Attached files

file filename
EX-21 - LIST OF SUBSIDIARIES - United American Petroleum Corp.uapcex21.htm
EX-23.3 - CONSENT OF MIRE AND ASSOCIATES, INC. - United American Petroleum Corp.uapcex233.htm
EX-23.2 - CONSENT OF NOVA RESOURCES, INC. - United American Petroleum Corp.uapcex232.htm
EX-23.1 - CONSENT OF NOVA RESOURCES, INC. - United American Petroleum Corp.uapcex231.htm
EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER PURSUANT TO 18 U.S.C. ? 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. - United American Petroleum Corp.uapcex321.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. - United American Petroleum Corp.uapcex311.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-K
 

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  

 For the fiscal year ended December 31, 2011.

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from     to                    
 
Commission File No:  000-51465
 
United American Petroleum Corp.
 (Exact name of registrant as specified in its charter)
Nevada
 
20-1904354
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
9600 Great Hills Trail, Suite 150W, Austin, TX 78759
(Address of principal executive offices) (Zip Code)
 
Registrant's telephone number, including area code: (512) 852-7888
   
Securities registered under Section 12(b) of the Act:
 
 
Title of each class:
 
Name of each exchange on which registered:
None
None 
   
Securities registered pursuant to section 12(g) of the Act:
 
Common Stock, Par Value $.001
(Title of Class)
 
Indicate by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  o Yes   x No

Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  o Yes   xNo

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     o 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). o Yes    x No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer   o    (Do not check if a smaller reporting company)
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes      x No

The aggregate market value of the registrant's shares of common stock held by non-affiliates of the registrant on June 30, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, based on $0.85 per share, the average bid and asked price of such common equity, is $18,700,000.

As of April 13, 2012, there were 44,000,000 shares of the issuer's $.001 par value common stock issued and outstanding.
 
 Documents incorporated by reference. There are no annual reports to security holders, proxy information statements, or any prospectus filed pursuant to Rule 424 of the Securities Act of 1933 incorporated herein by reference. 
 
 
 
 
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TABLE OF CONTENTS

 
 
PART I
 
   
Page
6
     
 
PART II
 
     
     
 
PART III
 
     
     
 
PART IV
 
     

 

 
2

 
 
PART I
 
Item 1.   Business.
 
Our Background.  United American Petroleum Corp. (“We” or the “Company”), formerly Forgehouse, Inc., was incorporated in the State of Nevada on November 19, 2004.  Pursuant to an Agreement and Plan of Exchange, dated January 31, 2008 (the “Exchange Agreement”), we acquired ForgeHouse LLC, a limited liability company.  Between January 31, 2008 and December 16, 2009, we were solely engaged in the business of developing and selling physical security industry application and software (the “Prior Business”).  On December 16, 2009, we supplemented that business with the acquisition of, our wholly-owned subsidiary, Northern Future Energy Corp., a Nevada corporation (“NFEC”), which is engaged in the oil and gas business. On December 29, 2009, we discontinued the Prior Business and established our principal business of the acquisition of leasehold interests in petroleum and natural gas rights, either directly or indirectly, and the exploitation and development of properties subject to these leases.

On December 31, 2010, we entered into and closed an Agreement and Plan of Merger (“Merger Agreement”) with our newly formed wholly-owned subsidiary, United PC Acquisition Corp., a Nevada corporation (“Merger Sub”), and United American Petroleum Corp., a Nevada Corporation (“United”) (the “Merger Transaction”), pursuant to which Merger Sub merged with and into United with United surviving, making United our new wholly-owned subsidiary.  Immediately thereafter and pursuant to the Merger Agreement, United merged with and into the Company, with the Company surviving and we changed our name to “United American Petroleum Corp.” In connection with the Merger Transaction, we assumed all of United’s contractual obligations and acquired certain oil and gas properties of United in Texas.

We have not undergone bankruptcy, receivership, or any similar proceeding.

Our Business.  We are an exploration company engaged in the acquisition, exploration, development and production of oil and gas properties.  Our principal business is the acquisition of leasehold interests in petroleum and natural gas rights, either directly or indirectly, and the exploitation and development of properties subject to these leases.  Our primary focus is to develop our properties that have potential for near-term production, We also provide operational expertise for several third party well owners out of our operation base in Austin, Texas. We currently have proved reserves in the State of Texas.

Our Properties.  On December 31, 2010, we completed the acquisition of United pursuant to the Merger Agreement.  As a result of the Merger Transaction and other acquisitions during the fiscal year 2011, we own the following interests in the following oil and gas properties in Texas:
 
The Marcee 1 Interest. We own a 100% working interest in the Marcee 1 Tract, which is located on approximately 112 acres of land in Gonzalez County, Texas (“Marcee 1 Tract”).  We have recently completed a workover on the well to increase oil production.  We have discovered an abundance of gas being produced with the oil, which is currently being tested for saleable quality.  Provided the gas is of saleable quality, we expect this well should produce 7-8 barrels of oil per day and approximately 30 mcf of gas per day.
 
The Lozano Interest.  We own a 100% working interest in the Hector Lozano Tract, which is located on approximately 110 acres, located in Frio County, Texas (“Lozano Tract”). The Lozano Tract is a currently producing asset with three wells with proven reserves.  .  The production from the Lozano wells is mature and we believe the wells are likely to continue to produce with slow decline for the foreseeable future.  All three wells are currently producing a total of 4-5 barrels of oil per day.  Historically these wells have produced a total of 10-12 barrels of oil per day.  We are planning a workover on the 3 wells which will include washing out the wells, reperforating the current zones as well as performing an acid job to the wells which we believe should return production to 10-12 barrels a day.

Pursuant to the Merger Agreement, we also acquired all of United’s rights and interests in all operating agreements for all wells for which United it was currently operating. We also acquired all of United’s assets used in the business conducted at the Marcee 1 Tract and the Lozano Tract or at any well that United acts as the operator, including certain furniture and equipment.

 
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The Patriot Minerals Interests.  On January 28, 2011, we acquired multiple undivided working interests to certain existing wells and to certain leases located in Texas (“Patriot Interests”) from Patriot Minerals, LLC, a Texas limited liability company (“Patriot”). The Patriot Interests consist of certain undivided working interests including, but not limited to (i) the Welder lease in Duval County, TX; (ii) the Bailey Rogers and Fohn leases in Medina County, TX; (iii) the Walker Smith lease in Wilbarger County, TX; (iv) the Merrick Davis lease in Shackelford County, TX; and (v) the Crouch, Heady and Lane leases in Erath County, TX.  

At the time of our acquisition of the Patriot Interests, all wells were shut in due to various factors including, but not limited to, bad weather and Patriot’s insufficient payment of operating expenses to maintain the Patriot Interests.  We have performed minor work on various wells and are in the process of developing plans with the working interest partners for workovers on wells on each of the leases.  We expect the workovers to be performed in 2012.  We expect we will have to expend significant capital to maintain the Patriot Interests.

The Gabriel and Rosser Interests.  On January 28, 2011, we acquired certain oil and gas interests located in Bastrop County, Texas, (“Gabriel Interests”) from Gabriel Rosser, LP (“Gabriel”).  The Gabriel Interests  include  Gabriel's undivided 50.83% working interest and 39.131% revenue interest in as the Gabriel 2 SWD Gabriel 3, 4, 5, 9, 15, Rosser #2 and #4 and Koi #1wells .At the time of our acquisition of the Gabriel Interests, all wells were not producing. The Gabriel Interests comprise over 400 acres, with approximately 10 wells that were shut in. The Rosser #4 well was re-entered and re-equipped in March 2011 and production has commenced.  The Gabriel #4 well is currently producing water and we are currently investigating the causes of the water production.  The Gabriel #9 well was re-entered and re-equipped but has not been producing.  We are currently investigating the causes of Gabriel #9 well’s non-production.  Drilling on a new Gabriel #16 well to test an anticipated payzone in the Serpentine formation will require a second completion attempt in order to achieve potential production on this well.

The Mckenzie State Well Interests. On November 30, 2011, we acquired one hundred percent (100%) of McKenzie’s working interest in the McKenzie State Well No. 1, located in Pecos County, Texas from McKenzie Oil Corp. (“McKenzie”)  in exchange for an aggregate cash sum of $550,000 and 50,000 shares of our common stock.  The well is currently offline due to the discovery of a hole in the tubing and will require a minor work-over, which is scheduled to commence in the first half of 2012.  The faulty section will be pulled, replaced, and is expected to produce an estimated 8 - 10 bbl per day, which was its most recent production rate prior to developing the hole in the tubing. In addition to the production from this current zone, several additional horizons (which are productive in the area) have been identified in the McKenzie well, which could be tested and potentially produced in the future.  

Our Subsidiaries.

Northern Future Energy Corp.  We also own certain oil and gas interests located near Anchorage, Alaska, through our wholly-owned subsidiary, Northern Future Energy Corp.  Northern Future Energy Corp. acquired an oil and gas lease for State of Alaska Oil and Gas Lease ADL 391120 Tract: CI2006-464, which contains approximately 545 acres, pursuant to a Purchase Agreement dated November 2009.  Production on the properties has not commenced and there can be no assurance that any hydrocarbons will be economically recoverable, if at all. We have conducted limited pre-production activities in the past and we intend to conduct additional activities, such as a multi-phase exploration program of trenching, sampling, geophysical surveys and test drilling, as soon as our new management is able to evaluate the interests. We also intend to conduct exploratory activities on the properties in the foreseeable future.  NFEC has not undergone bankruptcy, receivership, or any similar proceeding.

United Operating, LLC.  On January 13, 2011, we formed our wholly-owned subsidiary, United Operating, LLC, a Texas limited liability company, for the purpose of operating the Patriot Interests, including, but not limited to: (i) the Merrick Davis #16 & #17 wells in Shackelford County, TX; (ii) the Crouch and Lane Heady wells in Erath County, TX; (iii) the Merrick Davis wells in Shackelford County, TX; (iv) the Walker Smith #22D well in Wilbarger County, TX; and (v) the Walker Smith wells in Wilbarger County, TX.  United Operating, LLC, has not undergone bankruptcy, receivership, or any similar proceeding.

UAP Management, LLC.  On January 13, 2011, we formed our wholly-owned subsidiary, UAP Management, LLC, a Texas limited liability company, for the purpose of managing the Gabriel Interests. UAP Management, LLC, has not undergone bankruptcy, receivership, or any similar proceeding.
 
 
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Business Strategy.  Our strategy is to increase shareholder value through strategic acquisitions, appraisal drilling and development. We are focused on the acquisition, appraisal development and exploitation of oil properties.  We are also searching for possible joint-ventures and new prospects that fit our strategic focus.

Competition.  The oil and gas industry is intensely competitive.  We compete with numerous individuals and companies, including many major oil and gas companies, which have substantially greater technical, financial, and operational resources and staffs.  Accordingly, there is a high degree of competition for desirable oil and gas leases, suitable properties for drilling operations, and necessary drilling equipment, as well as for access to funds.
 
We will also compete with other junior oil and gas exploration companies for financing from a limited number of investors that are prepared to make investments in junior oil and gas exploration companies. The presence of competing junior oil and gas exploration companies may have an adverse impact on our ability to raise additional capital in order to fund our exploration programs if investors are of the view that investments in competitors are more attractive based on the merit of the oil and gas properties under investigation and the price of the investment offered to investors.

We also compete with other junior and senior oil and gas companies for available resources, including, but not limited to, professional exploration and production, geological and engineering personnel services and supplies, for the drilling completion and production of hydrocarbon resources.

Intellectual Property. We do not presently own any copyrights, patents or trademarks. We own the Internet domain name www.unitedamericanpetroleum.com.  Under current domain name registration practices, no one else can obtain an identical domain name, but someone might obtain a similar name, or the identical name with a different suffix, such as “.org”, or with a country designation. The regulation of domain names in the United States and in foreign countries is subject to change, and we could be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our domain names.

Government Regulation.  Our oil and gas operations are subject to various federal, state, and local governmental regulations.  Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells, and pooling of properties, and taxation.  From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas.  The production, handling, storage, transportation, and disposal of oil and gas, by-products thereof, and other substances and materials produced or used in connection with oil and gas operations are also subject to regulation under federal, state, provincial, and local laws and regulations relating primarily to the protection of human health and the environment.  To date, our expenditures related to complying with these laws, and for remediation of existing environmental contamination, have not been significant.  The requirements imposed by such laws and regulations are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations.
 
Employees.  As of April 13, 2012, we have three employees.  We expect to utilize independent contractors, consultants, and other personnel from time to time to assist in our business efforts.  

Our Facilities.  We maintain our corporate offices for approximately $200 per month on a month to month basis.  We also maintain our operational offices for $1,500 per month on a month to month basis.  We believe our current office space and facilities are sufficient to meet our current and future needs.  We do not anticipate the need to secure additional space.

Internet Website.  Our website is located at www.unitedamericanpetroleum.com. Our website describes each of our oil and gas projects, our management and provides additional information regarding our industry.

Legal Proceedings. We are not a party to any pending legal proceeding.

 
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Item 1A. Risk Factors.
 
In addition to the other information in this prospectus, the following risk factors should be considered carefully in evaluating our business before purchasing any of our shares of common stock. A purchase of our common stock is speculative in nature and involves a lot of risks. No purchase of our common stock should be made by any person who is not in a position to lose the entire amount of his investment.
 
Risks Related to our Business:

We have a limited history operating in the oil and gas industry.  As a result, it is difficult for potential investors to evaluate our business and prospects.
 
