- Quarterly Report (10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934

Commission File Number 333-152160

IMPERIAL RESOURCES, INC.

(Exact name of registrant as specified in its charter)

Nevada	83-0512922
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

106 E. 6th ST. Suite 900, Austin, TX 78701

(Address of principal executive offices)

[phone]

(Registrant’s telephone number)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

¨

Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer (Do not check if smaller reporting company)

x

Smaller Reporting company

 

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ¨ Yes x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: November 21, 2011: 42,894,561 common shares

 

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INDEX
		Page No.(s)
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	4
	Consolidated Balance Sheets as of September 30, 2011 (unaudited) and March 31, 2011	5
	Consolidated Statements of Operations for the three and six months ended  September 30, 2011 and 2010 (unaudited)	6
	Consolidated Statements of Cash Flows for the six months ended September 30, 2011 and 2010 (unaudited)	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4T.	Controls and Procedures	21
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	[RESERVED]	22
Item 5.	Other Information	22
Item 6.	Exhibits	22
SIGNATURES		23

 

 

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PART I—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

NOTE:  These consolidated financial statements reflect the Company’s Consolidated Balance Sheets at September 30, 2011 (unaudited) and March 31, 2011, the Unaudited Consolidated Statements of Operations for the three and six months ended September 30, 2011 and 2010, and unaudited Consolidated Statements of Cash Flows for the six months ended September 30, 2011 and 2010.

 

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  IMPERIAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

  

		Six Months Ended September 30, 2011				Year Ended March 31, 2011
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	183,114			$	364,891
Accounts receivable			23,528				28,503
Total Current Assets			206,642				393,394
Investment in oil and gas properties, net			548,555				322,126
Property and equipment-Salt Water Disposal Facility, net			1,668,037				-
Total Assets		$	2,423,234			$	715,520
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	411,959			$	82,697
Current portion of notes payable			92,633				-
Total Current Liabilities			504,592				82,697
Notes Payable, net of discount of $69,757			1,458,274				-
Total Liabilities			1,962,866				82,697
Stockholders’ equity:
500,000,000 shares authorized, $0.001 par value, ; 42,894,561 and 42,362,100 shares issued and outstanding at September 30, 2011and March 31, 2011, respectively			42,894				42,362
Additional paid-in capital			1,995,144				1,763,858
Accumulated deficit			(1,577,670	)			(1,173,397	)
Total Stockholders’ Equity			460,368				632,823
Total Liabilities and Stockholders’ Equity		$	2,423,234			$	715,520

The accompanying notes are an integral part of these consolidated financial statement.

 

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IMPERIAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

For the three and six months ended September 30, 2011 and 2010

(Unaudited)

 

		Three Months					Three Months			Six Months				Six Months
		ended					ended			ended				ended
		September 30,  2011					September 30, 2010			September 30, 2011				September 30, 2 010
REVENUES
Oil and gas revenue		$	20,449			$	46,445			$	47,931			$	67,634
Operatin g Expenses:
Lease operating costs			4,485				39,153				7,516				43,823
Depreciation			37,976				-				40,357				-
Depletion			5,136				1,288				11,235				2,576
Professional Fees			50,671				1,775				97,648				5,500
Directors fees			27,000				-				45,000				-
Other Administrative Expenses			7,325				4,672				36,321				8,725
Total Operating Expenses			132,593				46,888				238,077				60,624
(LOSS) INCOME FROM OPERATIONS			(112,144	)			(443	)			(190,146	)			7,010
Other Income and (Expenses):
Interest on promissory notes			(44,507	)			(11,250	)			(56,561	)			(22,500	)
Net Loss Before Extraordinary Items			(156,651	)			(11,693	)			(246,707	)			(15,490	)
Extraordinary loss due to fire			(157,562	)			-				(157,562	)			-
NET LOSS		$	(314,213	)		$	(11,693	)		$	(404,269	)		$	(15,490	)
Net (loss) income before extraordinary items per common share (basic and diluted)		$	(0.00	)		$	(0.00	)		$	(0.01	)		$	(0.00	)
Extraordinary loss per common share (basic and diluted)		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.00	)
Net loss per common share (basic and diluted)		$	(0.01	)		$	(0.00	)		$	(0.01	)		$	(0.00	)
WEIGHTED AVERAGE OUTSTANDING SHARES
Basic and diluted			42,854,048				40,000,000				42,609,418				40,000,000

he accompanying notes are an integral part of these consolidated financial statements

 

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IMPERIAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

For the six months ended September 30, 2011 and 2010

(Unaudited)

