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EX-32.1 - EXHIBIT 32.1 - Surge Global Energy, Inc.ex32-1.htm

 

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013

 

OR

 

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

 

FOR THE TRANSITION PERIOD FROM ___________ TO ____________.

 

Commission file number 0-24269

 

 

  SURGE GLOBAL ENERGY, INC.  
  (Exact name of registrant as specified in its charter)  

Delaware   34-1454529

(State or jurisdiction of incorporation or organization)

  (Employer Identification No.)

  75-153 MERLE DRIVE, SUITE B  
  PALM DESERT, CALIFORNIA 92211  
  (Address of Principal Executive Offices)  

 

Issuer’s telephone number: 800-284-3898

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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 website, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the 12 preceding months (or such shorter period that the registrant was required to submit and post such file). YES [X] NO [  ]

 

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

 

Large Accelerated Filer [  ] Accelerated Filer [  ]
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]

 

As of November 14, 2013, the Registrant had 12,919,673 shares of common stock issued and outstanding.

 

 

  

 
 

 

TABLE OF CONTENTS

 

Part I - Financial Information   
    
Item 1. Financial Statements (Unaudited)  3
    
Consolidated Balance Sheets  F-1
    
Consolidated Statements of Operations and Comprehensive Income (Loss)  F-2
    
Consolidated Statements of Cash Flows  F-3
    
Notes to Consolidated Financial Statements  F-6
    
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  4
    
Item 3. Quantitative and Qualitative Disclosures About Market Risk  11
    
Item 4. Controls and Procedures  11
    
Part II - Other Information   
    
Item 1. Legal Proceedings  12
    
Item 1A. Risk Factors  12
    
Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds  13
    
Item 3. Defaults Upon Senior Securities  13
    
Item 4. Mining Safety Disclosures  13
    
Item 5. Other Information  13
    
Item 6. Exhibits  13
    
Signatures 14

 

2
 

 

SURGE GLOBAL ENERGY, INC.

(AN EXPLORATION STAGE COMPANY)

INDEX TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

 

Item 1. Financial Statements (Unaudited)

 

   Page No
    
Consolidated Balance Sheets at September 30, 2013 (unaudited) and December 31, 2012  F-1
    
Unaudited Consolidated Condensed Statements of Operations and Comprehensive Income (Loss) for the Quarters Ended September 30, 2013 and September 30, 2012, and for the period from January 1, 2005 (inception of exploration stage) through September 30, 2013  F-2
    
Unaudited Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2013 and 2012, and for the period from January 1, 2005 (inception of exploration stage) through September 30, 2013  F-3
    
Notes to Unaudited Consolidated Condensed Financial Statements  F-6 - F-15

 

3
 

 

SURGE GLOBAL ENERGY, INC.

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS

 

   September 30, 2013   December 31, 2012 
   (unaudited)     
ASSETS          
Current assets:          
Cash and cash equivalents  $184,716   $90,541 
Accounts Receivable   1,394    - 
 Prepaid expenses   7,750    8,991 
Total current assets   193,860    99,532 
           
Oil and gas properties (net of amortization of $374)   242,096    - 
Investment in Andora Energy (Note 2)   1,658,086    1,733,632 
Property and equipment of $49,368 and $36,345 respectively, net of accumulated depreciation of $36,707 and 36,345, respectively   12,661    - 
Security Deposits   5,000    - 
           
Total assets  $2,111,703   $1,833,164 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued liabilities  $110,083   $39,243 
Loans payable-related parties   393,000    - 
Total current liabilities   503,083    39,243 
           
Total liabilities   503,083    39,243 
           
Commitments and contingencies   -    - 
           
Stockholders’ equity :          
Preferred stock, par value $0.001 per share; 10,000,000 shares authorized:   -    - 
Series A - none issued and outstanding   -    - 
Series B - none issued and outstanding   -    - 
Special Voting Preferred - 0 shares issued and outstanding, respectively   -    - 
Common stock, par value $0.001 per share; 400,000,000 shares authorized; 12,719,673 and 8,802,869 shares issued and outstanding, respectively   12,720    8,803 
Additional paid-in capital   55,488,409    55,040,326 
Common stock subscriptions   -    100,000 
Accumulated other comprehensive income (loss)   (75,546)   - 
Accumulated deficit   (12,337,512)   (12,337,512)
Deficit from inception of exploration stage   (41,479,451)   (41,017,696)
           
 Total stockholders’ equity   1,608,620    1,793,921 
           
Total liabilities and stockholders’ equity  $2,111,703   $1,833,164 

 

See accompanying footnotes to these unaudited condensed consolidated financial statements

 

F-1
 

 

SURGE GLOBAL ENERGY, INC.

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

 

   For the Three Months Ending
September 30,
   For the Nine Months Ending
September 30,
   For the period from
January 1, 2005
(date of inception of
exploration stage)
through
 
   2013   2012   2013   2012   September 30, 2013 
                     
Revenues:                         
Oil and Gas Revenues  $1,717   $-   $1,717    $$ -   $1,717 
Oil and gas expenses   (697)   -    (697)   -    (697)
Gross Income   1,020    -    1,020    -    1,020 
Operating Expenses:                         
Selling, general and administrative expense   236,803    59,483    462,076    201,749    24,878,994 
Accretion, depreciation and amortization   362    635    362    1,016    479,692 
Oil and gas impairment   -    -    -    -    11,425,969 
Total operating expenses   237,165    60,118    462,438    202,765    36,784,665 
Loss from operations   (236,145)   (60,118)   (461,418)   (202,765)   (36,783,635)
Equity in losses from affiliates   -    -    -    -    (2,099,663)
Impairment of marketable securities   -    -    -    -    (3,707,513)
Loss on redemption of preferred shares   -    -    -    -    (105,376)
Revaluation loss net of warrant liability   -    -    -    -    (431,261)
Gain (loss) on sale of marketable securities   -    (51)   -    (51)   1,067,814 
Warrants issued for Peace Oil acquisition        -    -    -    (368,000)
Interest income (expense) net   -    (20,034)   (337)   (21,194)   (4,256,018)
Gain on disposition of Peace Oil Corp.        -    -    -    1,525,105 
Loss from continuing operations, before income taxes and non-controlling interest   (236,145)   (80,203)   (461,755)   (224,010)   (45,158,547)
Provision for income taxes   -    -    -    -    - 
Loss before non-controlling interest   (236,145)   (80,203)   (461,755)   (224,010)   (45,158,547)
Gain applicable
to non- controlling interest
   -    -    -    -    3,679,096 
Net loss  $(236,145)  $(80,203)  $(461,755)  $(224,010)  $(41,479,451)
Other comprehensive income:                         
Unrealized gain (loss) on available for sale securities   (75,546)   (959,450)   (75,546)   (959,450)   (75,546)
Foreign currency translation adjustment   -    -    -    -    - 
Comprehensive loss  $(311,691)  $(1,039,653)  $(537,301)  $(1,183,460)  $(41,554,997)
Net loss per common share - basic and diluted  $(0.03)  $(0.04)  $(0.05)  $(0.12)     
Weighted average shares outstanding   12,225,108    1,802,869    11,088,811    1,802,402      

 

See accompanying footnotes to these unaudited condensed consolidated financial statements.

 

F-2
 

 

SURGE GLOBAL ENERGY, INC.

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the nine months ended   For the period from
January 1, 2005
(date of inception
of exploration stage) through
 
   September 30, 2013   September 30, 2012   September 30, 2013 
Cash flows from operating activities:               
Net loss  $(461,755)  $(224,010)  $(41,479,451)
Non-controlling interest   -         (3,679,096)
Adjustments to reconcile net loss to net cash used in operating activities:               
Accretion, depreciation and amortization   736    1,016    480,066 
Write-off of property and equipment   -         4,984 
Realized loss (gain) on sale of marketable securities   -         (1,066,277)
Loss from redemption of preferred shares   -         105,376 
Gain (loss) on sale of Peace Oil property and Peace Oil Corp., net of liabilities   -         (1,525,105)
Share of affiliate loss   -         2,099,663 
Impairment of oil and gas properties   -         11,425,969 
Amortization/write-off of debt discount-beneficial conversion feature of convertible debenture   -         1,022,492 
Impairment of marketable securities   -         1,786,498 
Share-based compensation   -    28,740    6,987,280 
Gain/loss on revaluation of warrant liabilities   -         431,261 
Non-cash compensation Andora shares             185,268 
Warrant expense   -         445,352 
Interest on Gemini note   -         230,000 
Amortization of deferred compensation costs             3,039,038 
Amortization of discount attributable to note receivable   -         (137,500)
Amortization of discount attributable to warrants   -         629,192 
Beneficial conversion feature in connection with issuance of convertible notes payable   -         1,076,575 
Debt discount   -         1,010,679 
Founders stock   -         4,265,640 
Changes in operating assets and liabilities:               
Production payment and other receivables   -    140,000    7,616 
Accounts Receivable   1,394    -    1,395 
Prepaid expense and other assets   1,241    4,924    (27,010)
Other assets   (5,000)        75,958 
Accounts payable and accrued liabilities   70,840    12,780   697,138 
Officer loans Payable        11,579   - 
Income taxes payable   -    -    - 
Net cash received in operating activities  $(395,332)  $(24,971)  $(11,909,788)

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

F-3
 

 

SURGE GLOBAL ENERGY, INC.

