x
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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¨
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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Nevada
(State or other jurisdiction of
incorporation or organization)
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87-0564472
(I.R.S. Employer
Identification No.)
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20341 Irvine Avenue, Newport Beach, California
(Address of principal executive offices)
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92660
(Zip Code)
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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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(Do not check if a smaller reporting company)
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Page
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PART I—FINANCIAL INFORMATION
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|||
Item 1.
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Financial Statements
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4
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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16
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk.
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21
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Item 4.
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Controls and Procedures
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21
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PART II—OTHER INFORMATION
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|||
Item 1.
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Legal Proceedings
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22
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Item 1A.
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Risk Factors
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22
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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22
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Item 3.
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Default Upon Senior Securities
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23
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Item 4.
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Removed and Reserved
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23
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Item 5.
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Other Information
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23
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Item 6.
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Exhibits
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23
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SIGNATURES
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June 30,
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December 31,
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|||||||
2011
|
2010
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|||||||
CURRENT ASSETS
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||||||||
Cash and cash equivalents
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$ | 467,712 | $ | 111,572 | ||||
Accounts receivable, net
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70,580 | 74,828 | ||||||
Prepaid expenses
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15,074 | 24,898 | ||||||
Total current assets
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553,366 | 211,298 | ||||||
FIXED ASSETS
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||||||||
Furniture and equipment
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10,623 | 2,294 | ||||||
Accumulated depreciation
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(2,491 | ) | (2,294 | ) | ||||
Total furniture and fixtures, net
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8,132 | - | ||||||
Option to acquire leases and mineral interests
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25,000 | 25,000 | ||||||
Oil and natural gas properties
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1,774,980 | 1,466,813 | ||||||
Accumulated depletion
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(983,491 | ) | (953,084 | ) | ||||
Oil and natural gas properties, net
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816,489 | 538,729 | ||||||
OTHER ASSETS
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||||||||
Funds held at court
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13,006 | 13,006 | ||||||
TOTAL ASSETS
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$ | 1,390,993 | $ | 763,033 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
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||||||||
CURRENT LIABILITIES
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||||||||
Accounts payable
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$ | 307,397 | $ | 342,285 | ||||
Accrued liabilities
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95,695 | 74,088 | ||||||
Accrued interest
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57,036 | 10,501 | ||||||
Line of credit - bank
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62,487 | 68,667 | ||||||
Notes payable - related parties
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- | 50,000 | ||||||
Liability for unauthorized preferred stock issued
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32,164 | 85,654 | ||||||
Total current liabilities
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554,779 | 631,195 | ||||||
OTHER LIABILITIES
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||||||||
Senior convertible debenture, net of debt discount
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89,264 | 127,338 | ||||||
Deferred tax liability
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482,124 | 238,000 | ||||||
Asset retirement obligation
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27,282 | 27,282 | ||||||
TOTAL LIABILITIES
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1,153,449 | 1,023,815 | ||||||
STOCKHOLDERS' EQUITY (DEFICIT)
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||||||||
Common Stock, $0.001 par value, 490,000,000 shares authorized, 382,307,294 and 136,719,608 issued and outstanding respectively
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382,308 | 136,720 | ||||||
Additional paid in capital
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33,891,976 | 31,740,090 | ||||||
Accumulated deficit
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(34,036,740 | ) | (32,137,592 | ) | ||||
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)
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237,544 | (260,782 | ) | |||||
TOTAL LIABILITIES AND
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||||||||
STOCKHOLDERS' EQUITY (DEFICIT)
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$ | 1,390,993 | $ | 763,033 |
For the Three Months Ended
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For the Six Months Ended
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|||||||||||||||
June 30,
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June 30,
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|||||||||||||||
2011
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2010
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2011
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2010
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|||||||||||||
REVENUES
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$ | 109,830 | $ | 118,928 | $ | 218,150 | $ | 268,299 | ||||||||
COSTS AND EXPENSES
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||||||||||||||||
Costs of production
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67,031 | 39,904 | 136,191 | 51,786 | ||||||||||||
General and administrative expense
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473,693 | 186,774 | 1,162,121 | 345,202 | ||||||||||||
Depletion and accretion
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18,402 | 24,983 | 30,604 | 49,966 | ||||||||||||
Gain on settlement with former officer
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- | - | - | (404,623 | ) | |||||||||||
Total expenses
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559,126 | 251,661 | 1,328,916 | 42,331 | ||||||||||||
INCOME (LOSS) FROM OPERATIONS
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(449,296 | ) | (132,733 | ) | (1,110,766 | ) | 225,968 | |||||||||
OTHER EXPENSE
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||||||||||||||||
Interest expense
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965,303 | 10,869 | 1,178,415 | 19,121 | ||||||||||||
Total other expense
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965,303 | 10,869 | 1,178,415 | 19,121 | ||||||||||||
NET INCOME (LOSS) BEFORE TAX BENEFIT
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(1,414,599 | ) | (143,602 | ) | (2,289,181 | ) | 206,847 | |||||||||
TAX BENEFIT
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331,927 | - | 390,032 | - | ||||||||||||
NET INCOME (LOSS)
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$ | (1,082,672 | ) | $ | (143,602 | ) | $ | (1,899,149 | ) | $ | 206,847 | |||||
Weighted average shares, basic and diluted
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150,660,143 | 136,719,608 | 143,728,385 | 136,719,608 | ||||||||||||
Net income (loss) per share, basic and diluted
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$ | (0.01 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | 0.00 |
For the Six Months Ended June 30,
