Efforts Method
is a change in accounting principle. This change in accounting principle is
deemed to be material in reporting our financial statements and therefore the
change is required to be retrospectively applied. The Company believes the
Successful Efforts Method will more fairly reflect the true cost of its
properties and reserves directly associated with those properties. Further, the
Successful Efforts Method of Accounting is considered a preferred method of
accounting for oil and gas properties.
Under successful efforts property acquisition costs, whether the property is
proved or unproved, are capitalized as incurred. However all exploration costs,
except the costs of exploratory wells, are charged to expense as they are
incurred. Costs of exploratory wells are initially capitalized pending the
outcome of the drilling operation. If the test well finds proved reserves the
costs remain capitalized to be amortized when reserves are produced. If a test
well is dry, the accumulated drilling costs are charged to exploration expense.
Under the previous full cost method, all acquisition, exploration and
development costs, including certain directly related employee costs incurred
for the purpose of finding oil and gas, are capitalized and accumulated in
pools.
Under successful efforts proved property costs are tested for impairment in the
same manner that most long-lived assets are tested. Thus when events or
circumstances indicate that an impairment of the carrying value of the asset may
not be recoverable, the Company compares the carrying value of the asset to the
undiscounted expected net future cash flows, then an impairment is recognized to
the extent that the carrying value is in excess of the assets fair value. Under
the full cost method, where proved reserves are established, capitalized costs
were limited using the ceiling test. Under the ceiling test, if the capitalized
cost of the full cost pool exceeds the ceiling limitation, the excess was
charged as an impairment expense. Unit-of-production depletion was applied to
capitalized costs of the full cost pool. Unit-of-production rates were based on
the amount of proved reserves of oil, gas and other minerals that were estimated
to be recoverable from existing facilities using current operating methods.
Under the successful efforts method, proved property costs are amortized on the
unit of production basis over the remaining life of proved developed reserves or
total proved reserves as applicable. Under the full cost method, proved property
costs are amortized on the unit of production basis over the remaining life of
total proved reserves.
The change resulted in a decrease in depletion expense and accumulated depletion
of $260,619. There was no change in gross oil and gas properties between the two
methods, because Black Rock Capital, LLC had incurred no geological costs, dry
holes or impairment. The change increased income from operations by $260,619 as
reported on the Statement of Operations and increased retained earnings by
$260,619 as reported on the Balance Sheet and Statement of Changes in Members
Equity. The change did not impact cash flows from operations, investing or
financing activities.
F-7
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Notes to Financial Statements
The impacts of the adjustments resulting from the retrospective application of
our change in accounting policy for oil and gas operations are summarized below:
Balance Sheet May 31, 2011
As previously Recognized
reported Under
under New Method Effect
Full Cost Successful of
Method Efforts Change
--------------- --------------- ---------------
Total current assets $ 662,051 $ 662,051 $ --
--------------- --------------- ---------------
Proved oil and gas properties 9,532,190 9,292,797 239,393
Unproved properties -- 239,393 (239,393)
Less Accumulated depletion (977,274) (716,655) 260,619
--------------- --------------- ---------------
Oil and gas properties, net of
accumulated depletion 8,554,916 8,815,535 260,619
--------------- --------------- ---------------
Total investments and other assets 6,078,764 6,078,764 --
--------------- --------------- ---------------
Total assets $ 15,295,731 $ 15,556,350 $ 260,619
=============== =============== ===============
Total current liabilities $ 9,020,368 $ 9,020,368 $ --
Total long term liabilities 2,243,130 2,243,130 --
Member's equity 4,032,233 4,292,852 260,619
--------------- --------------- ---------------
Total liabilities and members' equity $ 15,295,731 $ 15,556,350 $ 260,619
=============== =============== ===============
F-8
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Notes to Financial Statements
Income Statement - Year Ended May 31, 2011
As previously Recognized
reported Under
under New Method Effect
Full Cost Successful of
Method Efforts Change
------------- ------------- -------------
Revenue:
Oil and gas sales $ 3,711,815 $ 3,711,815 $ --
------------- ------------- -------------
Operating expenses
Production taxes 160,634 160,634 --
Lease operating expenses 165,180 165,180 --
Gas transportation and
marketing charge 236,476 236,476 --
Depletion 977,274 716,655 (260,619)
General and administrative 293,392 293,392 --
------------- ------------- -------------
Total operating expenses 1,832,956 1,572,337 (260,619)
------------- ------------- -------------
Operating income 1,878,859 2,139,478 260,619
Total other (expense) (236,566) (236,566) --
------------- ------------- -------------
Net income $ 1,642,293 $ 1,902,912 $ 260,619
============= ============= =============
Pro forma information
Net income $ 1,642,293 $ 1,902,912 $ 260,619
Pro forma income tax provision (560,000) (647,000) (87,000)
------------- ------------- -------------
Pro forma net income $ 1,082,293 $ 1,255,912 $ 173,619
============= ============= =============
Pro forma basis and diluted
earnings per share $ 0.04 $ 0.05 $ 0.01
Pro forma basic and diluted
weighted average common
shares outstanding 27,000,000 27,000,000 --
============= ============= =============
Statement of Changes in Members' Equity - Year Ended May 31, 2011
As previously Recognized
reported Under
under New Method Effect
Full Cost Successful of
Method Efforts Change
------------- ------------- -------------
Members' equity $ 1,193,625 $ 1,454,244 $ 260,619
Accumulated other
comprehensive income 2,838,608 2,838,608 -
------------- ------------- -------------
Total members' equity $ 4,032,233 $ 4,292,852 $ 260,649
============= ============= =============
Use of Estimates
The preparation of the Company's financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Management believes that the following material estimates affecting the
financial statements could significantly change in the coming year.
The most significant estimates pertain to proved oil and natural gas reserves
and related cash flow estimates used in impairment tests of long-lived assets,
estimates of future development, dismantlement and abandonment costs and to
estimates relating to certain oil and natural gas revenues and expenses and
estimates related to the valuation of our investment in the Cross Border
Resources, Inc. warrants. Certain of these estimates require assumptions
regarding future commodity prices, future costs and expenses and future
production rates. Actual results could differ from those estimates.