We entered the oil and gas business in December 2009. Our limited operating history makes it difficult for potential investors to evaluate our business or prospective operations. Since our formation, we have generated only limited revenues. As an early stage company, we are subject to all the risks inherent in the financing, expenditures, operations, complications and delays inherent in a new business. Accordingly, our business and success faces risks from uncertainties faced by developing companies in a competitive environment. There can be no assurance that our efforts will be successful or that we will ultimately be able to attain profitability.
 
Because we are an exploration stage company, we have limited revenues to sustain our operations.
 
We are an exploration stage company that is currently developing our business. To date, we have only generated limited revenues. The success of our business operations will depend upon our ability to further develop our properties and increase our revenues. We are not able to predict whether we will be able to develop our properties and generate more substantial revenues. If we are not able to complete the successful development of our business, generate more substantial revenues and attain sustainable operations, then our business will fail.
 
We have a history of net losses which will continue and which may negatively impact our ability to achieve our business objectives.
 
For the period from October 16, 2010 to December 31, 2011, United American Petroleum Corp., which was acquired by us, had revenue of $366,753 and a net loss of $1,151,741. We cannot guarantee that our future operations will result in net income. We may not be able to operate profitability on a quarterly or annual basis in the future and we will likely continue to have net losses for the foreseeable future. If our revenues grow more slowly than we anticipate or our operating expenses exceed our expectations, our operating results will suffer.
 
We will need additional financing to execute our business plan.

The revenues from our current operations are not sufficient to support our operating costs and anticipated drilling programs. We will need substantial additional funds to:

·
effectuate our business plan;
·
fund the acquisition, exploration, development and production of oil and natural gas in the future;
·
fund future drilling programs; and
·
hire and retain key employees.

We may seek additional funds through public or private equity or debt financing, via strategic transactions, and/or from other sources. There are no assurances that future funding will be available on favorable terms or at all. If additional funding is not obtained, we may need to reduce, defer or cancel drilling programs, planned initiatives, or overhead expenditures to the extent necessary. The failure to fund our operating and capital requirements could have a material adverse effect on our business, financial condition and results of operations.
 
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Our auditors have expressed substantial doubt regarding our ability to continue operations as a “going concern.” Investors may lose all of their investment if we are unable to continue operations and generate revenues, or if we do not raise sufficient funds.
 
We will seek to raise additional funds to meet our working capital needs principally through the additional sales of our securities.  However, we cannot guaranty that we will be able to obtain sufficient additional funds when needed, or that such funds, if available, will be obtainable on terms satisfactory to us.  If we do not raise sufficient funds, we may not be able to continue in business.  As a result, our auditors believe that substantial doubt exists about our ability to continue operations as a going concern.
 
As many of our properties are in the exploration stage, there can be no assurance that we will establish commercial discoveries on our properties.

Exploration for economic reserves of oil and gas is subject to a number of risk factors.  Few properties that are explored are ultimately developed into producing oil and/or gas wells.  Our properties are in the exploration stage only and are without proven reserves of oil and gas.  Any profitability in the future from our business will be dependent upon locating and developing economic reserves of oil and gas, which itself is subject to numerous risk factors as set forth herein.  We may not establish commercial discoveries on any of our properties.

Our exploration appraisal and development activities are subject to many risks which may affect our ability to profitably extract oil reserves or achieve targeted returns.  In addition, continued growth requires that we acquire and successfully develop additional oil reserves.
 
Oil exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations, and various field operating conditions may negatively affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme weather conditions, insufficient storage or transportation capacity or other geological and mechanical conditions. While diligent well supervision and effective maintenance operations can contribute to maximizing production rates over time, production delays and declines from normal field operating conditions cannot be eliminated and can be expected to negatively affect revenue and cash flow levels to varying degrees.
 
Our ability to successfully market and sell oil is subject to a number of factors that are beyond our control, and that may adversely impact our ability to produce and sell oil, or to achieve profitability.
 
The marketability and price of oil that may be acquired or discovered by us will be affected by numerous factors beyond our control.  Our ability to market our oil may depend upon our ability to acquire space on pipelines that deliver oil to commercial markets. We may be affected by deliverability uncertainties related to the proximity of our reserves to pipelines and processing facilities, by operational problems with such pipelines and facilities, and by government regulation relating to price, taxes, royalties, land tenure, allowable production, the export of oil and by many other aspects of the oil business.
 
Our revenues and future growth and the carrying value of our oil properties are substantially dependent on prevailing prices of oil. Our ability to borrow and to obtain additional capital on attractive terms is also substantially dependent upon oil and natural gas prices. Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil, market uncertainty and a variety of additional factors beyond our control. These factors include economic conditions, in the United States and Canada, the actions of the Organization of Petroleum Exporting Countries, governmental regulation, political stability in the Middle East and elsewhere, the foreign supply of oil, the price of foreign imports and the availability of alternative fuel sources. Any substantial and extended decline in the price of oil would have an adverse effect on our borrowing capacity, revenues, profitability and cash flows from operations.
  
Volatile oil prices make it difficult to estimate the value of producing properties for acquisition and often cause disruption in the market for oil producing properties, as buyers and sellers have difficulty agreeing on such value. Price volatility also makes it difficult to budget for and project the return on acquisitions and development and exploitation projects.
 
 
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Our reserve estimates are subject to numerous uncertainties and may be inaccurate.

We currently have proved reserves in Texas. We rely on independent third party petroleum engineering firms to calculate reserve estimates. There are numerous uncertainties inherent in estimating quantities of oil and natural gas reserves and cash flows to be derived therefrom, including many factors beyond our control. In general, estimates of economically recoverable oil and gas reserves and the future net cash flows therefrom are based upon a number of variable factors and assumptions, such as historical production from the properties, production rates, ultimate reserve recovery, timing and amount of capital expenditures, marketability our products, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of which may vary from actual results. All such estimates are to some degree speculative, and classifications of reserves are only attempts to define the degree of speculation involved. For those reasons, estimates of the economically recoverable reserves attributable to any particular group of properties, classification of such reserves based on risk of recovery and estimates of future net revenues expected therefrom prepared by different engineers, or by the same engineers at different times, may vary. Our actual production, revenues, taxes and development and operating expenditures with respect to our reserves will vary from estimates thereof and such variations could be material.

Estimates of proved or unproved reserves that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves rather than actual production history. Estimates based on these methods are generally less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history and production practices will result in variations in the estimated reserves and such variations could be material.

We cannot guaranty that title to our properties does not contain a defect that may materially affect our interest in those properties.
 
It is our practice in acquiring significant oil leases or interest in oil leases to retain lawyers to fully examine the title to the interest under the lease.  In the case of minor acquisitions, we rely upon the judgment of oil lease brokers or landmen who do the field work in examining records in the appropriate governmental office before attempting to place under lease a specific interest. We believe that this practice is widely followed in the oil industry. Nevertheless, there may be title defects which affect lands comprising a portion of our properties which may adversely affect us.
 
Our properties are held in the form of leases and working interests in operating agreements and leases. If the specific requirements of such licenses, leases and working interests are not met, the instrument may terminate or expire.
 
All of our properties are held under interests in oil and gas leases and working interests in operating agreements and leases. If we fail to meet the specific requirements of each lease or working interest, especially future drilling and production requirements, the lease may be terminated or otherwise expire. We cannot be assured that we will be able to meet our obligations under each lease and working interest. The termination or expiration of our working interest relating to any lease would harm our business, financial condition and results of operations.

Competition in the oil and gas industry is highly competitive and there is no assurance that we will be successful in acquiring properties or leases.

The oil and gas industry is intensely competitive.  We compete with numerous individuals and companies, including many major oil and gas companies, which have substantially greater technical, financial, and operational resources and staff.  Accordingly, there is a high degree of competition for desirable oil and gas leases, suitable properties for drilling operations, and necessary drilling equipment, as well as for access to funds. We cannot predict if the necessary funds can be raised or that any projected work will be completed.  Desirable acreage may not become available or if it is available for leasing, that we may not be successful in acquiring the leases.
 
The marketability of natural resources will be affected by numerous factors beyond our control which may result in us not receiving an adequate return on invested capital to be profitable or viable.

The marketability of natural resources which may be acquired or discovered by us will be affected by numerous factors beyond our control.  These factors include market fluctuations in oil and gas pricing and demand, the proximity and capacity of natural resource markets and processing equipment, governmental regulations, land tenure, land use, regulation concerning the importing and exporting of oil and gas, and environmental protection regulations.  The exact effect of these factors cannot be accurately predicted, but the combination of these factors may result in us not receiving an adequate return on invested capital to be profitable or viable. 
 
 
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Oil and gas operations are subject to comprehensive regulation, which may cause substantial delays or require capital outlays in excess of those anticipated, causing an adverse effect on us.

Our operations are subject to regulation at the federal, state and local levels, including regulation relating to matters such as the exploration for and the development, production, marketing, pricing, transmission and storage of oil, as well as environmental and safety matters.  Failure to comply with applicable regulations could result in fines or penalties being owed to third parties or governmental entities, the payment of which could negatively impact our financial condition or results of operations.  Our operations are subject to significant laws and regulations, which may negatively affect our ability to conduct business or increase our costs.  Extensive federal, state and local laws and regulations relating to health and environmental quality in the United States affect nearly all of our operations.  These laws and regulations set various standards regulating various aspects of health and environmental quality, provide for penalties and other liabilities for the violation of these standards, and in some circumstances, establish obligations to remediate current and former facilities and off-site locations.
 
Environmental legislation provides for, among other things, restrictions and prohibitions on spills, releases or emissions of various substances produced in association with oil operations. The legislation also requires that wells and facility sites be operated, maintained, abandoned and reclaimed to the satisfaction of the applicable regulatory authorities. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability and potentially increased capital expenditures and operating costs. The discharge of oil or other pollutants into the air, soil or water may give rise to liabilities to governments and third parties and may require us to incur costs to remedy such discharge. No assurance can be given that environmental laws will not result in a curtailment of production or a material increase in the costs of production, development or exploration activities or otherwise adversely impact our financial condition, results of operations or prospects.  We could incur significant liability for damages, clean-up costs and/or penalties in the event of discharges into the environment, environmental damage caused by us or previous owners of our property or non-compliance with environmental laws or regulations. In addition to actions brought by governmental agencies, we could face actions brought by private parties or citizens groups.
 
Moreover, we cannot predict what legislation or regulations will be enacted in the future or how existing or future laws or regulations will be administered, enforced or made more stringent. Compliance with more stringent laws or regulations, or more vigorous enforcement policies of the regulatory agencies, could require us to make material expenditures for the installation and operation of systems and equipment for remedial measures, all of which could have a material adverse effect on our financial condition or results of operations.

Exploratory drilling involves many risks and we may become liable for pollution or other liabilities, which may have an adverse effect on our financial position.

Drilling operations generally involve a high degree of risk.  Hazards such as unusual or unexpected geological formations, power outages, labor disruptions, blow-outs, sour gas leakage, fire, inability to obtain suitable or adequate machinery, equipment or labor, and other risks are involved.  We may become subject to liability for pollution or hazards against which we cannot adequately insure or that we may elect not to insure.  Incurring any such liability may have a material adverse effect on our financial position and operations.

Our exploration and development activities will depend in part on the evaluation of data obtained through geophysical testing and geological analysis, as well as test drilling activity.

The results of geophysical testing and geological analysis are subjective, and we cannot guarantee that the exploration and development activities we conduct based on positive analysis will produce oil or gas in commercial quantities or costs. As we perform developmental and exploratory activities, further data required for evaluation of our oil and gas interests will become available. The exploration and development activities that will be undertaken by us are subject to greater risks than those associated with the acquisition and ownership of producing properties. The drilling of development wells, although generally consisting of drilling to reservoirs believed to be productive, may result in dry holes or a failure to produce oil or gas in commercial quantities. Moreover, any drilling of exploratory wells is subject to significant risk of dry holes.
 
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Because we are small and have limited access to additional capital, we may have to limit our exploration activity, which may result in a loss of investment.

We have a small asset base and limited access to additional capital. Accordingly, we must limit our exploration activity. As such, we may not be able to complete an exploration program that is as thorough as our management would like. In that event, existing reserves may go undiscovered. Without finding reserves, we cannot generate revenues and investors may lose their investment.

Seasonal weather conditions and other factors could adversely affect our ability to conduct drilling activities.
 
Our operations could be adversely affected by seasonal weather conditions and wildlife restrictions on federal leases. In some areas, certain drilling and other oil and gas activities can only be conducted during limited times of the year, typically during the summer months. This would limit our ability to operate in these areas and could intensify competition during those times for drilling rigs, oil field equipment, services, supplies and qualified personnel, which may lead to periodic shortages. These constraints and the resulting shortages or high costs could delay our operations and materially increase our operating and capital costs, which could have a material adverse effect upon us and our results of operations.
  
We depend on the services of third parties for material aspects of our operations, including drilling operators, and accordingly if we cannot obtain certain third party services, we may not be able to operate.
 
We rely on third parties to operate some of the assets in which we possess an interest. The success of our oil operations, whether considered on the basis of drilling operations or production operations, will depend largely on whether the operator of the property properly fulfills our obligations.  As a result, our ability to exercise influence over the operation of these assets or their associated costs may be limited.  Our performance will therefore depend upon a number of factors that may be outside of our full control, including the timing and amount of capital expenditures, the operator’s expertise and financial resources, the approval of other participants, the selection of technology, and risk management practices.  The failure of third party operators and their contractors to perform their services in a proper manner could adversely affect our operations.

We will need additional financing to continue and grow our operations, which financing may not be available on acceptable terms or at all.

