Notes to the Consolidated Financial
Statements
Note 1 – Financial Statement Presentation
Organization and nature of operations
Victory Energy Corporation (OTCBB symbol
VYEY), formerly known as Victory Capital Holdings Corporation (the “Company”) was organized under the laws of the
State of Nevada on January 7, 1982, under the name All Things, Inc. On March 21, 1985 the Corporation’s name was changed
to New Environmental Technologies Corporation and on April 28, 2003 to Victory Capital Holdings Corporation. The name
was changed finally to Victory Energy Corporation on May 3, 2006.
The business of the Company is to acquire,
develop, produce and exploit oil and natural gas properties. The Company’s major oil and natural gas properties are located
in Texas. The Company’s executive offices are located in Newport Beach, California and its operations offices are located
in Austin, Texas.
The Company’s initial authorized
capital consisted of 100,000,000 shares of $0.001 par value common voting stock and, as of the date of this filing, has authorized
capital of 490,000,000 shares of $0.001 par value common stock.
Going Concern
As presented in the consolidated financial
statements, the Company has incurred a net loss of $3,953,697 during the twelve months ended December 31, 2011, and losses are
expected to continue in the near term. The accumulated deficit is $36,091,289 at December 31, 2011. The Company has
been funding its operations through the sale of senior convertible debentures. Management anticipates that significant additional
capital expenditures will be necessary to develop the Company’s oil and natural gas properties, which consist of proved
and unproved reserves, some of which may be non-producing, before significant positive operating cash flows will be achieved.
A significant share of losses incurred
in 2010 and 2011 are associated with general and administrative expenses involving legal fees related to the prosecution of a
malfeasance case against a former drilling contractor and other parties. Costs were also incurred related to the re-filing of
financial statements affected by these same irregularities. The Company’s prosecution of third parties for malfeasance was
successful and all filings with the SEC are current. The Company has an expanded portfolio of oil and gas properties now and a
plan for continued growth. Growth plans will require continued capital infusions beyond earnings from operations. Without additional
outside investment from the sale of equity securities or debt financing operating activities and overhead expenses will be reduced
to a pace that available operating cash flows will support.
The accompanying consolidated financial
statements are prepared as if the Company will continue as a going concern. The consolidated financial statements do not contain
adjustments, including adjustments to recorded assets and liabilities, which might be necessary if the Company were unable to
continue as a going concern.
Note 2 – Summary of Significant Accounting Policies
Principles of consolidation
The accompanying consolidated financial
statements are presented in accordance with accounting principles generally accepted in the United States of America. The
consolidated financial statements include the accounts of the Company and Aurora Energy Partners, A Texas General Partnership.
The Company holds a 50% equity interest in Aurora Energy Partners. Since the Company serves as managing partner and is responsible
for managing all business operations of the partnership, the financial statements of Aurora have been consolidated with the Company.
All significant intercompany transactions have been eliminated. The consolidated financial statements reflect necessary adjustments,
all of which were of a recurring nature and are in the opinion of management necessary for a fair presentation.
Reclassification
Some balances on the prior’s year’s
consolidated financial statements have been reclassified to conform to the current year presentation.
Property and equipment
Property and equipment are recorded at
cost. Cost of repairs and maintenance are expensed as they are incurred. Major repairs that extend the useful life of equipment
are capitalized and depreciated over the remaining estimated useful life. When property and equipment are sold or otherwise disposed,
the related costs and accumulated depreciation are removed from the respective accounts and the gains or losses realized on the
disposition are reflected in operations. The Company uses the straight-line method in computing depreciation for financial reporting
purposes.
Revenue Recognition
The Company uses the sales method of accounting
for oil and natural gas revenues. Under this method, revenues are recognized based on actual volumes of gas and oil sold to purchasers.
The volumes sold may differ from the volumes to which the company is entitled based on our interests in the properties. Differences
between volumes sold and entitled volumes create oil and gas imbalances which are generally reflected as adjustments to reported
proved oil and gas reserves and future cash flows in their supplemental oil and gas disclosures. If their excess takes of natural
gas or oil exceed their estimated remaining proved reserves for a property, a natural gas or oil imbalance liability is recorded
in the consolidated balance sheet.
Allowance for Doubtful Accounts
The Company recognizes an allowance for
doubtful accounts to ensure trade receivables are not overstated due to uncollectability. Bad debt reserves are maintained for
all customers based on a variety of factors, including the length of time receivables are past due, macroeconomic conditions,
significant one-time events and historical experience. An additional reserve for individual accounts is recorded when they become
aware of a customer's inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration
in the customer's operating results or financial position. If circumstances related to customers change, estimates of the recoverability
of receivables would be further adjusted.
Fair Value of Financial Instruments
The Company’s financial instruments
consist of cash and cash equivalents, accounts receivable, other assets, fixed assets, accounts payable, accrued liabilities and
short-term debt. The estimated fair value of cash, accounts receivable, other assets, accounts payable and accrued
liabilities approximated their carrying amounts due to the short-term nature of these instruments. The carrying value
of short-term debt also approximates fair value since their terms are similar to those in the lending market for comparable loans
with comparable risks. None of these instruments are held for trading purposes.
The Company utilizes various types of
financing to fund its business needs, including debt with warrants attached and other instruments indexed to its stock. The
Company reviews its warrants and conversion features of securities issued as to whether they are freestanding or contain an embedded
derivative and if so, whether they are classified as a liability at each reporting period until the amount is settled and reclassified
into equity with changes in fair value recognized in current earnings.
Inputs used in the valuation to derive
fair value are classified based on a fair value hierarchy which distinguishes between assumptions based on market data (observable
inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
|
•
|
Level one
– Quoted market prices in active markets for identical
assets or liabilities;
|
|
•
|
Level two
- Inputs other than level one inputs that are either directly or indirectly
observable; and
|
|
•
|
Level three
– Unobservable inputs developed using estimates and assumptions,
which are developed by the reporting entity and reflect those assumptions that a market participant would use.
|
Determining which category an asset or
liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures
each quarter. The following table presents all assets that were measured and recognized at fair value as of December
31, 2011 and 2010, and for the twelve months then ended on a non-recurring basis. The assets shown below were presented at fair
value due to the impairment analysis indicating an estimated fair value below the carrying value for the proved oil and gas properties.
Fair value of assets measured and recognized
at fair value on a non-recurring basis as of December 31, 2011 and 2010 were as follows:
As of December 31, 2011 and for the year
then ended:
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Realized
(Loss) Due to
Valuation
|
|
|
Total
Unrealized
(Loss)
|
|
Proved Oil and Gas Properties (net)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
557,034
|
|
|
$
|
(102,579
|
)
|
|
$
|
—
|
|
Totals
|
|
|
|
|
|
$
|
|
$—
|
|
$
|
557,034
|
|
|
$
|
(102,579
|
)
|
|
$
|
—
|
|
As of December 31, 2010 and for the year
then ended:
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Realized
(Loss) Due to
Valuation
|
|
|
Total
Unrealized
(Loss)
|
|
Proved Properties (net)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
538,729
|
|
|
$
|
(183,473
|
)
|
|
$
|
—
|
|
Totals
|
|
|
|
|
|
$
|
|
$—
|
|
$
|
538,729
|
|
|
$
|
(183,473
|
)
|
|
$
|
—
|
|
The Company valued the Proved Properties
at their fair value in accordance with the applicable Financial Accounting Standards Board (“FASB”) standard due to
the impairment indicators prevalent as of December 31, 2011 and 2010. The inputs that were used in determining the fair value
of these assets were Level 3 inputs. These inputs consist of but are not limited to the following: estimates of reserve quantities,
estimates of future production costs and taxes, estimates of consistent pricing of commodities, 10% discount rate, etc. Impairment
expense was recorded at both year ends at the amount the carrying value of the assets exceeded their estimated fair values as
of December 31, 2011 and 2010.
