**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

Washington, D.C. 20549

 

**FORM 10-Q**

 

 

 

  

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

For the quarterly period ended March 31, 2014

OR

 

 

 

  

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

 

For the transition period from          to

 

Commission file number: 333-169507

**BRENHAM OIL & GAS CORP.**

(Exact Name Of Registrant As Specified In Its Charter)

 

 

 

Nevada

27-2413874

(State of Incorporation)

(I.R.S. Employer Identification No.)

  

  

601 Cien Street, Suite 235, Kemah, TX

77565-3077

(Address of Principal Executive Offices)

(ZIP Code)

 

  Registrant's Telephone Number, Including Area Code: (281) 334-9479

 

 

 

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  x  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  x  No **   **** ̈**

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or 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  ** ̈**

Smaller reporting company x 

 

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

 

The number of shares outstanding of each of the issuer’s classes of equity as of May 15, 2014 is 128,102,064 shares of common stock.

 

 

 

 

 

**Item**

 

**Description**

 

**Page**

 

 

**PART I****– FINANCIAL INFORMATION**
 

 

ITEM 1.

 

FINANCIAL STATEMENTS

 

3

ITEM 2.

 

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

 

12

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

14

ITEM 4T.

 

CONTROLS AND PROCEDURES

 

15

 

 

 

 

 

 

 

**PART II – OTHER INFORMATION**

 

 

ITEM 1.

 

LEGAL PROCEEDINGS

 

15

ITEM 1A.

 

RISK FACTORS

 

15

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

15

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

 

15

ITEM 4.

 

MINE SAFETY DISCLOSURES

 

15

ITEM 5.

 

OTHER INFORMATION

 

15

ITEM 6.

 

EXHIBITS

 

15

2

**PART I - FINANCIAL INFORMATION**

 

 
ITEM 1. FINANCIAL STATEMENTS

 

 

**Financial Statements**

 

 

Financial Statements

 

Unaudited Consolidated Balance Sheets – March 31, 2014 and December 31, 2013

4

Unaudited Consolidated Statements of Operations – Three months ended March 31, 2014 and 2013

5

Unaudited Consolidated Statements of Cash Flows – Three months Ended March 31, 2014 and 2013

6

Notes to Unaudited Consolidated Financial Statements

7

3

**BRENHAM OIL & GAS CORP.**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 

 

**March 31, 2014**

 

**December 31, 2013**

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

6,873

$

6,859

 

Accounts receivable

 

663 

 

                         3,100 

 

Total current assets

 

                       7,536 

   

                        9,959 

 

 

 

 

 

 

 

Oil and gas properties, full cost method

 

 

 

 

 

     Costs subject to amortization

 

                       93,555 

 

                       93,555 

 

     Costs not being amortized

 

                       91,900 

 

                       91,900 

 

     Accumulated depletion

 

                      (2,803) 

 

                      (1,982)

 

Deposit for purchase of oil and gas property

 

20,000

 

-

 

Total assets

 $

210,188

 $

                   193,432 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

$

4,119

$

23,941

 

Accounts payable – related parties

 

                     368,994 

 

                    284,412 

 

Total current liabilities

 

                     373,113 

 

                    308,353 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

Asset retirement obligations

 

                        6,864 

 

                        6,702 

 

Total liabilities

 

                     379,977 

 

                    315,055 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

Preferred stock, $0.0001 par value, 10,000,000 shares authorized, 0 shares issued and outstanding

 

                               - 

 

                               - 

 

Common stock, $0.0001 par value, 200,000,000 shares authorized; 128,293,536 shares issued; 128,102,064 shares outstanding

 

                       12,830 

 

                       12,830 

 

Less: treasury stock, at cost; 191,472 shares

 

                      (2,755)

 

                      (2,755)

 

Additional paid-in capital

 

                    992,981 

 

                    992,981 

 

Accumulated deficit

 

               (1,172,845)

 

               (1,124,679)

 

Total stockholders’ deficit

 

                 (169,789)

 

                 (121,623)

 

Total liabilities and stockholders’ deficit

$

210,188

$

193,432

 

See accompanying notes to the unaudited consolidated financial statements.

