NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2014
Note 1 – Nature of Business and Significant
Accounting Policies
Nature of Business
Gray Fox Petroleum Corp. (formerly Viatech
Corp.) was incorporated in the State of Nevada on September 22, 2011. The Company was formed originally to provide interior design
and architectural visualization, 3D rendering and architectural animation services. On May 31, 2013, the then majority stockholder,
Viatcheslav Gelshteyn, entered into a stock purchase agreement with Lawrence Pemble pursuant to which Mr. Gelshteyn sold 7,000,000
shares of common stock, $0.001 par value per share (“Common Stock”), of the Company to Mr. Pemble and forgave $8,363
in stockholder loans he had made to the Company in consideration of $50,000 in cash from Mr. Pemble. This transaction is referred
to as the “Change in Control.” As a result of the Change in Control, Mr. Gelshteyn no longer owns any shares of Common
Stock. In addition, Mr. Gelshteyn resigned his positions as the sole director and officer of the Company and Mr. Pemble was appointed
as the Company’s sole director and as its Chief Executive Officer, President, Treasurer and Secretary. On June 5, 2013, the
board of directors approved the dismissal of Ronald R. Chadwick, P.C. as its independent auditor and appointed M&K CPAS, LLC
as its new independent auditor.
On June 10, 2013, the Company entered into
an Agreement for Redemption of Shares of Common Stock, pursuant to which the Company redeemed 4,700,000 shares of Common Stock
held by Mr. Pemble. As a result of this redemption, on June 10, 2013, Mr. Pemble’s shareholdings decreased from 7,000,000
shares to 2,300,000 shares, which represented approximately 53% of the total shares issued and outstanding.
On June 18, 2013, the Company received approval
from the Financial Industry Regulatory Authority (“FINRA”) to change its name from “Viatech Corp.” to “Gray
Fox Petroleum Corp.” and to conduct an 8:1 forward stock split of the issued and outstanding shares of Common Stock whereby
each outstanding share of Common Stock would be exchanged for eight new shares of Common Stock. On June 20, 2013, the Company effected
the stock split, which increased the issued and outstanding shares of Common Stock from 4,320,000 shares to 34,560,000 shares.
In connection with the Change in Control and the name change, on July 19, 2013, the Company’s ticker symbol on the OTCQB
was changed from VTCH to GFOX.
As of August 6, 2014, the Company had 37,036,000
shares of Common Stock issued and outstanding.
The Company’s administrative offices
are located at 3333 Lee Parkway, Suite 600, Dallas, Texas 75219. The Company has two employees, Lawrence Pemble, who serves as
its Chief Executive Officer and sole director, and Randall Newton, CPA who serves as Chief Financial Officer.
The Company is currently exploring oil and
gas production opportunities. On December 2, 2013, Gray Fox completed the acquisition of 22 separate oil and gas leases (the “Leases”)
issued by the U.S. Bureau of Land Management for the State of Nevada (the “BLM”) from FFMJ, LLC, a Nevada limited liability
company (“FFMJ”), for an aggregate purchase price of $250,000. The leased land, known as the “West Ranch Prospect,”
comprises 32,723 acres in the Butte Valley Oil Play Region in North Central Nevada. We have a 100% working interest and an 82%
net revenue interest in the Leases. If the property is viable and can be developed, we will receive 82% of the net revenues generated
from the property. As the leaseholder, we are responsible for evaluating, exploring, paying for and maintaining the Leases.
Our plan of operations for the next 12 months
is to conduct geological mapping, gravity surveying and 2D seismic coverage on the West Ranch Prospect. To that end, we have developed
an initial exploration plan to identify drilling targets. This initial exploration plan is designed to identify new drilling locations
targeting certain geological formations that the Company believes may be capable of producing oil or natural gas in commercial
quantities.
Basis of Presentation
The interim condensed financial statements
included herein, presented in accordance with United States generally accepted accounting principles and stated in U.S. Dollars,
have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that
the disclosures are adequate to make the information presented not misleading.
The Company has adopted a fiscal year end of
March 31.
