Item 1. Business
Background
We were incorporated as “Arthur Kaplan Cosmetics, Inc.” on June 25, 2007, in the State of Nevada. We subsequently changed our name to Savoy Energy Corporation.
On March 31, 2009, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Plantation Exploration, Inc., a privately held Texas corporation (“Plantation Exploration”), and Plantation Exploration Acquisition, Inc. (“Acquisition Sub”), our newly formed wholly-owned Nevada subsidiary. In connection with the closing of this merger transaction, Acquisition Sub merged with and into Plantation Exploration (the “Merger”) on April 2, 2009, with the filing of articles of merger with the Texas secretary of state. As a result of the Merger, Plantation Acquisition no longer exists and Plantation Exploration became our wholly-owned subsidiary.
Subsequently, on April 3, 2009, we merged with another wholly-owned subsidiary of our company, known as Savoy Energy Corporation, in a short-form merger transaction under Nevada law and, in connection with this short form merger, changed our name to Savoy Energy Corporation.
Our Business
We are in the business of re-entering, re-completing, extracting oil, and selling oil from previously undeveloped and drilled wells in the United States. Our plan of operations is to economically extract a significant amount of the “left-behind” oil from previously drilled sites.
We currently hold leases on or are producing oil from the following unproven and proven developed and undeveloped wells: a 25.75% working interest in Rozella Kifer No. 1, and a 2.75% working interest in the Glass 59 #2 well. We do not operate these wells.
Our strategy is to acquire interests in existing low maintenance producing wells. Large oil companies with high overhead costs require high production rates for wells to be economically viable. Our small size and lower overhead allows profitably extraction of oil at low production rates.
Developments in Expansion of Wells
On March 31, 2010, the Company secured a 2.75% working interest in the Glass 59 #2 well in Sterling County, Texas that is operated by Bright & Company.
In June 2010, the Company acquired the Davis-Cornell oil and gas lease for $28,900. The lease acreage is located in Gonzales County, Texas, and is comprised of 144 acres. The Company acquired a 75% undivided working interest in the unproven reserves, and the sellers retained a 25% undivided working interest. In July 2010, the Company sold a 92.5% undivided interest in its Eagle Ford formation “deep rights” located in Gonzales County, Texas to Lucas Energy, Inc. for $123,228. The “deep rights” sold are unevaluated oil and gas properties. The Company retained its existing working interests in the Austin Chalk producing formation. During the year ended December 31, 2010, the Company recognized a gain of $94,381 on sale of assets.
During the year ended December 31, 2010, the Company incurred development costs on its oil and gas properties totaling $40,043.
During June 2010, the Company entered into an option agreement with a shareholder and working interest participant in certain oil and gas properties located in Gonzales County, Texas to allow the shareholder to put their interest in the properties to the Company. Pursuant to the option agreement, Savoy agreed to issue 2,640,000 shares of common stock to the shareholder (which as of the date of this report have not been issued), together with future monthly payments of $5,000 per month to the shareholder until the holding period lapses and the restrictive legend can be removed from the face of the share certificate. Upon the restriction removal, the monthly payment will cease and the shareholder has the option to assign their interest in the oil and gas properties to Savoy. The 2,640,000 shares of common stock granted to the shareholder were valued at $52,800, based on fair market value using quoted market prices on the date of grant and was recorded as a return of capital to the shareholder. During the year ended December 31, 2010, the Company paid $35,000 to the shareholder under the agreement which was recorded as a return of capital to the shareholder.
In May 2010, the Company sold certain overriding royalty interests to Lucas Energy, Inc. for $92,568. The overriding royalty interests are associated with the Company’s producing wells in the Austin Chalk formation. The Company retained its existing working interests in the Austin Chalk producing formation. During the three months ended June 30, 2010, the proceeds of $92,568 were recognized as a gain on sale of assets. During the three months ended September 30, 2010, management re-assessed its initial accounting for the gain of $92,558 recognized in the three months ended June 30, 2010 and determined that a gain of $68,902 was the gain on sale of assets. Management evaluated the impact of recording the adjustment to the gain during the three months ended September 30, 2010 as opposed to the three months ended June 30, 2010 and concluded that it did not have a material impact on the financial statements.
In June 2010, the Company sold a 92.5% undivided interest in its Eagle Ford formation “deep rights” located in Gonzales County, Texas to Lucas Energy, Inc. for $140,752. The “deep rights” sold are unevaluated oil and gas properties associated with the Company’s producing wells in the Austin Chalk formation. The Company retained its existing working interests in the Austin Chalk producing formation. During the three months ended June 30, 2010, the proceeds of $140,752 were recognized as a gain on sale of assets. During the three months ended September 30, 2010, management re-assessed its initial accounting for the gain of $140,752 recognized in the three months ended June 30, 2010 and determined that a gain of $104,104 was the gain on sale of assets. Management evaluated the impact of recording the adjustment to the gain during the three months ended September 30, 2010 as opposed to the three months ended June 30, 2010 and concluded that it did not have a material impact on the financial statements.
In September 2010, the Company sold its 51.5% working and revenue interest and the support equipment on the Ali-O No. 1 well in Gonzales County, Texas to Lucas Energy, Inc. for cash proceeds of $52,500 and forgiveness of payables in the amount of $10,327. The proceeds associated with the support equipment and forgiveness of payable totaling $42,877 was recorded as a gain on sale of assets. The proceeds associated with working and revenue interest totaling $19,950 were accounted for as a reduction of capitalized costs, with no gain or loss recognized.
On October 25, 2010, an unrelated third party advanced $63,000 to the Company under the terms of a convertible promissory note. The convertible promissory note bears interest at 10% per annum and matures July 27, 2011, at which date the $63,000 and any accrued interest is payable. The convertible promissory note has a conversion price equal to the greater of either (i) a fixed conversion price of $0.00009 or (ii) 60% of the quoted market price for the Company’s common stock using the average of the lowest three (3) trading prices for the Company’s common stock during the ten (10) trading days prior to the conversion date. The amount of the convertible promissory note that can be converted at any time is limited to the number of authorized less the amount of issued and outstanding shares immediately prior to the conversion (limited to 39,375,000). The Company is required at all times to have authorized and reserved three times the number of shares that are actually issuable upon full conversion of the convertible promissory note. So long as the Company is not in default, the lender cannot exercise its conversion right for 180 days following the issuance date of the convertible promissory note. The Company has the right to prepay the convertible promissory note under certain specified terms and conditions. The terms and conditions to prepay the convertible promissory note are as follows: (i) the Company has not received a notice of conversion from the lender; (ii) from the date of issuance of the convertible promissory note up to one hundred twenty (120) days following the issuance date, the Company has the right, after giving the lender three days prior written notice, to prepay the outstanding principal and accrued interest, in full, in cash equal to 140% of the sum of the outstanding principal plus accrued and unpaid interest; (iii) from one hundred twenty one (121) days following the issuance date up to one hundred eighty (180) days following the issuance date, the Company has the right, after giving the lender three days prior written notice, to prepay the outstanding principal and accrued interest, in full, in cash equal to 150% of the sum of the outstanding principal amount plus accrued and unpaid interest; (iv) after one hundred eighty (180) days following issuance date, the Company does not have right of prepayment. At December 31, 2010, assuming no adjustment to the conversion price, if the lender converted the entire principal balance of the convertible promissory note using the greater of the fixed or variable conversion price at December 31, 2010, after taking into consideration the aforementioned limitation on the amount of the convertible promissory note that can be converted, then they would have received approximately 5,279,344 shares of the Company’s common stock. The Company evaluated the terms of the convertible promissory note and concluded that this convertible promissory note did not result in a derivative and that there was not a beneficial conversion feature. Subsequent to year end, the Company sold its working interest in the Zavadil well and 50% of its working interest in the Rozella Kiefer well. This constituted a significant sale of assets and as such rendered the note in default. As a result of the default, no demand for repayment has been made; however, the lender can exercise its conversion rights.
On December 14, 2010 the Company filed an Amendment to its Articles of Incorporation increasing its authorized capital to 310,000,000 shares comprising 300,000,000 shares of Common Stock par value $.001 per share and 10,000,000 shares of Preferred Stock par value $0.001 per share.
On December 21, 2010, an unrelated third party advanced $32,500 to the Company under the terms of a convertible promissory note. The convertible promissory note bears interest at 10% per annum and matures September 23, 2011, at which date the $32,500 and any accrued interest is payable. The convertible promissory note has a conversion price equal to the greater of either (i) a fixed conversion price of $0.00009 or (ii) 60% of the quoted market price for the Company’s common stock using the average of the lowest three (3) trading prices for the Company’s common stock during the ten (10) trading days prior to the conversion date. The amount of the convertible promissory note that can be converted at any time is limited to the number of authorized less the amount of issued and outstanding shares immediately prior to the conversion (limited to 17,324,094). The Company is required at all times to have authorized and reserved three times the number of shares that are actually issuable upon full conversion of the convertible promissory note. So long as the Company is not in default, the lender cannot exercise its conversion right for 180 days following the issuance date of the convertible promissory note. The Company has the right to prepay the convertible promissory note under certain specified terms and conditions. The terms and conditions to prepay the convertible promissory note are as follows: (i) the Company has not received a notice of conversion from the lender; (ii) from the date of issuance of the convertible promissory note up to one hundred twenty (120) days following the issuance date, the Company has the right, after giving the lender three days prior written notice, to prepay the outstanding principal and accrued interest, in full, in cash equal to 140% of the sum of the outstanding principal plus accrued and unpaid interest; (iii) from one hundred twenty one (121) days following the issuance date up to one hundred eighty (180) days following the issuance date, the Company has the right, after giving the lender three days prior written notice, to prepay the outstanding principal and accrued interest, in full, in cash equal to 150% of the sum of the outstanding principal amount plus accrued and unpaid interest; (iv) after one hundred eighty (180) days following issuance date, the Company does not have right of prepayment. At December 31, 2010, assuming no adjustment to the conversion price, if the lender converted the entire principal balance of the convertible promissory note using the greater of the fixed or variable conversion price at December 31, 2010, after taking into consideration the aforementioned limitation on the amount of the convertible promissory note that can be converted, then they would have received approximately 2,723,540 shares of the Company’s common stock. The Company evaluated the terms of the convertible promissory note and concluded that this convertible promissory note did not result in a derivative and that there was not a beneficial conversion feature. Subsequent to year end, the Company sold its working interest in the Zavadil well and 50% of its working interest in the Rozella Kiefer well. This constituted a significant sale of assets and as such rendered the note in default. As a result of the default, no demand for repayment has been made; however, the lender can exercise its conversion rights.