4

**BRENHAM OIL & GAS CORP.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013**

**(Unaudited)**

** **

 

 

 

 

 

 

 

**For the Three Months Ended**

 

 

 

**March  31,**

** **

 

 

**2014**

 

**2013**

 

 

 

 

 

 

 

Oil and gas revenues

$

10,421 

$ 

              8,643 

  

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

Lease operating expenses

 

                10,616 

 

              7,185 

 

General and administrative

 

                 46,988 

 

         482,278 

 

Depletion and accretion

 

                   983 

 

                   26 

 

Total operating expenses

 

         58,587 

 

      489,489 

 

 

 

 

 

 

 

Net loss

$

            (48,166) 

$

      (480,846)

 

 

 

 

 

 

 

Net loss per common share – basic and diluted

$

                 (0.00)

$ 

               (0.00)

 

 

 

 

 

 

 

Weighted average number of common shares outstanding – basic and diluted

 

128,102,064 

 

113,855,680 

 

See accompanying notes to the unaudited consolidated financial statements.

5

**BRENHAM OIL & GAS CORP.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013**

** (Unaudited)**

** **

 

 

 

**For the Three Months Ended March 31,**

** **

 

 

**2014**

 

**2013**

 

Cash flows from operating activities:

 

 

 

 

 

   Net loss

$

(48,166) 

$ 

              (480,846)

 

Adjustments to reconcile net loss to cash provided by (used in) operating activities:

 

 

 

 

 

Depletion and accretion

 

983 

 

                        26 

 

Stock-based compensation

 

               - 

 

               316,000 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

2,437 

 

                  (2,374)

 

Accounts payable and accrued expenses

 

                (19,822)

 

(7,908) 

 

Accounts payable – related parties

 

-

 

131,100

 

Net cash used in operating activities

 

(64,568) 

 

                (44,002)

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Payment for acquisition of oil and gas property

 

-

 

                (50,000)

 

Payment of deposit for purchase of oil and gas property

 

                 (20,000)

 

-

 

Net cash used in investing activities

 

(20,000)

  

                 (50,000)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Advances from related parties, net

 

84,582

 

                   94,745 

 

Net cash provided by financing activities

 

84,582 

 

                   94,745 

 

 

 

 

 

 

 

Net increase in cash

 

                       14 

 

                         743 

 

Cash and cash equivalents, beginning of period

 

                       6,859 

 

                     6,679 

 

Cash and cash equivalents, end of period

$

                    6,873 

$ 

                     7,422 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

Interest paid

$

                           - 

$

                            - 

 

Income taxes paid

$

                           - 

$

                            - 

 

 

 

 

 

 

 

Non-cash investing and financing transactions:

 

 

 

 

 

Issuance of note payable for oil and gas property

$

                          - 

$

                   70,000 

 

Issuance of common stock to convert payable due to American International Industries, Inc.

$

                             - 

$

                267,171 

 

Capitalized asset retirement costs

$

                           - 

$

                     1,684 

 

See accompanying notes to the unaudited consolidated financial statements.

6

**BRENHAM OIL & GAS CORP.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 1. Summary of Significant Accounting Policies**

** **

***Basis of Presentation***

The accompanying unaudited interim consolidated financial statements of Brenham Oil & Gas Corp. (“Brenham”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in Brenham's Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2013. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the unaudited interim consolidated financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year as reported in the Form 10-K have been omitted.

***Organization, Ownership and Business***

** **

Brenham Oil & Gas, Inc. was incorporated under the laws of the State of Texas in November 1997 and became a wholly-owned subsidiary of American International Industries, Inc. ("American") in November 1997. On April 21, 2010, the Company was re-domiciled in Nevada as Brenham Oil & Gas Corp. (“Brenham”) and Brenham Oil & Gas, Inc. became a wholly-owned subsidiary of Brenham. American was issued 64,977,093 shares of common stock of Brenham in connection with the reorganization in exchange for all shares outstanding of Brenham Oil & Gas, Inc. The reorganization has been retroactively applied to the consolidated financial statements for all periods presented.

** **

***Use of Estimates***

** **

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

***Going Concern***

The consolidated financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company incurred a loss from operations during the three months ended March 31, 2014 and 2013, has financial commitments in excess of current capital resources, and expects to incur further losses in the future, thus raising substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company generating 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. Management plans to obtain the necessary financing to meet its obligations during 2014. These financials do not include any adjustments relating to the recoverability and reclassification of recorded asset amounts, or amounts and classifications of liabilities that might result from this uncertainty.

***Reclassifications***

Certain reclassifications have been made to amounts in prior periods to conform to the current period presentation. All reclassifications have been applied consistently to the periods presented.

***Cash and Cash Equivalents***

** **

Brenham considers all short-term securities purchased with a maturity of three months or less to be cash equivalents.

***Accounts Receivable***

** **

Accounts receivable consist primarily of receivables from oil and gas revenue, and are carried at the expected net realizable value.