		Six Months				Six Months
		ended				ended
		September 30, 2011				September 30, 2010
Cash flows from operating activities:
Net Loss		$	(404,269	)		$	(15,490	)
Add back extraordinary loss			157,562				-
Net loss before extraordinary loss			(246,707	)			(15,490	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Capital contributions - expenses			-				7,800
Amortization of discount			12,061				-
Depletion and depreciation expense			51,592				2,576
Changes in accounts receivable			4,975				(67,634	)
Changes in accounts payable and accrued expenses			329,262				61,961
Net cash provided by (used in) operating activities			151,183				(10,787	)
Cash flows used in investing activities:
Investments in oil and gas properties			(237,664	)			(900,000	)
Purchase of fixed assets-salt water disposal well			(1,365,956	)			-
Purchase of saltwater disposal facility			(50,000	)			-
Net cash used in investing activities			(1,653,620	)			(900,000	)
Cash flows from financing activities:
Loans from related parties			-				10,787
Proceeds from sale of common stock			150,000				-
Notes payable			1,200,000				900,000
Repayments of notes payable			(29,340	)			-
Net cash provided from financing activities			1,320,660				910,787
Net decrease in cash and cash equivalents			(181,777	)			-
Cash and cash equivalents at the beginning of period			364,891				-
Cash and cash equivalents at the end of period		$	183,114			$	-
Supplemental Information
Cash paid for interest		$	6,530			$	-
Purchase of salt water disposal facility through issuance of note payable		$	450,000				-

The accompanying notes are an integral part of these consolidated financial statements

 

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IMPERIAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

1.	ORGANIZATION AND BASIS OF PRESENTATION

Imperial Resources, Inc. (“the Company”) was incorporated under the laws of the State of Nevada on August 2, 2007 with the authorized capital stock of 500,000,000 shares at $0.001 par value. 

The Company was organized for the purpose of acquiring and exploring a mineral property and later abandoned it.  The Company has decided to focus its core activities on development and exploration of oil and gas assets in the United States through its wholly-owned subsidiary Imperial Oil & Gas Inc. (“Imperial Oil” or “IOG”) which was formed under the laws of the State of Delaware on January 8, 2010. Big Dig Operating, Inc., (“Big Dig”) was formed June 13, 2011 for the purpose of operating a salt water disposal facility, and is a wholly owned subsidiary of Imperial Oil & Gas, Inc.  In addition, Green Tide Water Disposal, Ltd. (“Green Tide”) was formed on June 15, 2011, as a limited partnership with Imperial owning a 99% limited partnership interest, and Big Dig owning a 1% general partnership interest. Green Tide has obtained a promissory note, the funds from which shall be applied solely for the purpose of bringing the salt water disposal facility back in to commercial operations, servicing associated liabilities existing at time and marketing services of the facility.

The Company is engaged in the exploration and development of oil and natural gas properties. The Company acquires the oil and gas interests in various manners, by purchasing them or via a farm-in whereby we earn our interests by developing the acreage of another. The Company acquires fee simple determinable interests in the oil and gas properties in either acquisition scenario. In addition, the Company has purchased a salt water disposal facility.

 In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows for all periods presented have been made.  The information for the consolidated balance sheet as of March 31, 2011 was derived from audited financial statements.  The results of operations for the three and six months ended September 30, 2011 are not necessarily indicative of the results to be expected for the year ending March 31, 2012.

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements included herein, presented in accordance with accounting principles generally accepted in the United States of America and stated in US dollars, have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).

(a)	Basis of Consolidation

The accompanying financial statements present the consolidated accounts of the Company and its subsidiaries. All intercompany account balances and transactions have been eliminated.

(b)	Nature of Operations

The Company’s focus is on the acquisition, development and exploitation of long-lived oil and natural gas reserves and, to a lesser extent, exploration for new oil and natural gas reserves. The Company’s business activities are currently carried out in New Mexico, Oklahoma and Texas.

(c)	Concentration of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of unsecured accounts receivable from unaffiliated crude oil purchasers and the well operator. A substantial portion of the Company’s oil reserves are exposed to the impact of delays or interruptions of production from these wells due to mechanical problems, damages to the current producing reservoirs and significant governmental regulation, including any curtailment of production or interruption of transportation of oil or natural gas produced from the properties.

 

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IMPERIAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - cont'd

 

(d)	Investments in Oil and Gas Properties and Property and Equipment-Saltwater Disposal Facility

Investment in Oil and natural gas properties:

The Company follows the successful efforts method of accounting and will capitalize successful wells and related leasehold costs. Acquisition costs for proved and unproved properties are capitalized when incurred. Exploration costs, including geological and geophysical costs, the costs of carrying and retaining unproved properties and exploratory dry hole costs are expensed. Development costs, including costs to drill and equip development wells and successful exploratory drilling costs to locate proved reserves are capitalized.

 

These costs are amortized using the unit of production method.  Dry hole and related leasehold costs are expensed.

 

Property and Equipment-Salt Water Disposal Facility:

Property plant and equipment is recorded at its original cost of construction or fair value of assets purchased. Expenditures that extend the useful life or increase the expected output of property, plant and equipment, as well as major improvements are capitalized. Repair and maintenance costs are expensed as incurred.

