| • 10-Q • EX-31.1 • EX-31.2 • EX-32.1 • EX-32.2 • EX-101.INS • EX-101.SCH • EX-101.CAL • EX-101.DEF • EX-101.LAB • EX-101.PRE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended May 31, 2012
OR
For the transition period from __________________to ____________________
Commission File Number 000-52322
GULF UNITED ENERGY, INC.
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code:
(713) 942-6575
N.A.
(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. Yes þ 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). Yes þ 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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of July 10, 2012, there were 551,517,726 shares of the registrant’s common stock, par value $0.001 per share, issued and outstanding.
GULF UNITED ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
TABLE OF CONTENTS
Statement Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts included in this Report including, without limitation, statements in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Report, regarding our financial condition, estimated working capital, business strategy, the plans and objectives of our management for future operations and those statements preceded by, followed by or that otherwise include the words “believe”, “expects”, “anticipates”, “intends”, “estimates”, “projects”, “target”, “goal”, “plans”, “objective”, “should”, or similar expressions or variations on such expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements including, but not limited to, our ability to identify and exploit available corporate acquisition, farm-in and/or joint venture opportunities in the energy sector in Colombia and Peru and, more generally, in Latin America, our ability to establish technical and managerial infrastructure, our ability to raise required capital on acceptable terms and conditions, our ability to take advantage of, and successfully participate in such opportunities, our ability to successfully operate, or influence our joint venture partners’ operation of, the projects in which we participate in a cost effective and efficient way; future economic conditions, political and regulatory stability and changes and volatility in energy prices. A description of some of the risks and uncertainties that could cause our actual results to differ materially from those described by the forward-looking statements in this Quarterly Report on Form 10-Q appears in the section captioned “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on November 29, 2011 and Item 1A of this Quarterly Report on Form 10-Q.
Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
GULF UNITED ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
PART 1 – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUARTERLY REPORT
FINANCIAL STATEMENTS
May 31, 2012
(Unaudited)
F-1
GULF UNITED ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
The accompanying notes are an integral part of these consolidated financial statements.
F-2
GULF UNITED ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
The accompanying notes are an integral part of these consolidated financial statements.
F-3
GULF UNITED ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flow
(Unaudited)
The accompanying notes are an integral part of these consolidated financial statements. F-4
GULF UNITED ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Changes in Stockholders’ Equity (Deficiency) and Comprehensive Loss
Period from Inception (September 19, 2003) through May 31, 2012
(Unaudited)
The accompanying notes are an integral part of these consolidated financial statements. F-5
GULF UNITED ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Changes in Stockholders’ Equity (Deficiency) and Comprehensive Loss
Period from Inception (September 19, 2003) through May 31, 2012
(Unaudited)
The accompanying notes are an integral part of these consolidated financial statements. F-6
(A Development Stage Company)
Consolidated Statements of Changes in Stockholders’ Equity (Deficiency) and Comprehensive Loss
Period from Inception (September 19, 2003) through May 31, 2012
(Unaudited)
F-7
GULF UNITED ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2012
(Unaudited)
Gulf United Energy, Inc. (“Gulf United” or the “Company”), together with its 100% owned subsidiaries, is an international oil and gas exploration company concentrating on opportunities in South America. The Company currently has limited operations and is a development stage company as defined by the Financial Accounting Standards Board (FASB) Accounting Standards for Development Stage Entities. The Company was incorporated in the State of Nevada on September 19, 2003. Gulf United’s asset portfolio includes participation in two hydrocarbon exploration blocks operated by SK Innovation Co. Ltd. (“SK Innovation” – Formerly SK Energy, Ltd.). SK Innovation is a subsidiary of SK Innovation Group, one of South Korea’s top five industrial conglomerates. SK Innovation is Korea’s largest petroleum refiner and is currently active in 29 blocks in 16 countries. The Company also has a participating interest in Block XXIV Peru and the Peru TEA operated by Upland Oil and Gas.
