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. Our principal offices are located at 11200 Westheimer, Suite 900, Houston, TX 77042 and our telephone number is (713) 243-8788.
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
The United States is a major producer and importer of oil, which is then refined into gasoline, kerosene, heating oil and other products. To keep up with domestic consumption, oil companies must constantly look for new sources of petroleum, as well as improve the production of existing wells.
While crude oil prices are currently somewhat depressed compared to recent years, it still represents the core of the U.S.’s energy industry. The U.S. public, government, and oil companies are all seeking ways to meet the demand for oil without increasing our dependence on foreign oil. The oil that we sell is drilled domestically, providing a cost-efficient and convenient product supply for large oil companies who distribute nationally.
We are in the process of performing recompletion and workover activities on wells in Texas. We re-enter and bring back into production wells that have been previously drilled and subsequently abandoned for a variety of reasons. Most often the wells we pursue were drilled and abandoned by large oil companies because of uneconomical production rates.
Bringing a well back into production involves drilling into the wellhead and cleaning out the pipe, which lines the previously drilled hole. We often utilize acid to remove the sludge, which has built up and solidified in the pipe, and to decrease the viscosity of the oil, allowing it to flow more freely. Depending upon the condition of the well, we can either drill directly through bridge plugs that sit in the wellbore, or we can drill laterally into the wellbore. The initial production of a well that we re-enter is often higher than when the well was abandoned because pressure in the well has built up over time and aids in pushing oil to the surface.
We have retained Forrest A. Garb & Associates, a petroleum consulting firm specializing in geological analyses of oil wells, as an independent contractor. They evaluate abandoned wells and provide seismic and geological analyses of the wells, and counsel us in our decisions regarding which wells we should pursue. Based upon their recommendations, as well as the knowledge and experience of our executive officers, we will pursue an oil lease with the landowner who holds the property containing a sought-after well. Upon securing a lease, which generally provides that the landowner receives 25% of the revenue generated by the well, we begin the reclamation process. We currently hold leases, as well as title and right-of-way access, on four wells in Texas, all of which are currently producing crude oil. These wells are referred to as: Ali-O No.1, Rozella Kifer and Zavadil No.1. Three other parties hold fractional interests in these wells also. Each has a Well Interest (“WI”), which reflects the overall “ownership” of the well, but not the percentage of revenue because operational expenses have not been allowed for. Each party is also entitled to a Net Revenue Interest (“NRI”), or a percentage of the net revenues of a given well. Interests held by us are shown in the table below:
We have also identified 48 other wells, ten that are producing and 34 that have been shut in but have seismic or other data indicating that they are favorable candidates for recompletion and workover. We hope to acquire these potential assets in the next twelve months.
We presently use Lucas Energy, Inc. as operator to conduct field operations. This allows us to pursue our business plan without the overhead costs of employees, and the logistical concerns of scheduling, insurance, and human resources. Lucas Energy, Inc. is a working interest partner in the Ali-O, Rozella Kifer and Zavadil and conducts all of the field operations associated with these three wells, including drilling, pumping, and transporting to our customers. Our agreement with Lucas Energy, Inc. is by operating agreement. The Glass 59 #2 Well is operated by Bright & Co.
Currently, we sell all of the oil we produce to Gulfmark Energy, an oil broker who in turn sells oil to Royal Dutch Shell, one of the world’s largest oil companies. The price at which they purchase our oil is based upon the previous month’s open market crude oil prices, and is reset monthly accordingly. Thus, while we are susceptible to large trends in crude oil prices, we are not vulnerable to daily fluctuations.
Our offices are located at 11200 Westheimer, Suite 900, Houston TX 77042.
Oil Drilling
The creation and life of a well can be divided up into five segments: Planning, Drilling, Completion, Production, and Abandonment.
Planning
Geologists use seismic surveys to search for geological structures that may form oil reservoirs. The classic method includes making underground explosion nearby and observing the seismic response that provides information about the geological structures underground. However, passive methods that extract information from naturally-occurring seismic waves are also utilized. Other instruments such as gravimeters and magnetometers are also sometimes used in the search for petroleum. When extracting crude oil, it normally starts by drilling wells into the underground reservoir. When an oil well has been tapped, a geologist, known on the rig as the "mudlogger," will note its presence. Historically, in the U.S., some oil fields existed where the oil rose naturally to the surface, but most of these fields have long since been used up, except certain places in Alaska. Often many wells, called multilateral wells, are drilled into the same reservoir, to ensure that the extraction rate will be economically viable. Also, secondary wells may be used to pump water, steam, acids or various gas mixtures into the reservoir to raise or maintain the reservoir pressure, and so maintain an economic extraction rate.
Drilling
An oil well is created by drilling a hole 5 to 36 inches in diameter into the earth with a drilling rig which rotates a drill string with a bit attached. The drill bit, aided by the weight of thick walled pipes called "drill collars" above it, cuts into the rock. There are different types of drillbits, some cause the rock to fail by compressive failure. Others shear slices off the rock as the bit turns. Drilling fluid is pumped down the inside of the drill pipe and exits at the drill bit in order to cool the bit, lift rock cuttings to the surface, and prevent bore destabilization. The pipe or drill string to which the bit is attached is gradually lengthened as the well gets deeper by screwing in additional 30-foot (10 m) sections of pipe at the surface.
After the hole is drilled, sections of steel tubing, or casing, slightly smaller in diameter than the borehole, are placed in the hole. Cement may be placed between the outside of the casing and the borehole. The casing provides structural integrity to the newly drilled wellbore in addition to isolating potentially dangerous high pressure zones from each other and from the surface.
With these zones safely isolated and the formation protected by the casing, the well can be drilled deeper (into potentially more-unstable and violent formations) with a smaller bit, and also cased with a smaller size casing. Modern wells often have 2-5 sets of subsequently smaller hole sizes drilled inside one another, each cemented with casing.
This process is all facilitated by a drilling rig which contains all necessary equipment to circulate the drilling fluid, hoist and turn the pipe, control downhole pressures, remove cuttings from the drilling fluid, and generate onsite power for these operations.
Completion
After drilling and casing the well, it must be “completed.” Completion is the process by which the well is prepared to produce oil or gas. In a cased-hole completion, small holes called perforations are made in the portion of the casing which passed through the production zone, to provide a path for the oil to flow from the surrounding rock into the production tubing. In open hole completion, often “sand screens” or a “gravel pack” is installed in the last drilled, uncased reservoir section. These maintain structural integrity of the wellbore in the absence of casing, while still allowing flow from the reservoir into the wellbore. Screens also control the migration of formation sands into production pipes and surface equipment, which can cause significant problems.