In February 2011, the Company sold its 52.5% working and revenue interest and the support equipment on the Zavadil No. 1 well in Gonzales County, Texas to Lucas Energy, Inc. for cash proceeds of $65,000 and forgiveness of payables in the amount of $25,080. The proceeds associated with the support equipment and forgiveness of payable totaling $79,219 was recorded as a gain on sale of assets. The proceeds associated with working and revenue interest totaling $10,861 were accounted for as a reduction of capitalized costs, with no gain or loss recognized.
On March 7, 2011, an unrelated third party advanced $30,000 to the Company under the terms of a convertible promissory note. The convertible promissory note bears interest at 8% per annum and matures on December 9, 2011, at which time the $30,000 and any accrued interest is payable. The convertible promissory note has a conversion price equal to the greater of either (i) a fixed conversion price of $0.00009 or (ii) 60% of the quoted market price for the Company’s common stock using the average of the lowest three (3) trading prices for the Company’s common stock during the ten (10) trading days prior to the conversion date. The amount of the convertible promissory note that can be converted at any time is limited to the number of authorized less the amount of issued and outstanding shares immediately prior to the conversion (limited to 28,009,461). The Company is required at all times to have authorized and reserved three times the number of shares that are actually issuable upon full conversion of the convertible promissory note. So long as the Company is not in default, the lender cannot exercise its conversion right for 180 days following the issuance date of the convertible promissory note. The Company has the right to prepay the convertible promissory note under certain specified terms and conditions. The terms and conditions to prepay the convertible promissory note are as follows: (i) the Company has not received a notice of conversion from the lender; (ii) from the date of issuance of the convertible promissory note up to one hundred twenty (120) days following the issuance date, the Company has the right, after giving the lender three days prior written notice, to prepay the outstanding principal and accrued interest, in full, in cash equal to 140% of the sum of the outstanding principal plus accrued and unpaid interest; (iii) from one hundred twenty one (121) days following the issuance date up to one hundred eighty (180) days following the issuance date, the Company has the right, after giving the lender three days prior written notice, to prepay the outstanding principal and accrued interest, in full, in cash equal to 150% of the sum of the outstanding principal amount plus accrued and unpaid interest; (iv) after one hundred eighty (180) days following issuance date, the Company does not have right of prepayment. This constituted a significant sale of assets and as such rendered the note in default. The Company evaluated the terms of the convertible promissory note and concluded that this convertible promissory note did not result in a derivative and that there was not a beneficial conversion feature. Subsequent to entering into the convertible promissory note agreement, the Company sold 50% of its working interest in the Rozella Kiefer well. As a result of the default, no demand for repayment has been made; however, the lender can exercise its conversion rights.
In March 2011, the Company sold 25.75% working and revenue interest and the support equipment on the Rozella Kifer No. 1 well in Gonzales County, Texas to Lucas Energy, Inc. for cash proceeds of $37,100. The proceeds associated with the support equipment totaling $13,809 was recorded as a gain on sale of assets. The proceeds associated with working and revenue interest totaling $23,291 were accounted for as a reduction of capitalized costs, with no gain or loss recognized.
Item 1A.
Item 1A. Risk Factors.
A smaller reporting company is not required to provide the information required by this Item.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
We maintain our corporate office at 2100 West Loop South, Ste. 900, Houston, Texas 77027. We have no materially important physical properties.
Item 3.
Item 3. Legal Proceedings
Panos Industries, LLC v. Savoy Energy Corporation, et. al., District Court, Clark County, Nevada Case # A-10-612340-C.
On March 19, 2010, this action was filed in the above-entitled Court seeking damages “…in excess of $50,000” based upon monies which the Plaintiff claims were advanced by Plaintiff on behalf of the Company. The Company has filed an answer to the complaint denying the allegations stated therein and has filed a Counterclaim against the Plaintiff. While the outcome of this matter cannot be predicted, the Company specifically denies that it is indebted to Plaintiff and believes that any claims purportedly asserted in the lawsuit are without merit. The Company further believes that it has meritorious claims against Plaintiff which arose in connection with the merger of the Company’s predecessor (Arthur Kaplan Cosmetics, Inc.) with Plantation Exploration, Inc. and in connection with the aftermath of the merger. The Company intends to vigorously defend any claims asserted by the Plaintiff and to aggressively prosecute its claims against the Plaintiff. Even if the Company is ultimately successful in defending this action, it will incur legal fees and other expenses in connection with such defense, the amount of which cannot be predicted at this time. Such expenses could have a material impact on the Company’s future operating results and have an adverse impact on the Company’s funds available for its operations.
Item 4.
Item 4. [Removed and Reserved]
PART II
Item 5.
Item 5. Market for Company’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is currently quoted on the Pink Sheets, a network of security dealers who buy and sell stock. The dealers are connected by a computer network that provides information on current "bids" and "asks", as well as volume information. Our shares are quoted on the Pink Sheets under the symbol “SNVP.”
The following table sets forth the range of high and low bid quotations for our common stock for each of the periods indicated as reported by the OTCBB and Pink Sheets. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Penny Stock
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.
The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer's account.
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.
These disclosure requirements may have the effect of reducing the trading activity for our common stock. Therefore, stockholders may have difficulty selling our securities.
Holders of Our Common Stock
As of December 31, 2010, we had 63,646,000 shares of our common stock issued and outstanding, held by approximately 12 shareholders of record.
Dividends
The Company has not declared, or paid, any cash dividends since inception and does not anticipate declaring or paying a cash dividend for the foreseeable future.
Nevada law prohibits our board from declaring or paying a dividend where, after giving effect to such a dividend, (i) we would not be able to pay our debts as they came due in the ordinary course of our business, or (ii) our total assets would be less than the sum of our total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of distribution, to satisfy the rights of any creditors or preferred stockholders.
Recent Sales of Unregistered Securities
On January 26, 2010, the Company issued 1,000,000 shares to Excelsus Capital Partners, LLC for services rendered.
On February 1, 2010, the Company issued 800,000 shares to Rio Sterling Holdings, LLC for repayment of the Company's note payable with a face amount of $12,500.
On February 1, 2010, the Company issued 800,000 shares to Barclay Lyons, LLC for repayment of the Company's note payable with a face amount of $12,500.
On February 1, 2010, the Company issued 1,250,000 shares to Tombstone Capital, LLC for repayment of the Company's note payable with a face amount of $12,500
On March 4, 2010, the Company issued 10,000,000 shares to Arthur Bertagnolli in exchange for services rendered.
On March 4, 2010, the Company issued 2,000,000 shares to Excelsus Capital Partners, LLC for services rendered.
On March 4, 2010, the Company issued 3,000,000 shares to Excelsus Consulting, LLC for services rendered.
On March 4, 2010, the Company issued 500,000 shares to Robert L. B. Diener, Attorney at Law for services rendered.
On March 18, 2010, the Company issued 1,500,000 shares to Rio Sterling Holdings, LLC for repayment for Company's note payable with a face amount of $10,000.
On March 18, 2010, the Company issued 1,500,000 shares to Barclay Lyons, LLC for repayment for Company's note payable with a face amount of $10,000.
On April 15, 2010, the Company issued 1,500,000 shares to Rio Sterling Holdings, LLC for repayment for Company's note payable with a face amount of $10,000.
On April 26 and May 26, 2010, the Company issued shares to the following for services rendered: Joseph Laterza-2,000,000 shares; IR Pro 2.0-300,000 shares and John Vise-50,000 shares.
On May 26, 2010, the Company issued an aggregate of 1,700,000 shares to the Company’s outside directors for services rendered.
On May 26, 2010, the Company issued 500,000 shares to Robert L. B. Diener, Attorney at Law for services rendered.
On December 15, 2010, the Company issued 1,500,000 shares to Excelsus Capital Partners, LLC for services rendered.
On December 31, 2010, the Company issued 1,850,000 common shares to Directors in exchange for services rendered.
On December 31, 2010, the Company issued 600,000 common shares to IR Pro 2.0 for consulting services rendered.
On January 19, 2011, the Company issued 2,000,000 shares to Rio Sterling Holdings, LLC as partial consideration for an extension of its loan with the Company.
On January 19, 2011, the Company issued 1,000,000 shares to Barclay Lyons, LLC as partial consideration for an extension of its loan with the Company.
On February 2, 2011, the Company issued 700,000 shares to IR Pro 2.0, Inc. as consideration for services rendered.
Securities Authorized for Issuance under Equity Compensation Plans
We do not have any equity compensation plans.
Item 6.
Item 6. Selected Financial Data
A smaller reporting company is not required to provide the information required by this Item.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC. .
Plan of Operation
Overview
We are in the business of re-entering, re-completing, extracting oil, and selling oil from previously undeveloped and drilled wells in the United States. Our plan of operations is to economically extract a significant amount of the “left-behind” oil from previously drilled sites.
We currently hold leases on or are producing oil from the following unproven and proven developed and undeveloped wells: a 25.75% working interest in Rozella Kifer No. 1, and a 2.75% working interest in the Glass 59 #2 well. We do not operate these wells.
Our strategy is to acquire interests in existing low maintenance producing wells. Large oil companies with high overhead costs require high production rates for wells to be economically viable. Our small size and lower overhead allows profitably extraction of oil at low production rates.
Developments in Expansion of Wells
On March 31, 2010, the Company secured a 2.75% working interest in the Glass 59 #2 well in Sterling County, Texas that is operated by Bright & Company. During the nine months ended September 30, 2010, the Company made payments totaling $24,891 for drilling and completion costs.
In June 2010, the Company acquired the Davis-Cornell oil and gas lease for $28,900. The lease acreage is located in Gonzales County, Texas, and is comprised of 144 acres. The Company acquired a 75% undivided working interest in the unproven reserves, and the sellers retained a 25% undivided working interest. In July 2010, the Company sold a 92.5% undivided interest in its Eagle Ford formation “deep rights” located in Gonzales County, Texas to Lucas Energy, Inc. for $123,228. The “deep rights” sold are unevaluated oil and gas properties. The Company retained its existing working interests in the Austin Chalk producing formation. During the three months ended September 30, 2010, the Company recognized a gain of $94,381 on sale of assets.
