ITEM 1. BUSINESS
General; Discontinued Former Oil and Gas Operations.
Maverick Oil and Gas, Inc. (the “Company,” “we” or “us”) was incorporated in June 2002. From 2004 through January 2008 we were an early stage independent energy company seeking to find and develop oil and gas reserves. Following the sale in April 2007 of our interest in the Barnett Shale play in Wise County, Texas, we were unable to secure financial, operating or other developmental partners for our Fayetteville Shale project. We were also unable to secure additional funding for our operations. These factors led to the foreclosure on our last remaining project, the Fayetteville Shale project, in January 2008. Following the foreclosure process, we terminated most of our personnel and ceased all oil and gas related operations as we exited from the oil and gas business into the business of managing an inactive shell company whose objective is to identify business opportunities and financing that may be suitable for a public Company. However, our remaining cash assets will only be sufficient to sustain us as an inactive company for the short-term. There can be no assurances that we will be able to identify a suitable business opportunity or the financing necessary to complete a transaction, or that any business we may acquire will generate profits or increase the value of the Company. If we are unable to execute on our business plan within the short-term, we will be forced to suspend all public reporting with the SEC and possibly liquidate.
We have continued to incur significant losses since our inception. During fiscal years 2007 and 2006, we recognized losses to common stockholders of $11,333,825 and $21,529,473, respectively. For the fiscal year ended August 31, 2008, our net loss from continuing operations was $2,565,008 and we had an accumulated deficit of $58,886,571 as of August 31, 2008.
Our principal offices are located at 300 SE 2nd Street, Suite 860, Fort Lauderdale, Florida 33301. Our telephone number is 954-463-5707 and our fax number is (954) 463-6265.
Employees and Consultants
During January 2008, we terminated all personnel involved in oil and gas operations. We presently employ our Chief Executive Officer on a part time basis and contract accounting support on an as needed basis.
Current Business Plan
Our current business plan is to attempt to identify a suitable operating company with a view towards completing a business combination that could achieve long-term growth for the Company. However, as of the date of this report, we have not identified a particular industry and have determined not to restrict our search for a target company to any specific business, industry or geographical location. As of the date of this report, we have also not engaged in any specific discussions with any potential company regarding a transaction. In addition, although we have not developed any definitive criteria for evaluating a successful target, we expect to consider, among other factors, the following:
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growth potential as evidenced by technological superiority, anticipated market expansion or new products or services;
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the historic financial performance of the target;
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the quality of the management team, including consultants and advisors;
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the target’s competitive position relative to other firms of similar size and experience within its industry, a segment thereof, or geographic location;
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the capital requirements of the target and anticipated availability of required funds for both the short and long term;
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the results of our financial, business and management due diligence; and
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the anticipated time and cost to complete a transaction.
In applying the foregoing criteria, we will attempt to analyze all available, relevant and material factors and circumstances in order to make an informed decision. Potential opportunities may occur in different industries, in different geographic locations and at various stages of development, all of which will make the task of comparing, analyzing and evaluating business opportunities extremely difficult and complex.
Most acquisitions of private operating companies by public shell companies are completed by way of merger pursuant to which the stockholders of the private company acquire a substantial majority of the issued and outstanding shares of the pubic company after the merger is completed. These transactions are often referred to as “reverse acquisitions” or “reverse mergers” and generally result in substantial additional dilution to the ownership interests of the stockholders of the public company. If any transaction is structured in this manner, our stockholders will suffer substantial dilution. We may complete such an acquisition upon the sole determination of management without any vote or approval by our stockholders. In certain circumstances, however, it may be necessary to call a stockholders' meeting and obtain approval of our stockholders, which may result in delay and additional expense in the consummation of any proposed transaction and may also give rise to certain appraisal rights to dissenting stockholders. Most likely, we will seek to structure any such transaction so as not to require stockholder approval.
It is anticipated that the investigation of specific business opportunities and the negotiation, drafting and execution of relevant agreements, disclosure documents and other instruments will require substantial management time and attention and substantial cost for accountants, attorneys and other professionals. If we decide not to complete a transaction after we have incurred material transaction costs in connection with the investigation, negotiation and documentation related thereto, such costs will likely not be recoverable.
We intend to use our limited cash assets to pay for our minimal operations and legal, accounting and professional services required to prepare and file our reports with the SEC. Our remaining cash assets, however, will only be sufficient to sustain us as an inactive company for the short-term. There can be no assurance that we will be able to identify an acceptable operating company, complete an acquisition, or that any business we acquire will generate profits or increase the value of the Company. If we are unable to locate additional financing within the short-term, we will be forced to suspend all public reporting with the SEC and possibly liquidate. Furthermore, our ability to execute on these business objectives may be subject to material doubt as our management team will likely be limited to one part-time individual who will have minimal cash resources to support operations for more than the short-term.
ITEM 1A.
ITEM 1A. RISK FACTORS
Our business and an investment in our securities are subject to a variety of risks. The following risk factors describe the most significant events, facts or circumstances that could have a material adverse effect upon our business, financial condition, results of operations, ability to implement our business plan, and the market price for our securities. Many of these events are outside of our control.
Risks Relating to Our Business
We need additional capital and our auditors have raised substantial doubt about our ability to continue as a going concern.
We have ceased all oil and gas operations and, with the exception of a part-time relationship with our current Chief Executive Officer, have terminated all of our personnel. Our remaining assets, consisting only of a modest amount of cash, will only be sufficient to support our plan of operations for the short-term. We will seek business opportunities and related financing that may be suitable investments for the Company. There can be no assurances that we can identify an appropriate business opportunity, and even if we can, there can be no assurance that financing will be available to us. If we are unable to obtain funds when we need them or if we cannot obtain funds on terms favorable to us within the short-term, we may not be able to maintain our operations as a going concern. In this regard, our independent registered public accounting firm has included a paragraph in its audit report on our financial statements as of August 31, 2008 and for the year then ended, raising substantial doubt about our ability to continue as a going concern.
We discontinued oil and gas operations, will not generate any revenue unless we complete a business combination with an operating company, and need additional capital to fund our activities.
We have experienced net losses from operations in each fiscal quarter since our inception, and we expect to continue to incur losses for the foreseeable future. As we have transitioned our business model, unless we complete a business combination with an operating company, we will not generate any revenues in the future and we will continue to incur expenses related to identifying and acquiring an operating company and compliance with our reporting obligations under applicable federal securities laws. We will need to raise additional funds, and such funds may not be available on commercially acceptable terms, if at all. If we cannot raise funds on acceptable terms, we may not be able to continue to execute our plan to acquire an operating company and in the extreme case, liquidate the Company.
We may not be able to acquire an operating company and if we complete such an acquisition, we expect that we will need to raise additional capital.
Our sole business objective is to seek to identify business opportunities. As of the date of this report, we have not identified any operating companies as potential acquisition targets and have not commenced any discussions or entered into any agreement to acquire an operating company. There can be no assurance that we will be able to identify a suitable operating company to acquire or complete such an acquisition. Furthermore, our ability to execute on this business model may be subject to material doubt as our management team will likely be limited to one part-time individual who will have minimal cash resources to support operations for more than the short-term. In the event that we complete such an acquisition, we expect that we will need to raise substantial additional capital. We intend to rely on external sources of financing to meet any capital requirements and to obtain such funding through the debt and equity markets. We cannot provide any assurances that we will be able to obtain additional funding when it is required or that it will be available to us on commercially acceptable terms, if at all. If we fail to obtain such necessary funding, any such acquisition may not be successful.
Our Board of Directors has sole discretion to identify and evaluate acquisition candidates and complete acquisitions without approval of our stockholders.
We have not developed any specific acquisition guidelines and we are not obligated to follow any particular operating, financial, geographic or other criteria in evaluating candidates for potential acquisitions or business combinations. We will target companies that we believe will provide the best potential long-term financial return for our stockholders and we will determine the purchase price and other terms and conditions of acquisitions without review or approval of our stockholders. Accordingly, our stockholders will not have the opportunity to evaluate the relevant economic, financial and other information that our Board, which at that time may only consist of one person, will use and consider in deciding whether or not to enter into a particular transaction.
There is competition for those private companies suitable for a merger transaction of the type contemplated by management.
There is currently a very competitive market for business opportunities which could reduce the likelihood of consummating a successful business combination. We expect to be an insignificant participant in the business of seeking mergers with, joint ventures with, and acquisitions of small private and public entities. A large number of established and well-financed entities, including small public companies, venture capital firms, and special purpose acquisition companies or “SPACs” are active in mergers and acquisitions of companies that may be desirable target candidates for us. Nearly all these entities have significantly greater financial resources, technical expertise and managerial capabilities than we do. As result, we may be unable to effectively compete with such entities in identifying possible business opportunities and successfully completing a business combination. These competitive factors may reduce the likelihood of our identifying and consummating a successful business combination.