***Oil & Gas Properties***

The Company follows the full cost method of accounting for its investments in oil and gas properties, whereby all costs incurred in connection with the acquisition, exploration for and development of petroleum and natural gas reserves, including unproductive wells, are capitalized. Such costs include lease acquisition, geological and geophysical activities, rentals on non-producing leases, drilling, 

7

completing and equipping of oil and gas wells and administrative costs directly attributable to those activities, and asset retirement costs. General and administrative costs related to production and general overhead are expensed as incurred.

 

Disposition of oil properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such adjustment would significantly alter the relationship between capital costs and proved reserves of oil, in which case the gain or loss is recognized in the statement of operations.

 

Future development, site restoration, dismantlement and abandonment costs, are estimated property by property, based upon current economic conditions and regulatory requirements, and are included in amortization of our oil and natural gas property costs.

 

Depletion of capitalized oil properties and estimated future development costs, excluding unproved properties, are based on the unit-of-production method based on proved reserves.

 

At the end of each quarter, the unamortized cost of oil and natural gas properties, net of related deferred income taxes, is limited to the sum of the estimated future after-tax net revenues from proved properties, after giving effect to cash flow hedge positions, discounted at 10%, and the lower of cost or fair value of unproved properties, adjusted for related income tax effects. This limitation is known as the “ceiling test,” and is based on SEC rules for the full cost oil and gas accounting method. There was no ceiling test write-down recorded during the three months ended March 31, 2014 and 2013.

 

The Company assesses the carrying value of its unproved properties for impairment periodically. If the results of an assessment indicate that an unproved property is impaired (which was assessed in connection with the Company’s evaluation of goodwill impairment), then the carrying value of the unproved properties is added to the proved oil property costs to be amortized and subject to the ceiling test. There was no impairment during the three months ended March 31, 2014 and 2013.

 

As of March 31, 2014 and December 31, 2013, the Company has properties in the amount of $91,900, which are being excluded from amortization because they have not been evaluated to determine whether proved reserves are associated with those properties. Costs in excess of the present value of estimated future net revenues as discussed above are charged to impairment expense.

 

***Income Taxes***

 

Brenham is a taxable entity and recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when the temporary differences reverse. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the enactment date of the rate change. A valuation allowance is used to reduce deferred tax assets to the amount that is more likely than not to be realized. Interest and penalties associated with income taxes are included in selling, general and administrative expense.

 

Brenham has adopted ASC 740-10 “Accounting for Uncertainty in Income Taxes,” which prescribes a comprehensive model of how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. ASC 740-10 states that a tax benefit from an uncertain position may be recognized if it is "more likely than not" that the position is sustainable, based upon its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. As of March 31, 2014, Brenham had not recorded any tax benefits from uncertain tax positions.

 

***Net Loss Per Common Share***

 

Net loss per common share is computed by dividing the net loss by the weighted average number of shares outstanding during a period. The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding. Basic and diluted net losses per share were the same, as there were no common stock equivalents outstanding. 

For the three months ended March 31, 2014 and 2013, 3,000,000 stock options were excluded from the computation of diluted net loss per share, as the inclusion of such stock options would be anti-dilutive.

***Subsequent Events***

 

Brenham has evaluated all transactions from March 31, 2014 through the financial statement issuance date for subsequent event disclosure consideration.

 

***Recent Accounting Pronouncements***

 

There were various accounting standards and interpretations issued recently, none of which are expected to a have a material impact on the Company’s financial position, operations, or cash flows.

8

**Note 2. Oil and Gas Properties**

Brenham uses the full cost method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells used to find proved reserves, and to drill and equip development wells, including directly related overhead costs and related asset retirement costs are capitalized. Properties not subject to amortization consist of exploration and development costs that are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved, or their values become impaired and the corresponding costs are added to the capitalized costs subject to amortization. During the three months ended March 31, 2014 and 2013, depletion of oil and gas properties of $821 and $26, respectively, was recorded. Costs of oil and gas properties are amortized using the units of production method. Sales of oil and natural gas properties are accounted for as adjustments to the net full cost pool, and generally, no gain or loss is recognized.

In applying the full cost method, Brenham performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of oil and gas properties is compared to the “estimated present value” of its proved reserves discounted at a 10-percent interest rate of future net revenues, based on current economic and operating conditions at the end of the period, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties. If capitalized costs exceed this limit, the excess is charged as an impairment expense. During the three months ended March 31, 2014 and 2013, no impairment of oil and gas properties was recorded.