During the year ended December 31, 2010, the Company incurred development costs on its oil and gas properties totaling $40,043.
During June 2010, the Company entered into an option agreement with a shareholder and working interest participant in certain oil and gas properties located in Gonzales County, Texas to allow the shareholder to put their interest in the properties to the Company. Pursuant to the option agreement, Savoy agreed to issue 2,640,000 shares of common stock to the shareholder (which have not yet been issued as of the date of this report), together with future monthly payments of $5,000 per month to the shareholder until the holding period lapses and the restrictive legend can be removed from the face of the share certificate. Upon the restriction removal, the monthly payment will cease and the shareholder has the option to assign their interest in the oil and gas properties to Savoy. The 2,640,000 shares of common stock granted to the shareholder were valued at $52,800, based on fair market value using quoted market prices on the date of grant and was recorded as a return of capital to the shareholder. During the year ended December 31, 2010, the Company paid $35,000 to the shareholder under the agreement which was recorded as a return of capital to the shareholder.
In May 2010, the Company sold certain overriding royalty interests to Lucas Energy, Inc. for $92,568. The overriding royalty interests are associated with the Company’s producing wells in the Austin Chalk formation. The Company retained its existing working interests in the Austin Chalk producing formation. During the three months ended June 30, 2010, the proceeds of $92,568 were recognized as a gain on sale of assets. During the three months ended September 30, 2010, management re-assessed its initial accounting for the gain of $92,558 recognized in the three months ended June 30, 2010 and determined that a gain of $68,902 was the gain on sale of assets. Management evaluated the impact of recording the adjustment to the gain during the three months ended September 30, 2010 as opposed to the three months ended June 30, 2010 and concluded that it did not have a material impact on the financial statements.
In June 2010, the Company sold a 92.5% undivided interest in its Eagle Ford formation “deep rights” located in Gonzales County, Texas to Lucas Energy, Inc. for $140,752. The “deep rights” sold are unevaluated oil and gas properties associated with the Company’s producing wells in the Austin Chalk formation. The Company retained its existing working interests in the Austin Chalk producing formation. During the three months ended June 30, 2010, the proceeds of $140,752 were recognized as a gain on sale of assets. During the three months ended September 30, 2010, management re-assessed its initial accounting for the gain of $140,752 recognized in the three months ended June 30, 2010 and determined that a gain of $104,104 was the gain on sale of assets. Management evaluated the impact of recording the adjustment to the gain during the three months ended September 30, 2010 as opposed to the three months ended June 30, 2010 and concluded that it did not have a material impact on the financial statements.
In September 2010, the Company sold its 51.5% working and revenue interest and the support equipment on the Ali-O No. 1 well in Gonzales County, Texas to Lucas Energy, Inc. for cash proceeds of $52,500 and forgiveness of payables in the amount of $10,327. The proceeds associated with the support equipment and forgiveness of payable totaling $42,877 was recorded as a gain on sale of assets. The proceeds associated with working and revenue interest totaling $19,950 were accounted for as a reduction of capitalized costs, with no gain or loss recognized.
In February 2011, the Company sold its 52.5% working and revenue interest and the support equipment on the Zavadil No. 1 well in Gonzales County, Texas to Lucas Energy, Inc. for cash proceeds of $65,000 and forgiveness of payables in the amount of $25,080. The proceeds associated with the support equipment and forgiveness of payable totaling $79,219 was recorded as a gain on sale of assets. The proceeds associated with working and revenue interest totaling $10,861 were accounted for as a reduction of capitalized costs, with no gain or loss recognized.
In March 2011, the Company sold 25.75% working and revenue interest and the support equipment on the Rozella Kifer No. 1 well in Gonzales County, Texas to Lucas Energy, Inc. for cash proceeds of $37,100. The proceeds associated with the support equipment totaling $13,809 was recorded as a gain on sale of assets. The proceeds associated with working and revenue interest totaling $23,291 were accounted for as a reduction of capitalized costs, with no gain or loss recognized.
Results of Operations for the Fiscal Years ended December 31, 2010 and December 31, 2009
Revenues. Our total revenue reported for the fiscal year ended December 31, 2010 was $56,461, an increase from $35,885 for the fiscal year ended December 31, 2009.
Lease Operating Expenses. Our revenues are offset by our lease operating expenses related to our wells. The lease operating expenses for the fiscal year ended December 31, 2010 were $37,403 compared to $8,068 for the year ended December 31, 2009.
Depletion, Depreciation, Amortization and Impairment. Depletion, depreciation, amortization and impairment expense for the fiscal year ended December 31, 2010 was $2,763 compared to $650,813 for the year ended December 31, 2009.
General and Administrative Expense. General and Administrative Expense for the fiscal year ended December 31, 2010 was $1,252,698 compared to $847,047 for the fiscal year ended December 31, 2009. The increase in general and administrative expense includes the recognition of stock compensation expense and certain non-cash expenses relating to the recognition of stock issued for services during the fiscal year ended December 31, 2010.
Other Income (Expenses). We recorded interest income of $11,385 for the fiscal year ended December 31, 2010, compared with $47,296 interest income for the fiscal year ended December 31, 2009.
Net Income (Loss). We reported a net loss of $1,117,423 or $0.02 per share for the fiscal year ended December 31, 2010 compared with a net loss of $1,517,726 or $0.04 per share for the fiscal year ended December 31, 2009.
Liquidity and Capital Resources
As of December 31, 2010, we had total current assets of $9,170. Our total current liabilities as of December 31, 2010 were $903,782. Thus, we had a working capital deficit of $894,612 as of December 31, 2010.
Operating activities used $494,279 in cash for the fiscal year ended December 31, 2010. Our net loss of $1,117,423 was the primary component of our negative operating cash flow, offset by depletion, amortization and depreciation expense, amortization of stock options, impairment of oil and gas properties and stock compensation. Investing activities provided $340,105 during the fiscal year ended December 31, 2010 resulting from the sale of certain oil and gas properties, less the amount of capital expenditures and purchase of oil and gas properties. Cash flows provided by financing activities during the fiscal year ended December 31, 2010 was $103,000 consisting of proceeds from notes payable and other borrowings offset by certain note payments and payments representing a return of capital.
Based upon our current financial condition, we do not have sufficient cash to operate our business at the current level for the next twelve months. We have negative working capital and rely on investments and loans to fund our operations. We intend to fund operations through increased sales and debt and/or equity financing arrangements, which may be insufficient to fund expenditures or other cash requirements. We plan to seek additional financing in a private equity offering to secure funding for operations. There can be no assurance that we will be successful in raising additional funding. If we are not able to secure additional funding, the implementation of our business plan will be impaired. There can be no assurance that such additional financing will be available to us on acceptable terms or at all.
Going Concern
Our consolidated financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As of December 31, 2010, we have generated losses from operations, have an accumulated deficit of $2,699,415 and a working capital deficiency of $894,612. These factors raise substantial doubt regarding our ability to continue as a going concern.
In order to continue as a going concern and achieve a profitable level of operations, we will need, among other things, additional capital resources and to develop a consistent source of revenues. Our continuation as a going concern is dependent upon the continued financial support from our shareholders, the ability to raise equity or debt financing, and the attainment of profitable operations from our planned business.
The accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Off Balance Sheet Arrangements
As of December 31, 2010, there were no off balance sheet arrangements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
A smaller reporting company is not required to provide the information required by this Item.
Item 8.
Item 8. Financial Statements and Supplementary Data
See the financial statements annexed to this annual report.
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. The Company's Management under the supervision and with the participation of the Principal Executive Officer and the Principal Financial Officer are responsible for establishing and maintaining "disclosure controls and procedures" (as defined in the Exchange Act) for the Company. Based on their evaluation of the Company's disclosure controls and procedures as of December 31, 2010, the Company's Management has concluded that the Company's disclosure controls and procedures were not effective to ensure that the information required to be disclosed by the Company under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the Exchange Act and accumulated and communicated to the Company's Management, including the Principal Executive Officer and the Principal Financial Officer, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for our company. Our control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
●
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of our assets;
●
provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures are being made only with proper authorizations of management and directors; and
●
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of company assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, including our chief executive officer, also acting as chief financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Over Financial Reporting - Guidance for Smaller Public Companies.
As of December 31, 2010, our principal officers identified material weaknesses in our internal control over financial reporting. A material weakness is a significant deficiency (within the meaning of Public Company Accounting Oversight Board Auditing Standard No. 5), or combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by employees in the normal course of their assigned functions. Each material weakness is discussed below.
There are inadequate and ineffective controls over the corporate financial statement close process. As a result of ineffective procedures and controls, our December 31, 2008 and 2007 year-end financial statements were issued with material misstatements which resulted in a material restatement that was reflected in our restated consolidated financial statements included in the Form 10-K for fiscal year ended December 31, 2008. The ineffective procedures and controls occurred within our accounting process and involved account reconciliations, period cut-off procedures and manual journal entries that were not properly prepared and/or reviewed and approved. The Company intends to continue to rely on consulting professionals as needed until a permanent accounting and finance team is appointed. This weakness is due to the Company’s lack of working capital to hire additional staff.
There is a lack of segregation of duties and technical accounting expertise. Our financial reporting and all accounting functions are performed by an external consultant with no oversight by a professional with accounting expertise. Our management does not possess accounting expertise and hence our controls over the selection and application of accounting policies in accordance with generally accepted accounting principles were inadequate and constitute a material weakness in the design of internal control over financial reporting. This weakness is due to the Company’s lack of working capital to hire additional staff.
These material weaknesses led to the restatement of our consolidated financial results for previously issued 2008 and 2007 financial statements that were included in the Annual Report on Form 10-K for fiscal year ended 2008. As a result of the material weaknesses described above, our management has determined that, as of December 31, 2010, we did not maintain effective internal control over financial reporting based on the COSO criteria.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting. During the last quarter of the Company's fiscal year ended December 31, 2010, there were no changes in the Company's internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The following information sets forth the names of our current directors and executive officers, their ages as of December 31, 2010 and their then positions.
Name
Age
Office(s) Held
Arthur Bertagnolli
President, Chief Executive Officer, Chief Financial Officer and Director
William F. Howell
Director
Raymond F. Crabbe
Director
Charles J. Jacobus
Director
Donald C. Rusk
Director
Set forth below is a brief description of the background and business experience of our current executive officers and directors.