F-9
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Notes to Financial Statements
The Company's revenue, profitability and future growth are substantially
dependent upon the prevailing and future prices for oil and natural gas, which
are dependent upon numerous factors beyond its control such as economic,
political and regulatory developments and competition from other energy sources.
The energy markets have historically been very volatile and there can be no
assurance that oil and natural gas prices will not be subject to wide
fluctuations in the future. A substantial or extended decline in oil and natural
gas prices could have a material adverse effect on the Company's financial
position, results of operations, cash flows and quantities of oil and natural
gas reserves that may be economically produced.
Estimates of oil and natural gas reserves and their values, future production
rates and future costs and expenses are inherently uncertain for numerous
reasons, including many factors beyond the Company's control. Reservoir
engineering is a subjective process of estimating underground accumulations of
oil and natural gas that cannot be measured in an exact manner. The accuracy of
any reserve estimate is a function of the quality of data available and of
engineering and geological interpretation and judgment. In addition, estimates
of reserves may be revised based on actual production, results of subsequent
exploitation and development activities, prevailing commodity prices, operating
cost and other factors. These revisions may be material and could materially
affect future depletion, depreciation and amortization expense, dismantlement
and abandonment costs, and impairment expense.
At May 31, 2011 we estimated the value of the warrants related to our investment
in the Cross Border Resources Inc units warrant using level 3 inputs. Future
events or changes in the assumptions used to estimate the fair value of the
warrants could significantly change its fair value.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of
less than 90 days to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
The Company generates accounts receivable from the sale of its hydrocarbons. The
Company provides for a reserve against receivables for estimated losses that may
result from a customer's inability or unwillingness to pay. The allowance for
doubtful accounts is estimated primarily based upon historical write-off
percentages, known problem accounts, and current economic conditions. Accounts
are written off against the allowance for doubtful accounts when the Company
determines that amounts are not collectable. Recoveries of previously
written-off accounts are recorded when collected. As of May 31, 2011 there was
no reserve established as all amounts were deemed collectible.
Investments
The Company carries its investments in equity securities at fair value, based on
quoted market prices when available. Security transactions are recorded on a
trade date basis. Realized gains and losses are determined by the specific
identification method and are included in income. Unrealized gains and losses on
securities available-for-sale are reported as a component of accumulated other
comprehensive income.
Management determines the appropriate classification of its investments at the
time of purchase and reevaluates such determination at each balance sheet date.
Equity securities are classified as "available-for-sale." At May 31, 2011, the
Company had no trading securities or investments in debt securities that it
plans to hold to maturity.
Oil and Gas Properties
The Company uses the successful efforts method of accounting for its oil and
natural gas properties. The Company applies the provisions of the "Financial
Accounting and Reporting by Oil and Gas Producing Companies" topic of the
Financial Accounting Standards Board Accounting Standards Codification (the
"FASC"). Under this method, all costs associated with productive and
nonproductive development wells are capitalized. Exploration expenses, including
geological and geophysical expenses and delay rentals, are charged to expense as
incurred. Costs associated with drilling exploratory wells are initially
capitalized pending determination of whether the well is economically productive
or nonproductive.
F-10
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Notes to Financial Statements
If an exploratory well does not find reserves or does not find reserves in a
sufficient quantity as to make them economically producible, the previously
capitalized costs would be expensed in the period in which the determination was
made. If an exploratory well finds reserves but they cannot be classified as
proved, the Company continues to capitalize the associated cost as long if the
well has found a sufficient quantity of reserves to justify its completion as a
producing well and the Company is making sufficient progress in assessing the
reserves and the operating viability of the project. If subsequently it is
determined that these conditions do not continue to exist, all previously
capitalized costs associated with the exploratory well would be expensed in the
period in which the determination was made. Re-drilling or directional drilling
in a previously abandoned well is classified as development or exploratory based
on whether it is in a proved or unproved reservoir. Costs for repairs and
maintenance to sustain or increase production from the existing producing
reservoir are charged to expense as incurred. Costs to recomplete a well in a
different unproved reservoir are capitalized pending determination that economic
reserves have been added. If the recompletion is unsuccessful, the costs would
be charged to expense.
Significant tangible equipment added or replaced that extends the useful or
productive life of the property is capitalized. Costs to construct facilities or
increase the productive capacity from existing reservoirs are capitalized.
Capitalized costs are amortized on a unit-of-production basis over the remaining
life of proved developed reserves or total proved reserves, as applicable.
The costs of retired, sold, or abandoned properties that constitute part of an
amortization base are charged or credited, net of proceeds received, to
accumulated depletion, depreciation and amortization ("DD&A").
The Company applies the provisions of the "Accounting for the Impairment or
Disposal of Long-Lived Assets" topic of the FASC, which requires us to assess
the need for an impairment of long-lived assets to be held and used, including
proved oil and natural gas properties, whenever events and circumstances
indicate that the carrying value of the asset may not be recoverable. If
impairment is indicated based on a comparison of the asset's carrying value to
its undiscounted expected future net cash flows, then an impairment charge is
recognized to the extent the asset's carrying value exceeds its fair value.
Expected future net cash flows are based on existing proved reserves (and
appropriately risk-adjusted probable reserves), forecasted production
information, and management's outlook of future commodity prices. Any impairment
charge incurred is expensed and reduces the net basis in the asset. Management
aggregates proved property for impairment testing the same way as for
calculating DD&A. The price assumptions used to calculate undiscounted cash
flows is based on judgment.
Unproved properties are assessed for impairment on a property-by-property basis
for individually significant balances and on an aggregate basis for individually
insignificant balances. If the assessment indicates impairment, a loss is
recognized by providing a valuation allowance at the level at which impairment
was assessed. The impairment assessment is affected by economic factors such as
the results of exploration activities, commodity price outlooks, remaining lease
terms, and potential shifts in business strategy employed by management. In the
case of individually insignificant balances, the amount of the impairment loss
recognized is determined by amortizing the portion of these properties' costs
which the Company believes will not be transferred to proved properties over the
remaining life of the lease.
Other Property and Equipment
Other property and equipment is carried at cost. Depreciation is expensed on a
straight-line basis over estimated useful lives, which range from three to seven
years. Gains or losses from the disposal of other property and equipment are
recognized in the period realized.
As of May 31, 2011 and for the period then ended, the Company operated only in
the United States and had only proved property.
