Attached files
| file | filename |
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| EX-32.2 - EX-32.2 - Africa Growth Corp | ex32-2.htm |
| EX-31.1 - EX-31.1 - Africa Growth Corp | ex31-1.htm |
| EX-31.2 - EX-31.2 - Africa Growth Corp | ex31-2.htm |
| EX-32.1 - EX-32.1 - Africa Growth Corp | ex32-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2015
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¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission file number: 333-169507
BRENHAM OIL & GAS CORP.
(Exact Name Of Registrant As Specified In Its Charter)
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Nevada
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27-2413874
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(State of Incorporation)
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(I.R.S. Employer Identification No.)
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601 Cien Street, Suite 235, Kemah, TX
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77565-3077
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(Address of Principal Executive Offices)
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(ZIP Code)
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Registrant's Telephone Number, Including Area Code: (281) 334-9479
Securities Registered Pursuant to Section 12(g) of The Act: Common Stock, $0.0001
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer, "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ¨
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Accelerated filer ¨
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Non-accelerated filer ¨
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Smaller reporting company x
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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 June 30, 2015, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $324,899 based on the closing sale price of $0.04 on such date as reported on the OTCBB.
The number of shares outstanding of each of the issuer’s classes of equity as of April 20, 2016 is 128,031,064 shares of common stock.
TABLE OF CONTENTS
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Item
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Description
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Page
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PART I
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ITEM 1.
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3
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ITEM 1A.
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8
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ITEM 1B.
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14
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ITEM 2.
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14
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ITEM 3.
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14
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ITEM 4.
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14
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PART II
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ITEM 5.
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15
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ITEM 6.
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15
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ITEM 7.
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15
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ITEM 7A.
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18
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ITEM 8.
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18
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ITEM 9.
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32
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ITEM 9A.
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32
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ITEM 9B.
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32
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PART III
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ITEM 10.
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33
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ITEM 11.
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34
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ITEM 12.
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35
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ITEM 13.
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35
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ITEM 14.
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36
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ITEM 15.
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36
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Cautionary Statement regarding Forward-Looking Statements
This Annual Report on Form 10-K of Brenham Oil & Gas Corp., a Nevada corporation (hereinafter the "Company", the "Registrant", or "Brenham") includes 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. However based upon the Registrant’s current stock price it is not eligible to rely upon the traditional safe harbors within Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. The Registrant has made certain forward-looking statements in good faith based upon on its current expectations and projections about future events. These forward-looking statements are not guarantees but rather are projections based upon current facts subject to known and unknown risks, uncertainties and assumptions about the Registrant that may cause its actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "continue," or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in this Annual Report on Form 10-K and in the Registrant's other Securities and Exchange Commission filings. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. For a more detailed discussion of the foregoing risks and uncertainties, see "Risk Factors".
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General Background of Brenham
We were incorporated as Brenham Oil & Gas Inc. on November 7, 1997 under the laws of the State of Texas as a wholly-owned subsidiary of American International Industries, Inc. (“American” or “AMIN”). Brenham Oil and Gas Corp (“Brenham”), a Nevada corporation, was incorporated on April 21, 2010 and Brenham Oil & Gas Inc. became a wholly-owned subsidiary of Brenham. American owns approximately 51% of our Common Stock.
Our principal executive offices are located at 601 Cien Street, Suite 235, Kemah, Texas 77565-3077, which are the executive offices of American, and are provided to us on a rent-free basis. The telephone number of our principal executive offices is (281) 334-9479. Our web site is brenhamoil.com.
Our Business Plan
Brenham’s primary objective and current focus will be accessing capital to fund its drilling programs in Texas.
Brenham is an independent exploration and production company focused on acquiring a portfolio of assets in the United States and international locations. Brenham’s approach is to create a foundation of development and production assets in the United States, coupled with high potential international exploration opportunities.
Our focus for United States production is Texas, including both conventional and unconventional resources. The Company intends to identify existing oil fields where technology can be applied to increase the percentage of oil that can be recovered from such fields. Secondly, the Company seeks to identify acreage in unconventional resources capable of generating oil and condensate production.
Recent Developments
During the year ended December 31, 2015, the Company fully impaired all of its oil and gas properties.
Our Properties
Brenham holds oil and gas leases interests in Texas.
Gillock Field - Galveston County, Texas
Gillock Fields are segments of a large, complexly faulted deep seated salt dome. Brenham purchased four square miles of 3-D seismic data for the purpose of completion of its drilling program in this field. A preliminary review of the reprocessed 3-D seismic data shows numerous fault traps and amplitude bright spots normally associated with hydrocarbon production at both the Frio and deeper Vicksburg level. Additionally, structural rollover indicative of a hydrocarbon trap is also present in shallower horizons as well. As there are well over 20 pay zones in Gillock Field, the possibility of shallower pay would not be a surprise and all of the aforementioned anomalies are being carefully investigated and evaluated by our experienced geophysical team. The 3-D seismic data in conjunction with adjacent and nearby production will enable Brenham to pick precise drillable locations in the Frio as well as providing Brenham the opportunity to upgrade the reserve category of the Vicksburg Formation, thereby enhancing the value of the Company. Due to a significant drop in oil prices in 2015, the operations were shut-down during 2015. Management of the Company concluded that all of the Company’s oil and gas assets were impaired as of December 31, 2015, and the assets were written off as of December 31, 2015.
Pierce Junction Field - Houston, Texas
The Pierce Junction Field includes eight wells that were shut-in and not producing as of December 31, 2015, with an additional seven wells scheduled for mechanical work-over that should add more oil reserves. Additional offsetting acreage can be developed by Brenham on a well by well basis to produce additional oil reserves from several producing horizons.
Washington County, Texas
Since November 7, 1997 (inception), Brenham Oil & Gas Inc. has owned an oil and gas mineral royalty interest on a 24-acre parcel of land located in Washington County, Texas. The royalty interest is currently leased by Anadarko Petroleum Corporation for a term continuing until the covered minerals are no longer produced in paying quantities from the leased premises.
Competition
The oil and gas industry is highly competitive. We will encounter strong competition from major oil and gas companies and from other independent operators in seeking to acquire prospects and hiring and retaining qualified personnel. Many, if virtually not all, of these competitors have far greater financial, technical and personnel resources and far longer operating histories than Brenham. As a result, our competitors are able to devote more financial and other resources to evaluate and acquire the more desirable prospects. Furthermore, our competitors are expected to better withstand the financial losses resulting from unsuccessful drill attempts, sustained periods of volatility in financial markets and generally adverse global and industry-wide economic conditions.
We are also affected by competition for drilling rigs and the availability of related equipment. To the extent that in the future we acquire and develop undeveloped properties, higher commodity prices generally increase the demand for drilling rigs, supplies, services, equipment and crews, and can lead to shortages of, and increasing costs for, drilling equipment, services and personnel. Over the past three years, oil and gas companies have experienced higher drilling and operating costs. Shortages of, or increasing costs for, experienced drilling crews and equipment and services could restrict our ability to drill wells and conduct our operations. There can be no assurance that we will be able to compete successfully in all of the above areas.
Environmental Matters and Regulation
General
Virtually all aspects of oil and gas industry are subject to a vast array of laws and regulations, both domestically and internationally. In addition, it may be expected that in the future, new laws and regulations will be adopted that will limit certain operations and/or increase the costs of such operations. These laws and regulations either presently require or in the future may require, among other things:
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acquiring various permits before drilling commences;
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enjoining some or all of the operations of facilities deemed not in compliance with permits;
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restricting the types, quantities and concentration of various substances that can be released into the environment in connection with oil and gas and natural gas drilling, production and transportation activities;
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limiting or prohibiting drilling activities in certain locations lying within protected or otherwise sensitive areas; and
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requiring remedial measures to mitigate pollution from our operations.
Compliance with these laws can be costly; the regulatory burden on the oil and gas industry increases the cost of doing business in the industry and consequently affects profitability. Moreover, public interest in the protection of the environment has increased significantly in recent years, notwithstanding the widely recognized public demand for “energy independence.” Offshore drilling in some areas has been opposed by regulatory agencies as well as environmental groups and, in other areas, has been restricted by regulations. Our operations could be adversely affected to the extent laws are enacted or other governmental action is taken that prohibits or restricts offshore drilling or imposes environmental requirements that result in increased costs to the oil and gas industry in general, such as more stringent or costly waste handling, disposal or cleanup requirements.
The following is a summary of some of the existing laws or regulatory issues to which we and our business operations are or may be subject to in the future.
Oil and Gas Pollution Act of 1990
The U.S. Oil and Gas Pollution Act of 1990 ("OPA") and regulations thereunder impose liability on responsible parties for damages resulting from oil and gas spills into or upon navigable waters or in the exclusive economic zone of the U.S. Liability under the OPA is strict, joint and several and potentially unlimited. A "responsible party" under the OPA includes the lessee or permittee of the area in which an offshore facility is located. The OPA also requires the lessee or permittee of the offshore area in which a covered offshore facility is located to establish and maintain evidence of financial responsibility to cover potential liabilities related to an oil and gas spill for which such person would be statutorily responsible in an amount that depends on the risk represented by the quantity or quality of oil and gas handled by such facility. The MMS of the U.S. Department of the Interior ("DOI") has promulgated regulations that implement the financial responsibility requirements of the OPA. A failure to comply with the OPA's requirements or inadequate cooperation during a spill response action may subject a responsible party to civil, administrative and/or criminal enforcement actions.
Clean Water Act
The U.S. Federal Water Pollution Control Act of 1972, as amended, ("CWA") imposes restrictions and controls on the discharge of pollutants, produced waters and other oil and gas and natural gas wastes into waters of the U.S. These controls have become more stringent over the years, and it is possible that additional restrictions will be imposed in the future. Under the CWA, permits must be obtained to discharge pollutants into regulated waters. In addition, certain state regulations and the general permits issued under the federal National Pollutant Discharge Elimination System program prohibit discharge of produced waters and sand, drilling fluids, drill cuttings, and certain other substances related to the oil and gas industry into certain coastal and offshore waters.
The CWA provides for civil, criminal, and administrative penalties for unauthorized discharges of oil and gas and other hazardous substances and imposes liability on parties responsible for those discharges for the costs of cleaning up related damage and for natural resource damages resulting from the release. Comparable state statutes impose liabilities and authorize penalties in the case of an unauthorized discharge of petroleum or its derivatives, or other hazardous substances, into state waters.
Marine Protected Areas
Executive Order 13158, issued in 2000, directs federal agencies to safeguard existing Marine Protected Areas ("MPAs") in the U.S. and establish new MPAs. The order requires federal agencies to avoid harm to MPAs to the extent permitted by law and to the maximum extent practicable. It also directs the U.S. Environmental Protection Agency ("EPA") to propose regulations under the CWA to ensure appropriate levels of protection for the marine environment. This order and related CWA regulations have the potential to adversely affect our operations by restricting areas in which we may carry out future development and exploration projects and/or causing us to incur increased operating expenses.
Consideration of Environmental Issues in Connection with Governmental Approvals
Our operations will frequently require licenses, permits and other governmental approvals. Several federal statutes, including the Outer Continental Shelf Lands Act ("OCSLA"), the National Environmental Policy Act ("NEPA"), and the Coastal Zone Management Act ("CZMA") require federal agencies to evaluate environmental issues in connection with granting such approvals or taking other major agency actions. OCSLA, for instance, requires the DOI to evaluate whether certain proposed activities would cause serious harm or damage to the marine, coastal or human environment, and gives the DOI authority to refuse to issue, suspend or revoke permits and licenses allowing such activities in certain circumstances, including when there is a threat of serious harm or damage to the marine, coastal or human environment. Similarly, NEPA requires DOI and other federal agencies to evaluate major agency actions having the potential to significantly impact the environment. In the course of such evaluations, an agency must prepare an environmental assessment and, potentially, an environmental impact statement. CZMA, on the other hand, aids states in developing a coastal management program to protect the coastal environment from growing demands associated with various uses, including offshore oil and gas and natural gas development. In obtaining various approvals from the DOI, we will have to certify that we will conduct our activities in a manner consistent with any applicable CZMA program. Violation of these requirements may result in civil, administrative or criminal penalties.