Depreciation is computed using the following estimated useful lives:

 

Disposal wells	10 years
Machinery and equipment	7 years

Upon retirement or disposition of assets other than oil and natural gas properties, the cost and related accumulated depreciation are removed from the accounts with the resulting gains or losses, if any, recognized in income. Depreciation of other property   and equipment is computed using the straight-line method based on the estimated useful lives of the property and equipment.

 

(e)	Impairment of Long-Lived Assets:

The Company reviews and evaluates long-term assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable.  The assets are subject to impairment consideration under ASC 60-10-35-17 if events or circumstances indicate that their carrying amount might not be recoverable.   When the Company determines that an impairment analysis should be done, the analysis will be performed using the rules of ASC 930-360-35 Asset Impairment, and 360-10-15-3 through 15-5, Impairment or Disposal of Long-Term Assets.

 

(f)	Income Taxes

The Company accounts for federal income taxes using the liability method. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under the liability method, the effect on previously recorded deferred tax assets and liabilities resulting from a change in tax rates is recognized in operating results in the period in which the change is enacted.

 

(g)	Basic and Diluted Net Loss Per Share

Net loss per share is presented in accordance FASB ASC Topic No. 260 Earnings Per Share . Basic net loss per share is computed based on the weighted average shares of common stock outstanding for the period. There are no potentially dilutive common stock equivalents such as stock options or warrants outstanding, and as such basic and diluted net loss per share is the same.  

 

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IMPERIAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - cont'd

(h)	Use of Estimates in the Preparation of Consolidated Financial Statements

Preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The oil and natural gas reserve estimates, and the related future net cash flows derived from those reserves, are used in the determination of depletion expense and the full cost ceiling test and are inherently imprecise. Actual results could differ from those estimates.

 

(i)	Fair value of financial instruments

The Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the relatively short maturity of these instruments. None of these instruments are held for trading purposes. The carrying amounts and fair values for Convertible debt are presented in the following Notes.

 

ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and requires certain disclosures about fair value measurements. In general, fair values of financial instruments are based upon quoted market prices, where available (Level 1). If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters (Level 2). Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the customer’s creditworthiness, among other things, as well as unobservable parameters (Level 3). Any such valuation adjustments are applied consistently over time.

 

(j)	Cash Equivalents

 For purposes of the consolidated statements of cash flows, the Company considers all demand deposits, money market accounts and certificates of deposit purchased with an original maturity of three months or less to be cash equivalents.

 

(k)	Revenue Recognition

Oil and natural gas revenues are recorded using the sales method, whereby the Company recognizes oil and natural gas revenue based on the amount of oil and natural gas sold to purchasers. The Company did not have any oil or natural gas imbalances recorded. The Company does not recognize revenues until they are realized or realizable and earned. Revenues are considered realized or realizable and earned when: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the seller’s price to the buyer is fixed or determinable; and (iv) collectability is reasonably assured.

(l)	Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation.

(m) Recent Accounting Pronouncements

The Company does not expect the adoption of any recent accounting pronouncements to have a material impact on its financial statements.

 

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IMPERIAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

 

3.	INVESTMENTS IN OIL AND GAS PROPERTIES AND SALT WATER DISPOSAL FACILITY

Investments in oil and gas properties-

The Company has $548,555 in investments in oil and gas properties as of September 30, 2011, as follows: 

 

		Balance as of March 31, 2011				Additions				Balance as of September 30, 2011
Producing Well		$	313,266			$	-			$	313,266
Accumulated depletion on producing well			(70,900	)			(11,235	)			(82,135	)
Net producing well			242,366				(11,235	)			231,131
Exploratory Wells			79,760				237,664				317,424
Total oil and gas		$	322,126			$	226,429			$	548,555

Greater Garwood Project and Cochran #1 Well

On January 20, 2010, the Company acquired a 14.9% working interest in the oil, gas and mineral leases in the Greater Garwood hydrocarbon exploration project located in Colorado County, Texas (the “Project”).   The Project has one producing well known as the Cochran #1 Well, which is being operated by El Paso E & P Company, L.P. As of September 30, 2011, the investment totaled $231,131.

Oklahoma Project

On July 12, 2010, Imperial Oil entered into a participation agreement, four areas of mutual interest (AMI) agreement and joint operating agreement to acquire leases on up to 5,000 acres in Oklahoma. The agreement provides for a 50% working interest in horizontal oil and gas drilling projects.  As of March 31, 2011, there were no costs incurred. As of September 30, 2011, the Company has incurred $210,261 in acreage costs.

Nunnelly #1 Project

On January 10, 2011, the Company entered into an Oil and Gas lease with the mineral owner of approximately 35 acres and an existing wellbore in Montague County Texas. The lease agreement provides for the development of the Project lease area and the existing well, known as Nunnelly #1. The mineral owners’ will retain a 25% royalty interest in the acreage. Imperial has the option, to pay the costs associated with deepening and completion of the well, or alternatively, the drilling and completion of a new well. As of September 30, 2011, $47,162 is capitalized relating to surface preparation work at the site.

