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EX-31 - EXHIBIT 31.1 - Brenham Oil & Gas Corp.ex31z1.htm


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

  

ý                                       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

 

  

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

 

For the transition period from          to

 

Commission file number: 333-169507

BRENHAM OIL & GAS CORP.

(Exact Name Of Registrant As Specified In Its Charter)

 

Nevada

27-2413874

(State of Incorporation)

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

  

  

601 Cien Street, Suite 235 Kemah, TX

77565-3077

(Address of Principal Executive Offices)

(ZIP Code)

 

  Registrant's Telephone Number, Including Area Code: (281) 334-9479

 

 

 

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.  Yes  x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No ¨

 

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

 

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

The number of shares outstanding of each of the issuers classes of equity as of November 13, 2012 is 110,413,621 shares of common stock.



1





Item

 

Description

 

Page

 

 

PART I FINANCIAL INFORMATION

 

 

ITEM 1.

 

FINANCIAL STATEMENTS

 

3

ITEM 2.

 

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

10

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

12

ITEM 4T.

 

CONTROLS AND PROCEDURES

 

13

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

ITEM 1.

 

LEGAL PROCEEDINGS

 

13

ITEM 1A.

 

RISK FACTORS

 

13

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

13

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

 

13

ITEM 4.

 

MINE SAFETY DISCLOSURES

 

13

ITEM 5.

 

OTHER INFORMATION

 

13

ITEM 6.

 

EXHIBITS

 

13




2




PART I - FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS

 

 

Financial Statements


Financial Statements

 

Unaudited Consolidated Balance Sheets – September 30, 2012 and December 31, 2011

4

Unaudited Consolidated Statements of Operations – Three and Nine months Ended September 30, 2012 and 2011 and for the Period from November 7, 1997 (inception) to September 30, 2012

5

Unaudited Consolidated Statements of Cash Flows – Nine months Ended September 30, 2012 and 2011 and for the Period from November 7, 1997 (inception) to September 30, 2012

6

Notes to Unaudited Consolidated Financial Statements

7




3




BRENHAM OIL & GAS CORP.

(An Exploration Stage Company)

CONSOLIDATED BALANCE SHEETS

(Unaudited)


 

September 30, 2012

December 31, 2011

ASSETS

 

 

Current assets:

 

 

Cash and cash equivalents

$

6,502 

$

6,426 

Accounts receivable – related party

697 

Total current assets

7,199 

6,426 

 

 

 

Oil & gas properties - unproved

8,400 

8,400 

Total assets

$

15,599 

$

14,826 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

Current liabilities:

 

 

Accounts payable

$

9,221 

$

11,156 

Accounts payable – related party

232,675 

108,698 

Total liabilities

241,896 

119,854 

 

 

 

Commitments and contingencies

 

 

 

Stockholders’ deficit:

 

 

Preferred stock, $0.0001 par value, 10,000,000 shares authorized, 0 shares issued and outstanding

Common stock, $0.0001 par value, 200,000,000 shares authorized; 110,577,093 and 110,477,093 shares issued, respectively; 110,413,621 and 110,325,621 shares outstanding, respectively

11,058 

11,048 

Additional paid-in capital

106,608 

101,618 

Accumulated deficit during the exploration stage

(342,251)

(217,083)

Less treasury stock, at cost; 163,472 and 151,472 shares, respectively

(1,712)

(611)

Total stockholders’ deficit

(226,297)

(105,028)

Total liabilities and stockholders’ deficit

$

15,599 

$

14,826 


See accompanying notes to the unaudited consolidated financial statements.




4




BRENHAM OIL & GAS CORP.

