Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2011 and December 31, 2010
|
1.
|
Organization of the Company and Significant Accounting Principles
|
The Company was incorporated in the State of Nevada in October 1995. Effective October 13, 2004 the Company, previously known as Energy Producers Inc., changed its name to EGPI Firecreek, Inc.
Prior to December 2008, the Company held interests in various gas & oil wells located in the Wyoming and Texas area. In December 2008, the Company’s major creditor, Dutchess Private Equities Ltd. (Dutchess), foreclosed on the assets of the Company. As a result, all of the Company’s oil and gas properties were transferred to Dutchess in satisfaction of debt owed.
In October 2008, the Company effected a 1 share for 200 shares reverse split of its common stock and all amounts have been retroactively adjusted.
In May 2009 the Company acquired M3 Lighting, Inc. (“M3”) as a wholly owned subsidiary via reverse triangular merger. The Company was determined to be the acquirer in the transaction for accounting purposes. M3 is a distributor of commercial and decorative lighting to the trade and direct to retailers. As part of the Merger the Company effected a name change for its wholly owned subsidiary Malibu Holding, Inc. to Energy Producers, Inc. (“EPI”) as a conduit for its oil and gas activities.
In November 2009 the Company acquired all of the issued and outstanding capital stock of South Atlantic Traffic Corporation, a Florida corporation (“SATCO”). SATCO has been in business since 2001 and has several offices throughout the Southeast United States. SATCO carries a variety of products and inventory geared primarily towards the transportation industry. SATCO offers transportation products ranging from loop sealant, traffic signal equipment, traffic and light poles, data/video systems and Intelligent Traffic Systems (ITS) surveillance systems. SATCO works closely with Department of Transportation (DOT) agencies, local traffic engineers, contractors, and consultants to customize high quality traffic control systems.
In December 2009, the Company’s wholly owned subsidiary Energy Producers, Inc. acquired 50% working interests and corresponding 32% net revenue interests in oil and gas leases, reserves, and equipment located in West Central Texas. The Company entered into a turnkey work program included for three wells located on the leases.
On March 3, 2010, the Company executed a Stock Purchase Agreement with the stockholders of Redquartz LTD (“Sellers” or “RQTZ”), a company formed and existing under the laws of the country of Ireland, whereas the Company agreed to issue 100,000 shares of its restricted common stock valued at USD $2,500 in exchange for 100% of the issued and outstanding shares of common stock, par value $0.01 per share, of RQTZ. All assets and liabilities, other than the Shareholder Notes Payable, of the RQTZ were transferred to the prior owners of Redquartz. The Notes Payable represent a debt burden to RQTZ of USD $4,464,262. This obligation is based in Euros and converted to our functional currency the dollar. Redquartz LTD was inactive in the first and second quarter of 2010 and had no income and expense that would affect the financial statements of the Company and therefore no pro-forma is necessary.
On June 11, 2010, the Company acquired all of the issued and outstanding stock of Chanwest Resources, Inc., (“Chanwest or CWR”) a Texas corporation. In the course of this acquisition, Chanwest stockholders exchanged all outstanding common shares for the Company’s common shares and other provisions. Chanwest Resources, Inc. was formed in 2009 and has been engaged in ramping up operations including acquiring assets related to the servicing and construction, and activities related to the acquisition, production and development for oil and gas. Chanwest has formed strategic alliances and brought key management with over 40 years experience in all facets of the oil and gas industry, to be implemented on day one of our acquisition thereof. Chanwests’ first phase of operations include Construction and Trucking, services for drill site preparation to clear and lay pipeline (gathering systems) for operators. Chanwest operations can provide for services to maintain lease roads, set power poles and clean up oilfield spills. Chanwest works with operators or lease owners by purchase order or contract with major oil fields.
On October 1, 2010 EGPI Firecreek, Inc. the Company entered into a Definitive Securities Purchase/Exchange Agreement with Terra Telecom, LLC. (“Terra"). Terra is considered recognized as a leading provider of state-of-the-art communication technologies and a premier Alcatel-Lucent partner. They currently serve various sized companies and organizations that use and deploy communications systems, sales, service, and training while consolidating and optimizing the end user experience. Its goal is to provide customers value and integrity in each of these opportunities. Since 1980, Terra has focused on delivering enterprise solutions while leading with voice services and offering full turn-key solutions that consist of voice, data, video and associated applications. As of December 31, 2010, the Company has not assumed control of this acquisition. As a result, this company is not consolidated in the financial statements as of December 31, 2010.
On October 18, 2010, the Company filed a Certificate of Amendment to its Articles of Incorporation, increasing its authorized common stock, par value $0.001 per share, to 3,000,000,000 from 1,300,000,000 and is authorized to issue 60,000,000 shares of preferred stock that has a par value of $0.001 per share.
On November 9, 2010, the Company affected a 1 share for 50 shares reverse split of its common stock and all amounts have been retroactively adjusted for all periods presented.
On February 4, 2011, the Company entered into an Agreement to acquire all 100% of Arctic Solar Engineering LLC, a Missouri limited liability company located at PO Box 4391, Chesterfield, MO 63006 and the owners of Membership Interests of the Arctic Solar Engineering LLC; The FATM Partnership, a Missouri Partnership, The Frederic Sussman Living Trust. Arctic Solar Engineering, LLC, is an integrator of Solar Thermal Energy technology. For further information please see our Current Report on Form 8-K filed on February 10, 2011, and in the section on “The Business”, and “Overview” to the Management Discussion and Analysis sections, and elsewhere listed in this document.
On March 2, 2011, the Company obtained a consent from the majority shareholders of the Company to amend the Articles of Incorporation to i) authorize the issuance of 2,500 shares of a new D Series Preferred Stock to acquire an interest in an oil and gas lease from Dutchess Private Equities Fund, Ltd., and ii) for the Board of Directors to be able to authorize any and all capitalization of the Company going forward without the need for shareholder approval, and further authorized for the Board of Directors to set all rights, preferences, and designations, for and in behalf of any class of the Company’s common or preferred stock, and as may be required or as necessary in the best interest of the Company.
On March 14, 2011, the Company entered into and completed the closing of a Stock Purchase Agreement involving the sale of South Atlantic Traffic Corporation to Distressed Asset Acquisitions, Inc. For further information please see our Current Report on Form 8-K filed on March 18, 2011 and in the section on “The Business”, and “Overview” to the Management Discussion and Analysis sections, and elsewhere listed in this document.
On March 14, 2011, the Company entered into and completed the closing of a Stock Purchase Agreement involving the sale of Oklahoma Telecom Holdings, Inc. an Oklahoma corporation, formerly known as Terra Telecom, LLC., an Oklahoma limited liability company and Terra Telecom, Inc. (“TTI”), to Distressed Asset Acquisitions, Inc. For further information please see our Current Report on Form 8-K filed on March 18, 2011 and in the section on “The Business”, and “Overview” to the Management Discussion and Analysis sections, and elsewhere listed in this document.
On July 7, 2011, the Company filed a Certificate of Amendment to its Articles of Incorporation, increasing its authorized common stock, par value $0.001 per share, to 5,000,000,000 from 3,000,000 and is authorized to issue 60,000,000 shares of preferred stock that has a par value of $0.001 per share.
On July 7, 2011, the Company affected a 1 share for 500 shares reverse split of its common stock and all amounts have been retroactively adjusted for all periods presented.
Consolidation-
the accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company balances have been eliminated.
Use of Estimates
- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make reasonable estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses at the date of the consolidated financial statements and for the period they include. Actual results may differ from these estimates.
Revenue and Cost Recognition-
Ø
Oil and gas: Revenue is recognized from oil and gas sales at such time as the oil and gas is delivered to the buyer. Settlement on sales occurs anywhere from two weeks to two months after the delivery date. The Company recognizes revenue when an arrangement exists, the product has been delivered, the sales price is fixed or determinable, and collectability is reasonably assured.
Ø
Oilfield services: Revenue from services is recognized when an arrangement exists, the services are rendered, the sales price is fixed or determinable, and collectability is reasonably assured.
Ø
Product sales/installation: Revenue from product sales or installation pertaining to solar panels and equipment are recognized with an arrangement exists, the product is delivered or installed, the sales price is fixed or determinable, and collectability is reasonably assured.
Cash Equivalents-
The Company considers all highly liquid investments with the original maturities of three months or less to be cash equivalents. There were no cash equivalents as of December 31, 2012 and 2011.
Accounts Receivable-
The Company extends credit to its customers in the normal course of business and performs ongoing credit evaluations of its customers, maintaining allowances for potential credit losses which, when realized, have been within management's expectations. The allowance method is used to account for uncollectible amounts. The evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Allowance for doubtful accounts was $118,473 at December 31, 2011 . There were no outstanding receivables at December 31, 2012.
Inventory-
Inventories consist of merchandise purchased for resale and are stated at the lower of cost or market using the first-in, first-out (FIFO) method. Inventories were acquired with the acquisition of Arctic Solar Engineering, LLC and were sold during the period.
Prepaid Expenses-
Prepaid expenses are recorded at cost for payments for goods and services purchased during an accounting period but not used or consumed during that accounting period. The costs are amortized over time as the benefit is received.
Oil and Gas Activities
-The Company uses the successful efforts method of accounting for oil and gas producing activities. Under this method, acquisition costs for proved and unproved properties are capitalized when incurred. Exploration costs, including geological and geophysical costs, the costs of carrying and retaining unproved properties and exploratory dry hole drilling costs, are expensed. Development costs, including the costs to drill and equip development wells, and successful exploratory drilling costs to locate proved reserves are capitalized.
Exploratory drilling costs are capitalized when incurred pending the determination of whether a well has found proved reserves. A determination of whether a well has found proved reserves is made shortly after drilling is completed. The determination is based on a process which relies on interpretations of available geologic, geophysic, and engineering data. If a well is determined to be successful, the capitalized drilling costs will be reclassified as part of the cost of the well. If a well is determined to be unsuccessful, the capitalized drilling costs will be charged to expense in the period the determination is made. If an exploratory well requires a major capital expenditure before production can begin, the cost of drilling the exploratory well will continue to be carried as an asset pending determination of whether proved reserves have been found only as long as: i) the well has found a sufficient quantity of reserves to justify its completion as a producing well if the required capital expenditure is made and ii) drilling of the additional exploratory wells is under way or firmly planned for the near future. If drilling in the area is not under way or firmly planned, or if the well has not found a commercially producible quantity of reserves, the exploratory well is assumed to be impaired, and its costs are charged to expense.
In the absence of a determination as to whether the reserves that have been found can be classified as proved, the costs of drilling such an exploratory well is not carried as an asset for more than one year following completion of drilling. If, after that year has passed, a determination that proved reserves exist cannot be made, the well is assumed to be impaired, and its costs are charged to expense. Its costs can, however, continue to be capitalized if a sufficient quantity of reserves is discovered in the well to justify its completion as a producing well and sufficient progress is made in assessing the reserves and the well’s economic and operating feasibility.
The impairment of unamortized capital costs is measured at a lease level and is reduced to fair value if it is determined that the sum of expected future net cash flows is less than the net book value. The Company determines if impairment has occurred through either adverse changes or as a result of the annual review of all fields. During 2012 after conducting an impairment analysis, the Company recorded impairment of $204,476 as the PV 10 value of our reserves exceeded our cost. The company also impaired development costs incurred during the year of $322,689 that did not result in bringing additional reserves into production.
Asset Retirement Obligations (“ARO”-
The estimated costs of restoration and removal of facilities are accrued. The fair value of a liability for an asset's retirement obligation is recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depreciated with the related long-lived asset. If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized. For all periods presented, estimated future costs of abandonment and dismantlement are included in the full cost amortization base and are amortized as a component of depletion expense. At December 31, 2012 and 2011, the ARO of $11,789 and $21,861 is included in liabilities and fixed assets.
Development costs of proved oil and gas properties, including estimated dismantlement, restoration and abandonment costs and acquisition costs, are depreciated and depleted on a field basis by the units-of-production method using proved developed and proved reserves, respectively. The costs of unproved oil and gas properties are generally combined and impaired over a period that is based on the average holding period for such properties and the Company's experience of successful drilling.
Costs of retired, sold or abandoned properties that make up a part of an amortization base (partial field) are charged to accumulated depreciation, depletion and amortization if the units-of-production rate is not significantly affected. Accordingly, a gain or loss, if any, is recognized only when a group of proved properties (entire field) that make up the amortization base has been retired, abandoned or sold.
