Attached files
| file | filename |
|---|---|
| EX-31 - CERTIFICATION - Topaz Resources, Inc. | ex31a.htm |
| EX-31 - CERTIFICATION - Topaz Resources, Inc. | ex31b.htm |
| EXCEL - IDEA: XBRL DOCUMENT - Topaz Resources, Inc. | Financial_Report.xls |
| EX-32 - CERTIFICATION - Topaz Resources, Inc. | ex32b.htm |
| EX-32 - CERTIFICATION - Topaz Resources, Inc. | ex32a.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the Quarterly period ended September 30, 2011 | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from _____________ to _____________ | |
Commission file number: 333-158721
TOPAZ RESOURCES, INC. |
(Exact name of small business issuer as specified in its charter) |
Florida |
| 24-4090511 |
(State or other jurisdiction of Incorporation or organization) |
| (I.R.S. Employer Identification No.) |
1012 North Masch Branch Road, Denton, TX 76207 |
(Address of principal executive offices) |
940-243-1122 |
(Issuer's telephone number) |
Kids Germ Defense Corp. |
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 at least the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o Non-accelerated filer o | Accelerated filer o Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There were 518,175,000 shares of the Registrant's $0.0001 par value common stock outstanding as of November 4, 2011.
1
TOPAZ RESOURCES, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLSOURES ABOUT MARKET RISK
ITEM 4T. CONTROLS AND PROCEDURES
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULT UPON SENIOR SECURITIES
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOPAZ RESOURCES, INC. (Formerly Kids Germ Defense Corp.) (A Development Stage Company) CONDENSED CONSOLIDATED BALANCE SHEETS | ||||
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| September 30, |
| December 31, |
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| 2011 |
| 2010 |
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| (unaudited) |
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ASSETS |
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CURRENT ASSETS |
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Cash | $ | 8,300 | $ | 337,168 |
Other receivables |
| 55,517 |
| - |
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Total Current Assets |
| 63,817 |
| 337,168 |
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PROPERTY |
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Deposit on investment in unevaluated oil and natural gas properties |
| 660,908 |
| 661,708 |
Investment in unevaluated oil and natural gas properties |
| 216,326 |
| 84,406 |
Total Property |
| 877,234 |
| 746,114 |
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TOTAL ASSETS | $ | 941,051 | $ | 1,083,282 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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CURRENT LIABILITIES |
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Accounts payable and accrued liabilities | $ | 37,249 | $ | 21,815 |
Accounts payable, related party |
| 31,838 |
| 28,164 |
Accrued interest |
| 14,276 |
| - |
Due to operator, related party |
| 3,727 |
| - |
Due to joint venture |
| 3,302 |
| - |
Deposit |
| - |
| 300,000 |
Due to working interest owner |
| 9,346 |
| - |
Note payable, net of unamortized discount of $760 and $1,338, respectively |
| 114,620 |
| 38,612 |
Note payable - Related Party |
| 275,000 |
| 275,000 |
Total Current Liabilities |
| 489,358 |
| 663,591 |
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STOCKHOLDERS' EQUITY |
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Preferred stock; $0.0001 par value; 10,000,000 shares authorized; none issued and outstanding |
| - |
| - |
Common stock, $0.0001 par value; 700,000,000 shares authorized; 518,175,000 and 508,175,000 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively |
| 50,893 |
| 50,818 |
Common stock payable |
| 157,500 |
| 157,500 |
Additional paid-in capital |
| 515,614 |
| 366,189 |
Accumulated deficit during development stage |
| (272,314) |
| (154,816) |
Total Stockholders' Equity |
| 451,693 |
| 419,691 |
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 941,051 | $ | 1,083,282 |
The accompanying notes are an integral part of these financial statements.
3
The accompanying notes are an integral part of these financial statements.
4
The accompanying notes are an integral part of these financial statements.
5
TOPAZ RESOURCES, INC.
(FORMERLY KIDS GERM DEFENSE CORP.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND ORGANIZATION
Topaz Resources, Inc. formerly Kids Germ Defense Corp. (the "Company") is a development stage enterprise that was incorporated in the state of Florida on January 16, 2009. To date, the Company's activities have been limited to raising capital, organizational matters and structuring its business plan. The corporate headquarters are located in Denton, Texas. The Company is an independent oil and gas company focusing on production, acquisitions and developmental drilling opportunities within proven producing areas of North-Central-West Texas.