Recent Accounting Pronouncements
Recently Issued Accounting Standards
In September 2011, the FASB issued Accounting Standard Update
(“ASU”) No. 2011-08, Intangible – Goodwill and Other (Topic 350), Testing Goodwill for Impairment. Under
the amendments of this ASU, an entity has the option to first assess qualitative factors to determine whether the existence of
events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less
than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely
than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test
is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment
test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting
unit, as described in paragraph 350-20-35-4. If the carrying amount of a reporting unit exceeds its fair value, then the entity
is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if
any, as described in paragraph 350-20-35-9. Under the amendments in this Update, an entity has the option to bypass the qualitative
assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment
test. An entity may resume performing the qualitative assessment in any subsequent period. This ASU is effective for annual and
interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company is evaluating the
impact of the adoption of this ASU.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive
Income (Topic 220), Presentation of Comprehensive Income. Under the amendments of this ASU, an entity has the option to present
the total of comprehensive income, the components of net income, and the components of other comprehensive income either
in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity
is required to present each component of net income along with total net income, each component of other comprehensive income
along with a total for other comprehensive income, and a total amount for comprehensive income. In a single continuous statement,
the entity is required to present the components of net income and total net income, the components of other comprehensive income
and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement
approach, an entity is required to present components of net income and total net income in the statement of net income. The statement
of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive
income and a total for other comprehensive income, along with a total for comprehensive income. This ASU is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2011. The Company is evaluating the impact of the
adoption of this ASU.
In December 2010, the FASB issued
ASU No. 2010-13, Compensation—Stock Compensation (Topic 718), Effect of Denominating the Exercise Price of a Share-Based
Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades.
This
ASU provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated
in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered
to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an
award as a liability if it otherwise qualifies as equity. This ASU is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2010. The adoption of this standard did not have a significant impact on the
Company’s financial statements.
In December 2010, the FASB issued ASU No. 2010-28, Intangibles
– Goodwill and Other (Topic 350), When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or
Negative Carrying Amounts. The ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying
amounts. As a result, current GAAP will be improved by eliminating an entity’s ability to assert that a reporting unit is
not required to perform Step 2 because the carrying amount of the reporting unit is zero or negative despite the existence of
qualitative factors that indicate the goodwill is more likely than not impaired. As a result, goodwill impairments may be reported
sooner than under current practice. This ASU is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2010. The adoption of this standard did not have a significant impact on the Company’s financial statements.
In April 2010, the FASB issued Accounting
Standards Update (“ASU”) No. 2010-14, “Accounting for Extractive Activities – Oil & Gas, Amendments
to Paragraph 932-10-S99-1” due to SEC Release No. 33-8995 (FR 78), “Modernization of Oil and Gas Reporting”.
This amendment was effective January 1, 2010 and has been adopted by the Company in the presentation of the financial statements.
In January 2010, the FASB issued ASU No.
2010-16, “Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements”.
ASU 2010-16 will require the reporting entity to 1) disclose separately the amounts of significant transfers in and out of Level
1 and Level 2 fair value measurements and describe the reasons for the transfers and 2) present separately information about purchases,
sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level
3), This ASU also clarifies existing disclosures about levels of disaggregation and about inputs and valuation techniques. This
ASU is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements which are effective
for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal periods. The Company has adopted
the provisions of the ASU that were effective for reporting periods beginning after December 15, 2009 and it is current assessing
the impact of the Level 3 disclosures. This standard did not have a significant impact on the Company’s financial statements.
In January 2010, the FASB issued ASU No.
2010-03,
“Extractive Activities – Oil and Gas (Topic 932) – Oil and Gas Reserve Estimation and Disclosures”.
The ASU expands and amends certain definition of terms used in the Topic, requires an entity to disclosure separately information
about reserve quantities and financial statements amounts for geographic areas that represent 15 percent or more of proved reserves,
clarifies that an entity’s equity method investments must be considered in determining whether it has significant oil –
and gas- producing activities, required that an entity continue to disclosure separately the amounts and quantities for consolidated
and equity method investments and requires that disclosures about equity method investments be in the same level of detail as
is required for consolidated investments. Amendments to this Topic are effective to annual reporting periods ending on or after
December 31, 2009. This standard did not have a significant impact on the Company’s financial statements.
In October 2009, the FASB issued
an amendment to the accounting standards related to the accounting for revenue in arrangements with multiple deliverables including
how the arrangement consideration is allocated among delivered and undelivered items of the arrangement. Among the
amendments, this standard eliminates the use of the residual method for allocating arrangement consideration and requires an entity
to allocate the overall consideration to each deliverable based on an estimated selling price of each individual deliverable in
the arrangement in the absence of having vendor-specific objective evidence or other third party evidence of fair value of the
undelivered items. This standard also provides further guidance on how to determine a separate unit of accounting in
a multiple-deliverable revenue arrangement and expands the disclosure requirements about the judgments made in applying the estimated
selling price method and how those judgments affect the timing or amount of revenue recognition. This standard will
become effective for the Company on January 1, 2011 and did not have a significant impact on the Company’s financial statements.
In August 2009, the FASB issued an amendment
to the accounting standards related to the measurement of liabilities that are recognized or disclosed at fair value on a recurring
basis. This standard clarifies how a company should measure the fair value of liabilities and that restrictions preventing
the transfer of a liability should not be considered as a factor in the measurement of liabilities within the scope of this standard. This
standard was effective for the Company on October 1, 2009. This standard did not have a significant impact on the Company’s
financial statements.
Concentrations
There is a ready market for the sale of
crude oil and natural gas. During 2011 and 2010, our gas field and our producing wells sold their respective gas and oil production
to one purchaser for each field or well. However, because alternate purchasers of oil and natural gas are readily available at
similar prices, we believe that the loss of any of our purchasers would not have a material adverse effect on our financial results
Accounting estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the periods reported. Actual results could differ
from these estimates.
Significant estimates include volumes
of oil and natural gas reserves used in calculating depletion of proved oil and natural gas properties, future net revenues and
abandonment obligations, impairment of proved and unproved properties, future income taxes and related assets and liabilities,
the fair value of various common stock, warrants and option transactions, and contingencies. Oil and natural gas reserve estimates,
which are the basis for unit-of-production depletion and the calculation of impairment, have numerous inherent uncertainties.
The accuracy of any reserve estimate is a function of the quality of available data, the engineering and geological interpretation
and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify revision of such
estimate. Accordingly, reserve estimates are often different from the quantities of oil and natural gas that are ultimately recovered. In
addition, reserve estimates are vulnerable to changes in wellhead prices of crude oil and natural gas. Such prices have been volatile
in the past and can be expected to be volatile in the future.
These significant estimates are based
on current assumptions that may be materially affected by changes to future economic conditions such as the market prices received
for sales of volumes of oil and natural gas, interest rates, the fair value of the Company’s common stock and corresponding
volatility, and the Company’s ability to generate future taxable income. Future changes to these assumptions may affect
these significant estimates materially in the near term.
Oil and natural gas properties
The Company accounts for its oil and natural
gas properties using the successful efforts method of accounting. Under this method, all costs associated with property acquisitions,
successful exploratory wells, all development wells, including dry hole development wells, and asset retirement obligation assets
are capitalized. Additionally, interest is capitalized while wells are being drilled and the underlying property is in development.
Costs of exploratory wells are capitalized pending determination of whether each well has resulted in the discovery of proved
reserves. Oil and natural gas mineral leasehold costs are capitalized as incurred. Items charged to expense generally include
geological and geophysical costs, costs of unsuccessful exploratory wells, and oil and natural gas production costs. Capitalized
costs of proved properties including associated salvage are depleted on a well-by-well or field-by-field (common reservoir) basis
using the units-of-production method based upon proved producing oil and natural gas reserves. The depletion rate is the current
period production as a percentage of the total proved producing reserves. The depletion rate is applied to the net book value
of property costs to calculate the depletion expense. Proved reserves materially impact depletion expense. If the proved reserves
decline, then the depletion rate (the rate at which we record depletion expense) increases, reducing net income. Dispositions
of oil and natural gas properties are accounted for as adjustments to capitalized costs with gain or loss recognized upon sale. A
gain (loss) is recognized to the extent the sales price exceeds or is less than original cost or the carrying value, net of impairment. Oil
and natural gas properties are also subject to impairment at the end of each reporting period. Unproved property costs are excluded
from depletable costs until the related properties are developed. See impairment discussed in “Long-lived assets and intangible
assets” below.