Stateline

On January 25, 2011, the Company entered into a Farmout Agreement ("Agreement") with a private oil and gas exploration company, for the right to earn acreage by drilling up to four wells in an infill development project ("Stateline") in the existing Sawyer Field, in Lea County, New Mexico. The Agreement required the Company’s subsidiary to pay a spud fee of $60,000, and to drill between one and four wells to earn a 77% net revenue interests in 40 acres for each well drilled, subject to a reservation by the assigning party of a 10% working interest in each well drilled.  

The Company is developing a plan to exploit additional reserves by using a three well horizontal drilling plan as opposed to the originally intended 4 vertical wells. As of September 30, 2011, the Company has invested $60,000 related to the farmout agreement fee. The Company’s capital expenses for the first well are estimated to be approximately $3,000,000.

 

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IMPERIAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

3.	INVESTMENTS IN OIL AND GAS PROPERTIES AND SALT WATER DISPOSAL FACILITY

Investments in oil and gas properties-

 

Salt Water Disposal Facility

On April 27, 2011, Imperial Oil entered into a Purchase and Sale Agreement to purchase approximately 42 acres of land, a related salt water disposal facility (”SWDF”) consisting of surface equipment, and a wellbore and associated permits, located in Wise County, Texas.  The total purchase price of $500,000 was made through a $50,000 signing payment, plus the execution of a Convertible Promissory Note totaling $450,000. The note is secured over the SWDF assets.

Green Tide obtained a Convertible Promissory Note on June 17, 2011, for amounts up to $1,200,000 to rework and operate the SWDF. The note provides that Green Tide will pay interest at a rate of twenty percent per annum with principal and interest paid monthly in amounts equal to eighty percent of the net cash flow generated by the operations of the SWDF, until such time that the cumulative distribution equals the principal amount loaned.  The lender may convert at its option, the unpaid balance of the note into limited partner interests in Green Tide of up to 50% of the equity. As of September 30, 2011, $1,200,000 in proceeds had been received.  

The Company planned to deepen the well to a depth currently approved by the Texas Railroad Commission, conduct initial marketing operations and to reopen the Facility to dispose of up to 15,000 barrels of salt water a day. As of September 30, 2011, the Company incurred $1,365,956 in capitalized costs related to the deepening of the well.  The well was deepened and completed and the SWDF was about to open when the facility was struck by lightning on November 8, 2011.  A significant portion of the surface equipment- was lost and this has been reflected as an extraordinary loss in the Statement of Operations as of September 30, 2011, totaling $157,562.

		September 30, 2011
Purchase of salt water facility		$	500,000
Additions to well			1,365,956
Loss of equipment due to fire			(157,562	)
Depreciation expense and accumulated depreciation			(40,357	)
Total property and equipment related to salt water facility		$	1,668,037

 

4.	NOTE PAYABLE

On April 27, 2011 Imperial Oil entered into a Purchase and Sale Agreement to purchase approximately 41 acres of land, a related salt water disposal facility (”SWDF”) consisting of surface equipment, and a wellbore and associated permits, located in Wise County, Texas.  The total purchase price of $500,000 was made through a $50,000 signing payment, plus the execution of a Convertible Promissory Note (the “Note”) totaling $450,000. The Note is secured over the SWDF assets.

 

The note is repayable monthly at $9,529.59 for fifty four months at a 6% fixed interest rate, commencing on September 1, 2011.  The outstanding principal balance plus any accrued interest under the Note is convertible into common shares six months after execution of the agreement upon the option of the Holder.  The Note is convertible into the number of shares equal to the balance of the principal and interest being converted divided by a 15% discount to the daily volume weighted average price  per share for the ten business days prior to the date of the conversion notice.

On the date of the note the related beneficial conversion feature (“discount on note”) totaled $81,818, and is included in additional paid in capital as of September 30, 2011. The discount is being amortized using the effective interest method over the life of the note. Interest related to the note consisted of $8,781 monthly payment, plus amortization of $12,061, totaling $20,842 for the six months ended September 30, 2011. The balance at September 30, 2011 for the note was $420,664 less the unamortized discount of $69,757 totaling $350,907.

 

 

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IMPERIAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

 

4.	NOTE PAYABLE- cont'd

   

On June 15, 2011, the Green Tide Water Disposal, Ltd., was formed as a limited partnership with Imperial Oil & Gas, Inc. being a limited partner owning 99%  and Big Dig Operating, Inc., a wholly owned subsidiary of Imperial Oil & Gas, Inc., being the general partner and owning 1%, and obtained a Convertible Promissory Note on June 17, 2011, for amounts up to $1,200,000 to rework and operate the SWDF. The note provides that Green Tide will pay interest at a rate of twenty percent per annum with principal and interest paid monthly in amounts equal to eighty percent of the net cash flow generated by the operations of the SWDF, until such time that the cumulative distribution equals the principal amount loaned.  The lender may convert at its option, the unpaid balance of the note into limited partner interests in Green Tide of up to 50% of the equity. As of September 30, 2011, $1,200,000 in proceeds had been received. Interest expense of $35,720 was accrued on the note and is included in total interest expense of $56,561 in the Statement of Operations for the six months ended September 30, 2011.