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||||||||
2011
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2010
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|||||||
CASH FLOW FROM OPERATING ACTIVITIES
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Net income (loss)
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$ | (1,899,149 | ) | $ | 206,847 | |||
Adjustment to reconcile net income (loss) from operations to net cash used in operating activities
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||||||||
Amortization of debt discount and financing warrents
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98,171 | - | ||||||
Depletion
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30,407 | 49,966 | ||||||
Depreciation
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197 | - | ||||||
Debentures converted to common stock
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976,255 | - | ||||||
Gain on settlement with former officer
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- | (404,623 | ) | |||||
Tax benefit of debenture discount
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(390,032 | ) | - | |||||
Warrants for services
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35,200 | 6,030 | ||||||
Change in working capital
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||||||||
Accounts receivable
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4,248 | 20,515 | ||||||
Prepaid expense
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9,824 | 23,144 | ||||||
Accounts payable
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(34,887 | ) | 43,054 | |||||
Accrued liabilities
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106,082 | (11,466 | ) | |||||
Net cash used in operating activities
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(1,063,684 | ) | (66,533 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES
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||||||||
Drilled wells
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(308,167 | ) | - | |||||
Purchase of wells
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(8,329 | ) | - | |||||
Net cash used in investing activities
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(316,496 | ) | - | |||||
CASH FLOWS FROM FINANCING ACTIVITIES
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||||||||
Sale of debentures
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1,792,500 | - | ||||||
Bank line of credit - net repayments
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(6,180 | ) | (11,705 | ) | ||||
Proceeds from notes payable to related parties
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- | 125,000 | ||||||
Payments on notes payable to related party
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(50,000 | ) | - | |||||
Net cash provided by financing activities
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1,736,320 | 113,295 | ||||||
Net change in cash and cash equivalents
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356,140 | 46,762 | ||||||
Beginning cash and cash equivalents
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111,572 | 22,076 | ||||||
Ending cash and cash equivalents
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$ | 467,712 | $ | 68,838 | ||||
Supplemental schedule of non-cash investing and financing activities:
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||||||||
Preferred stock converted to common stock
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$ | 53,490 | $ | - | ||||
Debentures exchanged for common stock
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$ | 1,112,500 | $ | - | ||||
Common stock exchanged for accrued interest
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$ | 37,940 | $ | - | ||||
Deferred tax liability
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$ | 302,229 | $ | - | ||||
Supplemental disclosures of cash flow information:
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||||||||
Cash paid during the period for
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||||||||
Interest
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$ | - | $ | - | ||||
Income taxes
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$ | - | $ | - |
•
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Level one – Quoted market prices in active markets for identical assets or liabilities;
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•
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Level two – Inputs other than level one inputs that are either directly or indirectly observable; and
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•
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Level three – Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
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Description
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Level 1
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Level 2
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Level 3
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Total Realized
(Loss) due to
valuation
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Total
Unrealized
(Loss)
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|||||||||||||||
Proved Properties (net)
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$
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—
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$
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—
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$
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483,322
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$
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—
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$
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—
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||||||||||
Totals
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$
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—
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$
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—
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$
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483,322
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$
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—
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$
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—
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June 30,
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December 31,
|
|||||||
2011
|
2010
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|||||||
Option on oil and gas property
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$
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25,000
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$
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25,000
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||||
Drilling in process costs
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308,167
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-
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||||||
Proved property – drilled wells
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1,753,026
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1,753,026
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||||||
Proved property – purchased wells
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3,015,322
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3,015,322
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||||||
Total oil and natural gas properties, cost
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5,101,515
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4,793,348
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||||||
Less: accumulated depletion and impairment
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(4,285,026
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)
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(4,254,619
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)
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||||
Oil and natural gas properties, net
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$
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816,489
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$
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538,729
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June 30, 2011
|
December 31,
2010 |
|||||||
Line of credit payable to Wells Fargo Bank, 10% interest payable at maturity, currently in workout phase
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$
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62,487
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$
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68,667
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June 30, 2011
|
December 31,
2010 |
|||||||
Liability for unauthorized preferred stock
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$
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32,164
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$
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85,654
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June 30,
2011
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December 31,
2010
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|||||||
Convertible debentures, interest at 10% per annum payable quarterly, due September 30, 2013 with detachable warrants
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$
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2,067,500
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$
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275,000