Interim Financial Statements
In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which are necessary to provide a fair presentation of operating results for the interim periods presented. The Company assumes that the users of the interim financial information herein have read or have access to the audited financial statements for the preceding fiscal year and that the adequacy of additional disclosures needed for a fair presentation may be determined in that context. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. These consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended August 31, 2011, filed on November 29, 2011. The results of operations presented for the quarter ended May 31, 2012 are not necessarily indicative of the results to be expected for the year. Interim financial data presented herein are unaudited.
These financial statements have been prepared on a going concern basis. The Company has incurred losses since inception resulting in an accumulated deficit of $29,738,171 and further losses are anticipated in the development of our business raising substantial doubt about the Company’s ability to continue as a going concern. Our ability to continue as a going concern is dependent upon the ability of the Company to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The Company raised substantial equity and debt during the year ended August 31, 2011. Notwithstanding, we do not have any credit facilities available with financial institutions, stockholders or third party investors, and will continue to rely on best efforts debt and equity financings. There is no assurance that we can raise additional debt or equity capital from external sources. The Company has no control over the amount of funds that it may receive in financings and the time frame in which they may be received. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence.
F-8
GULF UNITED ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2012
(Unaudited)
Basis of Accounting
The Company maintains its accounts on the accrual method of accounting in accordance GAAP. The accompanying consolidated financial statements of the Company have been prepared in accordance with GAAP and the rules of the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments necessary for a fair presentation of consolidated financial position and the results of operations have been reflected herein.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of credit risk at this time consist principally of cash. The Company places its cash with high credit quality financial institutions. At times, such amounts may exceed FDIC limits; however, these deposits typically may be redeemed upon demand and therefore bear minimal risk. In monitoring this credit risk, the Company periodically evaluates the stability of the financial institutions.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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. Actual results could differ from those estimates. Certain of our more critical accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, and our observance of trends in the industry and information available from other outside sources, as appropriate. Different, reasonable estimates could have been used in the current period. Additionally, changes in accounting estimates are reasonably likely to occur from period to period. These, and other, factors could have a material impact on the presentation of our financial condition, changes in financial condition or results of operations.
Cash
Cash includes cash in a demand deposit account and a money market account with a Houston bank. In addition, the Company has established a cash account in Bogota, Colombia as required by local regulations. This account is maintained in Colombian pesos.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash, accounts payable, accrued liabilities and debt. It is management’s opinion that the Company is not exposed to significant interest or credit risks arising from these instruments. The fair value of these financial instruments approximates their carrying values.
The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest and discount rates that approximate prevailing market rates. In determining fair values, there are three levels of inputs used to determine value. Level 1 inputs are quoted prices in active markets for identical assets and liabilities. Level 2 inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs which include risk inherent in the asset or liability.
Software License and Fixed Assets
The value of the software license and other fixed assets (computer equipment) is stated at cost. Depreciation is computed using the straight-line method over the thirty six-month estimated useful life of the software and other fixed assets.
F-9
GULF UNITED ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2012
(Unaudited)
Any costs associated with maintenance and upgrades will be charged to expense as incurred. When the asset is retired or otherwise disposed of, the costs and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period; significant renewals and betterments are capitalized. Deductions are made for retirements resulting from renewals or betterments.