Stock-Based Compensation-
The Company estimates the fair value of share-based payment awards made to employees and directors, including stock options, restricted stock and employee stock purchases related to employee stock purchase plans, on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense ratably over the requisite service periods. We estimate the fair value of each share-based award using the Black-Sholes option pricing model. The Black-Sholes model is highly complex and dependent on key estimates by management. The estimates with the greatest degree of subjective judgment are the estimated lives of the stock-based awards and the estimated volatility of our stock price. The Black-Sholes model is also used for our valuation of warrants.
Earnings Per Common Share-
Basic earnings per common share is calculated based upon the weighted average number of common shares outstanding for the period. Diluted earnings per common share is computed by dividing net income by the weighted average number of common shares and dilutive common share equivalents (convertible notes and interest on the notes, stock awards and stock options) outstanding during the period. Dilutive earnings per common share reflects the potential dilution that could occur if options to purchase common stock were exercised for shares of common stock. Basic and diluted EPS are the same as the effect of our potential common stock equivalents would be anti-dilutive.
Derivative Financial Instruments -
The Company generally does not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may affect the fair values of its financial instruments. The Company utilizes various types of financing to fund our business needs, including convertible debts with conversion features and other instruments not indexed to our stock. The convertible notes include fluctuating conversion rates as well as conversion price reset provisions. The Company uses a lattice model for valuation of the derivative. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and then re-valued at each reporting date, with changes in the fair value reported in income in accordance with ASC 815. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether net cash settlement of the derivative instrument could be required within the 12 months of the balance sheet date.
Fair Value Measurements -
On January 1, 2008, the Company adopted guidance which defines fair value, establishes a framework for using fair value to measure financial assets and liabilities on a recurring basis, and expands disclosures about fair value measurements. Beginning on January 1, 2009, the Company also applied the guidance to non-financial assets and liabilities measured at fair value on a non-recurring basis, which includes goodwill and intangible assets. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:
Level 1 - Valuation is based upon unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level 2 -Valuation is based upon quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable in the market.
Level 3 - Valuation is based on models where significant inputs are not observable. The unobservable inputs reflect the Company's own assumptions about the inputs that market participants would use.
The following table presents assets and liabilities that are measured and recognized at fair value as of December 31, 2011 on a recurring and non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
(Losses)
|
|
|
Intangibles (non-recurring)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(309,816
|
)
|
|
Goodwill (non-recurring)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(22,119
|
)
|
|
Derivatives (recurring)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
639,859
|
|
|
$
|
470,833
|
|
The following table presents assets and liabilities that are measured and recognized at fair value as of December 31, 2012 on a recurring and non-recurring basis:
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
(Losses)
|
|
|
Intangibles (non-recurring)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Goodwill (non-recurring)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Derivatives ( recurring)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
637,685
|
|
|
$
|
(115,325
|
)
|
The Company had goodwill and intangible assets as a result of the 2009 business combinations discussed throughout this form 10-K. These assets were valued with the assistance of a valuation consultant and consisted of level 3 valuation techniques.
The Company has derivative liabilities as a result of 2011 convertible promissory notes that include embedded derivatives. These liabilities were valued with the assistance of a valuation consultant and consisted of level 3 valuation techniques.
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and long-term debt. The estimated fair value of cash, accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the short-term nature of these instruments. The carrying value of long-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.
Fixed Assets
-
Fixed assets are stated at cost. Depreciation expense is computed using the straight-line method over the estimated useful life of the asset. The following is a summary of the estimated useful lives used in computing depreciation expense:
|
Office equipment
|
3 years
|
|
Computer hardware & software
|
3 years
|
|
Improvements & furniture
|
5 years
|
|
Well equipment
|
7 years
|
Expenditures for major repairs and renewals that extend the useful life of the asset are capitalized. Minor repair expenditures are charged to expense as incurred.
Impairment of Long-Lived Assets-
The Company has adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment ("ASC 360-10"). ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates its long-lived assets for impairment annually or more often if events and circumstances warrant. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires that those assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.
Goodwill and Other Intangible Assets
-
The Company periodically reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist. Goodwill and certain intangible assets are assessed annually, or when certain triggering events occur, for impairment using fair value measurement techniques. These events could include a significant change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The Company uses level 3 inputs and a discounted cash flow methodology to estimate the fair value of a reporting unit. A discounted cash flow analysis requires one to make various judgmental assumptions including assumptions about future cash flows, growth rates, and discount rates. The assumptions about future cash flows and growth rates are based on the Company’s budget and long-term plans. Discount rate assumptions are based on an assessment of the risk inherent in the respective reporting units. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. The Company’s evaluation of goodwill and intangible assets completed during the year ended December 31, 2011 pertaining to Arctic Solar Engineering, LLC resulted in an impairment of goodwill of $22,119 and an impairment of intangibles of $309,816. As of December 31, 2012, there was no goodwill or intangible asset balances to assess or impairment.
As of December 31, 2011 the Company’s, amortizable intangible assets consist of trade names, customer contracts, patents and Non-compete clause. These intangibles were being amortized on a straight-line basis over their estimated useful lives of 3-5 years. For the years ending December 31, 2011and 2012 the Company recorded amortization of our intangibles of $88,569 and $0, respectively. Note 15 includes the balances of all intangibles as of December 31, 2011 and 2012. The useful lives pertaining to the intangible assets amortized are as follows:
Intangibles acquired in acquisition of Arctic Solar Engineering, Inc.
|
|
Useful life
|
|
Patents
|
5
|
|
Customer Base
|
5
|
|
Trademarks
|
5
|
|
Non-Compete
|
3
|
Intangibles disposed of pertaining to SATCO
|
|
Useful life
|
|
Tradename
|
12
|
|
Customer Relationships
|
10
|
Foreign Currency Translation and Transaction and translation
- The financial position at present for the Company’s foreign subsidiary Redquartz LLC, established under the laws of the Country of Ireland are determined using (U.S. dollars) reporting currency as the functional currency. All exchange gains and losses from remeasurement of monetary assets and liabilities that are not denominated in U.S. dollars are recognized currently in other comprehensive income. All transactional gains and losses are part of income or loss from operations (if and when incurred) will be pursuant to current accounting literature. The Company’s functional currency is the U.S dollar. We have an obligation related to our acquisition of Red Quartz as discussed in Note 7 which is denominated in Euro’s. The change in currency valuation from our reporting this obligation in U.S dollars is reported as a component of other comprehensive income consistent with the relevant accounting literature.
Income taxes-
The Company accounts for income taxes using the asset and liability method, which requires the establishment of deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent deferred tax assets may not be recoverable after consideration of the future reversal of deferred tax liabilities, tax planning strategies, and projected future taxable income.
The Company uses a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance requires the Company to recognize tax benefits only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in our tax returns that do not meet these recognition and measurement standards.
Recent accounting pronouncements
- In May 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This update clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This update is effective on a prospective basis for annual and interim reporting periods beginning on or after December 15, 2011, which for the Company is January 1, 2012.
In September 2011, the FASB issued ASU No. 2011-08, “Intangibles - Goodwill and Other” (ASU 2011-08). ASU 2011-08 allows a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the two-step impairment test would be performed. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, and early adoption is permitted.
2. Going Concern
The accompanying consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying consolidated financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company has experienced substantial losses, maintains a negative working capital and capital deficits, which raise substantial doubt about the Company's ability to continue as a going concern.
The Company is working to manage its current liabilities while it continues to make changes in operations to improve its cash flow and liquidity position. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon the Company’s ability to generate revenue from the sale of its services and the cooperation of the Company’s note holders to assist with obtaining working capital to meet operating costs in addition to our ability to raise funds.
3. Common Stock Transactions and Reverse Stock Split
During the year ended December 31, 2012, the Company issued 6,524,735 shares of common stock for services that were expensed and valued at $913,012 based upon the closing price of the Company’s common stock at the date of grant.
During the year ended December 31, 2012, the holder converted 6 shares of Preferred D stock by issuing 16,250,000 shares of common stock. The conversion was executed outside of the terms of the convertible preferred stock and a loss of $1,131 resulted.
During the year ended December 31, 2012, the Company granted 12,402,302,372 shares in common stock to extinguish debt of $652,089 resulting in a loss on extinguishment of debt of $1,185,683 based upon the closing price of the Company’s common stock at the grant date less the carrying value of the debt that was exchanged. Only a portion of the total shares were issued during the year. The remaining shares that remain unissued are recorded in common stock subscribed as of December 31, 2012.
During the year ended December 31, 2012, the Company recorded an additional amount of $501,090 to additional paid in capital related to the fair market value of the conversion of debts that were included in the derivative liability on the conversion date. The Company also recorded $89,578 in imputed interest as an increase to additional paid in capital related to loans that did not carry a market rate of interest or were non-interest bearing.
During the year ended December 31, 2011, the Company issued 2,181,259 shares of common stock for services that were expensed in the current year in the amount of $30,251. The value of the shares expensed in the prior year reduced the amount of common stock subscribed by $10,656 in the current period. All shares issued were valued based upon the closing price of the Company’s common stock at the date of grant.
During the year ended December 31, 2011, the Company granted $3,022,076 in common stock to extinguish debt of $1,640,063 resulting in a loss on extinguishment of debt of $1,382,440 based upon the closing price of the Company’s common stock at the grant date less the carrying value of the debt that was exchanged. Only a portion of the total shares were issued during the year. 96,050,259 common shares were issued during the year ended December 31, 2011. The remaining common shares to be issued have a fair value of $46,770 and are recorded in common stock subscribed as of December 31, 2011.
During the year ended December 31, 2011, the Company granted 12,000 shares of common stock as payment to acquire Arctic Solar Engineering, LLC. The fair value of these shares was recorded based on the closing price of the Company’s common stock on the date of closing, resulting in a value of $49,800. During the year ended December 31, 2011, these shares were issued.
During the year ended December 31, 2011, the Company issued 2,443 shares of common stock valued at $23,052. A portion of these shares, 1,200, was granted in the prior period and recorded in common stock subscribed in the amount of $18,000. The remaining portion was granted in the year ended December 31, 2011. The stock was valued based upon the closing price of the Company’s common stock at the grant date.
During the year ended December 31, 2011, the holder converted 10 shares of its series D preferred stock by issuing 1,298,701 common shares. The conversion was executed outside of the terms of the convertible preferred stock and a gain of $14,242 resulted.
During the year ended December 31, 2011, the Company recorded an additional amount of $603,401 to additional paid in capital related to the fair market value of the conversion of debts that were included in the derivative liability on the conversion date. The Company also recorded $49,149 in imputed interest as an increase to additional paid in capital related to loans that did not carry a market rate of interest or were non-interest bearing.
On July 7, 2011 the Company affected a 1 share for 500 shares reverse split of its common stock and all amounts have been retroactively adjusted for all periods presented.
4. Preferred Stock Series A, B, C and D Transactions
Series A preferred stock
: Series A preferred stock has a par value of $0.001 per share and no stated dividend preference. The Series A is convertible into common stock at a conversion ratio of one preferred share for one common share. Preferred A has liquidation preference over Preferred B stock and common stock.
Series B preferred stock
: Series B preferred stock has a par value of $0.001 per share and no stated dividend preference. The Series B is convertible into common stock at a conversion ratio of one preferred share for one common share. The Series B has liquidation preference over Preferred C stock and common stock.
Series C preferred stock
: The Preferred C stock has a stated value of $.001 and no stated dividend rate and is non-participatory. The Series C has liquidation preference over common stock. Effective May 20, 2009 i) Voting Rights for each share of Series C Preferred Stock shall have 21,200 votes on the election of directors of the Company and for all other purposes, and, ii) regarding Conversion to Common Shares, Series C have no right to convert to common or any other series of authorized shares of the Company.
During the year ended December 31, 2010, the Company issued 9,286 shares of its Series C preferred stock to consultants for services rendered. The value assigned to this issuance is $162,000 based on an estimate of the fair market value on the issuance date. The holders of Series C preferred stock represent a controlling voting interest in the Company. As a result, a determination of the control premium was determined to estimate the value of the shares. The control premium is based on publicly traded companies or comparable entities which have been recently acquired in arm’s length transactions. The Company performed the valuation with the assistance of a valuations expert.
During the year ended December 31, 2011, 72,856 shares of Series C preferred stock were issued for services rendered. The preferred stock was valued at $75,000 based on an estimate of fair market value on the date of grant. The holders of Series C preferred stock represent a controlling voting interest in the Company. As a result, a determination of the control premium was determined to estimate the value of the shares. The control premium is based on publicly traded companies or comparable entities which have been recently acquired in arm’s length transactions. The Company performed the valuation with the assistance of a valuations expert.