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||||
552,275
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552,275
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|||||||
Convertible debentures converted to common stock
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(1,112,500
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)
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--
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|||||
Subtotal
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1,507,275
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827,275
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||||||
Debt discount
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(1,418,011
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)
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(699,937
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)
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||||
Net book value
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$
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89,264
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$
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127,338
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Percentage
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||||||||||||||||
Three Months Ended June 30,
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Change
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|||||||||||||||
2011
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2010
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Change
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Inc (Dec)
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|||||||||||||
REVENUES
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$ | 109,830 | $ | 118,928 | $ | (9,098 | ) | (7.7 | %) | |||||||
COSTS AND EXPENSES
|
||||||||||||||||
Costs of production
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67,031 | 39,904 | 27,127 | 68.0 | % | |||||||||||
General and administrative expense
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473,693 | 186,774 | 286,919 | 154 | % | |||||||||||
Depletion and accretion
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18,402 | 24,983 | (6,581 | ) | (26.3 | %) | ||||||||||
Total expenses
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559,126 | 251,661 | 307,465 | 122 | % | |||||||||||
LOSS FROM OPERATIONS
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(449,296 | ) | (132,733 | ) | (316,563 | ) | (238 | %) | ||||||||
OTHER INCOME AND EXPENSE
|
||||||||||||||||
Interest expense
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965,303 | 10,869 | 954,434 | 8,781 | % | |||||||||||
Total other expense
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965,303 | 10,869 | 954,434 | |||||||||||||
INCOME (LOSS) BEFORE TAX BENEFIT
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(1,414,599 | ) | (143,602 | ) | (1,270,997 | ) | (885 | %) | ||||||||
TAX BENEFIT
|
331,927 | - | $ | 331,927 | ||||||||||||
NET INCOME (LOSS)
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$ | (1,082,672 | ) | $ | (143,602 | ) | $ | (939,070 | ) | (654 | %) | |||||
Weighted average shares, basic and diluted
|
150,660,143 | 136,719,608 | ||||||||||||||
Net loss per share, basic and diluted
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$ | (0.01 | ) | $ | (0.00 | ) |
Percentage
|
||||||||||||||||
Six Months Ended June 30,
|
Change
|
|||||||||||||||
2011
|
2010
|
Change
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Inc (Dec)
|
|||||||||||||
REVENUES
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$ | 218,150 | $ | 268,299 | $ | (50,149 | ) | (18.7 | %) | |||||||
COSTS AND EXPENSES
|
||||||||||||||||
Costs of production
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136,191 | 51,786 | 84,405 | 163 | % | |||||||||||
General and administrative expense
|
1,162,121 | 345,202 | 816,919 | 237 | % | |||||||||||
Depletion and accretion
|
30,604 | 49,966 | (19,362 | ) | (38.8 | %) | ||||||||||
Loss (gain) on settlements
|
- | (404,623 | ) | 404,623 | n/m | |||||||||||
Total expenses
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1,328,916 | 42,331 | 1,286,585 | 3,039 | % | |||||||||||
INCOME (LOSS) FROM OPERATIONS
|
(1,110,766 | ) | 225,968 | (1,336,734 | ) | (591 | )% | |||||||||
OTHER INCOME AND EXPENSE
|
||||||||||||||||
Interest expense
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1,178,415 | 19,121 | 1,159,294 | 6,063 | % | |||||||||||
Total other expense
|
1,178,415 | 19,121 | 1,159,294 | |||||||||||||
INCOME (LOSS) BEFORE TAX BENEFIT
|
(2,289,181 | ) | 206,847 | (2,496,028 | ) | (1,207 | %) | |||||||||
TAX BENEFIT
|
390,032 | - | $ | 390,032 | ||||||||||||
NET INCOME (LOSS)
|
$ | (1,899,149 | ) | $ | 206,847 | $ | (2,105,996 | ) | (1,018 | %) | ||||||
Weighted average shares, basic and diluted
|
143,728,385 | 136,719,608 | ||||||||||||||
Net loss per share, basic and diluted
|
$ | (0.01 | ) | $ | 0.00 |
June 30,
|
||||||||
|
2011
|
2010
|
||||||
Cash
|
$
|
467,712
|
$
|
68,838
|
||||
Total current assets
|
553,366
|
172,316
|
||||||
Total assets
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1,390,993
|
942,737
|
||||||
Total current liabilities
|
554,779
|
999,770
|
||||||
Total liabilities
|
1,153,449
|
1,034,747
|
Rule 13a-14(a)/15d-14(a) Certification of Robert Miranda
|
|
Rule 13a-14(a)/15d-14(a) Certification of Robert Miranda
|
|
32
|
Section 1350 Certification of Robert Miranda
|
Date: August 15, 2011
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VICTORY ENERGY CORPORATION
|
|
By:
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/s/ Robert J. Miranda
|
|
Robert J. Miranda
|
||
Chief Executive Officer,
Chief Financial Officer,
Chairman, and Director
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/s/ ROBERT J. MIRANDA
|
Robert J. Miranda
|
Chief Executive Officer (principal executive officer)
|
/s/ ROBERT J. MIRANDA
|
Dated: August 15 ,2011
|
By:
|
/s/ ROBERT J. MIRANDA
|
|
Robert J. Miranda
|
|||
Chief Executive Officer (principal executive officer)
|
|||
Dated: August 15, 2011
|
By:
|
/s/ ROBERT J. MIRANDA
|
|
Robert J. Miranda
|
|||
Chief Financial Officer (principal financial officer)
|
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
|
Jun. 30, 2011
|
Dec. 31, 2010
|
---|---|---|
Common Stock, par value | $ 0.001 | $ 0.001 |
Common Stock, shares authorized | 490,000,000 | 490,000,000 |
Common Stock, issued | 382,307,294 | 136,719,608 |
Common Stock, outstanding | 382,307,294 | 136,719,608 |
CONSOLIDATED STATEMENT OF OPERATIONS (USD $)
|
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2011
|
Jun. 30, 2010
|
Jun. 30, 2011
|
Jun. 30, 2010
|
|
REVENUES | $ 109,830 | $ 118,928 | $ 218,150 | $ 268,299 |
COSTS AND EXPENSES | Â | Â | Â | Â |
Costs of production | 67,031 | 39,904 | 136,191 | 51,786 |
General and administrative expense | 473,693 | 186,774 | 1,162,121 | 345,202 |
Depletion and accretion | 18,402 | 24,983 | 30,604 | 49,966 |
Gain on settlement with former officer | Â | Â | Â | (404,623) |
Total expenses | 559,126 | 251,661 | 1,328,916 | 42,331 |
INCOME (LOSS) FROM OPERATIONS | (449,296) | (132,733) | (1,110,766) | 225,968 |
OTHER EXPENSE | Â | Â | Â | Â |
Interest expense | 965,303 | 10,869 | 1,178,415 | 19,121 |
Total other expense | 965,303 | 10,869 | 1,178,415 | 19,121 |
NET INCOME (LOSS) BEFORE TAX BENEFIT | (1,414,599) | (143,602) | (2,289,181) | 206,847 |
TAX BENEFIT | 331,927 | Â | 390,032 | Â |
NET INCOME (LOSS) | $ (1,082,672) | $ (143,602) | $ (1,899,149) | $ 206,847 |
Weighted average shares, basic and diluted | 150,660,143 | 136,719,608 | 143,728,385 | 136,719,608 |
Net income (loss) per share, basic and diluted | $ (0.01) | $ 0.00 | $ (0.01) | $ 0.00 |
Document and Entity Information
|
6 Months Ended | |
---|---|---|
Jun. 30, 2011
|
Aug. 09, 2011
|
|
Document Information [Line Items] | Â | Â |
Document Type | 10-Q | Â |
Amendment Flag | false | Â |
Document Period End Date | Jun. 30, 2011 | |
Document Fiscal Year Focus | 2011 | Â |
Document Fiscal Period Focus | Q2 | Â |
Trading Symbol | VYEY | Â |
Entity Registrant Name | VICTORY ENERGY CORP | Â |
Entity Central Index Key | 0000700764 | Â |
Current Fiscal Year End Date | --12-31 | Â |
Entity Filer Category | Smaller Reporting Company | Â |
Entity Common Stock, Shares Outstanding | Â | 382,307,294 |
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Separation Settlement Payable to former officer and shareholder
|
6 Months Ended |
---|---|
Jun. 30, 2011
|
|
Separation Settlement Payable to former officer and shareholder |
Note 7 – Separation Settlement Payable to former officer and
shareholder
On
May 15, 2009, the Company entered into a “Separation
Agreement and General Release of Claims” with Jon Fullenkamp
(“Fullenkamp”) and the Virgin Family
Trust. The terms of the Agreement include (a)
termination of an employment agreement between the Company and
Fullenkamp; (b) payment of all accrued salaries, unreimbursed
expenses, and shareholder advances previously made by Fullenkamp;
(c) reduction of shareholder advances from estimated balance owed
at the time of settlement of $1,665,375 to a balance of $500,000
(the “Separation Settlement”); (d) Payment terms of the
Separation Settlement of $10,000 monthly commencing June 1, 2009,
and payable over a fifty (50) month period, including imputed
interest at the rate of 3.52% per annum; (e) cancellation of
2,000,000 shares of preferred stock, convertible at the rate of 100
shares of common, (d) lockup agreement with respect to all shares
owned directly or indirectly by Fullenkamp for a period of five
years, (e) Fullenkamp was to cooperate with the Company to recover
misappropriated funds and agreed to bring litigation or induce
others to bring litigation against the Company.