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the nine months ended
September 30,
   For the period from
January 1, 2005
(inception of
exploration stage)
through
 
   2013   2012   September 30, 2013 
Cash flows from investing activities:               
Purchases of property and equipment   (13,023)   -    (130,448)
Proceeds from sale of marketable securities   -    -    589,506 
Proceeds from sale of investment   -    -    600,000 
Payment for note receivable   -    -    (137,500)
Proceeds from note receivable   -    -    (275,000)
Purchase of oil and gas properties   (242,470)   -    (13,612,999)
Deposits   -    -    (9,913)
Proceeds from sale of oil leases   -    -    6,314,820 
Consideration paid on sale of subsidiary   -    -    (1,533,395)
Asset Retirement Obligation   -    -    51,273 
Proceeds from disposition of Peace Oil property   -    -    14,071,294 
Purchase of marketable securities   -    -    (5,475,727)
Gemini note repayment   -    -    (1,380,000)
Deduct June 2006 Signet cash balance   -    -    (5,626,405)
Net cash provided by (used in) investing activities   (255,493)   -    (6,554,494)
Cash flows from financing activities:               
Proceeds from sale of common stock, net of costs   452,000    5,100    5,150,613 
Repurchase of common stock   -    -    (33,933)
Principal payments on note payable   -    -    (330,000)
Common stock subscribed   (100,000)        - 
Investment obligation   393,000         393,000 
Proceeds from exercise of options   -    -    197,717 
Proceeds from equity to debt conversion   -    -    250,000 
Net (payments for) proceeds from Joint Venture Partner cash call obligations   -    -    125,000 
Proceeds from convertible debentures   -    -    1,710,000 
Proceeds from note payable, gross   -    15,000    10,526,933 
Proceeds from Signet stock, net of costs and fees   -    -    1,769,602 
Deferred financing costs   -    -    (1,208,375)
Net cash (used in) provided by financing activities   745,000    20,100    18,550,557 
                
Effect of exchange rates on cash and cash equivalents   0    -    (61,494)
                
Net increase (decrease) in cash and cash equivalents   94,175    (4,871)   24,781 
                
Cash and cash equivalents at the beginning of the period   90,541    14,659    159,935 
Cash and cash equivalents at the end of the period  $184,716   $9,394   $184,716 

 

See accompanying footnotes to these unaudited condensed consolidated financial statements

 

F-4
 

 

SURGE GLOBAL ENERGY, INC.

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

 

   For the nine months ended
September 30,
   For the period from
January 1, 2005
(date of inception
of exploration stage)
through
 
   2013   2012   September 30, 2013 
             
Supplemental Disclosures of Cash Flow Information:               
Cash paid during the period for interest  $123   $5,547   $525,130 
Cash paid during the period for income taxes  $-   $-    - 
                
Supplemental Disclosures of Non-Cash Transactions:               
Common stock issued in exchange for convertible notes payable  $-   $-   $1,710,000 
Cancellation of common shares  $-   $-   $1,000 
Unrealized (gain) loss on available for sale securities  $75,546   $-   $75,546 
Note payable issued for investment  $-   $-   $225,000 
Exchange of North Peace shares for common shares  $-   $-   $35,000 
Amortization of debt discount - beneficial conversion feature of convertible debenture  $-   $-   $2,099,067 
Andora shares issued on settlement of litigation  $-   $-   $645,780 
Andora shares issued in lieu of cash compensation  $-   $-   $215,273 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

F-5
 

 

SURGE GLOBAL ENERGY, INC.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012

 

NOTE 1 - SUMMARY OF ACCOUNTING POLICIES

 

A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows.

 

Business and Basis of Presentation

 

The consolidated financial statements include the accounts of Surge Global Energy, Inc., its wholly owned subsidiaries, Cold Flow Energy ULC, 1294697 Alberta Ltd., and Surge Holding Co., (collectively the “Company”). Neither 1294697 Alberta Ltd. nor Cold Flow Energy ULC has any ongoing business operations at this time.

 

The Company’s Canadian subsidiaries are carried in their Canadian dollar functional currency and are presented in U.S. dollars upon consolidation. Any gain or loss on conversion into U.S. dollars is reflected in other comprehensive income. All amounts stated in these financial statements are in $US unless otherwise noted.

 

In January 2005, the Company began implementing plans to establish an oil and gas development business. As a result, the Company is an exploration stage enterprise, as defined by ASC 915 (formerly Statement of Financial Accounting Standards No. 7 (“SFAS 7”)) and is now seeking to explore the acquisition and development of oil and gas properties in the United States and Canada. From its inception of exploration stage through the date of these financial statements, the Company has not generated any revenues from oil and gas operations and has incurred significant operating expenses. Consequently, its operations are subject to all risks inherent in the establishment of a new business enterprise.

 

For the period from January 1, 2005 (inception of exploration stage) through September 30, 2013, the Company has accumulated exploration stage losses of $41,554,997. The Company will cease to be an exploration stage oil and gas corporation once it commences oil and gas drilling, exploration, and production of oil and gas properties.

 

Management Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as certain financial statement disclosures. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates.

 

In the opinion of management, all adjustments consisting of normal recurring adjustments necessary for a fair statement of (a) the result of operations; (b) the financial position; and (c) cash flows, have been made.

 

Oil and Gas Properties

 

The Company follows the full cost accounting method to account for oil and natural gas properties, whereby costs incurred in the acquisition, exploration and development of oil and gas reserves are capitalized. Such costs include lease acquisition, geological and geophysical activities, rentals on non-producing leases, drilling, completing and equipping of oil and gas wells and administrative costs directly attributable to those activities and asset retirement costs. Disposition of oil and gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such adjustment would significantly alter the relationship between capital costs and proved reserves of oil and gas, in which case the gain or loss is recognized to income.

 

The capitalized costs of oil and gas properties, excluding unevaluated and unproved properties, are amortized using the units-of-production method based on estimated proved recoverable oil and gas reserves. Amortization of unevaluated and unproved property costs begins when the properties become proved or their values become impaired. Impairment of unevaluated and unproved prospects is assessed periodically based on a variety of factors, including management’s intention with regard to future exploration and development of individually significant properties and the ability of the Company to obtain funds to finance such exploration and development.

 

F-6
 

 

SURGE GLOBAL ENERGY, INC.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012

 

NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (continued)

 

Under full cost accounting rules for each cost center, capitalized costs of evaluated oil and gas properties, including asset retirement costs, less accumulated amortization and related deferred income taxes, may not exceed an amount (the “cost ceiling”) equal to the sum of (a) the present value of future net cash flows from estimated the production of proved oil and gas reserves, based on current economic and operating conditions, discounted at 10%, plus (b) the cost of properties not being amortized, plus (c) the lower of cost or estimate fair value of any unproved properties included in the costs being amortized, less (d) any income tax effects related to differences between the book and tax basis of the properties involved. If capitalized costs exceed this limit, the excess is charged to earnings. Given the volatility of oil and gas prices, it is reasonably possible that the estimate of discounted future net cash flows from proved oil and gas reserves could change in the near term. If oil and gas prices decline in the future, even if only for a short period of time, it is possible that additional impairments of oil and gas properties could occur. In addition, it is reasonably possible that additional impairments could occur if costs are incurred in excess of any increases in the present value of future net cash flows from proved oil and gas reserves, or if properties are sold for proceeds less than the discounted present value of the related proved oil and gas reserves.

 

Cash and Cash Equivalents

 

For purposes of the Balance Sheet and Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity date of three months or less to be cash equivalents. The Company has total cash of $184,716 cash in accounts maintained by U.S. banks, all of which is subject to up to $250,000 of FDIC insurance.

 

Fair Value of Financial Instruments

 

The carrying value of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings, as reflected in the balance sheets, approximate the fair value because of the short-term maturity of these instruments.

 

Income Taxes

 

Income taxes are provided based on the liability method for financial reporting purposes. Under this method deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be removed or settled. Most of our tax loss carry forwards will be cancelled as a result of a change of control which occurred in October 2012,the exact amount of which has not been determined.

 

Marketable securities

 

All investment securities are classified as either as available-for-sale or trading, and are carried at fair value or quoted market prices. Unrealized gains and losses on available-for-sale securities losses are reported as a separate component of stockholders’ equity. Amortization, accretion, interest and dividends, realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are recorded in other income. This evaluation depends on the specific facts and circumstances. Factors that we consider in determining whether another-than-temporary decline in value has occurred include: the market value of the security in relation to its cost basis; the financial condition of the investee; and the intent and ability to retain the investment for a sufficient period of time to allow for possible recovery in the market value of the investment.

 

Foreign Currency Translation

 

Assets and liabilities in foreign currency are translated at the rates of exchange at the balance sheet date, and related revenue and expenses are translated at average monthly exchange rates in effect during the period. Resulting translation adjustment, if any, is recorded as a separate component in stockholders’ equity. Foreign currency transaction gains and losses are included in the statements of operations.

