Note 1
– Nature of Operations
On May
10, 2012, Santa Fe Petroleum, Inc., f/k/a Baby All Corp., a Delaware corporation (the “we,” “us ,” “our
,” or the “Company”), entered into a Share Exchange Agreement (the “Exchange Agreement”), with Santa
Fe Operating, Inc., a Delaware corporation engaged in the exploration and production of oil and gas (“SFO”), Tom Griffin,
an individual, on behalf of the holders (the “SFO Shareholders”) of 100% of the issued and outstanding common stock
of SFO (the “SFO Stock”), and Efrat Schwartz, an individual and the holder of a majority of the issued and outstanding
shares of our common stock, par value $0.0001 per share (the “Common Stock”). Pursuant to the Exchange Agreement,
each SFO Shareholder was issued one share of Common Stock in exchange for each of such SFO Shareholder’s shares of SFO Stock
(the “Exchange”). Pursuant to the terms of the Exchange Agreement, the Exchange closed on May 20, 2012, (the “Closing
Date”). As a result, (i) we issued an aggregate of 33,478,261 shares of Common Stock to the SFO Shareholders; (ii) we issued
warrants to purchase an aggregate of 6,764,856 shares of Common Stock to the SFO Shareholders, at an exercise price of $0.50 per
share; and (iii) SFO became our wholly-owned subsidiary.
Prior
to the Exchange, our business plan was to seek third party entities interested in licensing the rights to manufacture and market
the patent design of an “infant medicine dispenser.” We were incorporated in Delaware on November 30, 2010, and a
Design Patent Transfer and Sale Agreement was signed between Mrs. Julie Franchi (the inventor and seller), in relation to a patented
technology on December 13, 2010, granting us exclusive rights, title and interest in and to the Design Patent Number: 380828 and
all Intellectual Property rights, free and clear of any lien, charge, claim, preemptive rights, etc. for an infant medicine dispenser.
We were not able to commercialize the product due to a lack of funds, and we did not build a prototype. Hence, no testing has
been done to determine the ability of the technology to perform as we expect its reliability or its cost effectiveness. As a result,
we were not able to commence operations under the infant medicine dispenser business plan and were in the development stage at
the time of the Exchange.
As the
result of the Exchange, we are now a development stage company engaged in the acquisition, exploration, and development of oil
and gas properties. In addition to the development of our existing property interests, we intend to acquire additional oil and
gas interests in the future. Our management believes that our future growth will primarily occur through the acquisition of additional
oil and gas properties following extensive due diligence by us. We also may elect to proceed through collaborative agreements
and joint ventures in order to share expertise and reduce operating costs with other experts in the oil and gas industry. The
analysis of new property interests will be undertaken by or under the supervision of our management and our board of directors
(our “Board”). Although the oil and gas industry is currently very competitive, our management believes that many
undervalued prospective properties remain available for acquisition purposes.
For accounting purposes,
the Exchange Agreement was accounted for as a reverse merger, since the SFO Shareholders collectively beneficially own approximately
84.8% of the Common Stock.
On May
11, 2011, SFO acquired 100 percent of the issued and outstanding units of membership interest of Santa Fe Land, LLC (such units,
the “SFL Units”), a Texas limited liability company and a wholly-owned subsidiary of SFO (“SFL”). SFO
issued an aggregate of 33,478,261 shares of its common stock and 1,999,150 warrants to purchase its common stock to holders of
SFL units of membership interest (the “SFL Unit Holders”) in exchange for their SFL Units (the “SFL Acquisition”).
The SFL Unit Holders were comprised entirely of entities under the control of Tom Griffin, the Company’s Chairman of the
Board and a related party (the “Principal Stockholder”), including Long Branch Petroleum, LP (“LB”). The
acquisition of SFL by SFO is being accounted for as a combination of entities under common control. Therefore, the acquisition
has been recorded at the historical cost basis of the assets transferred.