We depreciate other property and equipment
using the straight-line method based on estimated useful lives ranging from five to 10 years.
Long-lived assets and intangible assets
The Company accounts for intangible assets
in accordance with the applicable ASC. Intangible assets that have defined lives are subject to amortization
over the useful life of the assets. Intangible assets held having no contractual factors or other factors limiting the useful
life of the asset are not subject to amortization but are reviewed at least annually for impairment or when indicators suggest
that impairment may be needed. Intangible assets are subject to impairment review at least annually or when there is
an indication that an asset has been impaired. While there are prospects for possible capital funding (either debt or equity),
much is left to the market and outside instability. As such, at this time, management cannot anticipate with a comfortable
degree of certainty if the appropriate amount of funding will be achieved and any funding will be diverted fully to its E&P
activities. This will further postpone the Company’s ability to dedicate financial as well as human resources
to its technology division in the short term future. As such, the Company has eliminated the division entirely.
For unproved property costs, management
reviews these investments for impairment on a property-by-property basis if a triggering event should occur that may suggest that
impairment may be required.
The Company reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
If the carrying amount of the asset, including any intangible assets associated with that asset, exceeds its estimated future
undiscounted net cash flows, the Company will recognize an impairment loss equal to the difference between its carrying amount
and its estimated fair value. The fair value used to calculate the impairment for producing oil and natural gas field that produces
from a common reservoir is first determined by comparing the undiscounted future net cash flows associated with total proved properties
to the carrying value of the underlying evaluated property. If the cost of the underlying evaluated property is in excess of the
undiscounted future net cash flows, the future net cash flows are discounted at 10%, which the Company believes approximates fair
value, to determine the amount of impairment.
The Company recorded $102,579 and $183,473
for 2011 and 2010 respectively, upon determining that the oil and gas projects required impairment.
Asset retirement obligation
In accordance with the applicable ASC,
the Company recognizes the fair value of the liability for asset retirement costs in an entity’s balance sheet,
as both a liability and an increase in the carrying values of such assets, in the periods in which such liabilities can be reasonably
estimated. The present value of the estimated future asset retirement obligation (“ARO”), as of the date of acquisition
or the date at which a successful well is drilled, is capitalized as part of the costs of proved oil and natural gas properties
and recorded as a liability. The asset retirement costs are depleted over the production life of the oil and natural gas property
on a unit-of-production basis.
The ARO is recorded at fair value and
accretion expense is recognized as the discounted liability and 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, 2011 and 2010.
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Asset retirement obligation at beginning of period
|
|
$
|
27,282
|
|
|
$
|
34,977
|
|
Liabilities incurred
|
|
|
1,269
|
|
|
|
-
|
|
Revisions to previous estimates
|
|
|
-
|
|
|
|
(10,247
|
)
|
Accretion expense
|
|
|
1,453
|
|
|
|
2,552
|
|
Asset retirement obligation at end of period
|
|
$
|
30,004
|
|
|
$
|
27,282
|
|
Income taxes
The Company accounts for income taxes
in accordance with ASC 740 “Income Taxes” which requires an asset and liability approach for financial accounting
and reporting of income taxes. Deferred income taxes reflect the impact of temporary differences between the
amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Deferred
tax assets include tax loss and credit carry forwards and are reduced by a valuation allowance if, based on available evidence,
it is more likely than not that some portion or all of the deferred tax assets will not be realized.
On January 1, 2007, the Company adopted
the Financial Accounting Standards Board (“FASB”) Interpretation on accounting for uncertainty in income taxes. The
interpretation prescribes a measurement process for recording in the financial statements uncertain tax positions taken or expected
to be taken in a tax return. Additionally, the interpretation provides guidance regarding uncertain tax positions relating
to derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The
Company will classify any interest and penalties associated with income taxes as interest expense.
Stock based compensation
Beginning January 1, 2006, the Company
adopted the FASB standard for accounting for stock based compensation to account for its issuance of options and warrants to key
partners, directors and officers. The standard requires all share-based payments, including employee stock options, warrants and
restricted stock, be measured at the fair value of the award and expensed over the requisite service period (generally the vesting
period). The fair value of options and warrants granted to key partners, directors and officers is estimated at the date of grant
using the Black-Scholes option pricing model by using the historical volatility of the Company’s stock price. The calculation
also takes into account the common stock fair market value at the grant date, the exercise price, the expected life of the common
stock option or warrant, the dividend yield and the risk-free interest rate.
The Company from time to time may issue
stock options, warrants and restricted stock to acquire goods or services from third parties. Restricted stock, options or warrants
issued are recorded on the basis of their fair value, which is measured as of the date issued. The options or
warrants are valued using the Black-Scholes option pricing model on the basis of the market price of the underlying equity instrument
on the “valuation date,” which for options and warrants related to contracts that have substantial disincentives to
non-performance, is the date of the contract, and for all other contracts is the vesting date. Expense related to the options
and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the
vesting period.
The Company recognized stock-based directors
fee and service incentive fee compensation expense from warrants granted to directors for the year ended December 31, 2011 and
2010 of $312,000 and $14,070, respectively.
The Company recognized stock-based officer
compensation expense from stock options granted to officers of the company for the twelve months ended December 31, 2011 and 2010
of $152,700 and $0 respectively.
Earnings per share
Basic earnings per share are computed
using the weighted average number of common shares outstanding. Diluted earnings per share reflect the potential dilutive effects
of common stock equivalents such as options, warrants and convertible securities. Due to the Company incurring a net loss from
continuing operations during the twelve months ended December 31, 2011 and 2010, basic and diluted net loss per share are
the same as all potentially dilutive common stock equivalents are anti-dilutive.
Note 3 – Oil and natural gas properties
Oil and natural gas properties are comprised
of the following:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Option to acquire oil and mineral lease
|
|
$
|
—
|
|
|
$
|
25,000
|
|
Land
|
|
|
101,259
|
|
|
|
—
|
|
Drilling and work in process
|
|
|
268,436
|
|
|
|
—
|
|
Proved property – purchased gas wells
|
|
|
3,015,322
|
|
|
|
3,015,322
|
|
Proved property – drilled gas wells
|
|
|
1,753,026
|
|
|
|
1,753,026
|
|
Producing oil wells
|
|
|
219,700
|
|
|
|
—
|
|
Total oil and natural gas properties, cost
|
|
|
5,357,743
|
|
|
|
4,793,348
|
|
Less: accumulated depreciation , depletion and impairment
|
|
|
(4,431,014
|
)
|
|
|
(4,254,619
|
)
|
Oil and natural gas properties, net
|
|
$
|
926,729
|
|
|
$
|
538,729
|
|
Depletion expense for the years ended
December 31, 2011 and 2010 was $73,816 and $99,932, respectively. During the years ended December 31, 2011 and 2010, the Company
recorded impairment losses of $73,816 and $183,472 respectively.
Note 4 – Unsecured notes payable
to related parties
Unsecured notes payable to related parties
were as follows:
|
|
December 31
|
|
|
|
2011
|
|
|
2010
|
|
Note payable to an affiliate
of a shareholder and director, unsecured, 10% interest payable at maturity due on March 31, 2011 was paid on March 25, 2011
plus accrued interest of $10,274
|
|
|
-
|
|
|
|
50,000
|
|
Total notes payable to related parties
|
|
$
|
-
|
|
|
$
|
50,000
|
|
Note 5 – Line of credit payable
to Wells Fargo Bank
On October 7, 2008, the Company executed
an unsecured Business Line of Credit Agreement with Wells Fargo Bank, National Association. The Credit Agreement provides the
Company with a line of credit facility in the aggregate amount of $96,761. Interest on the loan is payable monthly, at the rate
of 10.0% per annum. The line of credit was personally guaranteed by the Company’s former CEO and shareholder.
