UAPC United American Petroleum Corporation (PK)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934: For the quarterly period ended September 30, 2012

 

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934: For the transition period from ____to____

 

  Commission File Number: 000-51465

 

United American Petroleum Corp.

(Exact name of registrant as specified in its charter)

 

Nevada	20-1904354
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

9600 Great Hills Trail, Suite 150W, Austin, TX 78759

(Address of principal executive offices) (Zip Code)

 

(512) 852-7888
(Registrant’s Telephone Number, including area code)

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x    Yes    o    No

 

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

 

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

 

Large accelerated filer	o		Accelerated filer	o
Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company	x

 

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

    

As of November 14, 2012, there were 50,034,543 shares of the issuer's $.001 par value common stock issued and outstanding.  

 

 

 

TABLE OF CONTENTS

 

 

PART I   FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	20
Item 4.	Controls and Procedures	20

     

PART II

   

OTHER INFORMATION

Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	20
Item 4.	Mine Safety Disclosures	20
Item 5.	Other Information	21
Item 6.	Exhibits	21

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

UNITED AMERICAN PETROLEUM CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED

 

		SEPTEMBER 30,				DECEMBER 31,
		2012				2011
ASSETS
CURRENT ASSET
Cash		$	610,349				593,469
Accounts receivable			75,245				35,405
Related party receivables			29,517				25,718
Prepaid expenses			8,394				-
Other receivable			-				160,302
Total current assets			723,505				814,894
Oil and gas properties (full cost method):
Evaluated, net of accumulated depletion of $80,359 and $23,135       as of September 30, 2012 and December 31, 2011, respectively			516,114				528,336
Unevaluated			847,155				617,630
TOTAL ASSETS		$	2,086,774				1,960,860
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities			321,082				217,702
Other payable			421,726				431,151
Total current liabilities			742,808				648,853
Accrued interest			-				141,255
Convertible note payable, net of discount of $1,561,997    as of December 31, 2011			-				623,003
Embedded derivative liability			-				1,138,989
Asset retirement obligation			61,283				56,012
TOTAL LIABILITIES			804,091				2,608,112
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value, 100,000,000 shares authorized,        47,250,000 shares issued and 50,034,043 and 44,000,000 shares       outstanding, respectively			50,035				44,000
Additional paid-in capital			8,283,103				487,739
Accumulated deficit			(7,050,455	)			(1,178,991	)
Total stockholders' deficit			1,282,683				(647,252	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT		$	2,086,774				1,960,860

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

UNITED AMERICAN PETROLEUM CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

UNAUDITED

		FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012				FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011				FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012				FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
REVENUE
Oil and Gas sales		$	194,723			$	48,460			$	376,140			$	72,192
Administrative Income			50,984				18,423				149,857				71,977
TOTAL REVENUE			245,707				66,883				525,997				144,169
OPERATING EXPENSES (INCOME)
Lease operating expenses			105,827				26,193				343,531				41,310
Accretion expense			1,757				258				5,271				763
Depletion expense			21,922				1,475				57,224				5,677
General and administrative			275,002				153,281				708,276				713,403
TOTAL OPERATING EXPENSES			404,508				181,207				1,114,302				761,153
NET LOSS BEFORE OTHER EXPENSE			(158,801	)			(114,324	)			(588,305	)			(616,984	)
OTHER INCOME (EXPENSE)
Interest Income (Expense)			21,548				(38,713	)			(2,252,939	)			(161,484	)
Gain (Loss) on embedded derivatives			-				(489,746	)			(3,030,218	)			(870,575	)
Total Other Income (Expense)			21,548				(528,459	)			(5,283,157	)			(1,032,059	)
NET INCOME (LOSS)		$	(137,253	)		$	(642,783	)		$	(5,871,462	)		$	(1,649,043	)
INCOME (LOSS) PER SHARE - BASIC			(0.00	)			(0.01	)			(0.13	)			(0.04	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC			50,034,543				43,950,000				46,803,104				43,950,000
INCOME (LOSS) PER SHARE - DILUTED			(0.00	)			(0.01	)			(0.13	)			(0.04)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED			50,034,543				43,950,000				48,726,227				43,950,000

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

UNITED AMERICAN PETROLEUM CORP.