Revenue Recognition
Revenues are recognized when hydrocarbons have been delivered, the customer has
taken title and payment is reasonably assured.
Taxes Associated with Revenue Producing Transactions
The Company reports taxes assessed by state, local and U.S. Federal governmental
authorities from the production and sale of hydrocarbons on a line item under
operating expenses.
Income Taxes
The Company follows the guidance of FASC 740 Income Taxes, Accounting for
Uncertainty in Income Taxes, which prescribes a comprehensive model for how a
company should measure, recognize, present, and disclose in its financial
statements uncertain tax positions that the company has taken or expects to take
on income tax returns.
The Company recognizes the tax benefits from uncertain tax positions only if it
is more likely than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the position. The
tax benefits recognized in the financial statements from such positions are
measured based on the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement. As of May 31, 2011, the Company has not
taken any uncertain tax positions.
F-11
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Notes to Financial Statements
The Company is taxed as a Partnership under the provisions of the Internal
Revenue Code. Consequently, the members of the Company are taxed as Partners
under the provisions of the Internal Revenue Code. Therefore, no provision or
liability for federal income taxes has been included in the financial
statements. In addition, the state that the Company operated within during the
period, Texas, does not have an income tax on the production and sale of
hydrocarbons, and instead utilizes a franchise tax.
Based on this, the Company has not recorded any current or deferred income taxes
for the period ended May 31, 2011.
Pro Forma Financial Information
As discussed in Note 1, Black Rock Capital, LLC was originally organized in the
form of a Limited Liability Company. Immediately prior to closing of the Merger
(see Note 8), its capital structure was changed to that of a corporation. The
change will result in the post-merger company becoming obligated for the tax
liabilities for the portion of income generated subsequent to the date of the
merger, whereas the previous income and associated liability was passed through
to the Black Rock Capital, LLC members. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin Number 1B.2 "Pro Forma Financial Statements
and Earnings per Share" ("SAB 1B.2"), pro forma information on the face of the
income statement has been presented which reflects the impact of the Company's
change in capital structure as if it had occurred at the commencement of
operations on June 1, 2010 and was therefore subject to income taxes. This
presentation reflects the Company generating current deferred tax liability for
earnings during the period presented and having the common shares outstanding
that were given as consideration for the merger.
Asset Retirement Obligations
The Company applies the provisions of the "Accounting for Asset Retirement
Obligation" topic of the FASC, which requires it to recognize the fair value of
a liability for an asset retirement obligation in the period in which the
liability is incurred. For oil and natural gas properties, this is the period in
which the property is acquired or a new well is drilled. An amount equal to and
offsetting the liability is capitalized as part of the carrying amount of the
Company's oil and natural gas properties. The liability is recorded at its
discounted risk adjusted fair value and then accreted each period until it is
settled or the asset is sold, at which time the liability is reversed. Estimates
are based on historical experience in plugging and abandoning wells and
estimated remaining field life based on reserve estimates. Please read "Note 5.
Asset Retirement Obligations" for additional information.
The significant assumptions used to develop the expected liability during the
period are as follows:
Average gross cost to remediate individual well sites $75,000 - 100,000
Average gross salvage value expected from individual well
sites remediated $ 15,000 - 25,000
Expected inflation rate for oil field service costs 4.50%
Credit adjusted risk-free interest rate 7.25%
Actual retirement costs will be recorded against the obligation when incurred.
Any difference between the recorded asset retirement obligations and the actual
retirement costs incurred is recorded as a gain or loss in the settlement
period.
Beginning balance at inception $ --
Liabilities incurred 230,217
Liabilities settled --
Accretion expense 9,319
-----------------
Balance at May 31, 2011 $ 239,536
=================
Accretion expense is recorded as interest expense in the financial statements.
F-12
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Notes to Financial Statements
Concentrations
Upon acquisition of its oil and gas field interests, the Company also became
party to joint operating agreements ("JOA's") that define the rights and
responsibilities between the third party operators and passive interest holders.
Under the JOA, the third party operator is responsible for acquiring customers
to sell the oil and gas produced and to either performing or contracting out to
other third parties to perform services necessary to continue and maintain well
production, commence and complete drilling operations and also to maintain
undeveloped acreage. The Company is thus dependent upon the third party operator
to remit payment for its share of the proceeds from the sale of hydrocarbons
produced, and to adequately maintain and develop the individual fields. As of
May 31, 2011, one operator, ConocoPhillips, Inc., controlled approximately 95%
of the Company's revenues and approximately 79% of direct operating expenses.
Concentrations of Market Risk
The future results of the Company's oil and natural gas operations will be
affected by the market prices of oil and natural gas. The availability of a
ready market for oil and natural gas products in the future will depend on
numerous factors beyond the control of the Company, including weather, imports,
marketing of competitive fuels, proximity and capacity of oil and natural gas
pipelines and other transportation facilities, any oversupply or undersupply of
oil, natural gas and liquid products, the regulatory environment, the economic
environment, and other regional and political events, none of which can be
predicted with certainty.
The Company operates in the exploration, development and production sector of
the oil and gas industry. The Company's receivables include amounts due from
purchasers of its oil and natural gas production and amounts due from joint
venture partners for their respective portions of operating expenses and
exploration and development costs. While certain of these customers and joint
venture partners are affected by periodic downturns in the economy in general or
in their specific segment of the oil or natural gas industry, the Company
believes that its level of credit-related losses due to such economic
fluctuations has been and will continue to be immaterial to the Company's
results of operations over the long-term. Trade receivables are generally not
collateralized.
Fair Value
As defined in the authoritative guidance, fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date ("exit price").
To estimate fair value, the Company utilizes market data or assumptions that
market participants would use in pricing the asset or liability, including
assumptions about risk and the risks inherent in the inputs to the valuation
technique. These inputs can be readily observable, market corroborated or
generally unobservable.
The authoritative guidance establishes a fair value hierarchy that prioritizes
the inputs used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or
liabilities ("Level 1" measurements) and the lowest priority to unobservable
inputs ("Level 3" measurements). The three levels of the fair value hierarchy
are as follows:
Level 1 -- Observable inputs such as quoted prices in active markets at the
measurement date for identical, unrestricted assets or liabilities.