The notes payable are summarized as follows as of September 30, 2011.

		Amount
Convertible note payable, net of discount of $69,757		$	350,907
Other borrowings			1,200,000
			1,550,907
Less Current Portion:			(92,633	)
Notes payable		$	1,458,274

5.	STOCKHOLDERS’ EQUITY

On July 8, 2011 Imperial Resources, Inc., pursuant to the Securities Purchase Agreement with an accredited investor dated December 31, 2010, entered into a second Securities Purchase Agreement with the accredited investor, by subscribing $150,000 for 532,461 shares of common stock at a 10% discount to the Volume Weighted Average closing Price for the ten business days prior to the Agreement, this being a price of $0.2817 per share, as mutually agreed between the Company and the accredited investor. Following the issuance the total number of issued shares of the Company’s common stock was 42,894,561.

 

6.	GOING CONCERN

The Company intends to seek business opportunities that will provide a profit. However, the Company does not have the working capital necessary to be successful in this effort and to service its debt, which raises substantial doubt about its ability to continue as a going concern.

Continuation of the Company as a going concern is dependent upon obtaining additional working capital and the management of the Company has developed a strategy, which it believes will accomplish this objective through additional loans and equity funding, which will enable the Company to operate for the coming year.

 

7.	INCOME TAXES

 

At September 30, 2011, the Company has accumulated operating losses totaling approximately $1,578,000. The net operating loss carry forwards will begin to expire in 2027 if not utilized. The Company has recorded net operating losses in each year since its inception through September 30, 2011. Based upon all available objective evidence, including the Company’s loss history, management believes it is more likely than not that the net deferred assets will not be fully realized. Therefore, the Company has provided a valuation allowance against its deferred tax assets as of September 30, 2011.

8.	COMMITMENTS AND CONTINGENCIES

Stateline

On January 25, 2011, the Company entered into a Farmout Agreement with a private oil and gas exploration company, for the right to earn acreage by drilling up to four wells in an infill development

 

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IMPERIAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

8.	COMMITMENTS AND CONTINGENCIES – Cont’d

Stateline

project ("Stateline") in the existing Sawyer Field, in Lea County, New Mexico. The Agreement required the Company’s subsidiary to pay a fee of $60,000 for the farmout agreement and to drill between one and four wells to earn a 77% net revenue interests in 40 acres for each well drilled, subject to a reservation by the assigning party of a 10% working interest in each well drilled. As of September 30, 2011, the Company has invested $60,000 related to the spud fee. The Company’s capital expenses for the first well are estimated to be $3,000,000.

 

9 .	SIGNIFICANT TRANSACTIONS WITH RELATED PARTY

On April 1, 2010, Imperial Oil entered into an Assignment of Overriding Royalty Interest Agreement to assign or pay Sydney Oil & Gas, LLC (“Sydney”), a gross overriding royalty of 6.5% of 8/8 for each lease or working interest acquired by Imperial Oil.  Imperial’s CEO owns an interest in and controls Sydney. At September 30, 2011, no royalties have been paid.

Director’s fees totaling $27,000 were incurred for the six months ended September 30, 2011, of which $9,000 is included in accounts payable and other accrued liabilities as of September 30, 2011.

10.	SUBSEQUENT EVENTS

On November 8, 2011 the Salt Water Disposal Facility (“SWDF”) owned by the Company’s Green Tide Water Disposal, Ltd. subsidiary located in Wise County, Texas, was struck by lightning. There were no causalities, injuries or environmental damages, however, the surface plant consisting of tanks and pumps were largely destroyed by an explosion caused by a lightning strike and ensuing fire. No damage is believed to have been caused to the newly deepened and completed well bore, wellhead, land and roadway infrastructure which form the majority portion of the SWDF assets, along with the value of the disposal permit. The replacement value of the surface equipment destroyed is estimated to be approximately $530,000. The equipment destroyed was not insured.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and the exhibits attached hereto contain certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements concern our anticipated results and developments in our operations in future periods, planned exploration and development of our properties, plans related to our business and matters that may occur in the future. These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management.

Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates” or “intends”, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be forward-looking statements. Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors which could cause actual events or results to differ from those expressed or implied by the forward-looking statements, including, without limitation:

●	risks related to our limited operating history; including security and conversion arrangements over Notes payable;

●	risks related to our financing and development activities;

●	risks related to the historical losses and expected losses in the future;

●	risks related to our dependence on our executive officers;

●	risks related to fluctuations in oil and natural gas prices, and the price for salt water disposal;

●	risks related to exploratory activities, drilling for and producing oil and natural gas, and the drilling of salt water disposal wells;

●	risks related to the operation of salt water disposal facilities;

●	risks related to liability claims from oil and gas, and salt water disposal operations;

●	risks related to accessing the oil and natural gas, and salt water disposal markets;

●	risks related to the statutory regulation of the drilling for and producing of oil and natural gas, and the disposal of salt water;

●	risks related to legal and reporting compliance costs and the ongoing accreditation of our auditors by the PCAOB;

●	risks related to the unavailability of drilling equipment and supplies;

●	risks related to competition in the oil and natural gas industry, including the disposal of salt water;

●	risks related to period to period comparison of our financial results;

 

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●	risks related to our securities and the general public markets;

●	risks related to our ability to raise capital or enter into joint venture or working interest arrangements on acceptable terms.

We qualify all the forward-looking statements contained in this Quarterly Report by the foregoing cautionary statements.

Overview and Plan of Operation

Producing Wells

Cochran #1 Well

On January 20, 2010, the Company acquired a 14.9% working interest in the oil, gas and mineral leases in the Greater Garwood hydrocarbon exploration project located in Colorado County, Texas (the “Project”).  The Project included one producing well known as the Cochran #1 Well. The well-produced and sold approximately 5 Mmcfe, net during the three months ended September 30, 2011, and 9.38 Mmcfe net to Imperial for the three months ended September 30, 2010.   Remaining natural gas reserves are estimated to be 189.71 mmcfe as of September 30, 2011. All revenues for the three and six months ended September 30, 2011 and 2010 are from the Cochran Well. The investment as of September 30, 2011 totaled $231,131.

Exploratory Wells

Oklahoma Project

In July of 2010, Imperial Oil entered into a participation agreement in an area of mutual interest (AMI) agreement and joint operating agreement to acquire a 50% working interest in leases on up to 5,000 acres in Oklahoma, including a 50% working interest in 15 planned horizontal oil and gas drilling projects. As of September 30, 2011 the Company incurred $210,261 related to acquisition of acreage. All leases are required to provide a gross net royalty interest of 79.25% or greater. At the Company’s option they may elect to participate in drilling and completion costs.  An independent evaluation has been prepared indicating net proven undeveloped reserves (P90) of 436,450 barrels of oil and gas of 7,179,200 mcf as of September 30, 2011.

Nunnelly #1 Project

On January 10, 2011, the Company entered into an Oil and Gas lease (“Agreement”) with the mineral owner of approximately 35 acres and an existing wellbore in Montague County Texas. The Agreement provides for the development of the Project lease area and the existing well, known as Nunnelly #1. The mineral owners’ will retain a 25% royalty interest in the acreage. The Company obtained an evaluation from an independent registered petroleum engineer indicating net probable recoverable oil reserves of approximately 17 Mbbls. As of September 30, 2011, $47,162 was capitalized, relating to surface preparation work at the site.

Stateline

On January 25, 2011, the Company entered into a Farmout Agreement with a private oil and gas exploration company, for the right to earn acreage by drilling up to four wells in an infill development project ("Stateline") in the existing Sawyer Field, in Lea County, New Mexico , targeting the San Andres Formation. The Agreement calls for drilling between one and four wells to earn a 77% net revenue interests in 40 acres for each well drilled, subject to a reservation by the assigning party of a 10% working interest in each well drilled.  As of September 30, 2011, the Company has invested $60,000 related to the farmout agreement fee. The Company’s capital expense for the first well is expected to be around $3,000,000 as the company is in discussions with the farmor to drill three horizontal wells rather than 4 vertical wells on the property.

 

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The Sawyer Field was discovered in 1947 with the establishment of oil and natural gas production from the dolomites of the San Andres Formation. Well spacing is currently 40 acres, allowing selective infill drilling on a smaller spacing basis. Similar fields in New Mexico and Texas are currently being infill drilled on 20 and 10 acre spacing, which would present additional upside to Stateline. Planned infill wells are relatively shallow at < 5,000 feet and are expected to produce oil and gas. The Company is developing a plan to exploit additional reserves by using a three well horizontal drilling plan as opposed to the originally intended 4 vertical. An independent evaluation has been carried out indicating primary proven undeveloped reserves (P90) of 360,000 barrels and secondary reserves of 582,700 barrels showing combined reserves of 942,700 barrels.