During the three months ended December
31, 2010, the Company defaulted on its monthly loan payments to Wells Fargo Bank and the loan was referred to the Wells Fargo
Bank’s workout department. The balance outstanding, including accrued interest was $68,667 as of December 31, 2010. The
Company negotiated an informal repayment program with the Wells Fargo Bank’s workout department whereby the Wells Fargo
Bank did not institute collection actions provided the Company made monthly principal payments of $2,200 to Wells Fargo Bank.
The note was settled for cash on August 4, 2011.
Note 6 – Separation Settlement Payable to former officer
and shareholder
On May 15, 2009, the Company entered into
a “Separation Agreement and General Release of Claims” with Jon Fullenkamp (“Fullenkamp”) and the Virgin
Family Trust. The terms of the Agreement include (a) termination of an employment agreement between the Company and
Fullenkamp; (b) payment of all accrued salaries, unreimbursed expenses, and shareholder advances previously made by Fullenkamp;
(c) reduction of shareholder advances from estimated balance owed at the time of settlement of $1,665,375 to a balance of $500,000
(the “Separation Settlement”); (d) Payment terms of the Separation Settlement of $10,000 monthly commencing June 1,
2009, and payable over a fifty (50) month period, including imputed interest at the rate of 3.52% per annum; (e) cancellation
of 2,000,000 shares of preferred stock, convertible at the rate of 100 shares of common, (d) lockup agreement with respect to
all shares owned directly or indirectly by Fullenkamp for a period of five years, (e) Fullenkamp was to cooperate with the Company
to recover misappropriated funds and agreed to bring litigation or induce others to bring litigation against the Company.
At the time of the agreement, Fullenkamp
was owed the sum of approximately $1,665,375 in shareholder advances which were settled for $500,000, resulting in a gain on the
settlement of this debt of $1,199,748. After the first payment of $10,000 the company recorded a discount of 3.25%
on $490,000, the minimum federal rate in the amount of $34,373 against the note. The discount is amortized to interest expense
over the period of estimated maturity. During the year ended December 31, 2009, the Company recorded interest expense of $8,997
and the note had an unamortized discount of $24,476. During the year ended December 31, 2009, the Company paid $51,004 of the
principal of the Separation Settlement, reducing the outstanding balance as of December 31, 2009 to $404,623.
During the year ended December 31, 2009,
Fullenkamp filed a lawsuit against the Company. The Company subsequently filed a lawsuit against Fullenkamp and others on January
19, 2010, in Midland County, Texas.
On March 24, 2011 the Company, James Capital
Energy, LLC and other related parties entered into a comprehensive Settlement Agreement with Jon Fullenkamp. Under
the Settlement Agreement, Victory agreed to i) dismiss Jon Fullenkamp from the Texas lawsuit with prejudice, ii) provide him with
a general release from all acts related thereto, and iii) pay him $30,000 over 70 days. In turn, Jon Fullenkamp agreed
to i) dismiss with prejudice the lawsuit he filed against the Company and others in California; ii) transfer to Victory 2,000,000
shares of Victory preferred stock for cancellation; iii) transfer to Victory 400,000 warrants for Victory common stock; iv) transfer
to James Capital Energy, LLC 16,144,563 shares of Victory common stock; v) voluntarily appear for his deposition to discuss events
that occurred at the Adams-Baggett Ranch; vi) waive the claim he had to the $430,000 severance payment under the May 15, 2009
Separation Agreement; and vii) provide Victory James Capital Energy, LLC and other related parties with a general release.
Note 7 – Senior Secured Convertible Debentures
Between October 15, 2010 and December
31, 2011, the Company entered into agreements with 56 accredited investors for the cash sale by the Company of an aggregate of
$3,395,000 of 10% Senior Secured Convertible Debentures (the “Debentures”) which are convertible into an aggregate
of 679,000,000 shares of the Company’s common stock at a conversion price of $0.005 per share of common stock, subject
to adjustment. .
The maturity date of the Debentures is
September 30, 2013, but may be extended at the sole discretion of the Company to December 31, 2013. The Debentures are immediately
convertible by the holder into shares of the Company’s common stock at a conversion price of $0.005 per share, subject to
customary adjustments for stock splits, stock dividends, recapitalizations and the like. The Company has the right to force
conversion of the Debenture if, among other things, the closing sales price of the Company’s common stock is equal to or
exceeds $0.025 for twenty (20) consecutive trading days. In connection with this offering, the Company also issued five
(5) year warrants to purchase an aggregate of 3,395,000 shares of the Company’s common stock at an exercise price of $0.005
per share, subject to adjustment, to the investors. There are no registration rights for the converted shares
The cash proceeds of $3,395,000 were allocated
to working capital. The Debentures are secured under the terms of a Security Agreement by a security interest in all
of the Company’s personal property. The relative fair value of the warrants and beneficial conversion features of the debentures
were determined at the time of issuance using the methodology prescribed by current accounting guidance.
On December 31, 2010, the Company exchanged
notes payable of $497,000 and accrued interest of $55,275 both due to a related party for $552,275 of the Company’s 10%
Senior Secured Convertible Debenture.
With each issuance, the Company determined
the fair value of the appropriate beneficial conversion feature and the warrants issued using the Black-Scholes option pricing
model assuming a 5 year life, and appropriate risk free rate, the appropriate volatility rate and a dividend rate of zero. The
following table summarizes these data.
|
|
|
|
|
Black-Scholes Values
|
|
Beneficial
|
|
Quarter
|
|
Raised or
|
|
|
Risk Free
|
|
Strike
|
|
|
|
|
Volatility
|
|
Conversion
|
|
Ending
|
|
Exchanged
|
|
|
Rate Range
|
|
Price
|
|
|
Life
|
|
Range
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2010
|
|
$
|
827,275
|
|
|
1.74% - 2.09%
|
|
|
0.005
|
|
|
5 Years
|
|
620.2% - 671.5%
|
|
$
|
700,708
|
|
3/31/2011
|
|
$
|
910,000
|
|
|
1.93% - 2.40%
|
|
|
0.005
|
|
|
5 Years
|
|
674.5% - 678.7%
|
|
$
|
910,000
|
|
6/30/2011
|
|
$
|
882,500
|
|
|
1.47% - 2.31%
|
|
|
0.005
|
|
|
5 Years
|
|
679.1% - 682.9%
|
|
$
|
882,500
|
|
9/30/2011
|
|
$
|
477,500
|
|
|
.85% - 1.74%
|
|
|
0.005
|
|
|
5 Years
|
|
682.9% - 688.7%
|
|
$
|
477,500
|
|
12/31/2011
|
|
$
|
850,000
|
|
|
.81% - 1.08%
|
|
|
0.005
|
|
|
5 Years
|
|
673.3% - 697.2%
|
|
$
|
850,000
|
|
|
|
$
|
3,947,275
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,820,708
|
|
Converted
|
|
|
(1,112,500
|
)
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
(1,618,467
|
)
|
Outstanding
|
|
$
|
2,834,775
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,202,241
|
|
The senior secured convertible debentures consist of the following
at December 31:
|
|
2011
|
|
|
2010
|
|
Convertible debenture, interest at 10% per annum payable quarterly, due September
30, 2013 with separable warrants
|
|
$
|
3,395,000
|
|
|
$
|
275,000
|
|
Convertible debenture, interest at 10% per annum payable quarterly, due
September 30, 2013 issued in exchange for notes payable and accrued interest to related party
|
|
|
552,275
|
|
|
|
552,275
|
|
Subtotal
|
|
|
3,947,275
|
|
|
|
827,275
|
|
Converted to common stock
|
|
|
(1,112,500
|
)
|
|
|
|
|
Subtotal
|
|
|
2,834,775
|
|
|
|
827,275
|
|
Unamortized debt discount
|
|
|
(2,202,241
|
)
|
|
|
(699,937
|
)
|
Net book value
|
|
$
|
632,534
|
|
|
$
|
127,338
|
|
Amortization of debt discount totaled
$714,788 and $811 for the years ended December 31, 2011 and 2010, respectively.