CONSOLIDATED STATEMENTS OF CASH FLOW

UNAUDITED

 

		FOR THE				FOR THE
		NINE MONTHS ENDED				NINE MONTHS ENDED
		SEPTEMBER 30, 2012				SEPTEMBER 30,2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)		$	(5,871,462	)		$	(1,649,043	)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depletion expense			57,224				5,677
Accretion expense			5,271				763
Amortization of debt discount			2,176,996				85,234
Loss on embedded derivatives			3,030,218				870,575
Change in assets and liabilities
(Increase) Decrease in  accounts receivable			(39,840	)			(26,400	)
Decrease in related party receivable			(3,799	)			-
(Increase) in other receivable			160,302				(59,688	)
Increase in prepaid expense			(8,394	)			-
Increase (Decrease) in  accounts payable and accrued expenses			179,316				(71,723	)
Increase in accrued interest			(9,425	)			76,208
Increase in revenue payable			-				48,020
Net cash (used in) operating activities			(323,593	)			(720,377	)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of oil and gas properties			(274,527	)			(5,000	)
Net cash used in investing activities			(274,527	)			(5,000	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of convertible notes			615,000				590,000
Payment of note payable			-				(250,000	)
Payment of related party notes payable			-				(50,000	)
Net cash provided by financing activities			615,000				290,000
NET INCREASE IN CASH AND CASH EQUIVALENTS			16,880				(435,377	)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD			593,469				557,344
CASH AND CASH EQUIVALENTS - END OF PERIOD		$	610,349			$	121,967
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	-			$	-
Taxes			-				-
NON CASH TRANSACTIONS:
Conversion of convertible notes payable		$	2,800,000			$	-
Conversion of accrued interest			217,272				-
Discount from derivative liabilities			615,000				-
Discount to additional paid-in capital from relative fair value of warrants			289,520				-
Settlement of derivative liabilities to additional paid-in capital			4,493,669				-
Discount to notes payable from relative fair value of warrants			-				304,107
Acquisition of oil and gas properties for debt							84,985

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

UNITED AMERICAN PETROLEUM CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.           Nature of Operations and Basis of Presentation

 

Nature of Operations

 

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

 

On October 15, 2010, United purchased the Lozano and Marcee working interests from Predecessor, triggering predecessor accounting and financial statement presentation. Successor company references herein are referring to consolidated information pertaining to United. Predecessor company references herein relate to 4 Phoenix Oil & Gas, LLC a former working interest owner of the Lozano lease.

 

On December 31, 2010, United entered into a Plan of Merger (the “Merger”) with Forgehouse, Inc., a Nevada corporation (“Forgehouse”) and its then newly formed wholly-owned subsidiary, United PC Acquisition Corp. (“Merger Sub”). Following the closing and pursuant to the Plan of Merger, effective as of December 31, 2010, United merged with and into Merger Sub with United surviving (the “Reverse Merger”). United, as a wholly-owned subsidiary of Forgehouse was then merged with and into Forgehouse, with Forgehouse surviving, and Forgehouse changed its name to United American Petroleum Corp. in connection with such merger.  For accounting purposes, the Merger was treated as a reverse merger and a recapitalization of United.  The merger transaction was deemed to be a reverse acquisition, where the Company (the legal acquirer) is considered the accounting acquiree and United (the legal acquiree) is considered the accounting acquirer. The Company is deemed a continuation of the business of United, and the historical financial statements of United became the historical financial statements of the Company. In these notes, the terms “United,” the “Company,” “we,” “us,” “successor," or “our” mean United American Petroleum Corp. and its subsidiaries.