In connection
with the SFL Acquisition, we acquired SFL’s oil and natural gas working interests of 100% with a net revenue interest of
75% for the Test Well in Comanche County, Texas. Additionally, we acquired a mineral lease over approximately 76 acres of land
as part of the SFL Acquisition.
The Company
formally changed its name from Baby All Corp. to Santa Fe Petroleum, Inc. on May 17, 2012.
Note 2
– Going Concern and Liquidity
As of September
30, 2012, we have not generated any revenue from our business plan and have an accumulated deficit since inception. The continuation
of the Company as a going concern is dependent upon the continued financial support from its shareholders, its ability to obtain
necessary equity and or debt financing to continue operations, and the attainment of profitable operations. These factors raise
substantial doubt regarding the Company’s ability to continue as a going concern.
Note
3 -
Summary of Significant Accounting Policies
Basic of
Presentation
The
accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim period reporting in conjunction with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these statements do not include all of the information required by
GAAP. In the opinion of management, the condensed consolidated financial statements include the adjustments and accruals, all
of which are of a normal recurring nature, which are necessary for a fair presentation of the results for the interim periods.
These interim results are not necessarily indicative of results for a full year. These unaudited condensed consolidated financial
statements should be read in connection with the consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2011, and the Company’s financial information on Form 8-K
for the Exchange Agreement filed on May 11, 2012, and as amended on Form 8-K/A.
Principles
of Consolidation
The
unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its wholly-owned
subsidiaries.
All significant intercompany transactions, accounts and balances have
been eliminated in consolidation.
Development
stage Company
The
Company is classified as a development stage company in accordance with Accounting Standard Codification (“ASC”) 915,
Development Stage Entities,
since no revenues have been generated from inception through the date of these consolidated
financial statements. During the development stage, the Company has primarily incurred compensation, professional, and consulting
expenses associated with the Company’s contemplated equity financing plan.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company’s
estimates of oil and natural gas reserves are, by necessity, projections based on geologic and engineering data, and there are
uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing
of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of natural gas
and oil that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering
and geological interpretation and judgment. Estimates of economically recoverable natural gas and oil reserves and future net
cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared
with production from other producing areas, the assumed effect of regulations by governmental agencies, and assumptions governing
future natural gas and oil prices, future operating costs, severance taxes, development costs and workover costs, all of which
may in fact vary considerably from actual results. The future drilling costs associated with reserves assigned to prove undeveloped
locations may ultimately increase to the extent that these reserves are later determined to be uneconomic. For these reasons,
estimates of the economically recoverable quantities of expected natural gas and oil attributable to any particular group of properties,
classifications of such reserves based on risk of recovery, and estimates of the future net cash flows may vary substantially.
Any significant variance in the assumptions could materially affect the estimated quantity of the reserves, which could affect
the carrying value of the Company’s oil and natural gas properties and/or the rate of depletion related to the oil and natural
gas properties.
JOBS Act
and Emerging Growth Company
Section 107
(b) of the JOBS Act provides that an “emerging growth company” can take advantage of the transition period for complying
with new or revised accounting standards. The Company has elected to use the extended transition period for complying with new
or revised accounting standards under Section 102(b)(1 of the Jobs Act. This election allows the Company to delay the adoption
of new or revised accounting standards that have different effective dates for public and private companies. As a result of this
election, the Company’s consolidated financial statements may not be comparable to companies that comply with other company
effective dates.
Oil
and Gas Properties
The
Company uses the successful efforts method of accounting for oil and natural gas producing activities, as further defined under
ASC 932,
Extractive Activities - Oil and Natural Gas
. Under these provisions, costs to acquire mineral interests in oil
and natural gas properties, to drill exploratory wells that find proved reserves, and to drill and equip development wells are
capitalized.
Exploratory
drilling costs are capitalized when incurred pending the determination of whether a well has found proved reserves. A determination
of whether a well has found proved reserves is made shortly after drilling is completed. The determination is based on a process
that relies on interpretations of available geologic, geophysic, and engineering data. If a well is determined to be successful,
the capitalized drilling costs will be reclassified as part of the cost of the well. Capitalized costs of producing oil and natural
gas interests are depleted on a unit-of-production basis.