 

F-7
 

 

SURGE GLOBAL ENERGY, INC.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012

 

NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (continued)

 

Going Concern

 

As shown in the accompanying consolidated financial statements, the Company incurred losses from continuing operations of $461,755 and $224,010 for the nine month periods ending September 30, 2013 and 2012, respectively, an increased loss of $237,745. The Company’s cash position as of September 30, 2013 was $184,716 compared with $90,541 at December 31, 2012, an increase of $94,175. The Company’s current liabilities, on a consolidated basis, exceeded its current assets by $308,403 at September 30, 2013, compared with current assets in excess of current liabilities by $60,289 at December 31, 2012.

 

Management believes it should have sufficient capital resources to meet projected cash flow needs through the next twelve months, although no assurances can be given in this regard.

 

Property and Equipment

 

Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. For financial statement purposes, property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Depreciation expenses were $362 and $1,016 for the nine months ending September 30, 2013 and 2012, respectively. Maintenance, repairs, and minor renewals are charged against earnings when incurred. Additions and major renewals are capitalized.

 

Stock-Based Compensation

 

The Company measures and recognizes compensation expense for all share-based payment awards made to employees, consultants and directors including employee stock options based on estimated fair values. Stock-based compensation expense recognized for the nine months ending September 30, 2013 and 2012 were -0- and $28,740, respectively. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that vest during the period.

 

The Company uses the Black-Scholes option-pricing model as its method of valuation for share-based awards granted. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and certain other market variables such as the risk free interest rate.

 

Comprehensive Income

 

Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. The Company’s other comprehensive income includes unrecognized gains (losses) on available for sale securities and foreign currency translation adjustments.

 

Reclassifications

 

Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation. These reclassifications did not have any effect on comprehensive net income (loss) or shareholders’ equity.

 

F-8
 

 

SURGE GLOBAL ENERGY, INC.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012

 

NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (continued)

 

Recently Issued Accounting Pronouncements

 

In January 2010, the FASB issued ASU No. 2010-03, “Extractive activities — Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosures”. The main provisions of ASU No. 2010-03 are the following: (1) expanding the definition of oil- and gas- producing activities to include the extraction of saleable hydrocarbons, in solid, liquid, or gaseous state, from oil sands, shale, coalbeds, or other nonrenewable resources that are intended to be upgraded into synthetic oil or gas, and activities undertaken with a view to such extraction; (2) entities should use first-day-of-the-month price during the 12-month period (the 12-months average price) in calculating proved oil and gas reserves and estimating related standardized measure of discounted net cash flows; (3) requiring entities to disclose separately information about reserves quantities and financial statement amounts for geographic areas that represent 15 percent or more of proved reserves; (4) separate disclosure for consolidated entities and equity method investments. ASU No. 2010-03 is effective for annual reporting periods ending on or after December 31, 2009. The Company adopted ASU No. 2010-03 for the 2009 annual financial statements. This adoption did not have a material impact on the Group’s reported reserves evaluation, results of operations, financial position or cash flows.

 

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”, which is intended to improve comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. generally accepted accounting principles and International Financial Reporting Standards. This standard clarifies the application of existing fair value measurement requirements including (1) the application of the highest and best use valuation premise, (2) the methodology to measure the fair value of an instrument classified in a reporting entity’s shareholders’ equity, (3) disclosure requirements for quantitative information on Level 3 fair value measurements and (4) guidance on measuring the fair value of financial instruments managed within a portfolio. In addition, the standard requires additional disclosures of the sensitivity of fair value to changes in unobservable inputs for Level 3 securities.

 

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”, which requires that comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The standard also requires entities to disclose on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net earnings. This standard no longer allows companies to present components of other comprehensive income only in the statement of equity. This standard is effective for interim and annual reporting periods beginning after December 15, 2011. The adoption of this guidance did not have a significant impact on the Company’s financial statements other than the prescribed change in presentation.

 

Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, the FASB Accounting Standards Codification™ (“ASC”) is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company. Management has reviewed these rules and releases and does not expect the adoption of any other recently issued accounting pronouncements to have a significant impact on its consolidated results of operations, financial position or cash flow.

 

NOTE 2 - INVESTMENT IN ANDORA ENERGY CORPORATION

 

On September 19, 2007, Signet completed the proposed business combination of Signet and Andora Energy Corporation (“Andora”). As part of the combination, each of the issued and outstanding shares of Signet common stock was exchanged for 0.296895028 shares of Andora common stock. The Company exchanged its 11,550,000 shares of Signet common stock for a total of 3,429,138 shares of common stock of Andora representing approximately 5.78% of the fully diluted shares of Andora. At that time, 3,429,138 shares of Andora common stock received by the Company were placed in an escrow account pursuant to an agreement with Valiant Trust Company, Andora and Signet.

 

In connection with a Dynamo Energy litigation claim arising in 2008, Andora was entitled to recover a claim of legal fees from the Company pursuant to a judgment of a court of competent jurisdiction and after exhausting all appeals, which only allowed the escrowed shares to be released upon settlement of all claims. Pursuant to the agreement reached between the Company and Andora, the Company agreed to return 375,000 Andora shares to Andora in full settlement of all legal fees owed and release all remaining shares from the Escrow account to the Company.

 

In 2009, the Company reached settlements with two former directors which increased the Andora shares owned by 177,361 shares (net).

 

During the years ended December 31, 2010 and 2011, the Company agreed to issue 33,333 Andora shares in lieu of $20,000 in cash compensation to its former Chief Executive Officer due under his employment agreement

  

F-9
 

 

SURGE GLOBAL ENERGY, INC.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012

 

NOTE 2 - INVESTMENT IN ANDORA ENERGY CORPORATION (continued)

 

In October 2012, the Company agreed to issue a total of 308,780 Andora shares and $120,919 in cash to two creditors, one of which was its former Chief Executive Officer and current Chief Financial Officer, E. Jamie Schloss, who received 243,155 Andora shares and $85,668 in cash, in settlement of $234,431 in claims.

 

In October 2012, the Company agreed it would take steps to contribute as promptly as possible approximately 2,886,000 shares of common stock of Andora held by it to its wholly-owned subsidiary, Cold Flow Energy ULC, an Alberta corporation (“Cold Flow”), or a newly-formed wholly-owned subsidiary, Surge Holding Co., a Delaware corporation (either or both, the “Holding Company”). The Buyers and the Company have agreed that the Holding Company and the Andora Shares will not be disposed of by the Company for any purpose until the later of (i) April 30, 2013 or (ii) 180 days after the subsequent closing date (the “Distribution Date”). This restriction on the time period for the disposition of the Andora Shares or of the Holding Company may be waived in the event that the value of the total non-cash assets of the Company exceeds the value of the Andora Shares. Three of the Company’s current directors, Charles V. Sage, Edwin J. Korhonen and E. Jamie Schloss, were appointed directors of the Holding Company and Messrs. Sage and Schloss were appointed officers of the Holding Company. The Buyers and the Company have agreed that such persons shall remain in such roles through the Distribution Date.

 

On the Distribution Date, the Company will distribute the shares of the Holding Company (or the Andora Shares) or a liquidating dividend to the shareholders of the Company other than the Buyers and their affiliates and transferees and any other holders of the Common Stock issued subsequent to the closing dates (including any purchaser of Common Stock of the Company in any private placement subsequent to the closing dates but excluding holders who have obtained shares in the public markets); provided, however, that such a dividend can be paid pursuant to applicable corporate laws and in compliance with all securities laws. The mechanism for such distribution shall be agreed upon between the Company and the majority of the directors of the Holding Company.

 

The Company’s valuation of Andora is based on reserve reports furnished to the Company by Andora which the Company has relied upon in assessing the value of its investment in Andora. Virtually all of these reserves will require alternative methods of production to enable them to be realized as income. Such methods require substantial investment in plant and equipment to be effective. Andora may obtain equity financing in the future to finance its drilling operations and, in that event, the Company may sustain additional dilution to its equity interest in Andora.

 

During the quarter ended September 30, 2013, the Company recorded a temporary writedown of the Andora shares in the amount of $75,546 compared with a temporary writedown of $959,450 in the quarter ended September 30, 2012.

 

At September 30, 2013, the Company owned 2,889,386 Andora shares valued at $1,658,086 ($0.57 per share), which shares are approximately 3% of Andora’s total outstanding common shares on a fully diluted basis.

 

NOTE 3 - CAPITAL STOCK

 

Preferred Stock

 

On March 2, 2007, the Company issued one share of Special Voting Preferred Stock to Olympia Trust Company as trustee pursuant to the Voting and Exchange Trust Agreement. The preferred stock was issued in connection with the acquisition of Peace Oil Corp.

 

The issuance of the preferred stock was exempt from registration pursuant to Regulation S promulgated under the Securities Act of 1933, as amended. The Special Voting Preferred Stock is not convertible into shares of any other series or class of our capital stock. The one share of Special Voting Preferred Stock referred to herein was cancelled in June 2008.