Below are the components of the oil and gas properties balance:

 

 

 

 

 

 

 

**March 31, 2014**

 

**December 31, 2013**

Royalty interest in 24 acres in Washington County, Texas (a)

$

 

- 

 

$

 

-

Royalty interest in 700 acres in the Permian Basin (b)

 

8,400 

 

8,400

10% working interest in the Pierce Junction Field (c)

 

87,500

 

87,500

Lease of 394 acres in the Gillock Field (d)

 

83,500 

 

83,500

Capitalized asset retirement costs

 

6,055

 

6,055

  Total oil and gas properties

 

185,455

 

185,455

     Accumulated depletion

 

(2,803)

 

(1,982)

  Net capitalized costs

$

182,652

$

183,473

a)      *Royalty interest in 24 acres in Washington County, Texas*- The Company has an oil and gas mineral royalty interest, covering a twenty-four acre tract of land located in Washington County, Texas, which is carried on the balance sheet at $0. The royalty interest is currently leased by Anadarko Petroleum Corporation for a term continuing until the covered minerals are no longer produced in paying quantities from the leased premises. Royalties on the minerals produced are currently incidental and paid to the Company as follows: (i) for oil and other liquid hydrocarbons, and (ii) for gas (including casing-head gas); the royalty is one-sixth of the net proceeds realized by Anadarko Petroleum Corporation on the sale thereof, less a proportionate part of ad valorem taxes and production, severance, or other excise taxes. In addition, the Company is entitled to shut-in royalties of $1 per acre of land for every ninety-day period within which one or more of the wells in leased premises, or lands pooled therewith, are capable of producing paying quantities, but such wells are either shut-in or production is not being sold.

b)      *Royalty interest in 700 acres in the Permian Basin*- On July 22, 2011, the Company entered into an Asset Purchase and Sale Agreement with Doug Pedrie, Davis Pedrie Associates, LLC and Energex Oil, Inc. (“Sellers”), pursuant to which the Company acquired 700 acres of unproved property located in the Permian Basin near Abilene, Texas. The agreement provided for the Sellers to complete all oil lease assignments by August 15, 2011. The purchase consideration for the acquisition is the issuance to Sellers of 2,000,000 restricted shares of Brenham common stock valued at $8,400, with an additional 2,000,000 restricted shares to be issued contingent upon realization of certain production targets in 2012. On March 8, 2012, this agreement was rescinded and replaced with an agreement that in consideration for the Brenham  share issuance; Brenham has a 2.5% overriding royalty interest in all of the leases associated with this property and any properties acquired or renewed in the future within a ten-mile radius. In addition, the contingency to issue additional shares was removed.

*c)       10% working interest in the Pierce Junction Field*- On March 12, 2013, Brenham entered into an agreement with an effective date of January 1, 2013, to purchase a 10% working interest in the Pierce Junction Field for $50,000 cash and a $70,000 non-interest bearing note payable due on August 31, 2013. On May 30, 2013, the holder of this note payable accepted $37,500 as full payment 

and Brenham recorded $32,500 as a reduction in the value of the oil and gas property due to the decrease in the consideration given to acquire it.

d)      *Lease of 394 acres in the Gillock Field*- Brenham leased 394 acres in Galveston County for the acquisition of 100% working interest in the Gillock Field from Kemah Development Texas, L.P. (“KDT”) and Daniel Dror II Trust of 2012 for $300 per acre, or $131,100 (recorded as accounts payable – related parties in the consolidated balance sheet as of March 31, 2014 and December 31, 2013) and 200,000 shares of American restricted common stock. Brenham issued 3,326,316 shares of Brenham restricted common stock to American as payment in full for the 200,000 shares issued by American on Brenham’s behalf. In 2002, KDT paid $1,175,000 for the original 437 acres and the mineral rights to 394 acres. However, KDT assigned no value to the mineral rights. Due to the related parties having no basis in the mineral rights, Brenham expensed the costs associated with the transaction, which totaled $447,100 and consisted of i) $316,000 of stock-based compensation calculated at the grant date fair value of the 3,326,316 shares of Brenham common stock issued to American (which equaled the grant date fair value of the common stock American issued to KDT and the Daniel Dror II Trust) and ii) the $131,100 related party payable. 

9

On January 8, 2014, the Company entered into a letter of intent with a third party to acquire a 332-acre oil and gas lease, the “Inez Prospect,” located in Victoria County, Texas, and the #1 Roberts Unit well-bore, and all the down-hole equipment and surface equipment associated therewith. On April 10, 2014, the Company and the third party entered into a prospect and lease acquisition agreement. Pursuant to the agreement, the Company has agreed to acquire 100% of the working interest for a total purchase price of $250,000, consisting of a $20,000 deposit, which was paid during the three months ended March 31, 2014, and a payment of the remaining $230,000 prior to the beginning of any exploration.