(An Exploration Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 AND FOR

THE PERIOD FROM NOVEMBER 7, 1997 (INCEPTION) TO SEPTEMBER 30, 2012

(Unaudited)


 

For the Three Months Ended

For the Nine months Ended

Inception to

 

September 30,  2012

September 30, 2011

September 30,  2012

September 30, 2011

September 30, 2012

 

 

 

 

 

 

Revenue

$

127 

$

347 

$

538 

$

1,018 

$

111,647 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

General and administrative

48,618 

67,762 

125,706 

129,378 

459,069 

 

 

 

 

 

 

Operating loss

(48,491)

(67,415)

(125,168)

(128,360)

(347,422)

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

Interest income

19,123 

Interest expense

(1,150)

Total other income

17,973 

 

 

 

 

 

 

Loss before income taxes

(48,491)

(67,415)

(125,168)

(128,360)

(329,449)

Income tax expense

12,802 

Net loss

$

(48,491)

(67,415)

$

(125,168)

$

(128,360)

$

(342,251)

 

 

 

 

 

 

Net loss per common share – basic and diluted

$

(0.00)

$

(0.00)

$

(0.00)

$

(0.00)

 

 

 

 

 

 

 

Weighted average number of common shares outstanding – basic and diluted

110,414,012 

106,974,368 

110,384,683 

102,335,149 

 


See accompanying notes to the unaudited consolidated financial statements.



5




BRENHAM OIL & GAS CORP.

(An Exploration Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 AND FOR

THE PERIOD FROM NOVEMBER 7, 1997 (INCEPTION) TO SEPTEMBER 30, 2012

(Unaudited)


 

For the Nine months Ended

Inception to

 

September 30,  2012

September 30, 2011

September 30, 2012

Cash flows from operating activities:

 

 

 

Net loss

$

(125,168)

$

(128,360)

$

(342,251)

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

Stock-based compensation

5,000 

35,700 

86,166 

Non-cash compensation

19,880 

19,880 

Changes in operating assets and liabilities:

 

 

 

Accounts receivable – related party

(697)

(697)

Accounts payable

(1,935)

23,962 

9,221 

Net cash used in operating activities

(122,800)

(48,818)

(227,681)

 

 

 

 

Cash flows from financing activities

 

 

 

Advances from related parties, net

123,977 

48,742 

212,795 

Payments for acquisition of treasury stock

(1,101)

(95)

(1,712)

Proceeds from sale of common stock

23,100 

Net cash provided by financing activities

122,876 

48,647 

234,183 

 

 

 

 

Net increase (decrease) in cash

76 

(171)

6,502 

Cash and cash equivalents, beginning of period

6,426 

6,394 

Cash and cash equivalents, end of period

$

6,502 

$

6,223 

$

6,502 

 

 

 

 

Supplemental disclosures:

 

 

 

Interest paid

$

$

$

1,150 

Income taxes paid

$

$

$

12,802 

Non-cash transactions:

 

 

 

Issuance of stock for oil & gas properties

$

$

8,400 

$

8,400 


See accompanying notes to the unaudited consolidated financial statements.



6



BRENHAM OIL & GAS, CORP.

(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 - Summary of Significant Accounting Policies

 

Basis of Presentation


The accompanying unaudited interim consolidated financial statements of Brenham Oil & Gas Corp. (“Brenham”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in Brenham's Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2011. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the unaudited interim consolidated financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year as reported in the Form 10-K have been omitted.


Organization, Ownership and Business

 

Brenham Oil & Gas, Inc. was incorporated under the laws of the State of Texas in November 1997 and became a wholly-owned subsidiary of American International Industries, Inc. ("American") in November 1997. On April 21, 2010, the Company was re-domiciled in Nevada as Brenham Oil & Gas Corp. and Brenham Oil & Gas, Inc. became a wholly-owned subsidiary of Brenham. American was issued 64,977,093 shares of common stock of Brenham in connection with the reorganization in exchange for all shares outstanding of Brenham Oil & Gas, Inc. The reorganization has been retroactively applied to the consolidated financial statements for all periods presented.

 

We have an oil and gas mineral royalty interest covering a twenty-four acre tract of land located in Washington County, Texas, which is carried on the balance sheet at $0. The royalty interest is currently leased by Anadarko Petroleum Corporation for a term continuing until the covered minerals are no longer produced in paying quantities from the leased premises.  In July 2011, we purchased unproved property.