We will need to raise additional funds to fund our operations or grow our business.  Additional financing may not be available on terms or at times favorable to us, or at all.  If adequate funds are not available when required or on acceptable terms, we may be unable to continue and grow our operations.  In addition, such additional financing transactions, if successful, may result in additional dilution of our stockholders.  They may also result in the issuance of securities with rights, preferences, and other characteristics superior to those of the common stock and, in the case of debt or preferred stock financings, may subject us to covenants that restrict our ability to operate our business freely.
 
The loss or unavailability of our key personnel for an extended period of time could adversely affect our business operations and prospects.
 
Our success depends in large measure on certain key personnel, including Michael Carey, our President and Chief Executive Officer and Ryan Hudson, our Secretary and Chief Operating Officer. The loss of the services of Mr. Carey and Mr. Hudson could significantly hinder our operations.  Although we are looking into acquiring key person insurance, we do not currently have such insurance in effect for Mr. Carey or Mr. Hudson. In addition, the competition for qualified personnel in the oil industry is intense and there can be no assurance that we will be able to continue to attract and retain all personnel necessary for the development and operation of our business. 

The costs and effects of litigation, investigations, or similar matters could adversely affect our financial position and result of operations.

We may be involved from time to time in a variety of litigation, investigations, or similar matters arising out of our business.  Our insurance may not cover all claims that may be asserted against us, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation.  If the ultimate judgments or settlements in any litigation or investigation significantly exceed insurance coverage, they could adversely affect our financial position and results of operations.  In addition, we may be unable to obtain appropriate types or levels of insurance in the future.
 
10

 
We are subject to the reporting requirements of federal securities laws, which will be expensive.
 
We are a public reporting company in the U.S. and, accordingly, subject to the information and reporting requirements of the Exchange Act and other federal securities laws, and the compliance obligations of the Sarbanes-Oxley Act. The costs of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders will cause our expenses to be higher than they would be if we remained a privately-held company.
 
Our compliance with the Sarbanes-Oxley Act and SEC rules concerning internal controls is time consuming, difficult and costly.
 
We are a reporting company with the SEC and therefore must comply with Sarbanes-Oxley Act and SEC rules concerning internal controls.  It is time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by Sarbanes-Oxley.  In order to expand our operations, we  will need to hire additional financial reporting, internal control, and other finance staff in order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with Sarbanes-Oxley’s internal controls requirements, we may not be able to obtain the independent accountant certifications that Sarbanes-Oxley Act requires us to obtain.
  
Failure to maintain the adequacy of our internal controls could impair our ability to provide accurate financial statements and comply with the requirements of the Sarbanes-Oxley Act, which could cause our stock price to decrease substantially.
 
We intend to amend certain of our prior periodic reports to include required disclosures that were previously omitted from those periodic reports. The filing of amendments to those periodic reports will necessitate a redetermination of the effectiveness of our internal controls over financial reporting and disclosure controls and procedures for those periods.   We have committed limited personnel and resources to the development of the external reporting and compliance obligations that are required of a public company. We have taken measures to address and improve our financial reporting and compliance capabilities and we are in the process of instituting changes to satisfy our obligations in connection with being a public company. We plan to obtain additional financial and accounting resources to support and enhance our ability to meet the requirements of being a public company. We will need to continue to improve our financial and managerial controls, reporting systems and procedures, and documentation thereof. If our financial and managerial controls, reporting systems, or procedures fail, we may not be able to provide accurate financial statements on a timely basis or comply with the Sarbanes-Oxley Act of 2002 as it applies to us. Any failure of our internal controls or our ability to provide accurate financial statements could cause the trading price of our common stock to decrease substantially.

Risks Related to our Common Stock

The issuance of shares upon conversion of the senior secured convertible promissory notes and exercise of outstanding warrants may cause immediate and substantial dilution to our existing stockholders.

If the price per share of our common stock at the time of conversion of our senior secured convertible promissory notes, and exercise of any warrants, options, or any other convertible securities is in excess of the various conversion or exercise prices of these convertible securities, conversion or exercise of these convertible securities would have a dilutive effect on our common stock. As of April 13, 2012, we had (i) outstanding senior secured convertible promissory notes which are convertible into an aggregate of 2,420,000 shares of our common stock at a conversion price of $0.50 per share, (ii) outstanding convertible promissory notes which are convertible into an aggregate of 2,750,000 shares of our common stock at a conversion price of $0.50 per share, and (iii) warrants to purchase up to 2,585,000 shares of our common stock at an exercise price of $1.00 per share. Further, any additional financing that we secure may require the granting of rights, preferences or privileges senior to those of our common stock and which result in additional dilution of the existing ownership interests of our common stockholders.
 
 
11

 
Our common shares are thinly-traded, and you may be unable to sell at or near ask prices or at all if you need to sell your shares or otherwise desire to liquidate such shares.
 
We cannot predict the extent to which an active public market for our common stock will develop or be sustained due to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors, and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained.
 
The market price for our common stock may be particularly volatile given our status as a relatively small company with a thinly-traded “float” and lack of significant revenues that could lead to wide fluctuations in our share price. You may be unable to sell your common stock at or above your purchase price if at all, which may result in substantial losses to you.
 
The market for our common shares may be characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will be more volatile than a seasoned issuer for the indefinite future. The potential volatility in our share price is attributable to a number of factors. First, as noted above, our common shares may be sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer that could better absorb those sales without adverse impact on its share price. Secondly, an investment in us is a speculative or “risky” investment due to our lack of revenues or profits to date and uncertainty of future market acceptance for current and potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer.
 
Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through pre-arranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. The occurrence of these patterns or practices could increase the volatility of our share price.
  
If a trading market for our common shares does develop, trading prices may be volatile.
 
In the event that an orderly trading market develops and is maintained for our common shares, the market price of such shares may be based on factors that may not be indicative of future market performance.  Consequently, the market price of our shares may vary greatly.  If an orderly market for our shares develops and is maintained, there is a significant risk that our share price may fluctuate dramatically in the future in response to any of the following factors, some of which are beyond our control:

variations in our operating results;
changes in expectations of our future financial performance, including financial estimates by securities analysts and investors;
changes in operating and stock price performance of other companies in our industry;
additions or departures of key personnel; and
future sales of our common stock.
 
Domestic and international stock markets often experience significant price and volume fluctuations. These fluctuations, as well as general economic and political conditions unrelated to our performance, may adversely affect the price of our common stock. In particular, following initial public offerings, the market prices for stocks of companies often reach levels that bear no established relationship to the operating performance of these companies. These market prices are generally not sustainable and could vary widely. In the past, following periods of volatility in the market price of a public company’s securities, securities class action litigation has often been initiated.  

 
12

 
Volatility in our common stock price may subject us to securities litigation.
 
The market for our common stock is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.
 
We do not anticipate paying any cash dividends.
 
We presently do not anticipate that we will pay any dividends on any of our capital stock in the foreseeable future. The payment of dividends, if any, would be contingent upon our revenues and earnings, if any, capital requirements, and general financial condition. The payment of any dividends will be within the discretion of our Board of Directors. We presently intend to retain all earnings, if any, to implement our business plan; accordingly, we do not anticipate the declaration of any dividends in the foreseeable future.

Because we may be subject to the “penny stock” rules, the level of trading activity in our stock may be reduced which may make it difficult for investors to sell their shares.
 
Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by the Securities and Exchange Commission. Penny stocks, like shares of our common stock, generally are equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on NASDAQ. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, broker-dealers who sell these securities to persons other than established customers and “accredited investors” must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security subject to the penny stock rules, and investors in our common stock may find it difficult to sell their shares.
 
We will need additional capital, and the sale of additional shares or other equity securities could result in additional dilution to our stockholders.
 
We believe that our current cash and cash equivalents and anticipated cash flow from operations will not be sufficient to meet our anticipated cash needs for the near future. We will require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our resources are insufficient to satisfy our cash requirements, we will seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in additional dilution to our stockholders. The incurrence of additional indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

We lack a public market for shares of our common stock, which may make it difficult for investors to sell their shares.
 
There is no public market for shares of our common stock. We cannot guaranty that an active public market will develop or be sustained. Therefore, investors may not be able to find purchasers for their shares of our common stock. Should there develop a significant market for our shares, the market price for those shares may be significantly affected by such factors as our financial results and introduction of new products and services.  Factors such as announcements of new services by us or our competitors and quarter-to-quarter variations in our results of operations, as well as market conditions in our sector may have a significant impact on the market price of our shares. Further, the stock market has experienced extreme volatility that has particularly affected the market prices of stock of many companies and that often has been unrelated or disproportionate to the operating performance of those companies.

 
13

 
Our board of directors has the authority, without stockholder approval, to issue preferred stock with terms that may not be beneficial to common stockholders and may grant voting powers, rights and preference that differ from or may be superior to those of our shares of common stock.

Our articles of incorporation allow us to issue 10,000,000 shares of preferred stock without any vote or further action by our stockholders. Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of directors also has the authority to issue preferred stock without further stockholder approval, including large blocks of preferred stock. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock.
 
Item 1B. Unresolved Staff Comments.

Not applicable to smaller reporting companies.

Item 2.  Properties.
 
Our Facilities. We maintain our corporate offices for approximately $200 per month on a month to month basis.  We also maintain our operational offices for $1,500 per month on a month to month basis.  We believe our current office space and facilities are sufficient to meet our current and future needs.  We do not anticipate the need to secure additional space.

Further, we have the following interests in oil and gas properties as detailed below:
  
The Marcee 1 Interest. We own a 100% working interest in the Marcee 1 Tract, which is located on approximately 112 acres of land in Gonzalez County, Texas (“Marcee 1 Tract”).  We have recently completed a workover on the well to increase oil production.  We have discovered an abundance of gas being produced with the oil, which is currently being tested for saleable quality.  Provided the gas is of saleable quality, we expect this well should produce 7-8 barrels of oil per day and approximately 30 mcf of gas per day.
 
The Lozano Interest.  We own a 100% working interest in the Hector Lozano Tract, which is located on approximately 110 acres, located in Frio County, Texas (“Lozano Tract”). The Lozano Tract is a currently producing asset with three wells with proven reserves.  The production from the Lozano wells is mature and we believe the wells are likely to continue to produce with slow decline for the foreseeable future.  All three wells are currently producing a total of 4-5 barrels of oil per day.  Historically these wells have produced a total of 10-12 barrels of oil per day.  We are planning a workover on the 3 wells which will include washing out the wells, reperforating the current zones as well as performing an acid job to the wells which we believe should return production to 10-12 barrels a day.

The Patriot Minerals Interests.  On January 28, 2011, we acquired certain oil and gas interests (“Patriot Interests”) from Patriot Minerals, LLC, a Texas limited liability company.   The Patriot Interests we acquired consist of certain undivided working interests including, but not limited to (i) the Welder lease in Duval County, TX; (ii) the Bailey Rogers and Fohn leases in Medina County, TX; (iii) the Walker Smith lease in Wilbarger County, TX; (iv) the Merrick Davis lease in Shackelford County, TX; and (v) the Crouch, Heady and Lane leases in Erath County, TX.  

At the time of our acquisition of the Patriot Interests, all wells were shut in due to various factors including, but not limited to, bad weather and Patriot’s insufficient payment of operating expenses to maintain the Patriot Interests.  We have performed minor work on various wells and are in the process of developing plans with the working interest partners for workovers on wells on each of the leases.  We expect the workovers to be performed in 2012.  We expect we will have to expend significant capital to maintain the Patriot Interests.

 
14

 
The Gabriel and Rosser Interests.  We own an undivided 50.83% working interest and 39.131% revenue interest in as the Gabriel 2 SWD Gabriel 3, 4, 5, 9, 15, Rosser #2 and #4 and Koi #1wells, located in Bastrop County,  Texas (“Gabriel Interests”).  At the time of our acquisition of the Gabriel Interests, all wells were not producing. The Gabriel Interests comprise over 400 acres, with approximately 10 wells that were shut in. The Rosser #4 well was re-entered and re-equipped in March 2011 and production has commenced.  The Gabriel #4 well is currently producing water and we are currently investigating the causes of the water production.  The Gabriel #9 well was re-entered and re-equipped but has not been producing.  We are currently investigating the causes of Gabriel #9 well’s non-production.  Drilling on a new Gabriel #16 well to test an anticipated payzone in the Serpentine formation will require a second completion attempt in order to achieve potential production on this well.
 
The Mckenzie State Well Interests. We own 100% working interest in the McKenzie State Well No. 1, located in Pecos County, Texas, in exchange for an aggregate cash sum of $550,000 and 50,000 shares of our common stock.  The well is currently offline due to the discovery of a hole in the tubing and will require a minor work-over, which is scheduled to commence in the first half of 2012.  The faulty section will be pulled, replaced, and is expected to produce an estimated 8 - 10 bbl per day, which was its most recent production rate prior to developing the hole in the tubing. In addition to the production from this current zone, several additional horizons (which are productive in the area) have been identified in the McKenzie well, which could be tested and potentially produced in the future.  
 
Company Reserve Estimates.
 
Our proved reserve information as of December 31, 2011 was estimated by Nova Resource, Inc. (“Nova”) and Mire and Associates, Inc. (“Mire”), independent petroleum engineers.  In accordance with SEC guidelines, Nova’s and Mire’s estimates of future net revenues from our properties, and the PV-10 and standardized measure thereof, were determined to be economically producible under existing economic conditions, which requires the use of the 12-month average price for each product, calculated as the unweighted arithmetic average of the first-day-of-the-month price for the period January 1, 2011 through December 31, 2011, except where such guidelines permit alternate treatment, including the use of fixed and determinable contractual price escalations.
  