**Note 3. Accounts Payable – Related Parties**

 

Related party payables at March 31, 2014 consists of $237,894 owed to American as advances to assist with Brenham's operating expenses, and $131,100 owed to KDT for the acquisition of mineral rights for the Gillock Field. Related party payables at December 31, 2013 consists of $153,312 owed to American as advances to assist with Brenham's operating expenses, and $131,100 owed to KDT for the acquisition of mineral rights for the Gillock Field. KDT is owned by an entity which is controlled by the brother of Daniel Dror, Brenham’s Chairman, Chief Executive Officer, and President. Scott Gaille is the former President of Brenham. The advances to Brenham are non-interest bearing and due on demand. 

**Note 4. Asset Retirement Obligations**

** **

The Company estimates the present value of future costs of dismantlement and abandonment of its wells, facilities, and other tangible long-lived assets, recording them as liabilities in the period incurred. Asset retirement obligations are calculated using an expected present value technique. Salvage values are excluded from the estimation. When the liability is initially recorded, the entity increases the carrying amount of the related long-lived asset. Accretion of the liability is recognized each period, and the capitalized cost is amortized over the useful life of the related asset. Upon settlement of the liability, the Company incurs a gain or loss based upon the difference between the estimated and final liability amounts. The Company records gains or losses from settlements as adjustments to the full cost pool.

 

Accretion expense was $162 and $0 during the three months ended March 31, 2014 and 2013, respectively.

 

The following table represents the change in the Company’s asset retirement obligations during the three months ended March 31, 2014:

 ** **

** **

** **

**Amount**

** **

Asset retirement obligations as of December 31, 2013

 

$

6,702

 

Additions

 

 

-

 

Current year revision to previous estimates

 

 

-

 

Accretion during the three months ended March 31, 2014

 

 

162

 

Asset retirement obligations as of March 31, 2014

 

$

6,864

 

**Note 5. Equity**

** **

*Stock Options*

 

On December 5, 2012, Brenham issued 3,000,000 stock options to Brenham’s Vice President - Exploration, Mr. L. Rogers Hardy, with an exercise price of $0.035 per share, expiring in 3 years, valued at $104,974 and recorded as share-based compensation. Brenham estimated the fair value of each stock option at the grant date as $0.035 by using the Black-Scholes option-pricing model, with the following weighted-average assumptions used for grants in 2012:

 

 

 

 

**December 5, 2012**

Dividend yield

0.0%

Expected volatility

423.12%

Risk free interest

0.75%

Expected lives

3 years

 

10

A summary of the status of Brenham's stock options to employees during the three months ended March 31, 2014 is presented below:

 

 

 

 

 

 

 

 

**Shares**

** **

**Weighted Average Exercise Price**

** **

**Intrinsic Value**

Outstanding and exercisable as of December 31, 2013

3,000,000

$

0.035

 

 

Granted

-

$

-

 

 

Exercised

-

 

N/A

 

 

Canceled / Expired

-

 

N/A

 

 

Outstanding and exercisable as of March 31, 2014

3,000,000

$

0.035

 $

              -

 

 

 

 

 

 

** **

11

**ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

As used in this Quarterly Report, the terms "we", "us", "our" and the "Company" means Brenham Oil & Gas, Corp., a Nevada corporation, and its subsidiary, Brenham Oil & Gas, Inc. (collectively, "Brenham"). To the extent that we make any forward-looking statements in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report, we emphasize that forward-looking statements involve risks and uncertainties and our actual results may differ materially from those expressed or implied by our forward-looking statements. Our forward-looking statements in this Quarterly Report reflect our current views about future events and are based on assumptions and are subject to risks and uncertainties. Generally, forward-looking statements include phrases with words such as "expect", "anticipate", "intend", "plan", "believe", "seek", "estimate" and similar expressions to identify forward-looking statements.

**Overview**

 

Brenham’s primary objective and current focus will be accessing capital to fund its drilling programs in Texas.

 

Brenham is an independent exploration and production company focused on acquiring a portfolio of assets in the United States and international locations. Brenham’s approach is to create a foundation of development and production assets in the United States, coupled with high potential international exploration opportunities.

 

Our focus for United States production is Texas, including both conventional and unconventional resources. The Company intends to identify existing oil fields where technology can be applied to increase the percentage of oil that can be recovered from such fields. Secondly, the Company seeks to identify acreage in unconventional resources capable of generating oil and condensate production, such as the Eagle Ford.

