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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2011

 

¨TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ___________ to ___________.

 

Commission File No. 001-10179

 

Glen Rose Petroleum Corporation

 

(Exact name of registrant as specified in charter)

 

Delaware   87-0372864

(State or other jurisdiction of

incorporation or organization)

  (I.R.S. Employer Identification No.)

 

1210 West Clay Road, Suite 5, Houston, Texas 77019
(Address of principal executive offices)

 

(281) 974 - 1655
(Issuer’s telephone number)

 

(Former name, former address and former fiscal year if changed since last report)

 

Copies of all communications to:

Marc Ross, Esq.

Andrew Smith, Esq.

Sichenzia Ross Friedman Ference LLP

61 Broadway, 32nd Floor

New York, New York 10006

Phone: (212) 930-9700

Fax: (212) 930-9725

 

Securities registered pursuant to Section 12(b) of the Act: None  

 

Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.001 par value

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x  Yes  ¨  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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 “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

¨  Large accelerated filer ¨  Accelerated filer
¨  Non-accelerated filer (Do not check if a smaller reporting company) x  Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes   x No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of February 21, 2012, the Company had 32,385,089 shares outstanding.

 

 
 

 

GLEN ROSE PETROLEUM CORPORATION—FORM 10-Q

TABLE OF CONTENTS

 

    Page Number
PART I - FINANCIAL INFORMATION    
     
Item 1 - Financial Statements   F-1
     
Consolidated Balance Sheets at December 31, 2011 (unaudited) and March 31, 2011   F-1
     
Consolidated Statements of Operations for the three months and the nine months ended December 31, 2011 and December 31, 2010 – Unaudited   F-3
     
Consolidated Statements of Cash Flows for the nine months ended December 31, 2011 and December 31, 2010 - Unaudited   F-4
     
Notes to Unaudited Consolidated Financial Statements   F-6
     
Item 2 - Management’s Discussion and Analysis and results of Operations   1
     
Item 3 - Quantitative and Qualitative Disclosure About Market Risk   8
     
Item 4 - Controls and Procedures   9
     
PART II - OTHER INFORMATION    
     
Item 1 - Legal Proceedings   10
     
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds   10
     
Item 3 - Defaults Upon Senior Securities   10
     
Item 4 – Removed and Reserved   10
     
Item 5 - Other Information   10
     
Item 6 – Exhibits   11
     
SIGNATURES   15

 

 
 

 

PART I - FINANCIAL INFORMMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

 

ASSETS

 

   December 31,
2011
   March 31,
2011
 
   (Unaudited)     
CURRENT ASSETS:          
Cash  $13,113   $483,578 
Cash held in escrow   -    367,554 
Accounts receivable   315,613    113,006 
Notes receivable   -    37,500 
Inventory   15,436    22,494 
Prepaid expenses and other current assets   83,817    3,251 
Total current assets   427,979    1,027,383 
           
OIL AND GAS PROPERTIES, accounted for using the full cost method, net          
Unproven   1,334,944    1,212,267 
Proven   6,226,262    5,657,975 
    7,561,206    6,870,242 
           
PROPERTY AND EQUIPMENT, at cost:          
Field equipment   229,846    201,187 
Computer equipment   11,945    19,759 
Vehicles   98,350    79,202 
    340,141    300,148 
Less: accumulated depreciation   (82,917)   (61,040)
    257,224    239,108 
           
OTHER ASSETS:          
Deferred financing fees and other   19,487    109,858 
    19,487    109,858 
           
Total assets  $8,265,896   $8,246,591 

 

See accompanying notes to these consolidated financial statements

 

F-1
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

 

LIABILITIES AND SHAREHOLDERS’ DEFICIT

 

   December 31, 
2011
   March 31,
2011
 
   (Unaudited)     
CURRENT LIABILITIES:          
Accounts payable  $1,047,480   $685,905 
Notes payable, current portion   2,747,253    144,570 
Convertible notes payable, net of unamortized discount   2,932,154    1,190,092 
Derivatives liability - convertible note (Iroquois)   271,749    4,534,069 
Total current liabilities   6,998,636    6,554,636 
           
LONG-TERM LIABILITIES:          
Asset retirement obligation   80,429    75,609 
Warrant liability - convertible note (Iroquois)   8,375,343    12,809,065 
Warrant liability - ABG   1,103,949    5,860,509 
Notes payable, less current portion   -    2,683,649 
Warrant  liability - other   8,632    670,395 
           
Total liabilities   16,566,989    28,653,863 
           
SHAREHOLDERS’ DEFICIT:          
Preferred stock, $.0001 par value; 5,000,000 shares authorized, none issued or outstanding   -    - 
Common stock, $.001 par value, 150,000,000 and 20,000,000 share authorized; 32,252,883 shares issued and outstanding at December 31, 2011 and 25,869,613 issued and outstanding at March 31, 2011   32,252    25,869 
Additional paid-in capital   48,835,855    47,551,410 
Accumulated deficit   (57,169,200)   (67,984,551)
Total shareholders’ deficit   (8,301,093)   (20,407,272)
           
Total liabilities and shareholders’ deficit  $8,265,896   $8,246,591 

 

See accompanying notes to these consolidated financial statements

 

F-2
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   December 31,   December 31, 
   2011   2010   2011   2010 
         (restated)         (restated) 
OPERATING REVENUES:                    
Oil and gas sales  $459,299   $477,403   $942,005   $747,640 
                     
OPERATING COSTS AND EXPENSES:                    
Production and operating   293,465    334,193    602,662    717,757 
Depreciation, depletion and accretion   92,435    104,199    198,850    180,504 
General and administrative   847,673    625,813    2,515,208    2,946,240 
Total operating costs and expenses   1,233,573    1,064,205    3,316,720    3,844,501 
                     
LOSS FROM OPERATIONS   (774,274)   (586,802)   (2,374,715)   (3,096,861)
                     
OTHER INCOME (EXPENSE):                    
Gain on cancellation of indebtedness   -    -    -    34,860 
Loss on sale of property and equipment   (5,070)   -    (13,016)   - 
Interest income   -    10,778    196    31,117 
Interest expense   (915,277)   (452,030)   (2,240,298)   (1,159,932)
Other   (60,673)   -    28,632    - 
Change in value of warrant liability   1,620    937,171    34,396    2,550,434 
Change in value of warrant liability - Iroquois   96,184    (968,299)   4,433,722    (1,196,503)
Change in value of derivative liability - Iroquois   1,022,321    392,949    4,262,320    1,133,075 
Change in value of warrant liability - ABG   1,544,277    -    6,684,113    - 
Total other income (expense)   1,683,382    (79,431)   13,190,065    1,393,051 
                     
NET INCOME (LOSS)  $909,108   $(666,233)  $10,815,350   $(1,703,810)
                     
BASIC EARNINGS PER COMMON SHARE                    
Net income  $0.03   $(0.04)  $0.36   $(0.10)
Weighted average number of shares outstanding   31,990,066    17,577,055    29,713,188    17,269,460 
                     
DILUTED EARNINGS PER COMMON SHARE                    
Net income  $0.02    (0.04)  $0.20    (0.10)
Weighted average number of shares outstanding   48,229,720    17,577,055    52,837,406    17,269,460 

 

See accompanying notes to these consolidated financial statements

 

F-3
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   For the Nine Months Ended December 31, 
   2011   2010 
         (restated) 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $10,815,350   $(1,703,810)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation, depletion and accretion   198,850    180,504 
Loss on disposal of property and equipment   13,016    - 
Net gain on settlement of debt   -    (34,860)
Gain on litigation settlements   (89,305)   - 
Change in value of warrant liability   (34,396)   (2,550,434)
Change in value of warrant liability - Iroquois   (4,433,722)   1,196,503 
Change in value of derivative liability - Iroquois   (4,262,320)   (1,133,075)
Change in value of warrant liability - ABG   (6,684,113)   - 
Stock compensation expense   467,954    1,143,396 
Amortization of financing fees   90,371    97,869 
Amortization of loan discount   1,743,272    564,319 
Changes in assets and liabilities:          
Trade and other receivables   (202,607)   (165,197)
Short term notes receivable   37,899    (28,484)
Inventory   7,058    (486)
Prepaid expenses and other assets   (81,155)   90,496 
Accounts payable and accrued expenses   361,575    165,149 
Accrued interest   198,534    470,101 
Net cash used in operating activities   (1,853,739)   (1,708,009)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Additions to oil and gas properties   (850,150)   (1,328,276)
Additions to equipment   (65,976)   (141,936)
Net cash used in investing activities   (916,126)   (1,470,212)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Cash held in escrow   367,554    2,750,000 
Proceeds from Regulation S offering   1,931,846    - 
Common stock receivable   -    2,370 
Net cash provided by financing activities   2,299,400    2,752,370 
           
NET DECREASE IN CASH   (470,465)   (425,851)
           
CASH, beginning of year   483,578    455,233 
           
CASH, end of year  $13,113   $29,382 

 

- Continued -

See accompanying notes to these consolidated financial statements

 

F-4
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   FOR THE NINE MONTHS 
   ENDED DECEMBER 31, 
   2011   2010
(restated)
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:        
         
Cash paid during the period for:          
Interest  $340,380   $198,205 
Taxes  $-   $- 
           
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:          
Stock issued for conversion of debt  $191,405   $- 
Warrant cancellations and terminations  $-   $292,331 
Warrant reclassified to equity  $627,367   $- 

 

See accompanying notes to these consolidated financial statements

 

F-5
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Glen Rose Petroleum Corporation’s (the “Company,” “we” or “our”) interim condensed consolidated financial statements are unaudited. They contain all necessary adjustments (consisting only of normal recurring adjustments) for a fair statement of the referenced interim period results. These interim period results do not indicate expected full-year results or results for future quarters/periods, due to several factors, including price volatility of crude oil and natural gas, price volatility of commodity derivatives, volatility of interest rates, estimates of reserves, drilling risks, geological risks, transportation restrictions, timing of acquisitions, product demand, market competition, interruption(s) in production, our ability to obtain additional capital, and the success of proposed enhanced oil recovery work (EOR). These consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in Glen Rose Petroleum Corporation’s Form 10-K for the year ended March 31, 2011.

 

Principles of Consolidation and Presentation

 

The Company prepared the accompanying financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and included the accounts of Glen Rose Petroleum Corporation and its wholly-owned subsidiaries, Glen Rose Petroleum Services, UHC Petroleum Corporation, UHC Petroleum Services Corporation and National Heritage Sales Corporation.

 

The name of the Company was changed from United Heritage Corporation to Glen Rose Petroleum Corporation in May 2008. Concurrent with the name change, the Company entered into a statutory merger whereby it moved its state of incorporation from Utah to Delaware and United Heritage Corporation, the Utah Corporation, merged into the newly formed Delaware Corporation, Glen Rose Petroleum Corporation.

 

All significant intercompany transactions and balances were eliminated in consolidation.

 

Use of Estimates

 

Management has made certain estimates and assumptions that affect reported amounts in the financial statements and disclosures of contingencies. Actual results may differ from those estimates. The Company made significant assumptions in valuing its unproved oil reserves, which may affect the amounts at which oil properties are recorded. The Company has computed its stock-based compensation expense using assumptions such as volatility, expected life and the risk-free interest rate. Those assumptions may be revised in the near term, in which case these estimates will be revised, and these revisions could be material.

 

Nature of Operations

 

Glen Rose Petroleum Corporation owns contiguous oil and gas properties located in Edwards County, Texas. The Company began production of the Texas properties during the year ended March 31, 2000. The Company sold a significant portion of its oil and gas properties in 2007. The Company continues to operate its remaining contiguous oil and gas properties including the Wardlaw and Adamson leases located in Edwards County, Texas and does not operate oil or gas properties in any other fields or areas.

 

Currently we have one customer who buys 100% of our production.

 

Oil and Gas Properties

 

The Company uses the full cost method of accounting for its oil and natural gas producing activities. Accordingly, all costs associated with acquisition, exploration, and development of oil and natural gas reserves, including directly related overhead costs, are capitalized.

 

F-6
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Under full cost accounting rules, capitalized costs, less accumulated amortization and related deferred income taxes, shall not exceed an amount (the ceiling) equal to the sum of: (i) the after tax present value of estimated future net revenues computed by applying the 12-month un-weighted first-day-of-the-month average oil and gas prices to the Company’s proved year-end reserve quantities, less future production, development, site restoration, and abandonment costs derived based on current costs assuming continuation of existing economic conditions and computed using a discount factor of ten percent; (ii) the cost of properties not being amortized; and (iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized. If unamortized costs capitalized within a cost center, less related deferred income taxes, exceed the ceiling, the excess shall be charged to expense and separately disclosed during the period in which the excess occurs. Amounts thus required to be written off are not reinstated for any subsequent increase in the cost center ceiling.