Basis of Presentation

 

These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim consolidated financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 8 of SEC Regulation S-X. The principles for interim consolidated financial information do not require the inclusion of all the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements on Form 10-K for the year ended December 31, 2011. The condensed consolidated financial statements included herein are unaudited; however, in the opinion of management, they contain all normal recurring adjustments necessary for a fair statement of the condensed results for the interim periods. Operating results for the nine month period ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. We made certain reclassifications to prior-period amounts to conform to the current presentation.

   

2.            Going Concern

 

The Company has incurred a net loss and negative operating cash flows since inception through September 30, 2012. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company's management is implementing plans to sustain the Company’s cash flow from operating activities and/or acquire additional capital funding. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

 

UNITED AMERICAN PETROLEUM CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

UNITED AMERICAN PETROLEUM CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

On June 4, 2012, the Company determined a relative fair value of $97,313 for the detachable warrants for the fifth installment of the convertible notes. In calculating the relative fair value of the warrants, the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 112.94%%, risk free rate of 0.27% and an expected term of approximately 4.69 years.

 

A summary of warrant activity for the period from December 31, 2011 through September 30, 2012 is presented below:

 

			Number of Warrants				Weighted Average Exercise Price			Weighted Average Remaining Contract Term
	Outstanding December 31, 2011			2,185,000			$	1.00		3.87 years
	Issued			615,000			$	1.00		4.17 years
	Exercised			-				-		-
	Outstanding September 30, 2012			2,800,000			$	1.00		3.93 years
	Exercisable, September  30, 2012			2,800,000			$	1.00		3.93 years

  Shares Reserved for Future Issuance

 

The Company has reserved shares for future issuance upon of its warrants as follows:

	Warrants	2,800,000
	Reserved shares at September 30, 2012	2,800,000

UNITED AMERICAN PETROLEUM CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following is a reconciliation of the conversion option liability and detachable warrant liability for which Level 3 inputs were used in determining fair value:

 

	Beginning balance January 1, 2012	$	1,138,989
	Initial recognition of debt derivative from issuance of     February 10, 2012, $150,000 convertible note		189,052
	Initial recognition of debt derivative from issuance of     March 30, 2012, $250,000 convertible note		514,784
	Initial recognition of debt derivative from issuance of    June 4, 2012, $215,000 convertible note		325,831
	Mark to market of debt derivative		2,325,015
	Other		1,017
	Total debt derivative preceding conversion		4,494,688
	Reduction of debt derivative from conversion		(4,494,688)
	Debt derivative as of September 30, 2012	$	-

 

During the nine months ended September 30, 2012, the loss on embedded derivatives in the condensed consolidated statement of operations consisted of a loss on the change in fair value of $2,326,032 and a loss of $704,186 which was the amount by which the embedded derivative liabilities exceeded the principal of the related notes payable on the date the notes were issued.

 

The Company’s conversion option liabilities are valued using pricing models and the Company generally uses similar models to value similar instruments. Where possible, the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility and correlations of such inputs. These consolidated financial liabilities do not trade in liquid markets, and as such, model inputs cannot generally be verified and do involve significant management judgment. Such instruments are typically classified within Level 3 of the fair value hierarchy. See Note 4 for Black Scholes Option Pricing Model inputs.

 

UNITED AMERICAN PETROLEUM CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Notes issued in 2012

			February 10, 2012				March 30, 2012				June 4, 2012				Total
	Total Proceeds		$	150,000			$	250,000			$	215,000			$	615,000
	Allocated to:
	Conversion Option Liability			189,052				514,783				325,831				1,029,666
	Relative Fair Value of Warrants			61,354				130,853				97,313				289,520
	Total Fair Value of Derivative			250,406				645,636				423,144				1,319,186
	Debt Discount			(150,000	)			(250,000	)			(215,000	)			(615,000	)
	Loss on debt derivative		$	100,406			$	395,636			$	208,144			$	704,186

 

During the nine months ended September 30, 2012 and 2011, the Company amortized $2,155,448 and $85,234 of the debt discount to interest expense.  The debt discount from the convertible notes was immediately expensed upon the conversion of the convertible notes during the period ended September 30, 2012.