Risks Relating to our Stock
Our common stock is traded on the OTC Bulletin Board and could be subject to extreme volatility.
Our common stock is currently quoted on the OTC Bulletin Board, which is characterized by low trading volume. Because of this limited liquidity, stockholders may be unable to sell their shares. The trading price of our shares has from time to time fluctuated widely and may be subject to similar fluctuations in the future. The trading price of our common stock may be affected by a number of factors, including events described in these risk factors, as well as our operating results and financial condition. In recent years, broad stock market indices, in general, and smaller capitalization companies, in particular, have experienced substantial price fluctuations. In a volatile market, we may experience wide fluctuations in the market price of our common stock. These fluctuations may have a negative effect on the market price of our common stock.
We will seek to raise additional funds in the future, and such additional funding will likely be dilutive to shareholders or impose operational restrictions.
We need to raise additional capital in the immediate term to help fund operating expenses and execute our new plan of operations. If additional capital is raised through the issuance of equity securities, the percentage ownership of our shareholders will be reduced. These shareholders may experience additional dilution in net book value per share and any additional equity securities may have rights, preferences and privileges senior to those of the holders of our common stock.
The influx of additional shares of our common stock onto the market may create downward pressure on the trading price of our common stock.
The initial sale or secondary resale of substantial amounts of our common stock in the public markets could have an adverse effect on the market price of our common stock and make it more difficult for us to sell our equity securities in the future at prices which we deem appropriate. We have over 1.7 million shares of our common stock that may be issued in the future upon the conversion or exercise of outstanding options and warrants. The entry of this substantial number of shares into the public market, or the mere expectation of the entry of those shares into the market could adversely affect the market price of our common stock and could impair our ability to obtain capital through securities offerings.
Acquiring an operating company may result in substantial dilution.
Most acquisitions of private operating companies by public shell companies are completed by way of “reverse acquisitions” or “reverse mergers” pursuant to which the shareholders of the target company acquire a substantial majority of the issued and outstanding shares of the pubic company after completion of the merger. Any such merger or acquisition may be effected by us without stockholder approval and will result in substantial dilution in the percentage of our common stock held by our then existing stockholders. Moreover, the common stock issued in any such merger or acquisition transaction may be valued on an arbitrary or non-arm’s-length basis by our management, resulting in an additional reduction in the percentage of common stock held by our then existing stockholders. Our Board of Directors which may only consist of one person, may have the power to issue any or all of such authorized but unissued shares without stockholder approval. To the extent that additional shares of common stock or preferred stock are issued in connection with a business combination or otherwise, dilution to the interests of our stockholders will occur and the rights of the holders of common stock might be materially adversely affected.
Substantial voting power concentrated in the hands of our principal stockholders.
We have less than 15 shareholders who in the aggregate own and control approximately 49.5% of our outstanding common stock. In addition, the two former holders of our Secured Convertible Debentures, have the right to acquire an aggregate of approximately 1,540,000 shares of our common stock should they exercise all of their warrants and hold the shares of common stock received upon such exercise. This would equate to approximately 39% of our outstanding common stock, after giving effect to such issuance. However, the terms of these warrants prohibit each holder from exercising the warrants, on less than sixty days notice, to the extent such conversion or exercise would cause such holder to beneficially own in excess of 2.49% of our outstanding common stock.
We may issue shares of preferred stock with greater rights than our common stock.
Our articles of incorporation authorize our board of directors to issue shares of preferred stock and to determine the price and other terms for those shares without the approval of our shareholders. Any such preferred stock we may issue in the future could rank ahead of our common stock, in terms of dividends, liquidation rights, and voting rights.
We do not anticipate paying dividends.
We have not paid any cash dividends on our common stock since our inception and we do not anticipate paying cash dividends in the foreseeable future. For the foreseeable future, we anticipate that we will retain any earnings which we may generate from our operations to finance and develop our growth and that we will not pay cash dividends to our stockholders.
We are not subject to certain of the corporate governance provisions of the Sarbanes-Oxley Act of 2002.
Since our common stock is not listed for trading on a national securities exchange, we are not subject to certain of the corporate governance requirements established by the national securities exchanges pursuant to the Sarbanes-Oxley Act of 2002. These include rules relating to independent directors, director nomination, audit and compensation committees, retention of audit committee financial expert and the adoption of a code of ethics. Although a majority of our directors are considered independent and we have separately designated board committees consisting exclusively of directors who are considered independent, we expect that some or all of our independent directors will resign following the filing of this report. Accordingly, we expect that we will no longer be in compliance with such corporate governance standards. Unless we voluntarily elect to fully comply with those obligations, which we have not to date, the protections that these corporate governance provisions were enacted to provide, will not exist with respect to the Company.
If we fail to comply in a timely manner with requirements of Section 404 of the Sarbanes-Oxley Act of 2002, our business could be harmed and our stock price could decline.
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal controls over financial reporting, and attestation of this assessment by our independent registered public accountants. The SEC has extended the compliance dates for smaller public companies, including us, such that the annual assessment of our internal controls requirement will first apply to our annual report for our first fiscal year
ending August 31, 2008 and that the first attestation report of our assessment that our independent registered public accounting firm will need to complete will be required in connection with the preparation of our annual report for our fiscal year ending August 31, 2010. Compliance with these rules will require us to incur increased general and administrative expenses and management attention. The standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our internal control over financial reporting. In addition, the attestation process by our independent registered public accountants is new and we may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation of our assessment by our independent registered public accountants. If we cannot assess our internal controls over financial reporting as effective, or our independent registered public accountants are unable to provide an unqualified attestation report on such assessment, investor confidence and share value may be negatively impacted.
ITEM 2.
ITEM 2. PROPERTIES
Our executive offices consist of approximately 3,284 feet of leased office space located at 300 SE 2nd Street, Suite 860, Ft. Lauderdale, FL 33301.
Oil and Gas Properties
We have disposed of virtually all of our interests in oil and gas properties, and no longer hold any interest of material value. Therefore, we have omitted any reference to our gross and net developed and undeveloped oil and natural gas acreage under lease as of August 31, 2008, as well as related reserves, production and drilling activities, as such information would provide no meaningful disclosure.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock currently trades on the OTC Bulletin Board under the symbol “MAVO.OB” The following table set forth the range of the high and low bid-prices per share of our common stock for each of the calendar quarters during our fiscal years ended August 31, 2008 and 2007, as reported by the OTC Bulletin Board. These quotations represent inter-dealer prices, without retail mark-up, markdown, or commission and may not represent actual transactions. Effective October 24, 2008, our common shares outstanding were subject to a reverse stock split in the ratio of 50:1. The prices below reflect the reverse stock split and therefore have been adjusted on a 50 for 1 basis. The last price of our common stock as reported on the OTC Bulletin Board on December 12, 2008 was $0.15 per share.
Holders
As of December 12, 2008, there were 143 shareholders of record of our common stock. However, based upon broker-inquiry conducted in conjunction with our recent reverse stock split, we believe that there are a substantial number of additional beneficial owners of our common stock.
Dividend Policy
We have not paid any cash dividends on our common stock to date, and we have no intention of paying cash dividends in the foreseeable future. Negative covenants in our Secured Convertible Debentures prohibit the payment of dividends. Whether we will declare and pay dividends in the future will be determined by our board of directors at their discretion, subject to certain limitations imposed under Nevada corporate law. The timing, amount and form of dividends, if any, will depend on, among other things, our results of operations, financial condition, cash requirements and other factors deemed relevant by our board of directors.
Recent Sales of Unregistered Securities
As of October 15, 2007, we issued an aggregate of 9,714,500 shares of our common stock, in combination with aggregate cash payments of $595,000, in compromise and discharge of a total of approximately $2,300,000 of unsecured indebtedness held by vendors who provided goods and services to our Fayetteville Shale project and in connection with the dismissal of a $1.2 million lawsuit filed by a land owner within the Fayetteville Shale project. The shares were issued in a private placement transaction to a limited number of persons in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act and Rule 506 of Regulation D, without payment of underwriting discounts or commissions to any person.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and result of operations should be read in conjunction with the financial statements and the related notes and other information included elsewhere in this report.
Overview and Recent Transactions
From 2004 through January 2008 we were an early stage independent energy company seeking to find and develop oil and gas reserves. Following the sale in April 2007 of our interest in the Barnett Shale play in Wise County, Texas, we were unable to secure financial, operating or other developmental partners for our Fayetteville Shale project. We were also been unable to secure additional funding for our operations.