Naturally Occurring Radioactive Materials
Wastes containing naturally occurring radioactive materials ("NORM") may also be generated in connection with our operations. Certain oil and gas and natural gas exploration and production activities may enhance the radioactivity of NORM. In the U.S., NORM is subject primarily to regulation under individual state radiation control regulations. In addition, NORM handling and management activities are governed by regulations promulgated by the Occupational Safety and Health Administration. These regulations impose certain requirements concerning worker protection; the treatment, storage and disposal of NORM waste; the management of waste piles, containers and tanks containing NORM; and restrictions on the uses of land with NORM contamination.
Resource Conservation and Recovery Act
The U.S. Resource Conservation and Recovery Act ("RCRA") and comparable state statutes regulate the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. Under the auspices of the EPA, individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own more stringent requirements. Drilling fluids, produced waters, and most of the other wastes associated with the exploration, development and production of crude oil and gas or natural gas are currently exempt from RCRA's requirements pertaining to hazardous waste and are regulated under RCRA's non-hazardous waste and other regulatory provisions. A similar exemption is contained in many of the state counterparts to RCRA. At various times in the past, proposals have been made to amend RCRA to rescind the exemption that excludes oil and gas and natural gas exploration and production wastes from regulation as hazardous waste. Accordingly, it is possible that certain oil and gas and natural gas exploration and production wastes now classified as non-hazardous could be classified as hazardous wastes in the future. Any such change could result in an increase in our costs to manage and dispose of wastes, which could have a material adverse effect on our results of operations and financial position. Also, in the course of our operations, we expect to generate some amounts of ordinary industrial wastes, such as waste solvents and waste oil and gas that may be regulated as hazardous wastes.
Air Pollution Control
The U.S. Clean Air Act ("CAA") and state air pollution laws adopted to fulfill its mandates provide a framework for national, state and local efforts to protect air quality. Our operations will utilize equipment that emits air pollutants subject to federal and state air pollution control laws. These laws require utilization of air emissions abatement equipment to achieve prescribed emissions limitations and ambient air quality standards, as well as operating permits for existing equipment and construction permits for new and modified equipment. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the CAA and associated state laws and regulations, including the suspension or termination of permits and monetary fines.
Superfund
The U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, ("CERCLA") also known as "Superfund," imposes joint and several liability for response costs at certain contaminated properties and damages to natural resources, without regard to fault or the legality of the original act, on some classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the current or past owner or operator of the site where the release occurred and anyone who disposed or arranged for the disposal of a hazardous substance at the site. CERCLA also authorizes the EPA and, in some instances, third parties to act in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur.
Protected Species and Habitats
The federal Endangered Species Act, the federal Marine Mammal Protection Act, and similar federal and state wildlife protection laws prohibit or restrict activities that could adversely impact protected plant and animal species or habitats. Oil and gas and natural gas exploration and production activities could be prohibited or delayed in areas where such protected species or habitats may be located. Additionally, expensive mitigation may be required to accommodate such activities.
Health and Safety
Our operations may become subject to the requirements of the federal Occupational Safety and Health Act ("OSH Act") and comparable state statutes. These laws and their implementing regulations strictly govern the protection of the health and safety of employees. The OSH Act hazard communication standard, EPA community right-to-know regulations under Title III of the Superfund Amendments and Reauthorization Act of 1986 and similar state statutes require that we organize and/or disclose information about hazardous materials used or produced in our operations. Such laws and regulations also require us to ensure our workplaces meet minimum safety standards and provide for compensation to employees injured as a result of our failure to meet these standards as well as civil and/or criminal penalties in certain circumstances.
Accidental spills or releases may occur in the course of our future operations, and we cannot assure you that we will not incur substantial costs and liabilities as a result, including costs relating to claims for damage to property and persons. Moreover, environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. Accordingly, we cannot assure you that we have been or will be at all times in compliance with such laws, or that environmental laws and regulations will not change or become more stringent in the future in a manner that could have a material adverse effect on our financial condition, results of operations or ability to make distributions to you.
Other Regulation Related to the Oil and Gas Industry
The oil and gas industry is regulated by numerous federal, state and local authorities. 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, both federal and state, are authorized by statute to issue rules and regulations binding on the oil and gas industry and its individual members, some of which carry substantial penalties for failure to comply. Although the regulatory burden on the oil and gas industry may increase our cost of doing business by increasing the future cost of transporting our production to market, these burdens generally do not affect us any differently or to any greater or lesser extent than they affect other companies in the industry with similar types, quantities and locations of production.
Homeland Security Regulations
The Department of Homeland Security Appropriations Act of 2007 requires the Department of Homeland Security ("DHS") to issue regulations establishing risk-based performance standards for the security of chemical and industrial facilities, including oil and gas and natural gas facilities that are deemed to present "high levels of security risk." The DHS is currently in the process of adopting regulations that will determine whether our operations may in the future be subject to DHS-mandated security requirements. Presently, it is not possible to accurately estimate the costs we could incur, directly or indirectly, to comply with any such facility security laws or regulations, but such expenditures could be substantial.
U.S. Coast Guard and the U.S. Customs Service
In case we have to transport drilling rigs to potential sites in the U.S. Gulf of Mexico, our operation of such drilling rigs would become subject to the rules and regulations of the U.S. Coast Guard and the U.S. Customs Service. Such regulation sets safety standards, authorizes investigations into vessel operations and accidents and governs the passage of vessels into U.S. territory. We would be required by these agencies to obtain various permits, licenses and certificates with respect to these operations.
International Laws and Regulations
Our exploration and production activities that may occur in other nations, including those in West Africa, are subject to the laws and regulations of such nations. These regulations may govern licensing for drilling operations, mandatory involvement of local partners in our operations, taxation of our revenues, safety and environmental matters and our ability to operate in such jurisdictions as a foreign participant.
Failure to comply with these laws and regulations also may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties. Moreover, these laws and regulations could change in ways that could substantially increase our costs.
Employees
As of December 31, 2015, we had four employees. All employees are currently located in the U.S. None of these employees are represented by labor unions or covered by any collective bargaining agreement. We believe that relations with our employees are satisfactory.
Offices
We currently utilize approximately 1,500 square feet of office space at the offices of American located at 601 Cien Street, Suite 235, Kemah, TX 77565-3077, which are provided to us by American on a rent-free basis.
Risk Factors
While investing in our Common Stock will provide an investor with an equity ownership interest in Brenham, our stockholders will be subject to risks inherent in investing in the highly competitive oil and gas industry, generally, and in Brenham, specifically, which has very limited operating history and limited resources. The performance of our shares will reflect the performance of our business relative to, among other things, general economic and industry conditions, market conditions and competition. The value of the investment may increase or decrease and could result in a loss in any investment in our shares. An investor should carefully consider the following factors as well as other information contained in this annual report on Form 10-K.
This annual report on Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including the risk factors described below and the other factors described elsewhere in this Form 10-K.
ITEM 1A. RISK FACTORS RELATED TO OUR BUSINESS
We have no proven reserves and the prospects that we may decide to pursue for exploration and development may not yield oil and gas in commercial quantities or quality, if at all, in which event we will incur significant losses.
At present, we have no proven reserves. Any future prospects may not prove to be commercially viable even if available seismic and geological information indicate the potential presence of oil and gas. As a result, any prospects that we may decide to acquire and develop may not yield oil and gas in commercial quantities or quality, or at all. Evaluating prospects will require substantial seismic data reprocessing and interpretation. Even when properly used and interpreted, 2-D and 3-D seismic data and visualization techniques are only tools used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators and do not enable the interpreter to know whether hydrocarbons are, in fact, present in those structures. We therefore do not know if any of our prospects will contain oil and gas in sufficient quantities or quality to recover drilling and completion costs or to be economically viable. Even if oil and gas is found on our prospects in commercial quantities, construction costs of oil and gas pipelines or floating production systems, as applicable, and transportation costs may prevent such prospects from being economically viable.
We may face substantial uncertainties in connection with any prospects, which could significantly delay or even prevent our ability to act on our plan of operation.
In this filing, we provide statements in connection with our plan of operation. Statements in connection with our plan of operation may face substantial uncertainties. To date, we have not yet identified any prospects. Any analogies drawn by us from other companies’ wells, prospects or producing fields may not prove to be indicators of the success of developing reserves from our prospects, notwithstanding the proximity of our prospects to other companies producing properties. Furthermore, evaluating the to-be-acquired data from wells or prospects produced by other parties which we may use may not lead to the results that we may expect.
It is possible that none of the future wells on our prospects’ properties will find commercially exploitable accumulations of oil and gas. Any significant variance between actual results and our assumptions could then materially and adversely affect the quantities of oil and gas attributable to any prospects.
Identifying prospects and drilling wells is speculative, often involving significant costs that may exceed our expectations and, further, may not result in any discoveries of future production or reserves in commercially exploitable quantities. Any material inaccuracies in future drilling costs, estimates or underlying assumptions will materially adversely affect our plan of operation and business objectives, thereby adversely affecting the value of our shares.
Seeking prospects, exploring for and developing oil and gas reserves involves a high degree of operational and financial risk, which precludes our ability to make any definitive estimates as to the time required and costs involved in reaching certain objectives. The actual costs of seeking prospects, drilling, completing and operating wells may exceed our budgeted costs and can increase significantly when drilling costs rise due to a tightening in the supply of various types of oil and gas field equipment and related services. Prospects may be unsuccessful for many reasons, including geological conditions, weather, cost overruns, equipment shortages and mechanical difficulties. Exploratory wells bear a much greater risk of loss than development wells. Moreover, the successful drilling of an oil and gas well does not necessarily result in a profit on investment. A variety of factors, both geological and market-related, can cause a well to become uneconomic or only marginally economic. Initial costs associated with identifying prospects and drilling wells require significant additional exploration and development, regulatory approval and commitments of resources prior to commercial development. If our actual costs are significantly more than any estimated costs, we may not be able to continue our plan of operation and/or business objectives and we would be forced to modify our plan of operation.
Our unidentified prospects and drilling locations may be scheduled out over several years, making them susceptible to uncertainties that could materially affect the occurrence or timing of any drilling, thereby hindering our ability to generate cash flow from operations, if any.
Our ability to identify, drill and develop future drilling locations depends on a number of factors, including the availability of equipment and capital, seasonal conditions, regulatory approvals, oil and gas prices, costs and drilling results. The final determination on whether to drill any of these prospects will be dependent upon the factors described elsewhere in this annual report. Due to these uncertainties, we do not know if any presently unidentified Prospect that we may identify in the future will be drilled within a reasonable timeframe, or at all, or, if we will be able to economically produce oil and gas in commercially exploitable quantities from these or any other potential drilling locations. As such, our actual drilling activities may be materially different from our expectations, which could adversely affect our plan of operation and future financial condition.
We expect not to be the operator on all or even many of our future prospects, and, therefore, we will not be able to control the timing of exploration or development efforts, associated costs, or the rate of production of any non-operated assets, which could prevent us from realizing any return targets that we may envision.
As we carry out our exploration and development programs, we may enter into arrangements with respect to future prospects that result in a greater proportion of our prospects being operated by others. As a result, we may have limited ability to exercise influence over the operations of our future prospects that will be operated by our potential partners. Dependence on third-party operators could prevent us from realizing certain return targets for those co-operated prospects. The success and timing of identifying prospects, exploration and development activities will depend on a number of factors that will be largely outside of our control, including:
- the timing and amount of capital expenditures;
- the co-operator's expertise and financial resources;
- approval of other participants in drilling wells;
- selection of technology; and
- the rate of production of reserves, if any.
This limited ability to exercise control over the operations of some of our prospects may cause a material adverse effect on our results of operations and financial condition.
We are dependent on the experience of members of our management and technical team and the loss of one or more such persons could significantly delay our plan of operation if we are unable to replace such persons with qualified individuals on a timely basis, which could have an adverse effect on our share price and our results of operations.