 

Salt Water Disposal Facility

On April 27, 2011 Imperial Oil entered into a Purchase and Sale Agreement to purchase approximately 42 acres of land, a related salt water disposal facility (”SWDF”) consisting of surface equipment, and a wellbore and associated permits, located in Wise County, Texas.  The total purchase price of $500,000 was made through a $50,000 signing payment, plus the execution of a Convertible Promissory Note totaling $450,000. The Note is secured over the SWDF assets. In addition, the Company has obtained $1,200,000 in proceeds from a convertible promissory note related to costs to complete the well. The Company plans to deepen the well to a depth currently approved by the Texas Railroad Commission, conduct initial marketing operations and to reopen the Facility to dispose of up to 15,000 barrels of salt water a day. As of September 30, 2011, the Company incurred $1,365,956 in capitalized costs related to the deepening of the well.  The well was near completion when the SWDF was struck by lightning on November 8, 2011.  A significant portion of surface equipment was lost and this has been reflected as an extraordinary loss in the Statement of Operations as of September 30, 2011 totaling $157,562. Following are amounts incurred related to the project.

		September 30, 2011
Purchase of salt water facility		$	500,000
Cost to complete and deepen well			1,365,956
Loss of equipment due to fire			(157,562	)
Depreciation expense and accumulated depreciation			(40,357	)
Total property and equipment related to salt water facility		$	1,668,037

 

The SWDF is located in the heart of the Barnett Shale, the largest gas play by number of wells, in Texas. The SWDF is conveniently located for the disposal of large volumes of salt water generated from essential fracture (“frac”) stimulation operations on Barnett Shale gas wells, some of which have been frac’ed up to four times. There are approximately 6,000 wells within 20 miles of the Facility. Disposal rates in the area range from approximately $0.40 to $0.60 per barrel of water, even at less attractive, generally more distant facilities. In addition to disposal revenues the Company expects to benefit from materially additional revenues generated by the facility from the recovery and re-sale of oil contained in frac water.

The deepening of the well has successfully found one of the major lost circulation zones containing high porosity strands targeted in the Ellenburger formation, ideal for the planned disposal volumes of water, and the well is now at the final total depth. The Ellenburger is the favoured formation for disposal purposes in this part of Texas as it is separated by thousands of feet of rock from any fresh water bearing formations.  The Ellenburger is a thick formation more than 2,000 feet thick in the subject location capable of sustaining constant input of huge amounts of disposal water without contamination risk to other oil and gas producing formations or ground water. The Company has a perpetual license to dispose of 15,000 barrels of contaminated water per day with a strong possibility to increase its permit to 30,000 per day after a satisfactory period of operations.

 

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Comparison of Fiscal six months ended September 30, 2011 and 2010, respectively:

 

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		Six  Months ended				Six Months ended			Amount of
		September 30, 2011				September 30, 2010			Increase (decrease)
REVENUES
Oil and gas revenue		$	47,931		$	67,634			$	(19703	)
Operatin g Expenses:
Lease operating costs			7,516			43,823				(36,307	)
Depreciation			40,357			-				40,357
Depletion			11,235			2,576				8,659
Professional Fees			7,861			-				7,861
Accounting and auditing			89,787			5,500				84,287
Directors fees			45,000			-				45,000
Other Administrative Expenses			36,321			8,725				27,596
Total Operating Expenses			238,077			60,624				177,453
(LOSS) INCOME FROM OPERATIONS			(190,146	)		7,010				(197,156	)
Other Income and (Expenses):
Interest on promissory note			(56,561	)		(22,500	)			34,061
Net Loss Before Extraordinary Items			(246,707	)		(15,490	)			231,217
Extraordinary Items			(157,562	)		-				157,562
NET LOSS		$	(404,269	)	$	(15,490	)		$	388,779

 

The Cochran #1 well produced and sold approximately 5 Mmcfe, net during the three months ended September 30, 2011, and 9.38 Mmcfe net to Imperial for the three months ended September 30, 2010. All revenues and lease operating expenses are from the Cochran Well. In addition, the Company was in the Development Stage for the three and six months ended September 30, 2010.

Depreciation expense totaling $40,357 was incurred for the salt water disposal facility for the three months ended September 30, 2011 compared to none in 2010

Accounting fees, professional fees, director’s fees and other general and administrative expenses all increased from 2010 primarily as a result of increased investments and operations in oil and gas and related properties.

Interest expense increased as a result of increased borrowings related to the salt water disposal facility for the three months ended September 30, 2011.

The well was near completion when the facility was struck by lightning on November 8, 2011. A significant portion of the surface equipment was lost and this has been reflected as an extraordinary loss in the Statement of Operations as of September 30, 2011 totaling $157,562. Costs to replace the equipment are estimated to be approximately $530,000.

 

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Liquidity and Capital Resources

 

We reported total current assets of $206,642 as of September 30, 2011, consisting of $183,114 in cash and $23,528 of accounts receivable. Current liabilities of $504,592 related to vendor payables and current portion of long term notes. Stockholders’ equity is $460,368 at September 30, 2011.