At
the time of the agreement, Fullenkamp was owed the sum of
approximately $1,665,375 in shareholder advances which were settled
for $500,000, resulting in a gain on the settlement of this debt of
$1,199,748. After the first payment of $10,000 the
Company recorded a discount of 3.25% on $490,000, the minimum
federal rate in the amount of $34,373 against the note. The
discount is amortized to interest expense over the period of
estimated maturity. During the year ended December 31, 2009, the
Company recorded interest expense of $8,997 and the note had an
unamortized discount of $24,476. During the year ended December 31,
2009, the Company paid $51,004 of the principal of the Separation
Settlement, reducing the outstanding balance as of December 31,
2009 to $404,623.
During
the year ended December 31, 2009, Fullenkamp filed a lawsuit
against the Company. The Company subsequently filed a lawsuit
against Fullenkamp and others on January 19, 2010, in Midland
County, Texas.
On
March 24, 2011 the Company, James Capital Energy, LLC and other
related parties entered into a comprehensive Settlement Agreement
with Jon Fullenkamp. Under the Settlement Agreement,
Victory agreed to i) dismiss Jon Fullenkamp from the Texas lawsuit
with prejudice, ii) provide him with a general release from all
acts related thereto, and iii) pay him $30,000 over 70
days. In turn, Jon Fullenkamp agreed to i) dismiss with
prejudice the lawsuit he filed against the Company and others in
California; ii) transfer to Victory 2,000,000 shares of Victory
preferred stock; iii) transfer to Victory 400,000 warrants for
Victory common stock; iv) transfer to James Capital Energy, LLC
16,144,563 shares of Victory common stock; v) voluntarily appear
for his deposition to discuss events that occurred at the
Adams-Baggett Ranch; vi) waive the claim he had to the $430,000
severance payment under the May 15, 2009 Separation Agreement; and
vii) provide Victory James Capital Energy, LLC and other related
parties with a general release.
|
Subsequent Event
|
6 Months Ended |
---|---|
Jun. 30, 2011
|
|
Subsequent Event |
Note 12 – Subsequent Event
On
August 5, 2011, the company settled the litigation that it filed on
March 18, 2011, against its former independent public accounting
firm, John Kinross-Kennedy, for professional
negligence. The Company executed a Settlement Agreement
and Mutual Release with Mr. Kinross-Kennedy as the matter has been
satisfactorily resolved.
|
Oil and natural gas properties
|
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Jun. 30, 2011
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Oil and natural gas properties |
Note 3 – Oil and natural gas properties
Oil
and natural gas properties are comprised of the following as
of:
Drilling
in process costs for the six months ended June 30, 2011 reflects
the acquisition costs and our share of the operating and drilling
costs for our respective working interest in a producing well
operated by CO Energy, a working interest in the Tunis Creek
project operated by V-F Petroleum Inc., a working interest in the
Alwan West natural gas prospect in Wharton County, Texas operated
by Miramar Petroleum, Inc., and the Atwood oil project in Hughes
County, Oklahoma In each case, participation in the
operating costs was part of the respective consideration given in
the acquisition.
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Senior Secured Convertible Debentures
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Jun. 30, 2011
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Senior Secured Convertible Debentures |
Note 9 – Senior Secured Convertible Debentures
Between
October 15, 2010, and July 25, 2011, the Company entered into
agreements with 47 accredited investors for the cash sale by the
Company of an aggregate of $2,917,275 of 10% Senior Secured
Convertible Debentures (the “Debentures”) which are
convertible into an aggregate of 583,455,000 shares of the
Company’s common stock at a conversion price of $0.005
per share of common stock, subject to adjustment. The
maturity date of the Debentures is September 30, 2013, but may be
extended at the sole discretion of the Company to December 31,
2013. The Debentures are immediately convertible by the
holder into shares of the Company’s common stock at a
conversion price of $0.005 per share, subject to customary
adjustments for stock splits, stock dividends, recapitalizations
and the like. The Company has the right to force conversion
of the Debenture if, among other things, the closing sales price of
the Company’s common stock is equal to or exceeds $0.025 for
twenty (20) consecutive trading days. In connection with this
offering, the Company also issued five (5) year warrants to
purchase an aggregate of 2,917,275 shares of the Company’s
common stock at an exercise price of $0.005 per share, subject to
adjustment, to the investors. The cash proceeds of
$2,917,275 were allocated to working capital. The
Debentures are secured under the terms of a Security Agreement by a
security interest in all of the Company’s personal property.
The relative fair value of the warrants and beneficial conversion
features of the debentures were determined at the time of issuance
using the methodology prescribed by current accounting
guidance.
During
the three months ended June 30, 2011, the Company issued $882,500
of these debentures for cash of $882,500. The Company determined
the initial fair value of the beneficial conversion feature was
approximately $857,416. The Company also determined that the
relative fair value of the warrants upon issuance was $25,084 which
was calculated under a Black-Scholes option pricing model using as
assumptions an expected life of 5 years, a stock volatility ranging
from 679.1% to 682.9% , a risk free interest rate ranging from
1.74% to 2.2%, and no expected dividend yield. The initial fair
value of the warrants of $25,084 and the beneficial conversion
feature of $857,416 were recorded by the Company as a financing
discount of $882,500 which the Company is amortizing to interest
expense over the life of the notes.
On
June 30, 2011, $1,112,500 of the convertible debentures were
converted into 222,500,000 shares of the Company’s common
stock in accordance with the terms of the debentures.
Senior
secured convertible debentures consisted of the following as
of:
Amortization
of the debt discount and related financing warrants totaled $98,171
for the six months ended June 30, 2011.
In
May 2011, a majority of the investors in the private placement
agreed to an amendment proposed by the Company to remove a
condition under which the Company would be required to unilaterally
adjust the conversion price of the debentures and the exercise
price of the warrants if the Company issued securities at a price
below the stated conversion price of $.005 per share.