If
a well is determined to be unsuccessful, the capitalized drilling costs will be charged to expense in the period the determination
is made. If a determination cannot be made as to whether the reserves that have been found can be classified as proved, the cost
of drilling the exploratory well is not carried as an asset for more than one year following completion of drilling. If, after
that year has passed, a determination that proved reserves exist cannot be made, the well is assumed to be impaired and its costs
are charged to expense. Its cost can, however, continue to be capitalized if a sufficient quantity of reserves is discovered in
the well to justify its completion as a producing well and the entity is making sufficient progress assessing the reserves and
the economic and operating viability of the project.
Impairment
of Long-Lived Assets
The
Company accounts for the impairment of long-lived assets in accordance with ASC 360-10,
Property, Plant and Equipment
,
which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the
book value of the asset may not be recoverable. Recoverability of the asset is measured by comparison of its carrying amount to
the undiscounted cash flow that the asset or asset group is expected to generate. If such assets or asset groups are considered
to be impaired, the loss recognized is the amount by which the carrying amount of the property, if any, exceeds its fair market
value.
Deferred
Offering Costs
The
Company complies with the requirements of the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin
(“SAB”) Topic 5A,
Expenses of Offering
. Deferred offering costs consist principally of the fair value of stock
grants and warrants issued to placement agents that are related to the Company’s contemplated equity financing and will
be charged to stockholders’ equity upon the receipt of the contemplated equity financing proceeds or charged to expense
if the contemplated equity financing is not completed. During the three months ended September 30, 2012, the Company
received
subscriptions of 807,050 shares of common stock for $319,789 of net proceeds ($403,525 gross proceeds less $83,736 of financing
and offering expenses) through a private placement memorandum at $0.50 per share.
The total amount
of funds raised through this PPM was less than 10% of the total amount of funds that the investment bank was authorized to raise
under the Agency Agreement.
As a result, previously recorded deferred offering expenses of $23,784 were written off.”
Income
Taxes
Income taxes
are accounted for under the asset and liability method of ASC 740,
Income Taxes
. Under ASC 740, 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. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
Effective May
11, 2011, with the commencement of operations, the Company adopted provisions of ASC 740, Sections 25 through 60,
Accounting
for Uncertainties in Income Taxes
. These sections provide detailed guidance for the financial statement recognition, measurement
and disclosure of uncertain tax positions recognized in the financial statements. Tax positions must meet a “more-likely-than-not”
recognition threshold at the effective date to be recognized upon the adoption of ASC 740 and in subsequent periods. Upon the
adoption of ASC 740, the Company had no unrecognized tax benefits. For the period from May 11, 2011, (commencement of operations)
through September 30, 2012, no adjustments were recognized for uncertain tax benefits. The Company’s initial tax year for
2011 is still subject to audit.
The Company
recognizes interest and penalties related to unrecognized tax benefits in interest expense and other expenses, respectively. No
interest expense or penalties were recognized during the period from May 11, 2011, (commencement of operations) through September
30, 2012.
The Company
is subject to ongoing tax exposures, examinations and assessments in various jurisdictions. Accordingly, the Company may incur
additional tax expense based upon the outcomes of such matters. In addition, when applicable, the Company will adjust tax expense
to reflect the Company’s ongoing assessments of such matters which require judgment and can materially increase or decrease
its effective rate as well as impact operating results. The Company’s management does not expect that the total amount of
unrecognized tax benefits will materially change over the next twelve months.
The number of
years with open tax audits varies depending on the tax jurisdiction. The Company’s major taxing jurisdictions include the
United States.
Stock-Based
Compensation
The
Company adopted ASC 718,
Compensation – Share Based Compensation
, as of May 11, 2011. This statement requires the
recognition of compensation expense measured at fair value when the Company obtains employee services in stock-based payment transactions.