.

F-10
 

 

SURGE GLOBAL ENERGY, INC.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012

 

NOTE 3 - CAPITAL STOCK (continued)

 

Common Stock

 

On February 22, 2007, the Company approved an increase to the Company’s authorized shares of capital stock to an aggregate of 210,000,000 shares, consisting of 200,000,000 shares of common stock with a par value of $0.001 per share and 10,000,000 shares of preferred stock, pursuant to an amendment to our Certificate of Incorporation.

 

The Company is not currently subject to any contractual arrangements which restrict its ability to pay cash dividends. The Company’s Certificate of Incorporation prohibits the payment of cash dividends on the Company’s Common Stock in excess of $0.05 per share per year so long as any one preferred stock remains outstanding unless all accrued and unpaid dividends on one preferred stock has been set apart and there are no arrearage with respect to the redemption of any preferred stock.

 

In November 2006, the Company issued an aggregate of 3 million shares of common stock to third party investors, Gemini Financial, in exchange for net proceeds of $1,350,000. In connection with this private placement, the Company issued to the investors an aggregate of six million warrants of the Company that are subject to registration rights and penalties amounting to 2% of the proceeds on a monthly basis if the registration was not effective by March 28, 2007. To address SEC comments, the Company was obligated to provide and disclose Peace Oil Corp. financial statements as well as a pro forma financial statement of the combined companies. The Company accounted for the warrants issued in accordance with ASC 815 (formerly EITF 00-19) “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” In December 2006, the FASB approved ASC 825 (formerly FSP EITF 00-19-2) “Accounting for Registration Payment Arrangements”, which establishes the standard that contingent obligations to make future payments under a registration rights arrangement shall be recognized and measured separately in accordance with Statement 5 and ASC 450 (formerly FASB Interpretation No. 14), “Reasonable Estimation of the Amount of a Loss.” The Company has evaluated the effect of how ASC 825 (formerly FSP EITF 00-19-2) and ASC 480 (formerly EITF Topic D-98) affected these accompanying financial statements. In adopting ASC 825 (formerly FSP EITF 00-19-2) accounting pronouncement on January 1, 2007, the Company reclassified the remainder of the warrant liability of $2,309,400 to permanent equity.

 

In January 2007, the Company issued 383,333 shares of Common Stock to two of the Company’s directors in connection with stock options exercised at an average of $0.24 per share for net proceeds of $91,867. In April 2007, the Company redeemed 2,000,000 shares of Common Stock for a note payable with Gemini, which 2,000,000 shares were cancelled.

 

In July 2007, the Company issued 400,000 pre reverse split common shares exercised at a price of $0.25 per share.

 

In November 2007, Cold Flow shareholders exchanged 3,749,953.5 preferred shares into 7,499,907 Surge common shares.

 

In March 2008, the Company received and cancelled 1,000,000 common shares in conjunction with its sale of the Cynthia Holdings, Ltd stock which entity owned the Santa Rosa property. In May 2008, the Company issued 100,000 common shares in conjunction with the exercise of options and simultaneously purchased 433,333 common shares from the same party at the same time. These purchased shares were cancelled immediately.

 

In June and July 2008, the Company redeemed an aggregate of 3,689,617 shares of common stock in connection with buyback

of shares previously issued in conjunction with the purchase of Peace Oil Corp.

 

In September 2008, the Company issued 50,000 common shares in conjunction with stock options exercised at a price of $0.115 per share for total proceeds of $5,750.

 

In December 2008, the Company purchased and cancelled 60,000 shares for $3,600 or $0.06 per share.

 

In 2010, the Company sold a total of pre reverse split 2,200,000 common shares with a total of 1,900,000 warrants for total proceeds of $218,000, net of fees, to various accredited investors and directors of the Company at prices from $0.05 to $0.11 per share.

 

F-11
 

 

SURGE GLOBAL ENERGY, INC.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012

 

NOTE 3 - CAPITAL STOCK (continued)

 

NOTE: All figures shown hereafter reflect the reverse common stock split which occurred on February 22, 2013:

 

In 2011, the Company sold a total of 112,500 common shares for total proceeds of $67,500 at $0.60 per share on a post reverse split basis.

 

In January 2012, the Company issued 8,500 shares of common shares and 8,500 warrants for total proceeds of $5,100. The warrants are exercisable for one year at a price of $1.00 per share.

 

In October 2012, the Company issued 7,000,000 shares of common stock for total proceeds of $350,000 at $0.05 per share.

 

On February 22, 2013, the Company completed a reverse 1 for 20 reverse common stock split and increased the authorized common shares to 400,000,000 from 200,000,000.

 

In March 2013, the Company issued a total of 3,216,615 common shares to Clark Morton, CEO and William Fitzgerald, President, pursuant to the stock purchase agreement dated October 18, 2012 at a price of $0.032 per share, valued at $100,000.

 

In June 2013, the Company issued a total of 200,000 common shares and stock purchase warrants to an accredited investor pursuant to a stock purchase agreement at a price of $0.50 per share, for total proceeds of $100,000.

 

In September 2013, the Company issued a total of 500,000 common shares and stock purchase warrants to an accredited investor pursuant to a stock purchase agreement at a price of $0.50 per share, for total proceeds of $350,000, of which $200,000 was paid in cash and $150,000 reduced our investment obligation.

 

NOTE 4 - INCOME TAXES

 

Reconciliation between actual tax expense (benefit) and income taxes computed by applying the U.S. federal income tax rate and state income tax rate to income from continuing operations before income taxes is as follows:

 

   For the nine months ended, 
   September 30, 2013   September 30, 2012 
Net Taxable Loss  $(460,000)  $(224,000)
Income tax computed at combined U.S. and state rates (30%)   (138,000)   (67,000)
Permanent differences   -    - 
Changes in valuation allowance   138,000    67,000 
Total  $-   $- 

 

Tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred liabilities are presented below:

 

   As of September 30, 
   2013   2012 
Deferred tax assets:          
Net operating loss carryforwards  $5,001,000   $4,754,000 
Other tax attributes   1,930,000    1,256,000 
Less valuation allowance   (6,609,000)   (6,010,000)
Total  $-   $- 

 

F-12
 

 

SURGE GLOBAL ENERGY, INC.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012

 

NOTE 4 - INCOME TAXES (continued)

 

At September 30, 2013, Surge had net operating loss carryforwards of approximately $14,000,000 for federal and approximately $10,000,000 for state income tax purposes, which will begin to expire, if unused, beginning in 2021. The valuation allowance increased by approximately $138,000 and $67,000 in the nine months ending September 30, 2013 and 2012 respectively. Internal Revenue Code Section 382 rules may place annual limitations on the Company’s net operating loss carryforward on a change in ownership. The above estimates are based upon management’s decisions concerning certain elections which could change the relationship between net income and taxable income. Management decisions are made annually and could cause the estimates to vary significantly. Deferred taxes are provided on a liability method for taxable temporary differences resulting from reported amounts of assets and liabilities and their tax basis. Deferred tax assets have resulted from the Company’s net operating loss carry-forward, which has been reduced by an equal valuation allowance. Valuation allowance has been established based on the opinion of management that it is more likely than not that some portion or all of the deferred tax assets will not be realized. A substantial portion of the tax loss carryforwards will not be available as a result of the change of control, which occurred in October 2012. The Company is open for the tax years ending 2009 through 2012.

 

NOTE 5 - WARRANTS AND STOCK OPTIONS

 

Class A Warrants.

 

Class A Warrants. The following table summarizes the stock purchase warrants outstanding at June 30, 2013. All figures are shown after the reverse stock split which occurred on February 22, 2013.

 

Transactions involving the Company’s warrant issuance or expiration are summarized as follows:

 

    Number of
Shares
    Weighted Average
Price Per Share
 
Outstanding at December 31, 2011     330,000       14.20  
Granted     112,500       1.00  
Exercised     -       -  
Canceled or expired     (442,500 )     (15.20 )
Outstanding at December 31, 2012     8,500     $ 1.00  
Granted and converted     852,500       0.89  
Exercised     -       -  
Canceled or Expired     (8,500 )     (1.00)  
Outstanding at September 30, 2013     852,500     $ 0.89  

 

For the year ended December 31, 2012 the Company issued 8,500 warrants (on a post reverse split basis) which were fully vested at December 31, 2012. The warrants were issued in conjunction with a common stock offerings and no warrant expense was recorded in 2012 or 2011 for these warrants.

 

For the quarter ended June 30, 2013, the company issued 152,500 warrants at an exercise price of $0.40 per share in exchange for cancelling a similar number of outstanding stock options as discussed below.

 

On June 29, 2013 the Company issued 200,000 stock purchase warrants at an exercise price of $1.00 per share exercisable until December 31, 2014.

 

On September 30, 2013 the Company issued 500,000 warrants with an exercise price of $1.00 per share until December 31, 2014.

 

Stock options.

 

No new stock options were issued or exercised during the quarter ended September 30, 2013. In the quarter ending September 30, 2012, 152,500 outstanding options were converted into warrants at the same exercise price.