Arthur Bertagnolli has been our President, CEO, CFO and director since 2007. He oversees all responsibilities in the areas of corporate administration, business development, and research. Mr. Bertagnolli began performing contract work for Plantation Exploration in 1988, and became a full-time employee in 1997. He served as our vice-president from 2000 until 2007, and became our President in 2007. His duties have included oil field management, competitive intelligence, demographic studies, strategic marketing, contract negotiations, account acquisition and retention, and advertising and promotion. Mr. Bertagnolli followed in the footsteps of his late father, who retired from Shell Oil after 33 years of service, by beginning his oil and gas career with Dresser Industries in 1980. He is a graduate of the University of South Florida with a B.A. in Management.
William F. Howell has been a director of the Company since June 2010. Mr. Howell’s oil and gas experience spans 47 years, both onshore and offshore. Mr. Howell has worked as a geologist domestically in Oklahoma, Texas and the Gulf of Mexico and internationally in Libya. Mr. Howell received a BS degree in Geology from the University of Oklahoma in 1954. His previous experience includes 13 years (1955 - 1968) as an exploration geologist at Continental Oil Company followed by 6 years (1968 - 1974) as Gulf Coast Exploration Manager for Mesa Petroleum. Mr. Howell originated prospects and organized a bidding group for participation in the Gulf of Mexico Shelf Exploration when he founded Paragon Petroleum, Inc. in 1978. Roberts Oil and Gas benefited from his services from 1981 to 1988 when he served as an Exploration Vice President. Mr. Howell also served on the Board of Directors of Roberts Oil and Gas, Inc., but no longer holds that position. From 1989 to June 2000, he served as a Senior Exploration Advisor to Hardy Oil & Gas and participated in the transition of Hardy to the new company, Mariner Energy, Inc. which is primarily active in the Gulf Coast. Since 2000, Mr. Howell continues to serve as the President of Paragon Petroleum, Inc.
Raymond A. Crabbe has been a director of the Company since June 2010. Mr. Crabbe has had a thirty-five year career with extensive knowledge and experience in oil and gas. This experience includes pipeline, chemical, petrochemical, refining and offshore. Mr. Crabbe has both domestic and international expertise in oil and gas gathering, pipeline, storage, transmission and loading facilities. His domestic experience covers all fifty of the United States and his international experience includes South America, Russia, Asia, Middle East, Indonesia, Canada, Africa and the Virgin Islands. In the past five years, Mr. Crabbe has been employed by Chevron (2005 - 2006); STV Inc. in 2007; and Mustang Engineering from 2007 to present. Mr. Crabbe received an AS, in Engineering Technology from San Jacinto College in 1970, a BS in Engineering Technology from the University of Maryland in 1973, a BS in Construction Management from Almeda University in 2000 and an MBA in Management from Almeda University in 2003.
Charles J. Jacobus has been a director of the Company since June 2010. Mr. Jacobus has been an accomplished real estate attorney and publisher since 1973. He has a sole practice law office and maintains affiliations with many real estate associations as they pertain to commercial and residential real estate law in the State of Texas. Mr. Jacobus has published numerous books focused on Georgia, Ohio and Texas Real Estate Law, co-authoring many of them. Mr. Jacobus holds a State Bar of Texas license as well as a Texas Real Estate Broker license. Mr. Jacobus received a Bachelor of Science from the University of Houston, Doctor of Jurisprudence from the University of Houston.
Donald C. Rusk has been a director of the Company since October 2009. Since 1991, he has been an independent consultant with respect to exploration projects in Algeria, Ecuador, Egypt, France, Hungary, Jordan, Liberia, Libya, Malta, Madagascar, Mozambique, Morocco, Sierra Leone, Syria, Tunisia and other countries for twenty U.S. and non-U.S. major and independent oil companies. He is a graduate of the University of Colorado with a B.A. in Geology.
Employment Agreements
On July 27, 2010, the Company entered into an Employment Agreement with Mr. Bertagnolli to serve as the Company’s President and Chief Executive Officer. The Agreement, which replaces and supersedes a prior Employment Agreement, is effective as of June 1, 2010 and has a term of two (2) years from the effective date. Unless terminated within one year of its expiration, the Agreement is automatically renewed for additional terms of one year each. It provides for a base salary of $15,000 per month together with certain perquisites and annual grants of employee stock options at the discretion of the Company’s board of directors. A copy of the Agreement is attached as Exhibit 10.1 to the Company’s Form 8-K/A Current Report filed on August 16, 2010.
Family Relationships
There are no family relationships between or among the directors, executive officers or persons nominated or chosen by us to become directors or executive officers.
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past ten years, none of the following occurred with respect to a present or former director, executive officer, or employee: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
Audit Committee
Our company currently does not have nominating, compensation or audit committees or committees performing similar functions nor does our company have a written nominating, compensation or audit committee charter. There has been no need to delegate functions to these committees due to the fact that our operations are at a very early stage to justify the effort and expense of creating and maintaining these committees.
Code of Ethics
As of December 31, 2010, we have not adopted a Code of Ethics for Financial Executives, which include our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, as required by sections 406 and 407 of the Sarbanes-Oxley Act of 2002.
Item 11.
Item 11. Executive Compensation
Summary Compensation Table
The table below summarizes all compensation awarded to, earned by, or paid to both to our officers and to our directors for all services rendered in all capacities to us for our fiscal years ended December 31, 2010 and 2009.
Narrative Disclosure to the Summary Compensation Table
We currently compensate our officers and we reserve the right to provide compensation in the future. Our decision to compensate officers depends on the availability of our cash resources with respect to the need for cash to further our business purposes.
Outstanding Equity Awards at Fiscal Year-End
The table below summarizes all unexercised options, stock that has not vested, and equity incentive plan awards for each named executive officer and director as of December 31, 2010.
None
Stock Option Grants
We have not granted any stock options to the executive officers or directors since our inception.
Compensation of Directors
The table below summarizes all compensation of our directors as of December 31, 2010.
Narrative Disclosure to the Director Compensation Table
At this time, we pay our directors only stock compensation. We do not pay any cash compensation to our directors at this time. However, we reserve the right to compensate our directors in the future with cash, stock, options, or some combination of the above.
Stock Option Plans
We did not have a stock option plan in place as of December 31, 2010.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information known to us with respect to the beneficial ownership of our Common Stock as of December 31, 2010, by (1) all persons who are beneficial owners of 5% or more of our voting securities, (2) each director, (3) each executive officer, and (4) all directors and executive officers as a group. The information regarding beneficial ownership of our common stock has been presented in accordance with the rules of the Securities and Exchange Commission. Under these rules, a person may be deemed to beneficially own any shares of capital stock as to which such person, directly or indirectly, has or shares voting power or investment power, and to beneficially own any shares of our capital stock as to which such person has the right to acquire voting or investment power within 60 days through the exercise of any stock option or other right. The percentage of beneficial ownership as to any person as of a particular date is calculated by dividing (a) (i) the number of shares beneficially owned by such person plus (ii) the number of shares as to which such person has the right to acquire voting or investment power within 60 days by (b) the total number of shares outstanding as of such date, plus any shares that such person has the right to acquire from us within 60 days. Including those shares in the tables does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares that power with that person’s spouse) with respect to all shares of capital stock listed as owned by that person or entity.
Except as otherwise indicated, all Shares are owned directly and the percentage shown is based on 61,196,000 Shares of Common Stock issued and outstanding as of December 31, 2010. Addresses for all of the individuals listed in the table below are c/o Savoy Energy Corporation, 2100 West Loop South, Ste. 900, Houston, Texas 77027.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Except as provided below, none of our directors or executive officers, nor any proposed nominee for election as a director, nor any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to all of our outstanding shares, nor any members of the immediate family (including spouse, parents, children, siblings, and in-laws) of any of the foregoing persons has any material interest, direct or indirect, in any transaction over the last two years or in any presently proposed transaction which, in either case, has or will materially affect us.
As of the date of this annual report, our common stock is traded on the Pink Sheets. No applicable market imposes on us standards relating to director independence or the makeup of committees with independent directors, or provide definitions of independence.
Item 14.
Item 14. Principal Accounting Fees and Services
Below is the table of Audit Fees (amounts in US$) billed by our auditor in connection with the audit of the Company’s annual financial statements for the years ended:
PART IV
Item 15.
Item 15. Exhibits, Financial Statements Schedules
Index to Financial Statements Required by Article 8 of Regulation S-X:
Exhibit
Number
Description
31.1
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a- 14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Savoy Energy Corporation
In accordance with Section 13 or 15(d) of the Exchange Act, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated:
By:
/s/ Arthur Bertagnolli
Arthur Bertagnolli
President, Secretary, Treasurer, CEO, CFO and Director
April 11, 2011
By:
/s/ William F. Howell
William F. Howell
Director
April 11, 2011
By:
/s/ Raymond F. Crabbe
Raymond F. Crabbe
Director
April 11, 2011
By:
/s/ Charles J. Jacobus
Charles J. Jacobus
Director
April 11, 2011
By:
/s/ Donald C. Rusk
Donald C. Rusk
Director
April 11, 2011
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Savoy Energy Corporation
Houston, Texas
We have audited the accompanying consolidated balance sheets of Savoy Energy Corporation and its subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has a working capital deficit, has generated limited revenues and has an accumulated deficit, which raises substantial doubt about their ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ GBH CPAs, PC
GBH CPAs, PC
www.gbhcpas.com
Houston, Texas
April 8, 2011
SAVOY ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
SAVOY ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements.
SAVOY ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
For the Years Ended December 31, 2010 and 2009
See notes to consolidated financial statements
SAVOY ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements
SAVOY ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - FINANCIAL STATEMENTS AND BASIS OF PRESENTATION
Savoy Energy Corporation (the “Company” or “we”) was incorporated as “Arthur Kaplan Cosmetics, Inc.” on June 25, 2007, in the State of Nevada.
On March 31, 2009, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Plantation Exploration, Inc., a privately held Texas corporation (“Plantation Exploration”), and Plantation Exploration Acquisition, Inc. (“Acquisition Sub”), a newly formed wholly-owned Nevada subsidiary. In connection with the closing of this merger transaction, Acquisition Sub merged with and into Plantation Exploration (the “Merger”) on April 2, 2009, with the filing of articles of merger with the Texas Secretary of State. As a result of the Merger, Plantation Acquisition no longer exists and Plantation Exploration became our wholly-owned subsidiary.