Series D preferred stock:
Effective March 2, 2011 EGPI Firecreek, Inc. (the “Company”) obtained consent from the majority shareholders of the Company to amend the Articles of Incorporation to i) authorize the issuance of 2,500 shares of a new D Series Preferred Stock. There are 2.5 million Series D preferred stock authorized for issuance, par value $.001, and each share of Series D Preferred Stock is convertible into common shares, where such number of shares shall be equal to the greater of the number calculated by dividing the Purchase Commitment per share ($1,000) by 1) $0.003 per share, or 2) one hundred and ten percent (110%) of the lowest VWAP for the three (3) days immediately preceding a Conversion Date. The 2,500 shares authorized have been issued to purchase an interest in a producing oil and gas property. The preferred stock was valued at fair value by calculating the face value of the preferred stock, $2,500,000, subtracting a discount due to lack of marketability of 24.5%, yielding $1,887,500 value of the preferred stock and adding the value of the embedded derivative of $279,796. The derivative was valued based on the use of a multinomial lattice model with the following assumptions: annual volatility at 238%, 20% of default at maturity, and the holder would convert at 1.5 times the conversion price decreasing as it approaches maturity. The preferred shares include anti-dilution protection if any future issuances occur for a lower price. The total fair value of these preferred shares was computed to be $2,167,306, including the derivative liability. A portion of this value, $279,796, was bifurcated at the grant date and included in the derivative value. This portion pertains to the anti-dilution protection and is marked to market each period as a component of the derivative value.
The Company classified the series D preferred stock in temporary equity. This classification is due to the fact that the shares are redeemable at the option of the holder, the Company is permitted to settle the redemption amount in cash or by delivery of a variable number of its common shares with an equivalent value, and there is no limit on the number of shares that could potentially be issuable under this agreement.
During the year ended December 31, 2012, the Company converted 6 shares of its series D preferred stock by issuing 16,250,000 common shares. The conversion was executed outside of the terms of the convertible preferred stock and a loss of $1,131 resulted.
5. Fixed Assets
The following is a detailed list of fixed assets:
|
|
|
12/31/2012
|
|
|
12/31/2011
|
|
|
Property and equipment
|
|
|
540,307
|
|
|
$
|
540,307
|
|
|
Well equipment
|
|
|
118,362
|
|
|
|
174,825
|
|
|
Accumulated depreciation
|
|
|
(218,401
|
)
|
|
|
(137,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets - net
|
|
$
|
440,069
|
|
|
|
577,958
|
|
During the year ended December 31, 2012, the Company disposed of $56,662 in well equipment as part of the sale of partial interests in oil and gas leases.
During the year ended December 31, 2011, the Company acquired $113,325 in well equipment as part of the acquisition of the Tubb oil and gas interest. See notes 6 and 9 for additional details of this acquisition.
Depreciation expense was $97,894 and $ 98,615 for the year ended December 31, 2012 and 2011, respectively.
Oil and gas related activity for the years ended December 31, 2012 and 2011 is as follows:
|
|
|
For the
|
|
|
For the
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Development costs paid in cash
|
|
$
|
565,420
|
|
|
$
|
165,162
|
|
|
Purchases of oil and gas properties through the issuance of preferred stock
|
|
|
-
|
|
|
|
2,053,981
|
|
|
Capitalized asset retirement obligations
|
|
|
-
|
|
|
|
11,876
|
|
|
Total purchase and development costs, oil and gas properties
|
|
$
|
565,420
|
|
|
$
|
2,231,019
|
|
|
Oil and Gas Properties:
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
|
|
Oil and gas properties - proved reserves
|
|
$
|
944,181
|
|
|
$
|
2,053,981
|
|
|
Development costs
|
|
|
203,646
|
|
|
|
165,162
|
|
|
Accumulated depletion
|
|
|
(254,988
|
)
|
|
|
(109,520)
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas properties - net
|
|
$
|
892,839
|
|
|
$
|
2,109,623
|
|
On March 1, 2011, the Company acquired a 75% working interest and 56.25% net revenue interest in oil and gas reserves of $2,053,981 by issuing 2,500 shares of its series D preferred stock. This interest is in the J.B. Tubb Leasehold Estate/Amoco Crawar field located in the Permian Basin in Ward County, Texas (“Tubb property”). See note 9 for additional details of this acquisition.
During the year ended December 31, 2012, the Company impaired the Tubb oil and gas reserves in the amount of $211,891 and impaired the capitalized development costs incurred by $322,689. During the year ended December 31, 2011, the Company impaired the oil and gas reserves in the amount of $163,500 pertaining to its Whitt property that was originally acquired in 2009.
Depletion expense was $248,697 and $112,293 for the years ended December 31, 2012 and 2011, respectively.
The company paid $565,420 and $165,162 in development costs during the year ended December 31, 2012 and 2011 to bring additional reserves into production. An impairment of $322,689 pertaining to these development costs were impaired due to the fact that the development costs for that project did not bring new reserves into production.
On July 31, 2012, the Company completed a Purchase Agreement whereby EGPI Firecreek, Inc., through its wholly owned subsidiary, Energy Producers, Inc, would sell one half (50%) of it’s holdings in the Tubb oil and gas leases. The loss on disposal is $595,684 and is recognized in the financial statements on the sale date. The sale was completed with Mondial Ventures, Inc. a related party. The company received 14,000,000 shares of Mondial common stock and Mondial assumed $450,000 of debt. The cost of the assets sold totaled $1,051,950 and included oil and gas reserves and related well equipment.
7.
Options & Warrants Outstanding
All options and warrants granted are recorded at fair value using a Black-Scholes model at the date of the grant for those warrants issued during the year ended December 31, 2009. There is no formal stock option plan for employees. The warrants issued during the years ended December 31, 2011 and 2010 were included in the fair value calculation of the derivative liability. This is due to the fact that an embedded derivative existed during this fiscal year that tainted the equity environment, causing all dilutive securities to be included in the derivative liability.
A listing of options and warrants outstanding at September 30, 2010 is as follows. Option and warrants outstanding and their attendant exercise prices have been adjusted for the 1 for 50 reverse split and the 1 for 500 reverse split of the common stock discussed in Note 1.
|
|
|
Amount
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Years to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
1,299
|
|
|
$
|
11.20
|
|
|
|
1.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
8,617
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(9,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2011
|
|
|
240
|
|
|
$
|
25.125
|
|
|
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Expired /cancelled
|
|
|
(240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
During the year ended December 31, 2011, an additional 8,617 warrants were issued to consultants. During this period, the warrants granted to the consultants were cancelled by the consultants. The warrants expire two and one half (2.5) years from the date of vesting. The total number of warrants cancelled totaled 9,676. During the year, the value of these warrants approximated $3,000. The remaining value of the 240 warrants are included in the derivative liability at December 31, 2011.
During the year ended December 31, 2012, all outstanding warrants were cancelled by consultants or expired. There were no warrants outstanding at December 31, 2012.
|
8.
|
Acquisition of Artic Solar Engineering LLC and Chanwest Resources, Inc. (CWR)
|
For the year ended December 31, 2011
|
|
i)
|
On February 4, 2011, the Company entered into a stock exchange and purchase agreement between Arctic Solar Engineering, LLC, FATM Partnership, and Fredrick Sussman Living Trust, (the “Sellers”) and EGPI Firecreek, Inc. (the “Purchaser”). The Sellers exchanged 100 % of their ownership interests in the three (3) selling entities for 12,000 shares of our restricted common stock. In addition, the Purchase Agreement contains an “Earn-out Provision “ which requires cash and/or stock payments based on financial performance over a period of 36 months. In each twelve (12) month period, the Sellers are entitled to 50% of the Company’s audited net income after taxes; payable in 50% cash and 50% restricted common stock, ten (10) days after the filing of the annual audited report. This stock Earn-out consideration will be valued at 90% of the last trade price on the filing date for the calendar year of operations. There was no net income for any prior periods and no projected net income for future periods subject to the Earn-Out. This resulted in no accrual being recorded for the Earn-Out at December 31, 2011 and 2012.
|
The Agreement calls for the following material terms:
In addition to the Purchase Price, the Sellers shall, for a period of thirty-six (36) months following the Closing Date (the "EARN-OUT TERM"), be entitled to receive payment in the form of cash and additional shares of Restricted Common Stock (the “Earn-out Provision” or “Earn-out”) based upon the financial performance of the Company set forth below:
|
|
(a)
|
The Earn-out Provision will be based on the audited Net Income After Tax of the Company.
|
|
|
|
|
(b)
|
For each twelve month period during the Earn-out Term, the Sellers will be entitled to Fifty Percent (“50%”) of the Company’s Net Income After Tax payable half in Cash (the “Cash Earn-out Consideration”) and half in Restricted Common Stock of the Purchaser (the “Stock Earn-out Consideration”) Ten (“10”) Days after the filing date of the Purchaser’s audited annual report.
|
A breakdown of the purchase price for Arctic Solar Engineering, Inc. is as follows:
|
Common stock subscribed
|
|
$
|
49,800
|
|
|
|
|
|
|
|
|
Final Purchase Price Allocation:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
538
|
|
|
Accounts receivable
|
|
|
131,660
|
|
|
Inventory
|
|
|
30,627
|
|
|
Fixed assets - net
|
|
|
337
|
|
|
Other assets
|
|
|
3
|
|
|
Patents/IP/Technology
|
|
|
135,000
|
|
|
Customer base
|
|
|
76,000
|
|
|
Trade-name/Marks
|
|
|
151,000
|
|
|
Non-compete
|
|
|
19,000
|
|
|
Goodwill
|
|
|
22,119
|
|
|
Liabilities assumed
|
|
|
(516,484
|
)
|
|
|
|
$
|
49,800
|
|
Pro Forma Information
The following summary presents unaudited pro forma consolidated results of operations as if the Arctic Solar Engineering, LLC acquisition described above had occurred on January 1, 2011. The unaudited pro forma consolidated results of operations combines the historical results of operations of the Company and Arctic Solar Engineering, LLC for the year ended December 31, 2011, and gives effect to certain adjustments, as noted in the section titled Supplemental Pro Forma Information.
The unaudited pro forma condensed results of operations has been prepared for comparative purposes only and does not purport to be indicative of the actual operating results that would have been recorded had the acquisitions actually taken place on January 1, 2011, and should not be taken as indicative of future consolidated operating results.
|
|
|
Year ended
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Pro forma revenue
|
|
$
|
293,712
|
|
|
Pro forma net loss
|
|
$
|
(5,027,175
|
)
|
9. Acquisition of interest in oil and gas property
I. Acquisition of 75% Oil and Gas Working Interests in the J.B. Tubb Leasehold Estate/Amoco Crawar Field, Ward County, Texas
On March 1, 2011 the Company, through its wholly owned subsidiary Energy Producers, Inc. (“EPI”), acquired all assets of Ginzoil Inc., (“GZI”) a wholly owned subsidiary of Dutchess Private Equities Fund, Ltd., (Investors”) as described in the preliminary Assignment and Bill of Sale and summarily as follows: Under the terms of the agreement, which shall be effective March 1, 2011, EPI acquired a majority 75% Working Interest and 56.25% corresponding Net Revenue Interest in the North 40 acres of the J.B. Tubb Leasehold Estate/Amoco Crawar field and oil and gas interests, including all related assets, fixtures, equipment, three well heads, three well bores, and pro rata oil & gas revenue and reserves for all depths below the surface to 8500 ft. The field is located in the Permian Basin and the Crawar Field in Ward County, Texas (12 miles west of Monahans & 30 miles west of Odessa in West Texas). Included in the transaction, EPI will also acquire 75% Working Interest and 56.25% corresponding Net Revenue Interest in the Highland Production Company No. 2 well-bore located in the South 40 acres of the J.B. Tubb Leasehold Estate/Amoco Crawar field, oil and gas interests, pro rata oil & gas revenues and reserves with depth of ownership 4700 ft. to 4900 ft. As consideration for the transaction the Company agreed to authorize and issue and sell to Investors 2,500 shares of a new, to be authorized, Series D preferred stock to Investors for one thousand dollars ($1,000) per share, or a total in the aggregate stated value of two million five hundred thousand ($2,500,000) dollars. The acquired leases and the property to which they relate are identified below:
North 40 acres: J.B. TUBB “18-1”, being the W1/2 of the NW1/4 of Section 18, Block B-20, Public School Lands, Ward County, Texas, containing Forty (North 40) acres only (also listed as Exhibit “A” to Exhibit 10.1 in our Current Report on Form 8-K filed on March 7, 2011, incorporated herein by reference.