 

Royalties on the minerals produced are currently incidental and paid to Brenham as follows: (i) for oil and other liquid hydrocarbons, and (ii) for gas (including casing-head gas), the royalty is one-sixth of the net proceeds realized by Anadarko Petroleum Corporation on the sale thereof, less a proportionate part of ad valorem taxes and production, severance, or other excise taxes. In addition, Brenham is entitled to shut-in royalties of $1 per acre of land for every ninety day period within which one or more of the wells in leased premises, or lands pooled therewith, are capable of producing paying quantities, but such wells are either shut-in or production is not being sold. From November 7, 1997 (inception) through September 30, 2012, Brenham has received $111,647 in royalty income, which is in revenue in the consolidated statement of operations.

 

Brenham is an exploration stage company and will continue to be so until commencement of substantial production from its oil and gas operations.

 

Use of Estimates

 

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.


Reclassifications


Certain reclassifications have been made to amounts in prior periods to conform to the current period presentation. All reclassifications have been applied consistently to the periods presented.



7



Cash and Cash Equivalents

 

Brenham considers all short-term securities purchased with a maturity of three months or less to be cash equivalents.


 

Accounts Receivable

 

Accounts receivable consist primarily of advances to related parties and are carried at the expected net realizable value.


Oil & Gas Properties – Unproved


Currently, oil & gas properties owned by Brenham have minimal production to maintain the lease and are considered unproved.  Management will assess the appropriate method of accounting to use for amortization, successful efforts or full cost, once these properties have been proved.


Income Taxes

 

Brenham is a taxable entity and recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when the temporary differences reverse. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the enactment date of the rate change. A valuation allowance is used to reduce deferred tax assets to the amount that is more likely than not to be realized. Interest and penalties associated with income taxes are included in selling, general and administrative expense.

 

Brenham has adopted ASC 740-10 “Accounting for Uncertainty in Income Taxes” which prescribes a comprehensive model of how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. ASC 740-10 states that a tax benefit from an uncertain position may be recognized if it is "more likely than not" that the position is sustainable, based upon its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. As of September 30, 2012, Brenham had not recorded any tax benefits from uncertain tax positions.

 

Net Loss Per Share

 

Net loss per common share is computed by dividing the net loss by the weighted average number of shares outstanding during a period. The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding.  Basic and diluted net losses per share were the same, as there were no common stock equivalents outstanding.

 

Subsequent Events

 

Brenham has evaluated all transactions from September 30, 2012 through the financial statement issuance date for subsequent event disclosure consideration.

 

Recent Accounting Pronouncements

 

There were various accounting standards and interpretations issued recently, none of which are expected to a have a material impact on our financial position, operations or cash flows.

 

Note 2. Receivables and Payables - Related Party

 

Related party receivables at September 30, 2012 represent $697 advanced to L. Rogers Hardy for anticipated reimbursable expenses. Related party payables at September 30, 2012 represent $229,219 owed to American as advances to assist with Brenham's operating expenses and $3,456 owed to Scott Gaille for operating expenses. Related party payables at December 31, 2011 represent $100,447 owed to American as advances to assist with Brenham's operating expenses, and $3,456 and $4,795 owed to Scott Gaille and Bryant Mook, respectively, for operating expenses. Scott Gaille is the former President of Brenham and Bryant Mook is the Vice President of Brenham. These advances are non-interest bearing and due on demand.

 

American will fully fund the operations of Brenham for the next twelve months.



8



Note 3. Equity

 

In December 1997, Brenham sold 64,977,093 common shares to a related party for $1,000.

 

In April 2010, American, the sole stockholder of Brenham Oil & Gas, Inc., entered into a Separation and Distribution Agreement to spin off Brenham Oil & Gas, Inc. from its parent. In conjunction with this transaction, American formed Brenham Oil & Gas, Corp., a Nevada corporation, with authorized common stock of 200,000,000 shares and authorized preferred stock of 10,000,000 shares. Brenham issued 64,977,093 shares of common stock to American for all shares of Brenham Oil & Gas, Inc., of which American issued as a dividend 10,297,019 shares to the existing stockholders of American, on a one-for-one basis. Brenham issued 13,000,000 shares of common stock for cash consideration of $22,100 and 22,000,000 shares for services valued at $45,466.  American maintains control of Brenham through ownership of 58,680,074 shares of Brenham's common stock, representing about 53% of the outstanding shares as of September 30, 2012.