Investors in our Common Stock must rely upon the ability, expertise, judgment and discretion of our management and the success of our technical team in identifying prospects and in discovering and developing oil and gas reserves. Our performance and success are dependent, in part, upon key members of our management and technical team, and the departure of such key persons would be detrimental to our future success. In making a decision to invest in our Common Stock, you must be willing to rely to a significant extent on our management's experience, discretion and business judgment. A significant percentage of the Common Stock of our Company is held by members of our management and our corporate parent, American. There can be no assurance that our management will remain in place. We do not have any "key man" life insurance on any member of our team. The loss of any of our management and technical team members could have a material adverse effect on our results of operations and financial condition, as well as on the market price of our Common Stock. See "Directors and Executive Officers" and “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.”
Our future development and exploration operations require substantial capital, and we may be unable to obtain needed capital or financing on satisfactory terms, or at all, which would delay or even prevent us from successfully pursuing and fully developing our business plan and our ability to generate revenues in both the short- and long-term.
The oil and gas industry is capital intensive and we anticipate that we will need to raise significant amounts of capital to meet our funding requirements, in amounts that we have not yet determined. We expect our capital outlays and operating expenditures to increase substantially over at least the next several years as we start our operations. Identifying prospects, obtaining seismic data and commencing exploration and production are all very expensive and we expect that we will need to raise substantial capital, through future private or public equity offerings, strategic alliances or debt financing, before we achieve commercialization of any of our prospects.
Our future capital requirements will depend on many factors, including:
- the scope, rate of progress and cost of our exploration and production activities;
- oil and gas and natural gas prices;
- our ability to locate and acquire prospects;
- our ability to produce oil and gas or natural gas from those reserves;
- the terms and timing of any drilling and other production-related arrangements that we may enter into;
- the cost and timing of governmental approvals and/or concessions; and
- the effects of competition by larger companies operating in the oil and gas industry.
We do not currently have any commitments for external funding and we do not expect to generate any significant revenue from production for several years, or at all. Additional financing may not be available on favorable terms, or at all. Even if we succeed in selling additional securities to raise funds, the sale of additional equity securities would dilute the ownership percentage of our existing shareholders and new investors may demand rights, preferences or privileges senior to those of our existing holders of our Common Stock. If we raise additional capital through debt financing, the financing may involve covenants that restrict our business activities. If we choose to offer interests in our prospects to third-party operators, we may lose operating control over such prospects.
Our working capital needs are difficult to forecast and may vary significantly, which could require us to seek additional financing that we may not be able to obtain on satisfactory terms, or at all. The failure or any significant delay in raising capital as needed may be expected to materially reduce or eliminate our opportunity for success.
At present, our working capital needs are extremely difficult to predict. This difficulty is due primarily to our not having identified actual prospects and therefore we lack the ability to estimate with any degree of accuracy the costs associated with identifying and acquiring prospects, the timing and costs related to our exploration and development efforts, the availability of personnel and equipment necessary for such efforts, fluctuations in the price of oil and gas, the costs and timing of regulatory approvals and the number of prospects we determine to pursue. We may therefore be subject to significant and rapid increases in our working capital needs that could require us to seek additional financing sources and there can be no assurance in our ability to secure additional financing at acceptable terms, if at all. Restrictions in any debt agreements that we may enter into may impair our ability to obtain other sources of financing.
We will be dependent upon our ability to enter into arrangements for financing with third parties and any delay or failure to enter into such arrangements could adversely affect the market price of our shares.
Our ability to identify and acquire prospects will depend upon our ability to identify and enter into financing arrangements in sufficient amounts at acceptable terms, of which there can be no assurance. This will include strategic relationships with existing oil and gas development and exploration companies, public or private sales of equity or debt securities as well as from other funding sources and/or joint ventures with third parties. Due to our long-term capital requirements, we may seek to access the public or private equity markets if and when conditions are favorable. We do not have any committed sources of financing at this time, and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us, or at all. If we raise funds by selling additional shares of Common Stock or other securities convertible into our Common Stock, the ownership interest of our existing shareholders will be diluted. If we are not able to obtain financing when needed, we may be unable to successfully carry out our business plan. As a result, we may have to significantly limit our operations for the foreseeable future and, as a result, our business, financial condition and results of operations would be materially adversely affected.
Current economic and credit conditions could adversely affect our plan of operation and could result in significant losses for the foreseeable future.
Our ability to secure additional financing and satisfy our financial obligations and indebtedness outstanding from time to time will depend upon our future operating performance, which is subject to the prevailing general economic and credit market conditions, including interest rate levels and the availability of credit generally, and financial, business and other factors, most of which will be beyond our control. The prolonged continuation or worsening of current credit market conditions would have a material adverse effect on our ability to secure financing on favorable terms, if at all.
The development schedule of any oil and gas projects that we may identify, including the availability and cost of drilling rigs, equipment, supplies, personnel and oil and gas field services, is subject to delays and cost overruns.
Historically, most oil and gas projects have experienced delays and capital cost increases and overruns due to, among other factors, the unavailability or high cost of drilling rigs and other essential equipment, supplies, personnel and oil and gas field services. The cost to develop prospects has not been fixed and remains dependent upon a number of factors, including the completion of detailed cost estimates and final engineering, contracting and procurement costs. Construction and operation schedules may not proceed as planned and may experience delays or cost overruns. Any delays may increase the costs of the projects, requiring additional capital, and such capital may not be available in a timely and cost-effective fashion.
Non-U.S. operations may be adversely affected by political and economic circumstances in the countries in which we may operate, in which event we may experience delays or be prevented from commencing or continuing operations in such countries.
Non-U.S. oil and gas exploration, development and production activities are subject to political and economic uncertainties (including but not limited to changes, sometimes frequent or marked, in energy policies or the personnel administering them), expropriation of property, cancellation or modification of contract rights, foreign exchange restrictions, currency fluctuations, royalty and tax increases and other risks arising out of foreign governmental sovereignty over the areas in which our operations are conducted, as well as risks of loss due to civil strife, acts of war, guerrilla activities and insurrection. These risks may be higher in the developing countries in which we intend to conduct our activities, including Africa.
Potential operations in these areas increase our exposure to risks of war, local economic conditions, political disruption, civil disturbance and governmental policies that may:
- disrupt our operations;
- restrict the movement of funds or limit repatriation of profits;
- lead to U.S. government or international sanctions; and
- limit access to markets for periods of time.
Several countries in Africa are presently experiencing or have experienced political instability in the past. Disruptions may occur in the future, and losses caused by these disruptions may occur that will not be covered by insurance, if, indeed, any insurance is available at costs that we can afford.
Consequently, our non-U.S. exploration, development and production activities may be substantially affected by factors which could have a material adverse effect on our financial condition and results of operations. Furthermore, in the event of a dispute arising from non-U.S. operations, we may be subject to the exclusive jurisdiction of courts outside the U.S. or may not be successful in subjecting non-U.S. persons to the jurisdiction of courts in the U.S., which could adversely affect the outcome of such dispute.
The oil and gas industry, including the acquisition of exploratory acreage in Africa, is intensely competitive and unless we are able to compete effectively, our plan of operation will have to be modified and our ability to pursue prospects could be materially, adversely effected.
The international oil and gas industry, including in the U.S. and Africa, is highly competitive in all aspects, including the exploration for, and the development of, new sources of supply. We expect to operate in a highly competitive environment for acquiring exploratory prospects and hiring and retaining trained personnel. Many of our competitors possess and employ financial, technical and personnel resources substantially greater than us, which can be particularly important in the areas in which we operate. These companies may be able to pay more for productive oil and gas properties and prospects and to evaluate, bid for and purchase a greater number of properties and prospects than our financial or personnel resources permit. Furthermore, these companies may also be better able to withstand the financial pressures of unsuccessful drill attempts, sustained periods of volatility in financial markets and generally adverse global and industry-wide economic conditions, and may be better able to absorb the burdens resulting from changes in relevant laws and regulations, which would adversely affect our competitive position. Our ability to acquire additional prospects and to find and develop reserves in the future will depend on our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. Also, there is substantial competition for available capital for investment in the oil and gas industry. As a result of these and other factors, we may not be able to compete successfully in an intensely competitive industry, which could cause a material adverse effect on our results of operations and financial condition.
Participants in the oil and gas industry are subject to complex laws that can affect the cost, manner or feasibility of doing business and could result in unanticipated costs and delays that could adversely affect our financial condition and the price of our shares.
Exploration and production activities in the oil and gas industry are subject to extensive local, state, federal and international regulations. We may be required to make large expenditures to comply with governmental regulations, particularly in respect of the following matters:
- licenses for drilling operations;
- royalty increases, including retroactive claims;
- drilling and development bonds;
- reports concerning operations;
- the spacing of wells;
- unitization of oil and gas accumulations;
- remediation or investigation activities for environmental purposes; and
- taxation.
Under these and other laws and regulations, we could be liable for personal injuries, property damage and other types of damages. Failure to comply with these laws and regulations also may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties. Moreover, these laws and regulations could change in ways that could substantially increase our costs. Any such liabilities, penalties, suspensions, terminations or regulatory changes could have a material adverse effect on our financial condition and results of operations.
Our future operations are subject to numerous environmental, health and safety regulations which may result in material liabilities and costs that we do not anticipate or that we may not be able to adequately fund; any inability to fund material liabilities and related costs could result in a discontinuation of our operations.
Our future operations will be, subject to various international, foreign, federal, state and local environmental, health and safety laws and regulations governing, among other things, the emission and discharge of pollutants into the ground, air or water, the generation, storage, handling, use and transportation of regulated materials and the health and safety of our employees. We are required to obtain environmental permits from governmental authorities for certain of our operations, including drilling permits for our wells. There is a risk that we will not be in complete compliance with these permits and the environmental laws and regulations to which we are subject at all times. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators, including through the revocation of our permits or the suspension or termination of our operations. If we fail to obtain permits in a timely manner or at all (due to opposition from community or environmental interest groups, governmental delays, or any other reasons), such failure could impede our operations, which could have a material adverse effect on our results of operations and our financial condition.
We could be held liable for all environmental, health and safety costs and liabilities arising out of our actions and omissions as well as those of potential third-party contractors. To the extent we do not address these costs and liabilities or if we are otherwise in breach of our lease requirements, our future leases could be suspended or terminated. We intend to hire third parties to perform the majority of the drilling and other services related to our operations. There is a risk that we may contract with third parties with unsatisfactory environmental, health and safety records or that our contractors may be unwilling or unable to cover any losses associated with their acts and omissions. Accordingly, we could be held liable for all costs and liabilities arising out of the acts or omissions of our contractors, which could have a material adverse effect on our results of operations and financial condition.
We may be required to maintain bonding or insurance coverage for certain risks relating to our operations, including environmental risks. Even under such policies, we may not be insured against certain risks. Our insurance may not cover any or all environmental claims that might arise from our operations or those of our third-party contractors. If a significant accident or other event occurs and is not fully covered by our insurance, or our third-party contractors have not agreed to bear responsibility, such accident or event could have a material adverse effect on our results of operations and our financial condition. In addition, we may not be able to obtain required bonding or insurance coverage at all or in time to meet our anticipated startup schedule for each well, and if we fail to obtain this bonding or coverage, such failure could have a material adverse effect on our results of operations and financial condition.
In addition, we expect continued attention to climate change issues. Various countries and U.S. states and regions have agreed to regulate emissions of greenhouse gases, including methane (a primary component of natural gas) and carbon dioxide, a byproduct of oil and gas and natural gas combustion. The U.S. federal government, as well as the U.S. Environmental Protection Agency, are currently considering national greenhouse gas regulation. Each have proposed bills or rules which would require or result in greenhouse gas emissions reductions. Final laws or regulations could be adopted this or next year. The regulation of greenhouse gases in the areas in which we intend to operate could adversely impact our operations.
Environmental, health and safety laws are complex, change frequently and have tended to become increasingly stringent over time. Our costs of complying with current and future environmental, health and safety laws, and our liabilities arising from releases of, or exposure to, regulated substances may adversely affect our results of operations and our financial condition. See "Description of Business - Environmental Matters and Regulation."
We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act could have us subject to civil or criminal liability and that could have a material adverse effect on our business and prevent us from operating in one or more jurisdictions.