As
the Company did not intend to be unilaterally required to adjust
the conversion price of the debentures because the conversion price
included in the offering of the debentures is so low, the Company
is treating the amendment as a correction to the original offering
documents.
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Shareholders Equity
|
6 Months Ended |
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Jun. 30, 2011
|
|
Shareholders Equity |
Note 10 – Shareholders Equity
During
the three months ended June 30, 2011, the following unregistered
securities were issued for the purposes noted.
On
April 25, 2011, 155,000 shares of the Companies preferred stock
held by three affiliates of the Company were converted to
15,500,005 shares of the Company’s common stock in accordance
with the terms on which such preferred stock has been
converted.
On
June 30, 2011, $1,112,500 of the face value of the Company’s
10% Senior Secured Convertible Debentures held by six affiliated
and six non affiliated entities were converted to 222,500,000
shares of the Company’s common stock in accordance with the
terms of the debentures.
On
June 30, 2011, 7,587,671 of the Company’s common stock were
issued to six affiliated and six non affiliated entities in full
satisfaction of the $37,940 in accrued interest on the debentures
converted on that date.
During
the three months ended June 30, 2011, we issued 10% Senior Secured
Convertible Debentures with the total face value of $750,000 to 15
individual or investment entities who are non-affiliates of the
Company in exchange for $750,000. The debentures are
convertible into 150,000,000 shares of common stock at a conversion
price of $0.005 per share.
During
the three months ended June 30, 2011, we issued warrants to
purchase a total of 750,000 shares of common stock to 15 individual
or investment entities who are non-affiliates of the Company at an
exercise price of $0.005 as part of the terms of the sale of the
debentures. The warrants are convertible into 750,000 shares of the
Company’s common stock.
During
the three months ended June 30, 2011, we issued 10% Senior Secured
Convertible Debentures with the total face value of $132,500 to
three individual or investment entities who are affiliates of the
Company in exchange for $132,500. The debentures are
convertible into 26,500,000 shares of common stock at a conversion
price of $0.005 per share.
During
the three months ended June 30, 2011, we issued warrants to
purchase a total of 132,500 shares of common stock to three
individual or investment entities who are affiliates of the Company
at an exercise price of $0.005 as part of the terms of the sale of
the debentures. The warrants are convertible into 132,500 shares of
the Company’s common stock.
On
June 30, 2011, we agreed to issue warrants to purchase a total of
400,000 shares of common stock to board members of the Company at
an exercise price of $0.01 per share in exchange for services. Of
these warrants, each board member is to receive warrants to
purchase 100,000 shares. These warrants will be issued
by us to the individuals on December 31, 2011.
|
Liability for Unauthorized Preferred Stock Issued
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6 Months Ended | ||||||||||||||||||
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Jun. 30, 2011
|
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Liability for Unauthorized Preferred Stock Issued |
Note 8 – Liability for Unauthorized Preferred Stock
Issued
During
the year ended December 31, 2006, the Company authorized 10,000,000
shares of Preferred Stock, convertible to common stock at the rate
of 100 shares of common for every share of preferred. During 2006,
the Company issued 715,517 shares of this preferred stock for cash
of $246,950. The Company subsequently issued additional
preferred stock and had several preferred shareholders converted
their shares into common stock during the years ended December 31,
2009, 2008, and 2007.
During
the course of the Company’s internal investigation, it
was determined by the Company’s legal counsel that the
preferred shares had not been duly authorized by the State of
Nevada. Since the Company had issued and received consideration for
the preferred stock, notwithstanding that the stock was not legally
authorized, the Company reclassified the preferred stock into a
liability. The Company has offered to settle the debt with the
remaining holders of the unauthorized preferred stock by honoring
the terms of conversion of one share of preferred into 100 shares
of common stock.
On
April 25, 2011, 155,000 shares of the Companies preferred stock
held by three affiliates of the Company were converted to
15,500,005 shares of the Company’s common stock in accordance
with the terms on which such preferred stock has been
converted.
The preferred stock liability consisted of the
following as of:
|
Financial Statement Presentation
|
6 Months Ended |
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Jun. 30, 2011
|
|
Financial Statement Presentation |
Note 1 – Financial Statement Presentation
Basis of Presentation
The
accompanying consolidated balance sheet as of December 31, 2010,
which has been derived from audited financial statements, and the
accompanying interim consolidated financial statements as of June
30, 2011, for the three and six month periods ended June 30, 2011
and 2010, have been prepared by management pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC")
for interim financial reporting. These interim consolidated
financial statements are unaudited and, in the opinion of
management, include all adjustments (consisting only of normal
recurring adjustments and accruals) necessary to present fairly the
financial condition, results of operations and cash flows of
Victory Energy Corporation and subsidiary (hereinafter collectively
referred to as the "Company") as of and for the periods presented
in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). Operating results for the three
and six month periods ended June 30, 2011 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2011 or for any other interim period during such year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been
omitted in accordance with the rules and regulations of the SEC.
The accompanying consolidated financial statements should be read
in conjunction with the audited consolidated financial statements
and notes thereto contained in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2010 filed with the SEC
on May 16, 2011.
Organization and nature of operations
Victory
Energy Corporation (Pink Sheets symbol VYEY), formerly known as
Victory Capital Holdings Corporation (the “Company”)
was organized under the laws of the State of Nevada on January 7,
1982, under the name All Things, Inc. On March 21, 1985 the
Corporation’s name was changed to New Environmental
Technologies Corporation and on April 28, 2003 to Victory Capital
Holdings Corporation. The name was changed finally to
Victory Energy Corporation on May 3, 2006.
The
business of the Company is to acquire, develop, produce and exploit
oil and natural gas properties. The Company’s major oil and
natural gas properties are located in Texas. The Company’s
executive offices are located in Newport Beach, California and its
operations offices are located in Austin,
Texas.
The
Company’s initial authorized capital consisted of 100,000,000
shares of $0.001 par value common voting stock and, as of the date
of this filing, has authorized capital of 490,000,000 shares of
$0.001 par value common stock.