The technical persons at Nova and Mire are responsible for preparing the reserves estimates presented herein and meets the requirements regarding qualifications, independence, objectivity, and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Michael Carey, our officer and director, acted as the liaison with the technical persons at Nova and Mire. 
 
Reserve Technologies.  Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations, prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.  If deterministic methods are used, reasonable certainty means a high degree of confidence that the quantities will be recovered.  If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate.  To achieve reasonable certainty, Nova and Mire employed technologies that have been demonstrated to yield results with consistency and repeatability. The technologies and economic data used in the estimation of our proved reserves include, but are not limited to, well logs, geologic maps and available down well and production data, seismic data, well test data.
 
 
15

 
Oil and Gas Reserve Information. The following reserve quantities and future net cash flow information for our proved reserves located in the State of Texas in the United States have been estimated as of December 31, 2011.  The determination of oil and gas reserves is based on estimates, which are highly complex and interpretive. The estimates are subject to continuing change as additional information becomes available.
 
Reserve Category 
 
Oil (BBLS)
 
Natural Gas (MCF) 
 
Present Worth at 10%
Proved 
           
   Developed: 
           
     United States - Texas 
   
2,274
 
                             -
 
$
63,599
   Undeveloped: 
               
     United States - Texas 
   
1,806
 
                              -
 
$
16,089
                 
 Total Proved – December 31, 2010
   
4,080
 
                              -
 
79,688
         
                              -
     
    Developed:
               
      United States - Texas 
   
29,802
 
46,536
 
$
948,445
    Undeveloped: 
               
      United States - Texas 
   
8,528
 
                      2,870
 
$
182,605
                 
Total Proved – December 31, 2011
   
38,330
 
  49,406
 
$
1,131,050
 
Reserved Quantity
 
Oil (BBLS)
   
Natural Gas (MCF)
 
Balance, August 10, 2010
    -       -  
Purchases 
    4,204       -  
Production 
    (124     -  
Balance, December 31, 2010
    4,080       -  
                 
Purchases
    35,560       49,948  
Production
    (1,310 )     (542
Balance, December 31, 2011
    38,330       49,406  
 
During the period from January 1, 2011 through December 31, 2011, the Company acquired an estimated 11,398 bbls of proved undeveloped net oil and gas reserves in place in connection with the Company’s purchase of the Lozano, Marcee and Patriot leases in Texas.  These properties are located in 7 (seven) fields in the following 6 (six) Texas counties: Erath, Gonzalez, Medina, Navarro, Shackleford and Wilbarger None of the proved undeveloped oil reserves were converted during the period ended December 31, 2011 as the Company is reviewing the production performance and assessment of the remaining recoverable resources.  In addition, there were no proved undeveloped reserves over five (5) years.
 
The standardized measure of discounted future net cash flows is provided using the 12-month unweighted arithmetic average and were held constant throughout the life of the properties. The oil price used as of December 31, 2011 was $96.19 per bbl of oil and $4.12 per MMbtu of natural gas. Future production costs are based on year-end costs and include severance and ad valorem taxes. Each property that is leased by us is also charged with field-level overhead in the reserve calculation. The present value of future cash inflows is based on a 10% discount rate.

Standardized Measure of Future Net Cash Flows:
 
   
December 31, 2011
   
December 31, 2010
 
Future cash flows 
  $ 3,278,186     $ 231,430  
Future production and development costs 
    (1,377,560 )     (90,258
Future income taxes 
    -       -  
Future net cash flows before discount 
    1,900,626       141,172  
10% discount to percent value 
    (769,576     (61,484
Standardized measure of discounted future net cash flows 
  $ 1,131,050     $ 79,688  

 
16

 
Changes in the Standard Measure of Discounted Cash Flows:
 
   
December 31, 2011
   
December 31, 2010
 
Standardized measure of discounted future net cash flows beginning of period
  $ 79,688       -  
Purchases of reserves in place
    1,064,368          
Extension and discoveries, net of future production and development costs
    -       89,901  
Sales of oil and gas produced, net of production costs
    (31,497 )     (10,213
Accretion of discount      7,969       -  
Revisions of previous quantity estimates      (68,859      -  
Net change in prices and production costs
    26,611       -  
Net change in income taxes      -        -  
Changes in timing and other      52,770        -  
Standardized measure of discounted future net cash flows end of period
  $ 1,131,050     $ 79,688  
 
The information required by Items 1204 to 1208 of Regulation S-K are provided as follows:
 
Production.
 
For the year ended December 31, 2010, we only had production from our interest in the Lozano lease located in Frio County, Texas.  The Company produced approximately 124 barrels on a net basis.

For the year ended December 31, 2011, we had production from our Lozano, Marcee, McKinney and Patriot leases located in six Texas counties: Erath, Gonzalez, Medina, Navarro, Shackleford and Wilbarger.  The Company produced approximately 1,310 barrels and 542 mcf on a net basis.
 
Drilling Activity. During the year ended December 31, 2011, we conducted drilling activity in Texas on a new Gabriel #16 well to test an anticipated payzone in the Serpentine formation.  We anticipate that the new well will require a second completion attempt in order to achieve potential production on the well.
 
Delivery Commitments. We are not obligated to provide a fixed and determinable quantity of oil or gas in the near future under existing contracts or agreements in Texas.

Gross and Net Productive Wells:
 
 
December 31, 2011
 
 
Oil
 
Gas
 
 
Gross
 
Net
 
Gross
 
Net
 
United States - 
               
Texas
88
 
11
 
2
 
.5
 
 
88
 
11
 
2
 
.5
 

Gross and Net Developed Acreage:
 
 
December 31, 2011
 
 
Oil
 
Gas
 
 
Gross
 
Net
 
Gross
 
Net
 
United States - 
               
Texas
1,553
 
 480
 
325
 
149
 
 
1,553
 
 480
 
325
 
149
 
 
 
17

 
Gross and Net Undeveloped Acreage:
 
 
December 31, 2011
 
 
Oil
 
Gas
 
 
Gross
 
Net
 
Gross
 
Net
 
United States - 
               
Texas
1,572
 
344
 
557
 
29
 
 
1,572
 
 344
 
557
 
29
 
 
Gross and Net Productive Wells:
 
 
December 31, 2010
 
 
Oil
 
Gas
 
 
Gross
 
Net
 
Gross
 
Net
 
United States - 
               
Texas
 3
 
 2.25
 
-
 
-
 
 
 3
 
 2.25
 
-
 
-
 
 
Gross and Net Developed Acreage:
 
 
December 31, 2010
 
 
Oil
 
Gas
 
 
Gross
 
Net
 
Gross
 
Net
 
United States - 
               
Texas
 110
 
 83
 
-
 
-
 
 
 110
 
 83
 
-
 
-
 
 
Gross and Net Undeveloped Acreage:
 
 
August 10, 2010 (Inception) through December 31, 2010
 
 
Oil
 
Gas
 
 
Gross
 
Net
 
Gross
 
Net
 
United States - 
               
Texas
453
 
 91
 
-
 
-
 
 
 453
 
 91
 
-
 
-
 
 
We also own certain oil and gas interests located near Anchorage, Alaska, through our wholly-owned subsidiary, NFEC.  NFEC acquired an oil and gas lease for State of Alaska Oil and Gas Lease ADL 391120 Tract: CI2006-464, which contains approximately 545 acres, pursuant to a Purchase Agreement dated November 2009.  Production on the properties has not commenced and there can be no assurance that any hydrocarbons will be economically recoverable, if at all. We have conducted limited pre-production activities in the past and we intend to conduct additional activities, such as a multi-phase exploration program of trenching, sampling, geophysical surveys and test drilling, as soon as our new management is able to evaluate the interests. We also intend to conduct exploratory activities on the properties in the foreseeable future.  NFEC has not undergone bankruptcy, receivership, or any similar proceeding.
 
 
18

 
Item 3.  Legal Proceedings.
 
There are no legal actions pending against us nor are any legal actions contemplated by us at this time
 
Item 4.  Mine Safety Disclosures.

Not applicable.
 
PART II
 
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Market Information.  Our common stock, par value $.001, has been quoted on the OTC Bulletin Board and OTCQB under the symbol “UAPC”.   For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions. 

   
High ($)
   
Low ($)
 
Fiscal Year 2011
               
First Quarter
 
$
1.50
   
$
0.22
 
Second Quarter
 
$
1.05
     
0.80
 
Third Quarter
 
$
 0.95
     
0.85
 
Fourth Quarter
 
$
 0.85
     
0.40
 
 
   
High ($)
   
Low ($)
 
Fiscal Year 2010
               
First Quarter
 
$
0.03
   
$
0.15
 
Second Quarter
 
$
0.11
     
0.13
 
Third Quarter
 
$
 0.10
     
0.15
 
Fourth Quarter
 
$
 0.10
     
0.28
 
 
Reports to Security Holders.  We are a reporting company with the SEC.  The public may read and copy any materials filed with the Securities and Exchange Commission at the Security and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may also obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330.  The Securities and Exchange Commission maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Securities and Exchange Commission. The address of that site is http://www.sec.gov.

Holders.  On April 13, 2012, we had approximately 15 stockholders of record.  The number of stockholders of record does not include beneficial owners of our common stock, whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries.
 
Dividends. We currently anticipate that we will not declare or pay cash dividends on our common stock in the foreseeable future. We will pay dividends on our common stock only if and when declared by our board of directors.  Our board of directors’ ability to declare a dividend is subject to restrictions imposed by Nevada law.  In determining whether to declare dividends, the board of directors will consider these restrictions as well as our financial condition, results of operations, working capital requirements, future prospects and other factors it considers relevant. 
 
 
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Securities Authorized For Issuance Under Equity Compensation Plans. As of December 31, 2011, we had no compensation plans under which our equity securities were authorized for issuance.
 
Recent Sales of Unregistered Securities.  During the year ended December 31, 2011, we had the following sales of unregistered securities:

In connection with the Merger Transaction and on December 31, 2010, we entered into a Note and Warrant Purchase Agreement (“Financing Agreement”) with one investor pursuant to which the investor agreed to lend up to $2,250,000 to us in multiple installments in exchange for a senior secured convertible promissory note with a conversion price of $0.50 per share and five-year warrants to acquire shares of common stock at an exercise price of $1.00 per share in the amount of each installment.  Pursuant to the Financing Agreement, we issued the following Notes and Warrants to the investor on the following dates:

Date of Note
Amount of Note
Number of Warrants
December 31, 2010
$620,000
620,000
January 1, 2011
$150,000
150,000
March 9, 2011
$250,000
250,000
June 20, 2011
$75,000
75,000
June 30, 2011
$115,000
115,000
     
TOTAL
$1,210,000
1,210,000

The Financing Agreement provides that the investor will lend additional installments to us in amounts as requested by us; provided however, that we provide the proposed use of proceeds for each requested amount. The investor shall have sole discretion in determining whether the proposed use of proceeds meets those requirements. The note and warrants were issued in a transaction which we believe satisfies the requirements of that exemption from the registration and prospectus delivery requirements of the Securities Act of 1933, which exemption is specified by the provisions of Regulation S promulgated pursuant to that act by the SEC.

On October 14, 2011, we entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with an investor unrelated to the investor described above pursuant to which the investor agreed to lend up to $1,500,000 to us in multiple installments in exchange for a convertible promissory note with a conversion price of $0.50 per share and five-year warrants to acquire shares of common stock at an exercise price of $1.00 per share in the amount of each installment. Pursuant to the Financing Agreement, we issued the following Notes and Warrants to the investor on the following dates:

Date of Note
Amount of Note
Number of Warrants
October 13, 2011
$400,000
400,000
November 29, 2011
$550,000
550,000
December 19, 2011
$25,000
25,000
     
TOTAL
$975,000
975,000

The Purchase Agreement provides that the investor will lend additional installments to us in amounts as requested by us; provided however, that we provide the proposed use of proceeds for each requested amount. The investor shall have sole discretion in determining whether the proposed use of proceeds meets those requirements. The note and warrants were issued in a transaction which we believe satisfies the requirements of that exemption from the registration and prospectus delivery requirements of the Securities Act of 1933, which exemption is specified by the provisions of Regulation S promulgated pursuant to that act by the SEC.

 
20

 
On November 30, 2011, we entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with McKenzie Oil Corp. (“McKenzie”), pursuant to which we acquired one hundred percent (100%) of McKenzie’s working interest in what is designated as the McKenzie State Well No. 1, located in Pecos County, Texas, in exchange for an aggregate cash sum of Five Hundred Fifty Thousand Dollars ($550,000) and fifty thousand (50,000) shares of our common stock (the “Shares”).  The Shares were issued to McKenzie in a transaction which we believe satisfies the requirements of that exemption from the registration and prospectus delivery requirements of the Securities Act, which exemption is specified by the provisions of Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated pursuant to the Securities Act by the Securities and Exchange Commission.
 
Use of Proceeds of Registered Securities.  There were no sales of registered securities during the year ended December 31, 2011.

Penny Stock Regulation.  Trading of our securities will be in the over-the-counter markets which are commonly referred to as the “pink sheets” or on the OTC Bulletin Board. As a result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the price of the securities offered.

Shares of our common stock will probably be subject to rules adopted the Securities and Exchange Commission that regulate broker-dealer practices in connection with transactions in “penny stocks”.  Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in those securities is provided by the exchange or system).  The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, deliver a standardized risk disclosure document prepared by the Securities and Exchange Commission, which contains the following:

·
  a description of the nature and level of risk in the market for penny stocks in both public offerings and
  secondary trading;
·
  a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to
 the customer with respect to violation to such duties or other requirements of securities’ laws;
·
  a brief, clear, narrative description of a dealer market, including "bid" and "ask” prices for penny stocks
  and the significance of the spread between the "bid" and "ask" price;
·
  a toll-free telephone number for inquiries on disciplinary actions;
·
  definitions of significant terms in the disclosure document or in the conduct of  trading in penny
 stocks;  and
·
  such other information and is in such form (including language, type, size and format), as the Securities
 and Exchange Commission shall require by rule or regulation.