Impairment of Long-lived Assets
The Company evaluates impairment when events or circumstances indicate that a long-lived asset’s carrying value may not be recovered. These events include market declines, decisions to sell an asset and adverse changes in the legal or business environment. If events or circumstances indicate that a long-lived asset’s carrying value may not be recoverable, the Company estimates the future undiscounted cash flows from the asset for which the lowest level of separate cash flows may be determined, to determine if the asset is impaired. If the total undiscounted future cash flows are less than the carrying amount for the asset, the Company estimates the fair value of the asset through reference to sales data for similar assets, or by using a discounted cash flow approach. The asset’s carrying value is then adjusted downward to the estimated fair value. These cash flow estimates and assumptions could change significantly either positively or negatively. In June 2012, the Company announced that a determination had been made to cease efforts to test and complete the Tamandua #1 well on the CPO-4 prospect in Colombia. As a result of the determination to cease efforts to complete the Tamandua #1 well, the Company recorded an impairment charge of $7,027,032 to write off costs attributable to the drilling of the Tamandua #1 well on the Company’s CPO-4 block. As of May 31, 2012, the Company had recorded approximately $960,000 of total expected costs of $2.5 million on the Cachirre #1 well. See “Note 10 – Subsequent events.” None of these costs were impaired at May 31, 2012.
Inflation
The Company's results of operations have not been significantly affected by inflation and management does not expect inflation to have a significant effect on its operations in the foreseeable future.
Oil and gas properties
The Company follows the full cost method of accounting for its oil and gas properties, whereby all costs incurred in connection with the acquisition, exploration for and development of petroleum and natural gas reserves, if any, are capitalized. Such costs include costs of acquisition, geological and geophysical activities, rentals on non-producing leases, drilling, completing and equipping of oil and gas wells and administrative costs directly attributable to those activities and asset retirement costs. Disposition of oil and gas properties will be accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such adjustment would significantly alter the relationship between capital costs and proved reserves, if any, of oil and gas, in which case the gain or loss will be recognized in the consolidated statements of operations.
As of May 31, 2012, the Company had oil and gas property investments in the amount of $19,288,590 that are excluded from depletion because reserves have not been proven to be associated with those properties. If any proved reserves are found and when its quantity can be estimated, costs in excess of the present value of estimated future net revenues will be charged to impairment expense. The Company will apply the full cost ceiling test on a quarterly basis on the date of the latest consolidated balance sheet presented. It is not known at this time if any recoverable reserves of oil and gas exist.
In June 2012, the Company announced that a determination had been made to cease efforts to test and complete the Tamandua #1 well on the CPO-4 prospect in Colombia. As a result of the determination to cease efforts to complete the Tamandua #1 well, the Company recorded an impairment charge of $7,027,032 to write off costs attributable to the drilling of the Tamandua #1 well on the Company’s CPO-4 block. As of May 31, 2012, the Company had recorded approximately $960,000 of total expected costs of $2.5 million on the Cachirre #1 well. See “Note 10 – Subsequent events.” None of these costs were impaired at May 31, 2012.
Asset retirement costs will be recognized when an asset is placed in service and will be included in the amortization base and will be amortized over proved reserves, if any, using the units of production method. Depletion of proved oil and gas properties will be calculated on the units-of-production method based upon estimates of proved reserves, if any. Such calculations include the estimated
F-10
GULF UNITED ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2012
(Unaudited)
future costs to develop proved reserves, if any. Costs of unproved properties are not included in the costs subject to depletion. These costs will also be assessed quarterly for impairment.
GAAP requires that an asset retirement obligation (ARO) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which it is incurred and becomes determinable. Under this method, when liabilities for dismantlement and abandonment costs, excluding salvage values, are initially recorded, the carrying amount of the related oil and natural gas properties is increased.
The fair value of the ARO asset and liability is measured using expected future cash outflows discounted at the Company’s credit-adjusted risk-free interest rate. Accretion of the liability is recognized each period using the interest method of allocation, and the capitalized cost is depleted using the units of production method. Should either the estimated life or the estimated abandonment costs of a property change materially upon the Company’s quarterly review, a new calculation is performed using the same methodology of taking the abandonment cost and inflating it forward to its abandonment date and then discounting it back to the present using the Company’s credit-adjusted, risk-free rate.
The carrying value of the asset retirement obligation is adjusted to the newly calculated value, with a corresponding offsetting adjustment to the asset retirement cost related to oil and gas property accounts. At May 31, 2012, the Company had no material asset retirement obligations.