After a flow path is made, acids and fracturing fluids are pumped into the well to fracture, clean, or otherwise prepare and stimulate the reservoir rock to optimally release oil into the wellbore. Finally, the area above the reservoir section of the well is packed off inside the casing, and connected to the surface via a smaller diameter pipe called tubing. This arrangement provides a redundant barrier to oil leaks as well as allowing damaged sections to be replaced. Also, the smaller diameter of the tubing draws oil at an increased velocity in order to overcome the hydrostatic effects of heavy fluids such as water. In many wells, the natural pressure of the subsurface reservoir is high enough for the oil to flow to the surface. However, this is not always the case, especially in depleted fields where the pressures have been lowered by other producing wells, or in low permeability oil reservoirs. Installing a small diameter tubing may be enough to help the production, but artificial lift methods may also be needed. Common solutions include downhole pumps, gas lift, or surface pump jacks. Many new systems in the last ten years have been introduced for well completion, including all in one systems that have cut completion costs and improved production, especially in the case of horizontal wells.
Production
The production stage is the most important stage of a well's life, when the oil is produced. By this time, the oil rigs and workover rigs used to drill and complete the well have moved off the wellbore, and the top is usually outfitted with a collection of valves called a production tree. These valves regulate pressures, control flows, and allow access to the wellbore in case further completion work is needed. From the outlet valve of the production tree, the flow can be connected to a distribution network of pipelines and tanks to supply the product to refineries or oil export terminals. As long as the pressure in the reservoir remains high enough, the production tree is all that is required to produce the well. If the pressure is depleted and it is considered economically viable, one of the artificial lift methods mentioned above can be employed.
Workovers are often necessary in older wells, which may need smaller diameter tubing, scale or paraffin removal, acid matrix jobs, or completing new zones of interest in a shallower reservoir. Such remedial work can be performed using workover rigs - also known as pulling units to pull and replace tubing, or by the use of a well intervention technique called coiled tubing. Enhanced recovery methods such as water flooding, steam flooding, or CO2 flooding may be used to increase reservoir pressure and provide a push to move oil out of the reservoir. Such methods require the use of injection wells (often chosen from old production wells in a carefully determined pattern), and are used when facing problems with reservoir pressure depletion, high oil viscosity, or can even be employed early in a field's life. In certain cases - depending on the reservoir's geomechanics - reservoir engineers may determine that ultimate recoverable oil may be increased by applying a water flooding strategy early in the field's development rather than later.
Abandonment
When a well no longer produces or produces so poorly that it is a liability, it is abandoned. In this process, tubing is removed from the well and sections of wellbore are filled with cement to isolate oil and water zones from each other, as well as the surface. Completely filling the wellbore with cement is costly and unnecessary. The surface around the wellhead is then excavated, and the wellhead and casing are cut off, a cap is welded in place and then buried.
The production from an oil well declines over time as oil is extracted. The point at which the well no longer makes a profit and is plugged and abandoned is called the Economic Limit. The equation to determine the economic limit contains four factors, namely: (1) taxes, (2) operating cost, (3) oil price, and (4) royalty. Because of differences in operating costs, different companies may have different Economic Limits for a given well.
At the Economic Limit for large oil companies there often is still a significant amount of unrecoverable oil left in the reservoir. They might be tempted to defer physical abandonment for a period of time, hoping that the oil price will go up or that new supplemental recovery techniques will be perfected. However, lease provisions and governmental regulations usually require quick abandonment; liability and tax concerns also may favor abandonment.
Oil Well Re-entry and Workovers
Workover activities include one or more of a variety of remedial operations on a producing well to try to increase production. These operations include:
Sand Cleanout Operations are performed to remove the buildup of sand in the wellbore. In wells that produce from loosely consolidated sandstone formations, a certain amount of sand is usually produced with oil. Although some of this sand will be produced at the surface, most of it will accumulate at the bottom of the hole. Continued accumulation of the sand in the wellbore will eventually cut the oil-producing rate and may even halt production altogether. When this problem, known as sanding, occurs, a service rig equipped with a sand pump on a wire line is called to the scene. The sand pump is a special tool which removes the sand from the wellbore.
Repairing Casings - Casings can be damaged by corrosion, abrasion, pressure, or other forces that create holes or splits. A packer is run down the well to locate the hole in the casing. Fluid is pumped into the casing above the packer. A loss of pressure indicates a hole in the casing. The following are the principal methods for repairing casing:
· Squeeze cementing.
· Patching a liner.
· Replacing casing.
· Adding a liner.
· Opening collapsed casing.
Sidetracking is the workover term for drilling a directional hole to bypass an obstruction in the well that cannot be removed or damage to the well, such as collapsed casing, that cannot be repaired. Sidetracking is also done to deepen a well or to relocate the bottom of the well in a more productive zone, which is horizontally removed from the original well. To sidetrack, a hole (called a window) is made in the casing above the obstruction. The well is then plugged with cement below the window. Special drill tools, such as a whipstock, bent housing, or bent sub are used to drill off at an angle from the main well. This new hole is completed in the same manner as any well after a casing is set.
Plug-back places a cement plug at one or more locations in a well to shut off flow from below the plug. Plug-back is also used before abandoning a well or before sidetracking is done. There are two methods for placing a cement plug in a well:
1. Plug-back using tubing.
2. Plug-back using a dump bailer
Acidizing - Acid treatments have been applied to wells in oil and gas bearing rock formations for many years. Acidizing is probably the most widely used workover and stimulation practice in the oil industry. By dissolving acid soluble components within underground rock formations, or removing material at the wellbore face, the rate of flow of oil may be significantly increased. A number of different acids are used in conventional acidizing treatments, the most common are:
· Hydrochloric, HCl
· Hydrofluoric, HF
· Acetic, CH3COOH
· Formic, HCOOH
· Sulfamic, H2NSO3H
· Chloroacetic, ClCH2COOH
These acids differ in their characteristics. Choice of the acid and any additives for a given situation depends on the underground reservoir characteristics and the specific intention of the treatment. The majority of acidizing treatments carried out utilize hydrochloric acid (HCl).