These statements reflect all adjustments, which
in the opinion of management, are necessary for fair presentation of the information contained therein. Except as otherwise disclosed,
all such adjustments are of a normal recurring nature. These interim condensed financial statements should be read in conjunction
with the financial statements of the Company for the fiscal year ended March 31, 2014 and notes thereto included in the Company’s
Annual Report on Form 10-K, filed on June 27, 2014. The Company follows the same accounting policies in the preparation of interim
reports.
Fair Value of Financial Instruments
Under ASC 820-10-05, the Financial Accounting
Standards Board (“FASB”) established a framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute.
The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The
carrying amounts of cash, prepaid expenses and accrued expenses reported on the balance sheet are estimated by management to approximate
fair value primarily due to the short term nature of the instruments.
Revenue Recognition
Revenue from the production of oil and natural
gas is recognized when persuasive evidence of an arrangement exists (such as a contract with an oil buyer), the Company has delivered
the oil, the fee is fixed and determinable, and collectability is reasonably assured.
Start-Up Costs
The Company accounts for start-up costs, including
organization costs, whereby such costs are expensed as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation
allowance is provided for significant deferred tax assets when it is more likely than not that such asset will not be recovered
through future operations.
Uncertain Tax Positions
In accordance with ASC 740, “Income Taxes”
(“ASC 740”), the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not
that the tax position will be capable of withstanding examination by the taxing authorities based on the technical merits of the
position. These standards prescribe 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. These standards also provide guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
Various taxing authorities may periodically
audit the Company’s income tax returns. These audits may include questions regarding the Company’s tax filing positions,
including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures
connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable
exposures. A number of years may elapse before a particular matter for which an allowance has been established is audited and fully
resolved. The Company has not yet undergone an examination by any taxing authorities.
The assessment of the Company’s tax position
relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.
Stock-Based Compensation
The Company adopted FASB guidance on stock
based compensation upon inception at September 22, 2011. Under FASB ASC 718-10-30-2, all share-based payments to employees, including
grants of employee stock options, are to be recognized in the income statement based on their fair values. Pro forma disclosure
is no longer an alternative.
Basic and Diluted Loss per Share
The basic net loss per common share is computed
by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed
by dividing the net loss adjusted on an “as if converted” basis by the weighted average number of common shares outstanding
plus potential dilutive securities. For the periods presented, potential dilutive securities had an anti-dilutive effect and were
not included in the calculation of diluted net loss per common share.
Recent Accounting Pronouncements
In February 2013, FASB issued Accounting Standards
Update (“ASU”) No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated
Other Comprehensive Income,” to improve the transparency of reporting these reclassifications. Other comprehensive income
includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later
reclassified out of accumulated other comprehensive income into net income. The amendments in ASU 2013-02 do not change the current
requirements for reporting net income or other comprehensive income in financial statements. All of the information that ASU 2013-02
requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP. The new amendments will require
an organization to:
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·
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Present (either
on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant
amounts reclassified out of accumulated other comprehensive income (but only if the item reclassified is required under U.S. GAAP
to be reclassified to net income in its entirety in the same reporting period); and
|
|
·
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Cross-reference
to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP)
to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion
of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g.,
inventory for pension-related amounts) instead of directly to income or expense.
|
The amendments apply to all public and private
companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all
reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012,
for public companies. The adoption of ASU No. 2013-02 has not had a material impact on our financial position or results of operations.
In January 2013, the FASB issued ASU No. 2013-01,
“Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,” which clarifies
which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11.
ASU 2013-01 addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed
unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope
of the offsetting disclosures, FASB determined that it could make them more operable and cost effective for preparers while still
giving financial statement users sufficient information to analyze the most significant presentation differences between financial
statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the amendments in this update
will be effective for fiscal periods beginning on or after January 1, 2013. The adoption of ASU 2013-01 has not had a material
impact on our financial position or results of operations.