 

Conversion of Convertible Notes

December 31, 2010 Convertible Note Installments (First Financing)

On April 13, 2012, the Company issued 1,240,000 shares of common stock to one investor who elected to convert the outstanding principal amount of $620,000 due on its convertible promissory note date December 31, 2010 at a conversion price of $0.50 per share as provided in the note agreement.

On June 1, 2012, the Company issued 1,180,000 shares of common stock to one investor who elected to convert the outstanding principal amount of $590,000 due on its convertible promissory notes dated January 1, 2011, March 9, 2011, June 20, 2011 and June 30, 2011 at a conversion price of $0.50 per share as provided in the note agreement.

 

On June 11, 2012, the Company issued 300,481 shares of common stock to one investor who elected to convert all of their accrued interest in the amount of $150,240 on its convertible notes from its first financing at a conversion price of $0.50 per share as provided in the note agreement.

October 14, 2011 Convertible Note Installments (referred to herein as “Second Financing”)

 

On June 7, 2012, the Company issued 3,314,062 shares of common stock to one investor who elected to convert the outstanding principal amount of $1,590,000 and all of the accrued interest due on its convertible promissory notes dated October 14, 2011, November 29, 2011, December 19, 2011, February 10, 2012, March 30, 2012 and June 4, 2012 at a conversion price of $0.50 per share as provided in the note agreement.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations .

Forward Looking Statements

This Quarterly Report of United American Petroleum Corp. on Form 10-Q contains forward-looking statements, particularly those identified with the words “anticipates,” “believes,” “expects,” “plans,” “intends,” “objectives” and similar expressions. These statements reflect management's best judgment based on factors known at the time of such statements. The reader may find discussions containing such forward-looking statements in the material set forth under “Management's Discussion and Analysis and Plan of Operations,” generally, and specifically therein under the captions “Liquidity and Capital Resources” as well as elsewhere in this Quarterly Report on Form 10-Q. Actual events or results may differ materially from those discussed herein. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guarantee, or warranty is to be inferred from those forward-looking statements.

The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements.

Critical Accounting Policy and Estimates.  Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources.  In addition, these accounting policies are described at relevant sections in this discussion and analysis and in the notes to the financial statements included in this Quarterly Report on Form 10-Q for the period ended September 30, 2012.

Oil and Gas Properties

The Company follows the full cost method of accounting for its investments in oil and gas properties. Under the full cost method, all costs associated with the exploration of properties are capitalized into appropriate cost centers within the full cost pool.  Internal costs that are capitalized are limited to those costs that can be directly identified with acquisition, exploration, and development activities undertaken and do not include any costs related to production, general corporate overhead, or similar activities.  Cost centers are established on a country-by-country basis.

Capitalized costs within the cost centers are amortized on the unit-of-production basis using proved oil and gas reserves. The cost of investments in unproved properties and major development projects are excluded from capitalized costs to be amortized until it is determined whether or not proved reserves can be assigned to the properties. Until such a determination is made, the properties are assessed annually to ascertain whether impairment has occurred.  The costs of drilling exploratory dry holes are included in the amortization base immediately upon determination that the well is dry.

For each cost center, capitalized costs are subject to an annual ceiling test, in which the costs shall not exceed the cost center ceiling.  The cost center ceiling is equal to i) the present value of estimated future net revenues computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions;  plus ii) the cost of properties not being amortized; plus iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less iv) income tax effects related to differences between the book and tax basis of the properties.  If unamortized costs capitalized within a cost center, less related deferred income taxes, exceed the cost center ceiling, the excess is charged to expense and separately disclosed during the period in which the excess occurs.