 

F-13
 

 

SURGE GLOBAL ENERGY, INC.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012

 

NOTE 5 - WARRANTS AND STOCK OPTIONS (continued)

 

Fair value expense of $0 and $28,740 was recorded for the nine months ending September 30, 2013 and 2012 respectively using the Black-Scholes method of option-pricing model for vested options.

 

Transactions involving the Company’s options issuance are summarized as follows:

 

  

Number of

Shares

  

Weighted Average

Price Per Share

 
Outstanding at December 31, 2011   282,500   $1.40 
Granted   50,000    0.80 
Exercised   -    - 
Canceled or expired   -    - 
Outstanding at December 31, 2012   332,500   $1.20 
Granted   115,000    0.40 
Cancelled or expired   (332,500)   (1.20)
Outstanding at September 30, 2013   115,000   $0.40 

 

NOTE 6 - INVESTMENT OBLIGATION

 

In February, 2013 the Company received an investment obligation advance of $240,000 from Fitzgerald Energy III, a related party.

 

In July, 2013, the Company received additional investment obligation advances totaling of $303,000 From Fitzgerald Energy Group and in September, 2013, the Company repaid $150,000 of the investment obligation. After the foregoing transactions the balance owed at September 30, 2013 was $393,000.

 

The Investment Obligation is a non-interest bearing loan repayable from the income from both current and future oil and gas properties.

 

NOTE 7 - RELATED PARTY TRANSACTIONS

 

In April 2010, the Company extended Mr. Schloss’ employment agreement on the same financial terms as were in effect previously until December 31, 2010. On September 1, 2010, the agreement was amended to provide that commencing September 1, 2010 and ending April 30, 2011, $2,500 per month in salary would be paid to Mr. Schloss in Andora Energy common stock in lieu of cash. A total of $20,000 in salary was deferred in 2010 and 2011 and in lieu thereof a total of 33,333 Andora shares were issued pursuant to this agreement.

 

In October 2012, Mr. Schloss’s prior employment agreement was terminated and he is employed on a month to month basis at a salary of $5,000 per month.

 

For the years ending December 31, 2011 and 2010, a total of 33,333 Andora shares were issuable to Mr. Schloss pursuant to this agreement and $20,000 in salary was converted into Andora shares. The total loans, deferred salary and expenses due Mr. Schloss at December 31, 2011 totaled $167,000.

 

During the twelve months ending December 31, 2012, the loan, deferred salary and expenses balance was paid in full. See Note 3 for additional details.

 

In October 2012, the Company employed three executives, Clark Morton (CEO), William Fitzgerald (President), and Conrad Negron (Sr. VP) on a month to month basis at a salary of $5,000 per month. Mr. Negron’s employment was terminated in May 2013.

  

See footnote 6 for additional related party transactions.

 

NOTE 8 - LITIGATION MATTERS

 

The Company’s business and operations may subject the Company to claims, litigation and other proceedings brought by private parties and governmental authorities. Litigation can involve complex factual and legal questions and its outcome is uncertain.

 

Any claim that is successfully asserted against us could result in significant damage claims and other losses. Even if the Company were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations, which adversely affect our financial condition, results of operations or cash flows.

 

F-14
 

 

SURGE GLOBAL ENERGY, INC.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012

 

NOTE 8 - LITIGATION MATTERS (continued)

 

On June 4, 2013, Funding Surge, LLC filed a lawsuit in the Superior Court of the State of California, Riverside County, Case Number INC 1303586. The Complaint alleges a single claim for breach of contract and asserts damages of $733,500. On July 22, 2013, the Company filed its answer, general denial and affirmative defenses. The Company believes the Complaint is meritless, intends to defend itself vigorously, and has filed a cross complaint alleging fraud and numerous other causes of action.

 

NOTE 9 - COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

In May 2011, the Company leased space on a month-to-month basis at 75-153 Merle Drive, Suite B, at a monthly rental of $225 per month.

 

In July 2013, the Company agreed to a two year lease for office space at 1110 Brickell Avenue, Miami, FL at a rental of $2,750 per month.

 

Employment Agreements

 

All employees are currently employed on a month to month basis. See Note 7.

 

Consulting Agreements

 

The Company had no outstanding consulting agreements as of September 30, 2013.

 

NOTE 10 - SUBSEQUENT EVENTS

 

In October, 2013, the Company sold 200,000 common shares at $0.50 per share for $100,000 and issued 200,000 stock purchase warrants exercisable at $1.00 per share until December 31, 2014.

 

F-15
 

  

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

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

This quarterly report on Form 10-Q, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are typically identified by the words “anticipates,” “believes,” “expects,” “intends,” forecasts,” estimates,” “plans,” “future,” “strategy,” or words of similar meaning. In particular, the following types of statements are forward-looking:

 

  statements regarding our potential growth opportunities;
  statements regarding our ability to generate revenues from our operations;
  statements regarding our anticipated exploration work;
  statements regarding our ability to extract, refine, sell oil or sell oil properties;
  statements regarding our ability to comply or continue to comply with governmental regulations; and
  statements regarding our estimated future costs and expenses.

 

Various factors could cause actual results to differ materially from those expressed in the forward-looking statements, including those described in “Risk Factors” in this Form 10-Q. The Company assumes no obligations to update these forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors, except as required by law.

 

General Overview

 

Surge Global Energy, Inc. (“Surge”) is a Delaware corporation traded on the OTCQB Markets and on the OTCBB Bulletin Board under the symbol “SRGG.” Our principal executive offices are located at 75-153 Merle Drive, Suite B, Palm Desert, CA 92211. Our telephone number is 800-284-3898 and our fax number is 786-923-0963. We maintain a website at www.SurgeGlobalEnergy.com. The contents of this website are not made a part of this filing.

 

We are an oil and gas exploration and development company.

 

During the quarter ended September 30, 2013 we acquired an oil and gas property located on 170 acres consisting of 4 producing wells and the Company entered into a letter of intent to acquire interests in Amazing Energy Group, a privately held independent oil and gas exploration company in the Permian Basin in Pecos County, Texas (West Texas), an area of known oil reserves and producing wells. The Company currently is engaged in negotiations concerning the feasibility, outline and development of a production partnership for the purposes of acquiring the oil & gas assets of Amazing Energy Group.

 

It is the Company’s present intent to only acquire interests in existing production sites or historical production sites. We intend to actively participate in drilling for oil and gas for our own account and to participate with others in drilling opportunities. We will be competing with a number of other potential purchasers of prospects and producing properties, most of which will have greater financial resources than us or our co-interest holders. In the oil and gas industry, the bidding for prospects has become particularly intense with different bidders evaluating potential acquisitions with different product pricing parameters and other criteria that result in widely divergent bid prices. In the current oil and gas lease environment, there can be no assurance that there will be a sufficient number of suitable prospects available for acquisition by us or that we can sell prospects or obtain financing for, or participate with others to join in the development of, prospects.

 

Corporate History

 

We were incorporated as The Havana Group, Inc. on November 25, 1997 under the laws of the state of Delaware. Our initial business was the sale of pipes and tobacco products and we completed our initial public offering in May 1998. On December 31, 2003, our pipe and tobacco inventory was liquidated and the tangible and intangible assets related to that business were sold. On October 13, 2004, our name was changed from The Havana Group, Inc. to Surge Global Energy, Inc.

 

In December 2004, we completed the restructuring of our balance sheet and the cancellation of outstanding Preferred A and Preferred B shares and indebtedness related to the discontinued tobacco and pipe business.

 

From 2005 through 2012, we engaged in a series of acquisition, divestiture and capital transactions in an effort to expand our business and provide the basis for long-term shareholder returns from oil and gas exploration and development. Because our operations from 2005 forward have not generated any revenue, we have used our equity and the value of interests in other entities that we have controlled from time to time, to attempt to develop business opportunities we believed would be advantageous. Our management has also undergone a number of changes during this period.

 

4
 

 

In October 2012, the Company agreed to sell 7,000,000 post reverse split shares to William E. Fitzgerald and Clark Morton and agreed to sell and issue 3,216,715 additional post reverse shares which shares were issued on March 27, 2013.

 

In March 2013, the Company issued 3,216,715 additional shares issued to Mr. Fitzgerald and Mr. Morton in consideration of an investment of $100,000. After this issuance, the total outstanding shares were 12,019,673 as at June 30, 2013 which are owned by Mr. Morton and Mr. Fitzgerald equally and which, in the aggregate, represented an ownership of 85% of the outstanding common shares at that time.

 

In June 2013, the Company sold 200,000 common shares at a price of $0.50 per share to an accredited investor for proceeds of $100,000 and in conjunction with this purchase, also issued 200,000 warrants at an exercise price of $1.00 per share exercisable until December 31, 2014.

 

In September 2013, the Company sold 500,000 common shares at a price of $0.50 per share to an accredited investor for cash proceeds of $100,000 and a reduction in the investment obligation due the Fitzgerald Group, and in conjunction with this purchase also issued 500,000 warrants at an exercise price of $1.00 per share exercisable until December 31, 2014.