 

Depletion is provided using the unit-of-production method based upon estimates of proved oil and natural gas reserves with oil and natural gas production being converted to a common unit of measure based upon their relative energy content. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized. Once the assessment of unproved properties is complete and when major development projects are evaluated, the costs previously excluded from amortization are transferred to the full cost pool and amortization begins. The amortizable base includes estimated future development costs and where significant, dismantlement, restoration and abandonment costs, net of estimated salvage value.

 

In arriving at rates under the unit-of-production method, the quantities of recoverable oil and natural gas reserves are established based on estimates made by the Company’s geologists and engineers which require significant judgment as does the projection of future production volumes and levels of future costs, including future development costs. In addition, considerable judgment is necessary in determining when unproved properties become impaired and in determining the existence of proved reserves once a well has been drilled. All of these judgments may have significant impact on the calculation of depletion expense.

 

Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved oil and natural gas reserves, in which case the gain or loss would be recognized in the statement of operations.

 

During the three and nine months ended December 31, 2011, the Company’s oil and gas properties did not have an impairment to recognize because it did not exceed its ceiling test limit.

 

Earnings per Common Share

 

The Company applies the provisions of ASC Topic 260-10, Earnings Per Share (“EPS”). ASC Topic 260-10 provides for the calculation of basic and diluted earnings per share. Basic EPS includes no dilution and is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings or losses of the entity.

 

A reconciliation of shares used in calculating earnings per basic and diluted share follows:

 

   Three Months Ended   Nine Months Ended 
   December 31,
2011
   December 31,
2010
   December 31,
2011
   December 31,
2010
 
Basic   31,990,066    17,577,055    29,713,188    17,269,460 
Effect of dilutive securities:                    
Stock options and warrants   2,011,274    -    8,895,838    - 
Effect of assumed conversion of convertible debt   12,006,158    -    12,006,158    - 
Effect of assumed conversion of working interest   2,222,222    -    2,222,222    - 
Diluted   48,229,720    17,577,055    52,837,406    17,269,460 

 

F-7
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Weighted-average options to purchase 15,000 shares of common stock at an exercise price of $0.39 that were outstanding during the three months ended December 31, 2011 were excluded from the computation of diluted earnings per share. No options were excluded from the computation of diluted earnings per share for the nine months ended December 31, 2011 Weighted-average warrants to purchase 54,655,597 and 47,779,482 shares of common stock at an exercise price ranging from $0.50 to $3.75 per share that were outstanding during the three and nine months ended December 31, 2011 were excluded from the computation of diluted earnings per share. In each of these periods, such options’ and warrants exercise prices exceeded the average market price of our common stock, thereby causing the effect of such options and warrants to be anti-dilutive. For the three and nine months ended December 31, 2010 basic and diluted loss per share are the same amount since the calculation of diluted per share would result in an anti-diluted calculation.

 

Financial Instruments

 

Financial instruments consist of cash, accounts receivable, accounts payable and notes payable. Recorded values of cash, receivables, payables and short-term debt approximate their respective fair values due to short maturities of these instruments. Recorded values of long-term notes payable approximate fair values, since their effective interest rates are commensurate with prevailing market rates for similar obligations.

 

Issuance of Stock for Non-Cash Consideration

 

All issuances of the Company's stock for non-cash consideration have been assigned a per share amount equaling either the market value of the shares issued or the value of consideration received, whichever is more readily determinable. The majority of the non-cash consideration received pertains to services rendered by consultants and others and has been valued at the market value of the shares on the dates issued.

 

The Company's accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of ASC Topic 505-10 Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services and ASC Topic 505-50, Equity-Based Payments to Non-Employees. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. In accordance with ASC Topic 505-10, an asset acquired in exchange for the issuance of fully vested, nonforfeitable equity instruments should not be presented or classified as an offset to equity on the grantor's balance sheet once the equity instrument is granted for accounting purposes. Accordingly, the Company records the fair value of the fully vested non-forfeitable common stock issued for future consulting services as prepaid services in its consolidated balance sheet.

 

Stock-Based Compensation

 

The Company accounts for its stock-based compensation to employees in accordance with the provisions of ASC Topic 718, Compensation - Stock Compensation. These provisions require, among other things: (a) the fair value of all stock awards be expensed over their respective vesting periods; (b) the amount of cumulative compensation cost recognized at any date must at least be equal to the portion of the grant-date value of the award that is vested at that date and (c) that compensation expense include a forfeiture estimate for those shares not expected to vest. Also in accordance with these provisions, for those awards with multiple vest dates, the Company recognizes compensation cost on a straight-line basis over the requisite service period for the entire award.

 

F-8
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Common stock awards are also granted to various employees from time to time for merit purposes or in conjunction with hiring. Board members also receive common stock awards as part of their annual compensation. The fair value of common stock awards is defined as the closing trading price of the Company's common stock on the date of grant.

 

All stock options and consultant warrants currently outstanding were valued using the Black-Scholes option pricing model, which requires extensive use of accounting judgment and financial estimates, including estimates of how long the holder will hold its vested stock options before exercise, the estimated volatility of the Company's common stock over the expected term, and the number of options that will be forfeited prior to the completion of vesting requirements. 

 

Warrant and Derivative Liabilities

 

The Company issued, in March 2010, convertible notes payable with warrants and, in a separate transaction in January 2011, issued Series D convertible preferred stock with warrants. In July 2011 and December 2011, the Company entered into separate purchase agreements with accredited non-U.S. investors for the issuance and sale of the Company’s common stock and warrants. In analyzing the March 2010 convertible notes and the January 2011, July 2011 and December 2011 financing transactions, the conversion option for the notes payable and warrants associated with these transactions have certain anti-dilution and other provisions that cause them to be a derivative and liability, respectively. The put option provision of the March 2010 convertible notes is at a 20% premium which causes it also to be a derivative. The derivative liabilities associated with the March 2010 convertible note are revalued each reporting period and any increase or decrease is recorded to the statement of operations under the caption “Change in value of derivative liability - Iroquois”. The warrant liabilities associated with the March 2010 convertible note are revalued each reporting period and any increase or decrease is recorded to the consolidated statement of operations under the caption “Change in value of warrant liability - Iroquois”. The warrant liabilities associated with the January 2011 and July 2011 financing transactions are revalued each reporting period and any increase or decrease is recorded to the statement of operations under the caption “Change in value of warrant liability - ABG”

 

In order to properly evaluate the fair value of the derivatives and warrants, the Company engaged an independent valuation firm to perform a model valuation. Together with this independent valuation firm, the Company determined that the fair value of the derivatives is estimated by calculating the fair value of the convertible notes with and without the derivatives and that the difference is the estimated fair value of the derivatives. The independent valuation firm created a Monte Carlo simulation model which more adequately captures the dilution effects of the Company’s entire capital structure by modeling the derivatives and all the classes of warrants which might have a material dilutive effect. Within each trial of the simulation, the common stock price is based on the simulated enterprise value. For each class of warrants, if the stock price is above the current strike price on the exercise date, the warrant is assumed to be exercised. In order to determine the stock price for any given enterprise value the simulation is repeated multiple times until the stock price converges. This approach effectively captures the dilution effects of warrants and convertible note and its derivatives. The underlying value of the model is Enterprise Value, and each Claim is treated as a “claim” on the Enterprise Value. Since the common stock price is not the underlying value, the volatility implied by the model is not equal to the volatility used under a closed-form Black-Scholes model which values the warrants with the common stock as the underlying security. In the opinion of the independent valuation firm and management, modeling Enterprise Value is preferable due to the high level of risk in the Company’s debt and the lack of an exogenous source for the size and volatility of the Company’s credit spread. Moreover, the Enterprise Value model more effectively captures the default feature of notes and the down round feature of the warrants.

 

For more information regarding the warrant and derivative liability associated with the Convertible Notes Issued in March 2010, refer to Note 4.

 

For more information regarding the warrant liabilities associated with the Series D convertible preferred stock, July 2011 and December 2011 transactions, refer to Note 5.

 

F-9
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Reclassifications

 

Certain reclassifications have been made to conform the March 31, 2011 and December 31, 2010 amounts to the December 31, 2011 presentation for comparative purposes.

 

Restatement

 

During the January 2011 offering of convertible preferred stock (“Regulation S Offering”) with warrants, the Company realized that, on May 22, 2008 when it entered into a statutory merger whereby it moved its state of incorporation from Utah to Delaware (See Note 5), the number of authorized shares was inadvertently changed from 125,000,000 to 20,000,000. In conjunction with the January 2011 Regulation S Offering, the Company applied to the State of Delaware to authorize 150,000,000 shares of common stock, which was completed on March 7, 2011. For the period from May 22, 2008 through March 7, 2011, the Company had warrants outstanding in excess of the authorized and unissued common shares and as such in accordance with ASC Topic 815, Derivatives and Hedging, these warrants should have been classified as liabilities. In addition, as part of the process of closing the Company’s financial records for the year ended March 31, 2011, it noted the convertible debt and warrants issued in March 2010 and other transactions were not recorded correctly. The conversion option, which includes certain anti-dilution provisions, and a put option that includes a 20% premium, should have been bifurcated from the host contract and adjusted to fair value in accordance with ASC Topic 815. In addition the warrants also contain anti-dilution provisions that require liability classification in accordance with ASC Topic 815. As a result, the Company concluded that its annual financial statements for the year ended March 31, 2010 as well as its quarterly financial statements for the quarters ended within the fiscal year ended March 31, 2011, required a restatement to reflect these changes.

 

A summary of significant effects of the restatement follows:

 

On May 22, 2008, the Company had 20,307,087 warrants outstanding that carried a fair value of $11,926,934 as of that date and a fair value of $1,784,348 as of March 31, 2009. As of May 22, 2008, the Company made an adjustment to reclassify the warrants from equity to a liability and at March 31, 2009 the fair value was adjusted. For the year ended March 31, 2010, 3,733,332 warrants at a fair value of $536,746 at grant date were issued and 9,000,000 warrants at a fair value of $1,391,493 at termination date were cancelled. At March 31, 2010 the fair value of the warrants outstanding, not including the warrants issued with the convertible notes, was $3,992,172. For the nine months ended December 31, 2010, 4,373,336 warrants at a fair value of $808,559 at grant date were issued. On March 7, 2011, the fair value of the warrants outstanding, not including the warrants issued with convertible notes or with the January 2011 Regulation S Offering or 1,335,000 warrants due to certain consultants (see note 5) was $4,525,117 and was reclassified to additional paid-in capital.

 

The convertible notes issued on March 3, 2010 included anti-dilution provisions in the conversion option and the warrants that allow for a reset of the respective conversion and exercise prices in certain situations when the Company issues common shares at a lower price. Additionally, the convertible notes include a provision that allows the creditors to put the notes back to the Company at a 20% premium in certain change of control or default situations. In order to determine the fair value of the embedded derivatives and the warrant liability the Company utilized a Monte Carlo simulation methodology. As of March 3, 2010, the fair value of the derivatives was $1,593,002 and the fair value of the warrant liability was $4,258,094. Due to the number of common shares on a fully-diluted basis offered to the creditors, the fair value of the derivatives and the warrant liability exceeded the principal amount of the convertible notes and so the Company recorded interest expense of $2,501,096 upon the date of issuance. The original issue discount of $3,350,000 is being amortized over the life of the debt using the effective interest rate method and for the year ended March 31, 2010 the amortization was $38,548. For the three and nine months ended December 31, 2010, the amortization of the debt discount was $243,056 and $564,318.

 

F-10
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Stock based compensation expense for the three and nine months ended December 31, 2010 of $124,038 and $580,085, respectively was reclassed from a separate category for stock based compensation in the statement of operations to general and administrative expense in accordance with ASC Topic 718, Stock Compensation. Additionally, $206 and $563,725 of stock based compensation related to warrants issued to consultants was recorded for the three and nine months ended December 31, 2010, respectively.