We are subject to the Foreign Corrupt Practices Act ("FCPA") and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties for the purpose of obtaining or retaining business. We may do business in the future in countries and regions, in which we may face, directly or indirectly, corrupt demands by officials, tribal or insurgent organizations, or private entities. Thus, we face the risk of unauthorized payments or offers of payments by one of our employees or consultants, even though these parties are not always subject to our control. Our existing safeguards and any future improvements may prove to be less than effective, and our employees and consultants may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the government may seek to hold us liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
RISK FACTORS RELATED TO MARKET OF OUR COMMON STOCK
The concentration of our capital stock ownership among our largest stockholders and their affiliates will limit your ability as individual shareholders to influence corporate matters.
Our largest shareholder, American, owns 51.0% of our outstanding Common Stock. Consequently, American will have significant influence over all matters that require approval by our shareholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership will limit your ability to influence corporate matters and, as a result, actions may be taken that you may not view as beneficial.
Provisions of our articles of incorporation and by-laws could discourage potential acquisition proposals and could deter or prevent a change in control, which shareholders may deem not be in their best interests.
Some provisions in our articles of incorporation and by-laws, as well as statutes, may have the effect of delaying, deferring or preventing a change in control. These provisions, including those providing for the possible issuance of shares of our Preferred Stock, which may be divided into series and with the preferences, limitations and relative rights to be determined by the Board of Directors, and the right of the board of directors to amend the by-laws, may make it more difficult for other persons, without the approval of our board of directors, to make a tender offer or otherwise acquire a substantial number of shares of our Common Stock or to launch other takeover attempts that a shareholder might consider to be in his or her best interest. These provisions could limit the price that some investors might be willing to pay in the future for shares of our Common Stock.
Your Percentage Ownership of our Common Shares will be Diluted by Future Share Issuances
Our Articles of Incorporation authorize the issuance of 200,000,000 shares of Common Stock, par value $0.0001 and 10,000,000 shares of Preferred Stock, par value $0.0001. At December 31, 2015, we had 128,293,536 shares of Common Stock issued and -0- shares of Preferred Stock issued. We may issue additional shares of Common Stock in connection with any future acquisitions of operating businesses or assets or to raise additional funding for our operations. To the extent that additional shares of Common Stock are issued, our shareholders would experience dilution of their respective ownership interests in the Company. The issuance of additional shares of Common Stock may adversely affect the market price of our Common Stock and could impair our ability to raise capital through the sale of our equity securities.
To the extent we issue new shares to fund acquisitions, to raise capital and/or to compensate employees and other persons, your percentage ownership of our shares will be further diluted.
We Do Not Intend To Pay Future Cash Dividends.
We currently do not anticipate paying cash dividends on our Common Stock at any time in the near future. We may never pay cash dividends or distributions on our Common Stock. Any credit agreements which we may enter into with institutional lenders may restrict our ability to pay dividends. Whether we pay cash dividends in the future will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements and any other factors that the board of directors decides is relevant.
Our Common Stock is Illiquid And Should A Market For Our Securities Develop The Price Of Our Securities May Be Volatile.
Our Common Stock is currently subject to quotation on the FINRA OTCBB and the trading market for our securities may likely remain illiquid. This means that as an investor you will likely have a difficult time selling our Common Stock at market. Furthermore, because of the small amount of shares that will represent the public float, the market price of our Common Stock may experience significant volatility. Other factors that may contribute to volatility should a market for our Common Stock develop are, our quarterly results, litigation, changes in general conditions in the economy and general market conditions could cause the market price of the Common Stock to fluctuate substantially. In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the trading prices of equity securities of many companies. Frequently, these price and volume fluctuations have been unrelated to the operating performance of the affected companies.
Broker-Dealers may be discouraged from effecting transactions in our Common Stock because they may be considered a “Penny Stock” and are subject to the applicable Penny Stock rules.
Rules 15g-1 through 15g-9 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) impose sales practice and disclosure requirements on certain brokers-dealers who engage in certain transactions involving a “penny stock.” The SEC has adopted regulations which generally define "penny stock" to be any equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our Common Stock is covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and "accredited investors". The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules may discourage investor interest in and limit the marketability of our Common Stock.
In addition to the "penny stock" rules, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our Common Stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As of the filing of this annual report on Form 10-K, there were no unresolved comments from the staff of the Securities and Exchange Commission (“SEC”).
ITEM 2. DESCRIPTION OF PROPERTIES
We currently utilize approximately 1,500 square feet of office space at the offices of American located at 601 Cien Street, Suite 235, Kemah, TX 77565-3077, which are provided to us by American on a rent-free basis.
For information regarding the Company’s oil & gas properties, see “Item 1. Description of Business” above.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Common Stock is subject to quotation on the pink sheets. There has only been limited trading activity in our Common Stock, which began trading on August 29, 2011. Quotation of the Company's securities on the pink sheets limits the liquidity and price of the Company's Common Stock more than if the Company's shares of Common Stock were listed on The Nasdaq Stock Market or a national exchange. For the periods indicated, the following table sets forth the high and low bid prices per share of Common Stock. The below prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.
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2015
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2014
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High
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First Quarter ended March 31,
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$ | 0.030 | $ | 0.010 | $ | 0.050 | $ | 0.013 | ||||||||
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Second Quarter ended June 30,
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$ | 0.040 | $ | 0.010 | $ | 0.045 | $ | 0.025 | ||||||||
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Third Quarter ended September 30,
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$ | 0.040 | $ | 0.020 | $ | 0.030 | $ | 0.012 | ||||||||
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Fourth Quarter ended December 31,
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$ | 0.025 | $ | 0.020 | $ | 0.032 | $ | 0.010 | ||||||||
As of December 31, 2015, our shares of common stock were held by approximately 527 stockholders of record. The transfer agent for our common stock is VStock Transfer, LLC, 18 Lafayette Place, Woodmere, NY 11598.
Dividends
Holders of common stock are entitled to dividends when, as, and if declared by the Board of Directors, out of funds legally available therefore. We have never declared cash dividends on our common stock and our Board of Directors does not anticipate paying cash dividends in the foreseeable future as it intends to retain future earnings to finance the growth of our businesses. There are no restrictions in our articles of incorporation or bylaws that restrict us from declaring dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
None.
Sale of Unregistered Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
Not required.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION
The following discussion should be read in conjunction with our financial statements and the related notes appearing elsewhere in this annual report. The following discussion contains forward-looking statements reflecting our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and elsewhere in this report, particularly in the section entitled "Risk Factors" of this annual report.
General
Our business objective is to become an independent, oil and gas-focused exploration and production company with the intent to acquire prospect inventory in the United States and international locations, with an initial focus on Africa. We believe that an experienced management team, equipped with industry-leading data, newly available seismic technologies, industry contacts and adequate funding, could acquire a prospect inventory that could be competitive with other relevant oil and gas companies. After considering numerous global oil and gas-producing regions in which to focus our exploration and development efforts, we decided that an initial focus on Africa was appropriate due to the largely unrealized hydrocarbon potential offered within this region. We believe that we can be successful in assembling such an inventory and that our potential asset portfolio would be attractive. Prior to joining Brenham, certain persons on our management team played a significant role in the assembly of asset portfolios in Africa.
The discussion of the results of operations represents our historical results. The following discussion may not be indicative of future results for many reasons, including the continuing trend in the financial markets, the credit crisis and related turmoil in the global financial system which may be expected to have a material adverse impact on our plan of operation and our liquidity and our financial condition. If conditions in the financial markets do not improve, our ability to access the capital markets or borrow money may be restricted at a time when we would like, or need, to raise capital. This could have an adverse impact on our flexibility to react to changing economic and business conditions and on our ability to fund our operations and capital expenditures in the future. Additionally, changing economic conditions could lead to reduced demand for natural gas and oil, or further reductions in the prices of natural gas and oil, or both, which could have a negative impact on our ability to implement our plan of operations and related financial positions, results of operations and cash flows. While the ultimate outcome and impact of the recent trends in the financial markets cannot be predicted, it may have a material adverse effect on our plan of operation, future liquidity, results of operations and financial condition.
Critical Accounting Policies
The following summarized several of our critical accounting policies. For a complete list of our significant accounting policies, see Note 1 to the consolidated financial statements for the years ended December 31, 2015 and 2014.
Oil & Natural Gas Properties
The Company follows the full cost method of accounting for its investments in oil & gas properties, whereby all costs incurred in connection with the acquisition, exploration for and development of petroleum and natural gas reserves, including unproductive wells, 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. General and administrative costs related to production and general overhead are expensed as incurred.
Disposition of oil 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, in which case the gain or loss is recognized in the statement of operations.
Future development, site restoration, dismantlement and abandonment costs, are estimated property by property based upon current economic conditions and regulatory requirements and are included in amortization of our oil and natural gas property costs.
Depletion of capitalized oil properties and estimated future development costs, excluding unproved properties, are based on the unit-of-production method based on proved reserves.
At the end of each quarter, the unamortized cost of oil and natural gas properties, net of related deferred income taxes, is limited to the sum of the estimated future after-tax net revenues from proved properties, after giving effect to cash flow hedge positions, discounted at 10%, and the lower of cost or fair value of unproved properties, adjusted for related income tax effects. This limitation is known as the “ceiling test,” and is based on SEC rules for the full cost oil and gas accounting method.
We assess the carrying value of our unproved properties for impairment periodically. If the results of an assessment indicate that an unproved property is impaired (which was assessed in connection with our evaluation of goodwill impairment), then the carrying value of our unproved properties is added to the proved oil property costs to be amortized and subject to the ceiling test.
New Accounting Pronouncements
There were various accounting standards and interpretations issued recently, none of which are expected to a have a material impact on our financial position, operations or cash flows.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2015 VERSUS YEAR ENDED DECEMBER 31, 2014
Net loss for the year ended December 31, 2015 was $351,240. Revenue for the year ended December 31, 2015 was $5,902 for oil and gas mineral royalty interests. The significant decrease in revenue from 2014 ($24,021) is due to a significant decrease in oil prices in 2015. Because of the significant decrease in oil prices, operation of the lease was discontinued in 2015. Lease operating expenses totaled $9,073 for the year ended December 31, 2015. General and administrative expenses for the year ended December 31, 2015 were $145,231 and consisted of executive compensation, travel, and legal and professional expenses. Depletion and accretion expense was $2,685 for the year ended December 31, 2015. The loss for the year ended December 31, 2015 includes impairment of all of the Company’s oil and gas properties in the amount of $200,153.
Net loss for the year ended December 31, 2014 was $201,781. Revenue for the year ended December 31, 2014 was $33,094 for oil and gas mineral royalty interests. Lease operating expenses totaled $38,516 for the year ended December 31, 2014. General and administrative expenses for the year ended December 31, 2014 were $193,408 and consisted of executive compensation, travel, and legal and professional expenses. Depletion and accretion expense was $2,951 during the year ended December 31, 2014.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2015 and 2014, total assets were $6,051 and $435,441, respectively. We had cash of $6,051 and $6,000 at December 31, 2015 and 2014, respectively. At December 31, 2015 and 2014, long-term assets consisted of oil and gas properties of $0 and $429,441, respectively. At December 31, 2015, total liabilities were $682,668, consisting of $23,518 of accounts payable, $651,750 of accounts payable to related parties, and an asset retirement obligation of $7,400. At December 31, 2014, total liabilities were $760,551, consisting of $249,235 of accounts payable, $505,695 of accounts payable to related parties, and an asset retirement obligation of $5,621.
We used cash in operating activities of $145,737 during the year ended December 31, 2015, principally as a result of a net loss of $351,240, including $200,153 impairment of oil and gas properties. We used cash in operating activities of $200,436 during the year ended December 31, 2014, principally as a result of a net loss of $201,781. The decrease in cash used in operative activities 2015 was due to a $29,443 decrease in lease operating expenses and a decrease of $48,177 in administrative expenses in 2015.
For the year ended December 31, 2014, cash used in investing activities totaled $20,000, which were payments for the acquisition of oil and gas properties.