Net
Income (loss) per Common Share
The
Company computes earnings (loss) per share in accordance with ASC 260-10,
Earnings Per Share
. ASC 260-10 requires presentation
of both basic and diluted earnings per share (“EPS”) on the face of the statement of operations. Basic EPS is computed
by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during
the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. Diluted EPS excludes
all dilutive potential common shares if their effect is anti-dilutive. No potential dilutive common shares are included in the
computation of any diluted per share amount when a loss is reported. Accordingly, we did not include 6,764,856 and 3,573,106 of
potentially dilutive warrants at September 30, 2012, and 2011, respectively.
Legal
Costs and Contingencies
In
the normal course of business, the Company incurs costs to retain external legal counsel to advise it on regulatory, litigation
and other matters. The Company expenses these costs as the related services are received. If a loss is considered probable and
the amount can be reasonable estimated, the Company recognizes an expense for the estimated loss. If we have the potential to
recover a portion of the estimated loss from a third party, the Company makes a separate assessment of recoverability and reduces
the estimated loss if recovery is also deemed probable.
Note 4
- Acquisition of Oil and Gas Company
On May
11, 2011, SFO acquired 100 percent of the member units of SFL by issuing 33,478,261 shares of common stock and 1,999,150 warrants
to SFL member unit holders in exchange for their SFL member units. The SFL member unit holders were comprised entirely of entities
under the control of Tom Griffin, the Company’s Chairman of the Board and a related party (the “Principal Stockholder”).
As a result of the Share Exchange on May 10, 2012, SFO and SFL are subsidiaries of the Company.
The acquisition
of SFL is being accounted for as a combination of entities under common control. Therefore, the acquisition has been recorded
at the historical cost basis of the assets transferred. The warrants to purchase common stock of the Company are at an exercise
price of $0.50 per share and have a three year exercise period.
The Company
acquired SFL’s oil and natural gas working interests of 100% with a net revenue interest of 75% for the Barnett Cody #1A
in Comanche County, Texas. Additionally, the Company acquired approximately 76 acres of land as part of the purchase.
The following
table presents a summary of the historical costs of assets and liabilities acquired at the date of acquisition:
|
Assets
acquired, unevaluated oil and natural gas property
|
|
$
|
494,132
|
|
|
Liabilities
assumed
|
|
|
—
|
|
|
Net assets acquired for 33,478,261 shares of Company common stock and 1,999,150 warrants to purchase Company common stock
at $0.50 per share
|
|
$
|
494,132
|
|
Concurrent with
this transaction, the Principal Stockholder assigned 10,446,782 of his personal shares and 1,573,956 warrants in the Company to
employees and consultants of the Company for services rendered. Under SAB Topic 5T,
Miscellaneous Accounting
, payments
made by a principal stockholder to settle the Company’s obligations were deemed to be capital contributions. Accordingly,
the assignment of shares was recognized in the accompanying condensed consolidated financial statements as stock based compensation
and deferred offering costs of approximately $124,000 and $24,000, respectively. In September 2012, the Company received cash
proceeds from its private placement memorandum and as a result, the deferred offering costs of $24,000 were adjusted to stockholders’
equity (deficit).
Note 5
- Unevaluated Oil and Natural Gas Property
The Company’s
principal asset consists of an unevaluated oil and natural gas property in Comanche County, Texas, which approximated $502,000
as of September 30, 2012, and $494,000 as of December 31, 2011.
The unevaluated
oil and natural gas property was originally drilled in 2009 by a predecessor affiliate company, as the Barnett Cody #1A test.
However, additional capital was needed for the Company to commence further drilling activities. As a result of the additional
capital requirements, the reservoir analysis has not yet being completed. As such, the Company has classified the oil and natural
gas property as unevaluated as of September 30, 2012. As of September 30, 2012, the primary term of the Company’s oil and
natural gas lease is through March 2014.
Additionally,
as of September 30, 2012, the Company performed an impairment assessment of its unevaluated oil and natural gas property. This
assessment included various factors such as management’s intention with regard to future exploration and development of
wells in the geological area, the ability to extend the primary term of the lease for a reasonable period of time, the Company’s
ability to obtain funds to finance exploration and development and the estimated discounted cash flows from the geological area
as estimated based on initial core samples. Based on this analysis, no impairment charge was recorded to the carrying amount of
the Company’s unevaluated oil and natural gas property as of September 30, 2012.