Going Concern
As
presented in the consolidated financial statements, we had a net
loss of $1,899,149 for the six months ended June 30,
2011. Almost half of the loss results from non-cash
accounting charges related to the sale and conversion of the
Company’s 10% Senior Secured Convertible
Debentures. The cash proceeds from the debentures have
allowed the Company to continue operations and invest in new oil
and gas properties. The Company also incurred
significant accounting, consulting, audit and legal expenses in six
month period ended June 30, 2011, associated with bringing the
Company current on its Security and Exchange Commission
filings. Losses are expected to continue in the near
term and, as of June 30, 2011, the Company has a deficit in its
working capital of $1,413 and an accumulated deficit is
$34,036,740. Management anticipates that significant
additional capital expenditures will be necessary to develop the
Company’s oil and natural gas properties before significant
positive operating cash flows will be achieved.
Management
plans to alleviate these conditions by pursuing business partnering
arrangements for the acquisition and development of its properties
as well as debt and equity funding through private placements.
Without outside investment from the sale of equity securities, debt
financing or partnering with other oil and natural gas companies,
operating activities and overhead expenses will be reduced to a
pace that available operating cash flows will support.
The
accompanying consolidated financial statements are prepared as if
the Company will continue as a going concern. The consolidated
financial statements do not contain adjustments, including
adjustments to recorded assets and liabilities, which might be
necessary if the Company were unable to continue as a going
concern.
|
Loans payable to related parties
|
6 Months Ended |
---|---|
Jun. 30, 2011
|
|
Loans payable to related parties |
Note 4 –Loans payable to related parties
On
March 24, 2011 the former CEO and shareholder waived his claim to
his loan payable as part of a comprehensive settlement agreement
with the Company (see Note 7). The Company realized a
gain on settlement of $404,623 at December 31, 2010 as a result of
the cancellation of this debt.
|
Unsecured notes payable to related parties
|
6 Months Ended | |||||||||||||||||||||||||||
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Jun. 30, 2011
|
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Unsecured notes payable to related parties |
Note 5 – Unsecured notes payable to related
parties
Unsecured
notes payable to related parties were as follows as
of:
|
Line of credit payable to Wells Fargo Bank
|
6 Months Ended | ||||||||||||||||||
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Jun. 30, 2011
|
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Line of credit payable to Wells Fargo Bank |
Note 6 – Line of credit payable to Wells Fargo
Bank
On
October 7, 2008, the Company executed an unsecured Business Line of
Credit Agreement with Wells Fargo Bank, National Association. The
Credit Agreement provides the Company with a line of credit
facility in the aggregate amount of $96,761. Interest on the loan
is payable monthly, at the rate of 10.0% per annum. The
line of credit was personally guaranteed by the Company’s
former CEO and shareholder.
During
the three months ended December 31, 2010, the Company defaulted on
its monthly loan payments to Wells Fargo Bank and the loan was
referred to the Wells Fargo Bank’s workout department. The
Company has negotiated an informal repayment program with the Wells
Fargo Bank’s workout department whereby the Wells Fargo Bank
will not institute collection actions provided the Company
continues to make monthly principal payments of $2,200 monthly to
Wells Fargo Bank. As of June 30, 2011, the Company was current on
the workout terms of this line of credit.
The note was settled for cash on
August 4, 2011.
|
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Summary of Significant Accounting Policies
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2011
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Summary of Significant Accounting Policies |
Note 2 – Summary of Significant Accounting
Policies
Principles of consolidation
The
accompanying consolidated financial statements are presented in
accordance with accounting principles generally accepted in the
United States. The consolidated financial statements include the
accounts of the Company and Aurora Energy Partners, A Texas General
Partnership. The Company holds a 15% equity interest in Aurora
Energy Partners. Since the Company serves as managing partner and
is responsible for managing all business operations of the
partnership, the financial statements of Aurora have been
consolidated with the Company. All significant intercompany
transactions have been eliminated. The consolidated financial
statements reflect necessary adjustments, all of which were of a
recurring nature and are in the opinion of management necessary for
a fair presentation.
Property and equipment
Property
and equipment are recorded at cost. Cost of repairs and maintenance
are expensed as they are incurred. Major repairs that extend the
useful life of equipment are capitalized and depreciated over the
remaining estimated useful life. When property and equipment are
sold or otherwise disposed, the related costs and accumulated
depreciation are removed from the respective accounts and the gains
or losses realized on the disposition are reflected in operations.
The Company uses the straight-line method in computing depreciation
for financial reporting purposes.
Revenue Recognition
We
use the sales method of accounting for oil and natural gas
revenues. Under this method, revenues are recognized based on
actual volumes of gas and oil sold to purchasers. The volumes sold
may differ from the volumes to which we are entitled based on our
interests in the properties. Differences between volumes sold and
entitled volumes create oil and gas imbalances which are generally
reflected as adjustments to reported proved oil and gas reserves
and future cash flows in our supplemental oil and gas disclosures.
If our excess takes of natural gas or oil exceed our estimated
remaining proved reserves for a property, a natural gas or oil
imbalance liability is recorded in the consolidated balance sheet.
There were no such imbalance liabilities recorded at June 30, 2011
and December 31, 2010.
Allowance for Doubtful Accounts
We
recognize an allowance for doubtful accounts to ensure trade
receivables are not overstated due to uncollectability. Bad debt
reserves are maintained for all customers based on a variety of
factors, including the length of time receivables are past due,
macroeconomic conditions, significant one-time events and
historical experience. An additional reserve for individual
accounts is recorded when we become aware of a customer's inability
to meet its financial obligations, such as in the case of
bankruptcy filings or deterioration in the customer's operating
results or financial position. If circumstances related to
customers change, estimates of the recoverability of receivables
would be further adjusted. There were allowance for
doubtful accounts balances at June 30, 2011 and December 31,
2010.
Fair Value of Financial Instruments
The
Company’s financial instruments consist of cash and cash
equivalents, accounts receivable, other assets, fixed assets,
derivative liability, deferred revenue, accounts payable, accrued
liabilities and short-term debt. The estimated fair
value of cash, accounts receivable, other assets, accounts payable,
deferred revenue and accrued liabilities approximated their
carrying amounts due to the short-term nature of these
instruments. The carrying value of short-term debt also
approximates fair value since their terms are similar to those in
the lending market for comparable loans with comparable
risks. None of these instruments are held for trading
purposes.