For the year ended December 31, 2015, cash provided by financing activities was $145,788, consisting of $146,055 in advances from related parties, offset by $267 for the repurchase of 11,000 shares of Brenham's common stock for treasury. For the year ended December 31, 2014, cash provided by financing activities was $219,577, consisting of $221,283 in advances from related parties and offset by $1,706 for the repurchase of 60,000 shares of Brenham’s common stock for treasury.
We expect to incur substantial expenses and generate significant operating losses as we pursue our efforts to identify prospects, develop those prospects and as we:
· purchase and analyze seismic data in order to identify future prospects;
· opportunistically invest in additional oil and gas leases and concession licenses;
· develop our discoveries which we determine to be commercially viable; and
· incur expenses related to operating as a public company and compliance with regulatory requirements.
Our future financial condition and liquidity will be impacted by, among other factors, the success of selection of prospects, our future exploration and appraisal drilling program, the number of commercially viable oil and gas discoveries made and the quantities of oil and gas discovered, the speed with which we can bring such discoveries to production, and the actual cost of exploration, appraisal and development of our prospects.
Until such time as we can identify specific prospects, we cannot determine with any certainty the amount of capital that we will be required to raise to fund each potential prospect. To-date, we have not begun negotiations with any investment bank, financial institution, or other source of funding for the purpose of raising either equity or debt capital, nor have we negotiated with any potential joint venture partner for the purpose of pursuing any potential prospect. Only when and if we identify prospects and seek to enter into contracts, licenses or other arrangements to pursue such prospects will we be able to determine the amount of funding that will be required for each such prospect. We have no arrangements with our executive officers or principal shareholders to provide any funding and any funding that they may be requested to provide may be limited.
Additional funding may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our shareholders. For example, if we raise additional funds by issuing additional equity securities, further dilution to our existing shareholders will result. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail one or more of our exploration and appraisal drilling programs. We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our prospects which we would otherwise develop on our own, or with a majority working interest.
Contractual Obligations
In the future, we may be party to the following contractual arrangements, which will subject us to further contractual obligations:
· credit facilities;
· contracts for the lease of drilling rigs;
· contracts for the provision of production facilities;
· infrastructure construction contracts; and
· long-term oil and gas property lease arrangements.
Off-Balance Sheet Arrangements
As of December 31, 2015, we did not have any off-balance sheet arrangements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders
Brenham Oil & Gas Corp.
Kemah, Texas
We have audited the accompanying consolidated balance sheets of Brenham Oil & Gas Corp. as of December 31, 2015 and 2014 and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects the financial position of Brenham Oil & Gas Corp. as of December 31, 2015 and 2014 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has no source of recurring revenue, has incurred a loss from operations in 2015 and has financial commitments in excess of current capital resources, together which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ GBH CPAs, PC
GBH CPAs, PC
www.gbhcpas.com
Houston, Texas
April 27, 2016
BRENHAM OIL & GAS CORP.
CONSOLIDATED BALANCE SHEETS
|
December 31, 2015
|
December 31, 2014
|
|||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 6,051 | $ | 6,000 | ||||
|
Total current assets
|
6,051 | 6,000 | ||||||
|
Oil and gas properties, full cost method:
|
||||||||
|
Costs subject to amortization
|
- | 91,503 | ||||||
|
Costs not being amortized
|
- | 341,900 | ||||||
|
Accumulated depletion
|
- | (3,962 | ) | |||||
|
Total assets
|
$ | 6,051 | $ | 435,441 | ||||
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable and accrued expenses
|
$ | 23,518 | $ | 249,235 | ||||
|
Accounts payable – related parties
|
651,750 | 505,695 | ||||||
|
Total current liabilities
|
675,268 | 754,930 | ||||||
|
Long-term liabilities:
|
||||||||
|
Asset retirement obligations
|
7,400 | 5,621 | ||||||
|
Total liabilities
|
682,668 | 760,551 | ||||||
|
Commitments and contingencies
|
||||||||
|
Stockholders’ deficit:
|
||||||||
|
Preferred stock, $0.0001 par value, 10,000,000 shares authorized; 0 shares issued and outstanding
|
- | - | ||||||
|
Common stock, $0.0001 par value, 200,000,000 shares authorized; 128,293,536 shares issued and outstanding
|
12,830 | 12,830 | ||||||
|
Less: treasury stock, at cost; 262,472 and 251,472 shares, respectively
|
(4,728 | ) | (4,461 | ) | ||||
|
Additional paid-in capital
|
992,981 | 992,981 | ||||||
|
Accumulated deficit
|
(1,677,700 | ) | (1,326,460 | ) | ||||
|
Total stockholders’ deficit
|
(676,617 | ) | (325,110 | ) | ||||
|
Total liabilities and stockholders’ deficit
|
$ | 6,051 | $ | 435,441 | ||||
See accompanying notes to the consolidated financial statements.
BRENHAM OIL & GAS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
2015
|
2014
|
|||||||
|
Oil and gas revenues
|
$ | 5,902 | $ | 33,094 | ||||
|
Costs and expenses:
|
||||||||
|
Lease operating expenses
|
9,073 | 38,516 | ||||||
|
General and administrative
|
145,231 | 193,408 | ||||||
|
Depletion and accretion
|
2,685 | 2,951 | ||||||
|
Impairment of oil and gas assets
|
200,153 | - | ||||||
|
Total operating expenses
|
357,142 | 234,875 | ||||||
|
Net loss
|
$ | (351,240 | ) | $ | (201,781 | ) | ||
|
Net loss per common share – basic and diluted
|
$ | (0.00 | ) | $ | (0.00 | ) | ||
|
Weighted average number of common shares outstanding – basic and diluted
|
128,293,094 | 128,102,064 | ||||||
See accompanying notes to the consolidated financial statements.
BRENHAM OIL & GAS CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
| Common Stock | Treasury |
Additional
Paid-in
|
Accumulated | |||||||||||||||||||||
|
Shares
|
Amount
|
Stock
|
Capital
|
Deficit
|
Total
|
|||||||||||||||||||
|
Balance at December 31, 2013
|
128,293,536 | $ | 12,830 | $ | (2,755 | ) | $ | 992,981 | $ | (1,124,679 | ) | $ | (121,623 | ) | ||||||||||
|
Acquisition of treasury shares
|
- | - | (1,706 | ) | - | - | (1,706 | ) | ||||||||||||||||
|
Net loss
|
- | - | - | - | (201,781 | ) | (201,781 | ) | ||||||||||||||||
|
Balance at December 31, 2014
|
128,293,536 | 12,830 | (4,461 | ) | 992,981 | (1,326,460 | ) | (325,110 | ) | |||||||||||||||
|
Acquisition of treasury shares
|
- | - | (267 | ) | - | - | (267 | ) | ||||||||||||||||
|
Net loss
|
- | - | - | - | (351,240 | ) | (351,240 | ) | ||||||||||||||||
|
Balance at December 31, 2015
|
128,293,536 | $ | 12,830 | $ | (4,728 | ) | $ | 992,981 | $ | (1,677,700 | ) | $ | (676,617 | ) | ||||||||||
See accompanying notes to the consolidated financial statements.
BRENHAM OIL & GAS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
For the Year Ended December 31,
|
||||||||
|
2015
|
2014
|
|||||||
|
Cash flows from operating activities:
|
||||||||
|
Net loss
|
$ | (351,240 | ) | $ | (201,781 | ) | ||
|
Adjustments to reconcile net loss to cash used in operating activities:
|
||||||||
|
Depletion and accretion
|
2,685 | 2,951 | ||||||
|
Impairment of oil and gas properties
|
200,153 | - | ||||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Accounts receivable
|
- | 3,100 | ||||||
|
Accounts payable and accrued expenses
|
2,665 | (4,706 | ) | |||||
|
Net cash used in operating activities
|
(145,737 | ) | (200,436 | ) | ||||
|
Cash flows from investing activities:
|
||||||||
|
Payment for acquisition of oil and gas property
|
- | (20,000 | ) | |||||
|
Net cash used in investing activities
|
- | (20,000 | ) | |||||
|
Cash flows from financing activities:
|
||||||||
|
Advances from related parties, net
|
146,055 | 221,283 | ||||||
|
Payments for acquisition of treasury stock
|
(267 | ) | (1,706 | ) | ||||
|
Net cash provided by financing activities
|
145,788 | 219,577 | ||||||
|
Net increase (decrease) in cash
|
51 | (859 | ) | |||||
|
Cash and cash equivalents, beginning of period
|
6,000 | 6,859 | ||||||
|
Cash and cash equivalents, end of period
|
$ | 6,051 | $ | 6,000 | ||||
|
Supplemental disclosures:
|
||||||||
|
Interest paid
|
$ | - | $ | - | ||||
|
Income taxes paid
|
$ | - | $ | - | ||||
|
Non-cash investing and financing transactions:
|
||||||||
|
Unpaid portion of Inez oil and gas property acquisition
|
$ | - | $ | 230,000 | ||||
|
Change in estimate of asset retirement costs
|
$ | 143 | $ | 2,052 | ||||
See accompanying notes to the consolidated financial statements.
BRENHAM OIL & GAS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Organization, Ownership and Business
Brenham Oil & Gas, Inc. was incorporated under the laws of the State of Texas in November 1997 and became a wholly-owned subsidiary of American International Industries, Inc. ("American") in November 1997. On April 21, 2010, the Company was re-domiciled in Nevada as Brenham Oil & Gas Corp. (“Brenham”) and Brenham Oil & Gas, Inc. became a wholly-owned subsidiary of Brenham.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Going Concern
The consolidated financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has had negligible revenues to date and does not anticipate generating any revenues in the near-term. In addition, the Company incurred a loss from operations in 2015, has financial commitments in excess of current capital resources, and expects to incur further losses in the future, thus raising substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management plans to obtain the necessary financing to meet its obligations during 2016. These financials do not include any adjustments relating to the recoverability and reclassification of recorded asset amounts, or amounts and classifications of liabilities that might result from this uncertainty.
Cash and Cash Equivalents
Brenham considers all short-term securities purchased with a maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable consist primarily of receivables from oil and gas revenue and are carried at the expected net realizable value.
Oil & Gas Properties
The Company follows the full cost method of accounting for its investments in oil and gas properties, whereby all costs incurred in connection with the acquisition, exploration for and development of petroleum and natural gas reserves, including unproductive wells, 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. General and administrative costs related to production and general overhead are expensed as incurred.
Disposition of oil 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, in which case the gain or loss is recognized in the statement of operations.
Future development, site restoration, dismantlement and abandonment costs, are estimated property by property, based upon current economic conditions and regulatory requirements and are included in amortization of our oil and natural gas property costs.
Depletion of capitalized oil properties and estimated future development costs, excluding unproved properties, are based on the unit-of-production method based on proved reserves.
At the end of each quarter, the unamortized cost of oil and natural gas properties, net of related deferred income taxes, is limited to the sum of the estimated future after-tax net revenues from proved properties, after giving effect to cash flow hedge positions, discounted at 10%, and the lower of cost or fair value of unproved properties, adjusted for related income tax effects. This limitation is known as the “ceiling test,” and is based on SEC rules for the full cost oil and gas accounting method.
We assess the carrying value of our unproved properties for impairment periodically. If the results of an assessment indicate that an unproved property is impaired (which was assessed in connection with our evaluation of goodwill impairment), then the carrying value of our unproved properties is added to the proved oil property costs to be amortized and subject to the ceiling test. The Company recorded $200,153 of impairment for the year ended December 31, 2015, resulting in the write-off of all of the Company’s oil and gas interest. There was no impairment in the year ended 2014.
As of December 31, 2015 and 2014, the Company had oil and gas properties in the amount of $0 and $341,900, respectively, which were excluded from amortization because they have not been evaluated to determine whether proved reserves are associated with those properties. Costs in excess of the present value of estimated future net revenues as discussed above are charged to impairment expense.
Revenue Recognition
The Company generally sells crude oil and natural gas under short-term agreements at prevailing market prices. In some cases (e.g., natural gas), products may be sold under long-term agreements, with periodic price adjustments. Revenues are recognized when the products are delivered, which occurs when the customer has taken title and has assumed the risks and rewards of ownership, prices are fixed or determinable, and collectability is reasonably assured.