Well-bore located on South 40 acres: The Highland Production Company (Crawar) #2 well-bore, API No. 42-475-33611, located on the J.B. Tubb Lease in W ½ of the NW ¼ of Sec. 18, Block B-20, Public School Lands, Ward County, Texas at 1787 FNL and 853 FWL being on the South Forty (40) acres of the J. B. Tubb Lease, Ward County, Texas.
The following wells are located on the leases identified, above:
|
|
1.
|
Crawar #1
|
|
|
|
|
|
|
|
|
|
|
2.
|
Tubb #18-1
|
|
|
|
|
|
|
|
|
3.
|
Highland Production Company(Crawar) #2 well-bore only, with depth of ownership 4700’ to 4900’ft. in well bore, described as: The Highland Production Company (Crawar) #2 well-bore, API No. 42-475-33611, located on the J.B. Tubb Lease in W ½ of the NW ¼ of Sec. 18, Block B-20, Public School Lands, Ward County, Texas at 1787 FNL and 853 FWL being on the South Forty (40) acres of the J. B. Tubb Lease, Ward County, Texas.
|
Pursuant to the SPA each share of Series D Preferred Stock shall be convertible, at the sole option of the Investor or holder thereof, into share(s) of the Corporation’s Common Stock (“Conversion Shares”). The Conversion Formula at the time of any noticed and converted shall mean that the number of Conversion Shares (common stock) to be received by the holder of Series D Preferred Stock in exchange for each share of Series D Preferred Stock that such holder intends to convert pursuant to this provision, where such number of Conversion Shares shall be equal to the greater of the number calculated by dividing the Purchase Commitment per share ($1000) by i) .003 per share, ii) one hundred and ten percent (110%) of the lowest VWAP for the three (3) days immediately preceding a Conversion Date. The Company has agreed to keep a sufficient number of its common shares on hand for future conversions as listed in Section 1 of the SPA. The preferred stock was valued at fair value based on the use of a multinomial lattice model with computed the following assumptions: annual volatility at 238%, 20% of default at maturity, and the holder would convert at 1.5 times the conversion price decreasing as it approaches maturity. The total fair value of these preferred shares was computed to be $2,167,306.
Listing for the Equipment items related to the wells on the leases on the J.B. Tubb Leasehold Estate (RRC #33611) Amoco/ Crawar field are as follows:
The following is the current & present equipment list that Energy Producers Inc. will acquire
75%
ownership rights, on the J.B. Tubb property: 2 (Two) 500 barrels metal tanks, 1(One) 500 barrel cement salt water tank- (open top), 1 (One) heater treater/oil & gas separator, all flow lines, on the north forty acres, well-heads, 2 (two) Christmas tree valve systems on well-heads, 3 (Three) well heads, three wells (well-bores). Model 320D Pumpjack Serial No. E98371M/456604, One (1) Fiberglass lined heater-treater, One (1) Test pot, Tubing string Rods and down hole pump.
*Success Oil Co., Inc. of California, and Texas Operator, visually inspected the equipment on the J.B. Tubb property RRC #33611 for the 75% Working Interests held by Energy Producers, Inc., wholly owned subsidiary of EGPI Firecreek, Inc. Based on Success Oil Co.’s determination of market value we determined the following allocations of the $2,500,000 purchase price paid based on our corresponding 75% working interests held by Energy Producers, Inc.
Allocation of Purchase Price for J.B. Tubb Leasehold Estate Working and Corresponding Net Revenue Interests, Amoco/Crawar Field, Ward County, Texas.
|
|
|
December 31,
2011
|
|
|
Well leases
|
|
$
|
2,053,981
|
|
|
Well property and equipment
|
|
|
113,325
|
|
|
|
|
$
|
2,167,306
|
|
10. Note Receivable
On March 14, 2011, the company received a promissory note from the sale of its interest in Terra to a third party. The Company entered into and completed the closing of a Stock Purchase Agreement involving the sale of Oklahoma Telecom Holdings, Inc. an Oklahoma corporation, formerly known as Terra Telecom, LLC., an Oklahoma limited liability company and Terra Telecom, Inc. (“TTI”), to Distressed Asset Acquisitions, Inc. The value of this promissory note is $50,000 and is due 1 year from the date of issuance, along with accrued interest at the rate of 9%. The note includes an optional provision to extend for one additional twelve month period. An allowance for doubtful accounts of $50,000 has been recorded for this receivable.
On March 14, 2011, the company received a promissory note from the sale of a subsidiary, SATCO, to a third party. The Company entered into and completed a definitive Stock Purchase Agreement whereby EGPI Firecreek, Inc. would sell 100% of the common shares of SATCO to Distressed Asset Acquisitions, Inc. The value of this promissory note is $50,000 and is due 1 year from the date of issuance, along with accrued interest at the rate of 9%. The note includes an optional provision to extend for one additional twelve month period. An allowance for doubtful accounts of $50,000 has been recorded for this receivable.
11. Income Tax Provision
Deferred income tax assets and liabilities consist of the following at December 31, 2011 and 2010:
|
|
|
2012
|
|
|
2011
|
|
|
Deferred Tax asset
|
|
|
3,724,850
|
|
|
$
|
2,574,794
|
|
|
Valuation allowance
|
|
|
(3,724,850
|
)
|
|
|
(2,574,794
|
)
|
|
Net deferred tax assets
|
|
|
0
|
|
|
|
0
|
|
The Company estimates that it has an NOL carry forward of approximately $10,642,428 that begins to expire in 2027.
After evaluating any potential tax consequence from our former subsidiary and our own potential tax uncertainties, the Company has determined that there are no material uncertain tax positions that have a greater than 50% likelihood of reversal if the Company were to be audited. The Company believes that it is current with all payroll and other statutory taxes. Our tax return for the years ended December 31, 2004 to December 31, 2012 may be subject to IRS audit.
12. Related Party Transactions
Through May 31, 2012 the Secretary of EGPI Firecreek, Inc provided office space for the Company’s Scottsdale office free of charge. June 1, 2009 Energy Producers, Inc, a 100% owned subsidiary of the Company entered into a month to month lease for the same office space at a rate of $1,400 per month. There remains an unpaid balance of $11,125 at December 31, 2012.
In addition Energy Producers Inc. also has an Administrative Service Agreement with Melvena Alexander, CPA , which is 100% owned by Melvena Alexander, officer and shareholder of the Company, to provide services to the Company. The agreement is an open-ended, annually renewable contract for payments of $4,600 per month. The contract is currently in force with a balance due of $33,270 at December 31, 2012.
The Company had a Service Agreement with Global Media Network USA, Inc. a company 100% owned By Dennis Alexander, to provide the services of Dennis Alexander to the Company. The contract terminated May 31, 2009 and there is an outstanding balance of $0 at December 31, 2012.
The above referenced contract was superseded by a month-to-month contract between Energy Producers, Inc., a 100% owned subsidiary of the Company, and Dennis Alexander, an officer and director of the Company, at a monthly payment of $15,000. There was a balance due on this contract of $200,050 at December 31, 2012.
The Company had a Service Agreement with Tirion Group, Inc., which was owned by Rupert C. Johnson, a former director of the Company. The contract was terminated in 2007 and Mr. Johnson severed his connection to the Company in 2008. However, there is unpaid balance of $43,000 remaining at December 31, 2012.
During 2010, Robert Miller, a director of the Company, made unsecured, non-interest bearing advances to M3 Lighting, Inc. a 100% owned subsidiary of the Company, for working capital of $ 1,500 which remains unpaid at December 31, 2012.
Chanwest Resources, Inc, a 100% owned subsidiary of the Company billed Petrolind Drilling, Inc a company in which David Taylor, a director and share holder of the Company, has a substantial interest. The invoice of $9,635 was still outstanding at December 31, 2011 and a full valuation allowance was recorded for this receivable.
Willoil Consulting, LLC also gave unsecured non-interest bearing advances to Chanwest Resources, Inc. of $20,826. Willoil Consulting LLC. is a company in which David Taylor is a managing member with 80% control. The funds have not been repaid as of December 31, 2012.
Relative to the May 21, 2009 acquisition of M3 Lighting, Inc. the Company approved an Administrative Services Agreement (ASA), and amended terms thereof, with Strategic Partners Consulting, LLC (SPC).Two of the Company’s officers, directors and shareholders, David H. Ray, Director and Executive Vice President and Treasurer of the Company since May 21, 2009 and Brandon D. Ray Director and Executive Vice President of Finance of the Company, are also owners and managers of SPC. Information is listed in Exhibit 10.1 to a Current Report on form 8-K, Amendment No. 1, filed on June 23, 3009. The ASA initiated on November 4, 2009, in accordance with its terms thereof, and was billed at the rate of $20,833.33 per month. The ASA contract was canceled June 8, 2010. During the twelve months ending December 31, 2012, the Company paid $ 4,750 to SPC, with a balance payable due in the amount of approximately $46,208.
Effective May 9, 2011 the Company entered into a Promissory Note with a company controlled by a director of the Company in the amount of $210,000, and amended December 9, 2011 to $315,625. The terms of the note are for 14% interest, with principal and interest all due on or before May 9, 2013. The loan is collateralized with the oil and gas leases held in our subsidiary Energy Producers, Inc. Additional funds were obtained and on July 1, 2012 the note was amended and restated to $997,551 at 18% interest.
The Company’s subsidiary Arctic Solar Engineers issued promissory notes to various individuals for working capital, all maturing in 2020 at an interest rate of 2%. Additional interest expense was imputed on these loans due to the fact that the interest rate was below market. Of these loans, $5,000 was owed to the former CEO of Arctic Solar Engineering, LLC, who is currently a director of the Company.
During the year ended December 31, 2012, the Company borrowed funds from Mondial Ventures, Inc. and repaid a portion of the amount due, leaving a remaining balance of $14,000 at December 31, 2012.
On July 31, 2012, the Company completed a Purchase Agreement whereby EGPI Firecreek, Inc., through its wholly owned subsidiary, Energy Producers, Inc, would sell one half (50%) of it’s holdings in the Tubb oil and gas leases. The loss on disposal is $595,684 and is recognized in the financial statements on the sale date. The sale was completed with Mondial Ventures, Inc. a related party. The company received 14,000,000 shares of Mondial common stock and Mondial assumed $450,000 of debt. The cost of the assets sold totaled $1,051,950 and included oil and gas reserves and related well equipment.