Basic Loss per Share
The Company is required to provide basic and diluted earnings (loss) per common share information. The basic net loss per common share is computed by dividing the net loss applicable to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss applicable to common stockholders, adjusted on an "as if converted" basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the period ended May 31, 2012, there were no potentially dilutive securities issued, therefore, diluted net loss per common share equals basic net loss per share. Common stock subscribed was not included in diluted earnings per share because the results were anti-dilutive. During the twelve months ended August 31, 2011, the Company issued five-year warrants to purchase up to 1 million shares of common stock at an exercise price of $0.30. In addition, in June 2011 the Company adopted the 2011 Stock Incentive Plan (the “2011 Plan”) under which the Company may issue stock grants and stock options to Company employees, directors and consultants up to 45,000,000 shares which may not exceed 1,000,000 shares to any individual during any fiscal year. These stock grants and stock options generally vest over a three-year period, beginning on the first anniversary from the date of each grant. As of May 31, 2012, the Company has granted, to employees and independent directors of the Company, a total of 1,950,000 shares in restricted stock grants and stock options to purchase 3,500,000 shares at a weighted average exercise price of $0.31 per share.
Potential dilutive securities as of May 31, 2012 have been considered, but the potential dilutive effect of these securities is not believed to be material and would be anti-dilutive. The Company reported net losses in the nine months ended May 31, 2012 as well as a cumulative net loss; accordingly, the effects of any additional shares would be anti-dilutive. The weighted average number of common and common equivalent shares outstanding was 473,465,689 and 374,967,587 for the nine months ended May 31, 2012 and 2011, respectively.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Gulf United Energy, Inc. and its wholly-owned subsidiaries, Gulf United Energy del Peru, Ltd., Gulf United Energy Cuenca Trujillo, Ltd. and Gulf United Energy de Colombia, Ltd. as of May 31, 2012. All significant inter-company transactions and balances have been eliminated in the consolidation.
Accounting for Uncertain Tax Positions
GAAP provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an entity’s financial statements. GAAP requires an entity to recognize the financial statement impact of a tax position when it is more likely that not that the position will be sustained upon examination. The Company believes that all significant tax positions utilized by the Company will more likely than not be sustained upon examination. As of the period ended May 31, 2012, the
F-11
GULF UNITED ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2012
(Unaudited)
tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations are from the fiscal year 2008 forward (with limited exceptions). Tax penalties and interest, if any, would be accrued as incurred and would be classified as tax expense in the consolidated statements of operations and comprehensive loss.
Stock-Based Compensation Arrangements
GAAP requires all share-based payments to employees, including grants of employee stock options, to be based on their fair values. In accordance with the provisions of GAAP, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award. The Company recognizes compensation cost net of a forfeiture rate and recognizes the compensation cost for only those awards expected to vest on a straight-line basis over the requisite service period of the award, which is generally the vesting term. The Company estimated the forfeiture rate based on its historical experience and its expectations of future forfeitures. We currently expect no forfeitures. This stock-based compensation is recognized as general and administrative expense over the employee’s requisite service period (generally the vesting period of the equity award). We apply the fair value method in accounting for stock option grants using the Black-Scholes Method.
We grant restricted stock and stock options to employees and directors as incentive compensation. The restricted stock and options generally vest over three years, beginning on the first anniversary of the grant date. The vesting of these shares and options is dependent upon the continued service of the grantees with the Company. Upon the occurrence of a change in control, each outstanding share of restricted stock and stock option will immediately vest.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The following summarizes the assumptions used in the option-pricing model and the method for determining the assumptions:
At May 31, 2012, total compensation cost related to non-vested options and awards granted to employees and independent directors not yet recognized is approximately $1,103,000 and is expected to be recognized over a period of less than three years.
Stock Options
Information relating to stock options is summarized as follows:
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