On July 22, 2011, Brenham Oil & Gas Corp., entered into an Asset Purchase and Sale Agreement (the “Agreement”) with Doug Pedrie, Davis Pedrie Associates, LLC and Energex Oil, Inc. (“Sellers”), pursuant to which Brenham acquired 700 acres of unproved property located in the Permian Basin near Abilene, Texas. The Agreement provides for the Sellers to complete all oil lease assignments by August 15, 2011. The purchase consideration for the acquisition is the issuance to Sellers of 2,000,000 restricted shares of Brenham common stock valued at $8,400, with an additional 2,000,000 restricted shares to be issued contingent upon realization of certain production targets in 2012. On March 8, 2012, this agreement was rescinded and replaced with an agreement that in consideration for the Brenham share issuance, Brenham has a 2.5% overriding royalty interest in all of the leases associated with this property and any properties acquired or renewed in the future within a ten-mile radius. In addition, the contingency to issue additional shares was removed. This property is on the balance sheet as "Oil & gas properties - unproved" for $8,400.

 

On April 3, 2012, Brenham issued 100,000 shares valued at $5,000 to a third party for services.  For the nine months ended September 30, 2012, Brenham paid $1,101 to repurchase 12,000 shares of its common stock for treasury.  For the year ended December 31, 2011, Brenham paid $611 to repurchase 151,472 shares of its common stock for treasury, and issued 4,500,000 shares of its common stock valued at $18,900 for services to employees, directors and third parties, and 4,000,000 shares of its common stock valued at $16,800 to Brenham’s parent, American, for services. 




9




ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


As used in this Quarterly Report, the terms "we", "us", "our" and the "Company" means Brenham Oil & Gas, Corp., a Nevada corporation, and its subsidiary, Brenham Oil & Gas, Inc. (collectively, "Brenham"). To the extent that we make any forward-looking statements in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report, we emphasize that forward-looking statements involve risks and uncertainties and our actual results may differ materially from those expressed or implied by our forward-looking statements. Our forward-looking statements in this Quarterly Report reflect our current views about future events and are based on assumptions and are subject to risks and uncertainties. Generally, forward-looking statements include phrases with words such as "expect", "anticipate", "intend", "plan", "believe", "seek", "estimate" and similar expressions to identify forward-looking statements.


Overview

 

Our business objective is to become an independent, oil and gas-focused exploration and production company with the intent to acquire prospect inventory in the United States and international locations, with an initial focus on Africa. We believe that an experienced management team, equipped with industry-leading data, newly available seismic technologies, industry contacts and adequate funding, could acquire a prospect inventory that could be competitive with other relevant oil and gas companies. After considering numerous global oil and gas-producing regions in which to focus our exploration and development efforts, we decided that an initial focus on Africa was appropriate due to the largely unrealized hydrocarbon potential offered within this region. We believe that we can be successful in assembling such an inventory and that our potential asset portfolio would be attractive. Prior to joining Brenham, certain persons on our management team played a significant role in the assembly of asset portfolios in Africa.

 

The discussion of the results of operations represents our historical results. The following discussion may not be indicative of future results for many reasons, including the continuing trend in the financial markets, the credit crisis and related turmoil in the global financial system which may be expected to have a material adverse impact on our plan of operation and our liquidity and our financial condition. If conditions in the financial markets do not improve, our ability to access the capital markets or borrow money may be restricted at a time when we would like, or need, to raise capital. This could have an adverse impact on our flexibility to react to changing economic and business conditions and on our ability to fund our operations and capital expenditures in the future. Additionally, changing economic conditions could lead to reduced demand for natural gas and oil, or further reductions in the prices of natural gas and oil, or both, which could have a negative impact on our ability to implement our plan of operations and related financial positions, results of operations and cash flows. While the ultimate outcome and impact of the recent trends in the financial markets cannot be predicted, it may have a material adverse effect on our plan of operation, future liquidity, results of operations and financial condition.

 

The discussion of the results of operations represents our historical results. The following discussion may not be indicative of future results.