Note 6
- Stockholders’ Deficit
Capital
Structure
The
Company is authorized to issue up to 200,000,000 shares of common stock at $0.0001 par value per share. As of September 30, 2012,
39,478,261 shares were issued and outstanding. Additionally, there were 807,050 shares of common stock to be issued as of September
30, 2012. In total, there were 40,285,311 shares of common stock issued, outstanding and to be issued as of September 30, 2012.
Common Stock
Effective on
the commencement date of May 11, 2011, (commencement of operations), the Company issued 33,478,261 shares of common stock for
the acquisition of SFL from a related party. The stock was valued based on the historical cost basis of the asset acquired, which
approximated $494,000.
In 2011, the
Company filed a registration statement on Form S-1 to register and sell in a self-directed offering 6,000,000 shares of newly
issued common stock at an offering price of $0.0125 per share for proceeds of up to $75,000. The Registration Statement was declared
effective on January 9, 2012. On February 6, 2012, the Company issued 6,000,000 shares of common stock pursuant to the registration
statement for proceeds of $75,000 and these shares are freely-tradable as a result of the registration of the offer and sale of
these shares on Form S-1.
From July 1,
2012, through September 30, 2012, the Company received subscriptions of 807,050 shares of common stock for $319,789 of net proceeds
($403,525 gross proceeds less $83,736 of financing and offering expenses) through a private placement memorandum (“PPM”).
Common stock was sold at $0.50 per share through the PPM to “accredited investors” as defined in Rule 501 (a) of Regulation
D promulgated under the Securities Act of 1933, as amended.
The total amount of funds raised through
this PPM was less than 10% of the total amount of funds that the investment bank was authorized to raise under the Agency Agreement.
As of September 30, 2012, the common stock sold had not been issued to the investors and these subscriptions are not refundable.
Thus, these amounts were reflected as common stock to be issued in the condensed consolidated statement of stockholders’
equity (deficit). See Subsequent Events Note.”
Stock Warrants
The Company
had outstanding warrants at September 30, 2012, totaling 6,764,856. These warrants expire at various dates ranging from May 11,
2014, through May 17, 2015, and have an average exercise price of $0.50 per share.
Effective on
the commencement date of May 11, 2011, (commencement of operations), the Company granted 1,999,150 warrants to purchase common
stock for the acquisition of SFL. The warrants have an exercise price of $0.50 per share and an exercise period of three years
from the date of grant. The Company evaluated the warrants and determined that the warrants were not separable from the common
stock issued for the acquisition of SFL. Therefore, no Black Scholes calculation was made by the Company.
Effective May
17, 2011, the Company granted 1,573,956 warrants to purchase common stock to a consultant of the Company. The Company evaluated
the stock warrants in accordance with ASC 718, Stock Compensation, and utilized the Black Scholes method to determine valuation.
As a result of our analysis, the total value for the stock warrant issuance on the grant date of May 17, 2011, approximated $2,000
and was recorded initially as deferred offering costs in the condensed consolidated financial statements. When the Company sold
shares through the PPM described above, the Company converted the $2,000 of deferred offering costs to stockholders’ equity
(deficit) in September 2012.
Effective on
January 1, 2012, the Company issued 3,200,000 warrants to purchase common stock to two consultants of the Company and 24,000 warrants
to purchase common stock to a director of the Company. The Company evaluated the stock warrants in accordance with ASC 718, Stock
Compensation, and utilized the Black Scholes method to determine valuation. As a result of our analysis, the total value for the
stock warrant issuance on the grant date of January 1, 2012, was de minimis and no amount was recorded in the condensed consolidated
financial statements.