Oil Industry in the United States
The oil/energy industry is extremely large. According to the Department of Energy (“DOE”), fossil fuels (including coal, oil, and natural gas) make up more than 85% of the energy consumed in the U.S. as of 2008, with oil supplying 40% of U.S. energy needs. There are two major sectors within the oil industry, upstream and downstream. Upstream refers to the exploration and production of oil and gas. Many analysts look at upstream expenditures from previous quarters to estimate future industry trends. For example, a decline in upstream expenditures usually trickles down to other areas such as transportation and marketing. Downstream refers to oil and gas operations after the production phase and through to the point of sale. It is the commercial side of the business, such as gas stations or the delivery of oil for heat.
Oil Price: Determining Factors
The Organization of Petroleum Exporting Countries (“OPEC”) is an intergovernmental organization consisting of 11 member countries dedicated to the stability and prosperity of the petroleum market. OPEC membership is open to any country that is a substantial exporter of oil and that shares the ideals of the organization. Output quotas placed by OPEC can send huge shocks throughout the energy markets. When OPEC meets to determine oil supply for the coming months, the price of oil can fluctuate wildly.
The oil industry is easily influenced by economic and political conditions. If a country is in a recession, fewer products are being manufactured, not as many people drive to work, take vacations, etc. All of these variables factor into less energy use. Oil and gas prices fluctuate on a minute by minute basis. Many factors determine the price of oil, but supply and demand are the chief deciding factors. Demand typically does not fluctuate too much (except in the case of recession), but supply shocks can occur for a number of reasons.
Recompletion and Workover Industry
Recompletion and workover operations on oil wells have become more common due to continuing trends of rising petroleum demand and new technology that enables up to 50% of the reserves in a well to be drained before the well is capped. While current demand and prices are down, the industry is focused more on the longer term trend of increasing demand. The Associated Press reported in 2005 that, in California, wells that are 45 years old are being put back into production, with many wells in Los Angeles having been shut down after only 20 or 25% of the oil was extracted. Jerome R. Corsi, Ph.D., co-author of Black Gold Stranglehold: The Myth of Scarcity and the Politics of Oil, states that, "The decision to uncap California oil wells proves that U.S. oil production did not peak because we ran out of domestic oil," and that "Much oil in the U.S. has been kept in the ground awaiting new technology and higher prices.”
John Martini, CEO of the California Independent Petroleum Association, told World Net Daily in 2005 that many wells are being opened up because new technology permits companies to drill anywhere from 100 to 1,000 feet deeper with economically productive results. "Oil production is like any other industrial process," Mr. Martini noted, "in that new technology lets you work smarter and more efficiently.” Another factor Martini cited was that the continued higher price of crude oil "puts in place a new set of dynamics, where smaller and smaller companies can come in and open up the capped wells profitably…In many cases, the infrastructure is already in place, so putting these wells back into production will not cause an unseemly impact on the landscape." While the price of crude oil has dropped significantly over the past year, industry leaders are confident that it will rebound.
Competition
We compete with a number of established drillers and distributors who specialize in recompletion and workover projects in Texas and sell crude oil to large oil companies. These companies enjoy brand recognition which exceeds that of our brand name. We compete with several drillers and distributors who have significantly greater financial, distribution, advertising, and marketing resources than we do, including:
·
Southern Plains Oil Corp is an independent oil company focused on the workover and enhancement of known oil production in Texas and Oklahoma. They have recovery programs in Oklahoma, such as their Big Sky Unit, and plan to produce the more than 1.3 million barrels of proven recoverable oil from their wells. Workover activities have also been scheduled for the company's Great Plains project, consisting of 45 wells located in Wichita County, Texas.
·
Consolidated Oil & Gas specializes in reentry well projects throughout Texas and the Gulf Coast region.
·
Freestone Resources is an East Texas based oil and gas company currently active in Texas and New Mexico. In addition to oil and gas lease acquisitions and petroleum waste disposal, they perform development activities including recompletions, developmental drilling, and utilize emerging technologies and products specifically in the area of well treatment.
·
Wentworth Energy is an independent exploration and production company focused on developing North American oil and natural gas reserves. They own a 27,557-acre mineral block in east central Freestone County and west central Anderson County in the active East Texas Basin. They recently announced the recompletion of the Shiloh #3 well, and are also evaluating the Rodessa zone in existing wellbores on their Anderson County, Texas acreage for possible recompletion.
·
Tradestar Resources Corporation is an independent energy company that is engaged in the exploration, development, exploitation and acquisition of on-shore oil and natural gas properties in conventional producing areas of the United States. They conduct their primary operations in Texas and focus on enhancement opportunities such as infill drilling, recompletions, secondary recovery projects, repairs and equipment changes.
·
Maranatha is our contract operator. They specialize in oil well workovers, and perform similar contract operator work for three other public companies and one private company. Maranatha also holds leases on twelve wells of their own, performing their own operations work and producing crude oil for sale to large oil companies.
·
Lucas Energy is an independent company engaged in re-entry and workover projects in Texas similar to ours. They hold leases on 46 wells, and have a fractional interest in all four of our wells.
We compete primarily on the basis of our ability to deliver quality crude oil, and our relationships with contract operators and large oil companies. We believe that our success will depend upon our ability to remain competitive in our industry. The failure to compete successfully in the future could result in a material deterioration of customer loyalty and our image and could have a material adverse effect on our business.
Intellectual Property
We do not currently have any intellectual property.
Regulatory Matters
Overview
We are required to abide by complex federal, state and local laws and regulations that cover the oil and gas industry in the United States. In Texas, the Railroad Commission of Texas (“RCT”) has primary regulatory jurisdiction over oil and natural gas industry, pipeline transporters, natural gas & hazardous liquid pipeline industry, and the LP-gas industry. While we are required to abide by these statutes and regulations, the implementation of these compliance activities currently rests with our contract operator. If we begin acting as our own operator, we will become responsible for ensuring compliance with these laws and regulations. Prior to becoming our own operator, we would also be required to post a bond with the Texas Oil and Gas Association, to ensure our compliance and remediation in the event of our non-compliance. We may also be required to obtain work permits and perform remediation work for any physical disturbance to the land in order to comply with RCT regulations. Currently, we have not experienced any difficulty with compliance to any laws or regulations which affect our business. While our planned exploration program budgets for regulatory compliance, there is a risk that new regulations could increase our costs of doing business, prevent us from carrying out our extraction program, and make compliance with new regulations unduly burdensome.