 

Independent petroleum engineers have estimated the Company’s proved oil and gas reserves, all of which are located in Edwards County, Texas. Proved reserves are the estimated quantities that geologic and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods. Due to the inherent uncertainties and the limited nature of reservoir data, such estimates are subject to change as additional information becomes available. The reserves actually recovered and the timing of production of these reserves may be substantially different from the original estimate. Revisions result primarily from new information obtained from development drilling and production history and from changes in economic factors. The original reserve report for fiscal year ended March 31, 2010 was not prepared in compliance with the Securities and Exchange Commission’s rules and accounting standards, which require that calculations be based on the twelve month un-weighted first-day-of–the-month average price for March 31, 2010. As such, the Company corrected the report and restated the related disclosures in the supplementary financial information in the Form 10-K for the year ended March 31, 2011. The effect of these adjustments was not material to the recorded depreciation, depletion and accretion amounts reported for the three and nine months ended December 31, 2010.

 

   Three Months Ended
December 31, 2010 (As
Previously Reported)
   Amount of Change   Three Months Ended
December 31, 2010 (As
Restated)
 
Statement of Operations               
Production and Operating  $334,193   $-   $334,193 
Impairment of field equipment   -    -    - 
Depreciation, depletion and accretion   117,181    (12,982)   104,199 
General and administrative   501,981    123,832    625,813 
Stock based compensation   124,038    (124,038)   - 
Interest Expense   (366,766)   (85,264)   (452,030)
Change in value of warrant liability   -    937,171    937,171 
Change in value of warrant liability – Iroquois   -    (968,299)   (968,299)
Change in value of derivative liability – Iroquois   -    392,949    392,949 
Net Loss  $(955,978)  $289,745   $(666,233)
Basic and Diluted Loss per common share  $(0.05)  $0.01   $(0.04)

 

F-11
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

   Nine Months Ended
December 31, 2010 (As
Previously Reported)
   Amount of Change   Nine Months Ended
December 31, 2010 (As
Restated)
 
Statement of Operations               
Production and Operating  $570,791   $146,966   $717,757 
Impairment of field equipment   124,870    (124,870)   - 
Depreciation, depletion and accretion   205,692    (25,188)   180,504 
General and administrative   1,802,842    1,143,398    2,946,240 
Stock based compensation   580,085    (580,085)   - 
Interest Expense   (1,067,274)   (92,658)   (1,159,932)
Change in value of warrant liability   -    2,550,434    2,550,434 
Change in value of warrant liability - Iroquois   -    (1,196,503)   (1,196,503)
Change in value of derivative liability - Iroquois   -    1,133,075    1,133,075 
Net Loss  $(3,537,937)  $1,834,127   $(1,703,810)
Basic and Diluted Loss per common share  $(0.20)  $0.10   $(0.10)

 

2. GOING CONCERN

 

The Company’s financial statements have been prepared on a going concern basis which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. The Company has incurred substantial losses from operations and it has negative operating cash flows which raises substantial doubt about its ability to continue as a going concern. The Company had net income of $909,108 and $10,815,350 for the three and nine months ended December 31, 2011, respectively. However, $2,664,402 and $15,414,551, respectively, of this net income is attributable to the change in value of the derivative and warrant liabilities. As of December 31, 2011 the Company had an accumulated deficit of $57,169,200.

 

The Company intends to continue its planned capital expenditure to continue its reworking and drilling programs, but does not have sufficient realized revenues and cash on hand is not adequate to cover immediate cash needs. However, the Company expects revenues from production will be enough to cover operating expenses in the near term.

 

The Company can provide no assurance that it will be able to obtain sufficient financing that it needs to develop its properties and alleviate doubt about its ability to continue as a going concern. If the Company is able to obtain sufficient additional financing proceeds, the Company cannot be certain that this additional financing will be available on acceptable terms, if at all. To the extent the Company raises additional funds by issuing equity securities, the Company’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct business. Furthermore, certain of the Company’s current creditors may be required to approve any such transaction.

 

On March 3, 2012 the convertible notes issued to Iroquois Capital Opportunity Fund LP (“Iroquois) and the associated investors (Note 4) are set to mature. The total principal amounts, together with the accrued non-cash interest and the cash interest payable, at maturity will be approximately $3,839,094. As of February 13, 2012, the Company does not have an approved or substantially acceptable plan or ability to pay this amount at maturity or to refinance the notes. However, the Company remains focused on its financing efforts in order to raise enough capital to settle the debt in the near term.

 

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

3. NOTES PAYABLE

 

   December 31,
2011
   March 31,
2011
 
Blackwood Ventures LLC  $33,246   $31,320 
Litigation settlement with Joseph “Chip” Langston   30,000    120,000 
Litigation settlement with Porter LeVay & Rose   79,323    - 
Litigation settlement with Robert Denman   35,000    - 
PE Consulting   -    13,250 
Lothian Put Option holders   2,569,684    2,663,649 
    2,747,253    2,828,219 
           
Less current portion   2,747,253    144,570 
Notes payable, less current portion  $-   $2,683,649 

 

F-12
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Blackwood Ventures LLC

 

Through March 31, 2010, Blackwood Ventures LLC made advances to the Company totaling $426,000, which were assessed interest at an annual rate of 8%. Accrued interest is payable quarterly. Of the amount advanced, $250,000 and related accrued interest were subject to a Convertible Debenture Agreement. Pursuant to the terms of the Debenture, in lieu of receiving cash, Blackwood had the right to receive shares of the Company’s common stock as payment for accrued interest at a conversion price of 5% over the bid price on the date of payment. The advances are convertible into common stock of the Company at price per share of $0.19. The debenture matured on December 31, 2010.

 

For the year ended March 31, 2010, the Company issued 2,600,410 shares of its common stock to Blackwood in exchange for the cancellation of $489,078 of loans, advances, accrued compensation, and accrued interest.

 

As of December 31, 2011 principal and accrued interest is $33,246. Interest charged to operations on the debenture for the three and nine months ended December 31, 2011 and 2010 amounted to $657 and $607 and $1,926 and $1,779, respectively.

 

Litigation Settlement with Joseph “Chip” Langston

 

On August 2, 2011 a litigation settlement was reached with Joseph “Chip” Langston, the Company’s former Chief Financial Officer. The settlement covered the Langston Family Partnership and Buccaneer Energy Corporation v. Glen Rose Petroleum Corporation and the Glen Rose Petroleum Corporation v. Joseph Langston matters.

 

In the settlement agreement, Mr. Langston agreed to discontinue and withdraw all legal claims with prejudice in exchange for receiving $80,000 in a lump sum payment and $3,333 each month for twelve (12) months thereafter and returning all shares of the Company’s common stock in which he or anyone related to him had beneficial control or ownership. The initial payment of $80,000 was made when the settlement was signed on August 2, 2011. The monthly payments commenced on October 1, 2011. As of December 31, 2011, the total monthly payments of $30,000 were recorded within current notes payables.

 

Litigation Settlement with Porter, LeVay & Rose, Inc.

 

On January 3, 2012 a litigation settlement was reached with Porter, LeVay & Rose, Inc. The settlement covered the Porter, LeVay & Rose, Inc. v. Glen Rose Petroleum Corporation matter. The settlement amount of $79,323, due by Glen Rose to Porter LeVay & Rose, Inc., was recorded within current notes payable as of December 31, 2011. The full settlement amount was paid in full on January 23, 2012.

 

Litigation Settlement with Robert Denman

 

On December 22, 2011 a general release was reached with Robert Denman, a former employee of UHC Petroleum. In accordance with the agreement, UHC Petroleum must pay Mr. Denman a total of $50,000. A payment of $15,000 was made on December 27, 2011, leaving a December 31, 2011 balance of $35,000 which is due by April 1, 2012.

 

Lothian Oil Note Payable

 

In February 2006, certain option agreements with shareholders of Lothian Oil, Inc. were modified and granted the shareholders a put option to require the Company to purchase said options for a price of $4.00 per share less the purchase price of $1.50 per share by making demand between April 1, 2008 and April 10, 2008 (“Put Option”). The Put Holders exercised their rights in the required period, but the Company had insufficient funds to meet the demand and these obligations totaling $2,147,770 were recognized as a liability by the Company.

 

F-13
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In February 2010, the Company entered into novation agreements with the option holders to convert the put option liabilities into unsecured notes payable totaling $2,489,780. These notes are assessed interest at an annual rate of 4% and mature on December 31, 2011, when the principal balances and accrued interest thereon are due; however, the Company has the right to extend the maturity dates to December 31, 2012 with an increase in the interest rate charged on the notes to 6% per annum. The Company recognized a loss of $342,010 on the conversion, which was charged to operations in March 2010. As of December 31, 2011, the principal balance of the note was reduced by $186,508, and accrued interest of $13,024 was written off, due to the litigation settlement with Thomas Pernice. The lump sum payment agreed upon in the settlement was paid in full on July 27, 2011.

 

Interest accrued on these notes and charged to operations for the three and nine months ended December 31, 2011 and 2010 amounted to $35,317 and $38,177, and $105,567 and $114,115, respectively. The balance of this obligation, including accrued interest, was $2,569,684 on December 31, 2011. On September 15, 2011 the Company exercised its right to extend the maturity of its Lothian Oil Notes Payable (Put Option) obligation, including accrued interest, till December 31, 2012.

 

4. CONVERTIBLE DEBT

 

On March 3, 2010, the Company issued secured convertible notes and warrants to Iroquois Capital Opportunity Fund LP (“Iroquois”) and 12 other investors in exchange for $3,350,000. The notes mature in two years and accrue interest at an annual rate of 8%. The Company, with the Note holders’ permission, can elect to defer the required quarterly interest payments by increasing the interest rate charged to 12% per annum. The outstanding principal and interest on the notes is convertible into common stock of the Company at the option of each note holder at $0.30 per share with the Company having the right to force conversion once the Company achieves a greater than $1.25 share price and minimum daily volume of $2,000,000. Upon the occurrence of a default that continues for more than 30 business days, a change of control or certain other events, the Note holders can demand redemption of the outstanding notes at a price of 120% of the principal plus accrued and unpaid interest. The original maximum number of conversion common stock shares for the notes’ principal amounts, assuming all shares are converted was 11,166,667 shares of common stock.

 

During the fiscal year ended March 31, 2011, one of the Note holders converted $45,000 of the Note balance into stock, resulting in the conversion of principal equivalent to 150,000 shares of common stock. During the nine months ended December 31, 2011, four Note holders converted their principal balance and accrued interest into common stock. The first Note holder converted $38,209 into 127,362 shares of common stock while the second Note holder converted $63,157 into 210,524 shares of common stock. The third and fourth Note holders each converted $44,350 into 147,833 shares of common stock. As of December 31, 2011, the remaining maximum number of conversion shares of common stock for the notes’ principal amounts plus accrued and unpaid interest, assuming all remaining shares are converted was 12,006,158 shares of common stock. The Company incurred loans fees of $250,311, which has been deferred and is being amortized over the life of the notes.

 

The notes are secured by all of the Company’s and its subsidiaries’ assets. The investors also received a total of 11,166,667 warrants exercisable at $0.60 per share with five year terms. The warrants have cashless exercise provisions. These warrants and conversion option contain certain reset provisions including (i) should the Company issue common stock to third parties for consideration less than the note conversion price or the warrant exercise price during the term of the notes or warrants, the note conversion price and the warrant exercise price shall be adjusted downward to equal the price at which the Company issued that common stock (referred to as the “down-round” feature), and (ii) should certain events occur, the number of warrants at the new exercise price shall be increased. On January 24, 2011, the Company issued Series D convertible preferred stock to third-party investors in a Regulation S Offering (see Note 5) at a conversion price of $0.30 per share. Due to the provisions of that stock offering and the warrant reset provisions, the Company adjusted the exercise price of the warrants to $0.30 per share and increased the number of warrants to 22,333,334.

 

F-14
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The subscription agreement also calls for the Company to have a director nominated by Iroquois Capital Opportunity Fund LP or its assignee. Accordingly, the Company has amended its bylaws to provide for such a “Nominated Director.” Further, under the amended bylaws, the Nominated Director must approve certain business decisions without regard to the vote of the other Directors, including (i) the Company’s or Subsidiary’s annual budget; (ii) acquisition or disposition of material assets, outside the ordinary course of business; (iii) formation or dissolution of the Company or Subsidiary; (iv) expenditure of or incurring of an obligation of $20,000 or more for a single purpose during any consecutive twelve month period unless such expenditure has been approved in a budget approved by the board of directors of the Company or Subsidiary (“single purpose” may include an approved general plan of operations relating to oil and gas production and shall not be a reference to the engagement of any single vendor in connection with such approved general plan of operations relating to oil and gas production), provided such expenditure has been approved in a budget approved by the board of directors of the Company and Subsidiary, as applicable; (v) open or close any account with any financial institution; (vi) initiation or settlement of any litigation, arbitration or judicial proceeding; and (vii) the issuance of any equity of the Company or right to receive or acquire any equity of the Company, or modification of any of the foregoing outstanding at any time. The Nominated Director bylaw provision ceases to be effective when the notes are paid.