 

Our focus for international exploration is Sub-Saharan Africa. This is based on the considerable experience of our management team, which includes a track record of acquisitions and discoveries for major oil and gas companies in Africa. The analysis used by Brenham to identify exploration acquisitions is based on a top-down and bottom-up approach. The “top down” process seeks to utilize our management team’s prior experience of comparing analogues of success and failure from seismic and drilling data in Africa (and elsewhere) for purposes of generating a “short-list” of the most attractive blocks. The “bottom up” process seeks to obtain narrowly focused, prospect-specific data on a block-by-block basis. The “bottom-up” review of specific blocks is used to confirm management’s “short-list” of recommendations.

 

We intend to develop strategic relationships and enter into long-term participation agreements with major oil and gas companies, in both domestic and international markets. We believe that such alliances will create a platform for exploration and development activities. 

The discussion of the results of operations represents our historical results. The following discussion may not be indicative of future results for many reasons, including the continuing trend in the financial markets, the credit crisis and related turmoil in the global financial system which may be expected to have a material adverse impact on our plan of operation and our liquidity and our financial condition. If conditions in the financial markets do not improve, our ability to access the capital markets or borrow money may be restricted at a time when we would like, or need, to raise capital. This could have an adverse impact on our flexibility to react to changing economic and business conditions and on our ability to fund our operations and capital expenditures in the future. Additionally, changing economic conditions could lead to reduced demand for natural gas and oil, or further reductions in the prices of natural gas and oil, or both, which could have a negative impact on our ability to implement our plan of operations and related financial positions, results of operations and cash flows. While the ultimate outcome and impact of the recent trends in the financial markets cannot be predicted, it may have a material adverse effect on our plan of operation, future liquidity, results of operations and financial condition.

 

The discussion of the results of operations represents our historical results. The following discussion may not be indicative of future results.

 

**THREE MONTHS ENDED MARCH 31, 2014 VERSUS THREE MONTHS ENDED MARCH 31, 2013**

 

Net loss for the three months ended March 31, 2014 was $48,166, compared to $480,846 for the three months ended March 31, 2013. Oil and gas revenues for the three months ended March 31, 2014 were $10,421. Lease operating expenses were $10,616 for the three months ended March 31, 2014. General and administrative expenses for the three months ended March 31, 2014 were $46,988, and consisted primarily of executive compensation and legal and professional expenses. Oil and gas revenues for the three months ended March 31, 2013 were $8,643. General and administrative expenses for the three months ended March 31, 2013 were $482,278, and consisted of $131,100 incurred in connection with the Gillock Field lease, $316,000 of stock-based compensation incurred in connection with the Gillock Field lease, and $35,178 in executive compensation, travel, and legal and professional expenses.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

At March 31, 2014 and December 31, 2013, total assets were $210,188 and $193,432, respectively. We had cash of $6,873 and $6,859 at March 31, 2014 and December 31, 2013, respectively. At March 31, 2014 and 2013, we had accounts receivable of $663 and $3,100, 

12

respectively. At March 31, 2014, long-term assets consisted of oil and gas properties of $182,652 and a deposit for purchase of oil and gas property of $20,000. At December 31, 2013, long-term assets consisted of oil and gas properties of $183,473.

At March 31, 2014, total liabilities were $379,977, consisting of $4,119 in accounts payable and accrued expenses, $368,994 of accounts payable to related parties, and asset retirement obligations of $6,864. At December 31, 2013, total liabilities were $315,055, consisting of $23,941 in accounts payable and accrued expenses, $284,412 in accounts payable to related parties, and asset retirement obligations of $6,702.

  

We had cash flow used in operations of $64,568 during the three months ended March 31, 2014 principally due to a net loss of $48,166 and a decrease in accounts payable of $19,822.  We had negative cash flow from operations of $44,002 during the three months ended March 31, 2013 principally due to a net loss of $480,846, an increase in accounts receivable of $2,374, and a decrease in accounts payable of $7,908, partially offset by stock-based compensation of $316,000, and a an increase in payable to related parties of $131,100. 

For the three months ended March 31, 2014, cash used in investing activities was $20,000 for a deposit related to the acquisition of a 332-acre oil and gas lease, the “Inez Prospect,” located in Victoria County, Texas, and the #1 Roberts Unit well-bore, and all the down-hole equipment and surface equipment associated therewith. For the three months ended March 31, 2013, cash used in investing activities was $50,000 for a payment made to acquire a 10% working interest in the Pierce Junction Field oil and gas property.

For the three months ended March 31, 2014 and 2013, cash provided by financing activities was $84,582 and $94,745, respectively, consisting of advances from a related party.  