Level 2 -- Other inputs that are observable, directly or indirectly, such as
quoted prices in markets that are not active, or inputs which are observable,
either directly or indirectly, for substantially the full term of the asset or
liability.
Level 3 -- Unobservable inputs for which there is little or no market data and
which the Company makes its own assumptions about how market participants would
price the assets and liabilities.
In instances in which multiple levels of inputs are used to measure fair value,
hierarchy classification is based on the lowest level input that is significant
to the fair value measurement in its entirety. The Company's assessment of the
significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the asset or liability.
Fair Value Level 1 Level 2 Level 3
---------- ------- ------- -------
Investment in
Cross Border 6,042,869 4,806,369 - 1,236,500
Resources, Inc.
Asset retirement
obligation 239,539 -- -- 239,536
F-13
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Notes to Financial Statements
Changes in level 3 Assets and Liabilities Measured at Fair Value on a
Recurring Basis for the Year Ended May 31, 2011
Asset
Investment in Retirement
Cross Border Obligation
--------------- ---------------
Beginning balance at inception $ -- $ --
Acquisition cost 337,819 --
Liability incurred -- 230,217
Realized and unrealized gains or (loss)
Charged to interest expense -- 9,319
Charged to Other Comprehensive Income 898,681 --
--------------- ---------------
Balance at May 31, 2011 $ 1,236,500 $ 239,536
=============== ===============
Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
receivables, payables, and a notes payable and line of credit. The carrying
amounts of cash and cash equivalents, receivables, payables and short-term debt
approximate fair value due to the highly liquid or short-term nature of these
instruments. The Company does not have any instruments that are measured at fair
value on a recurring basis.
Recent Accounting Pronouncements
Reserve Estimation
In January 2010, the FASB issued an update to the Oil and Gas Topic, which
aligns the oil and natural gas reserve estimation and disclosure requirements
with the requirements in the SEC's final rule, Modernization of the Oil and Gas
Reporting Requirements (the "Final Rule"). The Final Rule was issued on December
31, 2008. The Final Rule is intended to provide investors with a more meaningful
and comprehensive understanding of oil and natural gas reserves, which should
help investors evaluate the relative value of oil and natural gas companies.
In January 2010, the FASB issued ASU 2010-06, "Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements"
("ASU 2010-06"). ASU 2010-06 includes new disclosure requirements related to
fair value measurements, including transfers in and out of Levels 1 and 2 and
information about purchases, sales, issuances and settlements for Level 3 fair
value measurements. This update also clarifies existing disclosure requirements
relating to levels of disaggregation and disclosures of inputs and valuation
techniques. ASU 2010-06 was effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The Company adopted ASU 2010-06 upon issuance and such adoption did not
have a material impact on the Company's financial statements.
F-14
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Notes to Financial Statements
In December 2010, the FASB issued an accounting standard update 2010-29 that
addresses the disclosure of supplementary pro forma information for business
combinations. This update clarifies that when public entities are required to
disclose pro forma information for business combinations that occurred in the
current reporting period, the pro forma information should be presented as if
the business combination occurred as of the beginning of the previous fiscal
year when comparative financial statements are presented. This update is
effective prospectively for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2010. Early adoption is permitted. The Company expects the
adoption of this standard will not have a material effect on its results of
operation or its financial position.
Subsequent Change in Accounting Policy
Post-merger, the company will retroactively adopt as of June 1, 2011 the
successful efforts method of accounting for accounting for its oil and gas
properties and interests. The successful efforts method of accounting adheres to
traditional cost basis. Property acquisition costs, whether the property is
proved or unproved is capitalized as incurred. For other costs incurred under
this method, a direct relationship between the costs incurred and specific
reserves discovered is required before costs are permitted to be capitalized.
Under the successful efforts method, costs that cannot be directly related to
discovery of specific oil and gas reserves are expensed. The use of successful
efforts method is preferred, but not required by US GAAP.
NOTE 3. OIL AND GAS PROPERTIES
Oil and gas properties consisted of the following as of May 31, 2011:
Proved properties $ 9,292,797
Unproved properties 239,393
-----------------
$ 9,532,190
Accumulated depletion (716,655)
-----------------
$ 8,815,535
=================
In May 2010, the Company entered into an agreement to purchase two separate oil
and gas fields out of the bankruptcy estate of MSB Energy, Inc. and which became
effective as of June 1, 2010. Those fields are located in Zapata County and
Duval County, Texas. In October 2010, the Company entered into an agreement to
purchase two separate oil and gas fields located in Zapata County, Texas, also
out of the bankruptcy estate of MSB Energy, Inc., which became effective on
October 1, 2010.
In March, 2011, the Company entered into an agreement to acquire two oil and gas
leases located in Lea County, New Mexico which became effective on May 31, 2011.
Villareal - Zapata County, Texas
This field consists of approximately 1,099.78 gross acres (154.01 acres net to
the working interest). The purchase price of this property was approximately
$3,100,000, and included a prepaid drilling credit from the well operator of
approximately $680,000. At acquisition, there were eight producing wells on this
property. The Company acquired the approximate 13.942% working interest and
10.46% net revenue interest in seven of the producing wells and remaining
leasehold. The Company also acquired approximately 15.65% working interest and
11.74% net revenue interest in one producing well. During the period ended May
31, 2011 the Company elected to participate in all of the drilling operations
commenced by the operator of the property, ConocoPhillips. Those drilling
operations included capital expenditures on three wells plus drilling three new
wells. Total development costs incurred by the Company during the period ended
May 31 2011, which includes usage of the prepaid drilling costs acquired for
these wells, were approximately $1,635,000.
During the period ended May 31, 2011, one development well was drilled to a
deeper zone on an exploratory basis. The Costs incurred by the Company were
approximately $239,000. The deeper horizon showed the presence of hydrocarbons,
however as of May 31, 2011 and the date of these financial statements, the
Company is unable to determine if sufficient proved reserves exist. The Company
plans future expenditures in the near future to more fully explore this new
horizon, however the exact timing of such work is dependent upon the operator.