 

For the six months ended September 30, 2011, cash provided by operating activities was $151,183, compared to cash used in operations of $10,787 for the six months ended September 30, 2010. The Company was in the Development Stage as of September 30, 2010. For the same periods we used $1,653,620 and $900,000, respectively in cash for oil and gas and the salt water disposal property in 2011. We received $1,200,000 in proceeds from a promissory note for the six months ended September 30, 2011, compared to $900,000 received in 2010.  The $900,000 note was subsequently converted to common stock in December 2010.

 

On July 8, 2011 Imperial Resources, Inc., pursuant to the Securities Purchase Agreement with an accredited investor dated December 31, 2010, entered into a second Securities Purchase Agreement with this accredited investor, it subscribing $150,000 for 532,461 shares of common stock at a 10% discount to the Volume Weighted Average closing Price for the ten business days prior to the Agreement, this being a price of $0.2817 per share, as mutually agreed between the Company and the accredited investor.

 

Over the last 12 months the Company has raised capital and debt of approximately $3,000,000 in difficult capital markets.

We funded our operations from equity and debt financing and from our oil and gas revenues. We plan to continue to seek financings, and we believe that this will provide sufficient working capital to fund our operations for at least the next twelve months. This and other exploration activities, increased expenses, additional acquisitions, or other events, may require us to raise a significant amount of capital through equity or debt financings. There can be no assurance that we will be successful in raising additional funds and, if unsuccessful, our plans for expanding operations and business activities may have to be curtailed. Any attempt to raise funds, through debt or equity financing, would likely result in dilution to existing stockholders.

We continue to operate with very limited administrative support, and our current officers and directors continue to be responsible for many duties to preserve our working capital.

Critical Accounting Policies

Use of Estimates in the Preparation of Consolidated Financial Statements

Preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The oil and natural gas reserve estimates, and the related future net cash flows derived from those reserves, are used in the determination of depletion expense and the full cost ceiling test and are inherently imprecise. Actual results could differ from those estimates.

Property and Equipment:

Oil and natural gas properties:

The Company follows the successful efforts method of accounting and will capitalize successful wells and related leasehold costs. Acquisition costs for proved and unproved properties are capitalized when incurred. Exploration costs, including geological and geophysical costs, the costs of carrying and retaining unproved properties and exploratory dry hole costs are expensed. Development costs, including costs to drill and equip development wells and successful exploratory drilling costs to locate proved reserves are capitalized.

 

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These costs are amortized using the unit of production method.   Dry hole and related leasehold costs are expensed. 

 

 Impairment of Long-Lived Assets:

The Company reviews and evaluates long-term assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable.  The assets are subject to impairment consideration under ASC 60-10-35-17 if events or circumstances indicate that their carrying amount might not be recoverable.   When the Company determines that an impairment analysis should be done, the analysis will be performed using the rules of ASC 930-360-35 Asset Impairment, and 360-10-15-3 through 15-5, Impairment or Disposal of Long-Term Assets.

Fair value of financial instruments

The Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the relatively short maturity of these instruments. None of these instruments are held for trading purposes. The carrying amounts and fair values for Convertible debt are presented in the following Notes.

Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK

Not applicable.

ITEM 4.

CONTROLS AND PROCEDURES

Item 4T - Disclosure Controls and Procedures

Disclosure Controls and Procedures

 

As of the end of the current reported period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective at a reasonable assurance level with respect to the recording, processing, summarizing and reporting, within the time periods specified in the Commission’s rules and forms, of information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

 

Changes in Internal Control over Financial Reporting

During the first quarter of 2011 we have implemented additional controls and procedures designed to ensure that the disclosure provided by us meets the then current requirements of the applicable filing made under the Exchange Act. To address our lack of sufficient accounting technical expertise, during the fourth quarter ended March 31, 2011, we retained additional accounting technical expertise. Other than these there have been no changes in our internal control over financial reporting during the second quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

None.

ITEM 1A

RISK FACTORS

 

The description of the risk factors associated with the Company is incorporated into this Item 1A by reference to the description of risk factors set forth under the heading “Risk Factors” in Item 1A of Part I of our annual report on Form 10-K.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On July 8, 2011 Imperial Resources, Inc., pursuant to the Securities Purchase Agreement with an accredited investor dated December 31, 2010, entered into a second Securities Purchase Agreement with this accredited investor, it subscribing $150,000 for 532,461 shares of common stock at a 10% discount to the Volume Weighted Average closing Price for the ten business days prior to the Agreement, this being a price of $0.2817 per share, as mutually agreed between the Company and the accredited investor.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.

RESERVED

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

 

ITEM 6.

EXHIBITS

The following exhibits are included as part of this report by reference:

31.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C., Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C., Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	IMPERIAL RESOURCES, INC.
Date: November 21, 2011	By:	/s/  Rob Durbin
		Rob Durbin President, Chief Executive Officer and Director (Principal Executive Officer)
Date: November 21, 2011	By:	/s/ Mike Mackey
		Mike Mackey Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

 

 

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