On April 3, 2009, we merged with another wholly-owned subsidiary of our company, known as Savoy Energy Corporation in a short-form merger transaction under Nevada law and, in connection with this short form merger, changed our name to Savoy Energy Corporation.
Effective June 2, 2009, the Company’s board of directors approved a forward split of the Company’s common stock on the basis of four shares for each share issued and outstanding (4:1 split). The total number of authorized shares was not changed. The Company’s financial statements reflect the stock split on a retroactive basis.
Certain amounts in prior periods have been reclassified to conform to current period presentation.
These consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Planation Exploration. Intercompany transactions and balances have been eliminated upon consolidation.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 reporting period. Actual results could differ from those estimates.
The Company’s consolidated financial statements are based on a number of significant estimates, including oil and gas reserve quantities which are the basis for the calculation of depreciation, depletion and impairment of oil and gas properties, and timing and costs associated with its retirement obligations and share based compensation in which the estimated fair value is based upon the grant date fair value of the award and is recognized as expense over the estimated vesting period of the stock award using the straight-line method.
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and financial instruments which mature within three months of the date of purchase.
Fair Value of Financial Instruments
As at December 31, 2010, the fair value of cash, accounts receivable, accounts payable and notes payable approximate carrying values because of the short-term maturity of these instruments.
Oil and Gas Properties
The Company follows the full cost method of accounting for its oil and natural gas properties, whereby all costs incurred in connection with the acquisition, exploration for and development of petroleum and natural gas reserves are capitalized. Such costs include lease acquisition, geological and geophysical activities, rentals on non-producing leases, drilling, completing and equipping of oil and gas wells and administrative costs directly attributable to those activities and asset retirement costs. Disposition of oil and gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such adjustment would significantly alter the relationship between capital costs and proved reserves of oil and gas, in which case the gain or loss is recognized to income.
Depletion and depreciation of proved oil and gas properties is calculated on the units-of-production method based upon estimates of proved reserves. Such calculations include the estimated future costs to developed proved reserves. Oil and gas reserves are converted to a common unit of measure based on the energy content of 6,000 cubic feet of gas to one barrel of oil. Costs of undeveloped properties are not included in the costs subject to depletion. These costs are assessed periodically for impairment.
The fair value of an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The present value of the estimated asset retirement costs is capitalized as part of the carrying amount of the long-lived asset. For the Company, asset retirement obligations (“ARO”) relate to the plugging and abandonment of drilled oil and gas properties. The amounts recognized are based upon numerous estimates including future retirement costs; future recoverable reserve quantities and reserve lives; and the credit-adjusted risk-free interest rate.
Ceiling test
In applying the full cost method, The Company performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of property and equipment is compared to the value of its proved reserves discounted at a 10-percent interest rate of future net revenues, based on current economic and operating conditions, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties.
Oil and gas properties, not subject to amortization
The amortization of the oil and gas properties not classified as proved begins when the oil and gas properties become proved, or their values become impaired. The Company assesses the realizability of its properties not characterized as proved on at least an annual basis or when there is or has been an indication that an impairment in value may have occurred. The impairment of properties not classified as proved is assessed based on management’s intention with regard to future exploration and development of individually significant properties, and the Company’s ability to secure capital funding to finance such exploration and development. If the result of an assessment indicates that a property is impaired, the amount of the impairment is added to the capitalized costs in its full cost pool and they are amortized over production from proved reserves.
Revenue Recognition
Revenues from the sale of oil and natural gas are recognized when the product is delivered at a fixed or determinable price, title has transferred, and collectability is reasonably assured and evidenced by a contract. For oil sales, this occurs when the customer's truck takes delivery of oil from the operators’ storage tanks.
The Company follows the “sales method” of accounting for oil and natural gas revenue, so it recognizes revenue on all natural gas or crude oil sold to purchasers, regardless of whether the sales are proportionate to its ownership in the property. A receivable or liability is recognized only to the extent that the Company has an imbalance on a specific property greater than its share of the expected remaining proved reserves.
Costs associated with production are expensed in the period incurred.
Stock-Based Compensation
Stock-based compensation expense includes the estimated fair value of equity awards vested during the reporting period. The expense for equity awards vested during the reporting period is determined based upon the grant date fair value of the award and is recognized as expense over the applicable vesting period of the stock award using the straight-line method.
Deferred Taxes
Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and accrued tax liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Earnings (Loss) per Share of Common Stock
Basic net income per share calculations are determined by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted net income per share calculations are determined by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents outstanding. During the reporting period when they are anti-dilutive, common share equivalents, if any, are not considered in the computation.
Recent Accounting Pronouncements
The Company does not expect recent accounting standards or interpretations issued or recently adopted to have a material impact on the Company’s consolidated financial position, operations or cash flows.
NOTE 3 - GOING CONCERN
The Company’s consolidated financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As of December 31, 2010, the Company has a working capital deficit, has generated limited revenues and has an accumulated deficit. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.
In order to continue as a going concern and achieve a profitable level of operations, the Company will need, among other things, additional capital resources and to develop a consistent source of revenues sufficient to meet operating expenses. The continuation of the Company as a going concern is dependent upon the ability to raise equity or debt financing, and the attainment of profitable operations from the Company's operations.
The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern
NOTE 4 - BUSINESS COMBINATION
On March 31, 2009, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Plantation Exploration, Inc., a privately held Texas corporation (“Plantation Exploration”), and Plantation Exploration Acquisition, Inc. (“Acquisition Sub”), the Company’s newly formed wholly-owned Nevada subsidiary. In connection with the closing of this merger transaction, Acquisition Sub merged with and into Plantation Exploration (the “Merger”) on April 2, 2009, with the filing of articles of merger with the Texas secretary of state. As a result of the Merger, Plantation Acquisition no longer exists and Plantation Exploration became the Company’s wholly-owned subsidiary.
The preliminary purchase price of Plantation Exploration was approximately $160,000, consisting of the Company’s common stock valued at approximately $160,000. The value of the 2,000,000 shares of the Company’s common stock issued was determined using acquisition-date fair value of $0.08 per share on April 2, 2009.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The purchase price allocation herein was based on management’s assessment of the fair value of both the assets acquired and liabilities assumed.
There were no acquired identifiable intangible assets, customer relationships, developed technology or trade names. The excess of the fair value of the consideration paid by the Company over the fair value of the net assets of Plantation Exploration was assigned to its oil and gas properties (property, plant and equipment in the table above).
The following (unaudited) pro forma consolidated results of operations have been prepared as if the acquisition of Plantation Exploration, LLC had occurred as of the first day of the year ended December 31, 2009:
The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.
In addition, pursuant to the terms and conditions of the Merger Agreement:
·
The sole shareholder of all of the capital stock of Plantation Exploration’s issued and outstanding immediately prior to the closing of the Merger exchanged his shares into 2,000,000 pre-split (8,000,000 post-split) shares of the Company’s common stock. As a result, the sole shareholder of Plantation Exploration received 2,000,000 pre-split (8,000,000 post -split) newly issued shares of the Company’s common stock.
·
Our board of directors was reconstituted to consist of Arthur Bertagnolli who, prior to the Merger, was the sole director of Plantation Exploration. In connection with such, we entered into an employment agreement (“Employment Agreement”) with Mr. Bertagnolli to serve as CEO and director of our company. The terms of the Employment Agreement are set forth below.
·
Immediately following the closing of the Merger, in a separate transaction, the Company’s former Chief Executive Officer and sole director, Mr. Arthur Kaplan, agreed to purchase the Company’s former cosmetics business in exchange for the cancellation and return of all of his common stock into treasury and the forgiveness of debts owed to him. Specifically, in the stock purchase agreement, Mr. Kaplan retired 10,100,000 pre-split (40,400,000 post split) shares of the Company’s common stock and forgave the Company $33,194 in related party payables in exchange for our prior business of developing, manufacturing, and selling organic personal care products specifically for men and any assets that relate to that business. Subsequent to this transaction, there were 7,000,000 pre-split (28,000,000 post-split) shares of the Company’s common stock issued and outstanding.
Employment Agreement
Pursuant to the terms and conditions of the Employment Agreement entered into at the time of the Merger:
Mr. Bertagnolli will serve as President, CEO, Chairman and sole director of the Company and Plantation Exploration. The Company agreed to compensate Mr. Bertagnolli $14,000 per month for the first 12 months and $20,000 per month for the second 12 month period. As of December 31, 2009 we have accrued $84,000 as payable to Mr. Bertagnolli for his salary. The Company issued 400,000 post-split shares of common stock to Mr. Bertagnolli as payment for $70,000 of his salary payable.
The Company agreed to issue Mr. Bertagnolli options to purchase 1,000,000 pre-split shares (4,000,000 post-split) of our common stock at an exercise price of $1.00 per share that will vest in 2 years from the date of the agreement. The fair value of the options is $242,426 which was valued using the Black-Scholes pricing model at the date of grant. Variables used in the Black-Scholes pricing model include (1) discount rate of 1.35%, (2) expected term of 5 years, (3) expected volatility of 142% and (4) zero expected dividends.
The Company further agreed to issue Mr. Bertagnolli options to purchase up to 5% of our outstanding common stock at an exercise price of $1.00 per share that will vest in 2 years from the date of the agreement. The Company and Mr. Bertagnolli have since agreed that the number of options issuable under the agreement was to be 4,000,000 shares of our common stock under the same terms. The fair value of the options is $181,820 which was valued using the Black-Scholes pricing model at the date of grant. Variables used in the Black-Scholes pricing model include (1) discount rate of 1.35%, (2) expected term of 5 years, (3) expected volatility of 142% and (4) zero expected dividends.
Under the Employment Agreement, the Company is obligated to pay Mr. Bertagnolli a cash bonus of 5% of the net proceeds of any sale of the Company to any larger oil and gas company, with an additional 5% if Mr. Bertagnolli secures the purchaser.
On July 27, 2010, the Company entered into a new Employment Agreement with Mr. Bertagnolli to serve as the Company’s President and Chief Executive Officer. The Agreement, which replaces and supersedes the prior Employment Agreement, is effective as of June 1, 2010 and has a term of two (2) years from the effective date. Unless terminated within one year of its expiration, the Agreement is automatically renewed for additional terms of one year each. It provides for a base salary of $15,000 per month together with certain perquisites and annual grants of employee stock options at the discretion of the Company’s board of directors. A copy of the Agreement is attached as Exhibit 10.1 to the Company’s Form 8-K/A Current Report filed on August 16, 2010.