Note 2 – Going Concern
As shown in the accompanying financial statements,
the Company has no revenues, incurred net losses from operations resulting in an accumulated deficit of $1,706,142, and a working
capital deficit of $141,081. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
Management is actively pursuing oil and gas production opportunities on the Leases. To that end, the Company has developed an initial
exploration plan to identify new drilling locations on the West Ranch Prospect. In addition, the Company is currently in search
of additional sources of capital to fund short term operations. The Company, however, is dependent upon its ability to secure equity
and/or debt financing and there are no assurances that the Company will be successful; therefore, without sufficient financing
it would be unlikely for the Company to continue as a going concern.
The financial statements do not include any
adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern.
The financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset
amounts, or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going
concern.
Note 3 – Related Party Transactions
Common Stock
On May 30, 2014, the Company issued 1,000,000
shares to Lawrence Pemble, our Chief Executive Officer pursuant to his employment agreement with the Company.
Employment Agreement
On May 29, 2014, the Company engaged Randall
Newton to fulfill the role of its Chief Financial Officer. Mr. Newton, age 53, is the managing member of Newton Collaboration,
LLC. Mr. Newton is a Certified Public Accountant in the State of Texas.
Mr. Newton’s engagement is governed by
a consulting agreement pursuant to which he will be paid $5,000 per month to provide the services of Chief Financial Officer. In
addition, Mr. Newton will be entitled to receive up to 1,050,000 shares of common stock, $0.001 par value per share, which will
be issued in 350,000 increments on May 29, 2015, 2016 and 2017. In the event the consulting agreement is terminated prior to an
issuance date, Mr. Newton will be entitled to receive a prorated portion of the unissued shares attributable to that period and
will forfeit his right to any remaining shares. The agreement has an initial term of one year and automatically renews annually
unless one party provides 30 days’ notice to the other party of his or its intent not to renew the consulting agreement.
In addition, either party may terminate the consulting agreement at any time, with or without cause, upon 30 days’ written
notice to the other party. The terms of Gray Fox’s arrangement with Mr. Newton are described in the consulting agreement
dated May 29, 2014, a copy of which is attached as Exhibit 10.1 to Form 8-K filed June 2, 2014 and is incorporated herein by reference.
Note 4 – Oil and Gas Properties
On December 2, 2013, the Company completed
the acquisition of 22 separate oil and gas leases issued by the BLM pursuant to a Lease Purchase Agreement with FFMJ. The
leased land comprises 32,723 acres in the Butte Valley Oil Play Region in North Central Nevada and excludes well or lease bonds
in place with the Nevada Division of Minerals and/or the BLM. The expiration dates of the Leases range from March 31, 2016 to July
31, 2017. The Company has a 100% working interest and an 82% net revenue interest in the Leases. The Company also agreed to assume
all rental payments due on the Leases starting on July 5, 2013. The aggregate purchase price of the Leases was $250,000. The Company
made the final payment of $75,000 into escrow on October 23, 2013 and requested approval from the BLM to the assignment of the
Leases from FFMJ to the Company. On December 2, 2013, the Company received confirmation of the BLM’s approval of the assignment
of the Leases. At that time, the money was released from escrow and the lease purchase was consummated. The Company’s entry
into the Lease Purchase Agreement was previously reported in Item 1.01 of the Current Report on Form 8-K, filed on July 10, 2013.
Pursuant to the Lease Purchase Agreement, the
Company was responsible for all filing and recording fees for BLM and relevant county recorder offices. The Lease Purchase Agreement
also provides that the Company must drill a test well with a surface and bottom hole location on the Leases for the purpose of
hydrocarbon exploration and production which must achieve a depth of 6,000 feet, or a depth as otherwise agreed to between the
Company and FFMJ. If the Company does not begin drilling with a rig capable of total depth on or before a certain deadline date,
the Leases will be reassigned to FFMJ. In our original agreement, that deadline date was July 5, 2015. On August 5, 2014, we amended
the original agreement to extend that deadline date until November 5, 2015.
