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ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
9 Months Ended
Dec. 31, 2011
Accounting Policies [Abstract]  
Organization, Consolidation, Basis of Presentation, Business Description and Accounting Policies [Text Block]

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.

 

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  

 

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.

 

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.

 

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.

 

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 )

 

    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 )