 

Because we are an exploration stage company, the inability to develop successful oil and gas prospects has reduced our working capital and created the need for additional strategic transactions to raise capital and liquidate assets.

 

Recent Developments

 

None.

 

Oil and Gas Drilling Activities

 

The Company acquired a 32% working interest in the Robison lease located in Muhlenberg County, Kentucky for $240,470. At the time of the purchase the lease consisted of two producing oil wells. During the September, 2013 quarter and subsequently, the Operator of the property drilled two additional oil wells which tested as productive. The Operator is continuing to re-enter and test the property to maximize production levels.

 

The Company also acquired interests in two energy joint ventures valued at $2,000 during the quarter ended September 30, 2013.

 

For historical purposes, below is a recap of activities in prior years:

 

In June 2008, we began the process of acquiring via lease oil and gas properties for drilling and development. Three properties were leased in 2008 and one in 2009. The two of the three properties acquired in 2008 were written off due to insufficient reserves. The first was drilled in November 2008 in Crane County, Texas and was plugged and abandoned and fully impaired in 2008. The second well (Qualmay #1) commenced drilling in November 2008 in Park County, Wyoming. This well was completed with natural gas and oil results, but after two fracture procedures the well was deemed commercially unsuccessful and was shut in. The Qualmay #1 was fully impaired for financial statement purposes in 2009 due to the lack of commercial reserves. The Company was successful in selling our 35% working interest\this property in December 2010 and recovered approximately $39,000 of costs expensed previously. The third lease, on 2,500 acres in Pine Valley, Nevada was acquired in July 2008 and was the lease expired and written off in 2010. The cost of drilling this Nevada well to explore this property was greater than the Company’s financial ability to complete it and we were unable to find partners or sell the property prior to the lease exploration period.

 

In December 2009, the Company entered into an equipment lease agreement with Mandalay Energy, Inc. (“Mandalay”) to provide funds for the workover of four (4) oil and gas wells with an option to workover six (6) additional wells on a 40 acre lease located in Pawnee County, Oklahoma at a cost to the Company of $300,000. Shortly after workover operations commenced the operations were delayed by a dispute over leasehold rights by a new owner of the lease. Litigation between the landowner, and a cross complaint by Mandalay, has stopped development of the property until each party’s legal right are determined.

 

In 2010, the Company entered into a written settlement agreement with Mandalay for the recovery of $354,000 plus legal fees, none of which has been received pending the outcome of the above mentioned litigation. To minimize our exposure in this property, the Company also entered into a written agreement with CAVU Resources, Inc. in September 2010 which provide for the return to us $130,000 of this investment, plus interest, which amount was expected to be paid in June 2011. When received, this payment will in turn offset a similar amount of the settlement owed to us by Mandalay.

 

The Company took an impairment of $1,340,852 in the years ended December 31, 2012 and $75,000 in 2011 to reflect our revised estimate of the net realizable value which will be ultimately recoverable from oil and gas properties of our Andora shares and other oil and gas properties.

 

5
 

 

During 2012, the Company had several opportunities to invest in new oil and gas properties. However, the Company was unable to obtain additional financing to invest in any new projects. The Company’s ability to invest in future oil and gas transactions is dependent upon our ability to obtain additional financing on terms satisfactory to us, if at all. See “Risk Factors.”

 

Andora Energy Corporation (formerly Signet Energy)

 

Andora is a privately owned oil and gas company which is 71.80% owned and controlled by Pan Orient Energy Corp., a Canadian energy company listed on the TSX Venture Exchange.

 

In 2005, we formed a Canadian subsidiary that entered into an agreement to drill wells in the Sawn Lake Property located in Northern Alberta, Canada with Deep Well Oil & Gas, Inc. (“Deep Well”) and Northern Alberta Oil, Ltd. (“NAOL”). In November 2005, that subsidiary renamed Signet Energy, Inc. (“Signet”) was reorganized. Surge issued 5.1 million of common stock in its Canadian subsidiary to former Signet officers, directors and certain shareholders, and transferred shares of Signet to Deep Well and NAOL and Surge.

 

Surge retained 10,500,000 shares of Signet after the foregoing transaction (approximately 49%) of Signet on a non-diluted basis. As a result, we became a minority shareholder in Signet, and obtained leases of oil and gas properties from Deep Well and NAOL. In July 2006, our interest in Signet was further diluted by the issuance of additional equity by Signet. On September 17, 2007, Signet combined with Andora Energy Corporation (“Andora”), resulting in further dilution of our interest in the combined entity to approximately 5.6% of the fully diluted shares of Andora. In exchange for our Signet shares we received 3,429,138 shares of Andora.

 

In 2009, as a result of the dismissal of lawsuits and settlement agreements, we received 252,361 Andora shares from a settlement with our former Chief Executive Officer. We also paid out 75,000 shares in settlement with a former director.

 

In another settlement with Andora dated February 2, 2010, 375,000 Andora shares were paid to Andora in full payment of all outstanding claims of approximately $560,000 owed Andora for legal fees in conjunction with a lawsuit.

 

In 2010 and 2011, we transferred a total of 33,333 Andora shares to our former Chief Executive Officer in lieu of $20,000 in salary.

 

In October 2012, the Company agreed to issue a total of 308,780 Andora shares in settlement of amounts owed to its current Chief Financial Officer (and formerly its Chief Executive Officer) and another creditor.

 

In October 2012, the Company agreed it would take steps to contribute as promptly as possible 2,889,386 shares of common stock of Andora held by it to its wholly-owned subsidiary, Cold Flow Energy ULC, an Alberta corporation (“Cold Flow”), or a newly-formed wholly-owned subsidiary, Surge Holding Co., a Delaware corporation (either or both, the “Holding Company”). The Buyers and the Company have agreed that the Holding Company and the Andora Shares will not be disposed of by the Company for any purpose until the later of (i) April 30, 2014 or (ii) 180 days after the subsequent closing date (the “Distribution Date”). This restriction on the time period for the disposition of the Andora Shares or of the Holding Company may be waived in the event that the value of the total non-cash assets of the Company exceeds the value of the Andora Shares. Three of the Company’s current directors, Charles V. Sage, Edwin J. Korhonen and E. Jamie Schloss, were appointed directors of the Holding Company and Messrs. Sage and Schloss were appointed officers of the Holding Company. The Buyers and the Company have agreed that such persons shall remain in such roles through the Distribution Date. Expenses relating to the proposed distribution can be paid in Andora shares which will reduce the shares actually to be distributed.

 

On the Distribution Date, the Company will distribute the shares of the Holding Company (or the Andora Shares) or a liquidating dividend to the shareholders of the Company other than the Buyers and their affiliates and transferees and any other holders of the Common Stock issued subsequent to the closing dates (including any purchaser of Common Stock of the Company in any private placement subsequent to the closing dates but excluding holders who have obtained shares in the public markets); provided, however, that such a dividend can be paid pursuant to applicable corporate laws and in compliance with all securities laws. The mechanism for such distribution shall be agreed upon between the Company and the majority of the directors of the Holding Company. As of the date of this report the Company has yet to transfer the Andora shares to Surge Holding Co.

 

As of September 30, 2013, we owned a total of 2,889,386 shares in Andora valued at $1,658,086 for financial statement purposes ($0.57 per share). At the time these shares are distributed to shareholders owning Surge Global Energy, Inc. common shares the Andora shares will be either distributed in kind or as shares of Surge Holding Co. and the Company will case to own this asset.

  

6
 

 

Other

 

In 2010, the Company sold the remaining 50,000 Good Energy shares for $122,500.

 

In 2010, the Company issued a total of 2,200,000 pre reverse split common shares for net total proceeds of $218,000.

 

In December 2010, the Company sold its interest in the Qualmay #12-42 well in Wyoming for $10,000.00 in cash due in March, 2011, plus forgiveness of lease operating expenses on the well totaling $19,405, and release of any plugging liability (estimated previously at $10,500), for a total recovery of $39,405.

 

During 2011, the Company sold a total of 2,250,000 common shares for $67,500.

 

In September 2011, the Company issued a Convertible Note to Asher Enterprises for $45,000 and repaid the Note in full in February, 2012. See Notes to Consolidated Financial Statements for complete details.

 

In January 2012, the Company issued 170,000 pre reverse split common shares at $0.03 per common share.

 

In October 2012, the Company issued a total of 7,000,000 post reverse split common shares for total proceeds of $350,000..

 

In November 2012, the Company received $100,000 in cash for the purchase an additional 3,216,715 post reverse split common shares, which shares were subscribed for but were unissued at December 31, 2012 pending an increase in authorized shares and the completion of the proposed reverse 1 for 20 stock split which occurred on February 22, 2013.

 

In March 2013, the Company issued 1,608,357 and 1,608,358 post reverse split common shares referred to above to Clark Morton, its Chief Executive Officer and William Fitzgerald, its President, respectively.

 

In June 2013, the Company issued 200,000 common shares and 200,000 warrants to an accredited investor for total proceeds of $100,000.

 

In September 2013, the Company issued 500,000 common shares and 500,000 warrants to an accredited investor.