NOTE 5 - OIL AND GAS PROPERTIES
On March 31, 2010, the Company acquired a 2.75% working interest in the Glass 59 #2 well in Sterling County for approximately $13,000, Texas that is operated by Bright & Company.
In June 2010, the Company acquired the Davis-Cornell oil and gas lease for $28,900. The lease acreage is located in Gonzales County, Texas, and is comprised of 144 acres. The Company acquired a 75% undivided working interest in the unproven reserves, and the sellers retained a 25% undivided working interest. In July 2010, the Company sold a 92.5% undivided interest in its Eagle Ford formation “deep rights” located in Gonzales County, Texas to Lucas Energy, Inc. for $123,228. The “deep rights” sold are unevaluated oil and gas properties. The Company retained its existing working interests in the Austin Chalk producing formation. During the three months ended December 31, 2010, the Company recognized a gain of $94,381 on sale of assets.
During the year ended December 31, 2010, the Company incurred development costs on its oil and gas properties totaling $40,043.
During June 2010, the Company entered into an option agreement with a shareholder and working interest participant in certain oil and gas properties located in Gonzales County, Texas to allow the shareholder to put their interest in the properties to the Company. Pursuant to the option agreement, Savoy agreed to issue 2,640,000 shares of common stock to the shareholder, together with future monthly payments of $5,000 per month to the shareholder until the holding period lapses and the restrictive legend can be removed from the face of the share certificate. Upon the restriction removal, the monthly payment will cease and the shareholder has the option to assign their interest in the oil and gas properties to Savoy. The 2,640,000 shares of common stock granted to the shareholder were valued at $52,800, based on fair market value using quoted market prices on the date of grant and was recorded as a return of capital to the shareholder. During the year ended December 31, 2010, the Company paid $35,000 to the shareholder under the agreement which was recorded as a return of capital to the shareholder.
In May 2010, the Company sold certain overriding royalty interests to Lucas Energy, Inc. for $92,568. The overriding royalty interests are associated with the Company’s producing wells in the Austin Chalk formation. The Company retained its existing working interests in the Austin Chalk producing formation. During the three months ended June 30, 2010, the proceeds of $92,568 were recognized as a gain on sale of assets. During the three months ended September 30, 2010, management re-assessed its initial accounting for the gain of $92,558 recognized in the three months ended June 30, 2010 and determined that a gain of $68,902 was the gain on sale of assets. Management evaluated the impact of recording the adjustment to the gain during the three months ended September 30, 2010 as opposed to the three months ended June 30, 2010 and concluded that it did not have a material impact on the financial statements.
In June 2010, the Company sold a 92.5% undivided interest in its Eagle Ford formation “deep rights” located in Gonzales County, Texas to Lucas Energy, Inc. for $140,752. The “deep rights” sold are unevaluated oil and gas properties associated with the Company’s producing wells in the Austin Chalk formation. The Company retained its existing working interests in the Austin Chalk producing formation. During the three months ended June 30, 2010, the proceeds of $140,752 were recognized as a gain on sale of assets. During the three months ended September 30, 2010, management re-assessed its initial accounting for the gain of $140,752 recognized in the three months ended June 30, 2010 and determined that a gain of $104,104 was the gain on sale of assets. Management evaluated the impact of recording the adjustment to the gain during the three months ended September 30, 2010 as opposed to the three months ended June 30, 2010 and concluded that it did not have a material impact on the financial statements.
In September 2010, the Company sold its 51.5% working and revenue interest and the support equipment on the Ali-O No. 1 well in Gonzales County, Texas to Lucas Energy, Inc. for cash proceeds of $52,500 and forgiveness of payables in the amount of $10,327. The proceeds associated with the support equipment and forgiveness of payable totaling $42,877 was recorded as a gain on sale of assets. The proceeds associated with working and revenue interest totaling $19,950 were accounted for as a reduction of capitalized costs, with no gain or loss recognized.
NOTE 6 - ASSET RETIREMENT OBLIGATIONS
In accordance with ASC 410, “Accounting for Asset Retirement Obligations” Savoy records the fair value of a liability for asset retirement obligations (“ARO”) in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. The present value of the estimated asset retirement cost is capitalized as part of the carrying amount of the long-lived asset and is depreciated over the useful life of the asset. Savoy accrues an abandonment liability associated with its oil and gas wells when those assets are placed in service. The ARO is recorded at its estimated fair value and accretion is recognized over time as the discounted liability is accreted to its expected settlement value. Fair value is determined by using the expected future cash outflows discounted at Savoy's credit-adjusted risk-free interest rate. No market risk premium has been included in Savoy's calculation of the ARO balance.
The following is a description of the changes to the Company's asset retirement obligations for the years ended December 31,
NOTE 7 - NOTES PAYABLE
On September 24, 2008, Plantation Exploration, Inc. entered into a financing agreement with Oil Investment Leases, Inc. (OIL) for cash advances totaling $290,000. On January 27, 2009 and May 4, 2009, the Company amended the September 24, 2008 agreement with OIL for advance cash payments under the demand loan and to assign the debt from Plantation Exploration to Savoy. The amended agreements provided for total borrowings of $335,000 and $360,000, respectively, due on demand. The interest is payable in-kind at 5,000 shares of common stock of the Company for each month the debt remains unpaid. During the year ended December 31, 2010, the Company has made payment reductions totaling $77,500 and issued 7,350,000 shares of common stock with a fair value of $309,600 based on the quoted market value on the grant date. As of December 31, 2010, the outstanding balance of advances from OIL was $282,500.
On December 17, 2009, the Company borrowed $37,500 from a non-related third party bearing interest at 6% per annum. The loan is unsecured and the principal and accrued and unpaid interest was payable at maturity on June 30, 2010. The Company used the proceeds for working capital. On July 1, 2010 the outstanding balance on this loan plus accrued interest was repaid in full.
On December 29, 2009, the Company borrowed $50,000 from two non-related third parties bearing interest at 5% per annum. The loans are unsecured and the principal and accrued and unpaid interest was payable at maturity on June 30, 2010. The Company used the proceeds for working capital. One of the notes with an outstanding principal balance of $25,000 plus accrued interest was repaid on July 1, 2010; the other note with an outstanding principal balance of $25,000 plus accrued interest was repaid in full on July 6, 2010.
On March 19, 2010, the Company borrowed $40,000 from non-related third parties bearing interest at 5% per annum. The loans are unsecured and the principal and accrued and unpaid interest is payable at maturity on April 10, 2011. The Company used the proceeds for working capital. The outstanding balance of $40,000 at December 31, 2010 has been classified as current debt.
On March 22, 2010, the Company borrowed $40,000 from non-related third parties bearing interest at 5% per annum. The loans are unsecured and the principal and accrued and unpaid interest is payable at maturity on April 10, 2011. The Company used the proceeds for working capital. The outstanding balance of $40,000 at December 31, 2010 has been classified as current debt.
On April 21, 2010, the Company borrowed $40,000 from non-related third parties bearing interest at 5% per annum. The loans are unsecured and the principal and accrued and unpaid interest is payable at maturity on April 10, 2011. The Company used the proceeds for working capital. The outstanding balance of $40,000 at December 31, 2010 has been classified as current debt.
On October 25, 2010, an unrelated third party advanced $63,000 to the Company under the terms of a convertible promissory note. The convertible promissory note bears interest at 10% per annum and matures July 27, 2011, at which date the $63,000 and any accrued interest is payable. The convertible promissory note has a conversion price equal to the greater of either (i) a fixed conversion price of $0.00009 or (ii) 60% of the quoted market price for the Company’s common stock using the average of the lowest three (3) trading prices for the Company’s common stock during the ten (10) trading days prior to the conversion date. The amount of the convertible promissory note that can be converted at any time is limited to the number of authorized less the amount of issued and outstanding shares immediately prior to the conversion (initially limited to 39,375,000). The Company is required at all times to have authorized and reserved three times the number of shares that are actually issuable upon full conversion of the convertible promissory note. So long as the Company is not in default, the lender cannot exercise its conversion right for 180 days following the issuance date of the convertible promissory note. The Company has the right to prepay the convertible promissory note under certain specified terms and conditions. The terms and conditions to prepay the convertible promissory note are as follows: (i) the Company has not received a notice of conversion from the lender; (ii) from the date of issuance of the convertible promissory note up to one hundred twenty (120) days following the issuance date, the Company has the right, after giving the lender three days prior written notice, to prepay the outstanding principal and accrued interest, in full, in cash equal to 140% of the sum of the outstanding principal plus accrued and unpaid interest; (iii) from one hundred twenty one (121) days following the issuance date up to one hundred eighty (180) days following the issuance date, the Company has the right, after giving the lender three days prior written notice, to prepay the outstanding principal and accrued interest, in full, in cash equal to 150% of the sum of the outstanding principal amount plus accrued and unpaid interest; (iv) after one hundred eighty (180) days following issuance date, the Company does not have right of prepayment. At December 31, 2010, assuming no adjustment to the conversion price, if the lender converted the entire principal balance of the convertible promissory note using the greater of the fixed or variable conversion price at December 31, 2010, after taking into consideration the aforementioned limitation on the amount of the convertible promissory note that can be converted, then they would have received approximately 5,279,344 shares of the Company’s common stock. The Company evaluated the terms of the convertible promissory note and concluded that this convertible promissory note did not result in a derivative and that there was not a beneficial conversion feature. Subsequent to year end, the company sold its working interest in the Zavadil well and 50% of its working interest in the Rozella Kiefer well. This constituted a significant sale of assets and as such rendered the note in default. As a result of the default, no demand for repayment has been made; however, the lender can exercise its conversion rights.
On December 6, 2010, the Company borrowed $20,000 from a non-related third party bearing interest at 8% per annum. The loans are secured by certain oil and gas properties and the principal and accrued and unpaid interest is payable on demand. The Company used the proceeds for working capital. The outstanding balance of $20,000 at December 31, 2010 has been classified as current debt.