The
Company utilizes various types of financing to fund its business
needs, including debt with warrants attached and other instruments
indexed to its stock. The Company reviews its warrants
and conversion features of securities issued as to whether they are
freestanding or contain an embedded derivative and if so, whether
they are classified as a liability at each reporting period until
the amount is settled and reclassified into equity with changes in
fair value recognized in current earnings.
Inputs
used in the valuation to derive fair value are classified based on
a fair value hierarchy which distinguishes between assumptions
based on market data (observable inputs) and an entity’s own
assumptions (unobservable inputs). The hierarchy
consists of three levels:
Determining
which category an asset or liability falls within the hierarchy
requires significant judgment. The Company evaluates its
hierarchy disclosures each quarter. The following table
presents all assets that were measured and recognized at fair value
as of June 30, 2011 and for the three months then ended on a
non-recurring basis. The assets shown below were presented at fair
value due to the impairment analysis indicating an estimated fair
value below the carrying value for the proved oil and gas
properties.
Fair
value of assets measured and recognized at fair value on a
non-recurring basis as of June 30, 2011 were as
follows:
The Company valued the
Proved Properties at their fair value in accordance with the
applicable Accounting Standards Codification (“ASC”)
standard due to the impairment indicators prevalent as of June 30,
2011. The inputs that were used in determining the fair
value of these assets were Level 3 inputs. These inputs consist of
but are not limited to the following: estimates of reserve
quantities, estimates of future production costs and taxes,
estimates of consistent pricing of commodities, 10% discount rate,
etc. No impairment expense was recorded as of June 30,
2011.
Concentrations
There
is a ready market for the sale of crude oil and natural gas. During
the six months ended June 30, 2011, each of our fields sold all of
its oil production to one purchaser for each field and all of its
natural gas production to one purchaser for each field. However,
because alternate purchasers of oil and natural gas are readily
available at similar prices, we believe that the loss of any of our
purchasers would not have a material adverse effect on our
financial results
Accounting estimates
The
preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the periods reported. Actual results could differ from these
estimates.
Significant
estimates include volumes of oil and natural gas reserves used in
calculating depletion of proved oil and natural gas properties,
future net revenues and abandonment obligations, impairment of
proved and unproved properties, future income taxes and related
assets and liabilities, the fair value of various common stock,
warrants and option transactions, and contingencies. Oil and
natural gas reserve estimates, which are the basis for
unit-of-production depletion and the calculation of impairment,
have numerous inherent uncertainties. The accuracy of any reserve
estimate is a function of the quality of available data, the
engineering and geological interpretation and judgment. Results of
drilling, testing and production subsequent to the date of the
estimate may justify revision of such estimate. Accordingly,
reserve estimates are often different from the quantities of oil
and natural gas that are ultimately recovered. In
addition, reserve estimates are vulnerable to changes in wellhead
prices of crude oil and natural gas. Such prices have been volatile
in the past and can be expected to be volatile in the
future.
These
significant estimates are based on current assumptions that may be
materially affected by changes to future economic conditions such
as the market prices received for sales of volumes of oil and
natural gas, interest rates, the fair value of the Company’s
common stock and corresponding volatility, and the Company’s
ability to generate future taxable income. Future changes to these
assumptions may affect these significant estimates materially in
the near term.
Oil and natural gas properties
The
Company accounts for its oil and natural gas properties using the
successful efforts method of accounting. Under this method, all
costs associated with property acquisitions, successful exploratory
wells, all development wells, including dry hole development wells,
and asset retirement obligation assets are capitalized.
Additionally, interest is capitalized while wells are being drilled
and the underlying property is in development. Costs of exploratory
wells are capitalized pending determination of whether each well
has resulted in the discovery of proved reserves. Oil and natural
gas mineral leasehold costs are capitalized as incurred. Items
charged to expense generally include geological and geophysical
costs, costs of unsuccessful exploratory wells, and oil and natural
gas production costs. Capitalized costs of proved properties
including associated salvage are depleted on a well-by-well or
field-by-field (common reservoir) basis using the
units-of-production method based upon proved producing oil and
natural gas reserves. The depletion rate is the current period
production as a percentage of the total proved producing reserves.
The depletion rate is applied to the net book value of property
costs to calculate the depletion expense. Proved reserves
materially impact depletion expense. If the proved reserves
decline, then the depletion rate (the rate at which we record
depletion expense) increases, reducing net
income. Dispositions of oil and natural gas properties
are accounted for as adjustments to capitalized costs with gain or
loss recognized upon sale. A gain (loss) is recognized
to the extent the sales price exceeds or is less than original cost
or the carrying value, net of impairment. Oil and
natural gas properties are also subject to impairment at the end of
each reporting period. Unproved property costs are excluded from
depletable costs until the related properties are developed. See
impairment discussed in “Long-lived assets and intangible
assets” below.
We
depreciate other property and equipment using the straight-line
method based on estimated useful lives ranging from five to 10
years.
Long-lived assets and intangible assets
The
Company accounts for intangible assets in accordance with the
applicable ASC. Intangible assets that have
defined lives are subject to amortization over the useful life of
the assets. Intangible assets held having no contractual factors or
other factors limiting the useful life of the asset are not subject
to amortization but are reviewed at least annually for impairment
or when indicators suggest that impairment may be
needed. Intangible assets are subject to impairment
review at least annually or when there is an indication that an
asset has been impaired. While there are prospects for possible
capital funding (either debt or equity), much is left to the market
and outside instability. As such, at this time,
management cannot anticipate with a comfortable degree of certainty
if the appropriate amount of funding will be achieved and any
funding will be diverted fully to its exploration and production
activities. For unproved property costs, management reviews
these investments for impairment on a property-by-property basis if
a triggering event should occur that may suggest that impairment
may be required.
The
Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If the carrying amount
of the asset, including any intangible assets associated with that
asset, exceeds its estimated future undiscounted net cash flows,
the Company will recognize an impairment loss equal to the
difference between its carrying amount and its estimated fair
value. The fair value used to calculate the impairment for
producing oil and natural gas field that produces from a common
reservoir is first determined by comparing the undiscounted future
net cash flows associated with total proved properties to the
carrying value of the underlying evaluated property. If the cost of
the underlying evaluated property is in excess of the undiscounted
future net cash flows, the future net cash flows are discounted at
10%, which the Company believes approximates fair value, to
determine the amount of impairment.
The
Company recorded no impairment for the three and six months ended
June 30, 2011.