 

Competition

 

The oil and gas business is highly competitive. Subject to additional financing, of which we can provide no assurances, we will try to compete with private, public and state-owned companies in all facets of the oil business, including suppliers of energy and fuel to industrial, commercial and individual customers. Numerous independent and major oil and gas companies and oil and gas syndicates actively seek out and bid for both oil and gas prospects with substantially greater financial and personnel resources and operating histories than we do. Competitive conditions may be substantially affected by various forms of energy legislation and/or regulation considered from time to time by the government of the United States and other countries, as well as factors that we cannot control, including international political conditions, overall levels of supply properties as well as for the services of third-party providers, such as drilling companies, upon which we rely. Many of these companies not only explore for, produce and market oil and natural gas, but also carry out refining operations and market the resultant products on a worldwide basis.

 

Government and Environmental Regulation

 

Our operations will be subject to extensive and developing federal, state and local laws and regulations in the United States relating to environmental, health and safety matters; laws effecting petroleum, chemical products and materials; and waste management. Permits, registrations or other authorizations are required for the operation of certain of our facilities and for our oil and gas exploration and production activities. These permits, registrations or authorizations are subject to revocation, modification and renewal. Governmental authorities have the power to enforce compliance with these regulatory requirements, the provisions of required permits, registrations or other authorizations, lease conditions, and violators are subject to civil and criminal penalties, including fines, injunctions or both. Failure to obtain or maintain a required permit may also result in the imposition of civil and criminal penalties. Third parties may have the right to sue to enforce compliance. Foreign and domestic development, production and sale of oil are extensively regulated in Canada at both the federal and state levels. Legislation affecting the oil and gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, in Canada and at federal and state levels, have issued rules and regulations binding on the oil and gas industry and its individual members, compliance with which is often difficult and costly and some of which carry substantial penalties for failure to comply. Canada and multiple state statutes and regulations where we intend to conduct operations require permits for drilling operations, drilling bonds and reports concerning wells. Such jurisdictions also have statutes and regulations governing conservation matters, including the unitization or pooling of oil and gas properties and establishment of maximum rates of production from oil and gas wells.

 

7
 

 

Some risk of costs and liabilities related to environmental, health and safety matters is inherent in our operations, as it is with other companies engaged in similar businesses, and there can be no assurance that material costs or liabilities will not be incurred. In addition, it is possible that future developments, such as stricter requirements of environmental or health and safety laws and regulations affecting our business or more stringent interpretations of, or enforcement policies with respect to, such laws and regulations, could adversely affect us. To meet changing permitting and operational standards, we may be required, over time, to make site or operational modifications at our facilities, some of which might be significant and could involve substantial expenditures. There can be no assurance that material costs or liabilities will not arise from these or additional environmental matters that may be discovered or otherwise may arise from future requirements of laws in the United States and Canada.

 

Related party transactions

 

During the last two years, several of our directors and officers have been involved in transactions with us and have had contractual relationships with us. These are described in the Consolidated Financial Statements under “Related Party Transactions.”

 

In October 2012, the Company issued 7,000,000 post reverse split common shares and in March 2013, the Company subsequently issued an additional 3,216,715 common shares to its CEO, Clark Morton, and its President, William Fitzgerald. (See “Corporate History” above and Note 7 of the financial statements.)

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate significant estimates used in preparing our financial statements including those related to revenue recognition, guarantees and product warranties, stock based compensation and business combinations. We base our estimates on historical experience, underlying run rates and various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates. The following are critical judgments, assumptions, and estimates used in the preparation of the consolidated financial statements.

 

Use of Estimates

 

The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and the disclosure of contingent assets and liabilities, if any, at the date of the financial statements. The Company analyzes its estimates, including those related to future oil and gas revenues and oil and gas properties, contingencies and litigation. The Company bases its estimates on assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

 

Investments in Unconsolidated Subsidiaries

 

Investee entities that the Company can exercise significant influence, but not control over, are accounted for under the equity method of accounting. Whether the Company exercises significant influence with respect to an investee depends on an evaluation of several factors, among others, representation on the company’s board of directors and ownership level, generally 20% to 50% interest in the voting securities of the company including voting rights associated with the Company’s holdings in common, preferred and other convertible instruments in the company. Under the equity method of accounting, the Company’s share of the earnings or losses of these companies is included in the equity income (loss) section of the consolidated statements of operations.

 

A loss in value of an investment that is other than a temporary decline is recognized as a charge to operations. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment.

 

Impairment of Long-Lived Assets

 

We have adopted U.S. GAAP Accounting Standards for Property, Plant and Equipment (ASC 360) ASC 360 requires that long-lived assets and certain identifiable intangibles held and used by us 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, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. We evaluate the recoverability of long-lived assets based upon forecasted under counted cash flows. Should an impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and the ultimate disposition of the asset. ASC 360 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.

 

8
 

 

Stock-Based Compensation

 

The Company uses the Black-Scholes option-pricing model as its method of valuation for share-based awards granted. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables.

 

These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards, and certain other market variables such as the risk free interest rate. The Company measures and recognizes compensation expense for all share-based payment awards made to employees, consultants and directors including employee stock options based on estimated fair values.

 

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in the Company’s Consolidated statement of operations for the three months ended September 30, 2013 and 2012 of $-0- and $28,740 respectively included compensation expense for share-based payment awards granted prior to September 30, 2013.

 

Marketable Securities

 

All investment securities are classified as either as available-for-sale or trading, and are carried at fair value or quoted market prices. Unrealized gains and losses on available-for-sale securities are reported as a separate component of stockholders’ equity. Amortization, accretion, interest and dividends, realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are recorded in other income. ASC 320 - Investments - Debt and Equity, Accounting for Certain Investments in Debt and Equity Securities and, Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 59, Accounting for Noncurrent Marketable Equity Securities, provide guidance on determining when an investment is other-than-temporarily impaired. This evaluation depends on the specific facts and circumstances. Factors that we consider in determining whether an other-than-temporary decline in value has occurred include: the market value of the security in relation to its cost basis; the financial condition of the investee; and the intent and ability to retain the investment for a sufficient period of time to allow for possible recovery in the market value of the investment.

 

Results of Operations

 

For The Three Month Period Ending September 30, 2013 and September 30, 2012

 

The Company had gross operating revenues of $1,717 revenues in the three months ended September 30, 2013 compared with none in the quarter ended June 30, 2012.

 

For the three months ended September 30, 2013, the Company incurred a net loss of $236,145 compared with a loss of $80,203 for the comparable period in 2012, an increased loss of $165,942 from the prior period. The principal reasons for this increased loss are set forth below:

 

Total operating expenses for the three months ended September 30, 2013 were $236,083 compared to $59,483 in the comparable three months ended September 30, 2013, an increase of $176,600 from the prior period. The increase in operating expenses was attributable primarily to an increase in officer’s and employee salaries to $80,000 in the three months ending September 30,2013 compared with $18,000 in the comparable period in 2012, an increase of $62,000: an increase of legal fees of $40,798 mainly from the pending lawsuit; an increase in employment placement fees of $30,000, an increase in accounting, consulting and public relations fees of $12,000; an increase in rent expense of $4,166, an increase in travel and entertainment expenses of $9,047;and an increase in all other expenses (net) of $18,889.

 

Net interest expenses for the three months ended September 30, 2013 was $0 compared with $20,034 for the three months ended September 30, 2012.

 

For The Nine Month Period Ending September 30, 2013 and September 30, 2012

 

The Company had $1,717 in operating revenues in the nine months September 30, 2013 compared with none in the comparable period in 2012.

 

For the nine months ended September 30, 2013, the Company incurred a net loss of $461,755 compared to a loss of $224,010 for the comparable period in 2012, an increased loss of $237,745(106%) from the prior period. The principal reasons for this increased loss are set forth below:

 

9
 

 

Total operating expenses for the nine months ended September 30, 2013 were $462,438 compared to $202,765 in the nine months ended September 30, 2012, an increase of $259,723 (128%) from the prior period. The increase in operating expenses was attributable primarily to an increase in officers’ salaries to $191,500 in 2013 from $70,000 in the comparable period in 2012, an increase of $121,500; an increase in shareholders expenses related to the reverse stock split of $17,918 in 2013 versus none in 2012, an increase in legal fees to $99,209 in 2013 compared to $43,020 in 2012, an increase of $56,189; an increase in payroll tax expense of $1,727; a decrease of $28,740 in stock-based compensation expense during the nine months ended September 30, 2013, an increase in consulting and accounting fees to $24,000 in the nine months ending September 30, 2013 compared to $18,225 in 2012, an increase of $5,775; an increase in rent expense of $7,999; and an increase in all other expenses (net) of $41,946.

 

Net interest expenses for the nine months ended September 30, 2013 were $337 compared with versus net interest expense of $21,194 for the comparable period in 2012, a decrease of $20,857.

 

Future Operating Trends

 

Our future operations depend on available cash resources, additional financing, and/or the sale of additional common stock.

 

We can provide no assurances that any additional financing will be satisfactory to us, if at all.