Revenues from the production of natural gas properties in which the Company has an interest with other producers are recognized on the basis of the Company’s net working interest. Differences between actual production and net working interest volumes are not significant.
Purchases and sales of inventory with the same counterparty that are entered into in contemplation of one another are combined and recorded as exchanges measured at the book value of the item sold.
Income Taxes
Brenham is a taxable entity and recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when the temporary differences reverse. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the enactment date of the rate change. A valuation allowance is used to reduce deferred tax assets to the amount that is more likely than not to be realized. Interest and penalties associated with income taxes are included in selling, general and administrative expense.
Brenham has adopted ASC 740-10 “Accounting for Uncertainty in Income Taxes,” which prescribes a comprehensive model of how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. ASC 740-10 states that a tax benefit from an uncertain position may be recognized if it is "more likely than not" that the position is sustainable, based upon its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. As of December 31, 2015, Brenham had not recorded any tax benefits from uncertain tax positions.
Net Loss per Common Share
Net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during a period. The weighted average number of common shares was calculated by taking the number of common shares outstanding and weighting them by the amount of time that they were outstanding.
For the year ended December 31, 2014, 3,000,000 stock options were excluded from the computation of diluted net loss per share, as the inclusion of such stock options would be anti-dilutive.
Subsequent Events
Brenham has evaluated all transactions from December 31, 2015 through the financial statement issuance date for subsequent event disclosure consideration.
Recent Accounting Pronouncements
In August 2014, the FASB issued an ASU requiring, when applicable, disclosures regarding uncertainties about an entity’s ability to continue as a going concern. During the preparation of quarterly and annual financial statements, management should evaluate whether conditions or events exist that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued. If this evaluation indicates that it is probable that an entity will be unable to meet its obligations when they become due within one year of the financial statement issuance date, management must evaluate whether its mitigation plans will alleviate the substantial doubt of continuing as a going concern. If substantial doubt exists, regardless of whether the mitigation plan alleviates the concern, additional disclosures are required in the financial statements addressing the conditions or events that raise substantial doubt, management’s evaluation of the significance of those conditions or events, and management’s mitigation plans. This new guidance will become effective for the Company for all reporting periods beginning in 2016. Early application is permitted. The Company’s management currently does not expect that this new guidance will have a significant effect on its consolidated financial statements when adopted.
Note 2. Oil and Gas Properties
Brenham uses the full cost method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells used to find proved reserves, and to drill and equip development wells, including directly related overhead costs and related asset retirement costs are capitalized. Properties not subject to amortization consist of exploration and development costs that are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved, or their values become impaired and the corresponding costs are added to the capitalized costs subject to amortization. During the years ended December 31, 2015 and 2014, depletion of oil and gas properties of $763 and $1,980, respectively, was recorded. Costs of oil and gas properties are amortized using the units of production method. Sales of oil and natural gas properties are accounted for as adjustments to the net full cost pool, and generally, no gain or loss is recognized.
In applying the full cost method, Brenham performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of oil and gas properties is compared to the “estimated present value” of its proved reserves discounted at a 10-percent interest rate of future net revenues, based on current economic and operating conditions at the end of the period, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties. If capitalized costs exceed this limit, the excess is charged as an impairment expense. During the year ended December 31, 2015, $200,153 of impairment of oil and gas properties was recorded, resulting in the impairment of all of the Company’s oil and gas interests. During the year ended December 31, 2014, no impairment of oil and gas properties was recorded.
Below are the components of the oil and gas properties balance:
|
As of
December 31, 2015
|
As of
December 31, 2014
|
|||||||
|
Royalty interest in 24 acres in Washington County, Texas (a)
|
$ | - | $ | - | ||||
|
Royalty interest in 700 acres in the Permian Basin (b)
|
- | 8,400 | ||||||
|
10% working interest in the Pierce Junction Field (c)
|
- | 87,500 | ||||||
|
Lease of 394 acres in the Gillock Field (d)
|
- | 83,500 | ||||||
|
Lease of 332 acres in Inez Prospect (e)
|
- | 250,000 | ||||||
|
Capitalized asset retirement costs
|
- | 4,003 | ||||||
|
Total oil and gas properties
|
- | 433,403 | ||||||
|
Accumulated depletion
|
- | (3,962 | ) | |||||
|
Net capitalized costs
|
$ | - | $ | 429,441 | ||||
a) Royalty interest in 24 acres in Washington County, Texas - The Company has an oil and gas mineral royalty interest, covering a twenty-four acre tract of land located in Washington County, Texas, which is carried on the balance sheet at $0. The royalty interest is currently leased by Anadarko Petroleum Corporation for a term continuing until the covered minerals are no longer produced in paying quantities from the leased premises. Royalties on the minerals produced are currently incidental and paid to the Company as follows: (i) for oil and other liquid hydrocarbons, and (ii) for gas (including casing-head gas); the royalty is one-ninth of the net proceeds realized by Anadarko Petroleum Corporation on the sale thereof, less a proportionate part of ad valorem taxes and production, severance, or other excise taxes. In addition, the Company is entitled to shut-in royalties of $1 per acre of land for every ninety-day period within which one or more of the wells in leased premises, or lands pooled therewith, are capable of producing paying quantities, but such wells are either shut-in or production is not being sold.
b) Royalty interest in 700 acres in the Permian Basin - On July 22, 2011, the Company entered into an Asset Purchase and Sale Agreement with Doug Pedrie, Davis Pedrie Associates, LLC and Energex Oil, Inc. (“Sellers”), pursuant to which the Company acquired 700 acres of unproved property located in the Permian Basin near Abilene, Texas. The agreement provided for the Sellers to complete all oil lease assignments by August 15, 2011. The purchase consideration for the acquisition is the issuance to Sellers of 2,000,000 restricted common shares of Brenham, valued at $8,400, with an additional 2,000,000 restricted common shares to be issued contingent upon realization of certain production targets in 2012. On March 8, 2012, this agreement was rescinded and replaced with an agreement that in consideration for the Brenham share issuance; Brenham has a 2.5% overriding royalty interest in all of the leases associated with this property and any properties acquired or renewed in the future within a ten-mile radius. In addition, the contingency to issue additional shares was removed. The Company impaired this oil and gas asset in full during the year ended December 31, 2015.
c) 10% working interest in the Pierce Junction Field - On March 12, 2013, Brenham entered into an agreement with an effective date of January 1, 2013, to purchase a 10% working interest in the Pierce Junction Field for $50,000 cash and a $70,000 non-interest bearing note payable due on August 31, 2013. On May 30, 2013, the holder of this note payable accepted $37,500 as full payment and Brenham recorded $32,500 as a reduction in the value of the oil and gas property due to the decrease in the consideration given to acquire it. The Company impaired this oil and gas asset in full during the year ended December 31, 2015.
d) Lease of 394 acres in the Gillock Field - Brenham leased 394 acres in Galveston County for the acquisition of 100% working interest in the Gillock Field from Kemah Development Texas, L.P. (“KDT”) and Daniel Dror II Trust of 2012 for $300 per acre, or $131,100 (recorded as accounts payable – related parties in the consolidated balance sheets as of December 31, 2015 and 2014) and 200,000 shares of American restricted common stock. Brenham issued 3,326,316 shares of Brenham restricted common stock to American as payment in full for the 200,000 shares issued by American on Brenham’s behalf. In 2002, KDT paid $1,175,000 for the original 437 acres and the mineral rights to 394 acres. However, KDT assigned no value to the mineral rights. Due to the related parties having no basis in the mineral rights, Brenham expensed the costs associated with the transaction, which totaled $447,100 and consisted of i) $316,000 of stock-based compensation calculated at the grant date fair value of the 3,326,316 shares of Brenham common stock issued to American (which equaled the grant date fair value of the common stock American issued to KDT and the Daniel Dror II Trust) and ii) the $131,100 related party payable. The Company impaired this oil and gas asset in full during the year ended December 31, 2015.
e) Lease of 332 acres in the Inez Prospect - On January 8, 2014, the Company entered into a letter of intent with a third party to acquire a 332-acre oil and gas lease, the “Inez Prospect,” located in Victoria County, Texas, and the #1 Roberts Unit well-bore, and all the down-hole equipment and surface equipment associated therewith. On April 10, 2014, the Company and the third party entered into a prospect and lease acquisition agreement. Pursuant to the agreement, the Company has agreed to acquire 100% of the working interest for a total purchase price of $250,000, consisting of a $20,000 deposit, which was paid during the year ended December 31, 2014, and a payment of the remaining $230,000 prior to the beginning of any exploration which is recorded in accounts payable and accrued expenses at December 31, 2014. The Company elected not to complete the purchase of the Inez Prospect and wrote off the amounts recorded as of December 31, 2015. The Company impaired this oil and gas asset in full during the year ended December 31, 2015.
Note 3. Accounts Payable - Related Parties
Related party accounts payable at December 31, 2015 consists of $520,650 owed to American for the funding of the Company’s operations and $131,100 owed to KDT and Daniel Dror II Trust of 2012 for the acquisition of mineral rights for the Gillock Field. Related party accounts payable at December 31, 2014 consists of $374,595 owed to American as advances to assist with Brenham's operating expenses, and $131,100 owed to KDT and Daniel Dror II Trust of 2012 for the acquisition of mineral rights for the Gillock Field. The advances to Brenham are non-interest bearing and due on demand.
Note 4. Asset Retirement Obligations
The Company estimates the present value of future costs of dismantlement and abandonment of its wells, facilities, and other tangible long-lived assets, recording them as liabilities in the period incurred. Asset retirement obligations are calculated using an expected present value technique. Salvage values are excluded from the estimation. When the liability is initially recorded, the entity increases the carrying amount of the related long-lived asset. Accretion of the liability is recognized each period, and the capitalized cost is amortized over the useful life of the related asset. Upon settlement of the liability, the Company incurs a gain or loss based upon the difference between the estimated and final liability amounts. The Company records gains or losses from settlements as adjustments to the full cost pool.
Accretion expense was $1,922 and $971 for the years ended December 31, 2015 and 2014, respectively.
The following table presents the change in the Company’s asset retirement obligations for the years ended December 31, 2015 and 2014:
|
December 31, 2015
|
December 31, 2014
|
|||||||
|
Asset retirement obligations as of beginning of year
|
$ | 5,621 | $ | 6,702 | ||||
|
Additions
|
- | - | ||||||
|
Current year revision to previous estimates
|
(143 | ) | (2,052 | ) | ||||
|
Current year accretion
|
1,922 | 971 | ||||||
|
Asset retirement obligations as of end of year
|
$ | 7,400 | $ | 5,621 | ||||
Note 5. Equity
Common Stock
During the years ended December 31, 2015 and 2014, Brenham paid $267 and $1,706, respectively, to repurchase 11,000 and 60,000 shares of its common stock for treasury.