Set forth below is a review of the regulatory issues that affect our business:
Transportation
Our sales of crude oil are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is also subject to rate regulation. The Federal Energy Regulatory Commission, or the FERC, regulates interstate oil pipeline transportation rates under the Interstate Commerce Act. In general, interstate oil pipeline rates must be cost-based, although settlement rates agreed to by all shippers are permitted and market-based rates may be permitted in certain circumstances. Effective January 1, 1995, the FERC implemented regulations establishing an indexing system (based on inflation) for transportation rates for oil that allowed for an increase or decrease in the cost of transporting oil to the purchaser. A review of these regulations by the FERC in 2000 was successfully challenged on appeal by an association of oil pipelines. On remand, the FERC in February 2003 increased the index slightly, effective July 2001. Intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any way that is of material difference from those of our competitors.
Production
The production of oil and natural gas is subject to regulation under a wide range of local, state and federal statutes, rules, orders and regulations. Federal, state and local statutes and regulations require permits for drilling operations, drilling bonds and reports concerning operations. Federal, state and local statutes and regulations require permits for drilling operations, drilling bonds and reports concerning operations. Some states have regulations governing conservation matters, including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum allowable rates of production from oil and natural gas wells, the regulation of well spacing, and plugging and abandonment of wells. The effect of these regulations is to limit the amount of oil and natural gas that we can produce from our wells and to limit the number of wells or the locations at which we can drill, although we can apply for exceptions to such regulations or to have reductions in well spacing. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction.
The failure to comply with these rules and regulations can result in substantial penalties. Our competitors in the oil and natural gas industry are subject to the same regulatory requirements and restrictions that affect our operations.
Environmental Laws
We are required to abide by complex federal, state and local laws and regulations that cover environmental issues in the oil and gas industry in the United States. We are subject to the laws and regulations of the Texas Commission on Environmental Quality as well as the RCT. These laws and regulations generally require us to take precautions in our operations against environmental contamination, and to restore sites to their prior condition when we abandon a well. These tasks are currently performed by our contract operator, and the costs are part of the fee we pay them to perform this work for us.
Set forth below is a review of the environmental issues that affect our business:
General
Our operations are subject to stringent and complex federal, state and local laws and regulations governing environmental protection as well as the discharge of materials into the environment. These laws and regulations may, among other things:
§
require the acquisition of various permits before drilling commences;
§
restrict the types, quantities and concentration of various substances that can be released into the environment in connection with oil and natural gas drilling and production activities;
§
limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas; and
§
require remedial measures to mitigate pollution from former and ongoing operations, such as requirements to close pits and plug abandoned wells.
These laws and regulations may also restrict the rate of oil and natural gas production below the rate that would otherwise be possible. The regulatory burden on the oil and gas industry increases the cost of doing business in the industry and consequently affects profitability. Additionally, Congress and federal and state agencies frequently revise environmental laws and regulations, and any changes that result in more stringent and costly waste handling, disposal and cleanup requirements for the oil and gas industry could have a significant impact on our operating costs.
The following is a summary of some of the existing laws, rules and regulations to which our business operations are subject.
Waste Handling
The Resource Conservation and Recovery Act, or RCRA, and comparable state statutes, regulate the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. Under the auspices of the federal Environmental Protection Agency, or EPA, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Drilling fluids, produced waters and most of the other wastes associated with the exploration, development and production of crude oil or natural gas are currently regulated under RCRA or state non-hazardous waste provisions. Releases or spills of these regulated materials may result in remediation liabilities under these statutes. It is possible that certain oil and natural gas exploration and production wastes now classified as non-hazardous could be classified as hazardous wastes in the future. Any such change could result in an increase in our costs to manage and dispose of wastes, which could have a material adverse effect on our results of operations and financial position.
Comprehensive Environmental Response, Compensation, and Liability Act
The Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, also known as the Superfund Law, imposes joint and several liability, without regard to fault or legality of conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the current or former owner or operator of the site where the release occurred and anyone who disposed or arranged for the disposal of a hazardous substance released at the site. Under CERCLA, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.
In the course of our operations, we may generate wastes that may fall within CERCLA’s definition of hazardous substances. Further, we currently own, lease or operate properties that have been used for oil and natural gas exploration and production for many years. Hazardous substances or petroleum may have been released on, at or under the properties owned, leased or operated by us, or on, at or under other locations, including off-site locations, where such hazardous substances or other wastes have been taken for disposal. In addition, some of our properties have been operated by third parties or by previous owners or operators whose handling, treatment and disposal of hazardous substances, petroleum, or other materials or wastes were not under our control. These properties and the substances or materials disposed or released on, at or under them may be subject to CERCLA, RCRA or analogous or other state laws. Under such laws, we could be required to remove previously disposed substances and wastes or released petroleum, remediate contaminated property or perform remedial plugging or pit closure operations to prevent future contamination.
Water Discharges
The Federal Water Pollution Control Act, or the Clean Water Act, and analogous state laws, impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of oil and other substances into waters of the United States or state waters. Under these laws, the discharge of pollutants into regulated waters is prohibited except in accordance with the terms of a permit issued by EPA or an analogous state agency. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with discharge permits or other requirements of the Clean Water Act and analogous state laws and regulations.
The Oil Pollution Act of 1990, or OPA, which amends and augments the Clean Water Act, establishes strict liability for owners and operators of facilities that are the site of a release of oil into waters of the United States. In addition, OPA and regulations promulgated pursuant thereto impose a variety of regulations on responsible parties related to the prevention of oil spills and liability for damages resulting from such spills. OPA also requires certain oil and natural gas operators to develop, implement and maintain facility response plans, conduct annual spill training for certain employees and provide varying degrees of financial assurance.
Air Emissions
The Federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, EPA has developed and continues to develop stringent regulations governing emissions of toxic air pollutants at specified sources. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the Federal Clean Air Act and associated state laws and regulations. Oil and gas operations may in certain circumstances and locations be subject to permits and restrictions under these statutes for emissions of air pollutants, including volatile organic compounds, nitrous oxides, and hydrogen sulfide.
National Environmental Policy Act
Oil and natural gas exploration and production activities on federal lands are subject to the National Environmental Policy Act, or NEPA. NEPA requires federal agencies, including the Department of Interior, to evaluate major agency actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an Environmental Assessment that assesses the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed Environmental Impact Statement that may be made available for public review and comment. All of our current exploration and production activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. This process has the potential to delay the development of oil and natural gas projects.