 

Liquidity and Capital Resources

 

We have a history of net losses and expect that our operating expenses will continue to deplete our cash reserves as we have no revenues. Our business model contemplates expansion of our business by identifying and acquiring additional oil and gas properties. To make these acquisitions, our capital needs will increase substantially. We have limited working capital and cash resources to fund our oil and gas exploration. We plan to attempt to obtain our future funding that we will need to drill wells on leases owned, to lease additional properties and to otherwise finance our oil and gas operations through debt and equity markets or joint venture agreements with third parties; however, we can provide no assurances that we will be able to obtain additional funding (and/or joint venture partners willing to fund specific exploration projects) when it is required or that funding will be available to us on commercially acceptable terms, if at all. If we fail to obtain the financing that we need when it is required, we may have to forego or delay potentially valuable opportunities to acquire new oil and gas properties or default on existing funding commitments to third parties and forfeit or dilute our rights in existing oil property interests. In the event additional financing is not available to us on commercially acceptable terms, if and when needed to finance our oil and gas operations and to meet our cash needs as they come due, this may seriously harm our business, financial condition and results of operations.

 

Continuing Loss

 

As shown in the accompanying consolidated financial statements, the Company incurred losses from continuing operations of $461,755 and $224,010 for the nine month periods ending September 30, 2013 and 2012, respectively. The Company’s cash position as of September 30, 2013 was $184,716 compared with $90,541 at December 31, 2012, an increase of $94,175. The Company’s current liabilities, on a consolidated basis, increased to $503,083 at September 30, 2013 from $39,243, an increase of $463,840.

 

The Company’s net working capital deficit of $309,223 at September 30, 2013, compared with working capital of $60,289 at December 31, 2012, a decrease of $369,512.

 

Management believes it should have sufficient capital resources to meet projected cash flow needs through the next twelve months, although no assurances can be given in this regard.

 

Inflation

 

Our opinion is that inflation has not had a material effect on our operations. Inflation will increase operating expenses but since the Company’s Andora investment has significant oil reserves, such reserves should increase as oil prices increase due to inflation and market forces, which will in turn increase the value of our Andora shares.

 

Off Balance Sheet Arrangements

 

The Company does not maintain off-balance sheet arrangements nor does it participate in non-exchange traded contracts requiring fair value accounting treatment.

  

10
 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, and stock and/or commodity prices. The Company does not have any financial instruments held for trading or other speculative purposes and does not invest in derivative financial instruments, interest rate swaps or other investments that alter interest rate exposure, except that we own equity securities in a private company held for long term investment and we hold equity securities in a publicly traded company whose value is marked to market on a quarterly basis. Our primary exposure to market risk is interest rate risk associated with our short term money market investments and the market price risk of our publicly traded investment. The Company does not have any credit facilities with variable interest rates.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to Clark Morton, our principal executive officer and E. Jamie Schloss, our principal financial officer, to allow timely decisions regarding required disclosure.

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of E. Jamie Schloss, our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were ineffective and there was a material weakness due to insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements and ineffective controls over period end financial disclosure and reporting processes.

 

Management’s Report on Internal Control over Financial Reporting

 

Our adequate internal control over financial reporting, as that term is defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting.

 

Management is responsible for establishing and maintaining policies and procedures for the preparation of financial statements for external purposes consistent with generally accepted accounting principles in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.

 

Our principal executive officer, Clark Morton, and our principal financial officer, E. Jamie Schloss, evaluated the effectiveness of our internal control over financial reporting as of September 30, 2013. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on this evaluation, Mr. Morton and Mr. Schloss concluded that, as of September 30, 2013, our internal control over financial reporting was not effective due to material weaknesses in the system of internal control. A material weakness is a deficiency, or combination of deficiencies, that creates a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected in a timely manner.

 

The material weakness assessed by our management was that (1) we have not properly segregated duties as our principal financial officer can initiate, authorize, and complete all transactions, and (2) we have not implemented measures that would prevent the principal financial officer from overriding the internal control system. We do not believe that these control weaknesses have resulted in deficient financial reporting because the principal financial officer is aware of his responsibilities under the SEC’s reporting requirements and personally certifies our financial reports.

 

Accordingly, while we have identified certain material weaknesses in our system of internal control over financial reporting, we believe we have taken reasonable steps to ascertain that the financial information contained in this report is in accordance with generally accepted accounting principles. Our management has determined that current resources should be appropriately applied elsewhere and, when resources permit, it will address and remediate material weaknesses through implementing various controls or changes to controls. At such time as we have additional financial resources available to us, we intend to enhance our controls and procedures. We will not be able to assess whether the steps we intend to take will fully remedy the material weakness in our internal control over financial reporting until we have fully implemented them and sufficient time passes in order to evaluate their effectiveness.

 

11
 

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal controls over financial reporting, known to the principal financial officer that occurred during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company’s business and operations may subject the Company to claims, litigation and other proceedings brought by private parties and governmental authorities. The Company has in the past been involved in contract and indemnity disputes in several litigation matters. Litigation can involve complex factual and legal questions and its outcome is uncertain. Any claim that is successfully asserted against us could result in significant damage claims and other losses and could adversely affect our financial condition. Even if the Company were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations, which would adversely affect our financial condition, results of operations or cash flows.

 

On June 4, 2013, Funding Surge, LLC filed a lawsuit in the Superior Court of the State of California, Riverside County, Case Number INC 1303586. The Complaint alleges a single claim for breach of contract and asserts damages of $733,500. On July 22, 2013, the Company filed its answer, general denial and affirmative defenses. The Company believes the Complaint is meritless, intends to defend itself vigorously, and filed a cross complaint against Funding Surge,LLC and its principal owner.

 

ITEM 1A. RISK FACTORS

 

Our business has many risks. Factors that could materially adversely affect our business, financial condition, operating results or liquidity and the trading price of our common stock are described in more detail below and under “Risk Factors” in Item 1A of our 2012 Form 10-K filed with the Securities and Exchange Commission on April 9, 2013. This information should be considered carefully, together with other information in this report and other reports and materials we file with the Securities and Exchange Commission.

 

Loss of Investment Company Act Exclusion Would Adversely Affect Our Business

 

Surge Global Energy (“Surge”) currently relies on section 3(c)(9) of the Investment Company Act of 1940 (“1940 Act”) to avoid federal registration and regulation as an investment company. Section 3(c)(9) excludes from the 1940 Act’s definition on investment company “[a]ny person substantially all of whose business consists of owning or holding oil, gas, or other mineral royalties or leases, or fractional interests therein, or certificates of interest or participation in or investment contracts related to such mineral royalties or leases, or fractional interests therein relative to such royalties, leases, or fractional interests.”

 

Any future failure by Surge to qualify for the section 3(c)(9) exclusion, or any other exemption or exclusion from the 1940 Act or the rules thereunder, could cause Surge to be required to register with the U.S. Securities and Exchange Commission as an investment company under the 1940 Act or to reorganize its business so as to avoid such registration and regulation. Regulation and registration as an investment company under the 1940 Act and the rules thereunder would, among other things, prevent Surge from conducting its business as described herein and would create additional expenses and divert management time.

 

During the three months ended September 30, 2013 and nine months ended September 30, 2013, there were no material changes to the information in our 2012 Form 10-K under “Risk Factors.”

 

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

 

(a) During the three months ended September 30, 2013, there were no sales of securities by the Company except as set forth below:

 

Date of Sale  Title of Security  Number of
Shares
Sold
  Consideration
Received,
Commissions
  Purchasers  Exemption from
Registration
Claimed
September 30, 2013  Common Stock  500,000 common shares  $100,000, no commissions paid  Accredited Investor  Rule 506;
Section 4(2)
                
September 30, 2013  Warrant  500,000 common stock purchase warrants  Included in the purchase price of the commons shares  Accredited Investor  Rule 506;
Section 4(2)

 

During the nine ended September 30, 2013 there were no repurchases by the Company of its Common Stock.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None

 

ITEM 6. EXHIBITS

 

31.1 Certification by Principal Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2 Certification by Principal Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1 Certification by Principal Executive Officer, pursuant to 18 USC Section 1350.*
32.2 Certification by Principal Financial Officer, pursuant to 18 USC Section 1350.*
   
101 Interactive data files pursuant to Rule 405 of Regulation S-T:**
  (i) Consolidated Balance Sheets at September 30, 2013(unaudited) and December 31, 2012.
  (ii) the unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) for the periods ending September 30, 2013 and 2012
  (iii) the unaudited Consolidated Statements of Cash Flows for the periods ending September 30, 2013 and September 30, 2012, and inception of development stage to September 30, 2013, and September 30, 2012.
  (iv) the notes to unaudited financial statements.*

___________________

* Filed herewith.
** This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

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SIGNATURES

 

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

 

  SURGE GLOBAL ENERGY, INC.
     
DATED: November 14, 2013 By: /s/ Clark Morton
    Clark Morton
    (PRINCIPAL EXECUTIVE OFFICER)

 

     SURGE GLOBAL ENERGY, INC.
     
DATED: November 14, 2013 By: /s/ E. Jamie Schloss
    E. Jamie Schloss
    (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)

 

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