Asset retirement obligation
In
accordance with the ASC, the Company recognizes the fair
value of the liability for asset retirement costs in an
entity’s balance sheet, as both a liability and an increase
in the carrying values of such assets, in the periods in which such
liabilities can be reasonably estimated. The present value of the
estimated future asset retirement obligation (“ARO”),
as of the date of acquisition or the date at which a successful
well is drilled, is capitalized as part of the costs of proved oil
and natural gas properties and recorded as a liability. The asset
retirement costs are depleted over the production life of the oil
and natural gas property on a unit-of-production
basis.
The
ARO is recorded at fair value and accretion expense is recognized
as the discounted liability is accreted to its expected settlement
value. The fair value of the ARO liability is measured by using
expected future cash outflows discounted at the Company’s
credit adjusted risk free interest rate.
Amounts
incurred to settle plugging and abandonment obligations that are
either less than or greater than amounts accrued are recorded as a
gain or loss in current operations. Revisions to
previous estimates, such as the estimated cost to plug a well or
the estimated future economic life of a well, may require
adjustments to the ARO and are capitalized as part of the costs of
proved oil and natural gas property.
Income taxes
The
Company accounts for income taxes in accordance with ASC 740
“Income Taxes” which requires an asset and liability
approach for financial accounting and reporting of income
taxes. Deferred income taxes reflect the impact of
temporary differences between the amount of assets and liabilities
for financial reporting purposes and such amounts as measured by
tax laws and regulations. Deferred tax assets include tax loss and
credit carry forwards and are reduced by a valuation allowance if,
based on available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be
realized.
On
January 1, 2007, the Company adopted the Financial Accounting
Standards Board (“FASB”) Interpretation on accounting
for uncertainty in income taxes. The
interpretation prescribes a measurement process for recording
in the financial statements uncertain tax positions taken or
expected to be taken in a tax return. Additionally, the
interpretation provides guidance regarding uncertain tax positions
relating to derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and
transition. The Company will classify any interest and
penalties associated with income taxes as interest
expense.
Stock based compensation
Beginning
January 1, 2006, the Company adopted the FASB standard for
accounting for stock based compensation to account for its issuance
of warrants to key partners, directors and officers. The standard
requires all share-based payments, including employee stock
options, warrants and restricted stock, be measured at the fair
value of the award and expensed over the requisite service period
(generally the vesting period). The fair value of common warrants
granted to key partners, directors and officers is estimated at the
date of grant using the Black-Scholes option pricing model by using
the historical volatility of comparable public companies. The
calculation also takes into account the common stock fair market
value at the grant date, the exercise price, the expected life of
the common stock option or warrant, the dividend yield and the
risk-free interest rate.
The
Company from time to time may issue stock options, warrants and
restricted stock to acquire goods or services from third parties.
Restricted stock, options or warrants issued are recorded on the
basis of their fair value, which is measured as of the date
issued. The options or warrants are valued using
the Black-Scholes option pricing model on the basis of the market
price of the underlying equity instrument on the “valuation
date,” which for options and warrants related to contracts
that have substantial disincentives to non-performance, is the date
of the contract, and for all other contracts is the vesting date.
Expense related to the options and warrants is recognized on a
straight-line basis over the shorter of the period over which
services are to be received or the vesting period.
The
Company recognized stock-based compensation expense from warrants
granted to directors for the three and six months ended June 30,
2011 was $16,240 and $35,200,
respectively.
Earnings per share
Basic
earnings per share are computed using the weighted average number
of common shares outstanding. Diluted earnings per share reflect
the potential dilutive effects of common stock equivalents such as
options, warrants and convertible securities. The Company showed
positive net income of $206,487 for the six months ended June 30,
2010 which resulted from a one-time gain on a settlement with a
former officer of $404,623. Had the gain not occurred,
the Company would have shown a net loss of $197,776 for the six
months ended June 30, 2010. To avoid possible confusion
surrounding the effect of this one-time gain, basic and diluted net
income and net loss per share are the stated as being the same when
the net income is the result of a one-time gain. Given the
historical and projected future losses of the Company, all
potentially dilutive common stock equivalents are
anti-dilutive.
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Income Taxes
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6 Months Ended |
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Jun. 30, 2011
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Income Taxes |
Note 11 – Income Taxes
As
a result of net operating losses and the inability to record a
benefit for its deferred income tax assets, the Company has no
income tax provision for the six months ended June 30, 2011 or for
the year ended December 31, 2010.
The
Internal Revenue Code of 1986, as amended, imposes substantial
restrictions on the utilization of net operating losses in the
event of an “ownership change” of a
corporation. Accordingly, a company’s ability to
use net operating losses may be limited as prescribed under
Internal Revenue Code Section 382 (“IRC Section
382”). Events which may cause limitations in the
amount of the net operating losses that the company may use in any
one year include, but are not limited to, a cumulative ownership
change of more than 50% over a three-year period. There
have been transactions that have changed the Company’s
ownership structure since inception that may have resulted in
one or more ownership changes as defined by the Internal Revenue
Code of 1986.
At
December 31, 2010, the Company had available approximately
$2,896,000 in Federal and state net operating loss to reduce future
taxable income. The Federal net operating loss carry forward begins
to expire in 2025.
Given
the Company’s history of net operating losses, management has
determined that it is more-likely-than-not the Company will not be
able to realize the tax benefit of the carry forwards. Current
standards require that a valuation allowance be established when it
is more likely than not that all or a portion of deferred tax
assets will not be realized.
Accordingly,
the Company has recorded a full valuation allowance against its net
deferred tax assets at December 31, 2010. Upon the
attainment of taxable income by the Company, management will assess
the likelihood of realizing the tax benefit associated with the use
of the carry forwards and will recognize a deferred tax asset at
that time.
Accounting
principles generally accepted in the United States requires the
recognition of a deferred tax liability for the tax benefit
associated with the beneficial conversion feature related to the
Company’s 10% Senior Secured Convertible
Debentures. The beneficial conversion value is created
whenever the market price of the Company’s stock is less than
the conversion price of the debentures. The resulting deferred tax
liability is designed to reflect the potential tax credit
associated with the difference between the basis of the debentures
for accounting purposes and the basis of the debentures for tax
purposes. During the three and six months ended June 30, 2011, the
Company recognized a benefit of $331,927 and $390,032,
respectively, as a result of this difference.
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