Prior to effecting any transaction in penny stock, the broker-dealer also must provide the customer the following:

·
  the bid and offer quotations for the penny stock;
·
  the compensation of the broker-dealer and its salesperson in the transaction;
·
  the number of shares to which such bid and ask prices apply, or other comparable information relating to
  the depth and liquidity of the market for such stock; and
·
  monthly account statements showing the market value of each penny stock held in the customer’s account.

In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitably statement.  These disclosure requirements may have the effect of reducing the trading activity in the secondary market for a stock that becomes subject to the penny stock rules.  Holders of shares of our common stock may have difficulty selling those shares because our common stock will probably be subject to the penny stock rules.

 
21

 
Purchases of Equity Securities.  None during the period covered by this Annual Report.

Item 6. Selected Financial Data.

Not applicable.
 
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Forward Looking Statements
 
This Annual Report of United American Petroleum Corp. on Form 10-K contains forward-looking statements, particularly those identified with the words, “anticipates,” “believes,” “expects,” “plans,” “intends”, “objectives” and similar expressions. These statements reflect management's best judgment based on factors known at the time of such statements. The reader may find discussions containing such forward-looking statements in the material set forth under “Management's Discussion and Analysis and Plan of Operations,” generally, and specifically therein under the captions “Liquidity and Capital Resources” as well as elsewhere in this Annual Report on Form 10-K. Actual events or results may differ materially from those discussed herein. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements. The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements.
 
Critical Accounting Policy and Estimates. Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources.
 
Oil and Gas Properties
 
The Company follows the full cost method of accounting for its investments in oil and gas properties. Under the full cost method, all costs associated with the exploration of properties are capitalized into appropriate cost centers within the full cost pool.  Internal costs that are capitalized are limited to those costs that can be directly identified with acquisition, exploration, and development activities undertaken and do not include any costs related to production, general corporate overhead, or similar activities.  Cost centers are established on a country-by-country basis.
 
 
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Capitalized costs within the cost centers are amortized on the unit-of-production basis using proved oil and gas reserves. The cost of investments in unproved properties and major development projects are excluded from capitalized costs to be amortized until it is determined whether or not proved reserves can be assigned to the properties. Until such a determination is made, the properties are assessed annually to ascertain whether impairment has occurred.  The costs of drilling exploratory dry holes are included in the amortization base immediately upon determination that the well is dry.
 
For each cost center, capitalized costs are subject to an annual ceiling test, in which the costs shall not exceed the cost center ceiling.  The cost center ceiling is equal to i) the present value of estimated future net revenues computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions;  plus ii) the cost of properties not being amortized; plus iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less iv) income tax effects related to differences between the book and tax basis of the properties.  If unamortized costs capitalized within a cost center, less related deferred income taxes, exceed the cost center ceiling, the excess is charged to expense and separately disclosed during the period in which the excess occurs.
 
Share-Based Compensation
 
The Company accounts for share-based compensation in accordance with Accounting Standards Codification subtopic 718-10, Stock Compensation (“ASC 718-10”).  This requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases related to an Employee Stock Purchase Plan based on the estimated fair values.
 
As of December 31, 2011, there were no outstanding employee stock options.
  
Recent Accounting Pronouncements
 
In December 2008, the SEC issued Release No. 33-8995,Modernization of Oil and Gas Reporting (ASC 2010-3), which amended the oil and gas disclosures for oil and gas producers contained in Regulations S-K and S-X, and added a section to Regulation S-K (Subpart 1200) to codify the revised disclosure requirements in Securities Act Industry Guide 2, which was eliminated. The goal of Release No. 33-8995 is to provide investors with a more meaningful and comprehensive understanding of oil and gas reserves. Energy companies affected by Release No. 33-8995 are now required to price proved oil and gas reserves using the unweighted arithmetic average of the price on the first day of each month within the 12-month period prior to the end of the reporting period, unless prices are defined by contractual arrangements, excluding escalations based on future conditions. SEC Release No. 33-8995 is effective beginning for financial statements for fiscal years ending on or after December 31, 2009. The Company adopted SEC Release No. 33-8995 effective December 31, 2009. The impact on the Company's operating results, financial position and cash flows has been recorded in the financial statements and additional disclosures were added to the accompanying notes to the consolidated financial statements for the Company's supplemental oil and gas disclosure.
 
In January 2010, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2010-03 Oil and Gas Estimation and Disclosures  (ASU 2010-03). This update aligns the current oil and natural gas reserve estimation and disclosure requirements of the Extractive Industries Oil and Gas topic of the FASB Accounting Standards Codification (ASC Topic 932) with the changes required by the SEC final rule ASC 2010-3. As discussed above, ASU 2010-03 expands the disclosures required for equity method investments, revises the definition of oil- and natural gas-producing activities to include nontraditional resources in reserves unless not intended to be upgraded into synthetic oil or natural gas, amends the definition of proved oil and natural gas reserves to require 12-month average pricing in estimating reserves, amends and adds definitions in the Master Glossary that is used in estimating proved oil and natural gas quantities and provides guidance on geographic area with respect to disclosure of information about significant reserves. ASU 2010-03 must be applied prospectively as a change in accounting principle that is inseparable from a change in accounting estimate and is effective for entities with annual reporting periods ending on or after a change in accounting estimate and is effective for entities with annual reporting periods ending on or after December 31, 2009. The Company adopted ASU 2010-03 effective December 31, 2009.
 
 
23

 
In April 2010, the FASB issued ASU 2010-17, Revenue Recognition-Milestone Method (Topic 605): Milestone Method of Revenue Recognition. The amendments in this update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity should apply the amendments retrospectively from the beginning of the year of adoption. The Company does not expect the provisions of ASU 2010-17 to have a material effect on the financial position, results of operations or cash flows of the Company.
 
There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's financial position, results of operations or cash flows.
 
Overview. On December 31, 2010,  Forgehouse, Inc.  (“Forgehouse,” “We” or the “Company”) entered into and closed an Agreement and Plan of Merger (the “Merger Agreement”) by and among, the Company, United American Petroleum Corp., a Nevada corporation (“United”), and our newly formed wholly-owned subsidiary, United PC Acquisition Corp., a Nevada corporation (“Merger Sub”)(the “Merger Transaction”).  The transaction contemplated under the Merger Agreement was deemed to be a reverse acquisition, where Forgehouse, Inc. (the legal acquirer) is considered the accounting acquiree and United (the legal acquiree) is considered the accounting acquirer.  Forgehouse is deemed a continuation of the business of United, and the historical financial statements of United became the historical financial statements of Forgehouse.
 
On October 15, 2010, United purchased the Lozano working interest from 4 Phoenix Oil and Gas, LLC (“Phoenix” or “Predecessor”). As a result of correspondence from the staff at the SEC, we have determined that Phoenix is our Predecessor thereby triggering predecessor accounting and financial statement presentation.  Predecessor company references herein relate to Phoenix. Successor company references herein are referring to consolidated information pertaining to the Company and its wholly owned subsidiaries.

The following discussion of our financial condition and results of operations should be read in conjunction with (i) the Predecessor’s statement of operations, cash flows and changes in members’ equity for the period from January 1, 2010 to October 15, 2010 and (ii) our financial statements for the period of October 16, 2010 through December 31, 2011, together with notes thereto as included in this Annual Report on Form 10-K.
 
For the Predecessor’s period from January 1, 2010 through October 15, 2010.

Results of Operations.
 
Revenues.  The Predecessor had oil revenues of $39,800 for the Predecessor’s period from January 1, 2010 through October 15, 2010. Those revenues were generated from the Predecessor’s interest in the Lozano lease in Frio County, Texas.
 
Operating Expenses.  The Predecessor’s total operating costs and expenses for the Predecessor period from January 1, 2010 through October 15, 2010 were, $55,659, which was comprised of lease operating costs of $22,217, depletion expense of $13,665, accretion expense of $781 related to the Predecessor’s asset retirement obligation liability, and general and administrative expenses of $83,196.  Lease operating costs relate to operating costs associated with the Predecessor’s oil and gas properties.  General and administrative expenses relate to wages, corporate maintenance costs and administrative expenses associated with the Predecessor’s leases.  

Net Loss.  For the Predecessor’s period from January 1, 2010 through October 15, 2010, the Predecessor’s net loss was $15,859.  
 
 
24

 
For the Successor year ended December 31, 2011 as compared to the Successor period from October 16, 2010 through December 31, 2010.
 
Results of Operations.
 
Revenues.  We had total revenues of $356,540 for the year ended December 31, 2011. Those revenues were generated from oil sales of $139,692, gas sales of $1,670 and administrative income of $215,178. The oil sales were generated from our interest in the Lozano, McKinney, Walker Smith, Welder, Bailey Rogers and Fohn leases. Our natural gas sales of $1,670  resulted from our Crouch and Lane Heady leases. Our administrative income was a result of income derived from oil and gas administrative fees charged by United Operating, LLC to well owners for managing and accounting for the development and production of their oil and gas property interests.

To implement our business plan during the next twelve months, we need to generate increased revenues from our oil and gas properties. Our failure to do so will hinder our ability to increase the size of our operations and to generate additional revenues. If we are not able to generate additional revenues to cover our operating costs, we may not be able to expand our operations.
 
Operating Expenses.  For the year ended December 31, 2011, our total operating costs and expenses were $1,054,310, which is primarily comprised of lease operating costs of $109,865, depletion expense of $19,225, accretion expense of $2,592 related to our asset retirement obligation liability, and general and administrative expenses of $922,628.  By comparison, our total operating costs and expenses were $68,818 for the Successor period from October 16, 2010 through December 31, 2010, which was primarily comprised of lease operating costs of $4,020, depletion expense of $3,910, accretion expense of $207 related to its asset retirement obligation liability, general and administrative expenses of $60,681.  The increases in total operating costs and expenses from 2010 to 2011 was directly related to increases in production costs, wage related expenses and general administrative expenses for the Successor year ended December 31, 2011.  Our lease operating costs relate to operating costs associated with our oil and gas properties.  General and administrative expenses relate to wages, corporate maintenance costs and administrative expenses associated with our leases.  
  
We expect that our future monthly operating expenses for fiscal year 2012 will be similar to our current expense levels, plus additional direct costs relating to newly acquired interests.  We will continue to incur significant general and administrative expenses, but expect to generate increased revenues after further developing our business.
 
Other Expenses.  For the year ended December 31, 2011, we accrued interest expense in the amount of $289,291 related to outstanding note payables and a loss on embedded derivatives of $96,280, as compared to accrued interest expense in the amount of $9,795 related to a $250,000 note payable for the Successor period from October 16, 2010 through December 31, 2010.
 
Net Loss.  For the year ended December 31, 2011, our net loss was $1,083,341, as compared to a net loss of $68,400 for the period from October 16, 2010 through December 31, 2010.  The significant increase in our net loss between the comparable periods was directly related to the increase in operating expenses and net other expense for the year ended December 31, 2011. We hope to generate additional revenues from our projects to cover out operating costs, which will reduce our net loss in the future.  We cannot guarantee that we will be able to generate additional revenues or, if that we do generate additional revenues, that such increased revenues will reduce our net loss in future periods.
 
Liquidity and Capital Resources.  As of December 31, 2011, our current assets were $814,894, which consisted of cash of $593,469, accounts receivable of $35,405, related party receivables of $25,718 and other receivable of $160,302. Our current assets of $814,894 together with our evaluated oil and gas properties of $528,336, net of accumulated depletion of $23,135, and our unevaluated oil and gas properties of $617,630, represent our total assets of 1,960,860 as of December 31, 2011.
 
 
25

 
On December 31, 2010, we entered into a credit facility with one investor, whereby the investor agreed to lend up to $2,250,000 to us in multiple installments in exchange for senior secured convertible promissory notes with a conversion price of $0.50 per share and five-year warrants to acquire shares of common stock at an exercise price of $1.00 per share in the amount of each installment. The notes are due on December 31, 2013, or upon default, whichever is earlier, and bear interest at the annual rate of 10%. Pursuant to the credit facility, we issued the following notes and warrants to the investor on the following dates:
 
Date of Note
Amount of Note
Number of Warrants
December 31, 2010
$620,000
620,000
January 1, 2011
$150,000
150,000
March 9, 2011
$250,000
250,000
June 20, 2011
$75,000
75,000
June 30, 2011
$115,000
115,000
     
TOTAL
$1,210,000
1,210,000
 
The agreement provides that the investor will lend additional installments to us in amounts as requested by us; provided however, that we provide the proposed use of proceeds for each requested amount.
 
On October 14, 2011, we entered into a credit facility with an investor unrelated to the investor described above pursuant to which the investor agreed to lend up to $1,500,000 to us in multiple installments in exchange for a convertible promissory note with a conversion price of $0.50 per share and five-year warrants to acquire shares of common stock at an exercise price of $1.00 per share in the amount of each installment. Pursuant to the credit facility, we issued the following notes and warrants to the investor on the following dates:
 
Date of Note
Amount of Note
Number of Warrants
October 13, 2011
$400,000
400,000
November 29, 2011
$550,000
550,000
December 19, 2011
$25,000
25,000
     
TOTAL
$975,000
975,000

The agreement provides that the investor will lend additional installments to us in amounts as requested by us; provided however, that we provide the proposed use of proceeds for each requested amount.