F-15
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Notes to Financial Statements
Capitalized exploratory well costs for the fiscal year ending May 31, 2011, are
as follows:
Beginning balance at June 1 $ -
Additions to capitalized exploratory well costs pending the
determination of proved reserves 239,393
Reclassifications to wells, facilities, and equipment based on
the determination of proved reserves -
Capitalized exploratory well costs charged to expense -
-------------
Ending balance at May 31 $ 239,393
=============
Frost Bank - Duval County, Texas
This field consists of approximately 998.3 gross acres (319 acres net to the
working interest). The purchase price of this property was approximately
$200,000. At acquisition there were five producing wells. The Company acquired
an approximate 31.968% working and 23.976% net revenue interest in the well
production. No drilling activity occurred during the period ended May 31, 2011.
Resendez and LaDuquesa - Zapata County, Texas
These fields consist of approximately 2,496 gross acres (914 acres net to the
working interests). The purchase price of this property was approximately
$36,000. At acquisition there were two producing and two shut in wells. The
Company acquired an approximate 23.125% and 50.007% working interest in Resendez
and LaDuquesa, respectively, and 17.34% and 37.56% net revenue interest in the
well production for Resendez and LaDuquesa, respectively. No drilling activity
occurred during the period ended May 31, 2011.
Madera Prospect - Lea County, New Mexico
These fields consist of approximately 1,926 gross acres (1,153 net to the
working interests). The purchase price of this property was approximately
$4,774,000, including approximately $27,000 in acquisition related costs. At
acquisition, the two leases comprise two producing wells and one shut in well.
The Company acquired a 100% working interest and a net 75% net revenue interest
in one producing well , a 55.50% working interest and a 41.62% net revenue
interest in the second producing well and a 41.38% working interest and a 31.04%
net revenue interest in the shut in well. On April 29, 2011 the Company issued a
promissory note to Red Mountain Resources, Inc. in return for borrowing
approximately $4,900,000 to close this lease acquisition. The promissory note
was due and payable in full on May 31, 2011 and the note was subsequently
extended to June 22, 2011, the date of the merger with Red Mountain Resources,
Inc. The note is secured by a mortgage on all of the assets in the purchase
agreement.
The Company recorded $977,274 for depletion expense for the year ended May 31,
2011.
NOTE 4. INVESTMENT IN CROSS BORDER RESOURCES, INC.
On May 23, 2011, the Company entered into a securities purchase agreement with
Cross Border Resources, Inc. ("Cross Border") that granted the Company the right
to purchase 2,136,164 units in an offering by Cross Border. Each unit included 1
share of the common stock of Cross Border and one warrant to acquire an
additional share of Cross Border. The purchase price of the unit offering was
$3,204,261. The warrants have an exercise price of $2.25 per share. The warrants
are for a five year term and become exercisable on the six month anniversary of
the issuance date. As of May 31, 2011, the fair value of the units of Cross
Border increased by approximately $2,800,000. The Company valued the warrants as
of May 31, 2011 at $1,234,500 using the Black-Scholes Merton valuation model. In
determining this valuation, the Company used a volatility rate of 27.5%, a risk
free interest rate of 1.68%, an estimated life of 4.5 years and a dividend rate
of zero. Changes in the fair value of the investment between time of purchase
and May 31, 2011 are recorded as unrealized gains and reflected in other
comprehensive income.
F-16
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Notes to Financial Statements
NOTE 5. LINE OF CREDIT
In June 2010, the Company entered into a 3 year line of credit with First State
Bank of Lonoke, Arkansas ("FSB"). The line has a maximum draw amount of
approximately $3,475,000, and is secured by a first security lien against the
Villareal property (see Note 3). The line bears interest at the bank's reference
rate plus 275 basis points, which as of May 31, 2011 was 6.039% in total. The
line is payable on demand, however if no demand is made, principal payments of$1
million and $1.1 million are required after the first and second years,
respectively, and the loan is due in full at maturity. In addition to a security
interest in the Villareal Property, the principal member of the Company and
another individual who is a related party have personally guaranteed the line of
credit. In addition, the related party has also provided a mortgage in favor of
FSB on certain property owned by the related party as additional collateral.
In June 2010 the Company borrowed approximately $3,400,000 to fund the purchase
price of the Villareal property plus make its first capital call on the
property. The Company borrowed an additional $351,000 in November 2010 to fund
additional capital calls. As of May 31, 2011, the outstanding balance of the
line of Credit was $2,003,594 and the Company was in compliance with the
covenants related to the loan.
NOTE 6. NOTES PAYABLE
As of May 31, 2011, the Company had the following notes outstanding:
First State Bank of Lonoke, $200,060 Secured Promissory Note
issued June 15, 2010; interest rate at 6% per annum, due June
15, 2011. The note is secured by a first security lien against
the Frost Bank property (see Note 3). In addition to a
security interest in the Frost Bank Property, the principal
member of the Company and another individual who is a related
party have personally guaranteed the note. In addition, the
related party has also provided a mortgage in favor of FSB on
certain property owned by the related party as additional
collateral. The remaining balance was repaid subsequent to May
31, 2011. $ 10,000
Robert Hersov, $150,000 Promissory Note issued March 4, 2011;
interest rate at 3.25% per annum, due the earlier of July 31,
2011 or the closing of the acquisition of the Company by Red
Mountain Resources, Inc. The Company is currently negotiating
an extension to this note. 150,000
William F. Miller III, $250,000 Promissory Note issued May 24,
2011; interest rate at 10% per annum, due the earlier of
September 30, 2011 or after the closing of the merger between
the Company by Red Mountain Resources, Inc. and an additional
equity raise of $2,500,000. In addition, the holder is to
receive 50,000 shares of Red Mountain Resources common stock
(see Note 7). The Company is currently negotiating an
extension to the note. 250,000
Michael J. Garnick, $700,000 Promissory Note issued May 24,
2011; interest rate at 10% per annum, due the earlier of
September 30, 2011 or after the closing of the merger between
the Company by Red Mountain Resources, Inc. and an additional
equity raise of $2,500,000. In addition, the holder is to
receive 175,000 shares of Red Mountain Resources common stock
(see Note 7). The Company is currently negotiating an
extension to the note 700,000
Bel-Cal Properties, $1,500,000 Promissory Note issued May 24,
2011; interest rate at 10% per annum, due the earlier of
September 30, 2011 or after the closing of the merger between
the Company by Red Mountain Resources, Inc. and an additional
equity raise of $2,500,000. In addition, the holder is to
receive 375,000 shares of Red Mountain Resources common stock
(see Note 7). The Company is currently negotiating an
extension to the note 1,500,000
Red Mountain Resources, Inc., $4,900,000 non-interest bearing
Secured Commercial Promissory Note issued April 29, 2011, due
May 30, 2011. 4,900,000
Red Mountain Resources, Inc., $850,000 non-interest bearing
Commercial Promissory Note issued May 24, 2011, due June 15,
2011. 850,000
8,360,000
Less: unamortized discount (557,143)
----------
Total notes payable $7,802,857
==========
No interest was imputed on the loans from Red Mountain Resources, Inc. since
prior to issuance of these financial statements the merger was consummated and
this amount was immaterial.