Stock Options
A summary of Brenham's stock option activities for the years ended December 31, 2015 and 2014 is presented below:
|
Shares
|
Weighted
Average Exercise
Price
|
Intrinsic
Value
|
||||||||||
|
Outstanding and exercisable as of January 1, 2014
|
3,000,000 | $ | 0.035 | $ | - | |||||||
|
Granted
|
- | N/A | - | |||||||||
|
Exercised
|
- | N/A | - | |||||||||
|
Expired
|
- | N/A | - | |||||||||
|
Outstanding and exercisable as of December 31, 2014
|
3,000,000 | $ | 0.035 | $ | - | |||||||
|
Shares
|
Weighted
Average Exercise |
Intrinsic
Value
|
||||||||||
|
Outstanding and exercisable as of January 1, 2015
|
3,000,000 | $ | 0.035 | $ | - | |||||||
|
Granted
|
- | N/A | - | |||||||||
|
Exercised
|
- | N/A | - | |||||||||
|
Expired
|
(3,000,000 | ) | N/A | - | ||||||||
|
Outstanding and exercisable as of December 31, 2015
|
- | $ | 0.035 | $ | - | |||||||
Note 6. Income Taxes
The components of the income tax provision (benefit) for each of the periods presented below are as follows:
| Year Ended December 31, | ||||||||
|
2015
|
2014
|
|||||||
|
Current
|
$ | - | $ | - | ||||
|
Deferred
|
- | - | ||||||
|
Total income tax provision (benefit)
|
$ | - | $ | - | ||||
The effective income tax expense differed from the computed “expected” federal income tax expense on earnings before income taxes for the following reasons:
|
Year Ended December 31,
|
||||||||
|
2015
|
2014
|
|||||||
|
Computed federal income tax provision (benefit)
|
$ | (119,422 | ) | $ | (68,978 | ) | ||
|
Meals and entertainment
|
111 | 1,717 | ||||||
|
Share-based compensation
|
- | - | ||||||
|
Increase in valuation allowance
|
119,311 | 67,261 | ||||||
|
Total
|
$ | - | $ | - | ||||
Deferred income taxes are provided to reflect temporary differences in the basis of net assets for income tax and financial reporting purposes. The tax-effected temporary differences and tax loss carryforwards which comprise deferred taxes are as follows:
|
December 31,
|
||||||||
|
2015
|
2014
|
|||||||
|
Deferred tax assets:
|
||||||||
|
Net operating loss carryforwards
|
$ | 490,344 | $ | 371,033 | ||||
|
Valuation allowance
|
(490,344 | ) | (371,033 | ) | ||||
|
Total deferred tax asset
|
$ | - | $ | - | ||||
At December 31, 2015 and 2014, Brenham had a federal income tax net operating loss (“NOL”) carryforwards of approximately $1,442,000 and $1,091,000, respectively. The NOL carryforward begins to expire in 2031. The value of this carryforward depends on our ability to generate taxable income. A change in ownership, as defined by federal income tax regulations, could significantly limit our ability to utilize our net operating loss carryforward. Additionally, because federal tax laws limit the time during which the net operating loss carryforward may be applied against future taxes, if Brenham fails to generate taxable income prior to the expiration dates, Brenham may not be able to fully utilize the net operating loss carryforward to reduce future income taxes. Brenham has had cumulative losses and there is no assurance of future taxable income, therefore, a valuation allowance has been recorded to fully offset the deferred tax assets at December 31, 2015 and 2014.
Note 7. Supplemental Oil and Gas Disclosures (Unaudited)
Capitalized Costs Relating to Oil and Gas Producing Activities
The estimates of proved oil and gas reserves utilized in the preparation of these statements were prepared by Bryant Mook, a related party petroleum engineer, using reserve definitions and pricing requirements prescribed by the SEC. American used a combination of production performance and offset analogies, along with estimated future operating and development costs as provided by the Company and based upon historical costs adjusted for known future changes in operations or developmental plans, to estimate our reserves.
There are numerous uncertainties inherent in estimating quantities of proved reserves, projecting future rates of production and projecting the timing of development expenditures, including many factors beyond our control. The reserve data represents only estimates. Reservoir engineering is a subjective process of estimating underground accumulations of natural gas and oil that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretations and judgment. All estimates of proved reserves are determined according to the rules prescribed by the SEC. These rules indicate that the standard of “reasonable certainty” be applied to the proved reserve estimates. This concept of reasonable certainty implies that as more technical data becomes available, a positive, or upward, revision is more likely than a negative, or downward, revision. Estimates are subject to revision based upon a number of factors, including reservoir performance, prices, economic conditions and government restrictions. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of that estimate. Reserve estimates are often different from the quantities of natural gas and oil that are ultimately recovered. The meaningfulness of reserve estimates is highly dependent on the accuracy of the assumptions on which they were based. In general, the volume of production from natural gas and oil properties we own declines as reserves are depleted. Except to the extent we conduct successful development activities or acquire additional properties containing proved reserves, or both, our proved reserves will decline as reserves are produced. There have been no major discoveries or other events, favorable or adverse, that may be considered to have caused a significant change in the estimated proved reserves since December 31, 2015. The Company emphasizes that reserve estimates are inherently imprecise. Accordingly, the estimates are expected to change as more current information becomes available. In addition, a portion of the Company’s proved reserves are proved developed non-producing and proved undeveloped, which increases the imprecision inherent in estimating reserves which may ultimately be produced.
All of the Company’s reserves are located in the United States.
|
December 31,
|
||||||||
|
2015
|
2014
|
|||||||
|
Proved oil and gas properties
|
$
|
-
|
$
|
91,503
|
||||
|
Unproved oil and gas properties
|
-
|
341,900
|
||||||
|
Accumulated depreciation, depletion and amortization
|
-
|
(3,962)
|
||||||
|
Total acquisition, development and exploration costs
|
$
|
-
|
$
|
429,441
|
||||
Costs Incurred in Oil and Gas Property Acquisition, Exploration, and Development Activities
At December 31, 2015 and 2014, unevaluated costs of $0 and $341,900, respectively, were excluded from the depletion base. These costs relate to property located in the Permian Basin near Abilene, Texas and the Gillock Property in Galveston Count, and consist of acreage acquisition costs.
|
December 31,
|
||||||||
|
2015
|
2014
|
|||||||
|
Acquisition of properties – proved
|
$ | - | $ | - | ||||
|
Acquisition of properties – unproved
|
- | 250,000 | ||||||
|
Exploration costs
|
- | - | ||||||
|
Development costs
|
- | - | ||||||
|
Total costs incurred
|
$ | - | $ | 250,000 | ||||
Estimated Quantities of Proved Oil and Gas Reserves
The following table sets forth proved oil and gas reserves together with the changes therein, proved developed reserves and proved undeveloped reserves for the years ended December 31, 2015 and 2014. Units of oil are in thousands of barrels (MBbls) and units of gas are in millions of cubic feet (MMcf). Gas is converted to barrels of oil equivalents (MBoe) using a ratio of six Mcf of gas per Bbl of oil.
|
2015
|
2014
|
|||||||||||||||||||||||
|
Oil
|
Gas
|
BOE
|
Oil
|
Gas
|
BOE
|
|||||||||||||||||||
|
Proved reserves:
|
||||||||||||||||||||||||
|
Beginning of year
|
18 | - | 18 | 16 | - | 16 | ||||||||||||||||||
|
Revisions
|
(18 | ) | - | - | 2 | - | 2 | |||||||||||||||||
|
Extensions and discoveries
|
- | - | - | - | - | - | ||||||||||||||||||
|
Purchases of minerals-in-place
|
- | - | - | - | - | - | ||||||||||||||||||
|
Sales of minerals-in-place
|
- | - | - | - | - | - | ||||||||||||||||||
|
Production
|
- | - | - | - | - | - | ||||||||||||||||||
|
End of year
|
- | - | 18 | 18 | - | 18 | ||||||||||||||||||
|
Proved developed reserves:
|
||||||||||||||||||||||||
|
Beginning of year
|
9 | - | 9 | 8 | - | 8 | ||||||||||||||||||
|
End of year
|
- | - | 9 | 9 | - | 9 | ||||||||||||||||||
|
Proved not producing reserves:
|
||||||||||||||||||||||||
|
Beginning of year
|
9 | - | 9 | 8 | - | 8 | ||||||||||||||||||
|
End of year
|
- | - | 9 | 9 | - | 9 | ||||||||||||||||||
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Reserves
The standardized measure of discounted future net cash flows, in management’s opinion, should be examined with caution. The basis for this table is the reserve studies prepared by the Company’s independent petroleum engineering consultants, which contain imprecise estimates of quantities and rates of future production of reserves. Revisions of previous year estimates can have a significant impact on these results. Also, exploration costs in one year may lead to significant discoveries in later years and may significantly change previous estimates of proved reserves and their valuation. Therefore, the standardized measure of discounted future net cash flow is not necessarily indicative of the fair value of the Company’s proved oil and natural gas properties.
Future cash inflows for 2015 were computed by applying the average price for the year to the year-end quantities of proved reserves. The 2015 average price for the year was calculated using the 12-month period prior to the ending date of the period covered by the report, determined as an un-weighted arithmetic average of the first-day-of-the-month price for each month within such period. Adjustment in this calculation for future price changes is limited to those required by contractual arrangements in existence at the end of each reporting year. Future development, abandonment and production costs were computed by estimating the expenditures to be incurred in developing and producing proved oil and natural gas reserves at the end of the year, based on year-end costs, assuming continuation of year-end economic conditions. Future income tax expense was computed by applying statutory rates, less the effects of tax credits for each period presented, and to the difference between pre-tax net cash flows relating to the Company’s proved reserves and the tax basis of proved properties, after consideration of available net operating loss and percentage depletion carryovers. Discounted future net cash flows have been calculated using a ten percent discount factor. Discounting requires a year-by-year estimate of when future expenditures will be incurred and when reserves will be produced.
The estimated present value of future cash flows relating to prove reserves is extremely sensitive to prices used at any measurement period. The prices used for each commodity for the years ended December 31, 2015 and 2014, as adjusted, were as follows:
|
As of December 31,
|
Oil (Bbl) Using
NYMEX WTI
|
Gas (Mcf) Using
NYMEX Henry Hub
|
||||||
|
2015 (average price)
|
$ | 50.13 | $ | 2.63 | ||||
|
2014 (average price)
|
$ | 94.99 | $ | 4.65 | ||||
The information provided in the tables set out below does not represent management’s estimate of the Company’s expected future cash flows or of the value of the Company’s proved oil and gas reserves. Estimates of proved reserve quantities are imprecise and change over time as new information becomes available. Moreover, probable and possible reserves, which may become proved in the future, are excluded from the calculations. The arbitrary valuation prescribed under ASC No. 932 requires assumptions as to the timing and amount of future development and production costs. The calculations should not be relied upon as an indication of the Company’s future cash flows or of the value of its oil and gas reserves.
The following table sets forth the standardized measure of discounted future net cash flows relating to proven reserves for the years ended December 31, 2015 and 2014, respectively (stated in thousands):
|
2015
|
2014
|
|||||||
|
Future cash inflows
|
$ | - | $ | 1,712 | ||||
|
Future costs:
|
||||||||
|
Production costs
|
- | (284 | ) | |||||
|
Future tax expense
|
- | (128 | ) | |||||
|
Future net cash flows
|
- | 1,300 | ||||||
|
10% annual discount for estimated timing of cash flows
|
- | (746 | ) | |||||
|
Standardized measure of discounted net cash flows
|
$ | - | $ | 554 | ||||
Summary of Changes in Standardized Measure of Discounted Future Net Cash Flows
The following table summarizes the principal sources of change in the standardized measure of discounted future estimated net cash flows at 10% per annum for the years ended December 31, 2015 and 2014, respectively (stated in thousands):
|
2015
|
2014
|
|||||||
|
Increase (decrease):
|
||||||||
|
Beginning of year
|
$ | 554 | $ | 526 | ||||
|
Sales of oil produced, net of production costs
|
4 | 7 | ||||||
|
Net changes in sales and transfer prices and in production costs and production costs related to future production
|
- | - | ||||||
|
Previously estimated development costs incurred during the period
|
- | 21 | ||||||
|
Changes in future development costs
|
- | - | ||||||
|
Revisions of previous quantity estimates due to prices and performance
|
(558 | ) | - | |||||
|
Accretion of discount
|
- | - | ||||||
|
Discoveries, net of future production and development costs associated with these extensions and discoveries
|
- | - | ||||||
|
Timing and other
|
- | - | ||||||
|
End of year
|
$ | - | $ | 554 | ||||
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive and principal financial officers, we conducted an evaluation as of December 31, 2015 of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2015.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of management, including our principal executive and principal financial officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in
Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the “COSO Framework”). Based on this evaluation under the COSO Framework, management concluded that our internal control over financial reporting was not effective as of December 31, 2015. Such conclusion reflects the departure of our chief financial officer and assumption of duties of the principal financial officer by our chief executive officer and the resulting lack of accounting experience of our now principal financial officer and a lack of segregation of duties. Until we are able to remedy these material weaknesses, we are relying on third party consultants to assist with financial reporting.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit smaller reporting companies to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
Since the resignation of the Company’s Chief Financial Officer in 2013, the Company has relied on consultants to assist with financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
At present, we have four (4) executive officers and five (5) directors. We may elect one or more additional directors and appoint additional executive officers in connection with our plan to acquire additional oil and gas prospects, pursue new business opportunities and/or entering into a business combination to enhance our ability to grow our business. Our directors are elected to serve until the next annual meeting of shareholders and until their respective successors will have been elected and will have qualified. The following table sets forth the name, age and position held with respect to our present directors and executive officers:
|
Name
|
Age
|
Positions
|
||
|
Daniel Dror
|
75 |
Chairman and CEO
|
||
|
Charles R. Zeller
|
74 |
Director and Interim CFO
|
||
|
S. Scott Gaille
|
46 |
Director
|
||
|
Bryant M. Mook
|
62 |
Director, President and COO
|
||
|
L. Rogers Hardy
|
69 |
Director and Vice President of Exploration
|
Daniel Dror has been Chief Executive Officer and Chairman of the Board of Directors of Brenham Oil & Gas, Inc. since December 1997, and he devotes approximately 10% of his professional time to Brenham’s business. Mr. Daniel Dror has served as Chairman of the Board and Chief Executive Officer of American International Industries, Inc. since September 1997 and devotes approximately 70% of his professional time to American’s business. Mr. Dror served as Chairman of the Board and Chief Executive Officer of Hammonds Industries, Inc., a public company and formerly a subsidiary of American from June 2007 until December 31, 2008, and resumed this position on December 31, 2009. Hammonds was known later as Delta Seaboard International, Inc., and subsequently as American International Holdings Corp.