Note 8 – Liability for Unauthorized Preferred Stock
Issued
During the year ended December 31, 2006,
the Company authorized 10,000,000 shares of Preferred Stock, convertible to common stock at the rate of 100 shares of common for
every share of preferred. During 2006, the Company issued 715,517 shares of this preferred stock for cash of $246,950. The
Company subsequently issued additional preferred stock and had several preferred shareholders converted their shares into common
stock during the years ended December 31, 2009, 2008, and 2007.
During the course of the Company’s internal
investigation, it was determined by the Company’s legal counsel that the preferred shares had not been duly authorized by
the State of Nevada. Since the Company had issued and received consideration for the preferred stock, notwithstanding that the
stock was not legally authorized, the Company reclassified the preferred stock into a liability and does not present preferred
stock in the equity section of the balance sheet. The Company has offered to settle the debt with the remaining holders of the
unauthorized preferred stock by honoring the terms of conversion of one share of preferred into 100 shares of common stock. The
Company intends to cancel the preferred stock once all remaining preferred stockholders have converted.
On April 25, 2011, 155,000 shares of the
Companies preferred stock held by three affiliates of the Company were converted to 15,500,015 shares of the Company’s common
stock in accordance with the terms on which such preferred stock has been converted.
There were 238,966 and 393,966 shares
of unconverted preferred stock outstanding at December 31, 2011 and 2010, respectively.
The remaining liability for the unconverted
preferred stock is based on the original cash tendered and consisted of the following as of:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Liability for unauthorized preferred stock
|
|
$
|
32,164
|
|
|
$
|
85,654
|
|
Note 9 – Income Taxes
The provision for (benefit of) income taxes for the years ended
December 31, 2011 and 2010 consists of the following:
|
|
2011
|
|
|
2010
|
|
Current Tax Expense
|
|
$
|
|
|
|
$
|
0
|
|
Federal
|
|
|
0
|
|
|
|
0
|
|
State
|
|
|
0
|
|
|
|
0
|
|
|
|
|
0
|
|
|
|
0
|
|
Deferred Tax Expense
|
|
|
0
|
|
|
|
|
|
Federal
|
|
|
(1,170,892
|
)
|
|
|
0
|
|
State
|
|
|
0
|
|
|
|
0
|
|
|
|
|
(1,170,892
|
)
|
|
|
0
|
|
Change in Valuation
|
|
|
(550,292
|
)
|
|
|
0
|
|
Total Tax Benefit
|
|
$
|
(550,292
|
)
|
|
$
|
0
|
|
The Internal Revenue Code of 1986, as
amended, imposes substantial restrictions on the utilization of net operating losses in the event of an “ownership change”
of a corporation. Accordingly, a company’s ability to use net operating losses may be limited as prescribed
under Internal Revenue Code Section 382 (“IRC Section 382”). Events which may cause limitations in the
amount of the net operating losses that the company may use in any one year include, but are not limited to, a cumulative ownership
change of more than 50% over a three-year period. There have been transactions that have changed the Company’s
ownership structure since inception that may have resulted in one or more ownership changes as defined by the Internal Revenue
Code of 1986.
At December 31, 2011 and 2010, the Company
had available Federal and state net operating loss and capital loss carry forwards to reduce future taxable income. The net operating
loss carryovers available were approximately $13,130,000 and $2,896,000 at December 31, 2011 and 2010, respectively. The Federal
net operating loss carry forward begins to expire in 2025. Capital loss carryovers may only be used to offset capital gains. The
last of the capital loss carryover available was $50,900 and expired in 2010.
Given the Company’s history of net
operating losses, management has determined that it is more-likely-than-not the Company will not be able to realize the tax benefit
of the carry forwards. Current standards require that a valuation allowance be established when it is more likely than not that
all or a portion of deferred tax assets will not be realized.
Accordingly, the Company has recorded
a full valuation allowance against its net deferred tax assets at December 31, 2011 and 2010. Upon the attainment of taxable income
by the Company, management will assess the likelihood of realizing the tax benefit associated with the use of the carry forwards
and will recognize a deferred tax asset at that time. For the years ended December 31, 2011 and 2010, the valuation allowance
increased by $620,600 and $35,500, respectively.
Significant components of the Company’s deferred income
tax assets are as follows:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Net operating and capital loss carry forwards
|
|
$
|
4,464,000
|
|
|
$
|
984,600
|
|
Property
|
|
|
151,700
|
|
|
|
156,100
|
|
Accounts payable and accrued expenses
|
|
|
23,000
|
|
|
|
15,500
|
|
Malfeasance Loss
|
|
|
0
|
|
|
|
265,700
|
|
Equity based compensation
|
|
|
1,460,400
|
|
|
|
4,130,700
|
|
AR and prepaid expenses
|
|
|
(6,400
|
)
|
|
|
(3,800
|
)
|
Valuation discount
|
|
|
(6,092,700
|
)
|
|
|
(5,472,100
|
)
|
Debt discount
|
|
|
(748,762
|
)
|
|
|
(238,000
|
)
|
Deferred income
|
|
|
—
|
|
|
|
(76,700
|
)
|
Net deferred income tax liability
|
|
$
|
(748,762
|
)
|
|
$
|
(238,000
|
)
|
Reconciliation of the effective income tax rate to the
U.S. statutory rate is as follows:
|
|
December 31
|
|
|
|
2011
|
|
|
2010
|
|
Tax benefit at the U.S. statutory income tax
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income tax net of federal benefit
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Permanent differences
|
|
|
(8.0
|
)%
|
|
|
(24.2
|
)%
|
Expiration of loss carryovers
|
|
|
(0.0
|
)%
|
|
|
(3.2
|
)%
|
Change in valuation allowance
|
|
|
(13.8
|
)%
|
|
|
(6.6
|
)%
|
Effective tax rate
|
|
|
12.2
|
%
|
|
|
0.0
|
%
|
The Company adopted authoritative guidance in accordance with
GAAP which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded
in the financial statements. Under the current accounting guidelines, the Company may recognize the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should
be measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement.
Current accounting guidelines also provide guidance on derecognition, classification, interest and penalties on income taxes,
accounting in interim periods and require increased disclosures. At the date of adoption, and as of December 31, 2010 and 2009
the Company does not have a liability for unrecognized tax benefits.
Note 10 – Stockholders’ Equity
For the year ended December 31, 2011
Common stock
On June 30, 2011, $1,112,500 of the 10%
Senior Secured Convertible Debentures plus accrued interest of $37,928 were converted to 230,087,670 shares of common stock.
During 2011, the Company granted 3,120,000
warrants to purchase the Company’s common stock with an exercise price of $0.005 per share as part of the Company’s
10% Senior Secured Convertible Debentures. These warrants expire in five years from the date of grant. The estimated
fair value of the warrants was determined using the Black-Scholes option pricing model and totaled $77,765.
During 2011, the Company granted 5,700,000
warrants to purchase the Company’s common stock with an exercise price of $0.01 per share to the Company’s Board of
Directors in connection with the services rendered. These warrants expire in five years from the date of grant. The
estimated fair value of the warrants was determined using the Black-Scholes option pricing model and totaled $179,700.
During 2011, the Company granted 9,000,000
non-qualified stock options to purchase the Company’s common stock with an exercise price ranging from $0.01 to $.02 per
share to the officers of the Company as part of their compensation. These options expire in five years from the date of grant. The
estimated fair value of the warrants was determined using the Black-Scholes option pricing model and totaled $243,000.