13. Notes Payable
At December 31, 2012, the Company was liable on the following Promissory notes:
(See notes below to the accompanying table)
|
Date of
|
|
|
|
Date Obligation
|
|
Interest
|
|
|
Balance Due
|
|
|
Obligation
|
|
Notes
|
|
Matures
|
|
Rate (%)
|
|
|
12/31/12 ($)
|
|
|
7/1/2012
|
|
|
26
|
|
6/30/2015
|
|
|
12
|
|
|
|
242,731
|
|
|
12/18/2012
|
|
|
28
|
|
9/19/2013
|
|
|
8
|
|
|
|
25,000
|
|
|
3/25/2012
|
|
|
4
|
|
12/27/2012
|
|
|
18
|
*
|
|
|
201,853
|
|
|
11/4/2009
|
|
|
11
|
|
11/4/2012
|
|
|
9
|
|
|
|
469,206
|
|
|
7/1/2012
|
|
|
25
|
|
6/30/2015
|
|
|
12
|
|
|
|
58,460
|
|
|
1/25/2012
|
|
|
24
|
|
1/25/2013
|
|
|
12
|
|
|
|
41,004
|
|
|
5/30/2010
|
|
|
2
|
|
12/31/2011
|
|
|
8
|
|
|
|
55,870
|
|
|
3/1/2010
|
|
|
9
|
|
Various
|
|
|
0
|
|
|
|
482,500
|
|
|
3/15/2012
|
|
|
23
|
|
9/5/2012
|
|
|
8
|
|
|
|
26,950
|
|
|
7/26/2010
|
|
|
5
|
|
7/26/2012
|
|
|
10
|
|
|
|
118,974
|
|
|
8/10/2010
|
|
|
6
|
|
8/10/2012
|
|
|
10
|
|
|
|
42,708
|
|
|
8/8/2011
|
|
|
7
|
|
5/10/2012
|
|
|
8
|
|
|
|
25,000
|
|
|
8/31/2011
|
|
|
8
|
|
5/31/2012
|
|
|
8
|
|
|
|
25,000
|
|
|
7/1/2011
|
|
|
1
|
|
71/2013
|
|
|
18
|
|
|
|
109,000
|
|
|
2/18/2010
|
|
|
3
|
|
12/1/2010
|
|
|
4
|
|
|
|
138,750
|
|
|
2/15/2010
|
|
|
3
|
|
2/15/2010
|
|
|
8
|
|
|
|
201,500
|
|
|
3/3/2010
|
|
|
10
|
|
3/31/12
|
|
|
10
|
|
|
|
801,135
|
|
|
3/4/2011
|
|
|
12
|
|
9/8/2011
|
|
|
14
|
|
|
|
133,247
|
|
|
3/4/2011
|
|
|
12
|
|
9/22/2011
|
|
|
14
|
|
|
|
100,000
|
|
|
8/1/2010
|
|
|
13
|
|
12/3/2020
|
|
|
2
|
|
|
|
137,000
|
|
|
3/24/2010
|
|
|
13
|
|
12/31/2020
|
|
|
2
|
|
|
|
42,000
|
|
|
8/1/2010
|
|
|
13
|
|
12/31/2020
|
|
|
2
|
|
|
|
5,000
|
|
|
8/1/2010
|
|
|
13
|
|
12/31/2020
|
|
|
2
|
|
|
|
5,000
|
|
|
5/31/2011
|
|
|
14
|
|
5/31/2013
|
|
|
8
|
|
|
|
172,190
|
|
|
6/9/2011
|
|
|
15
|
|
5/9/2011
|
|
|
14
|
|
|
|
595,875
|
|
|
6/1/2011
|
|
|
16
|
|
12/1/2011
|
|
|
8
|
|
|
|
36,652
|
|
|
8/11/2011
|
|
|
17
|
|
4/11/2012
|
|
|
12
|
|
|
|
12,500
|
|
|
8/11/2011
|
|
|
18
|
|
4/11/2012
|
|
|
12
|
|
|
|
33,000
|
|
|
8/12/2011
|
|
|
19
|
|
2/12/2012
|
|
|
10
|
|
|
|
1,000
|
|
|
9/12/2011
|
|
|
20
|
|
3/12/2012
|
|
|
8
|
|
|
|
25,000
|
|
|
9/3/2011
|
|
|
21
|
|
3/3/2012
|
|
|
8
|
|
|
|
4,130
|
|
|
10/12011
|
|
|
22
|
|
3/30/2012
|
|
|
6
|
|
|
|
5,974
|
|
|
10/19/2012
|
|
|
27
|
|
4/19/2014
|
|
|
8
|
|
|
|
15,000
|
|
|
Unamortized Discount
|
|
|
|
|
|
|
|
|
|
|
|
(35,625
|
)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
4,353,584
|
|
* Compounded
Notes:
Other than as described at Notes 1, 6, 7, 8, 9, 17, 18, 19, and 22 none of the other notes had conversion options.
Note 1: On January 15, 2010, the Company issued an $86,000 Convertible Promissory Note (“Convertible Note”) and a registration rights agreement (“RRA”) to an investor for making a $1,000,000 cash loan. The Convertible Note has no specified interest rate and was scheduled to mature six months from the closing date. At the investor’s option, the outstanding principal amount, including all accrued and unpaid interest and fees, may be converted into shares of common stock at the conversion price, which is 75% of the lower of (a) $0.08 per share; or (b) the lowest three-day common stock volume weighted average price during the prior twenty business days. In addition, if the Company sells common shares or securities convertible into common shares, the Conversion Price shall become the lower of: (a) the conversion price in effect immediately prior to the sale of securities; or (b) the conversion price of the securities sold.
The RRA provides both mandatory and piggyback registration rights. The Company was obligated to (a) file a registration statement for 40,000 common shares (subject to adjustment) no later than 14 days after the closing date, and (b) have it declared effective no later than the earlier of (i) five days after the SEC notifies the Company that it may be declared effective or (ii) 90 days from the closing date. The Company was obligated to pay the investor a penalty of $100 for each day that it is late in meeting these obligations. The Company’s registration statement was filed late and on March 18, 2010 it was withdrawn.
Upon occurrence of an Event of Default (various specified events), the Lender may (a) declare the unpaid principal balance and all accrued and unpaid interest thereon immediately due and payable; (b) at anytime after January 31, 2010, immediately draw on the LOC to satisfy EGPI’s obligations; and (c) interest will accrue at the rate of 18%.
Upon occurrence of a Trigger event: (a) the outstanding principal amount will increase by 25%; and (b) interest will accrue at the rate of 18%. The Trigger Event effects shall not be applied more than two times. There are various Trigger Events, including (a) the five-day common stock VWAP declines below $0.04; (b) the ten-day average daily trading volume declines below $5,000; (c) a judgment against EGPI in excess of $100,000; (d) failure to file a registration statement on time; (e) failure to cause a registration statement to become effective on time; (f) events of default; and (g) insufficient authorized common shares.
During the first quarter of 2010, the Company tripped two trigger events and incurred resulting penalties and incremental debt obligation. These events increased the outstanding principal amount of the Convertible Note by approximately $22,000 and $27,000 of trigger penalties.
It was determined that the Convertible Note’s conversion option, plus other existing equity instruments (warrants outstanding; see Notes 2 and 7 below) of the Company, were required to be (re)classified as derivative liabilities as of January 15, 2010, because (a) the Convertible Note provides conversion price protection; and (b) the quantity of shares issuable pursuant to the conversion option is indeterminate. The conversion option and the related instruments were initially valued at $63,080 (expected term of 0.5 years; risk-free rate of 0.15%; and volatility of 95%) and this amount was recorded as a note discount and derivative liability. The derivative liabilities were then marked to the market to an aggregate value of $16,158 (expected term of 0.3 years; risk-free rate of 0.16%; and volatility of 95%) at December 31, 2010.
On May 12, 2010, the parties to the Convertible Note executed a Waiver of Trigger Event, which stipulated: (1) the principal outstanding on the Convertible Note was fixed at $147,500 as of May 12, 2010; (2) the remaining impact of the trigger events and failure to register the shares was waived; (3) the interest rate was reset at 9%; (4) the number of shares issuable under the conversion option was capped at 150 million shares; (5) the repricing provision of the conversion option was eliminated; and (6) the maturity date of the note was revised to August 15, 2010. In addition, if the market price of the Company’s common stock declines such that the conversion option would be capped at the agreed 150 million shares, the repayment date is accelerated and the outstanding balance on the note is immediately due and payable. As a result of the above, the conversion option and related instruments were revalued as of May 12, 2010 and were reclassified to paid-in-capital (equity) in the amount of $50,303 (expected term of 0.3 years; risk-free rate of 0.16%; and volatility of 95%).
Effective August 3, 2010 the Company entered into a Promissory Note in the amount of $153,046 with an entity that had acquired and then exchanged the Debt described above. The terms of the Promissory Note are for 8% interest, with principal and interest all due on or before August 3, 2012. In July 2011 a judgment was issued for $202,000 to be paid over two years with no interest, except if there is a default, then interest of 18% will accrue. As a result of defaults by the Company under the agreed upon settlement terms, another settlement agreement was entered into on January 31, 2012. This settlement required the payment of monthly amounts of $10,000 by the Company over 18 months and no default interest is owed until the Company defaults on a payment under these newly agreed upon terms. Default interest of 18% will accrue in the event of default.
Note 2: As of December 31, 2011, $393,825 was recorded as a liability under this line of credit. During 2012, the Company settled $172,030 in debt for common stock, yielding a balance of $55,870 at the period end.
Note 3: For the year ended December 31, 2012 the company had a promissory note of $201,500 for which no payments were made during the period. The company also had a promissory note of $138,750 for which no payments were made during the period and included $13,300 in accrued interest added to the principal value of the note.
Note 4: During 2012 we received cash proceeds for the aggregate amount of $153,225, which is payable in principal and interest with rates 18%. This was in addition to $44,179 balance that was oustanding at December 31, 2011 with the same note holder.
Note 5: On July 26, 2010, we issued a $165,000 secured convertible promissory note that is convertible at the election of the holder any time after issuance, or upon an Event of Default, or when due in 24 months on July 26, 2012. While the notes have become due and are not repaid in full, there was no Event of Default as of December 31, 2012, or thereafter. The Company evaluated the note on the date of issuance and determined that the shares issuable pursuant to the conversion option were indeterminate and therefore this conversion option and all other dilutive securities would be classified as a derivative liability as of July 26, 2010. This note also contains conversion price reset provisions which also factor into the derivative value. The July 26, 2010 value of the conversion option of $165,000 was recorded as a note discount, to be amortized over the life of the note, and derivative liability. For the year ended December 31, 2012, the debt discount was fully amortized with $106,988 being recognized during the period.
Note 6: On August 10, 2010, we issued a $35,000 convertible promissory note that is convertible at the election of the holder any time after issuance, or upon an Event of Default, or when due in 24 months on August 10, 2012. The Company evaluated the note on the date of issuance and determined that, because the shares issuable pursuant to the convertible note are indeterminate, the conversion option associated with this note is deemed to be a derivative liability. This note also contains conversion price reset provisions which also factor into the derivative value. The August 10, 2010 value of the note of $35,000 was recorded as a note discount, to be amortized over the life of the note, and derivative liability. The note was in default during the year ended December 31, 2012 and the company settled with the note holder to pay $42,708. For the year ended December 30, 2012, the Company recognized note discount amortization of $25,996. The discount is amortized using the effective interest method.
Note 7: On August 8, 2011, we issued a $15,000 convertible promissory note that is convertible at the election of the holder any time after issuance, or upon an Event of Default, or when due in 9 months on May 8, 2012. The Company evaluated the note and determined that, because the shares issuable pursuant to the convertible note are indeterminate, the conversion option associated with this note is deemed to be a derivative liability. This note also contains conversion price reset provisions which also factor into the derivative value. The August 8, 2011 value of the note of $15,000 was recorded as a note discount, to be amortized over the life of the note, and derivative liability. For the year ended December 31, 2012, the Company recognized note discount amortization of $15,000. The discount is amortized using the effective interest method. The note was fully converted into common stock during the year ended December 31, 2012.
Note 8: On August 31, 2011, we issued a $25,000 convertible promissory note that is convertible at the election of the holder any time after issuance, or upon an Event of Default, or when due in 9 months on May 31, 2012. The Company evaluated the note and determined that, because the shares issuable pursuant to the convertible note are indeterminate, the conversion option associated with this note is deemed to be a derivative liability. This note also contains conversion price reset provisions which also factor into the derivative value. The August 31, 2011 value of the note of $25,000 was recorded as a note discount, to be amortized over the life of the note, and derivative liability. For the year ended December 31, 2012, the Company recognized note discount amortization of $25,000. The discount is amortized using the effective interest method. On November 15, 2011, the Company issued an additional $25,000 convertible promissory note with the same terms and conditions, with a due date of August 17, 2012. The Company recognized note discount amortization of $25,000 in 2012. The notes are past due, but the Company has not been placed in default as of the date of this filing.
Note 9: On March 1, 2010 and monthly thereafter, we issued non-interest bearing, convertible notes for services, renewable annually until paid through conversions. The total debt owing under these agreements is $482,500 to two firms for services provided. These notes can be converted at 50% of the closing price of the stock on the day preceding the conversion date. The Company evaluated the note and determined that, because the shares issuable pursuant to the July 26, 2010 convertible note are indeterminate, the conversion option associated with this note is deemed to be a derivative liability. During the year ended December 31, 2011, $90,000 of these notes were settled by the issuance of common stock.
Note 10: For the period ended December 31, 2012 we have additional balance on debt obligations owed totaling $801,135, related to the acquisition of a subsidiary in March 2010. A total of $55,125 of this debt was settled by the issuance of stock during the year ended December 31, 2012.
Note 11: Promissory notes totaling $295,173, which were issued in conjunction with the acquisition of SATCO. An additional legal settlement for $176,000 was also incurred as a result of the SATCO acquisition.
Note 12: Accounts Payable of $141,581 due to Contegra Construction by Energy Ventures One, Inc, a Company subsidiary was converted to a Note Payable in March 2011. The amount remaining to be paid on this promissory note was $133,247 at December 31, 2012. Energy Ventures One also has a Line of Credit with Masters Equipment, Inc. with a balance due of $100,000 at December 31, 2012.
Note 13: The Company’s subsidiary Arctic Solar Engineering, LLC issued promissory notes to various individuals for working capital, all maturing in 2020 at an interest rate of 2%. Additional interest expense was imputed on these loans due to the fact that the interest rate was below market.