The Company accounts for share-based compensation in accordance with Accounting Standards Codification subtopic 718-10, Stock Compensation (“ASC 718-10”).  This requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases related to an Employee Stock Purchase Plan based on the estimated fair values.

As of September 30, 2012, there were no outstanding employee stock options.

Recent Accounting Pronouncements

The following table sets forth the revenue and production data for the three months ended September 30, 2012 and 2011.

		THREE MONTHS ENDED SEPTEMBER 30, 2012				THREE MONTHS ENDED SEPTEMBER 30, 2011				INCREASE (DECREASE)				% INCREASE (DECREASE)
REVENUES
Oil and Gas Revenues		$	194,723			$	48,460			$	146,263				302	%
Administrative revenues			50,984				18,423				32,561				177	%
Total Revenues		$	245,707			$	66,883			$	178,824				267	%
PRODUCTION:
Total production (BOE)			2,012				560				1,452				259	%
BOPD			22.05				6.14				15.91				259	%
AVERAGE SALES PRICES:
Price per BOE		$	98.78			$	86.54			$	10.22				12	%

 

For the three months ended September 2012, we increased total barrels of oil equivalent (BOE) produced by 259% over the same period in the prior year.  For the three months ended September 30, 2012 and 2011, total BOE produced was 2,012 and 560, respectively.  The increase in oil and gas production and revenues is primarily related to production increases on the Lozano, McKenzie, and Welder properties.  The Company conducted workover procedures on these properties during 2012 which has yielded significant increases in production for the current year’s period over the prior year’s period.

During the three months ended September 30, 2012, we increased our barrels of oil per day (BOPD) produced to an average of 22.05 BOPD from 6.14 BOPD for the three months ended September 30, 2012.

 

Operating Expenses.   For the three months ended September 30, 2012, our total operating expenses were $404,508, which consisted of lease operating expenses of $105,827, accretion expense of $1,757, depletion expense of $21,922, and general and administrative expenses of $275,002.  By comparison, for the three months ended September 30, 2011, our total operating expenses were $181,207, which consisted of lease operating expenses of $26,193, accretion expense of $258, depletion expense of $1,475, and general and administrative expenses of $153,281.

		THREE MONTHS ENDED SEPTEMBER 30, 2012				THREE MONTHS ENDED SEPTEMBER 30, 2011				INCREASE (DECREASE)				% INCREASE (DECREASE)
LEASE OPERATING EXPENSES
Lease and well operating expenses		$	42,474			$	10,034			$	32,440				323	%
Workover expenses			61,063				6,639				54,423				820	%
Legal, title and administrative well expenses			2,290				9,520				(7,230	)			(76	% )
Total Lease Operating Expenses		$	105,827			$	26,193			$	79,634				304	%
DEPRECIATION AND     ACCRETION EXPENSE
Depreciation and Accretion expense			23,679				1,733				21,946				1,266	%
GENERAL AND    ADMINISTRATIVE EXPENSE
Public reporting and compliance related expense			89,565				50,478				37,087				77	%
Employee and officer expenses			130,753				62,382				68,371				110	%
Other general and administrative expenses			54,684				40,421				14,263				35	%
Total General AND Administrative Expenses		$	275,002			$	153,281			$	121,721				79	%

 

The following table sets forth the revenue and production data for the nine months ended September 30, 2012 and 2011.