We have recorded the $250,000 cash paid to
FFMJ to “Oil and Gas Properties”. In addition to the cash costs paid to acquire the Leases, we also included in the
acquisition cost a payment in the amount of $1,870 to the Office of Natural Resources Revenue of the State of Nevada, which represents
the state fee for transferring title to the property. Additionally, we capitalized into the purchase price of the Leases $154,500
associated with the issuance of 150,000 shares of Common Stock to a broker as a finder’s fee (See Note 7).
In addition to the above, since acquiring the
West Ranch Prospect, we have paid or incurred $153,120 in geological and geophysical costs and $66,965 of lease rentals.
The Company assesses exploration and evaluation
assets for impairment when facts and circumstances suggest that the carrying amount of an asset may exceed its recoverable amount,
which is generally defined as its future discounted cash flows. At March 31, 2014 and June 30, 2014, we had not yet conducted an
evaluation of the potential oil and gas reserves, if any, that may exist in the West Ranch Prospect, and therefore cannot estimate
future cash flows. Management is therefore unable to determine whether the carrying value of the West Ranch Prospect exceeds its
recoverable amount and have recorded an impairment expense against the full carrying value of the West Ranch Prospect. The amount
of this impairment was $602,919 for the year ended March 31, 2014 and $22,037 for the three months ended June 30, 2014.
Note 5 – Fair Value of
Financial Instruments
The Company adopted FASB ASC 820-10 upon inception
at September 22, 2011. Under FASB ASC 820-10-5, fair value is defined as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard
outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair
value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and
FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.
The Company has certain financial instruments
that must be measured under the new fair value standard. The Company’s financial assets and liabilities are measured using
inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted
prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Inputs include quoted prices
for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that
are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves,
etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market
corroborated inputs).
Level 3 - Unobservable inputs that
reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
The following schedule summarizes the valuation
of financial instruments at fair value on a recurring basis in the balance sheets as of June 30, 2014 and March 31, 2014, respectively:
|
Fair Value Measurements at June 30, 2014
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
$
|
–
|
|
$
|
–
|
|
$
|
–
|
Total assets
|
|
–
|
|
|
–
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accrued expenses, related party
|
|
–
|
|
|
17,496
|
|
|
–
|
Total liabilities
|
$
|
–
|
|
$
|
17,496
|
|
$
|
–
|
|
Fair Value Measurements at March 31, 2014
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
$
|
7,419
|
|
$
|
–
|
|
$
|
–
|
Total assets
|
|
7,419
|
|
|
–
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accrued expenses, related party
|
|
–
|
|
|
607
|
|
|
–
|
Total liabilities
|
$
|
–
|
|
$
|
607
|
|
$
|
–
|
The fair values of our related party debts
are deemed to approximate book value, and are considered Level 2 inputs as defined by ASC Topic 820-10-35.
There were no transfers of financial assets
or liabilities between Level 1, Level 2 and Level 3 inputs for the three months ended June 30, 2014 or the year ended March 31,
2014.
Note 6 – Stockholders’ Equity
The Company has authorized 75,000,000 shares
of common stock, $0.001 par value per share.
On June 18, 2013, the Company received approval
from FINRA to conduct an 8:1 forward stock split of the issued and outstanding shares of Common Stock whereby each outstanding
share of Common Stock was exchanged for eight new shares of Common Stock. On June 20, 2013, the Company effected the stock split,
which increased the issued and outstanding shares of Common Stock from 4,320,000 shares to 34,560,000 shares. The stock split has
been applied retrospectively as presented in these financial statements and all related disclosures.
Common Stock Issuances
On June 10, 2013, the Company entered into
an Agreement for Redemption of Shares of Common Stock, pursuant to which the Company redeemed 37,600,000 shares of Common Stock
held by Mr. Pemble, as adjusted for the 8:1 forward stock split completed on June 20, 2013. As a result of this redemption, Mr.
Pemble’s adjusted shareholdings decreased from 56,000,000 shares to 18,400,000 shares, which at that time represented approximately
53% of the total shares of Common Stock then issued and outstanding.
During the year ended March 31, 2014, we issued
1,230,000 shares of Common Stock in exchange for $730,000 in cash.