Note 14: For the year ended December 31, 2012, we have received cash proceeds for these debt obligations of $52,400 and settled $4,500 with common stock. A total of $124,290 in cash proceeds were recevied in the year ended December 31, 2011.
Note 15: Effective May 9, 2011 the Company entered into a Promissory Note in the amount of $210,000, and amended December 9, 2011 to $315,625. Amended again July 31, 2012 to $997,551. The terms of the note are for 14% interest, with principal and interest all due on or before May 9, 2013. A portion of this loan was assumed by the purchaser of the interest in the Company’s oil and gas leases in the amount of $450,000. The loan is collateralized with the oil and gas leases held in our subsidiary Energy Producers, Inc.
Note 16: Effective June 1, 2011 the Company entered into a Promissory Note in the amount of $39,000. The terms of the note are for 8% interest only, with principal and interest all due on or before December 1, 2011. Effective September 2, 2011, the Company entered into an additional Promissory Note in the amount $20,500 with same terms due on or before March 2 2012. Also on September 28, 2011, the Company entered into an additional Promissory Note in the amount of $8,000, same terms, due on or before March 28, 2012. A fourth Promissory Note of $17,500 entered into on October 24, 2011 under the same terms, brings the total owed to $85,000 at December 31, 2011. A total of $48,348 of this debt was settled with the Company’s common stock.
Note 17: Effective August 11, 2011, the Company entered into a Convertible Promissory Note in the amount of $10,000. The terms of the note are 12% interest, with principal and interest all due on or before August 11, 2012. October 28, 2011, the Company entered into a Convertible Promissory Note in the amount of $17,000. The terms of the note are 12% interest, with principal and interest all due on or before June 11, 2012. On or after the maturity date, the notes may be converted based on the outstanding and unpaid principal and interest amount into fully paid and non-assessable shares of common stock at a 50% discount to the fair market value of the stock price at the time of conversion. The Company evaluated the notes and determined that because the shares issuable pursuant to the August 11, 2011 convertible note are indeterminate, the conversion option associated with this note is deemed a derivative liability. This note also contains conversion price reset provisions which factor into the derivative value. The August 11, 2011 and October 28, 2011 values of the notes of $10,000 and $17,000 were recorded as a note discount, to be amortized over the life of the note, and derivative liability. For the year ended December 31, 2012, the Company recognized note discount amortization of $17,000. The discount is amortized using the effective interest method. During the year ended December 31, 2012, $14,500 was converted into shares of the Company’s common stock.
Note 18: Effective September 12, 2012, the Company entered into a Convertible Promissory Note in the amount of $33,000. The terms of the note are 6% interest, with principal and interest all due on or before June 12, 2013. On or after the maturity date, the note may be converted based on the outstanding and unpaid principal and interest amount into fully paid and non-assessable shares of common stock at a 70% discount to the fair market value of the stock price at the time of conversion. The Company evaluated the note and determined that the shares issuable are indeterminate, the conversion option associated with this note is deemed a derivative liability. The September 14, 2012 value of the note of $33,000 was recorded as a note discount to be amortized over the life of the note and derivative liability. For the year ended December 31, 2012, the Company recognized note discount amortization of $8,090. The discount is amortized using the effective interest rate.
Note 19: Effective August 12, 2011 the Company entered into a Convertible Promissory Note in the amount of $50,000. The terms of the note are for 10% interest, with principal and interest all due on or before February 12, 2012. On, or after, the maturity date, the note may be converted based on the outstanding and unpaid principal and interest amount into fully paid and non-assessable shares of common stock at a 50% discount to the fair market value of the stock price at the time of conversion. The Company evaluated the note, and determined that because the shares issuable are indeterminate, the conversion option associated with this note is deemed a derivative liability. The August 12, 2011 value of the note of $50,000 was recorded as a note discount to be amortized over the life of the note, and derivative liability. The balance as of December 31, 2012 is $1,000.
Note 20: Effective September 12, 2011 the Company entered into a Convertible Promissory Note in the amount of $25,000. The terms of the note are for 8% interest, with principal and interest all due on or before March 12, 2012. On or after the maturity date, the note may be converted based on the outstanding and unpaid principal and interest amount into fully paid and non-assessable shares of common stock at a 50% discount to the fair market value of the stock price at the time of conversion. The Company evaluated the note and determined that because issuable shares are indeterminate, the conversion option associated with this note is deemed a derivative liability. For the year ended December 31, 2012, the Company recognized note discount amortization of $25,000. The discount is amortized using the effective interest method.
Note 21: Effective September 3, 2011 the Company entered into an Unsecured Promissory Note in the amount of $20,000. The terms of the note are for 8% per annum interest. During the year ended December 31, 2012 , the Company settled $15,870 of the debt leaving a balance of $4,130 at December 31, 2012.
Note 22: Effective October 1, 2011, the Company entered into a Convertible Promissory Note in the amount of $11,250. The terms of the note are for 6% interest with principal and interest due on demand. The note may be converted based on the outstanding and unpaid principal and interest amount into fully paid and non-assessable shares of common stock at a 50% discount to the fair market value of the stock price at the time of conversion. The Company evaluated the note and determined that because the shares issuable are indeterminate, the conversion option associated with this note is deemed a derivative liability. The October 1, 2011 value of the note of $11,250 was recorded as a note discount to be amortized over the life of the note and derivative liability. For the three months ended December 31, 2011, the Company recognized note discount amortization of $11,250. The discount is amortized using the effective interest method.
Note 23: Effective January 27, 2012, the Company entered into a Promissory Note in the amount of $13,700. The terms of the note are for interest of 12% with principal and interest due on or before July 27, 2012. Effective March 1,2012 the Company entered into an additional Promissory Notse in the amount of $10,000and $19,000 with the same terms, due on or before September 1, 2012. During the year ended December 31, 2012, the Company settled $3,500 of the debt with common stock and repaid $12,500, leaving a balance of $26,950 at December 31, 2012.
Note 24: Effective January 25, 2012, the Company entered into a Convertible Promissory Note in the amount of $50,000. The terms of the note are for interest of 12% with principal and interest due on or before January 25, 2013. The note may be converted based on the outstanding and unpaid principal and interest amount into fully paid and non-assessable shares of common stock at a 60% discount to the fair market value of the stock at the time of conversion. The Company evaluated the note and determined that because the shares issuable are indeterminate, the conversion option associated with this note is deemed a derivative liability. The January 25,2012 value of the note of $50,000 was recorded as a note discount to be amortized over the life of the note and derivative liability. On March 28, 2012 an additional note for $20,000 was issued bearing the same terms. For the year ended December 31, 2012, the Company recognized note discount of $18,465. The discount is amortized using the effective interest method.
Note 25: Effective July 1, 2012, the Company’s subsidiary, Energy Producers ,Inc. entered into a Promissory Note in the amount of $60,130. The principal is due on or before June 30, 2015 with default interest at 12%. In the year ended December 31,2012, the Company has paid $1,670 leaving a balance of $58,460.
Note 26: Effective July 1, 2012, the Company’s subsidiary Energy Producers, Inc. entered into a Promissory Note in the amount of $242.731. The principal is due on or before June 30, 2015, with default interest at 12%.
Note 27: Effective October 19, 2012, the Company entered into a Promissory Note in the amount of $15,000. The terms of the note are 8% interest , with principal and interest due on or before April,19, 2014.
Note 28: Effective December 18, 2012, the Company entered into a Promissory Note in the amount of $25,000. The terms of the note are 8% interest, with principal and interest due on or before September 19,2013. The promissory note is convertible into common stock of the Company using a conversion rate that is 45% of the average of the lowest three trading prices over the last 20 trading days. The total debt discount pertaining to this promissory note is $12,054. The Company recognized $1,339 in amortization of this discount for the year ended December 31, 2012.
Although a portion of our debt is not due within 12 months, given our working capital deficit and cash positions and our ability to service the debt on a long term basis is questionable, the notes are all effectively in default and treated as current liabilities.
14. Capital Lease Obligation
During the year ended December 31, 2010, the Company entered into a lease for equipment which included the promise to make monthly payments of $5,000 for 12 months with a bargain purchase option at the end of the lease. This lease is accounted for as a capital lease in which the present value of the future payments is recorded as a liability of $56,872. The discount rate is 10%. As of December 31, 2012, there were no payments made on this lease and the entire balance is classified as a current liability.
15. Derivative Liability
The Company evaluated the conversion feature embedded in the convertible notes to determine if such conversion feature should be bifurcated from its host instrument and accounted for as a freestanding derivative. Due to the note not meeting the definition of a conventional debt instrument because it contained a diluted issuance provision, the convertible notes were accounted for in accordance with ASC 815. According to ASC 815, the derivatives associated with the convertible notes were recognized as a discount to the debt instrument, and the discount is being amortized over the life of the note and any excess of the derivative value over the note payable value is recognized as additional expense at issuance date.
The Company also issued 2,500 series D convertible preferred stock which included reset provisions which are considered derivatives in accordance with ASC 815. The fair market value of these reset provisions were bifurcated and recorded as derivative liabilities.
Further, and in accordance with ASC 815, the embedded derivatives are revalued at each balance sheet date and marked to fair value with the corresponding adjustment as a “gain or loss on change in fair value of derivatives” in the consolidated statement of operations. As of December 31, 2012, the fair value of the embedded derivatives included on the accompanying consolidated balance sheet was $637,685. During the year ended December 31, 2012, the Company recognized a loss on change in fair value of derivative liability totaling $115,325.
Key assumptions used in the valuation of derivative liabilities associated with the convertible notes at December 31, 2012 were as follows:
Ø
The stock price would fluctuate with an annual volatility ranging from 264% to 520% based on the historical volatility for the company.
Ø
An event of default would occur 5% of the time, increasing 0.10% per quarter to a maximum of 25%.
Ø
Alternative financing for the convertible notes would be initially available to redeem the note 0% of the time and increase quarterly by 1% to a maximum of 20%.
Ø
The trading volume would average $265,308 to $291,990 and would increase at 1% per quarter.
Ø
The holder would automatically convert the notes at a stock price of the greater of the initial exercise price multiplied by two and the market price for the convertible notes if the registration was effective and the company was not in default.
Key assumptions used in the valuation of derivative liabilities associated with the reset provisions of the series D preferred stock at December 31, 2011 were as follows:
Ø
The stock price would fluctuate with an annual volatility ranging from 258% to 615% based on the historical volatility for the company.
Ø
An event of default that requires the Company to redeem the stock would be 0% increasing 2% per period to a maximum of 20% at maturity.
Ø
The Holder would automatically convert at a stock price of $0.0045 if the Company was not in default.
The Company classifies the fair value of these securities under level three of the fair value hierarchy of financial instruments. The fair value of the derivative liability was calculated using a lattice model that values the compound embedded derivatives based on a probability weighted discounted cash flow model. This model is based on future projections of the various potential outcomes. The embedded derivatives that were analyzed and incorporated into the model included the conversion feature with the full ratchet reset, and the redemption options.
The components of the derivative liability on the Company’s balance sheet at December 31, 2012 and 2011 are as follows:
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
Embedded conversion features - convertible promissory notes
|
|
$
|
632,456
|
|
|
$
|
629,953
|
|
|
Common stock warrants
|
|
|
-
|
|
|
|
-
|
|
|
Anti-dilution provisions of series D preferred stock
|
|
|
5,229
|
|
|
|
12,906
|
|
|
|
|
$
|
637,685
|
|
|
$
|
639,859
|
|
The Company had the following changes in the derivative liability:
|
Balance at December 31, 2011
|
|
$
|
639,859
|
|
|
Issuance of securities with embedded derivatives
|
|
|
636,676
|
|
|
Debt and preferred stock conversions
|
|
|
(501,090
|
)
|
|
Derivative (gain) or loss
|
|
|
115,864
|
|
|
Balance at December 31, 2012
|
|
$
|
637,685
|
|
16. Asset Retirement Obligation (ARO)
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.
The following table is a reconciliation of the ARO liability for continuing operations for the twelve months ended December 31, 2012 and 2011:
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
Asset retirement obligation at the beginning of period
|
|
$
|
21,831
|
|
|
$
|
5,368
|
|
|
Liabilities incurred
|
|
|
-
|
|
|
|
-
|
|
|
Revisions to previous estimates
|
|
|
(3,860
|
)
|
|
|
11,876
|
|
|
Dispositions
|
|
|
(8,644
|
)
|
|
|
-
|
|
|
Accretion expense
|
|
|
2,432
|
|
|
|
4,617
|
|
|
Asset retirement obligation at the end of period
|
|
$
|
11,789
|
|
|
$
|
21,861
|
|
17. Discontinued Operations
On July 31, 2012, the Company completed a Purchase Agreement whereby EGPI Firecreek, Inc., through its wholly owned subsidiary, Energy Producers, Inc, would sell one half (50%) of it’s holdings in the Tubb oil and gas leases . The loss on disposal is $595,684 and is recognized in the financial statements on the sale date.