 

Three and Nine Months Ended September 30, 2012 vs. 2011

 

Net loss for the three months ended September 30, 2012 was $48,491, compared to $67,415 for the three months ended September 30, 2011.  Revenue for the three months ended September 30, 2012 was $127 for oil and gas mineral royalty interests. General and administrative expenses for the three months ended September 30, 2012 were $48,618 and consisted primarily of executive compensation, travel, and legal and professional expenses.  Revenue for the three months ended September 30, 2011 was $347 for oil and gas mineral royalty interests. General and administrative expenses for the three months ended September 30, 2011 were $67,762, and consisted of travel, consulting, and legal and professional expenses associated with the spin-off transaction and consulting fees to locate oil and gas properties.


Net loss for the nine months ended September 30, 2012 was $125,168, compared to $128,360 for the nine months ended September 30, 2011.  Revenue for the nine months ended September 30, 2012 was $538 for oil and gas mineral royalty interests. General and administrative expenses for the nine months ended September 30, 2012 were $125,706 and consisted primarily of executive compensation, travel, and legal and professional expenses.  Revenue for the nine months ended September 30, 2011 was $1,018 for oil and gas mineral royalty interests. General and administrative expenses for the nine months ended September 30, 2011 were $129,378, and consisted of travel, consulting, and legal and professional expenses associated with the spin-off transaction and consulting fees to locate oil and gas properties.



10



Liquidity and Capital Resources

 

At September 30, 2012 and December 31, 2011, total assets were $15,599 and $14,826, respectively. We had cash of $6,502 and $6,426 at September 30, 2012 and December 31, 2011, respectively, and accounts receivable from related parties of $697 at September 30, 2012. At September 30, 2012 and December 31, 2011, long-term assets consisted of oil & gas properties - unproved of $8,400.

 

At September 30, 2012, total liabilities were $241,896, consisting of $9,221 in accounts payable and $232,675 in accounts payable to related parties.  At December 31, 2011, total liabilities were $119,854, consisting of $11,156 in accounts payable, and $108,698 in accounts payable to related parties.


We had negative cash flow from operations of $122,800 during the nine months ended September 30, 2012 as a result of a net loss of $125,168, an increase in accounts receivable from related parties of $697, and a decrease in accounts payable of $1,935, offset by stock-based compensation of $5,000.  We had negative cash flow from operations of $48,818 during the nine months ended September 30, 2011 as a result of a net loss of $128,360, offset by stock-based compensation of $35,700, other non-cash compensation of $19,880, and an increase in accounts payable of $23,962.

 

For the nine months ended September 30, 2012, cash provided by financing activities was $122,876, consisting of $123,977 in advances from related parties, offset by $1,101 for the repurchase of 12,000 shares of Brenham's common stock for treasury.  Cash provided by financing activities for the nine months ended September 30, 2011 was $48,647, consisting of advances from related parties, offset by $95 for the repurchase of 142,741 shares of Brenham’s common stock for treasury.

 

We are an exploration stage company and will continue to be so until commencement of substantial production from our future oil and gas properties, none of which have been identified to date. Future revenue will depend upon successful selection of future prospects, drilling results, additional and timely capital funding at terms and conditions satisfactory to us, of which there can be no assurance, and access to suitable infrastructure. Further, we will not be able to commence our exploration program until we have entered into certain agreements with government agencies of respective countries and/or other oil and gas companies. Until then our primary sources of liquidity are expected to be net proceeds from future offerings and funds from future private and public equity placements and debt funding.

 

In July 2011, we purchased a lease with 20 oil wells situated on approximately 700 acres in the Permian Basin near Abilene, Texas.  We issued 2,000,000 shares of Common Stock with an additional 2,000,000 shares to be issued contingent upon realization of certain production targets in 2012.  The oil field contains estimated probable reserves of approximately 1.4 million barrels of oil.  The net present value (10% discount rate after development and operating costs) is approximately $20 million.  On March 8, 2012, this agreement was rescinded and replaced with an agreement that in consideration for the Brenham share issuance, Brenham has a 2.5% overriding royalty interest in all of the leases associated with this property and any properties acquired or renewed in the future within a ten-mile radius. In addition, the contingency to issue additional shares was removed.