Effective April 16, 2010, the Company changed its name from Kids Germ Defense Corp. to Topaz Resources, Inc.
On April 16, 2010 the Company commenced oil and gas exploration activities. As of September 30, 2011, the Company has not achieved its planned principal operations from its oil and gas operations. Accordingly, the Company's activities are considered to be those of a "Development Stage Enterprise". Among the disclosures required, are that the Company's financial statements be identified as those of a development stage enterprise. In addition, the statements of operations, stockholders equity (deficit) and cash flows are required to disclose all activity since the Company's date of inception. The Company will continue to prepare its financial statements and related disclosures as those of a development stage enterprise until such time that the Company achieves planned principle operations.
CONSOLIDATION
The accompanying condensed consolidated financial statements include all accounts of Topaz and its wholly-owned subsidiary. All significant inter-company balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for a fair statement of (a) the results of operations for the three and nine month periods ended September 30, 2011 and 2010 and the Period January 16, 2009 (Date of Inception) through September 30, 2011, (b) the financial position at September 30, 2011 and December 31, 2010, and (c) cash flows for the periods ended September 30, 2011 and 2010, and the Period January 16, 2009 (Date of Inception) through September 30, 2011, have been made.
The unaudited condensed financial statements and notes are presented in accordance with SEC Form 10-Q. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying condensed financial statements and notes should be read in conjunction with the audited financial statements and notes of the Company for the fiscal year ended December 31, 2010. The results of operations for the three and nine month periods ended September 30, 2011 are not necessarily indicative of those to be expected for the entire year.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid instruments with a maturity of three months or less to be cash equivalents. The Company had $8,300 in cash and cash equivalents at September 30, 2011.
REVENUE RECOGNITION
We recognize revenue when all of the following criteria have been met: (i) evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the customer is fixed and determinable and (iv) collectability is reasonably assured.
6
TOPAZ RESOURCES, INC.
(FORMERLY KIDS GERM DEFENSE CORP.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
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| • | Evidence of an arrangement exists when a final understanding between us and our customer has occurred, and can be evidenced by a completed customer purchase order, field ticket, supplier contract, or master service agreement. |
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| • | Delivery has occurred or services have been rendered when we have completed requirements pursuant to the terms of the arrangement as evidenced by a field ticket or service log. |
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| • | The price to the customer is fixed and determinable when the amount that is required to be paid is agreed upon. Evidence of the price being fixed and determinable is evidenced by contractual terms, our price book, a completed customer purchase order, or a completed customer field ticket. |
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| • | Collectability is reasonably assured when we screen our customers and provide goods and services to customers according to determined credit terms that have been granted in accordance with our credit policy. |
We present our revenues net of any sales taxes collected by us from our customers that are required to be remitted to local or state governmental taxing authorities.
We review our contracts for multiple element revenue arrangements. Deliverables will be separated into units of accounting and assigned fair value if they have standalone value to our customer, have objective and reliable evidence of fair value, and delivery of undelivered items is substantially controlled by us. We believe that the negotiated prices for deliverables in our services contracts are representative of fair value since the acceptance or non-acceptance of each element in the contract does not affect the other elements.
EARNINGS PER SHARE
The Company follows ASC Topic 260 to account for the earnings per share. Basic earnings per common share (“EPS”) calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.
ADVERTISING
The Company expenses advertising costs as incurred. There were no advertising costs incurred during the fiscal quarter ending September 30, 2011.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company has evaluated all accounting pronouncements through the issuance of these financial statements and there were no new accounting pronouncements that had a significant impact on the Company's operating results, financial position or financial statements.
7
TOPAZ RESOURCES, INC.
(FORMERLY KIDS GERM DEFENSE CORP.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
NOTE 2 - GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. For the three and nine months ended September 30, 2011 and since inception through September 30, 2011, the Company has had a net income of $20,928 and net losses of $117,498 and $272,314, respectively. As of September 30, 2011, the Company has not emerged from the development stage. In view of these matters, there is substantial doubt that the Company will continue as a going concern and will be dependent upon the Company's ability to begin operations and achieve a level of profitability.