These factors led to the foreclosure on our last remaining project, the Fayetteville Shale project, in January 2008. Following the foreclosure process, we terminated most of our personnel and ceased all oil and gas related operations as we exited from our former oil and gas business into the business of managing an inactive shell company whose objective is to identify business opportunities and financing that may be suitable for a public company. However, our remaining cash assets will only be sufficient to sustain us as an inactive company for the short-term. There can be no assurances that we will be able to identify a suitable business opportunity or the financing necessary to complete a transaction, or that any business we may acquire will generate profits or increase the value of the Company. If we are unable to execute on our business plan within the short-term, we will be forced to suspend all public reporting with the SEC and possibly liquidate.
In October 2008, we completed a 1:50 reverse split of our common stock, which was authorized by a majority of our stockholders. As a result, the number of outstanding shares of common stock was reduced to approximately 2.4 million while the number of authorized shares of our common stock has remained the same. All common stock share amounts and common stock per share amounts have been restated to reflect the 1:50 reverse split as if it had occurred at our inception.
We have continued to incur significant losses since our inception. During fiscal years 2007 and 2006, we recognized losses to common stockholders of $11,333,825 and $21,529,473, respectively. For the fiscal year ended August 31, 2008, our net loss from continuing operations was $2,565,008 and we had an accumulated deficit of $58,886,571 as of August 31, 2008.
Plan to Acquire an Operating Company
As we have ceased all oil and gas operations, our assets consist primarily of a modest amount of cash. Our operations consist solely of attempting to identify and completing a business combination with an operating company and complying with our reporting obligations under federal securities laws. We anticipate that the selection of a business combination will be complex and subject to substantial risk. Based on general economic conditions, rapid technological advances being made in some industries and shortages of available capital, we believe that there are numerous firms seeking access to the capital markets and/or the perceived benefits of becoming a publicly traded corporation. Such perceived benefits include, among other things, facilitating or improving the terms on which additional equity financing may be obtained, providing liquidity for the principals of and investors in a business, creating a means for providing incentive stock options or similar benefits to incentivize key employees, and offering greater flexibility in structuring acquisitions, joint ventures and the like through the issuance of stock. Potentially available business combinations may occur in many different industries and at various stages of development, all of which will make the task of comparative investigation and analysis of such business opportunities extremely difficult and complex.
Unless we acquire an operating company, we do not expect to retain any additional personnel, incur any capital expenditures, or incur any research and development expenses. Our ability to generate future revenue and earnings is dependent on identifying and acquiring an operating company.
We will to use our limited cash assets to pay for our minimal operations and legal, accounting and professional services required to prepare and file our reports with the SEC. Our remaining cash assets will only be sufficient to sustain us as an inactive company for the short-term. There can be no assurance that we will be able to identify an acceptable operating company, complete an acquisition, or that any business we acquire will generate profits or increase the value of the Company. If we are unable to locate additional financing within the short-term, we will be forced to suspend all public reporting with the SEC and possibly liquidate.
Results of Operations.
Year ended August 31, 2008 compared to year ended August 31, 2007
We realized revenues from continuing operations of $62,140 for the twelve month period ended August 31, 2008, compared to revenues of $144,744 for the comparable prior year period.
We incurred a net loss from continuing operations of $2,565,008 for the twelve month period ended August 31, 2008 compared to a net loss from continuing operations of $26,463,979 for the twelve month period ended August 31, 2007. Non-cash charges were the largest single component of our losses for the prior year period. Our loss from continuing operations before other income (expense) for the twelve month period ended August 31, 2008 was $1,781,583 compared to a loss from continuing operations of $10,495,528 for the comparable prior year period.
Total operating expenses from continuing operations were $1,843,723 for the twelve month period ended August 31, 2008, as compared to $10,640,272 for the twelve month period ended August 31, 2007.
General and administrative expenses were $1,678,967 for the twelve month period ended August 31, 2008, as compared to $5,907,050 for the twelve month period ended August 31, 2007. Non-cash share based compensation expense was $272,043 and $1,357,920 for the twelve month periods ended August 31, 2008 and 2007, respectively. The year to year decrease in general and administrative expenses is reflective of staff reductions and lower professional fees due to the decline in business activity during the year ended August 31, 2008.
Non-cash charges from continuing operations for the twelve month period ended August 31, 2008 of $1,220,107 included $272,043 of share based compensation expense, $86,440 of depletion, depreciation and amortization, $5,983 of loss on sale of assets, and $797,641 of non-cash interest expense.
Non-cash expenses from continuing operations of $20,256,750 for the twelve month period ended August 31, 2007 included $1,357,920 of share based compensation, $252,355 of depletion, depreciation and amortization, $34,191,942 of non-cash interest expense, $755,111 of exploration expense, $2,271,313 of impairment charges, $1,396,865 of lease termination expense, which was offset by income of $19,968,756 associated with the conversion feature of our January 2006 Debentures, June 2006 Debentures, November 2006 Debentures, and the Warrants associated with those debentures classified as derivative liabilities. Of the non-cash interest expense, $28,004,623 is the result of accelerating the amortization of the debt discount and deferred financing costs in the second quarter pending the restructuring of the remaining 2006 debentures, which was consummated with the July 31, 2007 recapitalization. Another impact of the recapitalization is that the conversion feature of the recapitalized debt and associated warrants no longer qualify as derivative instruments with embedded liabilities under EITF-00-19 and FAS 133 and consequently, the remaining derivative liability of $387,715 at July 31, 2007 was reclassed to additional paid-in-capital. The impairment charges of approximately $2.3 million consisted primarily of $1.8 million for Zapata county wells and the reduction in carrying value of approximately $0.4 million for the Whitewater assets to expected market related value. Exploration charges were primarily for the G.L. Morris well in Fayetteville Shale Project. The approximate $1.4 million lease termination expense represents the loss of certain Fayetteville Shale Project leases for failure to execute on drilling commitments.
EITF-00-19 and FAS 133 require that certain financial instruments that meet certain conditions be treated as derivatives with embedded liabilities and must be established as a liability on the balance sheet and marked to market through the income statement on a regular basis. This is a non-cash accounting event that applies to the accounting for our Secured Convertible Debentures and associated warrants and does not represent a current or future cash requirement of the Company and, as such, has no impact on liquidity. This convention will cause a non-cash expense to be realized during periods when our share price rises and non-cash income to be recognized when our share price falls. This accounting treatment does not impact operating income. The debentures and associated warrants as recapitalized on July 31, 2007 no longer qualify for this treatment.
Discontinued operations
For the period ended August 31, 2008 we had a gain from discontinued operations of $5,888,043. This gain is primarily the result of $5,629,234 in gains from the extinguishment of debt and trade payables associated with the Fayetteville Shale project. The earnings for the twelve month period ended August 31, 2007 from the Barnett Shale assets prior to its sale and the gain on the sale resulted in a gain on discontinued operations of $24,526,644 gross and $15,166,154 net to us after minority interest.
Year ended August 31, 2007 compared to year ended August 31, 2006
We realized revenues from continuing operations of $144,744 for the twelve month period ended August 31, 2007, compared to revenues of $906,357 for the comparable prior year period.
We incurred a net loss to common stockholders of $11,333,825 for the twelve month period ended August 31, 2007 compared to a net loss of $21,529,473 for the twelve month period ended August 31, 2006. Non-cash charges were the largest component of our losses for both periods. Our loss from continuing operations before other income (expense) for the twelve month period ended August 31, 2007 was $10,495,528 compared to a loss from continuing operations of $13,983,043 for the comparable prior year period.
Total operating expenses for continuing operations were $10,640,272 for the twelve month period ended August 31, 2007, as compared to $14,889,400 for the twelve month period ended August 31, 2006. General and administrative expenses were $5,907,050 for the twelve month period ended August 31, 2007, as compared to $12,681,676 for the twelve month period ended August 31, 2006. Non-cash share based compensation expense of $1,357,920 and $5,316,690 for the twelve month periods ended August 31, 2007 and 2006, respectively, was a major component of general and administrative expense. The year to year decrease in other general and administrative expenses is reflective of the winding down of business activities. Non-cash expenses from continuing operations of $20,256,750 for the twelve month period ended August 31, 2007 included $1,357,920 of share based compensation, $252,355 of depletion, depreciation and amortization, $34,191,942 of non-cash interest expense, $755,111 of exploration expense, $2,271,313 of impairment charges, $1,396,865 of lease termination expense, which was offset by income of $19,968,756 associated with the conversion feature of our January 2006 Debentures, June 2006 Debentures, November 2006 Debentures, and the Warrants associated with those debentures classified as derivative liabilities. Of the non-cash interest expense, $28,004,623 is the result of accelerating the amortization of the debt discount and deferred financing costs in the second quarter pending the restructuring of the remaining 2006 debentures, which was consummated with the July 31, 2007 recapitalization. Another impact of the recapitalization is that the conversion feature of the recapitalized debt and associated warrants no longer qualify as derivative instruments with embedded liabilities under EITF-00-19 and FAS 133 and consequently, the remaining derivative liability of $387,715 at July 31, 2007 was reclassed to additional paid-in-capital. The impairment charges of approximately $2.3 million consisted primarily of $1.8 million for Zapata county wells and the reduction in carrying value of approximately $0.4 million for the Whitewater assets to expected market related value. Exploration charges were primarily for the G.L. Morris well in Fayetteville Shale Project. The approximate $1.4 million lease termination expense represents the loss of certain Fayetteville Shale Project leases for failure to execute on drilling commitments. Non-cash charges for the twelve month period ended August 31, 2006 of $1,845,073 included $5,316,690 of share based compensation, $625,436 of depletion, depreciation and amortization, $5,894,163 of non-cash interest expense, $1,488,339 exploration expense, and income of $11,479,555 associated with those debentures classified as derivative liabilities at that time.