On November 30, 2011, we acquired one hundred percent (100%) of McKenzie’s working interest in the McKenzie State Well No. 1, located in Pecos County, Texas, in exchange for $550,000 and 50,000 shares of our common stock.  
 
As of December 31, 2011, we had current liabilities in the amount of $648,853, of which $217,702 were represented by accounts payable and accrued expenses and a $431,151 payable.  As of December 31, 2011 we had long-term liabilities of $623,003 related to our convertible note net of discount, an embedded derivative liability of $1,138,989 and an asset retirement obligation of $37,955.

We had no other liabilities and no other long term commitments or contingencies as of December 31, 2011.

 
26

 
As of December 31, 2011, we had cash of $593,469. In the opinion of management, available funds will not satisfy our working capital requirements to operate at our current level of activity for the next twelve months. If we do not raise additional capital, then we may not be able to conduct oil and gas exploration and development activities and expand our operations. Our forecast for the period for which our financial resources will be adequate to support our operations involves risks and uncertainties and actual results could differ as a result of a number of factors. In addition to generating revenues from our current operations, we will need to raise additional capital to expand our operations to the point at which we are able to operate profitably.
 
We have been, and intend to continue, working toward identifying and obtaining new sources of financing. No assurances can be given that we will be successful in obtaining additional financing in the future. Any future financing that we may obtain may cause significant dilution to existing stockholders. Any debt financing or other financing of securities senior to common stock that we are able to obtain will likely include financial and other covenants that will restrict our flexibility. Any failure to comply with these covenants would have a negative impact on our business, prospects, financial condition, results of operations and cash flows.

If adequate funds are not available, we may be required to delay, scale back or eliminate portions of our operations or to obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain of our assets. Accordingly, the inability to obtain such financing could result in a significant loss of ownership and/or control of our assets and could also adversely affect our ability to fund our continued operations and our expansion efforts with respect to our properties.
 
 
During 2012, we expect that the following will continue to impact our liquidity: (i) legal and accounting costs of being a public company; (ii) expected expenses related to the exploration and development of our properties; (iii) expected expenses related to repair and maintenance costs on wells that are currently producing and (iv) anticipated increases in overhead and the use of independent contractors for services to be provided to us. We will need to obtain funds to pay those expenses. Other than those items specified above, we are not aware of any other known trends, events or uncertainties, which may affect our future liquidity.

In order to implement our business plan in the manner we envision, we need to raise additional capital. We cannot guarantee that we will be able to raise additional funds. Moreover, in the event that we can raise additional funds, we cannot guarantee that additional funding will be available on favorable terms.

We are in the exploration stage, have limited revenue and have incurred a net loss of $1,151,741 since October 16, 2010.  These factors raise substantial doubt about our ability to continue as a going concern.  Our management is implementing plans to sustain our cash flow from operating activities and/or acquire additional capital funding (see Note 1).   No assurances can be given that we will obtain sufficient working capital to sustain ongoing operations. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
 
We are not currently conducting any research and development activities. We do not anticipate conducting such activities in the near future. In the event that we expand our operations, then we may need to hire additional employees or independent contractors as well as purchase or lease additional equipment. Our management believes that we do not require the services of independent contractors to operate at our current level of activity. However, if our level of operations increases beyond the level that our current staff can provide, then we may need to supplement our staff in this manner.
 
Off-Balance Sheet Arrangements.  We have no off-balance sheet arrangements at December 31, 2011.
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.
 
 
27

 
Item 8. Financial Statements and Supplementary Data.

The financial statements required by Item 8 are presented in the following order:
 
TABLE OF CONTENTS
 
 
 

 
28

 

 
To the Board of Directors
United American Petroleum Corp.
Austin, Texas

We have audited the accompanying consolidated balance sheets of United American Petroleum Corp. and its subsidiaries (the “Company” or “Successor”) as of December 31, 2011 and 2010 and the related consolidated statements of operations, stockholders' deficit and cash flows for year ended December 31, 2011 and the period from October 16, 2010 through December 31, 2010.  We have also audited the accompanying statements of operations, changes in members’ equity and cash flows of 4 Phoenix Oil & Gas, LLC  (“Predecessor”) for the period from January 1, 2010 through October 15, 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Successor as of December 31, 2011 and 2010 and the consolidated results of their operations and their cash flows year ended December 31, 2011 and for the period from October 16, 2010 through December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.  Further, in our opinion, the Predecessor financial statements referred to above present fairly, in all material respects, the results of its operations and its cash flows for the period from January 1, 2010 through October 15, 2010 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has suffered losses from operations and has a working capital deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ MaloneBailey, LLP
www.malonebailey.com
Houston, Texas

April 16, 2012
 
 

 
29

 

UNITED AMERICAN PETROLEUM CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2011 AND 2010
 
   
SUCCESSOR
   
SUCCESSOR
 
   
DECEMBER 31,
   
DECEMBER 31,
 
   
2011
   
2010
 
ASSETS
             
CURRENT ASSET
           
   Cash
  $ 593,469     $ 557,344  
   Accounts receivable
    35,405       3,570  
   Related party receivables
    25,718       -  
   Other receivable
    160,302       -  
    Total current assets     814,894       560,914  
                 
Oil and gas properties (full cost method):
               
Evaluated, net of accumulated depletion of $23,135 and $3,910
               
as of December 31, 2011 and 2010, respectively
    528,336       81,328  
Unevaluated
    617,630       205,433  
                 
TOTAL ASSETS
  $ 1,960,860     $ 847,675  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
                 
CURRENT LIABILITIES
               
   Accounts payable and accrued liabilities
    217,702       155,323  
   Related party payable
    -       25,000  
   Note payable - related party
    -       50,000  
   Note payable
    -       250,000  
   Other payable
    431,151       -  
    Total current liabilities     648,853       480,323  
                 
Accrued interest
    141,255       20,925  
Convertible note payable, net of discount of $1,561,997 and $165,932
  as of December 31, 2011 and 2010, respectively
    623,003       454,068  
Embedded derivative liability
    1,138,989       165,932  
Asset retirement obligation
    56,012       15,465  
TOTAL LIABILITIES
    2,608,112       1,136,713  
                 
STOCKHOLDERS' DEFICIT
               
   Common stock, $0.001 par value, 100,000,000 shares authorized,47,250,000 shares issued and  
     44,000,000 and 43,950,000 shares outstanding, respectively
    44,000       43,950  
   Additional paid-in capital
    487,739       (237,338 )
   Accumulated deficit
    (1,178,991 )     (95,650 )
    Total stockholders' deficit     (647,252 )     (289,038 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
  $ 1,960,860     $ 847,675  

 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
30

 
 
UNITED AMERICAN PETROLEUM CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2011, THE PERIOD FROM OCTOBER 16, 2010 THROUGH DECEMBER 31, 2010
AND PREDECESSOR STATEMENT OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 2010 THROUGH OCTOBER 15, 2010
                   
   
SUCCESSOR
   
SUCCESSOR
   
PREDECESSOR
 
   
FOR THE YEAR ENDED
     OCTOBER 16, 2010 THROUGH     JANUARY 1, 2010 THROUGH  
   
DECEMBER 31, 2011
   
DECEMBER 31, 2010
   
OCTOBER 15, 2010
 
                   
REVENUE
                 
   Oil sales
  $ 139,692     $ 10,213     $ 39,800  
   Gas sales
    1,670       -       -  
   Well operator income
    215,178       -       -  
    TOTAL REVENUE
    356,540       10,213       39,800  
                         
OPERATING EXPENSES (INCOME)
                       
   Lease operating expenses
    109,865       4,020       22,217  
   Accretion expense
    2,592       207       781  
   Depletion expense
    19,225       3,910       13,665  
   Gain on sale of property and equipment
    -       -       (64,200 )
   General and administrative
    922,628       60,681       83,196  
    TOTAL OPERATING EXPENSES
    1,054,310       68,818       55,659  
                         
NET LOSS BEFORE OTHER EXPENSE
    (697,770 )     (58,605 )     (15,859 )
                         
OTHER INCOME (EXPENSE)
                       
   Interest Expense
    (289,291 )     (9,795 )     -  
   Loss on embedded derivatives
    (96,280 )     -       -  
   Total other expense
    (385,571 )     (9,795 )     -  
                         
NET INCOME (LOSS)
  $ (1,083,341 )   $ (68,400 )   $ (15,859 )
                         
INCOME (LOSS) PER SHARE - BASIC
    (0.02 )     (0.00 )  
NA
 
                         
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC
     43,954,258        37,026,923        N/A  
 
 
The accompanying notes are an integral part of these consolidated financial statements.

 
 
31

 
 
UNITED AMERICAN PETROLEUM CORP.
STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 2010 THROUGH OCTOBER 15, 2010
PREDECESSOR
 
               
Members’
 
   
Member A
   
Member B
   
Equity
 
                   
Balance, December 31, 2009
    38,625       38,624       77,249  
                         
Withdrawals
    (21,250 )     (21,250 )     (42,500 )
                         
Share of net loss
    (7,929 )     (7,930 )     (15,859 )
                         
Balance, October 15, 2010
  $ 9,446     $ 9,444     $ 18,890  

 
The accompanying notes are an integral part of these consolidated financial statements.
 
32

 

 
UNITED AMERICAN PETROLEUM CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM OCTOBER 16, 2010 THROUGH DECEMBER 31, 2010 AND THE YEAR ENDED DECEMBER 31, 2011
SUCCESSOR

   
Common Stock
   
Additional Paid-in
   
Accumulated
   
Stockholders’
 
   
Shares
   
Par Value
   
Capital
   
Deficit
   
Deficit
 
                               
Balance, October 16, 2010
    15,750,000     $ 15,750     $ -     $ (27,250 )   $ (11,500 )
                                         
Recapitalization
    31,500,000       31,500       (198,088 )     -       (166,588 )
                                         
Cancellation of shares issued
    (750,000 )     (750 )     (39,250 )     -       (40,000 )
                                         
Cancellation of shares issued
    (2,550,000 )     (2,550 )     -       -       (2,550 )
                                         
Net loss for the period
    -       -       -       (68,400 )     (68,400 )
                                         
Balance - December 31, 2010
    43,950,000     $ 43,950     $ (237,338 )   $ (95,650 )   $ (289,038 )
                                         
Discount on convertible notes
    -       -       684,627       -       684,627  
                                         
Shares issued for oil and gas property
    50,000       50       40,450       -       40,500  
                                         
Net loss for the period
    -       -       -       (1,083,341 )     (1,083,341 )
                                         
Balance - December 31, 2011
    44,000,000     $ 44,000     $ 487,739     $ (1,178,991 )   $ (647,252 )

The accompanying notes are an integral part of these financial statements.


 
33

 
 
UNITED AMERICAN PETROLEUM CORP.
CONSOLIDATED STATEMENTS OF CASH FLOW
 
   
SUCCESSOR
   
SUCCESSOR
   
PREDECESSOR
 
   
YEAR ENDED
   
OCTOBER 16, 2010 THROUGH
   
JANUARY 1, 2010 THROUGH
 
   
DECEMBER 31, 2011
   
DECEMBER 31, 2010
   
OCTOBER 15, 2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
   Net (loss)
  $ (1,083,341 )   $ (68,400 )   $ (15,859 )
                         
Adjustments to reconcile net loss
                       
  to net cash used in operating activities:
                       
    Depreciation expense
    -       -       1,383  
    Depletion expense
    19,225       3,910       13,665  
    Accretion expense
    2,592       207       781  
    Gain on sale of fixed assets
    -       -       (64,200 )
    Amortization of debt discount
    168,935       -       -  
    Loss on embedded derivatives
    96,280       -       -  
                         
Change in assets and liabilities
                       
    Accounts receivable
    (31,835 )     (3,570 )     1,891  
    Other assets
    -       -       (25,000 )
    Related party receivable
    (44,362 )     -       -  
    Other receivable
    (141,658 )     -       -  
    Accounts payable and accrued expenses
    (26,192 )     7,220       34,379  
    Accrued interest
    120,330       -       -  
    Other payable
    431,151       -       -  
          Net cash (used in) operating activities
    (488,875 )     (60,633 )     (52,960 )
                         
CASH FLOWS USED IN INVESTING ACTIVITIES:
                       
    Purchase of furniture and equipment
    -       -       (45,500 )
    Sale of fixed assets
    -       -       64,200  
    Earnest deposit received for working interest
    -       -       75,000  
    Acquisition of oil and gas properties
    (715,000 )     (2,623 )     -  
          Net cash used in investing activities
    (715,000 )     (2,623 )     93,700  
                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
    Distributions paid to members'
    -       -       (42,500 )
    Cash assumed from reverse merger
    -       600       -  
    Proceeds from convertible notes
    1,565,000       620,000       -  
    Payment of note payable
    (250,000 )     -       -  
    Payment of related party payable
    (25,000 )     -       -  
    Payment of related party notes payable
    (50,000 )     -       -  
          Net cash provided by financing activities
    1,240,000       620,600       (42,500 )
                         
NET INCREASE IN CASH AND CASH EQUIVALENTS
    36,125       557,344       (1,760 )
 
                       
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
    557,344       -       10,862  
 
                       
CASH AND CASH EQUIVALENTS - END OF PERIOD
  $ 593,469     $ 557,344     $ 9,102  
                         
SUPPLEMENTAL CASH FLOW INFORMATION:
                       
  Cash paid during the period for:
                       
        Interest
  $ -     $ -     $ -  
        Taxes
  $ -     $ -     $ -  
                         
NON CASH TRANSACTIONS:
                       
    Asset retirement liability incurred
  $ 37,955     $ -     $ -  
    Stock repurchase and cancellation
  $ -     $ 40,000     $ -  
    Common stock issued for oil and gas property
  $ 40,500     $ -     $ -  
    Acquisition of oil and gas properties with payables
  $ 84,975     $ -     $ -  
    Discount from derivative liabilities
  $ 880,373     $ -     $ -  
    Discount to additional paid-in capital from relative fair value of warrants
  $ 684,627     $ -     $ -  
                         

The accompanying notes are an integral part of these consolidated financial statements.
 