Since inception, the Company has financed its activities principally from term notes and the sale of public equity securities. The Company intends on financing its future development activities and its working capital needs largely from the sale of public equity securities with some additional funding from other traditional financing sources, including term notes until such time that funds provided by operations are sufficient to fund working capital requirements. The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 3 - INVESTMENT IN OIL AND NATURAL GAS PROPERTIES
The amounts capitalized as oil and natural gas properties were incurred for the purchase, exploration and ongoing development of properties.
| Acquisition Costs | Evaluation Costs | Total | |||
Balance at December 31, 2010 |
| 25,000 |
| 59,406 |
| 84,406 |
Costs incurred on exploratory activities during the nine months ended September 30, 2011 |
| 99,500 |
| 168,757 |
| 268,257 |
Impairment of oil and natural gas properties during the nine months ended September 30, 2011 |
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| (103,366) |
| (103,366) |
Balance at September 30, 2011 | $ | 124,500 | $ | 124,797 | $ | 216,326 |
The Company considers that all of its oil and natural gas properties are unevaluated and that the Company has no proved reserves. The Company began a rework of an existing well in May 2011 and finished the work in July 2011. This rework resulted in production and sale of natural gas in the amount of an estimated 75,078 net thousand cubic feet of natural gas during the nine months ending September 30, 2011. The Company continues to evaluate the well and considers that, at September 30, 2011; the well had not demonstrated sufficient production history to classify this as a proved developed property. We expect to make that determination in the coming months.
Pursuant to Securities and Exchange Regulation S-X Rule 4-10, the Company’s accounting policy is to follow the “full cost” accounting method, including depletion under the unit of production method. Although the Company has determined that it has no proved reserves we will have sales during this quarter. Therefore we considered it prudent to recognize a depletion expense against that revenue. We do not have an independent engineering reserve study report so we have made a rough estimate of 557,495 net thousand cubic feet of remaining recoverable natural gas to the Company’s ownership interest based on analogue production and a rough estimate of future production. This resulted in a depletion expense for the three and nine months ended of $4,610 and $8,025, respectively.
Properties which are not being amortized are assessed quarterly, on a field-by-field and a project-by-project basis, to determine whether they are recorded at the lower of cost or fair market value. During the nine months ended September 30, 2011, the Company drilled a new well which did not produce commercial quantities of hydrocarbons and has been declared a dry hole. As a result, an impairment cost of $103,366 was recognized as of September 30, 2011.
8
TOPAZ RESOURCES, INC.
(FORMERLY KIDS GERM DEFENSE CORP.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
NOTE 4 - DEPOSIT ON OIL AND NATURAL GAS PROPERTIES
During the year ended December 31, 2010 the Company acquired the right to a working interest in a lease in north Texas and drilled an exploratory well. The completion of the assignment of the working interest is pending the consent of the trustee for the landowners, such consent not to be unreasonably withheld.
The Company assigned, subject to completion of the well, a portion of its working interest in the exploratory well. In addition, the Company assigned a portion of its right to a working interest in the remaining lease.
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| September 30, 2011 |
Beginning balance | $ | 661,708 |
Lease acquisition costs |
| — |
Exploratory well drilling costs (reclassification) |
| (800) |
Less proceeds from sale of working interests |
| — |
| $ | 660,908 |
NOTE 5 - RELATED PARTY TRANSACTIONS
On October 23, 2010 the Company entered into an agreement to acquire from Dark Horse Operating Co., L.L.C. (DHOC"), an affiliate of the Company, its interest in 766,562 net acres in north central Texas. In consideration of this the Company agreed to pay $275,000, committed to issue 3,000,000 shares of its Common Stock, which is recorded as common stock payable of $157,500 in the accompanying balance sheet and assumed liabilities of $21,234. The property was assigned by Dark Horse Operating Co., L.L.C. to the Company on April 13, 2011. As of September 30, 2011, the Company has not paid the cash consideration of $275,000 and has not issued the 3,000,000 shares to DHOC.