During 2011, the Company granted 1,500,000
warrants with an exercise price of $.01 and 3,000,000 warrants with an exercise price of $.02 to purchase the Company’s
common stock to David McCall upon his assumption of the additional responsibilities as general counsel of the Company. These warrants
expire in four and six years respectively from the date of grant. The estimated fair value of the warrants was determined
using the Black-Scholes option pricing model and totaled $132,200.
For the year ended December 31, 2010
Common stock
No common stock was issued, converted,
or retired in 2010.
During 2010, the Company granted 3,875,000
warrants to purchase the Company’s common stock with an exercise price ranging from $0.005 to $.01 per share to the Company’s
Board of Directors in connection with the services rendered. These warrants expire in five years from the date of grant. The
estimated fair value of the warrants was determined using the Black-Scholes option pricing model and totaled $14,070.
Note 11 – Warrants for Stock
At December 31, 2011, warrants outstanding
for common stock of the Company were as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise Price
|
|
Balance at January 1, 2011
|
|
|
16,837,226
|
|
|
$
|
0.108
|
|
Granted
|
|
|
13,320,000
|
|
|
$
|
0.011
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
Balance at December 31, 2011
|
|
|
30,157,226
|
|
|
$
|
0.065
|
|
At December 31, 2010, warrants outstanding
for common stock of the Company were as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise Price
|
|
Balance at January 1, 2010
|
|
|
13,362,226
|
|
|
$
|
0.133
|
|
Granted
|
|
|
3,875,000
|
|
|
$
|
0.010
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Cancelled
|
|
|
(400,000
|
)
|
|
$
|
0.007
|
|
Balance at December 31, 2010
|
|
|
16,837,226
|
|
|
$
|
0.108
|
|
The following table summarizes information
about warrants for common stock of the Company outstanding and exercisable as of December 31, 2011:
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
Range of
|
|
of Shares
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
Exercise
|
|
Underlying
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Number
|
|
|
Exercise
|
|
Prices
|
|
Warrants
|
|
|
Price
|
|
|
Life (in years)
|
|
|
of Shares
|
|
|
Price
|
|
$0.005 - $0.35
|
|
|
30,157,226
|
|
|
$
|
0.065
|
|
|
|
4.99
|
|
|
|
30,157,226
|
|
|
$
|
0.065
|
|
|
|
|
30,157,226
|
|
|
|
|
|
|
|
|
|
|
|
30,157,226
|
|
|
|
|
|
The following table summarizes information
about from the common stock of the Company outstanding and exercisable as of December 31, 2010:
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
Range of
|
|
of Shares
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
Exercise
|
|
Underlying
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Number
|
|
|
Exercise
|
|
Prices
|
|
Warrants
|
|
|
Price
|
|
|
Life (in years)
|
|
|
of Shares
|
|
|
Price
|
|
$0.005 - $0.35
|
|
|
16,837,226
|
|
|
$
|
0.108
|
|
|
|
6.24
|
|
|
|
16,837,226
|
|
|
$
|
0.108
|
|
|
|
|
16,837,226
|
|
|
|
|
|
|
|
|
|
|
|
16,837,226
|
|
|
|
|
|
All future changes in the fair value of
these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire. These common
stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants
using the Black-Scholes option pricing model using the following assumptions:
|
|
2011
|
|
|
2010
|
|
Risk free rate
|
|
|
.81% - 2.40
|
%
|
|
|
1.17%-2.55
|
%
|
Expected life
|
|
|
5 years
|
|
|
|
5 years
|
|
Volatility
|
|
|
673.3% - 693.6
|
%
|
|
|
586.7 – 672.5
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility is based primarily
on historical volatility. Historical volatility was computed using weekly pricing observations for recent periods that correspond
to the remaining life of the warrants. We believe this method produces an estimate that is representative of our expectations
of future volatility over the expected term of these warrants. We currently have no reason to believe future volatility over the
expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based
on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities.
At December 31, 2011 and 2010 the aggregate
intrinsic value of the warrants outstanding and exercisable was $417,060 and $17,668, respectively. The intrinsic value of a warrant
is the amount by which the market value of the underlying warrant exercise price exceeds the market price of the stock December
31 of each year.
Note 12 – Stock Options
The following table summarizes stock option activity in the
Company’s stock-based compensation plans for the year ended December 31, 2011. All options issued were non-qualified stock
options. There were no stock options outstanding in the year ended December 31, 2010.
|
|
|
|
|
WEIGHTED
|
|
|
|
|
|
|
|
|
WEIGHTED
|
|
|
|
|
|
|
AVERAGE
|
|
|
AGGREGATE
|
|
|
NUMBER OF
|
|
|
AVERAGE
|
|
|
|
NUMBER OF
|
|
|
EXERCISE
|
|
|
INTRINSIC
|
|
|
SHARES
|
|
|
FAIR VALUE AT
|
|
|
|
SHARES
|
|
|
PRICE
|
|
|
VALUE(1)
|
|
|
EXERCISABLE
|
|
|
GRANT DATE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted at fair value
|
|
|
9,000,000
|
|
|
$
|
0.017
|
|
|
|
147,000-
|
|
|
|
4,000,000-
|
|
|
$
|
0.027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2011
|
|
|
9,000,000
|
|
|
$
|
0.017
|
|
|
$
|
147,000
|
|
|
|
4,000,000
|
|
|
|
$ 0 .027
|
|
|
(1)
|
The intrinsic value of a stock
option is the amount by which the market value of the underlying
stock exceeds the exercise price of the option at December 31,
2011. If the exercise price exceeds the market value, there is
no intrinsic value.
|
The fair value of the stock option grants
are amortized over the respective vesting period using the straight-line method and assuming no forfeitures and cancelations.
The Company has no historical experience to estimate forfeitures and cancellations.
Compensation expense related to stock options included in Exploration
Expense and General and Administrative Expense in the accompanying consolidated statement of operations for the year ended December
31, 2011, was $108,000. The estimated unrecognized compensation cost from unvested options as of December 31, 2011 was approximately
$135,000, which is expected to be recognized over an average period of 1.7 years.
Stock options are granted at the fair market value of one share
of common stock on the date of grant. Options granted to officers and other employees vest immediately or over 24 months as provided
in the option at the date of grant.
The fair value of each option granted in 2011 was estimated
using the Black-Scholes option pricing model. The following assumptions were used to compute the weighted average fair value of
options granted during the periods presented.
|
|
2011
|
|
Expected life of options
|
|
|
0 to 24 months
|
|
Risk free interest rates
|
|
|
0.94
|
%
|
Estimated volatility
|
|
|
685.1
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Weighted average fair market value of options granted
during the year
|
|
$
|
0.027
|
|
The following table summarizes information about options outstanding
at December 31, 2011.
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
Range of
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
Number
|
|
|
Exercise
|
|
|
Intrinsic
|
|
Exercise Prices
|
|
Options
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Value
|
|
|
Exercisable
|
|
|
Price
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.01 – 0.02
|
|
|
9,000,000
|
|
|
|
4.7
|
|
|
$
|
0.017
|
|
|
$
|
147,000
|
|
|
|
4,000,000
|
|
|
$
|
0.013
|
|
|
$
|
82,000
|
|
At December 31, 2011, there were 5,000,000
unvested options outstanding with a weighted average exercise price of $.02 and an intrinsic value of $65,000. All unvested options
will vest over the next 17 months.
Note 14 – Commitments and Contingencies
Leases
Rent expense for the years ended December 31, 2011 and 2010
was $17,600 and $23,095, respectively. The Company is committed for $22,750 through January 31, 2012, on an operating lease for
office space in Austin, Texas.
Litigation
Cause No. 08-04-07047-CV;
Oz Gas Corporation v. Remuda
Operating Company, et al. v. Victory Energy Corporation.
; In the 112
th
District Court of Crockett County, Texas.