 

In accordance with terms of the loan, the $3,350,000 was placed in escrow. Pursuant to the terms of the Escrow Agreement, funds were held in escrow and were released at the Company’s written request. As of March 31, 2011, all funds were released from escrow at the written permission of the Note holders.

 

In analyzing this transaction the Company considered all the terms and provisions of the convertible notes and the warrants. As a result of the down-round feature discussed above the Company applied the provisions of ASC Topic 815-15, Derivatives and Hedging, and concluded the conversion option is required to be bifurcated from the host contract and adjusted to fair value at each reporting period. The warrants also have the same down-round feature and thus the Company has concluded that the warrants are required to be classified as a liability and will be adjusted to fair value at each reporting period. In addition, the Company determined that the Note holders right to demand redemption of the notes upon certain events occurring also needs to be bifurcated. The convertible notes were recorded net of a discount of $3,350,000 due to the fair value of the warrants and derivatives amounting to $4,258,094 and $1,593,002, respectively, and being in excess of the principal value of the convertible notes. The difference of $2,501,096 between the discount and the fair value of the warrants and derivatives was recorded as interest expense at issuance. The discount is being amortized and charged to operations over the two year life of the notes using the effective interest method.

 

The initial fair value of the warrants of $4,258,094 and the initial fair value of the derivatives of $1,593,002 was calculated using the Monte Carlo simulation model. The underlying value of the model is Enterprise Value, and each Claim is treated as a Claim on the Enterprise Value. Since the common stock price is not the underlying value, the volatility implied by the model is not equal to the volatility used under a closed-form Black-Scholes model which values the warrants with the common stock as the underlying security. The Enterprise Value volatility used at December 31, 2011 and 2010 was 52.1% and 34.1%, respectively.

 

Amortization of the discount that was charged to interest expense for the three and nine months ended December 31, 2011 amounted to $750,841 and $1,743,273, respectively. For the three and nine months ended December 2010, $243,056 and $564,318 of discount amortization was recorded to interest expense.

 

Interest charged to operations on the principal balance of the notes for the three and nine months ended December 31, 2011 totaled $135,644 and $404,415, respectively. For the three and nine months ended December 31, 2010, interest charged to operations on the principal balance of the notes was $135,043 and $371,546, respectively.

 

The following is a summary of amounts related to the notes as of December 31, 2011 and March 31, 2011. The amounts related to the Statement of Operations are summarized for the three and nine months ended December 31, 2011 and 2010:

 

F-15
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Consolidated Balance Sheet – Assets 

   December 31,
2011
   March 31,
2011
 
Deferred financing fees  $250,311   $250,311 
Accumulated amortization   (230,824)   (140,453)
Net deferred financing fees  $19,487   $109,858 

  

Consolidated Balance Sheet – Liabilities

   December 31,
2011
   March 31,
2011
 
Face value of Convertible Notes  $3,350,000   $3,350,000 
Unamortized Original Issue Note Discount   (669,672)   (2,412,966)
Accrued and unpaid interest   486,892    298,058 
Conversions   (235,066)   (45,000)
Convertible notes payable, net of unamortized discount  $2,932,154   $1,190,092 
           
Derivatives Liability – Convertible Note (Iroquois)  $271,749   $4,534,069 
Warrant Liability – Convertible Note (Iroquois)   8,375,343    12,809,065 
Carrying value of notes and liabilities  $11,579,246   $18,533,226 

 

Consolidated Statement of Operations

   Three Months Ended December 31, 
   2011   2010 (restated) 
Interest Expense – Principal  $(135,644)  $(135,043)
Interest Expense – Deferred Financing   (29,527)   (31,975)
Interest Expense – Loan Discount
   (750,841)   (243,056)
Change in Convertible Note Warrant Liability   96,184    (968,299)
Change in Convertible Note Derivative Liability   1,022,321    392,949 
   $202,493   $(985,424)

 

   Nine Months Ended December  31, 
   2011   2010 (restated) 
Interest Expense – Principal  $(404,415)  $(371,546)
Interest Expense – Deferred Financing   (90,371)   (97,869)
Interest Expense – Loan Discount
   (1,743,273)   (564,319)
Change in Convertible Note Warrant Liability   4,433,722    (1,196,503)
Change in Convertible Note Derivative Liability   4,262,320    1,133,075 
   $6,457,983   $(1,097,162)

 

Working Interest in Oil Properties

 

In February 2010, the Company sold a 12.5% working interest in the production of newly drilled wells located in Wardlaw Field to Glen Rose Partners I, LLC, (“GRP1”) for $1,000,000. The purchase and sale agreement excludes certain existing producing wells. GRP1 has the right to participate in all non-excluded wells, including wells on the Adamson leases. Pursuant to the terms of the purchase and sale agreement, the Company is required to pay all of GRP1’s drilling and production costs until GRP1’s carried costs equal $2,000,000. Further, for five years, GRP1 will also have conversion rights to convert its working interest in the Wardlaw Prospect with an imputed value equal to the working interest purchase price as adjusted, into the Company’s common stock in the same manner as the secured convertible notes are convertible, except that GRP1 conversion price shall be 150% of the secured convertible notes’ conversion price in effect as of the conversion date, ($0.45 as of December 31, 2011) provided that the secured convertible notes remain outstanding on the date of such conversion. GRP1 is an affiliate of Iroquois Capital Opportunity Fund, LP.

 

F-16
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company included the $1,000,000 purchase price and is adding the carried interest to the full cost pool in accordance with ASC Topic 932, Extractive Activities – Oil and Gas. The Company considered if the conversion option was required to be bifurcated from the host contract and concluded it did not because the conversion option and the host contract are clearly and closely related.

 

5. SHAREHOLDERS’ EQUITY

 

In January 2008, the Company reincorporated and changed its domicile from Utah to Delaware pursuant to a Reincorporation and Merger Agreement. Prior to the reincorporation, the Company had 120 million common shares authorized. In the reincorporation, the Company believed it maintained the same number of authorized shares. However, by reason of an administrative error on the part of the Company, this was not the case, and only 20 million common shares were authorized for issuance. The Company discovered this technical defect in December 2010 and immediately acted to cure the defect by obtaining majority shareholder approval to increase the number of authorized shares to 150 million which was effective in March 2011.

 

Stock Issued for Service

 

During the three and nine months ended December 31, 2011, the Company issued 300,000 shares and 872,343 shares, respectively, of common stock to certain members of the Board of Directors and officers as compensation for their services rendered during the quarter ended December 31, 2011. These shares were valued at $125,955 and $377,954 for the same time periods, the value of these shares was charged to operations.

 

During the three and nine months ended December 31, 2011, the Company issued 91,457 shares and 208,903 shares, respectively, of common stock to Point Capital Partners LLC in consideration for financial and accounting services rendered under its contract. The shares were valued at $30,000 and $90,000 for the same time periods, the value of these shares was charged to operations.

 

Regulation S Offering

 

In January 2011, the Company entered into purchase agreements with accredited non-U.S. investors for the issuance and sale of an aggregate of 7,000 units. Each unit consisted of 7,000 shares of the Company’s Series D Convertible Preferred Stock, par value $.0001 per share, and warrants for aggregate proceeds equal to $2,184,000 from the sale. ABG Sundal Collier Norge ASA who acted as an advisor to the investors in connection with the Sale, was issued 280 shares of Series D Convertible Preferred Stock in connection with the Sale. The Shares were convertible into 7,280,000 shares of the Company’s common stock, automatically upon the effectiveness of an amendment to the Company’s articles of incorporation increasing its authorized common stock to not less than 125 million shares. The shares were valued at $2,184,000.

 

Each unit also consisted of one warrant for each common share in which the preferred shares are convertible for a strike price of $0.40 per share exercisable any time prior to the second anniversary of the issue date and one warrant for each common share in which the preferred shares are convertible for a strike price of $0.60 per share exercisable any time prior to the third anniversary of the issue date. The warrants contain anti-dilution provisions that would reset the strike price under certain conditions if the Company issues common stock at a price lower than the applicable strike price within twelve months from the date of issuance.

 

In analyzing this transaction the Company concluded that the Series D preferred stock did not fall under ASC Topic 480, Distinguishing Liabilities and Equity and as such is classified as equity. The Company also considered whether the conversion option required bifurcation in accordance with ASC Topic 815 and determined that the conversion option and the host contract are clearly and closely related and so bifurcation is not required. As a result of the anti-dilution provisions the warrants are required to be classified as liabilities and adjusted to fair value for the twelve months that the anti-dilution provision is effective (after that time the warrants would be reclassified to equity if they are still outstanding).

 

F-17
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company also considered whether there is a beneficial conversion feature discount as a result of a favorable conversion price. On the commitment date the Company’s stock price was $.57 per share and the conversion price is $.30 per share. However, due to the fair value of the warrant liability none of the proceeds are allocated to the preferred stock. In accordance with ASC Topic 470-20 any beneficial conversion feature would be limited to the proceeds allocated to the preferred stock and so then the beneficial conversion feature discount in this case is $0.

 

Additionally, the discount of $3,202,906 that results from the fair value of the warrants being in excess of the proceeds is amortized immediately during the fourth quarter when the Series D preferred stock was issued because the preferred stock was converted to common in March 2011.

 

The Company entered into a second purchase agreement dated July 4, 2011 with accredited non-U.S. investors for the sale of 4,292,990 shares of the Company’s common stock, for proceeds equal to $1,921,810. An additional 373,430 shares were issued to ABG Sundal Collier Norge ASA, as a fee for acting as an advisor to the investors in connection with the transaction. The price per share for the Shares was $0.45. The investor also received two year warrants to purchase up to an aggregate of 4,292,990 shares of common stock at an exercise price per share of $0.45. The warrants contain anti-dilution provisions that would reset the strike price under certain conditions if the Company issues common stock at a price lower than the applicable strike price within twelve months from the date of issuance (approximately July 2012). The warrants do not permit cashless exercise and are closed to exercise for six months. As a result of the anti-dilution provisions the warrants are required to be classified as liabilities and adjusted to fair value for the twelve months that the anti-dilution provision is effective (after that time the warrants would be reclassified to equity if they are still outstanding).

 

The shares and warrants were issued in reliance upon an exemption from registration afforded under Regulation S of the Securities Act of 1933, as amended, for transactions involving an offering and sale exclusively to non-U.S. persons.

 

The initial fair value of the warrants of approximately $5,400,000 issued in January 2011, the initial fair value of the warrants of approximately $1,900,000 issued in July 2011 and the initial fair value of the warrants of approximately $230,000 issued in December 2011, was calculated using the Monte Carlo simulation model. The underlying value of the model is Enterprise Value, and each Claim is treated as a Claim on the Enterprise Value. Since the common stock price is not the underlying value, the volatility implied by the model is not equal to the volatility used under a closed-form Black-Scholes model which values the warrants with the common stock as the underlying security. The Enterprise Value volatility used for the initial valuations in January 2011 and July 2011 was 86.2% and 90.2%, respectively, and the volatility used at December 31, 2011 was 52.1%.

 

6. STOCK-BASED COMPENSATION

 

Stock Option Plans

 

In January 2008, our board of directors approved and adopted the United Heritage Corporation 2008 Equity Incentive Plan (the “Plan”). The Company reserved 5,000,000 shares of common stock for awards that will be granted from the Plan. The awards are subject to adjustment in the event of stock dividends, recapitalizations, stock splits, reverse stock splits, subdivisions, combinations, reclassifications or similar changes in our capital structure. The Plan became effective upon adoption by the board, and, unless earlier terminated in accordance with the terms and provisions thereof, will remain in effect for a period of ten years from the date of adoption. As of December 31, 2011 and 2010 there were no awards outstanding under the Plan.

 

Directors of the Company adopted the 1995 Stock Option Plan effective September 11, 1995. This Plan and its subsequent amendment set aside 66,667 shares of the authorized but unissued common stock of the Company for issuance under the Plan. Options may be granted to directors, officers, consultants, and/or employees of the Company and/or its subsidiaries. As of December 31, 2010 and 2011 there were no awards outstanding under the Plan.

 

F-18
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Directors of the Company adopted the 1998 Stock Option Plan effective July 1, 1998. This Plan and its subsequent amendment set aside 66,667 shares of the authorized but unissued common stock of the Company for issuance under the Plan. Options may be granted to directors, officers, consultants, and/or employees of the Company and/or its subsidiaries. Options granted under the Plan are exercisable over a period to be determined when granted, but may be affected by the termination of employment. As of December 31, 2010 and 2011 there were no awards outstanding under the Plan.