DHOC is an affiliate of the Company because two of the officers, one of whom is also a director of the Company, own DHOC. The Company has adopted a policy that requires that the two officers not participate in discussions or votes regarding matters involving DHOC.
NOTE 6-- DEPOSIT
The Company agreed to sell a working interest in an oil and natural gas well at such time as the Company had acquired and completed that well for production of oil and natural gas. The Company received a $300,000 deposit towards the costs to acquire and complete the well. The transactions to acquire the well closed in January and February 2011 and the work to complete the well began in May and finished in July 2011. As of September 30, 2011 the deposit amount has been netted against the Company’s investment in this well.
NOTE 7 - NOTES PAYABLE
On December 21, 2010, the Company issued a secured note payable in the amount of $40,000. This note bears interest at 12% on the face value of the note and is secured by a first position lien on certain oil and natural gas assets of the Company. This note matured on June 21, 2011 and the Company is currently in discussions with the Note holder to modify the terms of the note.
On January 26, 2011, the Company issued a secured note payable in the amount of $25,000. This note matures on January 26, 2012, bears interest at 12% on the face value of the note and is secured by a first position lien on certain oil and natural gas assets of the Company.
On January 28, 2011, the Company issued secured notes payable in the amount of $50,000. These notes matures on January 26, 2012, bear interest at 12% on the face value of the notes and are secured by a first position lien on certain oil and natural gas assets of the Company.
9
TOPAZ RESOURCES, INC.
(FORMERLY KIDS GERM DEFENSE CORP.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
NOTE 8 - STOCKHOLDER'S EQUITY
On January 13, 2011, the Company issued 5,000,000 shares of common stock at $0.0129 per share (the underlying fair market value of the common stock), for a total of $64,500, for the acquisition of oil and gas properties.
On March 1, 2011, the Company issued 5,000,000 shares of common stock at $0.017 per share (the underlying fair market value of the common stock), for a total of $85,000, for the acquisition of oil and gas properties.
Effective April 22, 2010, the Company and an investor signed a subscription agreement to purchase a total of 4,800,000 shares of the Company's common stock at $0.04167 per share (the underlying fair market value of the common stock) plus 180,000,000 warrants to purchase shares of the Company's common stock at an exercise price of $0.0833 per share for a total amount of $200,000.
The warrant entitles the holder to purchase 180,000,000 shares of the Company's common stock, at any time, at an exercise price of $0.0833 per share, provided, however, that in no event shall the holder be entitled to exercise this warrant for a number of shares in excess of the number of shares which, upon giving effect to such exercise, would cause the aggregate number of shares of common stock beneficially owned by the holder and its affiliates to exceed 4.99% of the outstanding shares of common stock. The holder may exercise the warrant on either a cash or cashless exercise as determined by the holder of the warrant. The warrants expire in 2015.
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| Shares |
| Range of Exercise |
| Weighted Average | ||
Outstanding at December 31, 2010 |
| 180,000,000 |
| $ | 0.0833 |
| $ | 0.0833 |
Warrants granted |
| — |
| $ | — |
| $ | — |
Warrants cancelled or expired |
| — |
| $ | — |
| $ | — |
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Outstanding at September 30, 2011 |
| 180,000,000 |
| $ | 0.0833 |
| $ | 0.0833 |
Effective December 21, 2010 and in connection with the issuance of a secured note payable, the Company issued the lender 80,000 shares of common stock at the fair market value of $0.019 or $1,520. The amount is recorded as a discount on the related Note and was amortized over the 6 month term and expensed as interest.
NOTE 9 - INCOME TAXES
The Company operates in the United States ("U.S."); accordingly, federal and state income taxes have been provided based upon the tax laws and rates of the U.S. as they apply to the Company's current ownership structure.
The Company accounts for income taxes pursuant to Accounting Standards Codification No. 740, ACCOUNTING FOR INCOME TAXES, which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The Company provides for deferred taxes on temporary differences between the financial statements and tax basis of assets using the enacted tax rates that are expected to apply to taxable income when the temporary differences are expected to reverse.