 

On January 8, 2014, the Company entered into a letter of intent with a third party to acquire a 332-acre oil and gas lease, the “Inez Prospect,” located in Victoria County, Texas, and the #1 Roberts Unit well-bore, and all the down-hole equipment and surface equipment associated therewith. On April 10, 2014, the Company and the third party entered into a prospect and lease acquisition agreement. Pursuant to the agreement, the Company has agreed to acquire 100% of the working interest for a total purchase price of $250,000, consisting of a $20,000 deposit, which was paid during the three months ended March 31, 2014, and a payment of the remaining $230,000 prior to the beginning of any exploration.

On March 12, 2013, Brenham entered into an agreement with an effective date of January 1, 2013, to purchase a 10% working interest in the Pierce Junction Field for $50,000 cash and a $70,000 non-interest bearing note payable due on August 31, 2013. Brenham's asset acquisition includes eight producing wells, with an additional seven wells scheduled for mechanical work-over that should add more oil reserves. Additional offsetting acreage can be developed by Brenham on a well by well basis to produce additional oil reserves from several producing horizons. Brenham is presently negotiating to acquire an additional 85% ownership of the Pierce Junction Field.

On February 28, 2013, Brenham leased 394 acres in Galveston County for the acquisition of mineral rights for the Gillock Field for $131,100 cash and 200,000 shares of AMIN restricted common stock. The acquired acreage is located just west of Galveston Bay, Galveston County, 35 miles southeast of Houston and 15 miles northwest of Galveston. It is adjacent to and one location away from the Gillock, East Segment Field operated by Alta Mesa Services, and about two miles west of the Eagle Bay Field, operated by Sandridge Onshore, LLC and Transtexas Gas Corp. The conclusions of an internal reserve analysis, including a 4-mile by 4-mile seismic study of the 394 acre lease acquired by Brenham indicated proved undeveloped (PUD) and discounted NPV of 10% valued at $38,259,500. The Company is in the process of obtaining an independent reserve report on its Gillock Field Interest, and plans to seek financing for a two-well development program later in 2014.

 

In December 2012, Brenham Equatorial Guinea, LLC, a subsidiary of Brenham Oil & Gas Corp., executed a Production Sharing Contract with the Government of Equatorial Guinea in West Africa. Pursuant to the terms of the Agreement, Brenham received a 15% participating interest in newly-created Block Y, which consolidates four offshore exploration blocks into a single, half-million acre license. Brenham is negotiating the sale of its subsidiary, Brenham Oil and Gas International, LLC for purposes of focusing the Companies’ efforts and resources on the Texas assets.

 

In addition, Brenham is continuing to pursue its $6.4 billion claim against ENI and TGS in connection with its "tortious interference" case, which transaction was previously negotiated in a "production sharing agreement" with the country of Togo, Africa. Brenham’s claims are currently in the process of being appealed over matters primarily related to whether the Texas court was the appropriate venue for pursuing the claims.

We expect to incur substantial expenses and generate significant operating losses as we pursue our efforts to identify prospects, develop those prospects and as we:

·

purchase and analyze seismic data in order to identify future prospects;

·

opportunistically invest in additional oil and gas leases and concession licenses;

·

develop our discoveries which we determine to be commercially viable; and

13

·

incur expenses related to operating as a public company and compliance with regulatory requirements.

Our future financial condition and liquidity will be impacted by, among other factors, the success of selection of prospects, our future exploration and appraisal drilling program, the number of commercially viable oil and gas discoveries made and the quantities of oil and gas discovered, the speed with which we can bring such discoveries to production, and the actual cost of exploration, appraisal and development of our prospects.

Until such time as we can identify specific prospects, we cannot determine with any certainty the amount of capital that we will be required to raise to fund each potential prospect. To date, we have not begun negotiations with any investment bank, financial institution or other source of funding for the purpose of raising either equity or debt capital, nor have we negotiated with any potential joint venture partner for the purpose of pursuing any potential prospect. Only when and if we identify prospects and seek to enter into contracts, licenses or other arrangements to pursue such prospects will we be able to determine the amount of funding that will be required for each such prospect. We have no arrangements with our executive officers or principal shareholders to provide any funding and any funding that they may be requested to provide may be limited.

Additional funding may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our shareholders. For example, if we raise additional funds by issuing additional equity securities, further dilution to our existing shareholders will result. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail one or more of our exploration and appraisal drilling programs. We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our prospects which we would otherwise develop on our own, or with a majority working interest.

 

**Contractual Obligations**

 

In the future, we may be party to the following contractual arrangements, which will subject us to further contractual obligations:

·

credit facilities;

·

contracts for the lease of drilling rigs;

·

contracts for the provision of production facilities;

·

infrastructure construction contracts; and

·

long-term oil and gas property lease arrangements.

**Off-Balance Sheet Arrangements**

 

As of March 31, 2014 and December 31, 2013, we did not have any off-balance sheet arrangements.