Liquidity and Capital Resources
Net cash used in operations was $1,026,959 for the twelve month period ended August 31, 2008. The primary use of this cash was to fund the operating loss. There was no net cash used or provided by Investing or Financing activities for the period as compared to net cash used of $2,863,417 for Investing and $10,272,699 used for Financing activities for the comparable prior year period.
Net cash used by Discontinued Operations was $728,620 for the twelve month period ended August 31, 2008 compared to net cash used of $21,873,803 provided for the comparable prior year period. Proceeds from the sale of the Barnett Shale Assets, net of minority interest, was the primary contributor to prior year cash flow.
We had net working capital deficit of $380,359 as of August 31, 2008 a decrease of $31,242,378 as compared to the August 31, 2007 deficit of $31,622,737. The decrease was primarily attributed to the repayment of our secured long term debentures, the payment of $285,738 of trade payables, and a $1,755,604 reduction of cash.
Off-Balance Sheet Arrangements
As of August 31, 2008, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, that had been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. These estimates are based on information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary significantly from those estimates under different assumptions and conditions.
Critical accounting policies are defined as those significant accounting policies that are most critical to an understanding of a company’s financial condition and results of operation. We consider an accounting estimate or judgment to be critical if (i) it requires assumptions to be made that were uncertain at the time the estimate was made, and (ii) changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition.
We believe that the following significant accounting policies are the most critical to an evaluation of our future financial condition and results of operations.
Successful Efforts Accounting
Prior to our business restructuring, we utilized the successful efforts method to account for our crude oil and natural gas operations. Under this method of accounting, all costs associated with oil and gas lease acquisition costs, successful exploratory wells and all development wells are capitalized and amortized on a unit-of-production basis over the remaining life of proved developed reserves and proved reserves on a field basis. Unproved leasehold costs are capitalized pending the results of exploration efforts. Exploration costs, including geological and geophysical expenses, exploratory dry holes and delay rentals, are charge to expense when incurred.
Impairment of Properties
We review our proved properties at the field level when management determines that events or circumstances indicate that the recorded carrying value of the properties may not be recoverable. Such events include a projection of future oil and natural gas reserves that will be produced from a field, the timing of this future production, future costs to produce the oil and natural gas, and future inflation levels. If the carrying amount of an asset exceeds the sum of the undiscounted estimated future net cash flows, we recognize impairment expense equal to the difference between the carrying value and the fair value of the asset which is estimated to be the expected present value of future net cash flows from proved reserves, utilizing a risk-free rate of return. The Company cannot predict the amount of impairment charges that may be recorded in the future. Unproved leasehold costs are reviewed periodically and a loss is recognized to the extent, if any, that the cost of the property has been impaired.
Asset Retirement Obligations
We are required to make estimates of the future costs of the retirement obligations of our producing oil and gas properties. This requirement necessitates that we make estimates of its property abandonment costs that, in some cases, will not be incurred until a substantial number of years in the future. Such cost estimates could be subject to significant revisions in subsequent years due to changes in regulatory requirements, technological advances and other factors that may be difficult to predict.
Income Taxes
We are subject to income and other related taxes in areas in which we operate. When recording income tax expense, certain estimates are required by management due to timing and the impact of future events on when income tax expenses and benefits are recognized by us. We will periodically evaluate our tax operating loss and other carryforwards to determine whether a gross deferred tax asset, as well as a related valuation allowance, should be recognized in its financial statements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of Maverick Oil and Gas, Inc., including the notes thereto and the report of the independent accountants thereon, are included herein beginning at page of this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
Disclosure Controls and Procedures.
An evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) was carried out by us under the supervision and with the participation of our chief executive officer, who serves as our principal executive officer and principal financial officer. Based upon that evaluation, our chief executive officer concluded that as of August 31, 2008, our disclosure controls and procedures were effective to ensure (i) that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) that such information is accumulated and communicated to management, including our chief executive officer, in order to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principals. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management conducted an evaluation of the effectiveness of internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework. Based on its evaluation, our management concluded that our internal control over financial reporting was effective as of August 31, 2008.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting.
There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act ) that occurred during the fiscal quarter ended August 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Below is certain information regarding our directors and executive officers.
Name
Age
Position Held
John A. Ruddy
Chief Executive Officer and Director
John A. Ruddy has served as our Chief Financial Officer since March 2005 and was appointed Chief Executive Officer and Director in December 2007. Mr. Ruddy has over 30 years of experience in the oil and gas industry. From October 2003 until March 2005 he served as Chief Financial Officer of Hurricane Energy, LLC. From December 1996 to September 2003, Mr. Ruddy was the Chief Financial Officer of the Sunoco Marketing Division. From 1993 to 1996, he was the Chief Financial Officer for Sunoco’s International Exploration and Production division. Mr. Ruddy spent 25 years with Sunoco, Inc., the largest independent refining and marketing company in the U.S. Mr. Ruddy has extensive experience in acquisitions and divestments in both the upstream and downstream areas, having participated in transactions valued in excess of $1.5 billion during his career.
Directors’ Term of Office
Directors hold office until the next annual meeting of stockholders and the election and qualification of their successors.
Audit Committee of the Board of Directors
In light of the recent restructuring of our operations, the audit committee was eliminated and, as such, our full board of directors acts as our audit committee.
No member of our board of directors is an “audit committee financial expert.” We currently have no employees. John A. Ruddy, our sole executive officer and member of our board of directors, is actively involved in our operations. We conduct minimal operations, have limited financial resources and expect that we would have to expend significant financial resources, including obtaining and maintaining directors and officers liability insurance, to attract and retain an individual who qualifies as an “audit committee financial expert,” as that term is defined in Item 407(d)(5)(ii) of Regulation S-B promulgated under the Securities Act. In light of the foregoing, our board of directors concluded that the benefits of retaining an individual who qualifies as an “audit committee financial expert” would be outweighed by the costs of retaining such a person.
Security Holder Nominations of Directors
Since the date we last provided disclosure regarding procedures by which security holders may recommend nominees to serve as directors of the Company, we have not implemented any changes to the procedures by which security holders may recommend nominees to serve as directors of the Company.
Code of Ethics
We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Our Code of Ethics is designed to deter wrongdoing and promote: (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (ii) full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in our other public communications; (iii) compliance with applicable governmental laws, rules and regulations; (iv) the prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and (v) accountability for adherence to the code.
Our Code of Business Conduct and Ethics is available without charge upon written request directed to John Ruddy, Chief Executive Officer, Maverick Oil and Gas, Inc., 300 SE 2nd Street, Suite 860, Fort Lauderdale, Florida 33301.
Section 16 Beneficial Ownership Reporting Compliance
Section 16(a) of the U.S. Securities and Exchange Act of 1934, as amended (the “Exchange Act”), requires our officers and directors and persons who own more than ten percent (10%) of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock. Such officers, directors and ten percent (10%) stockholders are also required by applicable SEC rules to furnish to us copies of all forms filed with the SEC pursuant to Section 16(a) of the Exchange Act. Based solely on our review of copies of forms filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, and written representations from certain reporting persons, we believe that during fiscal 2008 all reporting persons timely complied with all filing requirements applicable to them.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following summary compensation table reflects total compensation for our named executive officers whose compensation exceeded $100,000 during the fiscal year ended August 31, 2008 and August 31, 2007.
(1)
Mr. Cohen was terminated in November 2007 in connection with the restructuring of the Company’s operations and received a severance payment in the amount of $50,853 in December 2007.