The Company recognizes interest and penalties related to unrecognized tax benefits within the provision for income taxes on continuing tax benefits. There are no unrecognized tax benefits that if recognized would affect the tax rate. There were no interest or penalties recognized as of the date of adoption or for the nine months ended September 30, 2011. The Company files tax returns in the U.S. and states in which it has operations and is subject to taxation. Each of the Company's tax years from 2009 remains open to examination by taxing authorities.
10
TOPAZ RESOURCES, INC.
(FORMERLY KIDS GERM DEFENSE CORP.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
The Company's effective tax rate for continuing operations for the nine months ended September 30, 2011 and 2010 was approximately 0% and 0%, respectively because the Company had no taxable income in either year.
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| September 30, 2011 |
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| September 30, 2010 |
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Loss |
| $ (117,498) |
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| $ (72,488) |
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Deferred Tax Asset (30%) |
| $ 35,249 |
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| $ 21,746 |
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Impairment of Deferred Tax Asset |
| $ (35,249) |
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| $ (21,746) |
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Net Deferred Tax Asset |
| $ 0 |
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| $ 0 |
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NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company, as an owner or lessee and operator of oil and gas properties, is subject to various federal, state and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease operations in the affected area.
In January 2011, the Company entered into an agreement to lease oil and gas property contiguous with existing leased oil and gas properties held by the Company. During the first and second quarters of 2011, the Company drilled a new well on this newly leased property which did not produce commercial quantities of hydrocarbons and has been declared a dry hole. Immediately prior to commencing the drilling of this well, the Company received $75,000 of proceeds from the issuance of three (3) separate 12% Senior Secured Notes. The Notes bear 12% interest and are due and payable on January 26, 2012. In January 2011, the Company also sold an interest in this well to another third party company. This third party company has lost his investment and retains no further interest in the lease or the well.
In March 2011, the Company entered into an agreement with a third party company to sell an interest in one of the Company's oil and gas properties. This agreement also provided for participation of this third party and funding by this third party company of drilling of new oil and gas wells on Company held properties. This transaction did not close because the required cash consideration by the third party company was not received by the Company. The agreement has been terminated.
NOTE 11 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events from the date the Financial Statements were issued through the date of this filing and has determined that there are no items to disclose.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q AND IN OUR ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 2011.
THIS FILING, INCLUDING BUT NOT LIMITED TO "MANAGEMENT'S DISCUSSION AND ANALYSIS", CONTAINS FORWARD-LOOKING STATEMENTS. THE WORDS "ANTICIPATED," "BELIEVE," "EXPECT," "PLAN," "INTEND," "SEEK," "ESTIMATE," "PROJECT," "WILL," "COULD," "MAY," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS INCLUDE, AMONG OTHERS, INFORMATION REGARDING FUTURE OPERATIONS, FUTURE CAPITAL EXPENDITURES, AND FUTURE NET CASH FLOW. SUCH STATEMENTS REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC AND BUSINESS CONDITIONS, CHANGES IN FOREIGN, POLITICAL, SOCIAL, AND ECONOMIC CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, THE ABILITY TO ACHIEVE FURTHER MARKET PENETRATION AND ADDITIONAL CUSTOMERS, AND VARIOUS OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD- LOOKING STATEMENTS AS A RESULT OF SEVERAL FACTORS, INCLUDING THE RISKS FACED BY US AS DESCRIBED BELOW AND ELSEWHERE IN THIS FORM 10-Q AS WELL AS IN OUR FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 2011. IN LIGHT OF THESE RISKS AND UNCERTAINTIES THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-Q WILL OCCUR. WE HAVE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT NEW INFORMATION, FUTURE EVENTS, OR OTHERWISE, EXCEPT AS REQUIRED BY FEDERAL SECURITIES LAWS AND WE CAUTION YOU NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. WE MAY NOT UPDATE THESE FORWARD-LOOKING STATEMENTS, EVEN THOUGH OUR SITUATION MAY CHANGE IN THE FUTURE.
INTRODUCTION AND OVERVIEW
On April 16, 2010 the Company changed its plan of operations from developing health and safety products to an independent oil and gas company focusing on production, acquisitions and developmental drilling opportunities within proven producing areas of north, central and west Texas. As such, the results of operations for the three and nine months ended September 30, 2011, are not comparable to the results of operations for the three and nine months ended September 30, 2010, nor are the assets, liabilities and stockholders' equity at September 30, 2011 comparable to the assets, liabilities and stockholders' equity at September 30, 2010.