Stock Grants
Effective
May 11, 2011, (commencement of operations), the Principal Stockholder granted 8,872,826 shares of common stock to employees
and consultants of the Company. Under SAB Topic 5T, Miscellaneous Accounting, these were deemed stock based compensation of
the Company and were valued in accordance with ASC 718,
Stock Compensation
. As a result of our analysis, the total
fair value for the stock grant, based on the net asset value of the Company on May 11, 2011, approximated $124,000 and is
included in compensation expense within the accompanying consolidate statement of operations. Additionally, on May 17, 2011,
the Principal Stockholder granted 1,573,956 shares of common stock to a capital placement agent which had a fair value of
approximately $22,000, based on the net asset value of the Company on May 17, 2011. This amount was initially recorded as
deferred offering costs in the condensed consolidated financial statements. When the Company sold shares through the PPM
described above, the Company converted the $22,000 of deferred offering costs to stockholders’ equity (deficit) in
September 2012.
Note 7
- Related Party Transactions
On May
11, 2011, SFO acquired 100% of the member units of SFL in exchange for 33,478,261 shares of Common Stock and 1,999,150 warrants
to SFL member unit holders in exchange for their SFL member units. All the SFL member unit holders were entities under the control
of Tom Griffin, our chairman of the board. This acquisition was accounted for as a combination of entities under common control;
therefore, the assets transferred are reflected on our balance sheet at their historical cost basis of $494,132 at December 31,
2011.
In the
Exchange described above, Mr. Griffin exchanged 18,157,329 shares of SFO for 18,157,329 shares of our Common Stock, and Bruce
A. Hall, our Chief Executive Officer and Chief Financial Officer, exchanged 8,347,826 shares of SFO for 8,347,826 shares of our
Common Stock.
Tom Griffin,
our chairman of the board, is the President of Land Banks for which we have arrangements with. The Land Bank arrangement, and
other similar arrangements we intend to enter into, is designed to allow us to build an inventory of oil and gas leases utilizing
our funds in a more efficient way. As of September 30, 2012, the Land Banks had acquired 11 leases on approximately 1,574 acres.
Under the Lease Acquisition Agreements, we can purchase the leases, or portions of the leases, held by the Land Banks from time
to time and are obligated to purchase all the leases held by the Land Banks within two years from the dates the Land Banks were
formed, subject to change by mutual consent. The Land Banks were formed in February and May of 2012. The aggregate purchase price
for the leases will be equal to a 50% minimum return, or 50% annualized return, whichever is greater, of the total investment
raised by an entity controlled by Mr. Griffin through the sale of its holdings of our Common Stock and utilized for the support
of the Land Banks. Investors in the Land Banks subsequent to the closing of the Exchange will receive proceeds from the sale of
leases by the Land Banks to SFL based on their Participation Agreements. If there are excess profits remaining after payments
to Participants by the Land Banks, 50% of the excess profits will be paid to the Participants and 50% to the Land Banks.
Our executive
offices are located at 4011 W. Plano Parkway, Suite 126, Plano, Texas 75093, where we occupy approximately 1,000 square feet of
office space. Effective August 2012, we pay $1,211 per month to lease this office space from an unaffiliated third party. Previously,
we paid $2,650 per month under an arrangement with a company controlled by Mr. Griffin, which leased a larger space from an unaffiliated
third party. We believe that our current office space and facilities will have to be expanded in the near future to meet our growth
plans. From May 11, 2011, (commencement of operations) through September 30, 2012, we have recorded approximately $27,000 in rental
expense for our executive offices.
From May 11, 2011, (commencement of
operations) through September 30, 2012, SFPetro, Inc., a Texas entity that is an affiliate of the Company (“SFPetro Inc.”)
expended $87,519 of funds on behalf of the Company and is recorded as a component of accounts payable, related parties in the
accompanying condensed consolidated balance sheet at September 30, 2012. SFPetro, Inc. is owned entirely by entities under the
control of the Principal Stockholder. The expenditures were primarily related to compensation and legal expenses for the Company
related to the Company preparing to structure a transaction to become a publicly traded company.