 

 
34

 

UNITED AMERICAN PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010

 1.           Nature of Operations and Basis of Presentation
 
Nature of Operations

4 Phoenix Oil & Gas, LLC, a limited liability company, was formed under the laws of the state of Texas on October 19, 2009 (“Predecessor”).   On August 10, 2010, we formed United American Petroleum Corp. a Company incorporated under the laws of the state of Nevada.  United American Petroleum Corp.’s principal business is the acquisition and management of leasehold interests in petroleum and natural gas rights, either directly or indirectly, and the exploitation and development of properties subject to these leases.  In these notes, the terms “United,” “Company,” “we,” “us,” “successor," or “our” mean United American Petroleum Corp.

On October 15, 2010, United American Petroleum Corp. purchased the Lozano and Marcee working interests from 4 Phoenix Oil and Gas, LLC, triggering predecessor accounting and financial statement presentation.     

Successor company references herein are referring to consolidated information pertaining to United American Petroleum Corp. and our wholly owned subsidiaries.

Predecessor company references herein relate to 4 Phoenix Oil & Gas, LLC a former working interest owner of the Lozano lease.
 
On December 31, 2010, the Company entered into a Plan of Merger (the “Merger”) with Forgehouse, Inc. and their newly formed wholly-owned subsidiary United PC Acquisition Corp. Following the closing and pursuant to the Plan of Merger, effective as of December 31, 2010, the Company merged with and into United PC Acquisition Corp. with the Company surviving (the “Reverse Merger”). The Company, as a wholly-owned subsidiary of Forgehouse, Inc. was then merged with and into Forgehouse, Inc. and Forgehouse, Inc. changed its name to United American Petroleum Corp. For accounting purposes, the Merger was treated as a reverse merger and a recapitalization of United American Petroleum Corp.

On January 13, 2011, the Company formed a wholly owned subsidiary, UAP Management, LLC, a Texas limited liability company, for the purpose of managing the Gabriel Rosser, LP (see Note 8).
 
On January 13, 2011, the Company formed a wholly owned subsidiary, United Operating, LLC, a Texas limited liability company, for the purpose of operating and managing the various interests acquired from Patriot Minerals, LLC (see Note 8).
 
Basis of Presentation – Predecessor

We acquired the Lozano working interest from 4 Phoenix Oil & Gas, LLC (our predecessor company) and at the time of the acquisition, we had minimal assets and no operations.  Accordingly, we have included the predecessor financial statements of Phoenix in the accompanying financial statements for purposes of complying with the rules and regulations of the Securities and Exchange Commission as required by S-X Rule 8-02.
 
 

 
35

 

UNITED AMERICAN PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
 
2.            Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accompanying consolidated financial statements include United American Petroleum Corp. and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated. The accompanying financial statements have been prepared in accordance with the Generally Accepted Accounting Principles in the United States of America ("GAAP"). We made certain reclassifications to prior-period amounts to conform to the current presentation.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods.  Actual results could materially differ from those estimates.
 
Cash and Cash Equivalents
 
All highly liquid investments purchased with an original maturity of three months or less at the time of acquisition are considered to be cash equivalents.
 
Fair Value of Financial Instruments
 
The Company is required to estimate the fair value of all financial instruments included on its balance sheet.  The carrying value of cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short period to maturity of these instruments.
 
Concentration of Credit Risk

The Company collects its receivables on its working interests in oil and gas properties from well operators. As such, the Company generally has relatively few customers. These receivables are unsecured and the Company performs ongoing credit evaluations of the well operators’ financial condition whenever necessary. Bad debt is recognized on an account-by-account review after all means of collection have been exhausted and recovery is not probable. There has been no bad debt expense for the period ended December 31, 2011 and 2010, respectively.

Revenue Recognition- Oil and Gas

The Company recognizes oil and gas revenue from interests in producing wells using the “sales method.” Under this method of accounting, revenues are recognized based on volumes sold, which may differ from the volume to which we are entitled based on our working interest. An imbalance is recognized as a liability only when the estimated remaining reserves will not be sufficient to enable the under–produced owner(s) to recoup its entitled share through future production. Under the sales method, no receivables are recorded where we have taken less than our share of production. Our net imbalance position at December 31, 2011 and December 31, 2010, was immaterial.

 
36

 

UNITED AMERICAN PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
 
2.   Summary of Significant Accounting Policies (Continued)
 
Revenue Recognition – Administrative Income
 
The Company will record revenue for administrative income in accordance with ASC 605. The criteria for recognition are as follows:

1)
Persuasive evidence of an arrangement exists;
2)
Delivery has occurred or services have been rendered;
3)
The seller’s price to the buyer is fixed or determinable, and
4)
Collectability is reasonably assured.

Determination of criteria (3) and (4) will be based on management's judgments regarding the fixed nature of the selling prices of the services performed and the collectability of those amounts.
 
Oil and Gas Properties
 
The Company follows the full cost method of accounting for its investments in oil and gas properties. Under the full cost method, all costs associated with the exploration of properties are capitalized into appropriate cost centers within the full cost pool. Internal costs that are capitalized are limited to those costs that can be directly identified with acquisition, exploration, and development activities undertaken and do not include any costs related to production, general corporate overhead, or similar activities. Cost centers are established on a country-by-country basis.
 
Capitalized costs within the cost centers are amortized on the unit-of-production basis using proved oil and gas reserves. The cost of investments in unproved properties and major development projects are excluded from capitalized costs to be amortized until it is determined whether or not proved reserves can be assigned to the properties. Until such a determination is made, the properties are assessed annually to ascertain whether impairment has occurred. The costs of drilling exploratory dry holes are included in the amortization base immediately upon determination that the well is dry.
 
Capitalized costs within the cost centers are amortized on the unit-of-production basis using proved oil and gas reserves. The cost of investments in unproved properties and major development projects are excluded from capitalized costs to be amortized until it is determined whether or not proved reserves can be assigned to the properties. Until such a determination is made, the properties are assessed annually to ascertain whether impairment has occurred. The costs of drilling exploratory dry holes are included in the amortization base immediately upon determination that the well is dry.
 
For each cost center, capitalized costs are subject to an annual ceiling test, in which the costs shall not exceed the cost center ceiling. The cost center ceiling is equal to i) the present value of estimated future net revenues computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions; plus ii) the cost of properties not being amortized; plus iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less iv) income tax effects related to differences between the book and tax basis of the properties. If unamortized costs capitalized within a cost center, less related deferred income taxes, exceed the cost center ceiling, the excess is charged to expense and separately disclosed during the period in which the excess occurs.
 
 
37

 
 
UNITED AMERICAN PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
 
2.    Summary of Significant Accounting Policies (Continued)
 
Asset Retirement Obligations
 
ASC 410, Asset Retirement and Environmental Obligations addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Specifically, ASC 410 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. In addition, the asset retirement cost is capitalized as part of the asset’s carrying value and subsequently allocated to expense over the asset’s useful life.
 
Fair Value of Financial Instruments
 
Unless otherwise indicated, the fair value of all reported assets and liabilities which represent financial instruments approximate the carrying values of such instruments due to their short-term maturity.
 
Recoverability of Long-Lived Assets
 
The Company has adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”). ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
 
Events relating to recoverability may include significant unfavorable changes in business conditions or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets would be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.
 
Share-Based Compensation
 
The Company accounts for share-based compensation in accordance with Accounting Standards Codification subtopic 718-10, Stock Compensation (“ASC 718-10”). This requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases related to an Employee Stock Purchase Plan based on the estimated fair values.
 
As of December 31, 2011, there were no outstanding employee stock options.
 
 
 
 
38

 
 
UNITED AMERICAN PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
 
2.    Summary of Significant Accounting Policies (Continued)
 
Income Taxes
 
The Company has adopted Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”). ASC 740-10 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts that are expected to be realized.
 
Basic and Diluted Earnings (Loss) Per Share
 
Basic earnings (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share is computed in the same way as basic earnings (loss) per common share except that the denominator is increased to include the number of additional common shares that would be outstanding if all potential common shares had been issued and if the additional common shares were dilutive.
 
Property and Equipment
 
Property and equipment is recorded at cost and depreciated over the estimated useful lives of the assets using principally the straight-line method. When items are retired or otherwise disposed of, income is charged or credited for the difference between net book value and proceeds realized. Ordinary maintenance and repairs are charged to expense as incurred, and replacements and betterments are capitalized.
The range of estimated useful lives used to calculated depreciation for principal items of property and equipment are as follow:
 
 
Asset Category
 
Depreciation Period
 
 
Furniture and Fixtures
 
5 Years
 
 
Automobiles
 
5 Years
 
 
Equipment
 
10 Years
 
 
Recent Accounting Pronouncements
 
In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for us in fiscal 2012 and earlier adoption is permitted. The Company is currently evaluating the impact of our pending adoption of ASU 2011-08 on our consolidated financial statements.
 
Management does not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, consolidated financial position or cash flow.
 
39

 
 
UNITED AMERICAN PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010

3.            Going Concern
 
The Company has incurred a net loss and negative operating cash flows since inception through December 31, 2011. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company's management is implementing plans to sustain the Company’s cash flow from operating activities and/or acquire additional capital funding. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

4.            Related Party Receivable

As of December 31, 2011, the Company had a related party receivable in the amount of $25,718 due from two Companies with working interest amounts payable.  Our directors are also officers in these two Companies.

5.            Embedded Derivative Liabilities
 
Conversion Option Liability
 
As described in Note 13, the Company issued a convertible note with certain reset provisions. The Company accounted for these reset provisions in accordance with ASC 815-40, which requires that the Company bifurcate the embedded conversion option as liability at the grant date and to record changes in fair value relating to the conversion option liability in the statement of operations as of each subsequent balance sheet date.   The debt discount related to the convertible note is amortized over the life of the note using the effective interest method.  See Note 7 for a reconciliation of the changes in fair value of the Company’s embedded derivative.  
 
December 31, 2010 Convertible Note Installments (First Financing)
 
On December 31, 2010, the Company determined a fair value of $116,905 for the conversion option liability for the first installment of the convertible notes using the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of: -0-%, volatility of 117.5%, risk free rate of 1.02% and an expected term of 3 years.
 
On January 20, 2011, the Company determined a fair value of $333,652 for the conversion option liability for the second installment of the convertible notes using the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 116.06%, risk free rate of 1.07% and an expected term of approximately 3 years.
 
On March 9, 2011, the Company determined a fair value of $376,698 for the conversion option liability for the third installment of the convertible notes using the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 116.48%, risk free rate of 1.21% and an expected term of approximately 3 years.
 
On June 20, 2011, the Company determined a fair value of $95,155 for the conversion option liability for the fourth installment of the convertible notes using the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 109.87%, risk free rate of 0.68% and an expected term of approximately 3 years.
 
 
40

 
UNITED AMERICAN PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
 
5.   Embedded Derivative Liabilities (Continued)
 
On June 30, 2011, the Company determined a fair value of $142,246 for the conversion option liability for the fifth installment of the convertible notes using the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 103.96%, risk free rate of 0.81% and an expected term of approximately 3 years.
 
On December 31, 2011, the Company determined a fair value of $583,319 for the conversion option liability for its convertible notes using the Black Scholes Option Pricing Model based upon the following: dividend yield of -0-%, volatility of 102.66%, risk free rate of 0.45% and an expected term of approximately 2 years.
 
October 14, 2011 Convertible Note Installments (Second Financing)
 
On October 14, 2011, the Company determined a fair value of $504,896 for the conversion option liability for the first installment of the convertible notes using the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 109.29%, risk free rate of 0.24% and an expected term of approximately 3 years.
 
On November 29, 2011, the Company determined a fair value of $655,150 for the conversion option liability for the second installment of the convertible notes using the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 108.60%, risk free rate of 0.75% and an expected term of approximately 3 years.
 
On December 19, 2011, the Company determined a fair value of $29,690 for the conversion option liability for the third installment of the convertible notes using the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 107.94%, risk free rate of 0.75 % and an expected term of approximately 3 years.
 
As of December 31, 2011, the Company determined a fair value of $555,670 for the conversion option liability for its convertible notes using the Black Scholes Option Pricing Model based upon the following: dividend yield of -0-%, volatility of 105.15%, risk free rate of 0.75% and an expected term of approximately 2.75 years.
 
Based upon the decrease in the fair value of the conversion option liability, the Company recognized a non-cash gain included in other expense of $1,115,403 for the year ended December 31, 2011.
 
6.           Detachable Warrants

As described in Note 13, the Company issued a convertible note with detachable warrants. The Company accounted for these detachable warrants in accordance with ASC 470-20, which requires that the Company calculate the relative fair value of the warrants at the grant date to additional paid-in capital. The Company amortizes the debt discount associated with the warrants over the life of the convertible notes using the effective interest method.
 

 
 
41

 
UNITED AMERICAN PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010

6.           Detachable Warrants (Continued)

December 31, 2010 – Convertible Note Installments (First Financing)
 
On December 31, 2010, the Company determined a relative fair value of $45,434 for the detachable warrants for the first installment of the convertible notes. In calculating the relative fair value of the warrants the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of: -0-%, volatility of 94.1%, risk free rate: 2.01% and an expected term of 5 years.
 