Endangered Species, Wetlands and Damages to Natural Resources
Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands, and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the Clean Water Act and CERCLA. Where takings of or harm to species or damages to wetlands, habitat, or natural resources occur or may occur, government entities or at times private parties may act to prevent oil and gas exploration or production or seek damages to species, habitat, or natural resources resulting from filling or construction or releases of oil, wastes, hazardous substances or other regulated materials.
OSHA and Other Laws and Regulations
We are subject to the requirements of the federal Occupational Safety and Health Act (OSHA) and comparable state statutes. The OSHA hazard communication standard, the Emergency Planning and Community Right to Know Act and similar state statutes require that we organize and/or disclose information about hazardous materials stored, used or produced in our operations.
Recent studies have indicated that emissions of certain gases may be contributing to warming of the Earth’s atmosphere. In response to these studies, many nations have agreed to limit emissions of “greenhouse gases” pursuant to the United Nations Framework Convention on Climate Change, also known as the “Kyoto Protocol.” Methane, a primary component of natural gas, and carbon dioxide, a byproduct of the burning of oil and natural gas, and refined petroleum products, are “greenhouse gases” regulated by the Kyoto Protocol. Although the United States is not participating in the Kyoto Protocol, several states have adopted legislation and regulations to reduce emissions of greenhouse gases. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect our operations and demand for our products. Additionally, the U.S. Supreme Court has ruled, in Massachusetts, et al. v. EPA, that the U.S. Environmental Protection Agency abused its discretion under the Clean Air Act by refusing to regulate carbon dioxide emissions from mobile sources. This Supreme Court decision could result in federal regulation of carbon dioxide emissions and other greenhouse gases, and may affect the outcome of other climate change lawsuits pending in U.S. federal courts in a manner unfavorable to our industry. Currently, our operations are not adversely impacted by existing state and local climate change initiatives and, at this time, it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business.
Private Lawsuits
In addition to claims arising under state and federal statutes, where a release or spill of hazardous substances, oil and gas or oil and gas wastes have occurred, private parties or landowners may bring lawsuits against oil and gas companies under state law. The plaintiffs may seek property damages, personal injury damages, remediation costs or injunctions to require remediation or restoration of contaminated property, soil, groundwater or surface water. In some cases, oil and gas operations are located near populated areas and emissions or accidental releases could affect the surrounding properties and population.
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
A smaller reporting company is not required to provide the information required by this Item.
Item 2.
Item 2. Properties
We maintain our corporate office at 11200 Westheimer, Suite 900, Houston, TX 77042. 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 $150,000” 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.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's shareholders during the fiscal year ended December 31, 2009.
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 OTC Bulletin Board (“OTCBB”), which is sponsored by FINRA. The OTCBB is 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 OTCBB under the symbol “SNVP.OB.”
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. 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, 2009, we had 31,296,000 shares of our common stock issued and outstanding, held by approximately 14 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 April 14, 2009, the Company issued 2,000,000 shares (8,000,000 shares post a 4 for 1 forward split effective June 3, 2009) to Arthur Bertagnolli in connection with the merger of Plantation Exploration, Inc. and the Company.
On June 11, 2009, the Company issued 249,000 shares (996,000 shares post a 4 for 1 forward split effective June 3, 2009) to The James J. Cerna Revocable Trust in exchange for services valued at $49,800.
On November 6, 2009, the Company issued 400,000 shares to Arthur Bertagnolli in exchange for services valued at $80,000.
On November 6, 2009, the Company issued 100,000 shares to Raymond A. Crabbe in exchange for services as a director of the Company valued at $20,000.
On November 6, 2009, the Company issued 100,000 shares to William F. Howell in exchange for services as a director of the Company valued at $20,000.
On November 6, 2009, the Company issued 100,000 shares to Charles J. Jacobus in exchange for services as a director of the Company valued at $20,000.
On November 6, 2009, the Company issued 100,000 shares to Roderic Salazar in exchange for services valued at $20,000.
On November 6, 2009, the Company issued 1,000,000 shares to Excelsus Capital Partners, LLC (shares were mistakenly issued in the name of Craig Cardillo, a principal of Excelsus Capital Partners, LLC) in exchange for services valued at $200,000.
On December 18, 2009, the Company issued 500,000 shares to The RLB 2006 Irrevocable Trust in exchange for an interest in a well valued at $350,000.
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 $12,500.00.
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 $12,500.00.
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 $12,500.00
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, LLC 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 $10,000.00.
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 $10,000.00.
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 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 and are producing oil from three wells: Ali-O No.1, Rozella Kifer, Zavadil No.1. We also own a 2.75% working interest in the producing Glass 59 #2 well. We will continue our workover efforts on these wells, and seek to duplicate our successful efforts with other wells. We have retained Forrest A. Garb & Associates, a petroleum consulting firm specializing in geological analyses of oil wells, to work with us to locate and screen a number of abandoned oil wells prospects for viability. Our evaluations include an assessment of production potential of each well using geological evaluations including the use of seismic data as available. In addition to the four wells that we are currently have in operation, we have also already identified 34 other wells as targets for acquisition: six that are producing and 28 that have been abandoned but have seismic or other data indicating that they are favorable candidates for recompletion or workover.
Once we have determined which wells have the greatest production potential and are most likely to respond to our workover efforts, we will then pursue acquiring interests in those wells. We will then engage in workover operations as with our previous wells, primarily through horizontal drilling and acidization. We hope to extract and sell crude oil through a third party purchaser.
Our strategy is to concentrate on existing low maintenance production, exploit low risk sidetrack drilling opportunities as and when identified, and use the accumulated information and results to advance operations.
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. Our goal is to turn wells rendered uneconomical and abandoned by large companies into profitable ones.
We continue to find ways to reduce expenses and increase efficiency. Recently, decisions were made to convert all applicable wells to operate on electricity. Electricity is cheaper as an energy source and also electric motors have lower maintenance expenses than gas-operated engines. To further this end, plans were made to install the “Jack Shaft Reducer” on our Rozella Kifer Well. The Jack Shaft Reducer is expected to both increase efficiency and decrease maintenance costs which will in turn extend the life of the well’s production. This was installed subsequent to the period ended September 30, 2009 and we have already begun to reap benefits from the conversions.