We are an independent oil and natural gas exploration, development and production company. Our basic business model is to increase shareholder value by finding and developing oil and gas reserves through exploration and development activities, and selling the production from those reserves at a profit. To be successful, we must, over time, be able to find oil and gas reserves and then sell the resulting production at a price that is sufficient to cover our finding costs, operating expenses, administrative costs and interest expense, plus offer us a return on our capital investment.
We have a limited operating history and minimal proven reserves, production and cash flow. To date, we have had limited revenues and have not been able to generate sustainable positive earnings. Our management cannot provide any assurances that the Company will ever operate profitably. As a result of our limited operating history, we are more susceptible to the numerous business, investment and industry risks that have been described in Item 1A. Risk Factors of our Form 10-K.
12
Our longer-term success depends on, among many other factors, the acquisition and drilling of commercial grade oil and gas properties and on the prevailing sales prices for oil and natural gas along with associated operating expenses. The volatile nature of the energy markets makes it difficult to estimate future prices of oil and natural gas; however, any prolonged period of depressed prices would have a material adverse effect on our results of operations and financial condition.
Our operations are focused on identifying and evaluating prospective oil and gas properties and funding projects that we believe have the potential to produce oil or gas in commercial quantities. We currently have projects and properties in Montague, Denton and Wichita Counties in Texas.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED SEPTEMBER 30, 2011 COMPARED TO THE SAME PERIOD ENDED JUNE 30, 2010
The following table presents a summary of our results of operations.
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| Three Months Ended |
| Three Months Ended |
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| September 30, |
| September 30, |
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| 2011 |
| 2010 |
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| (unaudited) |
| (unaudited) |
Revenues |
| $ | 61,172 | $ | - |
Professional fees expense |
|
| 7,550 |
| 44,313 |
Impairment of oil and gas properties |
|
| - |
| - |
Depletion expenses |
|
| 4,610 |
| - |
General and administrative expenses |
|
| 20,199 |
| 1,462 |
Interest expense |
|
| 7,885 |
| - |
Interest income |
|
| - |
| 2,123 |
NET INCOME (LOSS) |
| $ | 20,928 | $ | (43,652) |
REVENUES
The revenues of $61,172 are the result of a rework of an existing well which resulted in the production and sale of natural gas in the amount of an estimated 22,910 net thousand cubic feet of natural gas during the three months ended September 30, 2011.
PROFESSIONAL FEES
The professional fees of $7,550 incurred during the three months ended September 30, 2011 were comprised of engineering accounting and audit fees.
GENERAL AND ADMINISTRATIVE EXPENSES
The Company incurred $20,199 in general and administrative expenses during the three months ended September 30, 2011. These expenses were comprised of costs associated with operations, such as utilities.
INTEREST EXPENSE
The Company incurred $7,885 in interest expense for the three months ended September 30, 2011. The interest expense is a result of the interest on the outstanding debt and the amortization of the discount on the debt.
13
THE NINE MONTHS ENDED SEPTEMBER 30, 2011 COMPARED TO THE SAME PERIOD ENDED SEPTEMBER 30, 2010
The following table presents a summary of our results of operations.
|
|
| Nine Months Ended |
| Nine Months Ended |
|
|
| September 30, |
| September 30, |
|
|
| 2011 |
| 2010 |
|
|
| (unaudited) |
| (unaudited) |
Revenues |
| $ | 91,900 | $ | - |
Professional fees expense |
|
| 31,735 |
| 66,272 |
Depletion |
|
| 8,025 |
| - |
Impairment of oil and gas properties |
|
| 103,366 |
| - |
General and administrative expenses |
|
| 48,588 |
| 8,339 |
Interest expense |
|
| 17,684 |
| - |
Interest income |
|
| - |
| 2,123 |
NET LOSS |
| $ | (117,498) | $ | (72,488) |
REVENUES
The revenues of $91,900 are the result of a rework of an existing well which resulted in the production and sale of natural gas in the amount of an estimated 41,059 net thousand cubic feet of natural gas during the nine months ended September 30, 2011.