Executive Compensation Employment Agreements/Separation Agreements
We previously entered into written employment agreements with each of our executive officers, which provided for various benefits, including severance payable under certain circumstances. These employment agreements were designed to promote stability and continuity among our senior management team. A complete description of these agreements is set forth below under the caption “Description of Employment Arrangements”
As described in more detail elsewhere in this report, in April 2007, we sold our Barnett Shale project in consideration of gross cash proceeds of $35.5 million. More recently, we have been unable to satisfy our obligations
with respect to our Fayetteville Shale project, have substantially reduced our oil and gas operations, and our senior secured creditor has commenced foreclosure action on our Fayetteville Shale project and other oil and gas assets. In light of the foregoing, in November 2007 we terminated the employment agreements with our interim chief executive officer and chief financial officer. In connection with such terminations, on December 14, 2007 we entered into separation agreements and mutual releases with our executive officers pursuant to which we have agreed to pay one-time termination payments of $50,853 to Mr. Cohen and $27,556 to Mr. Ruddy. These amounts equal approximately 20% of the amounts due to each of our executive officers under their respective employment agreements. We arrived at these amounts as they are substantially equal, on a percentage basis, to the settlement payments we made to our unsecured creditors in connection with the wind down of our oil and gas operations.
Given the recent restructuring of our business operations, we do not expect to enter into any material compensation arrangements with our executive officers in 2008.
Description of Employment Arrangements
On March 9, 2005, we entered into an employment agreement with John A. Ruddy, our Chief Executive Officer. This agreement had a five-year term and requires us to pay Mr. Ruddy a base annual salary of $215,000. Under this agreement, we granted Mr. Ruddy an option to purchase up to 24,600 shares of our common stock at an exercise price of $119.75 per share, vesting in equal installments on each of the first five anniversaries of the date of his employment agreement. The agreement provided that if we terminated Mr. Ruddy’s employment without cause (as defined in the agreement) or by reason of his death or disability, we would be required to pay Mr. Ruddy his base salary and benefits, not including additional compensation, for a period of six months from the effective date of termination or until the term of the agreement expires, whichever period is shorter, and the options we granted Mr. Ruddy in the agreement will continue to vest through this severance period.
On November 30, 2007, in conjunction with the winding-down of our operations, we terminated Mr. Ruddy’s employment agreement. In connection with such termination, on December 14, 2007, we entered into a Separation Agreement with Mr. Ruddy. Under the Separation Agreement, we have agreed to pay Mr. Ruddy a one time termination payment of $27,556 (which represents a significant discount from the $137,778 provided for under his employment agreement in the event of a termination without cause) and execute a mutual release with Mr. Ruddy. Mr. Ruddy continued providing full-time services to us on an at-will basis through January 31, 2008 and has since worked in a part-time capacity at a rate of $8,500 per month.
Change in Control Arrangements
If our Stock Incentive Plan is terminated as a result of or following a “Change in Control,” as that term is defined in the Stock Incentive Plan, all participants in the Stock Incentive Plan are credited with an additional six months of service for vesting purposes. Mr. Ruddy holds options and restricted shares under the Stock Incentive Plan.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information regarding unexercised stock options, unvested restricted stock, and equity incentive plan awards for each named executive officer outstanding as of August 31, 2008:
(1)
The stock options were granted on 3/8/2005 and vest in 5 equal annual installments over a 5 year period.
(2)
Based on $0.95 per share, the last sales price of our common stock on August 29, 2008 as reported on the OTCBB.
Director Compensation
The following table sets forth the compensation for 2008 for those persons who served as members of our Board of Directors during the fiscal year ended August 31, 2008:
(1)
John Ruddy is not listed in the above table because he does not receive any additional compensation for serving on our board of directors.
(2)
Messrs. Preng and Johnson resigned from the board of directors on December 31, 2007.
(3)
Messrs. Fitzgerald and Rucigaj resigned from the board of directors on December 17, 2007.
Non-employee directors are paid $8,750 per quarter, provided such director has attended in person or by telephone at least 75% of meetings held during the quarter, and a fee of $1,250 for each Board meeting attended in person or telephonically. Upon joining our Board of Directors, each non-employee director received an award of options to purchase 80,000 shares of our common stock with an exercise price equal to the closing price of our common stock on the trading day prior to the date of grant. One half of each director’s options will vest upon the completion of one year of such director’s Board service and the remaining one half will vest upon the completion of two years of Board service.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table indicates how many shares of our common stock were beneficially owned as of December 7, 2007, by (1) each person known by us to be the owner of more than 5% of our outstanding shares of common stock, (2) our directors, (3) our executive officers, and (4) all our directors and executive officers as a group. In general, “beneficial ownership” includes those shares a director or executive officer has sole or shared power to vote or transfer (whether or not owned directly) and rights to acquire common stock through the exercise of stock options and warrants that are exercisable currently or become exercisable within 60 days. Except as indicated otherwise, the persons named in the table below have sole voting and investment power with respect to all shares shown as beneficially owned by them. The table has been prepared based on 118,142,860 shares outstanding on December 7, 2007. The address of each of the directors and executive officers listed below is c/o Maverick Oil and Gas, Inc., 300 SE 2nd Street, Suite 860, Fort Lauderdale, FL 33301.
(*) Less than 1%
(1) Mr. Ruddy is currently the Company’s sole officer and director. The shares reflected in the foregoing table include 23,400 shares directly owned by Mr. Ruddy, as well as 14,760 shares issuable under stock options that are currently exercisable at an exercise price of $119.75 per share and 1,067 restricted shares. Does not include: (i) 98,400 shares issuable upon exercise of stock options granted during March 2005 with an exercise price of $119.75 per share that are not currently exercisable; and (ii) 533 shares of restricted stock which will vest in February 2009.
(2) Line Trust Corporation Limited (“Line Trust”), The Aktiva Diversified Trust (“Aktiva”), and AltaFin, BV (“AltaFin”) have filed a Schedule 13D (the “Schedule 13D”) as members of a “group” (as that term is used in Section 13(d)(3) of the Exchange Act with respect to these shares. Aktiva has the beneficial ownership of 360,000 of these shares and AltaFin has the beneficial ownership of 40,000 of these shares. Line Trust is the independent sole trustee of Aktiva. Line Trust is also the independent sole trustee of a trust that owns all of the stock of AltaFin and of a trust that directly or indirectly holds all of the shares of AltaFin’s corporate managing director. Line Trust has disclaimed beneficial ownership of these shares, except to the extent of any indirect pecuniary interest therein. The foregoing information is based upon the Schedule 13D. The class of beneficiaries of the trusts described in this note currently includes Darko Horvat and his family members. (3) Based upon information provided to us, we have been advised that these shares are beneficially owned indirectly by David Stevenson, c/o KDS Capital, 53 Davies Street, Mayfair, London W1K 5JH, U.K.
The foregoing table does not include additional shares of common stock that may in the future be issuable to each of the two holders of our Secured Convertible Debentures upon conversion of their Secured Convertible Debentures and/or exercise of their associated Debenture Warrants. The terms of their separate agreements with the Company prohibit each of them from converting their Secured Convertible Debentures and/or exercising their Debenture Warrants to the extent that conversion and/or exercise would otherwise result in either of them beneficially owning more than 2.49% of our shares. However, either holder can increase or waive such percentage limitation on more than 60 days notice. Accordingly, it is possible that following such notice, either or both of such holders could beneficially own more than 5% of our shares. Without regard to any such percentage limitation, we may in the future be caused to issue up to approximately 2.8 million shares to one of our holders of Secured Convertible Debentures, and up to .94 million shares to the other holder of our Secured Convertible Debentures.
Equity Plan Information
The following table sets forth information, as of August 31, 2008, with respect to the Company’s stock option plan under which common stock is authorized for issuance, as well as other compensatory options granted outside of the Company’s stock option plan.
(1)
The Stock Incentive Plan covering up to 10 million shares was approved by our stockholders on January 27, 2006 . On December 7, 2006, our Stock Incentive Plan was amended to increase from 10 million to 15 million the number of options and stock awards available for issuance thereunder.
(2)
Includes 9,000 shares of common stock issuable upon the exercise of options granted to our former chief executive officer and the former manager of our treasury and accounting functions prior to the adoption of the Stock Incentive Plan.
(3)
Represents shares which may be issued under options available for award under the Company’s Stock Incentive Plan as of August 31, 2008.
Outstanding Stock Options
The Stock Incentive Plan covers 15,000,000 shares of common stock. Under its terms, employees, officers and directors of the Company and its subsidiaries are currently eligible to receive non-qualified stock options, restricted stock awards and incentive stock options within the meaning of Section 422 of the Code. In addition, advisors and consultants who perform services for the Company or its subsidiaries are eligible to receive non-qualified stock options under the Stock Incentive Plan. The Stock Incentive Plan is administered by the Board of Directors or a committee designated by the Board of Directors.
All stock options granted under the Stock Incentive Plan are exercisable for a period of up to ten years from the date of grant. The Company may not grant incentive stock options pursuant to the Stock Incentive Plan at exercise prices which are less than the fair market value of the common stock on the date of grant. The term of an incentive stock option granted under the Stock Incentive Plan to a stockholder owning more than 10% of the issued and outstanding common stock may not exceed five years and the exercise price of an incentive stock option granted to such stockholder may not be less than 110% of the fair market value of the common stock on the date of grant. The Stock Incentive Plan contains certain limitations on the maximum number of shares of the common stock that may be awarded in any calendar year to any one individual for the purposes of Section 162(m) of the Code.