F-17
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Notes to Financial Statements
NOTE 7. STOCK ISSUANCE LIABILITY
The three promissory notes totaling $2,450,000 issued on May 24, 2011 (see Note
6) contained provisions that required the Company to deliver to the note holders
600,000 shares of Red Mountain Resources, Inc. common stock as an inducement to
the note holders to make the loans. The Company recorded a liability in the
amount of $600,000 as the Company had yet to consummate its merger with Red
Mountain Resources, Inc. The Company has treated the amount as a debt discount,
and is amortizing the amount over the life of the loans. As of May 31, 2011,
approximately $42,000 had been amortized as interest expense. The Company
believes that $1.00 per share represents the fair value per share of the common
stock of Red Mountain Resources, Inc. as at issuance of the promissory notes,
Red Mountain Resources, Inc. was engaged in an offering of its securities at
$1.00 per share and had raised in excess of $5 million at that price. Upon
consummation of the merger in June 2011 (see Note 11) the liability was planned
to be extinguished.
NOTE 8. RELATED PARTY TRANSACTIONS
Stone Street Operating Company, LLC ("Stone Street") is related to the Company
by common ownership and management. Stone Street is the operator for the Frost
Bank, Resendez and LaDuquesa properties.
At May 31, 2011, the amount due to Stone Street totaled $3,059 which remains
unpaid after the end of the period by the Company. In addition, during the year,
the Company funded a $25,000 one year certificate of deposit with a bank in
Texas in order for Stone Street to secure an additional letter of credit for the
benefit of the Railroad Commission of Texas in regards to obligations for the
Resendez, La Duquesa and Frost Bank wells. Subsequent to funding, the Company
assigned the certificate of deposit to Stone Street. The certificate of deposit
is expected to be liquidated in the near future and the proceeds returned to the
Company as the operating responsibilities of Stone Street in regards to the
properties is in the process of being transferred to a wholly owned subsidiary
of Red Mountain Resources, Inc.
As of May 31, 2011, the following summarizes the transactions between Stone
Street and the Company in regards to the operations of the properties:
Revenues
Oil and gas sales $ 182,919
Operating expenses
Production taxes 11,336
Leasehold operating expenses 92,247
Gas marketing charge 19,954
----------
Total expenses 123,537
----------
Net proceeds $ 59,382
==========
NOTE 9. MEMBERS' EQUITY
In June 2010, the original three members of the Company assigned all of their
membership interests to two new members. During the year ended May 31, 2011, the
Company paid distributions totaling $448,801 to one of its members.
NOTE 10. COMMITMENTS AND CONTINGENCIES
General
There have been significant changes in the U.S. economy, oil and gas prices and
the finance industry which have adversely affected and may continue to adversely
affect the Company in its attempt to obtain financing or in its process to
produce commercially feasible gas exploration or production.
Federal, state and local authorities regulate the oil and gas industry. In
particular, gas and oil production operations and economics are affected by
environmental protection statutes, tax statutes and other laws and regulations
relating to the petroleum industry, as well as changes in such laws, changing
administrative regulations and the interpretations and application of such laws,
rules and regulations. The Company believes it is in compliance with all
federal, state and local laws, regulations, and orders applicable to the Company
and its properties and operations, the violation of which would have a material
adverse effect on the Company or its financial condition.
F-18
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Notes to Financial Statements
Operating Hazards and Insurance
The gas and oil business involves a variety of operating risks, including the
risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formation, and environmental hazards such as oil spills, gas leaks, ruptures or
discharges of toxic gases, the occurrence of any of which could result in
substantial losses to the Company due to injury or loss of life, severe damage
to or destruction of property, natural resources and equipment, pollution or
other environmental damage, cleanup responsibilities, regulatory investigation
and penalties and suspension of operations.
As noted elsewhere, the Company is a passive working and net revenue interest
owner in the oil and gas industry. As such, the Company only just prior to year
end acquired its own insurance coverage over its interests in the properties.
Prior to this, the Company had relied on the third party operators for its
properties to maintain insurance to cover its operations.
There can be no assurance that insurance will be adequate to cover any losses or
exposure to liability. Although the Company believes that the policies obtained
and those held by the third party operators provide coverage in scope and in
amounts customary in the industry, they do not provide complete coverage against
all operating risks. An uninsured or partially insured claim, if successful and
of significant magnitude, could have a material adverse effect on the Company
and its financial condition via its contractual liability to the prospect.
Title to Properties
The Company's practice has been to acquire ownership or leasehold rights to oil
and natural gas properties from third parties. Most of the Company's current
drilling operations are conducted on properties acquired from third parties. Our
existing rights are dependent on those previous third parties having obtained
valid title to the properties. Prior to the commencement of gas drilling
operations on those properties, the third parties customarily conduct a title
examination. The Company generally does not conduct examinations of title prior
to obtaining its interests in its operations, but rely on representations from
the third parties that they have good, valid and enforceable title to the oil
and gas properties. Based upon the foregoing, we believe that we have
satisfactory title to our producing properties in accordance with customary
practices in the gas industry. The Company is not aware of any title
deficiencies as of the date of these financial statements. The Company is
currently working with its third party operator (see Note 5) for the Frost Bank
property to update the division order for between the interest owners.