Charles R. Zeller was appointed to the Board of Directors of the Company in 2011, and as Interim Chief Financial Officer on November 21, 2013. He has served as a Director of the American International Industries, Inc. since 2000. Mr. Zeller is a developer of residential subdivisions, including Cardiff Estates, 800 acres subdivision in Houston, TX, and the estate of Gulf Crest in downtown Pearland, Texas. He has extensive experience in real estate and finance, and has been a real estate investor and developer for over 35 years, including shopping centers, office buildings, and apartment complexes and the financing of such projects.
S. Scott Gaille has been a Director since July 2010. From July 2010 to September 2012, Mr. Gaille served as President of the Company. From August 2007 to the present, Mr. Gaille’s Gaille Group has successfully launched and incubated a series of businesses in the energy and financial services sectors. Since February 2012, Mr. Gaille has served as the Chief Compliance Officer for ZaZa Energy Corporation (NASDAQ: ZAZA), and he is now the Chief Compliance Officer & General Counsel for the company. As the chief legal officer for ZaZa, he is responsible for the corporation’s transactional, securities, litigation and regulatory matters. Mr. Gaille also is an Adjunct Professor of Management at Rice University, where he teaches International Energy Development to MBA students. Mr. Gaille was Director - Business Development for Occidental Oil & Gas Corporation from July 2004 to August 2007. Mr. Gaille was an Olin Fellow in Law and Economics at the University of Chicago, where he received his Doctor of Law Degree with High Honors in 1995 and attended undergraduate college at the University of Texas at Austin, where he earned a Bachelor of Arts degree in Government with High Honors and was elected to Phi Beta Kappa.
Bryant M. Mook was appointed Brenham’s President, Chief Operating Officer and Director on February 28, 2013. He had served as Vice President of the Company since July 2010, is a registered geologist with a Masters degree in Petroleum Engineering from Colorado School of Mines, and has more than 35 years of multi-disciplinary experience in oil and gas. He devotes approximately 10% of his professional time to Brenham’s business. For the past five years, Mr. Mook has worked as a technical advisor and consulting petroleum engineer in Houston, Texas, providing technical, reserve, valuation, and management expertise for numerous oil and gas companies. Mr. Mook also has served as an independent technical consultant and reserve engineer with La Cortez Energy Inc., and as an independent consultant-technical advisor for public reporting and engineering support reporting with American Standard Energy Corp., both of which are public companies.
L. Rogers Hardy, Vice President of the Company since July 2010 and Director since August 2, 2011, has been an independent geological consultant since 2000, and devotes approximately 10% of his professional time to Brenham. From 1993 to 1999, Mr. Hardy was Vice President of Exploration for Unocal Indonesia, supporting the company’s entry into the first successful deepwater exploration in the country. From 1984 to 1993, Mr. Hardy held positions of team leader and exploration manager with Unocal International, focusing on new ventures and operations in Latin America, Africa, and, while manager of the basins studies group, conducted scoping evaluations worldwide. Before joining Unocal, Mr. Hardy conducted international exploration programs for Natomas International in Colombia, China, the North Sea, and the Bahamas. Previously, he worked in geology and geophysics in Alaska and offshore California with Chevron USA, and offshore Louisiana with Amoco USA. He holds a Masters of Geology from San Diego State University (1973) and a Bachelors of Geology from the University of Minnesota (1968).
Independent Public Accountants
Our Board of Directors has approved the appointment by the Company's Board of Directors of GBH CPAs, PC as independent public accountants for the fiscal year ended December 31, 2015.
Code of Ethics
The Registrant has adopted a Code of Ethics that are designed to deter wrongdoing and to promote honest and ethical conduct, full, fair, accurate, timely and understandable disclosure in the Registrant's SEC reports and other public communications. The Code of Ethics promotes compliance with applicable governmental laws, rules, and regulations.
Section 16(a) Compliance
Section 16(a) of the Securities and Exchange Act of 1934 requires the Registrant's directors and executive officers, and persons who own beneficially more than ten percent (10%) of the Registrant's Common Stock, to file reports of ownership and changes of ownership with the Securities and Exchange Commission. Copies of all filed reports are required to be furnished to the Registrant pursuant to Section 16(a). Based solely on the reports received by the Registrant and on written representations from reporting persons, the Registrant was informed that its officers and directors and ten percent (10%) shareholders have not filed reports required to be filed under Section 16(a).
ITEM 11. EXECUTIVE COMPENSATION
The following tables contain compensation data for the Chief Executive Officer and other named executive officers of the Company for the fiscal years ended December 31, 2015 and 2014:
|
Annual Compensation
|
Long-Term Compensation Awards
|
|||||||||||||||||||||||||
|
Name and Principal Position
|
Year
|
Salary
|
Bonus
|
Other Annual Compensation
|
Stock Award(s) (1)
|
Securities Underlying Options
|
Total Compensation
|
|||||||||||||||||||
|
Daniel Dror, Chairman and CEO
|
2015
|
$ | 120,000 | - | - | - | - | $ | 120,000 | |||||||||||||||||
|
2014
|
$ | 120,000 | - | - | - | - | $ | 120,000 | ||||||||||||||||||
|
Charles R. Zeller,
Director and Interim CFO (1)
|
2015
|
- | - | - | - | - | - | |||||||||||||||||||
|
2014
|
- | - | - | - | - | - | ||||||||||||||||||||
|
Bryant M. Mook,
Director, President and COO
|
2015
|
- | - | - | - | - | - | |||||||||||||||||||
|
2014
|
- | - | - | - | - | - | ||||||||||||||||||||
|
L. Rogers Hardy,
Director and Vice President of Exploration
|
2015
|
- | - | - | - | - | - | |||||||||||||||||||
|
2014
|
- | - | - | - | - | - | ||||||||||||||||||||
(1) Appointed as Interim CFO on November 21, 2013
Grants of Plan-Based Awards
None.
Director Summary Compensation Table
None.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The following table sets forth information regarding the beneficial ownership of our common stock as of December 31, 2015. The information in this table provides the ownership information for: each person known by us to be the beneficial owner of more than 5% of our common stock; each of our directors; each of our executive officers; and our executive officers and directors as a group. Beneficial ownership has been determined in accordance with the rules and regulations of the SEC and includes voting or investment power with respect to the shares. Unless otherwise indicated, the persons named in the table below have sole voting and investment power with respect to the number of shares indicated as beneficially owned by them.
|
Name of Beneficial Owner
|
Common Stock Beneficially Owned (1)
|
Percentage of Common Stock Owned (1)
|
||||||
|
American International Industries, Inc.
|
65,346,390 | 51.01 | % | |||||
|
601 Cien Street, Suite 235
|
||||||||
|
Kemah, TX 77565
|
||||||||
|
|
||||||||
|
S. Scott Gaille, Director
|
21,200,000 | 16.55 | % | |||||
|
601 Cien Street, Suite 235
|
||||||||
|
Kemah, TX 77565
|
||||||||
|
|
||||||||
|
International Diversified Corporation, Ltd.
|
3,488,657 | 2.72 | % | |||||
|
Shirley House, Shirley Street, P.O. Box SS 19084
|
||||||||
|
Nassau, Bahamas (2)
|
||||||||
|
Charles R. Zeller, Director and Interim CFO
|
6,320 | 0.00 | % | |||||
|
601 Cien Street, Suite 235
|
||||||||
|
Kemah, TX 77565
|
||||||||
|
L. Rogers Hardy, Director and Vice President of Exploration
|
1,000,000 | 0.78 | % | |||||
|
601 Cien Street, Suite 235
|
||||||||
|
Kemah, TX 77565
|
||||||||
|
Bryant M. Mook, Director, President and COO
|
12,050,127 | 9.41 | % | |||||
|
601 Cien Street, Suite 235
|
||||||||
|
Kemah, TX 77565
|
||||||||
|
Directors and Officers (5 persons) (3)
|
99,602,837 | 77.75 | % | |||||
(1) Applicable percentage ownership is based on 128,031,564 shares of common stock outstanding as of December 31, 2015. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of December 31, 2015 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(2) Elkana Faiwuszewicz is the brother of Mr. Dror. International Diversified Corporation, Ltd. (“IDCL”) is owned by Elkana Faiwuszewicz. Mr. Dror disclaims beneficial ownership of IDCL. IDCL is an affiliate of American by virtue of the size of its stock ownership of American.
(3) Includes shares owned by American International Industries, Inc.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company obtains approval from its entire Board of Directors prior to entering into any transactions with a related party or affiliate of the Company, including disclosure to the Board of Directors of such relationship prior to any action or vote of the Board of Directors. Prior to entering into any financing arrangement with any affiliated parties, disclosure is made to the Board of Directors regarding the terms and conditions of such related party transactions.
Related party payables at December 31, 2015 consists of $520,650 owed to American as advances to assist with Brenham's operating expenses, and $131,100 owed to KDT and Daniel Dror II Trust of 2012 for the acquisition of mineral rights for the Gillock Field.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Independent Public Accountants
The Registrant's Board of Directors has appointed GBH CPAs, PC, which firm has issued its report on our financial statements for the years ended December 31, 2015 and 2014.
Principal Accounting Fees
The following table presents the fees for professional audit services rendered by GBH CPAs, PC for the audit of the Registrant's annual financial statements for the years ended December 31, 2015 and 2014, and fees billed for other services rendered by GBH CPAs, PC during those years. All of the services described below were approved by the Board of Directors.
|
2015
|
2014
|
|||||||
|
Audit fees (1)
|
$ | 21,000 | $ | 17,956 | ||||
|
Audit-related fees (2)
|
$ | - | $ | - | ||||
|
Tax fees (3)
|
$ | 3,185 | $ | 3,080 | ||||
|
All other fees
|
$ | - | $ | - | ||||
(1) Audit fees consist of audit and review services, consents and review of documents filed with the SEC.
(2) Audit-related fees consist of assistance and discussion concerning financial accounting and reporting standards and other accounting issues.
(3) Tax fees consist of preparation of federal and state tax returns, review of quarterly estimated tax payments, and consultation concerning tax compliance issues.
ITEM 15. EXHIBITS
The following documents are filed as exhibits to this report on Form 10-K or incorporated by reference herein. Any document incorporated by reference is identified by a parenthetical reference to the SEC filing that included such document.
|
Exhibit No.
|
Description
|
|
|
31.1
|
||
|
31.2
|
||
|
32.1
|
||
|
32.2
|
||
|
101.INS
|
XBRL Instance Document
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Brenham Oil & Gas Corp.
By /s/ Daniel Dror
Daniel Dror
Chairman and Chief Executive Officer
April 27, 2016
By /s/ Charles R. Zeller
Charles R. Zeller
Director and Interim Chief Financial Officer
April 27, 2016
By /s/ S. Scott Gaille
S. Scott Gaille
Director
April 27, 2016
37