Developments in Expansion of Wells
We signed a letter of intent to acquire 100% of the working interest in the Wright Well in Gonzalez County, Texas from Lucas Energy, Inc., an independent crude oil and gas company. The letter of intent has expired, however, as of the date of this report negotiations are continuing to purchase a 100% interest in the well. No definitive agreements have been signed to date, but we are continuing to pursue the proposed transaction.
We signed a participation agreement with Paragon Petroleum, Inc., an independent crude oil and gas company, in the Glass 59 #2 well which has been recently completed. The completion data from Bright & Co., the operator has increased from anticipated production to initial production levels of 53 bopd of oil and 858 mcf of gas.
Results of Operations for the Fiscal Years ended December 31, 2009 and December 31,
Revenues. Our total revenue reported for the fiscal year ended December 31, 2009 was $35,885, an increase from $-for the fiscal year ended December 31, 2008.
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, 2009 were $8,068. There were no comparable expenses in the fiscal year ended December 31, 2008.
Depletion and Impairment. Depletion expense for the fiscal year ended December 31, 2009 was $3,508 and we recorded $647,305 impairment expense in the fiscal year ended December 31, 2009. There were no comparable expenses in the fiscal year ended December 31, 2008.
Operating Expenses. Operating expense for the fiscal year ended December 31, 2009 was $847,434 compared to $37,097 for the fiscal year ended December 31, 2008. The increase is the result of the merger of the Company with Plantation Exploration, Inc. which closed in April, 2009. The increase in operating expense includes the recognition of stock compensation expense, certain non-cash expenses relating to the recognition of stock options and relating to stock issued for services during the fiscal year ended December 31, 2009.
Other Income (Expenses). We recorded interest expenses of $47,296 for the fiscal year ended December 31, 2009, compared with $2,652 interest income for the fiscal year ended December 31, 2008. The increase in interest expense is associated with a loans entered into during fiscal 2009.
Net Income (Loss). We reported a net loss of $1,517,726 or $0.04 per share for the fiscal year ended December 31, 2009 compared with a net loss of $39,749 or $0.00 per share for the fiscal year ended December 31, 2008.
Liquidity and Capital Resources
As of December 31, 2009, we had total current assets of $62,717. Our total current liabilities as of December 31, 2009 were $1,010,587. Thus, we had a working capital deficit of $947,870 as of December 31, 2009.
Operating activities used $42,695 in cash for the fiscal year ended December 31, 2009. Our net loss of $1,517,726 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. We had no investing activities during the fiscal year ended December 31, 2009. Cash flows provided by financing activities during the fiscal year ended December 31, 2009 was $302,500 consisting of proceeds from notes payable and other borrowings offset by certain note payments.
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 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, 2009, we have generated losses from operations, have an accumulated deficit of $1,581,992 and a working capital deficiency of $947,870. 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 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, 2009, 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
On August 3, 2009, Board of Directors of the Company dismissed Moore & Associates Chartered, its independent registered public account firm. On the same date, August 3, 2009, the accounting firm of Seale and Beers, CPAs was engaged as the Company's new independent registered public account firm. The Company’s Board of Directors and the Audit Committee approved of the dismissal of Moore & Associates Chartered and the engagement of Seale and Beers, CPAs as its independent auditor. None of the reports of Moore & Associates Chartered on the Company's financial statements for either of the past two years or subsequent interim period contained an adverse opinion or disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles, except that the Company’s audited financial statements contained in its Form 10-K for the fiscal year ended December 31, 2008 a going concern qualification in the Company's audited financial statements.
On August 3, 2009 the Company engaged Seale and Beers, however, on September 10, 2009, the Board of Directors of the Company dismissed Seale and Beers, CPAs and on the same date, the accounting firm of GBH CPAs, PC was engaged as the Company’s new independent registered public accounting firm. The Board of Directors of the Company approved of the dismissal of Seale and Beers, CPAs and the engagement of GBH CPAs, PC as its independent auditor.
On August 27, 2009, the PCAOB revoked the registration of our prior auditor, Moore & Associates Chartered, because of violations of PCAOB rules and auditing standards in auditing financial statements, PCAOB rules and quality controls standards and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and noncooperation with a Board investigation. The Company was notified by the SEC that a due to the revocation, a re-audit of the Company’s financial statements for the year ended December 31, 2008 would be required. For this purpose, GBH CPAs, PC has conducted a re-audit of the Company’s financial statements for the year ended December 31, 2008, for the period from Inception (June 25, 2007) through December 31, 2007 and for the period from Inception (June 25, 2007) through December 31, 2008 and has conducted an examination of such financial statements which has resulted in the restatement thereof incorporated in this report. In addition to the Company’s financial statements for the year ended December 31, 2009 and for the period from Inception (June 25, 2007) through December 31, 2009 and for the period from Inception (June 25, 2007) through December 31, 2008, this report also incorporates the re-audited Company financial statements for the year ended December 31, 2008, for the period from Inception (June 25, 2007) through December 31, 2007 and for the period from Inception (June 25, 2007) through December 31, 2008.
Item 9A(T).
Item 9A(T). Controls and Procedures
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2009. The Company's internal control over financial reporting is a process and procedures designed under the supervision of the Company's Principal Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Based upon that evaluation, our Chief Executive Officer who is also our Principal Financial Officer concluded that, as of December 31, 2009, our disclosure controls and procedures over financing reporting were not effective. This conclusion was based on the existence of the material weaknesses in our internal control over financial reporting previously disclosed and discussed below. There have been no changes in our internal controls over financial reporting during the year ended December 31, 2009. To address the need for more effective internal controls, management has plans to improve the existing controls and implement new controls as our financial position and capital availability improves. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
We identified and continue to have the following material weakness in our internal controls over financial reporting:
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.
Limitations on the Effectiveness of Internal Controls
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives and our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
Management’s Annual Report on Internal Control over Financing Reporting
This annual report does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of the company's registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.
Changes in Internal Control over Financial Reporting
During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting. Management plans to address the material weakness in internal controls noted above as sufficient resources become available.
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, 2009 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.
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 five 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, 2009, 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. We anticipate that we will adopt a code of ethics during 2010.
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, 2009 and 2008.
Narrative Disclosure to the Summary Compensation Table
Although we do not currently compensate our officers, we reserve the right to provide compensation at some time 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, 2009.
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, 2009.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Narrative Disclosure to the Director Compensation Table
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, 2009.