On January 20, 2011, the Company determined a relative fair value of $78,062 for the detachable warrants for the second installment of the convertible notes. In calculating the relative fair value of the warrants the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of: -0-%, volatility of 104.65%, risk free rate: 2.06% and an expected term of 5 years.
 
On March 9, 2011, the Company determined a relative fair value of $106,132 for the detachable warrants for the third installment of the convertible notes. In calculating the relative fair value of the warrants the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 105.22% , risk free rate of 2.16% and an expected term of approximately 5 years.
 
On June 20, 2011, the Company determined a relative fair value of $29,276 for the detachable warrants for the fourth installment of the convertible notes.  In calculating the relative fair value of the warrants the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 105.87%, risk free rate of 1.55% and an expected term of approximately 5 years.
 
On June 30, 2011, the Company determined a relative fair value of $45,233 for the detachable warrants for the fifth installment of the convertible notes.  In calculating the relative fair value of the warrants the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 107.39%, risk free rate of 1.76% and an expected term of approximately 5 years.
 
October 14, 2011 – Convertible Note Installments (Second Financing)
 
On October 14, 2011, the Company determined a relative fair value of $157,388 for the detachable warrants for the first installment of the convertible notes. In calculating the relative fair value of the warrants the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 108.61%, risk free rate of 1.12% and an expected term of approximately 5 years.
 
On November 29, 2011, the Company determined a relative fair value of $209,317 for the detachable warrants for the second installment of the convertible notes. In calculating the relative fair value of the warrants the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 109.19%, risk free rate of .93% and an expected term of approximately 5 years.
 
On December 19, 2011, the Company determined a relative fair value of $13,788 for the detachable warrants for the third installment of the convertible notes. In calculating the relative fair value of the warrants the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 109.32%, risk free rate of .82% and an expected term of approximately 5 years.
 
 
42

 
 
UNITED AMERICAN PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
 
7.    Fair Value
 
The Company measures fair value in accordance with 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). The three levels of the fair value hierarchy are described below:
 
 
Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
 
 
Level 2
Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
 
 
Level 3
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
 
The following table sets forth the Company's consolidated financial assets and liabilities measured at fair value by level within the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 
     
Total
   
Level 1
   
Level 2
   
Level 3
 
 
LIABILITIES:
                       
                           
 
Conversion option liability
   
1,138,989
     
-
     
-
     
1,138,989
 
 
The following is a reconciliation of the conversion option liability and detachable warrant liability for which Level 3 inputs were used in determining fair value:
 
 
Beginning balance January 1, 2011
$
116,905
 
         
 
Initial recognition of debt derivative from issuance of 
   January 20, 2011, $150,000 convertible note
 
 333,652
 
         
 
Initial recognition of debt derivative from issuance of 
   March 9, 2011, $250,000 convertible note
 
376,698
 
         
 
Initial recognition of debt derivative from issuance of 
   June 20, 2011, $75,000 convertible note
 
95,155
 
         
 
Initial recognition of debt derivative from issuance of 
   June 30, 2011, $115,000 convertible note
 
142,246
 
         
 
Initial recognition of debt derivative from issuance of
   October 14, 2011, $400,000 convertible note
 
504,896
 
         
 
Initial recognition of debt derivative from issuance of 
   November 29, 2011, $550,000 convertible note
 
655,150
 
         
 
Initial recognition of debt derivative from issuance of 
   December 19, 2011, $25,000 convertible note
 
29,690
 
         
 
Decrease in fair value of debt derivative
 
(1,115,403)
 
         
         
 
Ending balance as of December  31, 2011
$
1,138,989
 
 
 
43

 
UNITED AMERICAN PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
 
7.   Fair Value (Continued)
 
During the year ended December 31, 2011, the loss on embedded derivatives of $96,280 in the consolidated statement of operations consisted of a gain on the change in fair value of $1,115,403 noted above and a loss of $1,211,683 which was the amount by which the embedded derivative liabilities exceeded the principal of the related notes payable on the date the notes were issued.
 
The Company’s conversion option liabilities are valued using pricing models and the Company generally uses similar models to value similar instruments. Where possible, the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility and correlations of such inputs. These consolidated financial liabilities do not trade in liquid markets, and as such, model inputs cannot generally be verified and do involve significant management judgment. Such instruments are typically classified within Level 3 of the fair value hierarchy. See Note 4 for Black Scholes Option Pricing Model inputs.
 
8.    Oil and Gas Properties
 
Predecessor

On October 19, 2009, the Company’s founders contributed proved oil and gas properties valued at $68,134.  These properties were received by our Companies’ founders as consideration for their services in brokering the sale of the 75% interest to Alamo Energy, Inc. on behalf of an unrelated third party.  As a result of the consideration, we own a twenty-five percent (25%) working interest in the Lozano lease, which is a currently producing asset with three wells.  The property was valued based upon the Company’s future net revenues in the wells discounted at a present value of 10%.  The Lozano lease covers approximately 110 gross acres and is located in Frio County, Texas.   The Company also owns a one hundred percent interest (100%) working interest in the Marcee lease located in Gonzales County Texas.  The Marcee lease contains one well and was being developed for production as of October 15, 2010.  In conjunction with the contribution, we recorded an asset retirement obligation of $14,705.  See Note 10.
 
Successor 

On October 15, 2010, the Company paid $250,000 to acquire oil, gas and mineral leases on the Lozano and Marcee properties. As a result of the asset purchase, we own a twenty-five percent (25%) working interest in the Lozano lease, which is a currently producing asset with three wells. The Lozano lease covers approximately 110 gross acres and is located in Frio County, Texas.  The Company has a one hundred percent interest (100%) working interest in the Marcee lease located in Gonzales County Texas. The Marcee lease contains one well, is being developed for production and has proved reserves.
 
As part of the Reverse Merger, the Company acquired an oil and gas lease in Anchorage, Alaska. Production on the properties has not commenced and there can be no assurance that any hydrocarbons will be economically recoverable; however, pre-production activities, such as a multi-phase exploration program of trenching, sampling, geophysical surveys and test drilling have commenced.
 
 
 
 
44

 
UNITED AMERICAN PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
8.           Oil and Gas Properties
 
On January 28, 2011, United American Petroleum Corp. entered and closed a purchase and sale agreement with Patriot Minerals, LLC, a Texas limited liability company for a $5,000 payment to a consultant. The Purchase Agreement provides, among other things, that United American Petroleum Corp. shall purchase multiple undivided working interests to certain existing wells and to certain leases located in Texas. In connection with the Purchase Agreement, United American Petroleum Corp. formed a wholly owned subsidiary, United Operating, LLC, a Texas limited liability company, for the purpose of operating the various interests set forth in the Purchase Agreement. The properties purchased from Patriot Minerals by United American Petroleum Corp. are producing at December 31, 2011. The Company is currently undergoing various reserve studies to assess potential production and to continue the development of the wells purchased.

On January 28, 2011, United American Petroleum Corp. entered and closed a purchase, sale and participation agreement with Gabriel Rosser, LP (“Gabriel”). The purchase agreement provides that the Company shall purchase Gabriel's undivided 50.83% working interest and 39.131% revenue interest in the Gabriel 2 SWD Gabriel 3, 4, 5, 9, 15, Rosser #2 and #4 and Koi #1wells in exchange for consideration of $10 and the assumed and paid $84,975 of liabilities, which were owed to certain vendors of Gabriel. The properties purchased from Gabriel Rosser, LP by United American Petroleum Corp. are unevaluated and non-producing as of December 31, 2011, and the Company is currently undergoing various reserve studies to assess potential production and develop the wells purchased.

On November 4, 2011, United American Petroleum Corp. entered into and closed an Agreement with Alamo Energy Corp., a Nevada corporation pursuant to which United American acquired a 75% working interest in an oil and gas lease totaling approximately 110 gross acres located in Frio County, Texas and all wellbores and personal property related thereto for the total purchase price of $160,000. The Company currently has a 100% working interest in the Lozano lease, which is a producing property with three wells.

On November 30, 2011, the Company entered into and closed an agreement with McKenzie Oil Corp. pursuant to which United American acquired a 100% working interest in what is designated as the McKenzie State Well No. 1, located in Pecos County, Texas, in exchange for an aggregate cash sum of $550,000 and 50,000 shares of the Company’s common stock valued at $40,500. The McKenzie well currently has one producing well valued at $80,655. The remaining wells are classified as unproved.
 
Presented below are unaudited pro-forma consolidated statements of operations for the year ended December 31, 2011, when considering the operating results of the Lozano and McKenzie working interest if acquired on October 15, 2010.

     
United American Petroleum Corp.
 
Lozano
 
Pro Forma
Combined
 
 
Oil Sales
 
$
10,213
 
40,171
 
$ 50,384
 
                   
 
Net income (loss)
   
(95,650
)
17,760
 
(77,890)
 
                   
 
Net income (loss) per share basic and diluted
           
$ 0.00
 
                   
 
Weighted average number of shares
           
37,026,923
 
 

 
 
45

 
UNITED AMERICAN PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
 
8.   Oil and Gas Properties (Continued)

Presented below are unaudited pro-forma consolidated statements of operations for the year ended December 31, 2011, when considering the operating results of the Lozano and McKenzie working interest if acquired on January 1, 2011.

     
United American Petroleum Corp.
 
Lozano
McKenzie
 
Pro Forma
Combined
 
 
Oil Sales
 
$
139,692
 
80,819
67,101
 
287,612
 
                       
 
Net income (loss)
   
(1,083,341
)
47,463
(168,277
 
(1,204,155
                       
 
Net income (loss) per share basic and diluted
 
$
         
(0.03
                       
 
Weighted average number of shares
               
43,954,258
 

9.            Related Party Payable

As part of the Reverse Merger, the Company assumed a related party payable owed to an individual who is a shareholder of the Company.  The related party payable was fully paid in December 2011.

10.          Note Payable – Related Party

As part of the Reverse Merger, the Company assumed two notes payable owed to an individual who is a shareholder of the Company. The notes payable are unsecured and each has a face value of $25,000 with a fixed interest rate of 10% per annum. The notes payable are due on demand and were fully paid in January 2011.

11.          Note Payable
 
On August 10, 2010, the Company issued a promissory note to an individual in the amount of $250,000. The note matures on August 10, 2011 and is subject to an annual interest of 10%. The note was fully paid in January 2011.
 
12.         Other Payable

As of December 31, 2011, United Operating, LLC received cash in the amount of $431,151 to perform work on behalf of various working interest owners including repairs, drilling and production related costs.
 
13.         Convertible Note Payable
 
Credit Facility – December 31, 2010
 
On December 31, 2010, the Company entered into a credit facility with one investor pursuant to which the investor agreed to lend up to $2,250,000 to us in multiple installments in exchange for a senior secured convertible promissory note with a conversion price of $0.50 per share and five-year warrants to acquire shares of common stock at an exercise price of $1.00 per share in the amount of each installment. The credit facility provides that the investor will lend additional installments to us in amounts as requested by us; provided however, that we provide the proposed use of proceeds for each requested amount. The investor shall have sole discretion in determining whether the proposed use of proceeds meets those requirements. The notes mature on December 31, 2013, or upon default, whichever is earlier and bear interest at an annual rate of 10%.
 
 
46

 
UNITED AMERICAN PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
 
13.    Convertible Note Payable (Continued)
 
The first installment of $620,000 was delivered on December 31, 2010 and we issued 620,000 warrants in connection with the first installment.
 
The second installment of $150,000 was delivered to us on January 20, 2011 and we issued 150,000 warrants in connections with the second installment.
 
The third installment of $250,000 was delivered to us on March 9, 2011 and we issued 250,000 warrants in connection with the third installment.
 
The fourth installment of $75,000 was delivered to us on June 20, 2011 and we issued 75,000 warrants in connection with the fourth installment.
 
The fifth installment of $115,000 was delivered to us on June 30, 2011 and we issued 115,000 warrants in connection with the fifth installment.
 
Credit Facility – October 14, 2011
 
On October 14, 2011, we entered into a Note and Warrant Purchase Agreement with an investor pursuant to which the investor agreed to lend up to $1,500,000 in multiple installments in exchange for a senior secured convertible promissory note with a conversion price of $0.50 per share and five-year warrants to acquire shares of common stock at an exercise price of $1.00 per share in the amount of each installment. The first installment of $400,000 was delivered on the date of the Purchase Agreement and we issued 400,000 warrants to the investor in connection with the first installment. The notes matures on October 14, 2014, or upon default, whichever is earlier and bear interest at an annual rate of 10%.
 
The first installment of $400,000 was delivered on October 14, 2011 and we issued 400,000 warrants in connection with the first installment.
 
The second installment of $550,000 was delivered on November 29, 2011 and we issued 550,000 warrants in connection with the second installment.
 
The third installment of $25,000 was delivered on December 19, 2011 and we issued 25,000 warrants in connection with the third installment.
 
Using a pro rata contribution, the Company allocated the proceeds of the January 20, 2011, March 9, 2011, June 20, 2011, June 30, 2011, October 14, 2011, November 29, 2011 and December 19, 2011 first to the relative fair value of the warrants and the remainder to the fair value of the embedded derivative on the date of grant as follows:
 
   
January 20, 2011
Note
   
March 9, 2011
Note
   
June 20, 2011
Note
   
June 30, 2011
Note
   
October 14, 2011
Note
   
November 29, 2011
Note
   
December 19, 2011
Note
   
 
Total
 
                                                 
Total Proceeds
  $ 150,000     $ 250,000     $ 75,000     $ 115,000     $ 400,000     $ 550,000     $ 25,000     $ 1,565,000