Potential Loss of Oil and Gas Interests / Cash Calls
The Company has agreed to be bound by the existing JOA's with various operators
for the drilling of oil and gas properties, and still owes certain operator
payments on drilling wells. In addition, it might be subject to future cash
calls due to (1) the drilling of any new well or wells on drilling sites; (2)
rework or recompletion of a well; and (3) deepening or plugging back of dry
holes, etc. If the Company does not pay delinquent amounts due or its share of
future Authorization For Expenditures ("AFE") invoices, it may have to forfeit
all of its rights in certain of its interests in the applicable prospects and
any related profits. If one or more of the other members of the prospects fail
to pay their share of the prospect costs, the Company may need to pay additional
funds to protect its investments.
NOTE 11. SUBSEQUENT EVENTS
On March 22, 2011, the Company entered an agreement to be acquired by Red
Mountain Resources, Inc. ("Red Mountain") a publicly traded shell company. The
agreement provided for Red Mountain to issue 27,000,000 shares of common stock
in exchange for all of the then outstanding common stock of the Company. On June
22, 2011, the transaction was completed and the reverse recapitalization with
Red Mountain was completed. Red Mountain's $850,000 non-interest bearing
Commercial Promissory Note issued May 24, 2011, due June 15, 2011 was
extinguished upon completion of the transaction. As part of the transaction Red
Mountain guaranteed a loan of $2,500,000 from the First State Bank of Lonoke
which was re-executed in the name of the Company. The First State Bank of Lonoke
also had the following requirements: (i) Alan Barksdale, the Company's sole
officer, director and shareholder, must be the only officer as President of the
Company and Chief Executive Officer of Red Mountain during the term of the loan;
(ii) the Company's 1,000 common shares (100%) shall be pledged as collateral for
the loan by Red Mountain to First State Bank of Lonoke; (iii) the Company's
assets shall remain held in the name of the Company during the term of the loan;
(iv) Red Mountain and the Company were to jointly sign a new Note to the First
State Bank of Lonoke to acquire the loan to Bamco Gas, LLC, in receivership, in
the amount of approximately $2,681,201.37, which is currently in technical
default, and the First State Bank of Lonoke would assign the Note to the
Company. with any collateral pledges; and (v) the shareholders of the Company
pledge two million common shares of Red Mountain to secure the Black Rock loan
and the acquisition of the Note for Bamco Gas, LLC to the First State Bank of
Lonoke.
F-19
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Notes to Financial Statements
On June 16, 2011, the Company filed Articles of Conversion with the Secretary of
State for the State of Arkansas to convert the Company into a corporation. The
conversion became effective as of July 1, 2011.
On July 8, 2011, the Company entered into an agreement, effective as of July 1,
2011, that governed the relationship between the Company and certain other
parties with respect to oil and gas leases in the Permian Basin covering
approximately 1,255 gross acres (1,029 net acres) that the Company acquired an
82% ownership interest in. Pursuant to the agreement, on July 25, 2011, the
Company acquired the remaining 18% ownership interest in the land from such
other parties. The total acquisition cost of the combined 1,255 gross/net acres
was $439,222 or $350 per acre.
On August 8, 2011, Red Mountain entered into an employment agreement with John
T. Hanley pursuant to which Mr. Hanley will serve as Red Mountain's Executive
Vice President and Director of Finance. The agreement provides for Mr. Hanley to
receive a base salary of $13,750 per month and expires on December 31, 2011.
On August 16, 2011, Red Mountain also acquired a 100% working interest in the
"Martin Lease" in exchange for 320,000 shares of Red Mountain's common stock and
a 100% working interest with a 75% net revenue interest in the "Shafter Lake
Lease" for $250,000 and 250,000 shares of Red Mountain's common stock. The
Martin Lease is 320 gross/net acres located in Andrews County, Texas. The Martin
Lease is held by production and is for all rights 5,000 feet and below the
surface of the land. The target horizons associated with the Martin Lease are
the Clearfork and Wichita Albany formations. The Shafter Lake Lease is
approximately 185 gross/net acres located in Andrews County, Texas. The Shafter
Lake Lease is held by production and is for all rights from surface to 4,250
feet below the surface of the land. The target horizons associated with the
Shafter Lake Lease are the Grayburg and San Andrus formations.
On August 16, 2011, Red Mountain entered into a stock purchase and sale
agreement pursuant to which Red Mountain acquired 218,535 shares of common stock
of Cross Border Resources, Inc. from a third party in exchange for the issuance
of 273,169 shares of Red Mountain's common stock.
On August 30, 2011, the Board of Directors of Red Mountain approved the
dismissal of L J Soldinger Associates LLC and the engagement of Hein &
Associates LLP as the principal accountant to audit Red Mountain's financial
statements.
Beginning in March 2011, Red Mountain commenced a private placement of its
shares of common stock at an offering price of $1.00 per share. As of September
22, 2011, Red Mountain has sold an aggregate of 12,055,000 shares of its common
stock raising gross proceeds of $12,055,000.
In July 2011, the Company issued unsecured promissory notes in the principal
amount of $850,000 to RMS Advisors, Inc. and TSS Investment, Inc., each an
unaffiliated lender. In July and August 2011, the Company repaid the amounts due
under the notes held by RMS Advisors, Inc. and TSS Investment, Inc. and such
notes were retired. The Company also repaid a portion of the amounts owed under
the promissory notes held by Michael J. Garnick, Bel-Cal Properties and William
F. Miller, III. As of September 22, 2011, an aggregate of $1,150,000 remained
outstanding to these three lenders, and separately $150,000 remained unpaid to
Robert Hersov. The Company is currently negotiating an extension to these notes.
The Company evaluated events and transactions subsequent to May 31, 2011 and
determined there were no significant further events to report through September
22, 2011, the date the Company issued these financial statements.
NOTE 12. SUPPLEMENTAL OIL AND GAS DISCLOSURE (unaudited)
ESTIMATED NET QUANTITIES OF OIL AND GAS RESERVES (unaudited)
Users of this information should be aware that the process of estimating
quantities of "proved" and "proved developed" natural gas and crude oil reserves
is very complex, requiring significant subjective decisions in the evaluation of
all available geological, engineering and economic data for each reservoir. The
data for a given reservoir may also change substantially over time as a result
of numerous factors including, but not limited to, additional development
activity, evolving production history and continual reassessment of the
viability of production under varying economic conditions. Consequently,
material revisions to existing reserve estimates occur from time to time.