On December 21, 2010, an unrelated third party advanced $32,500 to the Company under the terms of a convertible promissory note. The convertible promissory note bears interest at 10% per annum and matures September 23, 2011, at which date the $32,500 and any accrued interest is payable. The convertible promissory note has a conversion price equal to the greater of either (i) a fixed conversion price of $0.00009 or (ii) 60% of the quoted market price for the Company’s common stock using the average of the lowest three (3) trading prices for the Company’s common stock during the ten (10) trading days prior to the conversion date. The amount of the convertible promissory note that can be converted at any time is limited to the number of authorized less the amount of issued and outstanding shares immediately prior to the conversion (initially limited to 17,324,094). The Company is required at all times to have authorized and reserved three times the number of shares that are actually issuable upon full conversion of the convertible promissory note. So long as the Company is not in default, the lender cannot exercise its conversion right for 180 days following the issuance date of the convertible promissory note. The Company has the right to prepay the convertible promissory note under certain specified terms and conditions. The terms and conditions to prepay the convertible promissory note are as follows: (i) the Company has not received a notice of conversion from the lender; (ii) from the date of issuance of the convertible promissory note up to one hundred twenty (120) days following the issuance date, the Company has the right, after giving the lender three days prior written notice, to prepay the outstanding principal and accrued interest, in full, in cash equal to 140% of the sum of the outstanding principal plus accrued and unpaid interest; (iii) from one hundred twenty one (121) days following the issuance date up to one hundred eighty (180) days following the issuance date, the Company has the right, after giving the lender three days prior written notice, to prepay the outstanding principal and accrued interest, in full, in cash equal to 150% of the sum of the outstanding principal amount plus accrued and unpaid interest; (iv) after one hundred eighty (180) days following issuance date, the Company does not have right of prepayment. At December 31, 2010, assuming no adjustment to the conversion price, if the lender converted the entire principal balance of the convertible promissory note using the greater of the fixed or variable conversion price at December 31, 2010, after taking into consideration the aforementioned limitation on the amount of the convertible promissory note that can be converted, then they would have received approximately 2,723,540 shares of the Company’s common stock. The Company evaluated the terms of the convertible promissory note and concluded that this convertible promissory note did not result in a derivative and that there was not a beneficial conversion feature. Subsequent to year end, the company sold its working interest in the Zavadil well and 50% of its working interest in the Rozella Kiefer well. This constituted a significant sale of assets and as such rendered the note in default. As a result of the default, no demand for repayment has been made; however, the lender can exercise its conversion rights.
NOTE 7 - RELATED PARTY TRANSACTIONS
From time to time, the Company receives cash advances from related parties, including stockholders and their affiliates, to cover operating expenses. The advances do not bear interest and are due upon demand. During the twelve months ended December 31, 2010, the Company received no cash advances. As of December 31, 2009, the outstanding balance of advances from related parties was $151,003. As of December 31, 2010, it was determined that the lenders were no longer related parties and the balance was reclassified to an advance from unrelated parties.
NOTE 8 - STOCK OPTIONS AND WARRANTS
Summary information regarding stock option activity is as follows:
NOTE 9 - COMMON STOCK
On January 26, 2010, the Company issued 1,000,000 common shares valued at $56,000, based on the fair market value using quoted market prices on the date of grant to Excelsus Capital Partners, LLC for services rendered. The value of the shares were recognized in the Company’s consolidated results of operations for the three months ended March 31, 2010.
On February 1, 2010, the Company issued 800,000 common shares valued at $44,800, based on fair market value using quoted market prices on the date of grant to Rio Sterling Holdings, LLC for payment on the Company’s note payable with Oil Investment Leases, Inc. (OIL) in the amount of $12,500 and recorded a realized loss of $32,300 on settlement of debt.
On February 1, 2010, the Company issued 800,000 common shares valued at $44,800, based on fair market value using quoted market prices on the date of grant to Barclay Lyons, LLC for payment on the Company’s note payable with Oil Investment Leases, Inc. (OIL) in the amount of $12,500 and recorded a realized loss of $32,300 on settlement of debt.
On February 1, 2010, the Company issued 1,250,000 common shares valued at $70,000, based on fair market value using quoted market prices on the date of grant to Tombstone Capital, LLC for payment on the Company’s note payable with Oil Investment Leases, Inc. (OIL) in the amount of $12,500 and recorded a realized loss of $57,500 on settlement of debt.
On March 4, 2010, the Company issued 10,000,000 common shares valued at $330,000, based on fair market value using quoted market prices on the date of grant to Arthur Bertagnolli in satisfaction of accrued but unpaid employment compensation due to Arthur Bertagnolli of $43,500 and recorded compensation expense of $286,500 in exchange for services rendered.
On March 4, 2010, the Company issued 2,000,000 common shares valued at $70,000, based on fair market value using quoted market prices on the date of grant to for investment banking services rendered.
On March 4, 2010, the Company issued 3,000,000 common shares valued at $105,000, based on fair market value using quoted market prices on the date of grant for investment banking services rendered.
On March 4, 2010, the Company issued 500,000 common shares valued at $16,500, based on fair market value using quoted market prices on the date of grant for legal services rendered.
On March 18, 2010, the Company issued 1,500,000 common shares valued at $52,500, based on fair market value using quoted market prices on the date of grant to Rio Sterling Holdings, LLC for payment on the Company’s note payable with Oil Investment Leases, Inc. (OIL) in the amount of $10,000 and recorded a realized loss of $42,500 on settlement of debt.
On March 18, 2010, the Company issued 1,500,000 common shares valued at $52,500, based on fair market value using quoted market prices on the date of grant to Barclay Lyons, LLC for payment on the Company’s note payable with Oil Investment Leases, Inc. (OIL) in the amount of $10,000 and recorded a realized loss of $42,500 on settlement of debt.
On April 15, 2010, the Company issued 1,500,000 common shares valued at $45,000, based on fair market value using quoted market prices on the date of grant to Rio Sterling Holdings, LLC for payment on the Company’s note payable with Oil Investment Leases, Inc. (OIL) in the amount of $10,000 and recorded a realized loss of $35,000 on settlement of debt.
On April 26 and May 26, 2010, the Company issued 2,350,000 common shares valued at $58,500, based on fair market value using quoted market prices on the date of grant for consulting services rendered.
On May 26, 2010, the Company issued 1,700,000 common shares valued at $153,400, based on fair market value using quoted market prices on the date of grant to Directors in satisfaction of accrued but unpaid director fees of $133,726 and recorded an expense of $19,674, for the nine months ended September 30, 2010, in exchange for services rendered.
On May 26, 2010, the Company issued 500,000 common shares valued at $11,500, based on fair market value using quoted market prices on the date of grant for legal services rendered.
On December 14, 2010 the Company filed an Amendment to its Articles of Incorporation increasing its authorized capital to 310,000,000 shares comprising 300,000,000 shares of Common Stock par value $.001 per share and 10,000,000 shares of Preferred Stock par value $0.001 per share.
On December 15, 2010, the Company issued 1,500,000 common shares valued at $15,000, based on fair market value using quoted market prices on the date of grant for investment banking services rendered.
On December 31, 2010, the Company issued 1,850,000 common shares valued at $28,120, based on fair market value using quoted market prices on the date of grant to Directors in exchange for services rendered.
On December 31, 2010, the Company issued 600,000 common shares valued at $7,520, based on fair market value using quoted market prices on the date of grant for consulting services rendered.
NOTE 10 - COMMITMENTS, CONTINGENCIES AND LITIGATION
During January 2010, the Company entered into a consulting agreement with an unrelated third party and paid the consultant for investment banking services a commitment fee of $5,000 and issued the consultant 1,000,000 fully vested shares of common stock (see Note 9). The Company amended the consulting agreement in March 2010 that extended the term for twelve months from the date of the amendment and issued the consultant 5,000,000 fully vested shares of common stock (2,000,000 shares on March 4, and 3,000,000 shares on March 4, 2010 - See Note 9). As amended, the consulting agreement includes the following commitments:
i.
The consultant will receive $5,000 per month for twelve months;
ii.
The consultant will receive a referral fee of 10% cash and 10% equity of the aggregate amount of each successful equity financing;
iii.
The consultant will receive a referral fee of 5% cash and 5% equity of the aggregate amount of each successful debt financing.
During March 2010, the Company executed an investor relations agreement whereby the Company, agreed to pay $120,000 in cash and 600,000 shares in common stock with an initial payment of $15,000 and issue 100,000 shares of common stock to be paid upon execution of the agreement. As of September 30, 2010, the Company has paid a total of $45,000 cash and issued 300,000 shares of the Company’s common stock valued at $6,900, based on the fair market value using quoted market prices on the date of grant. During the three months ended September 30, 2010, the Company terminated the agreement. There is no unrecognized expense related to this agreement at December 31, 2010.
During October 2010, the Company executed an investor relations agreement whereby the Company, agreed to pay $90,000 in cash and 900,000 shares in common stock with an initial payment of $15,000 and initially issuance of 400,000 shares of common stock to be paid upon execution of the agreement. As of December 31, 2010, the Company has paid a total of $22,500 cash and issued 600,000 shares of the Company’s common stock valued at $7,520, based on the fair market value using quoted market prices on the date of grant. During February 2011, the Company issued 700,000 shares of the Company’s common stock valued at $8,400, based on the fair market value using quoted market prices on the date of grant.
The Company’s Employment Agreement with Arthur Bertagnolli provides for certain compensation and benefits based on the Company’s achievement of specified milestones. As of December 31, 2010, none of those milestones have been achieved. Under certain circumstances, Mr. Bertagnolli is also entitled to an additional payment upon sale of the Company.
Panos Industries, LLC v. Savoy Energy Corporation, et. al., District Court, Clark County, Nevada Case # A-10-612340-C.
On March 19, 2010, this action was filed in the above-entitled Court seeking damages “…in excess of $50,000” based upon monies which the Plaintiff claims were advanced by Plaintiff on behalf of the Company. This action is in its very early stages and as of this date the Company has not been served with the Summons and Complaint and has therefore not filed any Answer to the Complaint. While the outcome of this matter cannot be predicted, the Company specifically denies that it is indebted to Plaintiff and believes that any claims purportedly asserted in the lawsuit are without merit. The Company further believes that it has meritorious claims against Plaintiff which arose in connection with the merger of the Company’s predecessor (Arthur Kaplan Cosmetics, Inc.) with Plantation Exploration, Inc. and in connection with the aftermath of the merger. The Company intends to vigorously defend any claims asserted by the Plaintiff and to aggressively prosecute its claims against the Plaintiff. Even if the Company is ultimately successful in defending this action, it will incur legal fees and other expenses in connection with such defense, the amount of which cannot be predicted at this time. Such expenses could have a material impact on the Company’s future operating results and have an adverse impact on the Company’s funds available for its operations.