 

Directors of the Company adopted the 2000 Stock Option Plan effective September 5, 2000. This Plan set aside 1,666,667 shares of the authorized but unissued common stock of the Company for issuance under the Plan. Options may be granted to directors, officers, consultants, advisors, and/or employees of the Company and/or its subsidiaries. As of December 31, 2010 and 2011 there were no awards outstanding under the Plan.

 

Options granted under the Plan must be exercised within the number of years determined by the Stock Option Committee and allowed in the Stock Option Agreement. The Stock Option Agreement may provide that a period of time must elapse after the date of grant before the options are exercisable. The options may not be exercised as to less than 100 shares at any one time.

 

Director’s compensation was amended on December 31, 2008. Under the revised plan, each director can choose each month to receive either $5,000 in the form of the Company’s common stock or stock options to purchase 5,000 shares of common stock. The option price is equal to the Company’s closing average bid price for the previous ended quarter. The previous agreement provided for 5,000 stock purchase options per month, with the price to be calculated on the average closing bid price for the month. Under the Plan, 150,000 stock options were granted to the Company’s Directors during the years ended March 31, 2009 and March 31, 2010. 15,000 options were retired as part of the litigation settlement with Joseph F. Langston Jr. 45,000 stock options remain outstanding under this Plan as of December 31, 2011.

 

During the year ended March 31, 2008, 100,000 stock options were issued to an employee and were not part of the plans mentioned above. These options expired as of June 30, 2011.

 

The director’s compensation was changed on April 1, 2010 to 20,000 shares of common stock per month delivered quarterly in advance. On June 30, 2011, the Board of Directors changed the director compensation to be 20,000 shares of common stock per month, earned in arrears at the end of each month served, and issued quarterly.

 

The Black-Scholes option-pricing model was used to estimate the option fair values. The option-pricing model requires a number of assumptions, of which the most significant are the risk free rate, the expected stock price volatility, the expected pre-vesting forfeiture rate and the expected option term (the amount of time from the grant date until the options are exercised or expire). The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility was calculated based upon actual historical stock price movements over the most recent periods ending December 31, 2011 and 2010. The expected option term was calculated based on the vesting period. The expected forfeiture rate is based on historical experience and expectations about future forfeitures.

 

No stock options were granted during the nine months ended December 31, 2011.

 

The following is an option activity summary under the plans for the quarter ended December 31, 2011.

 

   Number of
Stock Options
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Life (years)
   Aggregate
Intrinsic
Value
 
Outstanding, March 31, 2011   235,000   $0.78    0.44   $13,950 
                     
Forfeited or expired   (190,000)  $-    -      
                     
Outstanding, December 31, 2011   45,000   $0.29    0.41   $300 
                     
Exercisable December 31, 2011   45,000   $0.29    0.41   $300 

 

F-19
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

No options were exercised in the quarter ended December 31, 2011. No options remained unvested as of December 31, 2011.

 

The following schedule summarizes pertinent information with regard to the stock warrants for the quarter ended December 31, 2011:

 

   2011 
  

Warrants

Outstanding

  

Weighted Average

Exercise Price

 
         
Beginning of year:   50,936,532   $0.72 
Granted   4,367,990    0.45 
End of period   55,304,522   $0.70 
Exercisable   51,011,532   $0.72 

  

For the period from May 22, 2008 through March 7, 2011, the Company had recorded the warrants as liabilities and adjusted the carrying amount to fair value each reporting period. The warrants issued with the convertible notes in March 2010 and the warrants issued as part of the January 2011 Series D convertible preferred stock offering continue to be classified as liabilities. Additionally 75,000 warrants owed to certain consultants were owed to them prior to December 31, 2011 but not issued until subsequent to December 31, 2011 and thus the Company is recording them as liabilities until the date the warrant agreements are executed and the terms confirmed. All other remaining warrants have been re-classified to stockholders’ equity as of March 7, 2011. The following table shows the change in the value of the warrant liability for the nine months ended December 31, 2011.

 

 

Warrant liability balance March 31, 2011  $670,395 
Change in fair value of warrant liability   (34,396)
Warrants reclassified to equity   (627,367)
Warrant liability balance December 31, 2011  $8,632 

  

7. FAIR VALUE

 

ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques 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). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability. The three levels of the fair value hierarchy under ASC 820 are described below:

 

Level 1. Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.

 

Level 2. Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

 

F-20
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Level 3. Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

As of December 31, 2011 and March 31, 2011 the Company had assets and liabilities that fell under the scope of ASC 820. The carrying value of accounts receivable, notes receivable and accounts payable and accrued interest all approximate their fair value due to the short term nature. The fair value of the warrant liabilities were determined by the Monte Carlo simulation method. The Monte Carlo simulation is a generally accepted statistical method used to generate a defined number of stock paths in order to develop a reasonable estimate of the range of future expected stock prices of the Company and its peer group and minimizes standard error. Please see Notes 1, and 4 for discussion regarding the determination of fair value for these liabilities. Accordingly, the Company’s fair value measurements of the Company’s warrant liability and derivative liabilities are classified as a Level 3 input.

 

The fair value of the Company’s financial assets and liabilities carried at fair value and measured on a recurring basis are as follows:

 

   December 31, 2011 
   Fair Value Measurements 
   Level 1   Level 2   Level 3   Total 
Liabilities                    
Warrant Liability – Convertible Note (Iroquois)  $-   $-   $8,375,343   $8,375,343 
Derivatives Liability – Convertible Note (Iroquois)  $-   $-   $271,749   $271,749 
Warrant Liability - ABG  $-   $-   $1,103,949   $1,103,949 
Warrant liability - Other  $-   $-   $8,632   $8,632 

 

   March 31, 2011
Fair Value Measurements
 
   Level 1   Level 2   Level 3   Total 
Liabilities                    
Warrant Liability – Convertible Note (Iroquois)  $-   $-   $12,809,065   $12,809,065 
Derivatives Liability – Convertible Note (Iroquois)  $-   $-   $4,534,069   $4,534,069 
Warrant liability - ABG  $-   $-   $5,860,509   $5,860,509 
Warrant liability - Other  $-   $-   $670,395   $670,395 

 

The following table sets forth a summary of changes in the fair value of the Company's Level 3 liabilities for the nine months ended December 31, 2011:

 

       Fair Value       Cancellation,     
   Balance at   of warrants   Unrealized   termination,   Balance at 
   March 31,   upon   (gains) or   and   December 31, 
Description  2011   issuance   losses   reclassification   2011 
Warrant Liability – Convertible Note (Iroquois)  $12,809,065   $-   $(4,433,722)  $-   $8,375,343 
Derivatives Liability – Convertible Note (Iroquois)  $4,534,069   $-   $(4,262,320)  $-   $271,749 
Warrant Liability – ABG  $5,860,509   $1,927,553   $(6,684,113)  $-   $1,103,949 
Warrant liability - Other  $670,395   $-   $(34,396)  $(627,367)  $8,632 

 

F-21
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The unrealized gains or losses on warrant or derivative liabilities are recorded as a change in fair value of warrant or derivative liabilities in the Company's statement of operations. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, the Company reviews the assets and liabilities that are subject to ASC Topic 815-40. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.

 

8. LEGAL PROCEEDINGS

 

Paradigm Lift Technologies, LLC v. UHC Petroleum Corporation

On September 21, 2009 Paradigm Lift Technologies, LLC filed a lawsuit against UHC Petroleum Corporation in the 63rd District Court in Edwards County, Texas for sworn account for equipment allegedly purchased by UHC Petroleum Corporation. The case is in the discovery stage and the Company will continue to vigorously defend its position.

 

Jeff Toth v. Glen Rose Petroleum Corp.

On January 27, 2010, Jeff Toth filed a petition in the 63rd District Court in Edwards County, Texas against Glen Rose Petroleum Corporation for trespass, surface damage, and use of filler. The petition was served on February 18, 2010 and is in the discovery period and the parties have submitted to mediation.

 

Langston Family Partnership and Buccaneer Energy Corporation v. Glen Rose Petroleum Corporation

On October 9, 2009, an action was commenced in the District Court in Kaufman County, Texas, by Langston Family Limited Partnership and Buccaneer Energy Corporation against the Company seeking recovery of funds and compensation for services allegedly advanced to the Company. The Company was served in March 2010 and defended the action. The action was amended on May 4, 2010 to, among other things, add Mr. Langston as a plaintiff. See, also Glen Rose Petroleum Corporation v. Joseph Langston, below. As of August 2, 2011, this matter, along with the related matter of Glen Rose Petroleum Corporation v. Joseph Langston, below, was settled. Langston agreed to discontinue and withdraw his claims with prejudice in exchange for receiving $80,000 in a lump sum payment and $3,333 each month for twelve (12) months thereafter and returning to the Company all shares of the Company’s common stock in which he or anyone related to him had beneficial control or ownership. The lump sum payment of $80,000 was paid in August 2011. The monthly payments of $3,333 commenced on October 1, 2011.

 

Glen Rose Petroleum Corporation v. Joseph Langston

On April 1, 2010, the Company filed an action in the Delaware Court of Chancery against Mr. Langston, the Company’s former Chief Executive Officer, based upon alleged breaches of fiduciary duties as an officer and director of the Company and alleged self-dealing. On July 8, 2010, the Court denied jurisdiction in Delaware due to the prior action of Mr. Langston in Kaufman County, Texas, and directed the Company to proceed in the Texas Court. See also, Langston Family Partnership and Langston Family Partnership and Buccaneer Energy Corporation, above, which was settled. As of August 2, 2011, the Company agreed to discontinue its claims and pay Langston $80,000 in a lump sum payment and $3,333 each month for twelve (12) months thereafter in consideration for Langston returning to the Company all shares of the Company’s common stock in which he or anyone related to him had beneficial control or ownership. The lump sum payment of $80,000 was paid in August 2011. The monthly payments of $3,333 commenced on October 1, 2011.

 

Pernice v. Glen Rose Petroleum, et. al.

On or about April 15, 2011, the Company was advised of an action filed in the Los Angeles Superior Court, in the State of California, by an individual against the Company and others, including Blackwood Capital Limited and Andrew Taylor-Kimmins, our CEO. The claim alleges, among other things, breach of contract and negligent misrepresentations arising out of a proposed transaction related to certain securities and indebtedness of the Company purportedly held by the individual. On June 13, 2011, the parties agreed to a settlement that includes a lump sum payment to Mr. Pernice of $110,267 which was paid in full on July 27, 2011.

 

F-22
 

 

GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Porter, LeVay & Rose, Inc. v. Glen Rose Petroleum.

On September 6, 2011, an action against the Company was filed in the Supreme Court of the State of New York, County of Westchester by Porter, LeVay & Rose, Inc. The settlement amount of $79,323, due by the Company to Porter LeVay & Rose, Inc., was paid in full on January 23, 2012.

 

Potential Shareholder Derivative Litigation

On September 25, 2010, the Company was advised by its counsel in the Langston matters that the firm received a letter from Mr. Langston’s counsel purportedly constituting a notice to the Company and its directors of “a potential shareholder derivative lawsuit against the officer and directors of Glen Rose Petroleum”.

 

In the course of events, this matter no longer is applicable due to a settlement having been reached between the Company and Langston (see Langston Family Partnership and Buccaneer Energy Corporation v. Glen Rose Petroleum Corporation, above, and Glen Rose Petroleum Corporation v. Joseph Langston, above).

 

Other

The Company does not have any other litigation current or contemplated. However, the Company terminated Geoff Beatson, an engineering consultant, and has taken issue with various vendors, any of which could result in litigation, which the Company will vigorously pursue and defend.

 

Also, the Company may routinely be involved in government administrative proceedings relating to our oil and gas operations. The Texas Railroad Commission regulates the oil and gas industry in Texas and Texas law requires that the Texas Railroad Commission issue permits for a variety of activities. The Company can provide no assurance that all of the Company’s requested permits will be granted.

 

9. SUBSEQUENT EVENTS

 

On January 9, 2012, the Company announced the appointment to the board of directors of Mikhail Afendikov, Robert L.M. Hilliard, MD, Misbah Al Droubi, and Cliff M. West, Jr., each to serve until the next meeting of the shareholders of the Company.

  

F-23
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND RESULTS OF OPERATIONS.

 

The following discussion and analysis of our financial condition, plan of operation and liquidity should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this quarterly report on Form 10-Q, and our audited financial statements and the notes thereto and our Management’s Discussion and Analysis or Plan of Operation contained in our annual report on Form 10-K for the fiscal year ended March 31, 2011.