During the year ended December 31, 2012, the Company entered into a preliminary Agreement to sell 51% of it’s stock in Arctic Solar Engineering, LLC. Negotiations continue on the Agreement. Income on the discontinued portion is $32,567 and is recognized in the financial statements on the Agreement date. This income is primarily due to an insurance reimbursement that is recorded in other income.
On March 14, 2011, the Company entered into and completed a definitive Stock Purchase Agreement whereby EGPI Firecreek, Inc. would sell 100% of the common shares of SATCO to Distressed Asset Acquisitions, Inc.
The consideration being paid by Distressed Asset Acquisitions, Inc. consists of a $50,000 in the form of a promissory note (the “Purchase Price”). The promissory note is to be paid to the Company on or before March 14, 2012 in lawful money of the United States of America and in immediately available funds the principal sum of $50,000, together with interest on the unpaid principal of this Note from the date hereof at the interest rate of Nine Percent (9%). The Note can be extended for one additional twelve month period. The loss on disposal is $586,924 and is recognized in the financial statements on the disposal date.
Please refer to the Form 8-K filed with the SEC on March 18, 2011.
The results of discontinued operations is a net loss of $655,077 and $602,885 for the years ended December 31, 2012 and 2011 .
All assets and liabilities of SATCO are segregated in the balance sheet and appropriately labeled as held for sale in 2011. All assets and liabilities of Arctic Solar are segregated in the balance sheet and appropriately labeled as held for sale in 2012.
18. Professional Service Agreements
On March 1, 2010, the Company entered into two professional service agreements (the “Agreements”) which are intended to be automatically renewable annually. Aggregate fees pursuant to the Agreements are comprised of (a) $20,000 in cash per month which has been accrued through the period ended December 31, 2010; (b) a one-time issuance of 120,000 shares of restricted common stock; and (c) three-year warrants, which vest six months from the grant date, to purchase for $20,000 the lower of (i) shares of common stock representing 1% of the Company’s outstanding common stock; or (ii) shares of common stock representing a fair market value of $150,000. In addition, the vendors are entitled to convert any unpaid cash fees into common stock at a 50% discount to the fair market value of the stock on the date of conversion. On April 1, 2011 the contracts were renewed with aggregate fees of $30,000 per month which have been accrued through the period ended December 31, 2011. In this renewal, the warrants were cancelled no longer exercisable. All amounts accrued as part of the $30,000 monthly accrual are done so pursuant to convertible promissory notes due on demand. They are convertible at a 50% discount to the fair market value of the stock on the date of conversion. On April 1, 2012 the contracts were renewed with aggregate fees of $10,000 per month which have been accrued throught the period ending December 31, 2012. Other terms remain the same.
19. Concentrations and Risk
Customers
During the year ended December 31, 2012, revenue generated under the top three customers accounted for 100% of the Company’s total revenue. Concentration with a single or a few customers may expose the Company to the risk of substantial losses if a single dominant customer stops conducting business with the Company. Moreover, the Company may be subject to the risks faced by these major customers to the extent that such risks impede such customers’ ability to stay in business and make timely payments.
20. Contingencies
The Company is subject to various claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. Management believes that any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the financial condition or results of operations of the Company.
In October 2010 we received notice of a lawsuit filed against the Company by St. George Investments, LLC relating to certain Agreements entered on January 15th, 2010 by EGPI Firecreek Inc. and St. George Investments LLC which include: i) Note Purchase Agreement, ii) Convertible Promissory Note, iii) Judgment by Confession and iv) Registration Rights Agreement. St. George Investments LLC believes that EGPI Firecreek is in breach of terms agreed upon pursuant to the aforementioned agreements and sought damages totaling $262,585 (includes principal, interest and all penalties/fees pursuant to plaintiff's initial disclosures dated 3/28/11). In July 2011, the Company and St. George Investments LLC entered into a settlement agreement where the Company agreed to pay $202,000 on various payment terms beginning with $10,000 on signing of agreement, followed by five payments beginning August through December 2011, and thereafter payments for 18 months in the amount of $6,158. St. George now claims EGPI defaulted on the payment schedule and entered a Confession of Judgment. On September 23, 2011, EGPI Firecreek, Inc. received notice that St. George Investments LLC had filed a second lawsuit arising out of the same claims. The Company is moving to set aside the Confession of Judgment on this basis and is answering and vigorously defending the second lawsuit. As of January 31, 2012, the Company entered into a Settlement Agreement with St. George Investments, LLC whereas among other terms due the Company agreed to two principal options for settlement with summary terms as follows: 1. A settlement payment in the total aggregate amount of $200,000 with $20,000 due January 21, 2012, and $10,000 per month thereafter on the 21
st
of each month thereafter going forward until paid or 2. A payment balloon of $100,000 paid by April 21, 2012 less $30,000 in payments as credited or $70,000 total upon which the Company or its parties shall have no further obligation to make settlement payments or pay any other amounts to St. George Investments, LLC thereafter. The Company having negotiated settlement payment is current in its payment through October 21, 2012 in accordance with recent modifications to forbearance agreements (for the August payment) having negotiated a stock payment for June and July 2012 and recently for August 2012. The Company did not timely make its August 2012 payment but has been in communication with St. George Investments, LLC as to its current position with both parties now agreed to a current status based on resumption of payments due for August 2012 by resuming payments on May 31, 2013. The entire amount owed is accrued in notes payable in the financial statements.
In November 2010, EGPI Firecreek Inc and South Atlantic Traffic Corp., a former wholly owned subsidiary of the Company, received a lawsuit from two of the former owners of SATCO, Mr. Jesse Joyner and Mr. James Stewart Hall. Mr. Joyner and Mr. Hall have subsequently resigned from their positions with the company. On December 17, 2010, EGPI Firecreek Inc. filed its answer to the claim and filed a counterclaim against Mr. Joyner and Mr. Hall. As of August 2011 and through April 2012, the Company is in settlement negotiations and believes the matter will be resolved for less than the amount currently accrued and included in notes payable and accrued interest, which are the subject of the lawsuit. SATCO was sold to Distressed Asset Acquisitions, Inc. in March 2012. As of July 2012 the case has been settled for $177,000 on scheduled payments over three years. The Company has made seven payments of just under $5,000 each, is current through January 2013 and due for February and March 2013, and has negotiated to bring current on two payments due May 8, 2013.
In December 2010 the Company received a lawsuit notice on behalf of our former Terra Telecom (“Terra”) subsidiary from Source Capital Group Inc (“Source”) seeking a judgment for amounts allegedly owed it from Terra in the total aggregate amount of $81,492 plus pre and post judgment interest. In June 2011, the Company filed a motion to dismiss for lack of personal jurisdiction. Additionally, the Company also filed a motion to dismiss for Sources’ failure to state a claim. In response to that motion, Source has now, as of July, 2011, dismissed its assumption argument. On October 14
th
, 2011, EGPI Firecreek Inc. received notice from Source Capital’s legal representation that they were seeking to withdrawal as counsel for plaintiffs in this matter. The Company believes that this development with further strengthen our position in defense of this matter and will ultimately result in the granting of our pending motions to dismiss. As of April 2013 there has been no communications received further in this matter.
In February 2011 the Company received a lawsuit notice on behalf of our Terra Telecom (“Terra”) subsidiary from Nu-Horizons Electronics (“Nu-Horizons”) seeking judgment for amounts allegedly owed it from Terra in the total aggregate amount of $196,620. The Company believes that it is not liable, and intends to file appeal to remove it from the motion for judgment. The Company will vigorously defend its position. As of April 2013, the Company has not received further communications with respect to Nu-Horizons.
In May 2011 the Company received a lawsuit by Edelweiss Enterprises Inc. dba The Small Business Money Store (“SMBS”) seeking a judgment to collect amounts allegedly owed it relating to an account receivable factoring agreement, to the former subsidiary SATCO, in the total aggregate amount of $48,032. The Company believes that it is not liable, and will vigorously defend its position. In July 2012 the Company attended an arbitration hearing and in August was awarded a dismissal of the case by the Arbitrator. The Plaintiff then appealed and since the appeal the matter has been settled and dismissed for a payment of $5,000 cash and 275,000 shares of the Company’s restricted common stock, which both have been tendered as of the date of this filing.
In August 2011, the Company received a lawsuit notice on behalf of our wholly owned subsidiary Energy Ventures One Inc whereas Contegra Construction Company LLC (“CCC”) is seeking a judgment to collect amounts owed it relating to a promissory note in the amount of $157,767, which includes interest and late fees. The amount is recorded as a liability in the financial statements.
In August 2011, the Company received a lawsuit notice on behalf of itself and our wholly owned subsidiary Energy Ventures One Inc. and Arctic Solar, LLC by Masters Equipment Services, Inc. (“Masters”) seeking a judgment to collect amounts allegedly owed it relating to a promissory note in the amount of $110,153, including interest and late fees. The Company is one of several parties named in the proceeding and is prepared to vigorously defend its position. In July 2012, the Company negotiated a settlement of this case for $22,000 at the rate of $2,000 per month beginning October 2012. The promissory note is recorded as a liability in the financial statements. The Company has made its first payment of $2,000 and is current at September 30, 2012 but has fallen behind in payments since, and will attempt to resume as soon as practicable.
In January, 2012 a lawsuit was filed in the Middlesex County, Massachusetts Superior Court by Joshua White, against Terra Telecom and the Company. Mr. White was a former employee of Terra Telecom and not the Company. Mr. White alleges the Company should be liable to him for the acts of Terra Telecom. A Motion to Dismiss has been filed for lack of jurisdiction on behalf of the Company, which the Company believes will be granted. In any event the Company believes it has no liability and will defend vigorously if, for some reason, the Motion to Dismiss is not granted. The Company sold its interest in Terra Telecom in March of 2011. On August 3, 2012 the Motion to Dismiss was granted by the Justice of the Superior Court.
In February 2012 the Company received a lawsuit notice on behalf of itself by Morrell Saffa Craige, PC (“Morrell”) seeking the recovery of legal fees in the approximate sum of $25,000 owed to the Plaintiff in connection with its successful defense of a lawsuit styled Thermo Credit, LLC v. EGPI, et al. The Company owes the above fees and intends on paying the bill in full. The amount is recorded in the financial statements in accounts payable.
In May 2012 a lawsuit was filed in the Clark County, Nevada District Court by Lakeview Consulting, LLC (“Lakeview”), against the Company and other various Does 1-V and Roes corporations V1-X. Lakeview alleges the Company failed or refused to convert shares on a Convertible Note in the amount of $35,000 and therefore the sum plus interest, damages, etc. The Company is one of several parties named in the proceeding and is prepared to vigorously defend its position. The Company entered negotiations for settlement and has recently made its first payment, and current for the period ended September 30, 2012, but has fallen behind on all subsequent payments. The Company has negotiated for a payment to be made by May 15, 2013. The amount is recorded as a liability in the financial statements.
In October 2012 the Company received a lawsuit behalf of Solaire Power Technologies, LLC, a subsidiary of our wholly owned subsidiary Arctic Solar Engineering LLC. Robert T Short (“RTS”) , the Plaintiff, is claiming personal injuries and damages relating to alleged fall from the City of Dardene Prairie building, in the City of Dardene Prairie MO, Solaire is one of several parties named in the proceeding. Solaire denies all liability, and is prepared to vigorously defend its position. There is no further activity related to this matter that we are aware of as as of April 2013.
As noted in our debt footnote above, we have certain notes that may become convertible in the future and potential result in further dilution to our common shareholders.
On April 26, 2013 the Company, Mondial Ventures, Inc. (“Mondial”) and Success Oil Co., Inc. (“Success”) together (the “Parties”) extended a January 28, 2013 Agreement to further extend option (the “AEO”) relating to a Participation Agreement (Turnkey Drilling, Re Entry, and Multiple Wells) (“Participation Agreement”) dated July 31, 2012 between the Company, Mondial, and Success effectively increasing the expiration date to at least July 26, 2013 unless modified in writing signed by the parties or there is a default not cured or waived.
The Company is in completion stage discussions with equity, asset-based lenders, and other financial institutions for the purpose of acquiring financing capital expenditures to build upon its infrastructure for its oil and gas operations including the J.B. Tubb Leasehold Estate and our interests located in Callahan, Stephens, and Shackelford Counties, Texas.