PROFESSIONAL FEES
The professional fees of $31,735 incurred during the nine months ended September 30, 2011 were comprised predominantly of engineering fees associated with properties that the Company decided not to pursue and accounting fees.
IMPAIRMENT OF OIL AND GAS PROPERTIES
The Company incurred $103,366 impairment of oil and gas properties is a result of the Company drilling a new well which did not produce commercial quantities of hydrocarbons and has been declared a dry hole.
GENERAL AND ADMINISTRATIVE EXPENSES
The Company incurred $48,588 in general and administrative expenses during the nine months ended September 30, 2011. These expenses were comprised of costs associated with operations, such as utilities.
INTEREST EXPENSE
The Company incurred $17,684 in interest expense for the nine months ended September 30, 2011. The interest expense is a result of the interest on the outstanding debt and the amortization of the discount on the debt.
During the nine months ended September 30, 2011 the Company focused on acquiring drilling rights in north central Texas. This entailed:
·
identifying opportunities in existing oil and natural gas producing areas;
·
evaluating the production history of producing wells in the general vicinity of the opportunity;
·
researching the legal title to the identified properties;
·
negotiating the terms and conditions with the landowners and/or working interest owners;
·
drilling and completing one new well; and
·
reworking one existing well.
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The Company determined that the new well was not commercially viable. The reworking of the existing well resulted in estimated sales of 41,059 net thousand cubic feet of natural gas during the nine months ended September 30, 2011.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
| September 30, 2011 |
| September 30, 2010 | ||
Current assets | $ | 63,817 |
| $ | 269,215 |
Current liabilities |
| 489,358 |
|
| 6,130 |
Working capital (deficit) |
| (425,541) |
|
| 263,085 |
|
|
|
|
|
|
The Company had $8,300 in cash at September 30, 2011.
The Company does not currently have the cash to fund the level of activity required on its existing properties. As set out in the Company's strategic focus, included herein, the Company will seek to arrange the funding by some combination of: (i) proceeds from the sale of oil and natural gas produced from wells once they are completed; (ii) the sale of a portion of the Company's working interest in wells to be drilled; (iii) the incurrence of interest bearing debt, which may include the issuance of equity securities, such as warrants, preferred stock and/or common stock, to enhance the yield of the lender and thus increase the effective interest rate of the Company; and (iv) the issuance of equity instruments, such as warrants, preferred stock and/or common stock.
There is no assurance that the Company will be able to obtain the further funds required for our continued working capital requirements. The lease acquisition costs and the exploration and development costs are largely discretionary in nature. In the event that the Company does not have sufficient cash resources to fund these activities, the level of activity can and will be adjusted accordingly. The ability of the Company to meet its financial liabilities and commitments is primarily dependent on the issuance of debt and equity instruments to existing and new lenders and stockholders, and the Company's ability to achieve and maintain profitable operations.
There is substantial doubt about the ability of the Company to continue as a going concern as the continuation of the business of the Company is dependent on obtaining further long-term financing, successful exploration of the Company's property interests, the identification of reserves sufficient enough to warrant development, successful development of the property interests of the Company and, finally, achieving a profitable level of operations. The issuance of additional equity securities by the Company could result in significant dilution of the equity interests of the current stockholders. Obtaining commercial loans, assuming these loans would be available, will increase the Company's liabilities and future cash commitments.
NOTES PAYABLE
On December 21, 2010, the Company issued a secured note payable in the amount of $40,000. This note bears interest at 12% on the face value of the note and is secured by a first position lien on certain oil and natural gas assets of the Company. This note matured on June 21, 2011 and the Company is currently in discussions with the Note holder to modify the terms of the note.
During the period January 28, 2011 through January 31, 2011 the Company issued three additional secured notes payable, each in the amount of $25,000, for a total of $75,000. All of the notes mature on January 26, 2012 and bear interest at 12% of the face value of the note. These notes payable are secured by a first position lien on certain oil and natural gas assets of the Company. In conjunction with the issuance of these secured notes payable, the Company conveyed a small working interest in the wells to be drilled with the proceeds of these notes payable.