In addition to the stock options covered by the Stock Incentive Plan, the Company has outstanding options to purchase 9,000 shares of common stock. Options granted under the Plan have been granted subject to 20% annual vesting over a period of five years, contingent on continued service with the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Review, Approval or Ratification of Transactions with Related Persons
Our Board of Directors is responsible for reviewing and approving all related party transactions. Before approving such a transaction, the Board of Directors takes into account all relevant factors that it deems appropriate, including whether the related party transaction is on terms no less favorable to us than terms generally available from an unaffiliated third party under the same or similar circumstances, and the extent of the related person’s interest in the transaction. The Board’s policy regarding related party transactions is not in writing, but is the result of the oral consensus of the members of the Board.
Director Independence
Our Board of Directors currently consists of John A. Ruddy. Pursuant to applicable rules of the SEC, the Board has adopted the definition of “independent director” as set forth in the American Stock Exchange, or AMEX, Company Guide. In applying this definition, the Board has determined that Mr. Ruddy does not qualify as “independent directors” pursuant to AMEX Company Guide.
As of the date of the report, we do not maintain a separately designated audit, compensation or nominating committee.
Certain Transactions
On November 30, 2007, in conjunction with the winding-down of our operations, we terminated our employment agreements with Messrs. Ruddy and Cohen. In connection with such termination, on December 14, 2007, we entered into a Separation Agreements with each of Messrs. Ruddy and Cohen. Under the Separation Agreement, we agreed to pay a one time termination payments to Mr. Ruddy and Mr. Cohen of $27,556 and $50,853, respectively (which represent significant discounts from the $392,043 provided for under their employment agreements in the event of a termination without cause) and execute a mutual release with Mr. Ruddy and Mr. Cohen. Mr. Ruddy continued to provide full-time services to us on an at-will basis through January 31, 2008 and has since continued on a part-time basis at a rate of $8,500 per month.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
The following table presents fees for professional audit services performed by Malone & Bailey, PC for the audit of our annual financial statements for the fiscal years ended August 31, 2008 and 2007 and fees billed for other services rendered by it during those periods.
Audit Fees consist of fees billed for professional services rendered for the audit of our financial statements and review of the interim financial statements included in quarterly reports and services that are normally provided by our independent accountants in connection with statutory and regulatory filings or engagements.
Audit Related Fees
Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company's consolidated financial statements and are not reported under "Audit Fees."
Tax Fees
Tax Fees consists of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal and state tax compliance, tax audit defense, customs and duties, and mergers and acquisitions.
Audit Committee Pre-Approval Policies and Procedures
Our Audit Committee Charter requires the prior approval of all audit and non-audit services provided by our independent auditors, subject to certain de minimus exceptions which are approved by the Audit Committee prior to the completion of the audit. Prior to the creation of the Audit Committee, our Board of Directors served the role of our audit committee and approved the engagement of our independent auditors to render audit and non-audit services before they were engaged. All of the services for which fees are listed above were pre-approved by our Board of Directors.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following is a complete list of Exhibits filed as part of this Registration Statement, which are incorporated herein:
(a) Exhibits
_____________________
(1)
Incorporated by reference to our Registration Statement on Form SB-2 filed with the Commission on October 4, 2002.
(2)
Incorporated by reference to our Annual Report on 10-KSB filed with the Commission on December 23, 2004.
(3)
Incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 3, 2005.
(4)
Incorporated by reference to our Current Report on Form 8-K filed with the Commission on January 4, 2006.
(5)
Incorporated by reference to our Current Report on Form 8-K filed with the Commission on November 1, 2005.
(6)
Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB filed with the Commission on November 29, 2005.
(7)
Incorporated by reference to our Current Report on Form 8-K filed with the Commission on August 10, 2006.
(8)
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 31, 2007.
(9)
Incorporated by reference to our Current Report on Form 8-K filed with the Commission on October 17, 2007.
(10)
Incorporated by reference to our Current Report on Form 8-K filed with the Commission on October 21, 2008.
(11)
Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
MAVERICK OIL AND GAS, INC. AND SUBSIDIARES
INDEX TO THE FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Maverick Oil and Gas, Inc. and Subsidiaries
Fort Lauderdale, Florida
We have audited the accompanying consolidated balance sheets of Maverick Oil and Gas, Inc. and Subsidiaries as of August 31, 2008 and 2007 and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the three years then ended. These financial statements are the responsibility of Maverick’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audit 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, consolidated financial statements referred to above present fairly, in all material respects, the financial position of Maverick, as of August 31, 2008 and 2007, and the results of its operations and its cash flows for the periods described in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that Maverick will continue as a going concern. As discussed in Note 3 to the financial statements, Maverick has suffered recurring losses from operations, has negative working capital and was subjected to a default notice from its debenture holders that caused the Company to suspend its operations, all of which raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Malone & Bailey, PC
Malone & Bailey, PC
www.malone-bailey.com
Houston, Texas
December 15, 2008
MAVERICK OIL AND GAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying Notes to Consolidated Financial Statements.
MAVERICK OIL AND GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying Notes to Consolidated Financial Statements.
MAVERICK OIL AND GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
See accompanying Notes to Consolidated Financial Statements.
MAVERICK OIL AND GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
Years ended August 31, 2008 and August 31, 2007
See accompanying Notes to Consolidated Financial Statements
MAVERICK OIL AND GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
See accompanying Notes to Consolidated Financial Statements.
MAVERICK OIL AND GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
See accompanying Notes to Consolidated Financial Statements.
MAVERICK OIL AND GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS
Maverick Oil and Gas, Inc. (“Maverick”) was incorporated in Nevada on June 18, 2002. Since 2004, Maverick had been an early stage independent energy company seeking to find and develop oil and gas reserves. Maverick and its subsidiaries (collectively, the “Company”) have ceased its Oil and Gas operations effective January 2008. Our operations consist solely of attempting to preserve our status as a public company and seeking to identify a business combination with an operating company. There can be no assurance that we will be able to identify an acceptable operating company, complete an acquisition, or that any business we acquire will generate profits or increase the value of the Company. If we are unable to locate additional financing within the short-term, we will be forced to suspend all public reporting with the SEC and possibly liquidate.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. These estimates are based on information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary significantly from those estimates under different assumptions and conditions.
Critical accounting policies are defined as those significant accounting policies that are most critical to an understanding of a company’s financial condition and results of operation. We consider an accounting estimate or judgment to be critical if (i) it requires assumptions to be made that were uncertain at the time the estimate was made, and (ii) changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition.
Principles of Consolidation
The consolidated financial statements include the accounts of Maverick and its subsidiaries. All significant intercompany transactions and balances associated with the consolidated operations have been eliminated.
Certain reclassifications have been made to the prior year’s financial statements to conform with current presentation.
Successful Efforts Accounting
Prior to our business restructuring, we utilized the successful efforts method to account for our crude oil and natural gas operations. Under this method of accounting, all costs associated with oil and gas lease acquisition costs, successful exploratory wells and all development wells are capitalized and amortized on a unit-of-production basis over the remaining life of proved developed reserves and proved reserves on a field basis. Unproved leasehold costs are capitalized pending the results of exploration efforts. Exploration costs, including geological and geophysical expenses, exploratory dry holes and delay rentals, are charge to expense when incurred.
Valuation of Property and Equipment
The Company follows the provisions of Statement of Financial Accounting Standards No. 144 “Accounting for Impairment or Disposal of Long-lived Assets” (“SFAS 144”). SFAS 144 requires that the Company’s long-lived assets, including its oil and gas properties, be assessed for potential impairment in their carrying values whenever events or changes in circumstances indicate such impairment may have occurred. An impairment charge to current operations is recognized when the estimated undiscounted future net cash flows of the asset are less than its carrying value. Any such impairment is recognized based on the differences in the carrying value and estimated fair value of the impaired asset.
SFAS 144 provides for future revenue from the Company’s oil and gas production to be estimated based upon prices at which management reasonably estimates such products will be sold. These estimates of future product prices may differ from current market prices of oil and gas. Any downward revisions to management’s estimates of future production or product prices could result in an impairment of the Company’s oil and gas properties in subsequent periods.
The long-lived assets of the Company, which are subject to evaluation, consist primarily of oil and gas properties. During the fiscal year ended August 31,2008, the company recorded lease termination expenses related to unproved properties of $58,000.
During the fiscal year ended August 31, 2007 the company recorded an impairment loss of $2,271,313 on oil and gas properties, lease termination expenses of $1,396,865 and exploration expenses of $755,111 related to unproved properties. During the fiscal year ended August 31,2006, the company recorded exploration expenses related to unproved properties of $1,488,339.