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, 2009, 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 31,296,000 Shares of Common Stock issued and outstanding as of December 31, 2009. Addresses for all of the individuals listed in the table below are c/o Savoy Energy Corporation, 11200 Westheimer, Suite 900, Houston, TX 77042.
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 OTC Bulletin Board (the “Bulletin Board”). The Bulletin Board does not impose 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
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 Actof
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
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/ William F. Howell
William F. Howell
Director
April 16, 2010
By:
/s/ Raymond F. Crabbe
Raymond F. Crabbe
Director
April 16, 2010
By:
/s/ Charles J. Jacobus
Charles J. Jacobus
Director
April 16, 2010
By:
/s/ Donald C. Rusk
Donald C. Rusk
Director
April 16, 2010
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Savoy Energy Corporation
(FKA Arthur Kaplan Cosmetics, Inc.)
Houston, Texas
We have audited the accompanying consolidated balance sheets of Savoy Energy Corporation (fka Arthur Kaplan Cosmetics, Inc.) and its subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity (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, 2009 and 2008, 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 Note2 to the 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 2. 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 16,
SAVOY ENERGY CORPORATION
(FKA ARTHUR KAPLAN COSMETICS, INC.)
Consolidated Balance Sheets
The accompanying notes are an integral part of these consolidated financial statements.
SAVOY ENERGY CORPORATION
(FKA ARTHUR KAPLAN COSMETICS, INC.)
Consolidated Statements of Operations
The accompanying notes are an integral part of these consolidated financial statements.
SAVOY ENERGY CORPORATION
(FKA ARTHUR KAPLAN COSMETICS, INC.)
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended December 31, 2009 and 2008
The accompanying notes are an integral part of these consolidated financial statements.
SAVOY ENERGY CORPORATION
(FKA ARTHUR KAPLAN COSMETICS, INC.)
Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these consolidated financial statements.
SAVOY ENERGY CORPORATION
(FKA ARTHUR KAPLAN COSMETICS, INC.)
Notes to Consolidated Financial Statements
December 31, 2009
NOTE 1 - FINANCIAL STATEMENTS AND BASIS OF PRESENTATION
Savoy Energy Corporation (the “Company”) was incorporated as “Arthur Kaplan Cosmetics, Inc.” on June 25, 2007, in the State of Nevada. Our principal offices are located at 11200 Westheimer, Suite 900, Houston, TX 77042 and our telephone number is (713) 243-8788.
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.
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 has not been changed. The Company’s financial statements reflect the stock split on a retro-active basis.
Certain amounts in prior periods have been reclassified to conform to current period presentation
NOTE 2 - GOING CONCERN
Our 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 the date of this report, the Company has a working capital deficit, has generated limited revenues and has an accumulated deficit. 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, the Company will need, among other things, additional capital resources and to develop a consistent source of revenues. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability to raise equity or debt financing, and the attainment of profitable operations from the Company's planned business.
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 3 - 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 at the date of the financial statements and the reported amounts of revenue 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.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes.
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
As of December 31, 2009, the carrying value of all oil and gas properties were subject to amortization. The Company has no carrying value for properties not subject to amortization.
Revenue and cost recognition
The Company uses the sales method of accounting for natural gas and oil revenues. Under this method, revenues are recognized based on the actual volumes of gas and oil sold to purchasers. The volume sold may differ from the volumes to which the Company is entitled based on our interest in the properties. Costs associated with production are expensed in the period incurred. 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. 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. For oil sales, this occurs when the customer's truck takes delivery of oil from the operators’ storage tanks.
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.
Recent Accounting Pronouncements
In May 2009, the FASB issued ASC 855-10 entitled “Subsequent Events”. Companies are now required to disclose the date through which subsequent events have been evaluated by management. Public entities (as defined) must conduct the evaluation as of the date the financial statements are issued, and provide disclosure that such date was used for this evaluation. ASC 855-10 provides that financial statements are considered “issued” when they are widely distributed for general use and reliance in a form and format that complies with GAAP. ASC 855-10 is effective for interim and annual periods ending after June 15, 2009 and must be applied prospectively. The adoption of ASC 855-10 during the the year ended December 31, 2009 did not have a significant effect on the Company’s financial statements. In connection with preparing the accompanying financial statements as of December 31, 2009, management evaluated subsequent events through the date that such financial statements were issued (filed with the SEC).
In June 2009, the FASB issued ASC 105-10, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. ASC 105-10 establishes the Codification as the sole source of authoritative accounting principles recognized by the FASB to be applied by all nongovernmental entities in the preparation of financial statements in conformity with GAAP. ASC 105-10 was prospectively effective for financial statements issued for fiscal years ending on or after September 15, 2009 and interim periods within those fiscal years. The adoption of ASC 105-10 did not impact the Company’s results of operations or financial condition. The Codification did not change GAAP, however, it did change the way GAAP is organized and presented. As a result, these changes impact how companies reference GAAP in their financial statements and in their significant accounting policies. The Company implemented the Codification in this Report by providing references to the Codification topics alongside references to the corresponding standards.
In January 2010, the FASB issued ASU No. 2010-03, “Extractive activities - Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosures”. The main provisions of ASU No. 2010-03 are the following: (1) expanding the definition of oil- and gas- producing activities to include the extraction of saleable hydrocarbons, in solid, liquid, or gaseous state, from oil sands, shale, coalbeds, or other nonrenewable resources that are intended to be upgraded into synthetic oil or gas, and activities undertaken with a view to such extraction; (2) entities should use first-day-of-the-month price during the 12-month period (the 12-months average price) in calculating proved oil and gas reserves and estimating related standardized measure of discounted net cash flows; (3) requiring entities to disclose separately information about reserves quantities and financial statement amounts for geographic areas that represent 15 percent or more of proved reserves; (4) separate disclosure for consolidated entities and equity method investments. ASU No. 2010-03 is effective for annual reporting periods ending on or after December 31, 2009. The Company adopted ASU No. 2010-03 for the 2009 annual financial statements. This adoption did not have a material impact on the Company’s reported reserves evaluation, results of operations, financial position or cash flows.
With the exception of the pronouncements noted above, no other accounting standards or interpretations issued or recently adopted are expected to have a material impact on the Company’s financial position, operations or cash flows.
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 is based on management’s preliminary assessment of the fair value of both the assets acquired and liabilities assumed. The Company is in the process of reviewing the preliminary valuation of certain acquired assets and liabilities; thus, the allocation of the purchase price is subject to refinement.