 

OVERVIEW

 

Glen Rose Petroleum Corporation (“Glen Rose”) is a Delaware corporation formed in 2008. The Company was previously United Heritage Corporation, a Utah corporation that was formed in 1981 and was reincorporated in Delaware in 2008. The reincorporation entailed a reincorporation merger agreement between Glen Rose Petroleum Company and United Heritage Corporation, but there were no substantive changes in assets or personnel and we also have continuous financial reporting through the reincorporation.

 

Glen Rose owns UHC Petroleum Corporation (“UHC Petroleum”), a Texas corporation and licensed operator with the Texas Railroad Commission. UHC Petroleum is an independent producer of crude oil, based in Houston, Texas. UHC Petroleum operates the Wardlaw Lease and Adamson Lease (collectively, the “leaseholds”), located approximately 28 miles west of Rocksprings in Edwards County, Texas. The leaseholds lie in the southeast portion of the Val Verde Basin with oil production from the field currently coming from the formation at a depth of less than 600 feet. The Wardlaw Lease consists of approximately 10,562 gross acres of which approximately 10,500 gross acres are undeveloped. The Adamson Lease consists of approximately 1,157 gross acres, including 160 gross acres which were added during the three months ended December 31, 2011. All of the gross acres within the Adamson Lease are undeveloped.

 

The leaseholds currently include 88 identifiable wellbores. Of these, 46 are capable of producing with another 41 wellbores currently shut-in. Of the 41 shut-in wellbores, 39 are believed to be capable of being reclaimed in the future. There is also one shut-in gas well which tested gas is believed to be capable of producing and is scheduled for completion in the future subject to gas prices

 

In certain older wells, UHC Petroleum operates and owns a gross working interest of 100% and a net revenue interest of 75% of the current Wardlaw Lease production. In other wells, including the new wells which UHC Petroleum is developing on the Adamson Lease, UHC Petroleum operates and owns a gross working interest of 87.5% and a net revenue interest of 65.625%. For these last noted wells, the remaining 12.5% working interest and net revenue interest of 9.375% is owned by a separate, but related entity, called Glen Rose Partners 1, LLC, which is owned and controlled by substantially the same members as Iroquois Capital, a creditor of the Company. The original lease term was extended by a period of 90 days each time a well was drilled; therefore, based on prior drilling, the primary lease term is currently extended to 2014.

 

We produce a raw commodity. Currently one purchaser, Enterprise Crude Oil, LLC, buys 100% of our production. However, we believe that other purchasers are available for our production. Our customer risk primarily stems from the purchaser’s solvency relating to outstanding balances. The purchaser has historically timely paid and we have no information that would indicate that it would be unable to continue paying in the future.

 

We have no patents, trademarks, material license agreements, franchises, or labor contracts.

 

In addition to UHC Petroleum, Glen Rose also owns, UHC Petroleum Services Corporation (“UHC Services”) a Texas corporation. Our other subsidiary is National Heritage Sales Corporation, a Texas corporation. National Heritage Sales Corporation has not operated for a number of years, and the Company plans to wind up this corporation in the coming year. Until recently, UHC New Mexico Corporation was a non-operating subsidiary of Glen Rose. Pursuant to a Common Stock Purchase Agreement dated February 12, 2010, it was sold to Blackwood Capital Limited, a company controlled by our Chief Executive Officer. At the time of the sale, it had no assets but was subject to a current UCC filing and ongoing expenses relating to maintaining its corporate existence. Glen Rose determined that the expense of enforcing and collecting the indebtedness of UHC New Mexico Corporation owing to Glen Rose likely would exceed the proceeds realized by Glen Rose from such enforcement and collection activities. Accordingly, Glen Rose approved the cancellation and forgiveness of such indebtedness effective as of the date of the closing on the sale to Blackwood Capital Limited.

 

1
 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q and other reports filed from time to time with the Securities and Exchange Commission by Glen Rose Petroleum Corporation (referred to as the “Company”, “we”, “us” or “our”), contains certain forward-looking statements and information based upon the beliefs of, and data currently available to, our management, as well as estimates and assumptions made by our management regarding the Company’s financial condition, future operating performance, results of operations and other statements that are not statements of historical fact. The words “expect,” “project,” “estimate,” “believe,” “anticipate,” “intend,” “plan” “forecast” or the negative of these terms and similar expressions and variations thereof are intended to identify such forward-looking statements. These forward-looking statements appear in a number of places in this Form 10-Q and reflect the current view of our management with respect to future events. Such forward-looking statements are not guarantees of future performance and are subject to certain important risks, uncertainties, assumptions and other factors relating to our industry and operations which could cause results to differ materially from those anticipated, believed, estimated, expected intended or planned. Some of these risks include, among other things:

 

·whether we will be able to find financing/produce cash flows to continue/expand our operations;
·whether changes in regulatory requirements will adversely affect our business;
·environmental risks;
·volatility in commodity prices, supply of, and demand for, oil and natural gas;
·whether the recovery methods that we use in or will use in our oil and gas operations succeed;
·the ability of our management to execute its plans to meet its goals;
·general economic conditions, whether internationally, nationally, or in the regional and local markets in which we operate, which may be less favorable than expected;
·the difficulty of estimating the presence or recoverability of oil and natural gas resources and future production rates and associated costs;
·the ability to retain key members of management and key employees and to attract additional talent as required;
·drilling and operating risks and expense cost escalations; and
·other uncertainties, all of which are difficult to predict and many of which are beyond our control.

 

Except as otherwise required by law, we undertake no obligation to update any of the forward-looking statements contained in this quarterly report Form 10-Q after the date of this report.

 

2
 

 

GOING CONCERN STATUS

 

The Company’s financial statements have been prepared on a going concern basis which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. The Company has incurred substantial losses from operations and it has negative operating cash flows which raises substantial doubt about its ability to continue as a going concern. The Company had net income of $909,108 and $10,815,350 for the three and nine months ended December 31, 2011, respectively. However, $2,664,402 and $15,414,551, respectively, of this net income is attributable to the change in value of the derivative and warrant liabilities. As of December 31, 2011 the Company had an accumulated deficit of $57,169,200.

 

The Company intends to continue its planned capital expenditure to continue its reworking and drilling programs, but does not have sufficient realized revenues and cash on hand is not adequate to cover immediate cash needs. However, the Company expects revenues from production will be enough to cover operating expenses in the near term.

 

The Company can provide no assurance that it will be able to obtain sufficient financing that it needs to develop its properties and alleviate doubt about its ability to continue as a going concern. If the Company is able to obtain sufficient additional financing proceeds, the Company cannot be certain that this additional financing will be available on acceptable terms, if at all. To the extent the Company raises additional funds by issuing equity securities, the Company’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct business. Furthermore, certain of the Company’s current creditors may be required to approve any such transaction.

 

On March 3, 2012 the convertible notes issued to Iroquois Capital Opportunity Fund LP (“Iroquois) and the associated investors (Note 4) are set to mature. The total principal amounts, together with the accrued non-cash interest and the cash interest payable, at maturity will be approximately $3,839,094. As of February 13, 2012, the Company does not have an approved or substantially acceptable plan or ability to pay this amount at maturity or to refinance the notes. However, the Company remains focused on its financing efforts in order to raise enough capital to settle the debt in the near term.

 

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Restatement

 

During the January 2011 offering of convertible preferred stock (“Regulation S Offering”) with warrants, the Company realized that, on May 22, 2008 when it entered into a statutory merger whereby it moved its state of incorporation from Utah to Delaware (See Note 5), the number of authorized shares was inadvertently changed from 125,000,000 to 20,000,000. In conjunction with the January 2011 Regulation S Offering, the Company applied to the State of Delaware to authorize 150,000,000 shares of common stock, which was completed on March 7, 2011. For the period from May 22, 2008 through March 7, 2011, the Company had warrants outstanding in excess of the authorized and unissued common shares and as such in accordance with ASC Topic 815, Derivatives and Hedging, these warrants should have been classified as liabilities. In addition, as part of the process of closing the Company’s financial records for the year ended March 31, 2011, it noted the convertible debt and warrants issued in March 2010 and other transactions were not recorded correctly. The conversion option, which includes certain anti-dilution provisions, and a put option that includes a 20% premium, should have been bifurcated from the host contract and adjusted to fair value in accordance with ASC Topic 815. In addition the warrants also contain anti-dilution provisions that require liability classification in accordance with ASC Topic 815. As a result, the Company concluded that its annual financial statements for the year ended March 31, 2010 as well as its quarterly financial statements for the quarters ended within the fiscal year ended March 31, 2011, required a restatement to reflect these changes.

 

3
 

 

A summary of significant effects of the restatement follows:

 

On May 22, 2008, the Company had 20,307,087 warrants outstanding that carried a fair value of $11,926,934 as of that date and a fair value of $1,784,348 as of March 31, 2009. As of May 22, 2008, the Company made an adjustment to reclassify the warrants from equity to a liability and at March 31, 2009 the fair value was adjusted. For the year ended March 31, 2010, 3,733,332 warrants at a fair value of $536,746 at grant date were issued and 9,000,000 warrants at a fair value of $1,391,493 at termination date were cancelled. At March 31, 2010 the fair value of the warrants outstanding, not including the warrants issued with the convertible notes, was $3,992,172. For the nine months ended December 31, 2010, 4,373,336warrants at a fair value of $808,559 at grant date were issued. On March 7, 2011, the fair value of the warrants outstanding, not including the warrants issued with convertible notes or with the January 2011 Regulation S Offering or 1,335,000 warrants due to certain consultants (see note 5) was $4,525,117 and was reclassified to additional paid-in capital.

 

The convertible notes issued on March 3, 2010 included anti-dilution provisions in the conversion option and the warrants that allow for a reset of the respective conversion and exercise prices in certain situations when the Company issues common shares at a lower price. Additionally, the convertible notes include a provision that allows the creditors to put the notes back to the Company at a 20% premium in certain change of control or default situations. In order to determine the fair value of the embedded derivatives and the warrant liability the Company utilized a Monte Carlo simulation methodology. As of March 3, 2010, the fair value of the derivatives was $1,593,002 and the fair value of the warrant liability was $4,258,094. Due to the number of common shares on a fully-diluted basis offered to the creditors, the fair value of the derivatives and the warrant liability exceeded the principal amount of the convertible notes and so the Company recorded interest expense of $2,501,096 upon the date of issuance. The original issue discount of $3,350,000 is being amortized over the life of the debt using the effective interest rate method and for the year ended March 31, 2010 the amortization was $38,548. For the three and nine months ended December 31, 2010, the amortization of the debt discount was $243,056 and $564,318.

 

Stock based compensation expense for the three and nine months ended December 31, 2010 of $124,038 and $580,085, respectively was reclassed from a separate category for stock based compensation in the statement of operations to general and administrative expense in accordance with ASC Topic 718, Stock Compensation. Additionally, $206 and $563,725 of stock based compensation related to warrants issued to consultants was recorded for the three and nine months ended December 31, 2010, respectively.

 

Independent petroleum engineers have estimated the Company’s proved oil and gas reserves, all of which are located in Edwards County, Texas. Proved reserves are the estimated quantities that geologic and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods. Due to the inherent uncertainties and the limited nature of reservoir data, such estimates are subject to change as additional information becomes available. The reserves actually recovered and the timing of production of these reserves may be substantially different from the original estimate. Revisions result primarily from new information obtained from development drilling and production history and from changes in economic factors. The original reserve report for fiscal year ended March 31, 2010 was not prepared in compliance with the Securities and Exchange Commission’s rules and accounting standards, which require that calculations be based on the twelve month un-weighted first-day-of–the-month average price for March 31, 2010. As such, the Company corrected the report and restated the related disclosures in the supplementary financial information in the Form 10-K for the year ended March 31, 2011. The effect of these adjustments was not material to the recorded depreciation, depletion and accretion amounts reported for the three and nine months ended December 31, 2010.