This is a lawsuit wherein Plaintiff Oz Gas Corporation sued
various parties for bad faith trespass, among other claims regarding two wells that Oz claims were drilled on lands they have
superior title to. Oz Gas agreed to keep Remuda Operating Company as the operator of the wells involved in the lawsuit so long
as all the monies are paid into the Registry of the Court, which is currently being done. Victory Energy Corporation has a 50%
interest in one of the named wells involved in this lawsuit (that being well 155-2 on the Adams Baggett Ranch in Crockett County,
Texas). The lawsuit was originally filed around April 2008, but Victory Energy Corporation was not a party until it learned of
this lawsuit and filed a Plea in Intervention on November 18, 2009.
Plaintiff Oz alleges a claim of bad faith trespass by Victory
and other parties who drilled the wells. Victory merely purchased an interest in the well, and Victory takes the position that
they had superior title when they purchased their interest in the well, and that they are not a bad faith trespasser.
This case was mediated, with no settlement reached. It went
to trial February 8-9, 2012. Victory contested the allegations made in this lawsuit and argued that Oz did not have superior title,
nor that Oz has more than a 40% interest in well 155-2 (Oz claims to own 100% interest in the well). When Oz purchased the lands
and wells on the Adams Baggett Ranch, some of the leases had expired. In order to cure this defect, Oz obtained a revivor and
ratification from two of three parties who held the interest. There is still an unleased interest owner of these lands. The Court
found in favor of Oz on certain claims, but has not made all if its rulings on the entire case. A hearing in this case is currently
set for April 17, 2012. Depending on the final rulings of the Court, Victory will appeal any findings of bad faith trespass, conversion,
and punitive damages. We are confident of a positive outcome in the Court of Appeals as the rulings that have been made and could
be made are contrary to current State law and evidence of Oz’s lack of superior title was presented and proven by Victory
at the trial court level.
Cause No. CV-47,230; James Capital Energy, LLC and Victory
Energy Corporation v. Jim Dial, et al.; In the 142nd District Court of Midland County, Texas.
This is a lawsuit filed on or about January 19, 2010 by James
Capital Energy, LLC and Victory Energy Corporation against numerous parties for fraud, fraudulent inducement, negligent misrepresentation,
breach of contract, breach of fiduciary duty, trespass, conversion and a few other related causes of action. This lawsuit stems
from an investment both James Capital and Victory entered into for the purchase of six wells on the Adams Baggett Ranch with the
right of first refusal on option acreage.
On December 9, 2010, Victory was granted an interlocutory Default
Judgment against Defendants Jim Dial, 1st Texas Natural Gas Company, Inc., Universal Energy Resources, Inc., Grifco International,
Inc., and Precision Drilling & Exploration, Inc. The total judgment amounted to approximately seventeen million, one-hundred
eighty-three thousand, nine-hundred eighty-seven dollars and eight cents ($17,183,987.08).
Recently Victory and James Capital have added a few more parties
to this lawsuit. Discovery is ongoing in this case and no trial date has been set at this time.
Victory and James Capital believe that they will be victorious
against all the remaining Defendants in this case.
On October 20, 2011 Defendant Remuda filed a Motion to Consolidate
and a Counterclaim against Victory. Remuda is seeking to consolidate this case with two other cases wherein Remuda is the named
Defendant. An objection to this motion was filed and the cases have not been consolidated. Additionally, we do not believe that
the counterclaim made by Remuda has any legal merit.
Cause No. 10-09-07213;
Perry Howell, et al. v. Charles
Gary Garlitz, et al.
; In the 112
th
District Court of Crockett County, Texas.
The above referenced lawsuit was filed on or about September
6, 2010. This lawsuit alleges that Cambrian Management, Ltd. and Victory were trespassers on their land, and that they, along
with other Defendants, drilled a well (115 #8) on land belonging to Plaintiffs. Plaintiffs claim trespass and unjust enrichment
by certain Defendants because of the drilling of the 115 #8 well.
Discovery is ongoing in this case and there has not been a
trial date set at this time. Victory and Cambrian are in the process of having some title work done on this piece of property
so they can decide which direction to go with this case.
If Victory and Cambrian are not victorious in this case, they
will be out their initial investment monies paid for the drilling of this well.
Note 15 - Related Party Transactions
During 2010, the Company entered into
unsecured notes payable totaling $302,000 with Visionary Investments, LLC. (“Visionary”). Ronald Zamber, a director
and major stockholder of the Company, is the sole member of Visionary. These notes bear interest at a fixed rate of 10% and mature
on December 31, 2010.
On December 31, 2010, the Company entered
into a Loan Extension Agreement with Visionary to convert various unsecured promissory notes held by Visionary (the “Notes”)
into a 10% Senior Secured Convertible Debenture (the “Debenture”).
The Notes have a total principal amount
of $497,000 and have accumulated interest in the amount of $55,275. In consideration of the loan extension, the Notes and all
accumulated interest were cancelled and the Company issued the Debenture to Visionary with a total face value of $552,275.
The Debenture bears interest at the rate of 10% per year payable at maturity. The maturity date of the Debenture is September
30, 2013, but may be extended at the sole discretion of the Company to December 31, 2013. The Debenture is immediately convertible
by the holder into shares of the Company’s common stock at a conversion price of $0.005 per share, subject to customary
adjustments for stock splits, stock dividends, recapitalizations and the like. The Company has the right to force conversion
of the Debenture if, among other things, the closing sales price of the Company’s common stock is equal to or exceeds $0.025
for twenty (20) consecutive trading days. The total number of shares of common stock issuable upon conversion of the Debenture
is 110,455,000.
During the year ended December 31, 2011,
we incurred a total of $549,471 of accounting, internal audit, CEO & CFO management, and tax, and business turnaround consulting
fees with Miranda & Associates, A Professional Accountancy Corporation (“Miranda”). Of these fees, $180,000 is
attributable to the services of Robert Miranda as an executive officer of the Company. The balance of approximately $120,500 is
related to the work done on the Company’s SEC filings for 2007 through 2010 with the remaining balance of 248,971 going
for internal audit, tax, and advisory services provided by other members of the Miranda firm. As of December 31, 2011,
Miranda & Associates was owed $66,230 for these professional services. Mr. Miranda also receives warrants for services as
a director of the Company.
During the year ended December 31, 2011, we incurred a total
of $210,332 in legal fees with The McCall Firm primarily for work in relation to the trespass law suits and other lawsuits related
to the recovery of the malfeasance losses in 2008 and 009. In November, 2011, David McCall, a principal in the The McCall Firm
was appointed general counsel of the Company and was given a total of 4,500,000 warrants representing a value of approximately
$132,200 based on Black-Scholes analysis as a result. As of December 31, 2011, The McCall Firm was owed $24,549 for these processional
services. Mr. McCall also receives warrants for services as a director of the Company.
Note
16 –
Supplementary Financial Information on Oil and Natural Gas Exploration,
Development and Production Activities (Unaudited)
The following disclosures provide unaudited
information required by the FASB standard on oil and gas producing activities.