 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term "market risks" refers to the risk of loss arising from changes in commodity prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures. All of our market risk sensitive instruments will be entered into for purposes of risk management and not for speculation.

 

Due to the historical volatility of commodity prices, if and when we commence production, we may enter into various derivative instruments to manage our exposure to volatility of commodity market prices. We may use options (including floors and collars) and fixed price swaps to mitigate the impact of downward swings in commodity prices to our cash flow. All contracts will be settled with cash and would not require the delivery of physical volumes to satisfy settlement. While in times of higher commodity prices this strategy may result in our having lower net cash inflows than we would otherwise have if we had not utilized these instruments, management believes the risk reduction benefits of such a strategy would outweigh the potential costs.

 

We may borrow under fixed rate and variable rate debt instruments that give rise to interest rate risk. Our objective in borrowing under fixed or variable rate debt is to satisfy capital requirements while minimizing our costs of capital.
14

ITEM 4T. CONTROLS AND PROCEDURES

 

*Evaluation of disclosure controls and procedures*. As of March 31, 2014, the Company's chief executive officer and interim chief financial officer conducted an evaluation regarding the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act. Based upon the evaluation of these controls and procedures, our chief executive officer and interim chief financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report. Such conclusion reflects the departure of our chief financial officer and assumption of duties of the principal financial officer by our chief executive officer and the resulting lack of accounting experience of our now principal financial officer and a lack of segregation of duties. Until we are able to remedy these material weaknesses, we are relying on third party consultants to assist with financial reporting.

 

*Changes in internal controls*. During the quarterly period covered by this report, no changes occurred in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

 
ITEM 1. LEGAL PROCEEDINGS

 

None.

 
ITEM 1A. RISK FACTORS

For the three months ended March 31, 2014, there were no material changes from risk factors as disclosed in Company’s annual report for the year ended December 31, 2013.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 
ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 
ITEM 5. OTHER INFORMATION

None.

 
ITEM 6. EXHIBITS

 

The following documents are filed as exhibits to this report on Form 10-Q or incorporated by reference herein. Any document incorporated by reference is identified by a parenthetical reference to the SEC filing that included such document.

 

 

 

Exhibit No.

Description

31.1

Certification of CEO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002

31.2

Certification of CFO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002

32.1

Certification of CEO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

32.2

Certification of CFO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

101.LAB

XBRL Taxonomy Extension Label Linkbase

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

15

**SIGNATURES**

 

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

 

 

By /s/ Daniel Dror

Daniel Dror

Chief Executive Officer, President, and Chairman

May 15, 2014

 

 

By /s/ Charles R. Zeller

Charles R. Zeller

Director and Interim Chief Financial Officer

May 15, 2014

 

**CERTIFICATIONS**

 

 

I, Charles R. Zeller, certify that:

 

1. I have reviewed this quarterly report of Brenham Oil & Gas Corp.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date:  May 15, 2014

/s/ Charles R. Zeller

Interim CFO

 

**CERTIFICATIONS**

 

 

I, Daniel Dror, certify that:

 

1. I have reviewed this quarterly report of Brenham Oil & Gas Corp.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date:  May 15, 2014

/s/ Daniel Dror

CEO and Chairman

 

Statement Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

 

 

The undersigned, Charles R. Zeller, Interim CFO of Brenham Oil & Gas Corp., a Nevada corporation, hereby makes the following certification as required by Section 906(a) of the Sarbanes-Oxley Act of 2002, with respect to the following of this report filed pursuant to Section 15(d) of the Securities Exchange Act of 1934: Quarterly Report of Form 10-Q for the period ended March 31, 2014.

 

The undersigned certifies that the above annual report fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934, and information contained in the above annual report fairly presents, in all respects, the financial condition of Brenham Oil & Gas Corp. and results of its operations.

 

Date:  May 15, 2014

Charles R. Zeller

Interim CFO

/s/ Charles R. Zeller

 

Statement Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

 

 

The undersigned, Daniel Dror, Chairman & CEO of Brenham Oil & Gas Corp., a Nevada corporation, hereby makes the following certification as required by Section 906(a) of the Sarbanes-Oxley Act of 2002, with respect to the following of this report filed pursuant to Section 15(d) of the Securities Exchange Act of 1934: Quarterly Report of Form 10-Q for the period ended March 31, 2014.

 

The undersigned certifies that the above annual report fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934, and information contained in the above annual report fairly presents, in all respects, the financial condition of Brenham Oil & Gas Corp. and results of its operations.

 

Date:  May 15, 2014

Daniel Dror

Chairman

/s/ Daniel Dror