 

4
 

 

   Three Months Ended
December 31, 2010 (As
Previously Reported)
   Amount of Change   Three Months Ended
December 31, 2010 (As
Restated)
 
Statement of Operations               
Production and Operating  $334,193   $-   $334,193 
Impairment of field equipment   -    -    - 
Depreciation, depletion and accretion   117,181    (12,982)   104,199 
General and administrative   501,981    123,832    625,813 
Stock based compensation   124,038    (124,038)   - 
Interest Expense   (366,766)   (85,264)   (452,030)
Change in value of warrant liability   -    937,171    937,171 
Change in value of warrant liability – Iroquois   -    (968,299)   (968,299)
Change in value of derivative liability – Iroquois   -    392,949    392,949 
Net Loss  $(955,978)  $289,745   $(666,233)
Basic and Diluted Loss per common share  $(0.05)  $0.01   $(0.04)

  

   Nine Months Ended
December 31, 2010 (As
Previously Reported)
   Amount of Change   Nine Months Ended
December 31, 2010 (As
Restated)
 
Statement of Operations               
Production and Operating  $570,791   $146,966   $717,757 
Impairment of field equipment   124,870    (124,870)   - 
Depreciation, depletion and accretion   205,692    (25,188)   180,504 
General and administrative   1,802,842    1,143,398    2,946,240 
Stock based compensation   580,085    (580,085)   - 
Interest Expense   (1,067,274)   (92,658)   (1,159,932)
Change in value of warrant liability   -    2,550,434    2,550,434 
Change in value of warrant liability - Iroquois   -    (1,196,503)   (1,196,503)
Change in value of derivative liability - Iroquois   -    1,133,075    1,133,075 
Net Loss  $(3,537,937)  $1,834,127   $(1,703,810)
Basic and Diluted Loss per common share  $(0.20)  $0.10   $(0.10)

  

RESULTS OF OPERATIONS

 

Three Months Ended December 31, 2011 and 2010

 

Our revenues decreased $18,104 or approximately 4%, to $459,299 for the three months ended December 31, 2011, as compared to $477,403 for the three months ended December 31, 2010. The decrease in revenue in 2011 compared to 2010 was due to a decrease in sales as additional time was spent preparing previous contaminated oil to be ready for sale. During the three months ended December 31, 2011 and 2010, the Company sold 8,074 and 9,004 barrels of oil, respectively.

 

Our total production and operating costs and expenses decreased $40,728, or approximately 12%, to $293,465 for the three months ended December 31, 2011, as compared to $334,193 for the three months ended December 31, 2010. The decrease in our production and operating expenses is partly due to less barrels of oil being produced as well as a reduction in operating cost per well due to streamlined operations.

 

Our depreciation, depletion and accretion decreased by $11,764, or approximately 11%, to $92,435 for the three months ended December 31, 2011, as compared to $104,199 for the three months ended December 31, 2010. Substantially all of the decrease pertained to lower depletion recorded for the period. Depletion decreased due to the decrease in the volume of oil sold.

 

5
 

 

General and administrative expenses increased $221,860, or approximately 35%, to $847,673 for the three months ended December 31, 2011, as compared to $625,813 for the three months ended December 31, 2010. This increase in our general and administrative expenses during the current three month period is mainly attributable to increased legal and professional fees.

 

Our loss from operations increased $187,472, or approximately 32%, from a loss of $586,802 for the three months ended December 31, 2010, to a loss of $774,274 for the three months ended December 31, 2011. This change in our loss from operations is primarily attributable to the decrease in revenue which was off-set by the decrease in production and operating costs and the larger increase in general and administrative expenses.

 

Interest expense increased $463,247, or approximately 102%, from $452,030 for the three months ended December 31, 2010 to $915,277 for the three months ended December 31, 2011. Part of this increase is attributable to a higher amount of the Iroquois Notes Discount being expensed on a quarter basis.

 

The income/expense related to the changes in value of warrant and derivative liabilities increase from a combined income of $361,821 for the three months ended December 31, 2010 to a combined income of $2,664,402 for the three months ended December 31, 2011. The change in value of warrant and derivative liability is attributable to fluctuations in the share price of Glen Rose common stock.

 

Our net income (loss) increased $1,575,341 from a net loss of ($666,233) for the three months ended December 31, 2010, to net income of $909,108 for the three months ended December 31, 2011. The increase in net income is mainly attributable to the decrease in value of warrant and derivative liabilities.

 

Nine Months Ended December 31, 2011 and 2010

 

Our revenues increased $194,365, or approximately 26%, to $942,005 for the nine months ended December 31, 2011, as compared to $747,640 for the nine months ended December 31, 2010. This overall increase is attributable to the significant increase in revenue during the first three months of the period due to new development and reworking of wells. During the nine months ended December 31, 2011 and 2010, the Company sold 16,029 and 14,776 barrels of oil, respectively.

 

Our total production and operating costs and expenses decreased $115,095 or approximately 16%, to $602,662 for the nine months ended December 31, 2011, as compared to $717,757 for the nine months ended December 31, 2010. The overall decrease in our production and operating expenses can be attributed to a reduction in operating cost per well due to streamlined operations.

 

Our depreciation, depletion and accretion increased by $18,346, or approximately 10%, to $198,850 for the nine months ended December 31, 2011, as compared to $180,504 for the nine months ended December 31, 2010. Substantially all of our increase pertained to the depreciation, depletion and accretion expenses incurred in our oil properties.

 

General and administrative expenses decreased $431,032, or approximately 15%, to $2,515,208 for the nine months ended December 31, 2011, as compared to $2,946,240 for the nine months ended December 31, 2010. This decrease is mainly attributable to a decrease in professional fees and salaries.

 

Our loss from operations decreased $722,146, or approximately 23%, from a loss of $3,096,861 for the nine months ended December 31, 2010, to a loss of $2,374,715 for the nine months ended December 31, 2011. This change in our loss from operations is primarily attributable to the increase in revenue and the decrease in production and operating expenses as well as the decrease in general and administrative expenses.

 

6
 

 

Interest expense increased $1,080,366, or approximately 93%, from $1,159,932 for the nine months ended December 31, 2010 to $2,240,298 for the nine months ended December 31, 2011. A significant part of this increase is attributable to higher amounts of the Iroquois Notes Discount being expensed on a quarter basis.

 

The income/expense related to the changes in value of warrant and derivative liabilities increase from an income of $2,487,006 for the nine months ended December 31, 2010 to an income of $15,414,551 for the nine months ended December 31, 2011. The change in value of warrant and derivative liability is attributable to fluctuations in the share price of Glen Rose common stock.

 

Our net income (loss) increased $12,519,160 from a net loss of ($1,703,810) for the three months ended December 31, 2010, to net income of $10,815,350 for the nine months ended December 31, 2011. The increase in net income is mainly attributable to the decrease in value of warrant and derivative liabilities.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity

 

Our revenues have not been adequate to support our operations. We anticipate that this will change in the near future as a result of our capital raising and development efforts, combined with operating changes.

 

Current liabilities decreased from $6,554,636 at March 31, 2011 to $6,998,636 at December 31, 2011, a decrease of $444,000, or approximately 7%. This decrease was caused by the increase of $2,602,683 in the notes payable, current portion from $144,570 at March 31, 2011 to $2,747,253 at December 31, 2011, together with the increase of $1,742,062 in the convertible notes payable, net of unamortized discount from $1,190,092 at March 31, 2011 to $2,932,154 at December 31, 2011; offsetting the decrease in the derivatives liability on the convertible note with Iroquois of $4,262,320 from $4,534,069 at March 31, 2011 to $271,749 at December 31, 2011.

 

We had working capital deficit of $6,570,657 at December 31, 2011, as compared to working capital deficit of $5,527,253 at March 31, 2011, a working capital decrease of $1,043,404 or approximately 19%. The decrease in our working capital resulted from the decrease in current assets, mainly the decrease in the December 31, 2011 cash balance compared to March 31, 2011.

 

As of February 24, 2012 the Company held $30,698 in cash.

 

The Company intends to continue its planned capital expenditure to continue its reworking and drilling programs, but does not have sufficient realized revenues and cash on hand is not adequate to cover immediate cash needs.

 

The Company can provide no assurance that it will be able to obtain sufficient financing that it needs to develop its properties and alleviate doubt about its ability to continue as a going concern. If the Company is able to obtain sufficient additional financing proceeds, the Company cannot be certain that this additional financing will be available on acceptable terms, if at all. To the extent the Company raises additional funds by issuing equity securities, the Company’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct business. Furthermore, certain of the Company’s current creditors may be required to approve any such transaction.

 

On March 3, 2012 the convertible notes issued to Iroquois Capital Opportunity Fund LP (“Iroquois) and the associated investors (Note 4) are set to mature. The total principal amounts, together with the accrued non-cash interest and the cash interest payable, at maturity will be approximately $3,839,094. As of February 21, 2012, the Company does not have an approved or substantially acceptable plan or ability to pay this amount at maturity or to refinance the notes. However, the Company remains focused on its financing efforts in order to raise enough capital to settle the debt in the near term.

 

7
 

 

Cash Flow

 

Our operations used $1,853,739 of cash in the nine months ended December 31, 2011. Net income for the nine months of $10,815,350 was offset by changes in value of warrant liability and derivative liability totaling $15,414,551. Stock compensation expenses of $467,954, amortization of loan discount of $1,743,272 and a increase of $361,575 in accounts payable and accrued expenses also impacted the cash used in operating activities. Cash of $916,126 was used in investing activities during the same six month period, most of which was used on additions to the oil and gas properties. Cash from escrow of $367,554 and proceeds from the July 2011 Reg. S. offering of $1,931,846, contributed to cash provided by financing activity during the nine months ended December 31, 2011.

 

At December 31, 2011, we had cash on hand and cash in escrow in the amount of $13,113 as compared to $29,382 at December 31, 2010.

 

Except as otherwise discussed in this quarterly report, we know of no trends, events or uncertainties that have, or are reasonably likely to have, a material impact on our short-term or long-term liquidity or on our net sales or revenues from continuing operations. We do not currently have any significant commitments for capital expenditures for the next twelve months, but do have significant plans, depending upon success of the pilot flooding program and our success in attracting capital.

 

ITEM 3. Quantitative and Qualitative Disclosure About Market Risk.

 

Commodity Price Risk

 

Our major market risk exposure is in the pricing applicable to our oil production. Realized pricing is primarily driven by the prevailing price for crude oil. Pricing for oil has been volatile and unpredictable for several years, and we expect this volatility to continue in the future. The prices we receive for production depend on many factors outside of our control, such as the strength of the global economy. Currently the Company does not use any derivative instruments to hedge our exposure in the movement in oil prices.

 

The market price per barrel of oil decreased from $106.72 on March 31, 2011 to $99.00 on December 30, 2011.

 

8
 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2011. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures.

 

Based on the evaluation of our disclosure controls and procedures as of December 31, 2011, and due to the material weaknesses in our internal control over financial reporting described previously in our Form 10-K for the year ended March 31, 2011, and summarized below, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were not effective.

 

We identified the following material weaknesses in internal control over financial reporting as of December 31, 2011. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—An Integrated Framework (September 1992).

 

Complex Equity and Debt Transactions

We had difficulties in applying complex accounting standards and did not have sufficient staffing and technical expertise in order to recognize and record complex equity and debt transactions. Adequate controls over these processes were absent as of December 31, 2011. During the audit of the March 31, 2011 financial statements it was noted that there were certain debt and equity transactions that were improperly recorded and were required to be restated and/or adjusted based on the audit findings. The absence of controls in this area resulted in the restatement of the March 31, 2010 Form 10-K and adjustments to fiscal year ended March 31, 2011 balances related to stock based compensation to consultants, classification of outstanding warrants, convertible debt and convertible equity which were not originally recorded in accordance with ASC Topic 718, Stock Compensation, ASC Topic 815, Derivatives and Hedging and ASC Topic 480, Distinguishing Liabilities and Equity.

 

Taxes

We did not have adequately designed controls to provide reasonable assurance that the accounting for income taxes and related disclosures were prepared in accordance with ASC Topic 740, Incomes Taxes. Specifically, we did not have sufficient staffing and technical expertise in the tax area to adequately prepare and review analysis and disclosures with respect to the complete and accurate recording of deferred tax assets and liabilities.

 

Oil and Gas Accounting

We did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience, and training in the application of ASC Topic 932, Extractive Activities – Oil and Gas. We had to rely on external resources to oversee the preparation and completion of the valuation for the proven and unproven properties and to complete the final adjustments related to changes in the proven properties, unproven properties, production expense, general and administrative expense, impairment expense and depletion expense and the related disclosures.

 

9
 

 

Entity Level Controls

We did not have adequately designed controls to provide reasonable assurance that executed agreements between us and third parties are being properly retained. Specifically, we could not locate certain executed common stock, warrant or consulting agreements. Additionally, certain executed board of directors’ minutes could not be provided.