Although every reasonable effort is made to ensure that reserve estimates
reported represent the most accurate assessments possible, the significance of
the subjective decisions required and variances in available data for various
reservoirs make these estimates generally less precise than other estimates
presented in connection with financial statements.
F-20
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Notes to Financial Statements
Proved oil and gas reserves are those quantities of natural gas, crude oil and
condensate, which, by analysis of geoscience and engineering data, can be
estimated with reasonable certainty to be economically producible - from a given
date forward, from known reservoirs, and under existing economic conditions,
operating methods, and government regulations - prior to the time at which
contacts providing the right to operate expire, unless evidence indicates that
renewal is reasonably certain, regardless of whether deterministic or
probabilistic methods are used for the estimation. The project to extract the
hydrocarbons must have commenced or the Company must be reasonably certain that
it will commence the project within a reasonable time.
Proved developed reserves are proved reserves that can be expected to be
recovered through existing wells with existing equipment and under existing
economic and operating conditions.
Oil and Gas Reserves
The following tables set forth our net proved oil and gas reserves, including
the changes therein, and net proved developed reserves at May 31, 2011.
Net proved Developed and Undeveloped Reserves - (In millions of cubic feet
"MMCF") of natural gas and (thousands of barrels "Mbbl") of oil:
Natural Gas Oil
----------- ------------
(unaudited) (unaudited)
June 1, 2010 -- --
Purchase of properties 9,443 844
Revisions of previous estimates -- --
Extension, discoveries, other estimates 1,902 --
Production (895) --
Disposition of properties -- --
----------- ------------
May 31, 2011 10,450 844
=========== ============
Net proved oil and gas reserves consisted of the following at May 31, 2011:
Natural Gas Oil
Volumes Volumes
MMCF Mbbl
----------- ------------
(unaudited) (unaudited)
Proved developed producing 4,479 2
Proved undeveloped 5,971 842
----------- ------------
Total proven 10,450 844
=========== ============
Results of operations for oil and gas producing activities for May 31, 2011
Year ended May 31, 2011 (unaudited)
Revenue $ 3,711,815
Operating expenses (lifting costs) (325,814)
Depletion (716,655)
Impairment of oil and gas properties --
------------
Operating income 2,669,346
Income tax provision --
------------
Results of operations for oil and gas properties $ 2,669,346
F-21
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Notes to Financial Statements
Cost incurred for oil and gas property acquisition, exploration and development
activities
(unaudited)
Property acquisition
Unproved $ --
Proved (1) 7,573,614
Exploration 239,393
Development (1) 1,719,183
------------
Total costs incurred $ 9,532,190
============
(1) The Company has included the prepaid drilling costs acquired in the purchase
of the Villareal property (see Note 3) of approximately $680,000 as part of
development costs incurred.
Aggregate capitalized costs
Capitalized costs relating to oil and gas activities are as follows:
May 31, 2011 (unaudited)
Proved $ 9,292,797
Unproved 239,393
------------
Total capitalized costs $ 9,532,190
Accumulated depletion 716,655
------------
Net capitalized costs $ 8,815,535
============
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES - (unaudited)
The following information has been developed utilizing procedures prescribed by
FASC Topic 932 and based on crude oil reserve and production volumes estimated
by the Company's engineering staff. It may be useful for certain comparative
purposes, but should not be solely relied upon in evaluating the Company or its
performance. Further, information contained in the following table should not be
considered as representative of realistic assessments of future cash flows, nor
should the Standardized Measure of Discounted Future Net Cash Flows be viewed as
representative of the current value of the Company.
The Company believes that the following factors should be taken into account in
reviewing the following information: (1) future costs and selling prices will
probably differ from those required to be used in these calculations; (2) actual
rates of production achieved in future years may vary significantly from the
rate of production assumed in the calculations; (3) selection of a 10% discount
rate is arbitrary and may not be reasonable as a measure of the relative risk
inherent in realizing future net oil and gas revenues; and (4) future net
revenues may be subject to different rates of income taxation.
Under the Standardized Measure, future cash inflows were estimated by applying
the average first day price for each month during the period adjusted for fixed
and determinable escalations to the estimated future production of period-end
proven reserves. Future cash inflows were reduced by estimated future
development, abandonment and production costs based on period-end costs in order
to arrive at net cash flow before tax. Future income tax expenses has been
computed by applying period-end statutory tax rates to aggregate future pre-tax
net cash flows, reduced by the tax basis of the properties involved and tax
carryforwards. Use of a 10% discount rate is required by FASC Topic 932.
Management does not rely solely upon the following information in making
investment and operating decisions. Such decisions are based upon a wide range
of factors, including estimates of probable as well as proven reserves and
varying price and cost assumptions considered more representative of a range of
possible economic conditions that may be anticipated.
Standardized measure of discounted future net cash flows relating to proved oil
and gas reserves
F-22
BLACK ROCK CAPITAL, INC.
(FORMERLY BLACK ROCK CAPITAL, LLC)
Notes to Financial Statements
The standardized measure of discounted future net cash flows relating to proved
oil and gas reserves for the Company is as follows:
May 31,
2011
------------
(in thousands)
(unaudited)
Future cash inflows $ 121,327
Less related future:
Production costs 20,087
Development costs 20,733
------------
Future net cash flows before income taxes 80,507
Future income taxes --
Future net cash flows 80,507
10% annual discount for estimating timing of cash flows (45,076)
------------
Standardized measure of discounted future net cash flows $ 35,431
============
A summary of the changes in the standardized measure of discounted future net
cash flows applicable to proved oil and gas reserves is as follows:
May 31,
2011
(in thousands)
(unaudited)
Net changes in sales and transfer prices and in
production (lifting) costs related to future production $ --
Changes in estimated future development costs --
Sales and transfers of oil and gas produced during
the period (3,712)
Net change due to extensions, discoveries and improved
recovery --
Net change due to purchases and sales of minerals in place 41,093
Net change due to revisions in quantity estimates --
Previously estimated development costs incurred during
the period (1,959)
Accretion of discount 9
Other - unspecified --
Net change in income taxes --
------------
Aggregate change in the standardized measure of
discounted net cash flows for the year $ 35,431
F-23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: October 24, 2011 RED MOUNTAIN RESOURCES, INC.
By: /s/ Alan W. Barksdale
-------------------------------
Alan W. Barksdale
Chief Executive Officer