The Company is again pursuing certain international based oil and gas programs available and will Report progress when appropriate.
The Company’s goal is to build our revenues, asset base and cash flow; however, the Company makes no guarantees and can provide no assurances that it will be successful in these endeavors.
The Company is still in completion stages for a reverse stock split on a 1:4000 basis and expects to conclude as soon as practicable. For further information on this planned event please see our Current Report on Form 8-K, Item 8.01 filed on January 29, 2013.
Please also see “Recent Developments” at the top of this Report.
We classify our operations into two main business lines: (1) Solar Thermal Energy, and (2) Oil and Gas. This segmentation best describes our business activities and how we assess our performance. Summarized financial information by business segment for the years ended December 31, 2012 and December 31, 2011 is presented below. All segment revenues were derived from external customers. As more fully disclosed in the Company’s fiscal year 2010 Annual Report, we had no operations in these business segments until our acquisitions of Arctic Solar Engineering, LLC on February 4, 2011 (Solar Thermal Energy), and the beginning operations of Energy Producers, Inc. (Oil and Gas).
For the year ending December 31, 2012,
|
|
|
Discontinued
Operations
|
|
|
Solar
Thermal
Energy
|
|
|
Oil & Gas
|
|
|
All Other (a)
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
124,157
|
|
|
|
-
|
|
|
|
124,157
|
|
|
|
-
|
|
|
|
124,157
|
|
|
Depreciation & amortization
|
|
|
55,490
|
|
|
|
-
|
|
|
|
290,292
|
|
|
|
809
|
|
|
|
346,591
|
|
|
Income (loss) from operations
|
|
|
(655,077
|
)
|
|
|
31,290
|
|
|
|
(833,692
|
)
|
|
|
(4,627,733
|
)
|
|
|
(6,085,212
|
)
|
|
Interest expense
|
|
|
1,290
|
|
|
|
1,240
|
|
|
|
-
|
|
|
|
1,337,168
|
|
|
|
1,339,698
|
|
|
Segment assets
|
|
|
-
|
|
|
|
325
|
|
|
|
1,332,955
|
|
|
|
248
|
|
|
|
1,333,508
|
|
For the year ending December 31, 2011,
|
|
|
Solar
Thermal
Energy
|
|
|
Oil &
Gas
|
|
|
All Other (a)
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
47,362
|
|
|
|
246,350
|
|
|
|
-
|
|
|
|
293,712
|
|
|
Depreciation, depletion, & amortization
|
|
|
-
|
|
|
|
215,806
|
|
|
|
88,569
|
|
|
|
304,375
|
|
|
Income (loss) from operations
|
|
|
(182,634
|
)
|
|
|
(624,059
|
)
|
|
|
(1,401,392
|
)
|
|
|
(2,208,085
|
)
|
|
Interest expense
|
|
|
5,895
|
|
|
|
-
|
|
|
|
1,296,362
|
|
|
|
1,302,257
|
|
|
Segment assets
|
|
|
762
|
|
|
|
2,701,715
|
|
|
|
2,271
|
|
|
|
2,704,748
|
|
The following are reconciliations of reportable segment revenues, results of operations, assets and other significant items to the Company’s consolidated totals (amounts stated in thousands):
|
|
|
Year Ended
December 31,
2012
|
|
|
Year Ended
December
31,
2011
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Total for reportable segments
|
|
|
124,157
|
|
|
|
293,712
|
|
|
Corporate
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
124,157
|
|
|
|
293,712
|
|
|
Depreciation, depletion and amortization:
|
|
|
|
|
|
|
|
|
|
Total for reportable segments
|
|
|
345,782
|
|
|
|
215,806
|
|
|
Corporate
|
|
|
809
|
|
|
|
88,567
|
|
|
|
|
|
346,591
|
|
|
|
304,375
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
Total for reportable segments
|
|
|
(1,457,479
|
)
|
|
|
(806,693
|
)
|
|
Corporate
|
|
|
(4,627,733
|
)
|
|
|
(1,401,392
|
)
|
|
|
|
|
(6,085,212
|
)
|
|
|
(2,208,085
|
)
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
Total for reportable segments
|
|
|
2,530
|
|
|
|
5,895
|
|
|
Corporate
|
|
|
1,337,168
|
|
|
|
1,296,362
|
|
|
|
|
|
1,339,698
|
|
|
|
1,302,257
|
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
|
Total for reportable segments
|
|
|
1,333,280
|
|
|
|
2,702,477
|
|
|
Corporate
|
|
|
248
|
|
|
|
2,271
|
|
|
|
|
|
1,333,508
|
|
|
|
2,704,748
|
|
Supplemental Oil and Gas Information (Unaudited)
Oil and Natural Gas Exploration and Production Activities
Oil and gas sales reflect the market prices of net production sold or transferred with appropriate adjustments for royalties, net profits interest, and other contractual provisions. Production expenses include lifting costs incurred to operate and maintain productive wells and related equipment including such costs as operating labor, repairs and maintenance, materials, supplies and fuel consumed. Production taxes include production and severance taxes. Depletion of oil and gas properties relates to capitalized costs incurred in acquisition, exploration, and development activities. Results of operations do not include interest expense and general corporate amounts. The results of operations for the company's oil and gas production activities are provided in the Company's related statements of operations.
Costs Incurred and Capitalized Costs
The costs incurred in oil and gas acquisition, exploration and development activities follow:
|
|
|
Year Ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Costs Incurred for the Year:
|
|
|
|
|
|
|
|
|
|
Proved Property Acquisition
|
|
$
|
-
|
|
|
$
|
2,053,981
|
|
|
Unproved Property Acquisition
|
|
|
-
|
|
|
|
-
|
|
|
Development Costs
|
|
|
565,420
|
|
|
|
165,162
|
|
|
Total
|
|
$
|
565,420
|
|
|
$
|
2,219,143
|
|
Results of operations (All United States Based):
|
|
|
2012
|
|
|
2011
|
|
|
Revenues
|
|
$
|
124,157
|
|
|
$
|
246,350
|
|
|
Production costs
|
|
|
146,046
|
|
|
|
264,556
|
|
|
Exploration costs
|
|
|
-
|
|
|
|
-
|
|
|
Development costs
|
|
|
565,420
|
|
|
|
61,032
|
|
|
Depreciation, depletion & amortization
|
|
|
248,697
|
|
|
|
116,717
|
|
|
Provision for income tax
|
|
|
-
|
|
|
|
-
|
|
|
Net profit (loss) from oil and gas producing activities:
|
|
$
|
(836,006
|
)
|
|
$
|
(195,955
|
)
|
Oil and Natural Gas Reserves and Related Financial Data
Information with respect to the Company’s oil and gas producing activities is presented in the following tables. Reserve quantities, as well as certain information regarding future production and discounted cash flows, were determined by Harper Associates, Inc. independent petroleum consultants based on information provided by the Company.
Oil and Natural Gas Reserve Data
The following tables present the Company’s independent petroleum consultants’ estimates of its proved oil and gas reserves. The Company emphasizes that reserves are approximations and are expected to change as additional information becomes available. Reservoir engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment.
|
|
|
Natural
|
|
|
|
|
|
|
|
Gas
|
|
|
Oil
|
|
|
|
|
(MCF)
|
|
|
(BLS)
|
|
|
Proved Developed and Undeveloped Reserves at December 31, 2010
|
|
|
119,672
|
|
|
|
36,865
|
|
|
|
|
|
|
|
|
|
|
|
|
Revisions of Previous Estimates
|
|
|
706,245
|
|
|
|
70,184
|
|
|
Extensions, Discoveries and Other Additions
|
|
|
861,543
|
|
|
|
154,534
|
|
|
Production
|
|
|
(20,331)
|
|
|
|
(3,882)
|
|
|
Proved Developed and Undeveloped Reserves at December 31, 2011
|
|
|
1,667,129
|
|
|
|
257,701
|
|
|
|
|
|
|
|
|
|
|
|
|
Revisions of Previous Estimates
|
|
|
750,070
|
|
|
|
56,075
|
|
|
Extensions, Discoveries and Other Additions
|
|
|
-
|
|
|
|
-
|
|
|
Production
|
|
|
(23,927)
|
|
|
|
(3,329)
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved Developed and Undeveloped Reserves at December 31, 2012
|
|
|
1,559,707
|
|
|
|
181,596
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved Developed Reserves at December 31, 2011
|
|
|
24,446
|
|
|
|
3,461
|
|
|
Proved Developed Reserves at December 31, 2012
|
|
|
23,126
|
|
|
|
5,462
|
|
Proved reserves are estimated quantities of oil and gas, which geological and engineering data indicate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are included for reserves for which there is a high degree of confidence in their recoverability and they are scheduled to be drilled within the next five years.
Standardized Measure of Discounted Future Net Cash Inflows and Changes Therein
The following table presents a standardized measure of discounted future net cash flows relating to proved oil and gas reserves and the changes in standardized measure of discounted future net cash flows relating proved oil and gas were prepared in accordance with the provisions of ASC 932-235-555. Future cash inflows were computed by applying average prices of oil and gas for the last 12 months as of December 31, 2012 and current prices as of December 31, 2011 to estimated future production. Future production and development costs were computed by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves at the end of the year, based on year-end costs and assuming continuation of existing economic conditions. Future income tax expenses were calculated by applying appropriate year-end tax rates to future pretax cash flows relating to proved oil and gas reserves, less the tax basis of properties involved and tax credits and loss carryforwards relating to oil and gas producing activities. Future net cash flows are discounted at the rate of 10% annually to derive the standardized measure of discounted future cash flows. Actual future cash inflows may vary considerably, and the standardized measure does not necessarily represent the fair value of the Company’s oil and gas reserves.
|
|
|
Year Ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Future Cash Inflows
|
|
$
|
18,976,033
|
|
|
$
|
28,693,296
|
|
|
Future Production Costs
|
|
|
(3,119,472
|
)
|
|
|
(4,883,190
|
)
|
|
Future Development Costs
|
|
|
(5,679,937
|
)
|
|
|
(8,115,000
|
)
|
|
Future Income Tax Expense
|
|
|
-
|
|
|
|
-
|
|
|
Future Net Cash Inflows
|
|
|
10,176,624
|
|
|
|
15,695,106
|
|
|
|
|
|
|
|
|
|
|
|
|
10% Annual Discount for Estimated Timing of Cash Flows
|
|
|
(6,427,510
|
)
|
|
|
(8,490,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Standardized Measure of Discounted Future Net Cash Flows
|
|
$
|
3,749,114
|
|
|
$
|
7,204,770
|
|
The twelve month average prices for the year ended December 31, 2012 were adjusted to reflect applicable transportation and quality differentials on a well-by-well basis to arrive at realized sales prices used to estimate the Company’s reserves. The prices for the Company’s reserve estimates were as follows:
|
|
|
Natural Gas
|
|
|
Oil
|
|
|
|
|
MCF
|
|
|
Bbl
|
|
|
December 31, 2011 (Average)
|
|
$
|
5.31
|
|
|
$
|
91,54
|
|
|
December 31, 2012 (Average)
|
|
$
|
3.15
|
|
|
$
|
88.45
|
|
Changes in the future net cash inflows discounted at 10% per annum follow:
|
|
|
Year Ended
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Beginning of Period
|
|
$
|
7,204,770
|
|
|
$
|
679,606
|
|
|
Sales of Oil and Natural Gas Produced, Net of Production Costs
|
|
|
21,889
|
|
|
|
-
|
|
|
Extensions and Discoveries
|
|
|
-
|
|
|
|
-
|
|
|
Previously Estimated Development Cost Incurred During the Period
|
|
|
565,420
|
|
|
|
-
|
|
|
Net Change of Prices and Production Costs
|
|
|
(4,230,875
|
)
|
|
|
(8,149,946
|
)
|
|
Change in Future Development Costs
|
|
|
1,869,643
|
|
|
|
(8,045,000
|
)
|
|
Revisions of Quantity and Timing Estimates
|
|
|
2,337,193
|
|
|
|
-
|
|
|
Accretion of Discount
|
|
|
720,477
|
|
|
|
-
|
|
|
Change in Income Taxes
|
|
|
-
|
|
|
|
-
|
|
|
Purchase (sale) of Reserves in Place
|
|
|
(3,602,385
|
)
|
|
|
22,720,110
|
|
|
Other
|
|
|
(1,137,018
|
)
|
|
|
-
|
|
|
End of Period
|
|
$
|
4,516,956
|
|
|
$
|
7,204,770
|
|