Results of operations from oil and
natural gas producing activities
The Company’s oil and natural gas
properties are located within the United States. The Company currently has no operations in foreign jurisdictions. Results
of operations from oil and natural gas producing activities are summarized below for the years ended December 31:
|
|
2011
|
|
|
2010
|
|
Revenues
|
|
$
|
305,180
|
|
|
$
|
385,889
|
|
|
|
|
|
|
|
|
|
|
Costs incurred:
|
|
|
|
|
|
|
|
|
Lease operating costs and production taxes
|
|
|
160,736
|
|
|
|
201,750
|
|
Impairment of oil and natural gas reserves
|
|
|
102,579
|
|
|
|
183,473
|
|
Accretion of asset retirement obligation
|
|
|
1,453
|
|
|
|
2,552
|
|
Depletion, depreciation and amortization
|
|
|
75,072
|
|
|
|
100,743
|
|
Totals, costs incurred
|
|
|
339,840
|
|
|
|
488,518
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income (loss) from producing activities
|
|
|
(34,660
|
)
|
|
|
(102,629
|
)
|
Results of oil and natural gas producing activities (excluding overhead
and interest costs)
|
|
$
|
(34,660
|
)
|
|
$
|
(102,629
|
)
|
Costs incurred in oil and natural gas property acquisition,
exploration and development activities are summarized below for the years ended December 31:
|
|
2011
|
|
|
2010
|
|
Property acquisition costs:
|
|
|
|
|
|
|
|
|
Proved
|
|
$
|
219,700
|
|
|
$
|
10,247
|
|
Unproved
|
|
|
101,259
|
|
|
|
—
|
|
Exploration costs
|
|
|
559,523
|
|
|
|
167,877
|
|
Development costs
|
|
|
—
|
|
|
|
—
|
|
Asset retirement obligations
|
|
|
2,722
|
|
|
|
7,695
|
|
|
|
|
|
|
|
|
|
|
Totals costs incurred
|
|
$
|
883,204
|
|
|
$
|
185,819
|
|
Oil and natural gas reserves
Proved reserves are estimated quantities
of oil and natural gas which geological and engineering data demonstrate 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 reasonably be expected to be recovered through existing wells with existing equipment and operating methods.
Proved oil and natural gas reserve quantities
at December 31, 2011 and 2010, and the related discounted future net cash flows are based on estimates prepared by independent
petroleum engineers. The reserves as of December 31, 2011 were derived from reserve estimates prepared by the independent reserve
engineer; James Nicolson. Such estimates have been prepared in accordance with guidelines established by the Securities and Exchange
Commission. In 2009 the SEC issued guidance requiring oil and gas companies to calculate the value of proved reserves using prices
that were calculated as the average price of the first day of the twelve months in the year. This guidance differed from the previous
standard of valuing prices according to the end of year prices. The guidance does not require that prior year information be revised
for the new method. As a result, this change in methods of pricing should be taken into account while reviewing the comparable
information for 2011 and 2010 within this disclosure.
Standardized measure
The standardized measure of discounted
future net cash flows relating to the Company’s ownership interests in proved oil and natural gas reserves for the years
ended December 31, 2011 and 2010 are shown below:
|
|
Years Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Natural gas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved developed and undeveloped reserves (mcf):
|
|
|
-
|
|
|
|
-
|
|
Beginning of year
|
|
|
709,700
|
|
|
|
748,700
|
|
Purchase of natural gas properties in place
|
|
|
-
|
|
|
|
-
|
|
Discoveries and extensions
|
|
|
-
|
|
|
|
-
|
|
Revisions
|
|
|
43,797
|
|
|
|
51,971
|
)
|
Production
|
|
|
(67,477
|
)
|
|
|
(90,971
|
)
|
Proved reserves, at end of year
|
|
|
686,020
|
|
|
|
709,700
|
|
|
|
Years Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Oil:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved developed and undeveloped reserves (bbl):
|
|
|
-
|
|
|
|
-
|
|
Beginning of year
|
|
|
-
|
|
|
|
-
|
|
Purchase of oil producing wells in place
|
|
|
7,053
|
|
|
|
-
|
|
Discoveries and extensions
|
|
|
-
|
|
|
|
-
|
|
Revisions
|
|
|
-
|
|
|
|
-
|
|
Production
|
|
|
(303
|
)
|
|
|
-
|
|
Proved reserves, at end of year
|
|
|
6,750
|
|
|
|
-
|
|
|
|
Years Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Future cash inflows
|
|
$
|
5,198,500
|
|
|
$
|
4,314,940
|
|
Future costs:
|
|
|
|
|
|
|
|
|
Production
|
|
|
(2,423,560
|
)
|
|
|
(431,490
|
)
|
Development
|
|
|
(32,890
|
)
|
|
|
(1,803,300
|
)
|
|
|
|
|
|
|
|
|
|
Future cash flows
|
|
|
2,742,050
|
|
|
|
2,080,070
|
|
10% annual discount for estimated timing of cash flow
|
|
|
(1,384,610
|
)
|
|
|
(1,099,070
|
)
|
|
|
|
|
|
|
|
|
|
Standardized measure of discounted cash flow
|
|
$
|
1,357,440
|
|
|
$
|
981,080
|
|
The average quarterly product prices for
natural gas revenue for 2011 and 2010 ranged from $5.73/MCF to $8.91/MCF. The average quarterly product price for oil revenue
for 2011 ranged from $87.3 to $95.30 per bbl (barrel). In neither year was the Company allowed to value assets attributable to
Proved Undeveloped or Probable Reserves because of the SEC guidelines requiring available capital to monetize the projects.
Future income taxes are based on year-end
statutory rates, adjusted for tax basis of oil and natural gas properties and availability of applicable tax assets, such as net
operating losses. A discount factor of 10% was used to reflect the timing of future net cash flows.
The standardized measure of discounted
future net cash flows is not intended to represent the replacement cost or fair market value of the Company’s oil and natural
gas properties. An estimate of fair value may also take into account, among other things, the recovery of reserves not presently
classified as proved, anticipated future changes in prices and costs, and may require a discount factor more representative of
the time value of money and the risks inherent in reserve estimates.
Changes in standardized measure
Included within standardized measure are
reserves purchased in place. The purchase of reserves in place includes undeveloped reserves which were acquired at minimal value
that have been estimated by independent reserve engineers to be recoverable through existing wells utilizing equipment and operating
methods available to the Company and that are expected to be developed in the near term based on an approved plan of development
contingent on available capital.
Changes in the standardized measure of
future net cash flows relating to proved oil and natural gas reserves for the years ended December 31 is summarized below:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Increase (decrease)
|
|
|
|
|
|
|
|
|
Sale of gas and oil, net of operating expenses
|
|
$
|
144,444
|
|
|
$
|
(296,343
|
)
|
Purchase of oil and gas properties in place
|
|
|
—
|
|
|
|
—
|
|
Discoveries, extensions and improved recovery, net of future production and development costs
|
|
|
—
|
|
|
|
—
|
|
Accretion of discount
|
|
|
231,916
|
|
|
|
144,126
|
|
Net change in sales prices, net of production costs
|
|
|
—
|
|
|
|
316,177
|
|
Net increase (decrease)
|
|
|
376,360
|
|
|
|
163,960
|
|
Standardized measure of discounted future cash flows:
|
|
|
|
|
|
|
|
|
Beginning of the year
|
|
|
981,080
|
|
|
|
817,120
|
|
End of the year
|
|
$
|
1,357,440
|
|
|
$
|
981,080
|
|
Note 17 – Subsequent Events
Reverse Stock Split
On January 12, 2012, the Financial Industry Regulatory Authority
approved the Reverse Stock Split and the Amended and Restated Articles became effective at 7:00 a.m., Eastern Daylight Time, on
January 13, 2012. Pursuant to and upon the effectiveness of the Amended and Restated Articles, each 50 shares of common
stock of the Company issued and outstanding at the time of such effectiveness were combined into one share of common stock of
the Company and the total number of shares of common stock outstanding was reduced from approximately 490,000,000 shares
to approximately 9,800,000 shares.
Change of Officers
On January 10, 2012, Mark Biggers
became Chief Financial Officer of the Company.
As part of his compensation, Mr. Biggers will receive
a five year option to purchase 1,500,000 shares of the Company’s common stock at an exercise price of $0.01 and an additional
option to purchase 3,000,000 shares of the Company’s common stock, vesting monthly at the rate of 125,000 shares per month,
at an exercise price of $0.02 per share, such additional options expiring at the end of the calendar year 2017.
On January 17, 2012, Kenneth Hill, Vice
President, Chief Operating Officer, and a Director of the Company was elected President and Chief Executive Officer.
Conversion of Debentures to Common Stock
On March 6, 2012, the Company announced
that all the outstanding 10% Convertible Secured Debentures and accrued interest thereon had been converted to common stock as
of February 29, 2012