 

Towards the end of the fiscal year and subsequent to March 31, 2011 we have begun to address these weaknesses. We hired one of our former directors to take on the role of Chief Financial Officer on March 18, 2011 and entered into an agreement with Point Capital Partners, LLC (Point Capital), pursuant to which it will take control of all accounting functions and administrative operations, including but not limited to daily, monthly and quarterly cash management, bill paying, receivables management, as well as the accounting and financial reporting of such items for us. Point Capital is in the process of performing a comprehensive review of the accounting procedures and policies and will update the processes and controls as necessary.

 

The Company believes that deficiencies and material weaknesses in our controls and procedures will be remediated before management undertakes its assessment of disclosure controls and procedures and internal control over financial reporting for the fiscal year ending March 31, 2012.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

During the quarter ended December 31, 2011, no changes were identified with respect to our internal control over financial reporting that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

For a current report regarding ongoing legal proceedings involving the Company and other material claims, reference is made to Item 3 of Part I of the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on October 17, 2011, which is incorporated herein.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

There were no reportable events under this Item 2 during the quarterly period ended December 31, 2011.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

There were no reportable events under this Item 3 during the quarterly period ended December 31, 2011.

 

ITEM 4. REMOVED AND RESERVED.

 

ITEM 5. OTHER INFORMATION

 

None.

 

10
 

 

ITEM 6.   EXHIBITS

 

Exhibits

 

3.1 Certificate of Incorporation filed in Delaware on May 22, 2008, incorporated by reference to Exhibit 3.1 to Registrant’s Form 10-K for period ending March 31, 2008 filed July 14, 2008.

 

3.3 Bylaws of Corporation, incorporated by reference to Exhibit 3.1 to Registrant’s Form 10-K for period ending March 31, 2008 filed July 14, 2008.

 

3.3(a) Amendment to By-Laws, incorporated by reference to Exhibit 3.3(a) to Registrant’s Form 10-K/A for period ending March 31, 2010 filed July 22, 2010.

 

3.3(b) Certificate of Designation of Preferences, Rights and Limitations of Series D Convertible Preferred Stock, incorporated by reference to Exhibit 4.1 to Registrant’s Form 8-K filed on January 25, 2011.

 

3.3(c) Amended and Restated Certificate of Preferences, Rights and Limitations of Series D Convertible Preferred Stock, incorporated by reference to Exhibit 4.1 to Registrant’s Form 8-K filed on January 25, 2011.

 

4.1  Secured Convertible Note (Iroquois) (see Exhibit 10.11).

 

4.2  Form of Common Stock Purchase Warrant issued to Iroquois Capital Opportunity Fund, LLC and other investors on March 3, 2010 (see Exhibit 10.13).

 

4.3 Form of Common Stock Purchase Warrant issued to DK True Energy Development Ltd., incorporated by reference to Exhibit 4.3 to Registrant’s Form 10-K/A for period ending March 31, 2010 filed July 22, 2010.

 

4.4 Form of Common Stock Purchase Warrant issued to RTP Secure Energy Corp., incorporated by reference to Exhibit 4.4 to Registrant’s Form 10-K/A for period ending March 31, 2010 filed July 22, 2010.

 

4.4(a) Registration Rights Agreement for Warrant issued to RTP, incorporated by reference to Exhibit 4.4(a) to Registrant’s Form 10-K/A for period ending March 31, 2010 filed July 22, 2010.

 

4.5 Form of Common Stock Purchase Warrants issued to Joseph Tovey, incorporated by reference to Exhibit 4.5 to Registrant’s Form 10-K/A for period ending March 31, 2010 filed July 22, 2010.

 

4.5(a) Registration Rights Agreement for Warrant issued to Tovey, incorporated by reference to Exhibit 4.5(a) to Registrant’s Form 10-K/A for period ending March 31, 2010 filed July 22, 2010.

 

4.6 Registration Rights Agreement, with the purchasers of Series D Convertible Preferred Stock, incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K filed on January 25, 2011.

 

4.7 Form of Warrant issued to purchasers of Series D Convertible Preferred Stock, incorporated by reference to Exhibit 4.2 to Registrant’s Form 8-K filed on January 25, 2011.

 

4.8 Form of Warrant issued to purchasers of common stock, incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K filed on July 12, 2011.

10.1 1995 Stock Option Plan, incorporated by reference to Exhibit 10.3 of the Registrant’s Form SB-2 Registration Statement filed May 4, 2004.

 

11
 

 

10.2 1998 Stock Option Plan, incorporated by reference to Exhibit 99.01 the Registrant’s Form S-8 registration statement filed on September 30, 1998 as document number 333-64711.

 

10.3 2000 Stock Option Plan, incorporated by reference to Exhibit 4.01 of Registrant’s Form S-8 Registration Statement filed on December 6, 2000.

 

10.4 2008 Stock Option Plan, incorporated by reference to Exhibit 10-1 to Registrant’s Form S-8 Registration Statement filed May 30, 2008.

 

10.5 Amended Agreement with Joseph F. Langston, incorporated by reference to Exhibit 10.5 to Registrant’s Form 10-K filed July 13, 2009.

 

10.7 Debenture issued to Blackwood Ventures, LLC dated January 28, 2009, incorporated by reference to Exhibit 10.6 to Registrant’s Form 10-Q filed November 20, 2009.

 

10.8 Consulting Agreement with DK True Energy Development Ltd. and RTP Secure Energy Corp. dated November 27, 2007, incorporated by reference to Exhibit 10-1 to Registrant’s Form 8-K filed December 3, 2007.

 

10.8a Termination of Consulting Agreement with DK True Energy Development Ltd. and Mutual Release, incorporated by reference to Exhibit 10.8a to the Registrant’s Form 10-K, filed on July 14, 2010.

 

10.9 Consulting Agreement with Blackwood Capital, Ltd. dated January 15, 2008, incorporated by reference to Exhibit 10-2 to Registrant’s Form 8-K filed January 22, 2008.

 

10.9(a) Amendment to Consulting Agreement with Blackwood Capital, Ltd., incorporated by reference to Exhibit 10.5 to Registrant’s Form 10-Q filed November 20, 2009.

 

10.9(b) 8.5% Senior Secured Convertible Debenture and Warrant Purchase Agreement, incorporated by reference to Exhibit 10.6 to Registrant’s Form 10-Q filed November 20, 2009.

 

10.10 Subscription Agreement (Iroquois), incorporated by reference to Exhibit 10.10 to the Registrant’s Form 10-K, filed on July 14, 2010.

 

10.11 Form of Secured Convertible Promissory Note (Iroquois), incorporated by reference to Exhibit 10.11 to the Registrant’s Form 10-K, filed on July 14, 2010.

 

10.12 Security Agreement (Iroquois), incorporated by reference to Exhibit 10.12 to the Registrant’s Form 10-K, filed on July 14, 2010.

 

10.12(a) Waiver of default, incorporated by reference to Exhibit 10.3 to Registrant’s Form 8-K, filed on January 25, 2011.

 

10.13 Form of Warrant (Iroquois), incorporated by reference to Exhibit 10.13 to the Registrant’s Form 10-K, filed on July 14, 2010.

 

10.14 Working Interest Purchase and Sale Agreement (Iroquois), incorporated by reference to Exhibit 10.14 to Registrant’s Form 10-K/A for period ending March 31, 2010 filed July 22, 2010.

 

10.15 Consulting Agreement with Blackwood Ventures, LLC dated January 28, 2009, incorporated by reference to Exhibit 10.5 to Registrant’s Form 10-Q filed November 20, 2009.

 

12
 

 

10.16 Consulting Agreement with Iromad, LLC (Iroquois), incorporated by reference to Exhibit 10.16 to the Registrant’s Form 10-K, filed on July 14, 2010.

 

10.17 Form of Option Holder Novation Agreement, incorporated by reference to Exhibit 10.17 to the Registrant’s Form 10-K, filed on July 14, 2010.

 

10.18 Termination and Settlement Agreement with Joseph Tovey, incorporated by reference to Exhibit 10.18 to the Registrant’s Form 10-K, filed on July 14, 2010.

 

10.19 Employment Agreement with Ruben Alba, incorporated by reference to Exhibit 10.19 to Registrant’s Form 10-K/A for period ending March 31, 2010 filed July 22, 2010.

 

10.20 Employment Agreement with Kenneth E. Martin, incorporated by reference to Exhibit 10.20 to the Registrant’s Form 10-K, filed on July 14, 2010.

 

10.21(a) Agreement for short-term financing with Dr. Howard Berg, incorporated by reference to Exhibit 10.21(a) to Registrant’s Form 10-K/A for period ending March 31, 2010 filed July 22, 2010.

 

10.21(b) Senior Secured Note in the principal amount of $250,000, incorporated by reference to Exhibit 10.21(b) to Registrant’s Form 10-K/A for period ending March 31, 2010 filed July 22, 2010.

 

10.21(c) Security Agreement, incorporated by reference to Exhibit 10.21(c) to Registrant’s Form 10-K/A for period ending March 31, 2010 filed July 22, 2010.

 

10.21(d) Warrants issued to Dr. Howard Berg, incorporated by reference to Exhibit 10.21(d) to Registrant’s Form 10-K/A for period ending March 31, 2010 filed July 22, 2010.

 

10.21(e) Registration Rights Agreement for Warrants issued to Dr. Howard Berg, incorporated by reference to Exhibit 10.21(e) to Registrant’s Form 10-K/A for period ending March 31, 2010 filed July 22, 2010.

 

10.22  Second Addendum to Amended and Restated Promissory Note made by World Link Partners, LLC in favor of Registrant, incorporated by reference to Exhibit 10.22 to the Registrant’s Form 10-K, filed on July 14, 2010.

 

10.22(a) Third Addendum to Amended and Restated Promissory Note, dated September 24, 2010, incorporated by reference to Exhibit 10.22(a) to Registrant’s Form 10-Q filed February 22, 2011.

 

10.23 Management Consulting Services Agreement with Weisshorn Management Services, Inc., incorporated by reference to Exhibit 10.23 to the Registrant’s Form 10-K, filed on July 14, 2010.

 

10.24 Employment Agreement with Sam Smith, incorporated by reference to Exhibit 10.24 to the Registrant’s Form 10-K, filed on July 14, 2010.

 

10.25 Consulting Agreement with Compagnie de Ressources Naturelles et d’Investissment SA, incorporated by reference to Exhibit 10.25 to the Registrant’s Form 10-K, filed on July 14, 2010.

 

10.26(a) Adamson-Glen Rose Lease, September 2010, incorporated by reference to Exhibit 10.26(a) to Registrant’s Form 10-K/A for period ending March 31, 2010 filed July 22, 2010.

 

10.26(b) Adamson-Memorandum of Lease to UHC Petroleum, incorporated by reference to Exhibit 10.26(b) to Registrant’s Form 10-K/A for period ending March 31, 2010 filed July 22, 2010.

 

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10.26(c) Adamson Option, July 2010, incorporated by reference to Exhibit 10.26(c) to Registrant’s Form 10-K/A for period ending March 31, 2010 filed July 22, 2010.

 

10.27 Application Form for the purchase of the Company’s Series D Convertible Preferred Stock, incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed on January 25, 2011,

 

10.28 Engagement Letter, dated January 15, 2011, between the Company and Barry J. Pierce, CPA incorporated by reference to Exhibit 10.28 to Registrant’s Form 10-Q filed February 22, 2011.

 

10.29 Consulting Agreement, dated October 25, 2010, between the Company and James Casperson incorporated by reference to Exhibit 10.29 to Registrant’s Form 10-Q filed February 22, 2011.

 

10.30 Agreement with Point Capital Partners, LLC for bookkeeping, accounting and financial reporting services, dated March 28, 2011, incorporated by reference to Exhibit 10.1 to Registrant’s current report on Form 8-K filed April 11, 2011.

 

10.31 Application Form for the purchase of the Company’s common stock, incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed on July 12, 2011.

 

14 Code of Ethics, incorporated by reference to Exhibit 14 to Registrant’s Form 10-KSB for the year ending March 30, 2004 filed September 29, 2004.

 

21 Subsidiaries of the Company, incorporated by reference to Exhibit 21 to Registrant’s Form 10-K for period ending March 31, 2008 filed July 14, 2008.

 

31.1 Certification of Principal Executive Officer*

 

31.2 Certification of Principal Accounting and Financial Officer*

 

32.1 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act*

 

32.2 Certification of Principal Accounting and Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act*

 

*Filed herewith.

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  GLEN ROSE  PETROLEUM CORPORATION
     
Date: February 24, 2012 By: /s/ Andrew Taylor-Kimmins
    Andrew Taylor-Kimmins
    President and Chief Executive Officer
     
Date: February 24, 2012 By: /s/ Theodore D. Williams
    Theodore D. Williams
    Chief Financial Officer

 

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