NOTE 11 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share.
No computation for diluted earnings per share was prepared for the convertible promissory notes (see Note 7) that would have been convertible into approximately 8,002,884 common shares at December 31, 2010.
NOTE 12 - INCOME TAXES
The Company provides for income taxes under Statement ASC 740 Accounting for Income Taxes. ASC 740 requires the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse. The Company’s predecessor operated as entity exempt from Federal and State income taxes.
ASC 740 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The provision for income taxes differs from the amounts which would be provided by applying the statutory federal income tax rate of 39% to the net loss before provision for income taxes for the following reasons:
Net deferred tax assets consist of the following components as of:
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards of $64,266 for federal income tax reporting purposes are subject to annual limitations. When a change in ownership occurs, net operating loss carry forwards may be limited as to use in future years.
NOTE 13 - SUPPLEMENTAL OIL AND GAS INFORMATION-(Unaudited)
Proved oil and gas reserve quantities are based on a compilation of reserve estimates provided to the Company by the operators of the Company’s oil and gas leases which are extracted from reserve estimates prepared externally by independent engineers in accordance with guidelines established by the Securities Exchange Commission (SEC).
There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production. The following reserve data related to the properties represents estimates only and should not be construed as being exact. The reliability of these estimates at any point in time depends on both the quality and quantity of the technical and economic data, the performance of the reservoirs, as well as extensive engineering judgment. Consequently, reserve estimates are subject to revision as additional data becomes available during the producing life of a reservoir. The evolution of technology may also result in the application of improved recovery techniques, such as supplemental or enhanced recovery projects, which have the potential to increase reserves beyond those currently envisioned.
Estimates of proved reserves are derived from quantities of crude oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing operating and economic conditions and rely upon a production plan and strategy.
Modernization of Oil and Natural Gas Reporting Requirements
Effective for fiscal years ending on or after December 31, 2009, the Securities and Exchange Commission (“SEC”) approved revisions designed to modernize reserve reporting requirements for oil and natural gas companies. In addition, effective for the same period, the Financial Accounting Standards Board issued Accounting Standards Codification Update 2010-03, “Extractive Activities - Oil and Gas (Topic 932) - Oil and Gas Reserve Estimation and Disclosures,” to provide consistency with the new SEC rules. The Company adopted the new requirements effective December 31, 2009.
Reserve engineering is inherently a subjective process of estimating underground accumulations of oil, natural gas and NGL that cannot be measured exactly. The accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment. Accordingly, reserve estimates may vary from the quantities of oil, natural gas and NGL that are ultimately recovered. Future prices received for production may vary, perhaps significantly, from the prices assumed for the purposes of estimating the standardized measure of discounted future net cash flows. The standardized measure of discounted future net cash flows should not be construed as the market value of the reserves at the dates shown. The 10% discount factor required to be used under the provisions of applicable accounting standards may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the Company or the oil and natural gas industry. The standardized measure of discounted future net cash flows is materially affected by assumptions about the timing of future production, which may prove to be inaccurate.
In accordance with SEC regulations, reserves were estimated using the average prices shown in the table below during the 12-month period, determined as an unweighted average of the first-day-of-the-month price for each month, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
The 25,236 of MBbls of extensions and discoveries relate primarily to the proved undeveloped reserves on the Rozella Kifer lease. The Company estimates that the cost to develop those reserves will be approximately $180,000.
Capitalized Costs of Oil and Gas Producing Activities
The following table sets forth the aggregate amounts of capitalized costs relating to the Company’s oil and gas producing activities and the related accumulated depletion as of December 31, 2010 and 2009:
Costs Incurred in Oil and Gas Producing Activities
The following table reflects the costs incurred in oil and gas property acquisition, exploration and development activities during the years ended December 31, 2010 and 2009:
The following disclosures concerning the standardized measure of future cash flows from proved oil and gas reserves are presented in accordance with FAS 69. As prescribed by FAS 69, the amounts shown are based on prices using the unweighted average of the first-day-of-the-month price for each month, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions and average costs at the end of each period and a 10 percent annual discount factor.
Future cash flows are computed by applying average prices of natural gas and oil to year-end quantities of proved natural gas and oil reserves. Future operating expenses and development costs are computed primarily by the Company’s petroleum engineer by estimating the expenditures to be incurred in developing and producing the Company’s proved natural gas and oil reserves at the end of the year, based on year end costs and assuming continuation of existing economic conditions. Future income taxes are based on currently enacted statutory rates.
The standardized measure of discounted future net cash flows is not intended to represent the replacement costs or fair value of the Company’s natural gas and oil properties. An estimate of fair value would take into account, among other things, anticipated future changes in prices and costs, and a discount factor more representative of the time value of money and the risks inherent in reserve estimates of natural gas and oil producing operation.
Reserve estimates were prepared by both external and internal sources.
Standardized Measure of Discounted Future Net Cash Flow
The following reconciles the change in the standardized measure of discounted net cash flow for the years ended December 31, 2010 and 2009
NOTE 11 - SUBSEQUENT EVENTS
In accordance with ASC 855, the Company evaluated subsequent events through the date these financial statements were available to be issued. With the exception of those matters discussed below, there were no material subsequent events that required recognition or additional disclosure in these financial statements.
On January 12, 2011, Rio Sterling Holdings, LLC amended its $40,000 promissory note dated March 22, 2010 and its $40,000 promissory note dated April 21, 2010 plus attorney fees of $1,500 to a convertible promissory note. The convertible promissory note bears interest at 5% per annum and matures April 10, 2011, at which date the $41,500 and any accrued interest is payable or convertible at a price of $0.01 per share. On January 12, 2011, Rio Sterling Holdings, LLC elected to convert $20,000 to 2,000,000 shares of common stock valued at $36,000, based on fair market value using quoted market prices on the date of grant and the Company recorded a realized loss of $16,000 on settlement of debt. The Company evaluated the modification and concluded that the modification was an extinguishment of the original debt; as a result no gain or loss will be recognized upon modification as the difference between the carrying value of the debt prior to modification and the fair value of the debt after modification; however, a beneficial conversion feature of approximately $16,000 will be recognized as the initial debt discount (prior to any conversions).
On January 12, 2011, Barclay Lyons, LLC amended its $40,000 promissory note dated March 22, 2010 plus attorney fees of $1,500 to a convertible promissory note. The convertible promissory note bears interest at 5% per annum and matures April 10, 2011, at which date the $41,500 and any accrued interest is payable or convertible at a price of $0.01 per share. On January 12, 2011, Barclay Lyons, LLC elected to convert $10,000 to 1,000,000 shares of common stock valued at $18,000, based on fair market value using quoted market prices on the date of grant and the Company recorded a realized loss of $8,000 on settlement of debt. The Company evaluated the modification and concluded that the modification was an extinguishment of the original debt; as a result no gain or loss will be recognized upon modification as the difference between the carrying value of the debt prior to modification and the fair value of the debt after modification; however, a beneficial conversion feature of approximately $16,000 will be recognized as the initial debt discount (prior to any conversions).
On February 2, 2011, the Company issued 700,000 common shares valued at $8,400, based on fair market value using quoted market prices on the date of grant for consulting services rendered.
In February 2011, the Company sold its 52.5% working and revenue interest and the support equipment on the Zavadil No. 1 well in Gonzales County, Texas to Lucas Energy, Inc. for cash proceeds of $65,000 and forgiveness of payables in the amount of $25,080. The proceeds associated with the support equipment and forgiveness of payable totaling $79,219 was recorded as a gain on sale of assets. The proceeds associated with working and revenue interest totaling $10,861 were accounted for as a reduction of capitalized costs, with no gain or loss recognized.
On March 7, 2011, an unrelated third party advanced $30,000 to the Company under the terms of a convertible promissory note. The convertible promissory note bears interest at 8% per annum and matures on December 9, 2011, at which time the $30,000 and any accrued interest is payable. The convertible promissory note has a conversion price equal to the greater of either (i) a fixed conversion price of $0.00009 or (ii) 60% of the quoted market price for the Company’s common stock using the average of the lowest three (3) trading prices for the Company’s common stock during the ten (10) trading days prior to the conversion date. The amount of the convertible promissory note that can be converted at any time is limited to the number of authorized less the amount of issued and outstanding shares immediately prior to the conversion (initially limited to 28,009,461). The Company is required at all times to have authorized and reserved three times the number of shares that are actually issuable upon full conversion of the convertible promissory note. So long as the Company is not in default, the lender cannot exercise its conversion right for 180 days following the issuance date of the convertible promissory note. The Company has the right to prepay the convertible promissory note under certain specified terms and conditions. The terms and conditions to prepay the convertible promissory note are as follows: (i) the Company has not received a notice of conversion from the lender; (ii) from the date of issuance of the convertible promissory note up to one hundred twenty (120) days following the issuance date, the Company has the right, after giving the lender three days prior written notice, to prepay the outstanding principal and accrued interest, in full, in cash equal to 140% of the sum of the outstanding principal plus accrued and unpaid interest; (iii) from one hundred twenty one (121) days following the issuance date up to one hundred eighty (180) days following the issuance date, the Company has the right, after giving the lender three days prior written notice, to prepay the outstanding principal and accrued interest, in full, in cash equal to 150% of the sum of the outstanding principal amount plus accrued and unpaid interest; (iv) after one hundred eighty (180) days following issuance date, the Company does not have right of prepayment. This constituted a significant sale of assets and as such rendered the note in default. The Company evaluated the terms of the convertible promissory note and concluded that this convertible promissory note did not result in a derivative and that there was not a beneficial conversion feature. Subsequent to entering into the convertible promissory note agreement, the company sold 50% of its working interest in the Rozella Kiefer well. As a result of the default, no demand for repayment has been made; however, the lender can exercise its conversion rights.
In March 2011, the Company sold 25.75% working and revenue interest and the support equipment on the Rozella Kifer No. 1 well in Gonzales County, Texas to Lucas Energy, Inc. for cash proceeds of $37,100. The proceeds associated with the support equipment totaling $13,809 was recorded as a gain on sale of assets. The proceeds associated with working and revenue interest totaling $23,291 were accounted for as a reduction of capitalized costs, with no gain or loss recognized.