		NINE MONTHS ENDED SEPTEMBER 30, 2012				NINE MONTHS ENDED SEPTEMBER 30, 2011				INCREASE (DECREASE)				% INCREASE (DECREASE)
REVENUES
Oil and Gas Revenues		$	376,140			$	72,192			$	303,948				421	%
Administrative revenues			149,857				71,977				77,780				108	%
Total Revenues		$	525,997			$	144,169			$	381,828				265	%
PRODUCTION:
Total production (BOE)			4,346				948				3,398				358	%
BOE per day			15.88				3.46				12.42				359	%
AVERAGE SALES PRICES:
Price per BOE		$	86.55			$	76.15			$	10.39				14	%

		NINE MONTHS ENDED SEPTEMBER 30, 2012				NINE MONTHS ENDED SEPTEMBER 30, 2011				INCREASE (DECREASE)				% INCREASE (DECREASE)
LEASE OPERATING EXPENSES
Lease and well operating expenses		$	200,584			$	18,123			$	182,461				1,007	%
Workover expenses			139,731				8,994				130,737				1,454	%
Legal, title and administrative well expenses			3,216				14,193				(10,977	)			(77	%)
Total Lease Operating Expenses		$	343,531			$	41,130			$	302,221				732	%
DEPLETION AND ACCRETION EXPENSE
Depreciation and Accretion expense			62,495				6,440				56,055				870	%
GENERAL AND ADMINISTRATIVE EXPENSE
Public reporting and compliance related expense			353,425				339,509				13,916				4	%
Employee and officer expenses			242,200				253,546				(11,346	)			(4	%)
Other general and administrative expenses			112,651				120,348				(7,697	)			(6	%)
Total General and Administrative Expenses		$	708,276			$	713,403			$	(5,127	)			(1	%)

 

For the nine months ended September 30, 2012 compared to the nine months ended September 31, 2011, we incurred increases in lease and well operating expenses of $182,461 due to properties acquired in 2012 and increases in production activities on our properties.  During the nine months ended September 30, 2012, the Company worked over the Lozano property resulting in an increase to workover activity of $130,737.

 

Net Operating Loss.   For the nine months ended September 30, 2012, our total net operating loss was $588,305 as compared to a net operating loss of $616,984 for the nine months ended September 30, 2011.  Our net operating loss decreased over the prior period mainly due to increases in oil and gas sales of $381,828, which were offset by a $302,221 increase in lease operating expenses, associated with the workover of the Company’s wells during 2012.

Other Expenses.   For the nine months ended September 30, 2012, we recognized interest expense in the amount of $2,252,939 and a loss on embedded derivatives of $3,030,218 related to converted notes payable.  This is in comparison to accrued interest expense in the amount of $161,484 and a loss on embedded derivatives of $870,575 for the nine months ended September 30, 2011.

Net Loss.   For the nine months ended September 30, 2012, our net loss was $5,871,462, as compared to a net loss of $1,649,043 for the nine months ended September 30, 2011.  The $4,222,419 increase in our net loss between the comparable periods was mainly related to the increase in interest expense and loss on embedded derivatives related to our convertible notes payable for the nine months ended September 30, 2012, compared to the prior period and the increase in operating expenses, offset by the increase in revenues.

Liquidity and Capital Resources.    During the nine months ended September 30, 2012, we used $323,593 in operations, $274,527 in investing activities, related solely to property acquisitions and received $615,000 of cash from financing activities, related directly to proceeds on convertible notes.  Our convertible notes are described below.

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

 

Second Note and Warrants.   On October 14, 2011, we entered into a credit facility with an investor unrelated to the investor described above pursuant to which the investor agreed to lend up to $1,500,000 to us in multiple installments in exchange for convertible promissory notes with a conversion price of $0.50 per share (the “Second Notes”) and five-year warrants to acquire shares of common stock at an exercise price of $1.00 per share in the amount of each installment (the “Second Warrants”). On June 4, 2012, we and the investor agreed to increase the total amount of the credit facility to $1,590,000.  Pursuant to the credit facility, we issued the following notes and warrants to the investor on the following dates:

 

Date of Note	Amount of Note	Number of Warrants
October 14, 2011	$400,000	400,000
November 29, 2011	$550,000	550,000
December 19, 2011	$25,000	25,000
February 10, 2012	$150,000	150,000
March 30, 2012	$250,000	250,000
June 4, 2012	$215,000	215,000
TOTAL	$1,590,000	1,590,000