 

We expect to incur substantial expenses and generate significant operating losses as we pursue our efforts to identify prospects, develop those prospects and as we:


·

purchase and analyze seismic data in order to identify future prospects;

·

opportunistically invest in additional oil and gas leases and concession licenses;

·

develop our discoveries which we determine to be commercially viable; and

·

incur expenses related to operating as a public company and compliance with regulatory requirements.


Our future financial condition and liquidity will be impacted by, among other factors, the success of selection of prospects, our future exploration and appraisal drilling program, the number of commercially viable oil and gas discoveries made and the quantities of oil and gas discovered, the speed with which we can bring such discoveries to production, and the actual cost of exploration, appraisal and development of our prospects.

 



11



Until such time as we can identify specific prospects, we cannot determine with any certainty the amount of capital that we will be required to raise to fund each potential prospect. To date, we have not begun negotiations with any investment bank, financial institution or other source of funding for the purpose of raising either equity or debt capital, nor have we negotiated with any potential joint venture partner for the purpose of pursuing any potential prospect. Only when and if we identify prospects and seek to enter into contracts, licenses or other arrangements to pursue such prospects will we be able to determine the amount of funding that will be required for each such prospect. We have no arrangements with our executive officers or principal shareholders to provide any funding and any funding that they may be requested to provide may be limited.


Additional funding may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our shareholders. For example, if we raise additional funds by issuing additional equity securities, further dilution to our existing shareholders will result. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail one or more of our exploration and appraisal drilling programs. We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our prospects which we would otherwise develop on our own, or with a majority working interest.

 

Contractual Obligations

 

In the future, we may be party to the following contractual arrangements, which will subject us to further contractual obligations:


·

credit facilities;

·

contracts for the lease of drilling rigs;

·

contracts for the provision of production facilities;

·

infrastructure construction contracts; and

·

long term oil and gas property lease arrangements.


Off-Balance Sheet Arrangements

 

As of September 30, 2012 and December 31, 2011, we did not have any off-balance sheet arrangements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term "market risks" refers to the risk of loss arising from changes in commodity prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures. All of our market risk sensitive instruments will be entered into for purposes of risk management and not for speculation.

 

Due to the historical volatility of commodity prices, if and when we commence production, we may enter into various derivative instruments to manage our exposure to volatility of commodity market prices. We may use options (including floors and collars) and fixed price swaps to mitigate the impact of downward swings in commodity prices to our cash flow. All contracts will be settled with cash and would not require the delivery of physical volumes to satisfy settlement. While in times of higher commodity prices this strategy may result in our having lower net cash inflows than we would otherwise have if we had not utilized these instruments, management believes the risk reduction benefits of such a strategy would outweigh the potential costs.

 

We may borrow under fixed rate and variable rate debt instruments that give rise to interest rate risk. Our objective in borrowing under fixed or variable rate debt is to satisfy capital requirements while minimizing our costs of capital.



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ITEM 4T. CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures. As of September 30, 2012, the Company's chief executive officer and chief financial officer conducted an evaluation regarding the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act. Based upon the evaluation of these controls and procedures, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Changes in internal controls. During the quarterly period covered by this report, no changes occurred in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. RISK FACTORS


For the nine months ended September 30, 2012, there were no material changes from risk factors as disclosed in Company’s annual report for the year ended December 31, 2011.


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

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

None.

 

ITEM 5. OTHER INFORMATION

None.

 

ITEM 6. EXHIBITS

 

The following documents are filed as exhibits to this report on Form 10-Q or incorporated by reference herein. Any document incorporated by reference is identified by a parenthetical reference to the SEC filing that included such document.

 

Exhibit No.

Description

31.1

Certification of CEO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002

31.2

Certification of CFO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002

32.1

Certification of CEO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

32.2

Certification of CFO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

101.LAB

XBRL Taxonomy Extension Label Linkbase

101.PRE

XBRL Taxonomy Extension Presentation Linkbase












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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

 

 

By /s/ Daniel Dror

Daniel Dror

Chief Executive Officer, President, and Chairman

November 13, 2012

 

 

By /s/ Sherry L. McKinzey

Sherry L. McKinzey

Director, Chief Financial Officer, and Vice-President

November 13, 2012



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