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OIL AND NATURAL GAS PRODUCTION COSTS
The Company has one well that that began to produce in May 2011. The Company has actual and accrued production and sales of natural gas during this quarter from this well. As the Company completes wells and begins to produce oil and natural gas it will incur production costs. These production costs will be funded from the proceeds of the sale of the oil and natural gas produced from those wells.
LAND ACQUISITION AND EXPLORATION AND DEVELOPMENT COSTS
In order to maintain this continued right to explore and develop the oil and natural gas rights on its leases in Montague and Wichita Counties in Texas, the Company is obligated to continue to drill wells. On the Montague County acreage the lease terms are satisfied if a well that tests the Barnett Shale is drilled approximately every 9 months or if a shallower well is drilled approximately every 6 months. The estimated cost to drill and complete each well is estimated to be between $650,000 and $2,500,000 depending on the type and depth of the well. On the Wichita County acreage the lease terms are satisfied if a well is drilled every 12 months at an approximate cost of $150,000 per well. In the event that the Company fails to meet its ongoing drilling obligations under this lease then the Company's right to explore and develop the land that has not been drilled will be forfeited. The Company will consider selling some or all of its working interest in these leases.
PROFESSIONAL FEES
The Company uses the services of independent legal counsel, certified landmen, auditors and corporate tax preparers during the course of the fiscal year.
GENERAL AND ADMINISTRATIVE EXPENSES
The Company does not have any employees, but does, from time to time contract for administrative and accounting services.
CASH FLOWS
CASH FLOW USED IN OPERATING ACTIVITIES
The Company used $151,764 in operating activities during the nine months ended September 30, 2011. This is the result of an increase in accounts payable partially offset by the increase in other receivables and other current assets coupled with the net loss of $117,498 attributable to the professional fees, impairment of oil and gas properties and general administrative expenses.
CASH FLOW PROVIDED BY INVESTING ACTIVITIES
The Company invested $252,104 related to the acquisition and deposits on oil and natural gas properties.
CASH FLOW PROVIDED BY FINANCING ACTIVITIES
The Company used $75,000 in financing activities from the issuance of secured notes payable.
CAPITAL EXPENDITURES
As of September 30, 2011 the Company has no capital spending commitments.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 30, 2011, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLSOURES ABOUT MARKET RISK
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (collectively the "Certifying Officers") maintain a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed, is accumulated and communicated to management timely. The Certifying Officers have concluded that the disclosure controls and procedures are effective at the "reasonable assurance" level. Under the supervision and with the participation of management, as of the end of the period covered by this report, the Certifying Officers evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Furthermore, the Certifying Officers concluded that our disclosure controls and procedures in place are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported on a timely basis in accordance with applicable Commission rules and regulations; and (ii) accumulated and communicated to our management, including our Certifying Officers and other persons that perform similar functions, if any, to allow us to make timely decisions regarding required disclosure in our periodic filings.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change in the Company's internal control over financial reporting occurred during the three months ended September 30, 2011, that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The status of our legal proceedings, as disclosed in our Annual Report remains unchanged. The Company may be party to lawsuits from time to time arising in the ordinary course of its business. The Company provides for costs relating to these matters when a loss is probable and the amount is reasonably estimable. The effect of the outcome of these matters on the Company's future results of operations cannot be predicted because any such effect depends on future results of operations and the amount and timing of the resolution of such matters.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 13, 2011, the Company issued 5,000,000 shares of common stock valued at $64,500 for the purchase of oil and gas investment properties.
On March 1, 2011, the Company issued 5,000,000 shares of common stock valued at $85,000 for the purchase of oil and gas investment properties.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
There have been no defaults in any material payments during the covered period.
ITEM 4. RESERVED
ITEM 5. OTHER INFORMATION
The Company does not have any other material information to report with respect to the three months ended September 30, 2011.
ITEM 6. EXHIBITS
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SIGNATURES
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 thereunto duly authorized.
TOPAZ RESOURCES, INC. (Registrant) |
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/s/ EDWARD J MUNDEN |
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|
| Dated: |
| November 14, 2011 |
Edward J. Munden |
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|
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President and Chief Executive Officer |
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|
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|
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(Principal Executive Officer) |
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Chief Financial Officer and Treasurer |
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(Principal Financial and Accounting Officer) |
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