On December 13, 2013, we issued 150,000 shares
of Common Stock to a broker as a finder’s fee in exchange for services associated with our acquisition of the West Ranch
Prospect. We valued the shares at their fair values on the grant date and increased the acquisition price and carrying value of
the West Ranch Prospect by $154,500, subject to the property impairment as reported in Note 4.
On April 10, 2014, the Company 96,000 issued
shares to a single accredited investor for $80,000 in cash.
Common Stock Payable
On July 8, 2013, the Company entered into an
Employment Agreement with Lawrence Pemble regarding his position as President and Chief Executive Officer of the Company. Pursuant
to the Employment Agreement, Mr. Pemble will be entitled to receive 3,000,000 shares of Common Stock, which will be issued in increments
of 1,000,000 shares on May 31 in 2014, 2015 and 2016. We valued these shares at their fair values on the grant date, and valued
the total of the 3,000,000 shares at $1,500,000. We are amortizing the value of these shares at the greater of the amount vesting
or straight line (which, in this case, is the same). For the year ended March 31, 2014 and the three months ended June 30, 2014,
we have charged general and administrative expenses with $364,386 and $177,281, respectively, associated with Mr. Pemble’s
Employment Agreement. The amount accrued but not settled in common stock is included on the balance sheet as Common Stock Payable.
On May 29, 2014, the Company entered into an
employment agreement with Randall Newton to fulfill the role of its Chief Financial Officer. Pursuant to the agreement, Mr. Newton
will be entitled to receive up to 1,050,000 shares of common stock, $0.001 par value per share, which will be issued in 350,000
increments on May 29, 2015, 2016 and 2017. We valued these shares at their fair values on the grant date, and valued the total
of the 1,050,000 shares at $974,400. We are amortizing the value of these shares at the greater of the amount vesting or straight
line (which, in this case, is the same). For the three months ended June 30, 2014, we charged general and administrative expenses
with $27,067 associated with Mr. Newton’s Employment Agreement. The amount accrued but not settled in common stock is included
on the balance sheet as Common Stock Payable.
On May 30, 2014, we issued the first of three
issuances of 1,000,000 shares to Mr. Pemble pursuant to his employment agreement. In so doing, we decreased the stock payable to
him by $500,000.
Note 7 – Income Taxes
The Company accounts for income taxes under
FASB ASC 740-10, which requires use of the liability method. FASB ASC 740-10-25 provides that deferred tax assets and liabilities
are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial
reporting purposes, referred to as temporary differences.
For the three months ended June 30, 2014 and
the year ended March 31, 2014, the Company incurred net operating losses and, accordingly, no provision for income taxes has been
recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets.
At June 30 and March 31, 2014, the Company had approximately $504,089 and $409,787 of federal net operating losses, respectively.
The net operating loss carry forwards, if not utilized, will begin to expire in 2032.
The components of the Company’s deferred
tax asset are as follows:
|
|
June 30, 2014
|
|
|
March 31, 2014
|
|
|
|
|
|
|
|
|
Net operating loss carry-forwards
|
|
$
|
504,089
|
|
|
$
|
409,787
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/14
|
|
|
3/31/14
|
|
Deferred tax asset
|
|
|
176,431
|
|
|
|
143,425
|
|
Valuation allowance
|
|
|
(176,431
|
)
|
|
|
(143,425
|
)
|
Net deferred tax asset
|
|
$
|
–
|
|
|
$
|
–
|
|
Note 8 – Subsequent Events
On July 21, 2014, the Company entered into
a Securities Purchase Agreement with Rooftop Investments Ltd., a company organized under the laws of the Marshall Islands, pursuant
to which the Company issued 89,889 shares of Common Stock to the investor for an aggregate purchase price of $80,000, or $0.89
per share. The shares have not been registered with the Securities and Exchange Commission, or under any state securities laws,
and were issued in reliance on an exemption from registration provided by Regulation S promulgated under the Securities Act of
1933, as amended.
The proceeds from the sale will be used for
general administrative purposes and to finance the Company’s plan of operations related to the West Ranch Prospect.