From
May 11, 2011, (commencement of operations) through September, 2012, SF Petroleum, LLC (“SF Petroleum LLC”), expended
$13,939 of funds on behalf of the Company and is recorded as a component of accounts payable, related parties in the accompanying
condensed consolidated balance sheet at September, 2012. SF Petroleum LLC is owned entirely by entities under the control of the
Principal Stockholder. The expenditures were primarily related to legal and consulting expenses for the Company related to the
Company preparing to structure a transaction to become a publicly traded company.
We have engaged,
and may engage in the future, in transactions with our affiliates or stockholders, officers and directors of our affiliates. TexTron
Southwest, Inc. (“TexTron”) provides operating services including drilling of wells and ongoing operating management
for oil and gas entities and is owned by entities under the control of the Principal Stockholder.
Note
8 - Commitments and Contingencies
From time-to-time
the Company may become subject to proceedings, lawsuits and other claims in the ordinary course of business including proceedings
related to environmental and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable with
assurance. The Company is unaware of any claim or lawsuit as of September 30, 2012, and December 31, 2011.
The Company
is subject to various possible contingencies that arise primarily from interpretation of federal and state laws and regulations
affecting the oil and natural gas industry. Such contingencies include differing interpretations as to the prices at which oil
and natural gas sales may be made, the prices at which royalty owners may be paid for production from their leases, environmental
issues and other matters. Although management believes that it has complied with the various laws and regulations, administrative
rulings and interpretations thereof, adjustments could be required as new interpretations and regulations are issued. In addition,
environmental matters are subject to regulation by various federal and state agencies.
We, along with
SFL, have entered into Lease Acquisition Agreements with the Land Banks pursuant to which SFL will have the option from time-to
time to acquire leases held by the Land Banks at prices to be determined based on the date of each purchase and the obligation
to buy any remaining leases the Land Bank owns at the end of a two (2) year period at a price determined by a preset formula as
discussed below. The amount of our financial risk related to these acquisitions will depend on the amount and value of the leases
that the Land Bank acquires.
Under the Lease
Acquisition Agreements, SFL will have the right to acquire leases from the Land Banks. The aggregate purchase price for the leases
will be equal to a 50% minimum return, or 50% annualized return, whichever is greater, of the total investment raised by LB through
the sale of its shares of our common stock and utilized for the support of the Land Banks. SFL’s acquisitions of Leases
may occur from time to time, but must be completed
within two years
from the date the Land Bank is formed
.
Additionally, if the SFL has borrowed funds pursuant to the Land Bank Loan, the
Land Bank Loan will bear interest at 50% minimum return, or 50% annualized return, whichever is greater, and be payable in full
not later than two years after each of the Land Banks were formed, which was February and May of 2012, respectively.
At the time
SFL completes the acquisition of all the Leases or pays the loan in full, whichever is later, the Lease Acquisition Agreement
will require that SFL make an additional payment to the Land Bank equal to the greater of (a) 50% of the total contributions by
Participants to the Land Bank less the sum of (i) Lease acquisition payments made by SFL to the Land Bank in excess of the Land
Bank’s costs to acquire the Leases plus (ii) aggregate interest paid on the loan to SFL or (b) an amount that, after taking
into account the amount and timing of all distributions from the Land Bank to Participants, will repay the Participants’
contributions and provide a 50% minimum return, or 50% annualized return, whichever is greater, to the Participants on their un-repaid
contributions (that is, contributions not yet repaid) over the life of the Land Bank.
If, for any
reason, SFL fails to acquire all remaining leases or repay the loan as discussed above, in addition to any other remedies it may
have for such failure, the Land Bank may sell the remaining leases to other purchasers. Additionally, we will be liable if SFL
does not perform its obligations. See Note 9 – Subsequent Events.
Note
9 - Subsequent Events
In October 2012, the
Company
received subscriptions of 372,400 shares of common stock for $93,100 of net proceeds through a PPM at $0.50 per
share.
In November 2012, the Company, along
with SFL, entered into an agreement with the Land Banks to terminate the Lease Acquisition Agreements, which were discussed previously
under Note 8, “Commitments and Contingencies,” by mutual consent.