Other Property and Equipment
Other property and equipment of the Company consists primarily of buildings, computer equipment, vehicles and furniture and fixtures, which are depreciated over estimated useful lives, on a straight-line basis. The estimated useful life on buildings is 25 years and ranges from 3 to 7 years for computer equipment, vehicles, furniture and fixtures. Repairs and maintenance are expensed as incurred while costs incurred that extend the useful life are capitalized.
Asset Retirement Obligations
We are required to make estimates of the future costs of the retirement obligations of our producing oil and gas properties. This requirement necessitates that we make estimates of its property abandonment costs that, in some cases, will not be incurred until a substantial number of years in the future. Such cost estimates could be subject to significant revisions in subsequent years due to changes in regulatory requirements, technological advances and other factors that may be difficult to predict.
Revenue Recognition
The Company recognizes oil and natural gas revenue for its interest in producing wells as oil and natural gas is produced and sold from those wells. Oil and natural gas sold by the Company is not significantly different from the Company's share of production.
Income Taxes
The Company is subject to income and other related taxes in areas in which it operates. When recording income tax expense, certain estimates are required by management due to timing and the impact of future events on when income tax expenses and benefits are recognized by the Company. The Company evaluates periodically its tax operating loss and other carryforwards to determine whether a gross deferred tax asset, as well as a related valuation allowance, should be recognized in its financial statements.
Cash and Cash Equivalents
Cash equivalents are considered to be all highly liquid investments having an original maturity of three months or less. The Company maintains its cash in bank deposit accounts that at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Allowance for Doubtful Accounts
Bad debt expense is recognized based on management’s estimate of likely losses per year, based on past experience and an estimate of current year uncollectible amounts. At August 31, 2007 and August 31, 2008 the allowance for doubtful accounts was $36,968.
Short-term investments
Short-Term investments at August 31, 2008 represent certificates of deposit with maturities ranging from three months to twelve months.
Share Based Compensation
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payments” (“FAS 123R”). The Company adopted the disclosure requirements of FAS 123R as of January 1, 2006 using the modified prospective transition method approach. FAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. FAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in Share-Based Payment transactions. FAS 123R requires that the fair value of such equity instruments be recognized as expense in the historical financial statements as services are performed. Prior to FAS 123R, only certain pro forma disclosures of fair value were required. See additional discussion in Note 4 Share-based compensation.
Loss per Common Share
Basic earnings per common share is computed by dividing the earnings available to common shareholders by the weighted average number of common shares outstanding.
Diluted earnings per common share is computed by dividing the net earnings available to common shareholders, adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the fiscal years ended August 31, 2008, 2007, and 2006 potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.
Reverse Stock split
On October 16, 2008, our stockholders approved an amendment to our articles of incorporation to effect a 1 for 50 reverse stock split (the “Reverse Split”) of our common stock, $.001 par value per share. The effective date of the reverse split was October 24, 2008 and has been retroactively reflected in the accompanying financial statements. Upon effectiveness of the Reverse Split, each stockholder received one share of common stock for every 50 shares of common stock owned and outstanding as of August 21, 2008, the record date. The Reverse Split does not affect the number of shares of common stock authorized for issuance. All share and per share information has been retroactively adjusted to reflect the reverse stock split.
Recently Issued Accounting Pronouncements
Maverick does not expect the adoption of any other recently issued accounting pronouncements to have a significant impact on Maverick’s result of operations, financial position or cash flows.
NOTE 3. GOING CONCERN
The Company has incurred significant losses since its inception. For the fiscal year ended August 31, 2008, our net loss from continuing operations was $2,565,008 and we had incurred an accumulated deficit of $58,886,571. For the fiscal year ended August 31, 2007, our net loss from continuing operations was $26,463,979 we had incurred an accumulated deficit of $62,209,606. During the twelve months period ended August 31, 2008, our accumulated deficit decreased primarily due to gains on extinguishment of debt through the sale of our discontinued operations.
Even though we were able to successfully compromise significant financial obligations to the vendors and suppliers to our Fayetteville Shale project, one of our Fayetteville Shale partners, and to an existing claimant involving our Fayetteville Shale project, as of the beginning of our second fiscal quarter our remaining capital resources were not sufficient to maintain our operations and to pay the remaining liabilities of the Company and its subsidiaries, generally as they became due. This included, within the immediate term, amounts which became payable to certain leaseholders within the Fayetteville Shale project because we did not have the resources to discharge our drilling obligations to them, amounts required to remediate existing well sites and certain severance and other employment related obligations. In the longer term, we would not have been able to satisfy the amounts which would have become due under our senior secured convertible debentures, for which we were obligated to repay the principal amount of approximately $27.8 million. Furthermore, we had been unable to secure financial, operating or other developmental partners for our Fayetteville Shale project. We had also been unable to secure additional funding for the Company.
On December 4, 2007, we received notices of default from the holders of our senior Secured Convertible Debentures. Subsequently, on December 17, 2007, we entered into a Strict Foreclosure Agreement with the holders of our Secured Convertible Debentures under which they, effective as of January 8, 2008, foreclosed upon our interest in the Fayetteville Shale Project through foreclosure upon our interest in Maverick Woodruff County, LLC our wholly owned subsidiary (which holds our leasehold interests in the Fayetteville Shale Project), Maverick Operating, LLC (our wholly owned subsidiary, that is the licensed operator of our Fayetteville Shale Project) and miscellaneous seismic data and files related to our Fayetteville Shale Project. In consideration of the transfers evidenced by the Strict Foreclosure Agreement, our obligations under the Secured Convertible Debentures were extinguished and certain mutual releases were provided.
Following the foreclosure process, we terminated most of our personnel and ceased all oil and gas related operations as we will now attempt to identify business opportunities and financing that may be suitable for the Company. However, our remaining cash assets will only be sufficient to sustain us as an inactive company for the short-term. There can be no assurances that we will be able to identify a suitable business opportunity or the financing necessary to complete a transaction, or that any business we may acquire will generate profits or increase the value of the Company. If we are unable to execute on our business plan within the short-term, we will be forced to suspend all public reporting with the SEC and possibly liquidate.
The information above raises substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements have been prepared on a going concern basis which assumes continuity of operations and realization of assets and liabilities in the ordinary course of business. The consolidated financial statements do not include any adjustments that might result if the Company was forced to cease operations as a going concern.
NOTE 4. SHARE-BASED COMPENSATION
The Company has adopted a Stock Incentive Plan (the "Stock Incentive Plan") which covers 15,000,000 shares of common stock. During November 2006, we amended our Stock Incentive Plan to increase the shares covered thereunder from 10,000,000 to 15,000,000.
In addition to the stock options covered by the Stock Incentive Plan, the Company has outstanding options to purchase 450,000 shares of common stock.
Prior to September 1, 2005, the Company accounted for stock-based compensation under Statement of Financial Accounting Standards No. 123 “Accounting for Stock-based Compensation” (“FAS 123”). As permitted under this standard, compensation cost was recognized using the intrinsic value method described in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Effective December 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (“FAS 123R”) and applied the provisions of the Securities and Exchange Commission Staff Accounting Bulletin No. 107 using the modified-prospective transition method. Prior periods were not restated to reflect the impact of adopting the new standard. As a result of the adoption of FAS 123R, stock-based compensation expense recognized during the fiscal year ended August 31, 2007, includes compensation expense for all Share-Based Payments granted on or prior to, but not yet vested as of November 30, 2005, based on the grant date fair value estimated in accordance with the original provisions of FAS 123, and compensation cost for all Share-Based Payments granted on or subsequent to September 1, 2005, based on the grant date fair value estimated in accordance with the provisions of FAS 123R.
During the twelve months ended August 31, 2008 and August 31, 2007, the Company recognized stock-based compensation expenses of $272,043 and $ 1,357,921, respectively, related to outstanding stock options according to the provisions of FAS 123R, using the modified-prospective transition method.
Prior to the adoption of FAS 123R and for the twelve months ended August 31, 2008 and August 31, 2007, no tax benefits from the exercise of stock options have been recognized as no options have been exercised. Any future excess tax benefits derived from the exercise of stock options will be recorded prospectively and reported as cash flows from financing activities in accordance with FAS 123R.
No options were issued or exercised by the Company during the twelve months ended August 31, 2008 and August 31, 2007, respectively. A schedule of outstanding options is as follows:
Stock-based compensation expense includes expense recognized for restricted stock awards of $21,907 and $36,165 for the twelve months ended August 31, 2008 and August 31, 2007, respectively. There is no unrecognized cost related to unvested restricted shares at August 31, 2008.