There was 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 years ended December 31, 2009 and 2008:
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:
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. Subsequent to September 30, 2009, we 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.
NOTE 5 - ASSET RETIREMENT OBLIGATIONS
In accordance with ASC 410, “Accounting for Asset Retirement Obligations” ECCE 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. ECCE 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 ECCE's credit-adjusted risk-free interest rate. No market risk premium has been included in ECCE'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 6 - 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. During the year ended December 31, 2009, the Company borrowed an additional $40,000 from OIL. As of December 31, 2009, the Company had received $360,000 from OIL. The interest is payable in-kind at 5,000 (20,000 post-split) shares of common stock of the Company for each month the debt remains unpaid. Both the January 27, 2009 and May 4, 2009 agreements require the Company to issue 5,000 (20,000 post-split) shares of common stock to OIL as financing fees.
On December 10, 2009, the Company settled outstanding debts to Lucas Energy, Inc. in the amount of $100,000. In exchange for the settlement and release of the debt, the Company agreed to exchange a 16% working interest in the Rozella Kifer No.1, Louis Zavadil No.1 and Ali-O Unit No.1 wells.
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 is payable at maturity on June 30, 2010. The Company is using the proceeds for working capital. The outstanding balance of $37,500 has been classified as current debt at December 31, 2009.
On December 29, 2009, the Company borrowed $50,000 from a two 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 June 30, 2010. The Company is using the proceeds for working capital. The outstanding aggregate balance of $50,000 has been classified as current debt at December 31, 2009.
NOTE 7 - STOCK OPTIONS AND WARRANTS
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.
A summary of stock option activity is as follows:
Options outstanding and their relative exercise price at December 31, 2009 are as follows:
NOTE -8 RELATED PARTY TRANSACTIONS
During 2008, the former officer and director paid $4,500 of expenses on behalf of the Company. The advances were unsecured, non interest bearing, and had no specific terms for repayment. The amount was forgiven as part of the business combination (see Note 4). As of December 31, 2009 and 2008, $0 and $33,194, respectively has been included in related party payables in the financial statements.
During 2008, a shareholder of the company paid for $930 of the Company’s legal expenses. The $930 has been recognized as legal expenses and additional paid in capital in the financial statements as of and for the year ended December 31, 2008.
As of December 31, 2009, a shareholder had advanced the Company $151,003 for operating costs. The advances are repayable on demand.
NOTE 9 - COMMITMENTS, CONTINGENCIES AND LITIGATION
The Company’s Employment Agreement with Arthur Bertagnolli provides for certain compensation and benefits based on Company output over and above base compensation based on the Company’s achievement of specified milestones. As of this date, none of those milestones have been achieved. Under certain circumstances, Mr. Bertagnolli is also entitled to an additional payment upon sale of the Company to a larger 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 10 - EARNINGS PER SHARE
Basic Loss per Common Share
Basic loss per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net income available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, if any, because their inclusion would be anti-dilutive.
NOTE 11 - 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 12 - COMMON STOCK
On April 2, 2009, in accordance with the Merger Agreement dated March 31, 2009, our Acquisition Sub merged with and into Plantation Exploration, and the sole stockholder of Plantation Exploration (Arthur Bertagnolli) received 2,000,000 shares of our common stock (8,000,000 post split). In conjunction with te closing of the Merger on April 4, 2009, in connection with the sale of the Company’s previous business, Arthur Kaplan cancelled 40,400,000 shares Company stock owned by him.
On May 29, 2008, the Company’s common stock was forward split on a 10 shares for 1 share basis. Effective June 2, 2009, our 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. The total number of authorized shares was not changed. The accompanying financial statements reflect the forward stock splits on a retroactive basis. The par value of the Company’s common stock remained at $0.001 per share resulting in negative additional paid-in-capital to account for certain shares issued at less than par value after adjusting for the split.
On June 4, 2009, the Company issued 996,000 shares of its common stock for consulting services to a non-related third party valued at approximately $189,000. The $189,000 fair value of the 300,000 shares was based on the Company’s stock price on the date of grant and was expensed at the grant date as there was no requisite service period.
On October 7, 2009 the Board of Directors granted 400,000 shares of common stock as payment to Art Bertagnolli for accrued salary valued at approximately $60,000. The $60,000 fair value of the 400,000 shares was based on the Company’s stock price on the date of grant and was expensed over the requisite service period from April 2009 through December 2009.
On October 7, 2009, the Board of Directors granted 300,000 shares of common stock to directors of the Company for director fees valued at approximately $45,000. The $45,000 fair value of the 300,000 shares was based on the Company’s stock price on the date of grant and was expensed over the requisite service period from July 2009 through December 2009.
On October 7, 2009 the Board of Directors granted 100,000 shares of common stock to a consultant for services valued at approximately $15,000. The $15,000 fair value of the 100,000 shares was based on the Company’s stock price on the date of grant and was expensed at the grant date as there was no requisite service period.
On November 18, 2009, the Board of Directors granted 1,000,000 shares of common stock for consulting fees to a non-related third party. The $110,000 fair value of the 1,000,000 shares was based on the Company’s stock price on the date of grant and was expensed at the grant date as there was no requisite service period.
On December 18, 2009, the Company issued 500,000 shares to The RLB 2006 Irrevocable Trust in exchange for an interest in a well. . The $45,000 fair value of the 500,000 shares was based on the Company’s stock price on the date of grant and was included in the capitalized costs of its oil and gas properties at the grant date.
NOTE 13- SUPPLEMENTAL OIL AND GAS INFORMATION-(Unaudited)
Proved oil and gas reserve quantities are based on estimates prepared externally by an independent engineer 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.
(1) This measure is not intended to represent the market value of estimated reserves.
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 price 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.
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, 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, 2009 and 2008:
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 and costs at the end of each period and a 10 percent annual discount factor.
Future cash flows are computed by applying fiscal year-end 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 year ended December 31, 2009 and 2008
NOTE 14- SUBSEQUENT EVENTS
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 $12,500.00.
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 $12,500.00.
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 $12,500.00
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, LLC for services rendered.
On March 18, 2010, the Company issued 1,500,000 shares to Rio Sterling Holdings, LLC for repayment of the Company’s note payable with a face amount of $10,000.00.
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 $10,000.00.
On March 31, 2010, the Company secured a 2.75% working and revenue interest in the Glass 59 #2 well in Sterling County, Texas that is operated by Bright & Company.