During the fiscal year ended August 31, 2008, no additional restricted stock grants were made. As of August 31, 2008 there were 4,640,000 restricted shares outstanding with a weighted average grant date fair value of $2.51.
NOTE 5. EXTINGUISHMENT OF DEBT-SENIOR SECURED CONVERTIBLE DEBENTURES
Effective January 8, 2008, our interest in the Fayetteville Shale Project were foreclosed upon through assignment to the holders of our 2007 Debenture of our interest in Maverick Woodruff County, LLC (which holds our leasehold interests in the Fayetteville Shale Project), Maverick Operating, LLC (the licensed operator of our Fayetteville Shale Project) and miscellaneous seismic data and files related to our Fayetteville Shale Project. In consideration of the transfers evidenced by the Strict Foreclosure Agreement, our obligations under the 2007 Debentures, which totaled $28.8 million representing both principle and accrued interest were extinguished and certain mutual releases were provided.
Background description of our 2007 Debentures
Effective as of July 30, 2007, we entered into a recapitalization transaction (the Recapitalization) involving the retirement of debentures and warrants issued during 2006 in exchange for new secured convertible debentures (the “2007 Debentures”) and associated warrants (the “2007 Warrants”).
The 2007 Debentures had an aggregate principal amount of $27.8 million, were subject to interest at 8 % per annum, and had a maturity date on the second anniversary of their issuance, subject to the right of the holders to require us to repurchase one(third of the outstanding principal amount due on each of the fifteenth and twenty-first month anniversaries of the date of issuance. Interest payments and expenses associated with issuance were due on the maturity date. The 2007 Debentures were convertible into 111,038,016 shares of our common stock at a conversion price of $0.25 per share, subject to only standard anti-dilution adjustments relating to stock splits, stock dividends and the like. The 2007 Warrants granted as part of the recapitalization are exercisable into 77,902,597 shares of common stock at an exercise price of $0.01 per share (on a post-split basis). The 2007 Warrants are subject to only standard anti-dilution adjustments relating to stock splits, stock dividends and the like, and are not subject to the “full-ratchet” and “gross-up” anti-dilution features of the Warrants issued during 2006. As a result of the Recapitalization, the unamortized debt discount and deferred financing costs were expensed.
The provisions of the 2007 Debentures were evaluated pursuant to the terms of FAS 15, “Accounting by Debtors and Creditors for Troubled Debt Restructuring” and EITF-02-04, “Determining Whether a Debtor’s Modification or Exchange of Debt Instruments is within the Scope of FASB Statement No. 15” and were determined to represent a modification of debt rather than a constructive extinguishment and accordingly, no gain or loss on the exchange of the 2006 Debentures for the 2007 Debentures has been recognized.
The 2007 Warrants had a fair market value at date of grant of $1,124,716, which was determined using the Black-Scholes Option Pricing Model utilizing an expected term of 2.5 years, assumed volatility of 97.2%, a risk free discount rate of 4.58% and a dividend yield of zero. Because the exchange qualified as a modification of debt, the fair value of the 2007 Warrants was expensed at date of grant as interest expense.
NOTE 6. STOCKHOLDERS’ EQUITY
During October 2006, we issued 1,292,244 registered shares of our common stock as an interest payment to the holders of our January 5 debentures. These shares were issued in lieu of a cash payment of $378,082 that would have otherwise been paid as interest through the period ended September 30, 2006.
On December 19, 2006, we issued an aggregate of 5,225,000 investment units in a private placement transaction at a purchase price of $0.20 per unit, for total proceeds of $1,045,000. Each investment unit consisted of one share of the Company’s common stock (the “Shares”) and a warrant to purchase an additional share of the Company’s common stock (the “Warrants”). The Warrants are exercisable for a period of three years, commencing January 30, 2007, at an exercise price of $0.20 per share, subject to customary anti-dilution adjustments. The Company has granted incidental (“piggyback”) registration rights to the investors in the private placement pursuant to which the Company has agreed to include the resale of the Shares (including the shares issuable upon exercise of the Warrants) in the next registration statement to be filed by the Company with the Securities and Exchange Commission (the “SEC”) (excluding its current registration statement on file with the SEC). However, these investors have the right to demand that the
Company file a registration statement registering the resale of their Shares if a registration statement including the resale of their Shares is not otherwise filed by March 31, 2007.
The Shares and Warrants were issued to eight accredited investors, including James A. Watt, our former Chief Executive Officer, who purchased 1 million Shares and Warrants for a purchase price of $200,000. In connection with the transaction, and to insure that our authorized capital was sufficient to complete the placement, Line Trust Corporation Limited, one of our principal shareholders, agreed to surrender for cancellation outstanding warrants to purchase 5,225,000 shares of our common stock that it purchased from us in a private placement transaction completed in early 2005.
As of February 15, 2008, we compromised and discharged a total of approximately $2,300,000 of unsecured indebtedness held by vendors who provided goods and services to Maverick Woodruff County in connection with the development of the Fayetteville Shale project. The indebtedness was discharged for aggregate cash payments of approximately $470,000 and the issuance of 6,714,500 shares of our common stock to the vendors, on a pro rata basis.
We also settled the lawsuit filed by M.A. Wallace and Elvia Vaudine Wallace against us and Maverick Woodruff County in the Circuit Court of Cross County, Arkansas. That lawsuit sought damages of approximately $1,200,000. Under the terms of the settlement, we paid $135,000 and issued 3,000,000 shares of our common stock.
NOTE 7. DISCONTINUED OPERATIONS
· Foreclosure of our Fayetteville Shale Project interests.
Effective January 8, 2008, our interest in the Fayetteville Shale Project were foreclosed upon through assignment of our interest in Maverick Woodruff County, LLC (which held our leasehold interests in the Fayetteville Shale Project), Maverick Operating, LLC (the licensed operator of our Fayetteville Shale Project) and miscellaneous seismic data and files related to our Fayetteville Shale Project. In consideration of the transfers evidenced by the Strict Foreclosure Agreement, our obligations under the 2007 Debentures were extinguished and certain mutual releases were provided. The balances and results related to our former subsidiaries Maverick Operating, LLC and in Maverick Woodruff County, LLC together with the related debt and interest obligation extinguishment with foreclosure, are being reported as part of discontinued operations in the accompanying financial statements. We recognized a gain of approximately $3.9 million for the quarter and twelve months ended August 31, 2008 related to the disposal.
·
Barnett Shale Project:
On April 26, 2007, we completed the sale of our interests in the Barnett Shale project for net proceeds of approximately $22.5 million. The sale of our interest in the project was required as part of the terms of the secured convertible debentures. The cash received from the buyer was subject to post-closing adjustments based upon the net of total revenues and capital expenditures for the period January through April 2007. Our final settlement took place during November 2007.
·
Whitewater Project:
During November 2007, we sold our interest in our Colorado-based Whitewater project. We initially sold a 30% interest in the project for $600,000, plus the pro rata assumption of all unpaid project costs since May 2006. Thereafter, we sold the remaining 70% interest in the project to one of our Fayetteville Shale project partners for $200,000, the discharge of approximately $1.4 million owed to this partner, and the assumption of the remaining unpaid project costs since May 2006. This asset was impaired to its expected realizable value of $2,000,000 in anticipation of a cash sale. The combination cash and discharge of debt transaction resulted in a gain of approximately $450,000 for the fiscal year ended August 31, 2008.
We have accounted for the sale, transfer and cease of operations related to these assets in accordance with FAS 144 - Accounting for the Impairment or Disposal of Long-Lived Assets. Pursuant to FAS 144 we have separated the detail of the individual assets, liabilities and results from operations of these projects from our consolidated balance sheet and statement of operations at August 31, 2008 as follows:
* Does not include minority interest of $9,396,490 at August 31, 2007.
NOTE 8. COMMITMENTS AND CONTINGENCIES
● Fayetteville Shale.
Certain leases in our former Fayetteville Shale Project required us to conduct additional drilling prior to the end of 2007. Failure to meet these obligations would have obligated the company to pay up to $3,000,000 of penalties to the landowners under those leases. These obligations were renegotiated by the current owners of our Maverick Woodruff County, LLC and we have been relieved of any future liabilities associated with these commitments.
● Leases.
During the second quarter of our fiscal year 2007, the Company entered into a sub-lease for its offices located in Fort Lauderdale, Florida at a total monthly minimum cost of approximately $10,200 and a six-month security deposit of $61,005. This lease expires during March 2009.
NOTE 9. INCOME TAXES
The Company uses the liability method, where deferred taxes and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. During fiscal 2007, 2006 and 2005, the company incurred net losses and, therefore, has no tax liability. The net deferred tax asset generated by the loss carry-forward has been fully reserved. The cumulative net operating loss carry-forward is approximately $22.5 million at August 31, 2008, and will expire in the years 2025 through 2028.
At August 31, 2008, deferred tax assets consisted of the following: