UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 
 FORM 10-K 
  x

          

          ANNUAL REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended December 31, 2008 OR  o

          

          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File No. 0-30502 
 JOHN D. OIL AND GAS COMPANY (Exact Name of Registrant As Specified in Its Charter)  Maryland

          

          94-6542723(State or Other Jurisdiction of Incorporation or Organization)

          

          (I.R.S. Employer Identification No.)
 8500 Station Street, Suite 345, Mentor, Ohio 44060 (Address of Principal Executive Office) 
 Registrants Telephone Number, Including Area Code: (440) 255-6325 Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Shares of Common Stock 
 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act. Yes x No o Check whether the Issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No x 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 o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o 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 o

          

          Accelerated Filer o

          

          Non-Accelerated Filer o

          

          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 o No x On March 16, 2009, the aggregate market value of the voting and non-voting common equity held by non-affiliates was $665,136 computed as the average bid and asked price of $.17 per share times the total shares held by non-affiliates of 3,912,562. The Registrant had 9,067,090 shares of common stock outstanding on March 16, 2009. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrants definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 16, 2009 are incorporated by reference into Part III of this 10-K.
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JOHN D. OIL AND GAS COMPANY

INDEX TO ANNUAL REPORT ON FORM 10-K



PagePART IGlossary of TermsItem 1:Business





2Item 1A:Risk Factors





6Item 2:Properties





10Item 3:Legal Proceedings





12Item 4:Submission of Matters to a Vote of Security Holders





12PART IIItem 5:Market for Registrants Common Equity, Related Stockholder Matters and Issuers Purchases of Equity Securities





13Item 7:Management's Discussion and Analysis of Financial Condition and Results of Operations





13Item 8:Financial Statements and Supplementary Data





22Item 9A(T):Controls and Procedures





23Item 9B:Other Information





23PART IIIItem 10:Directors, Executive Officers and Corporate Governance





24Item 11:Executive Compensation





24Item 12:Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters





24Item 13:Certain Relationships and Related Transactions, and Director Independence





24Item 14:Principal Accountant Fees and Services





24PART 1VItem 15:Exhibits and Financial Statement Schedules





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PART I

Glossary of Terms

As commonly used in the natural gas and oil industry and as used in this Annual Report on Form 10-K, the following terms have the following meanings:

Bbl.  One stock tank barrel or 42 U.S. gallons liquid volume.

Development Well.  A well drilled within the proved area of a natural gas or oil reservoir to the depth of a stratigraphic horizon known to be productive.

Developed Acres.  Acres spaced or assigned to productive wells.

Dry Hole or Well.  A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production would exceed production expenses and taxes.

Field.  An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structure feature and/or stratigraphic condition.

Gross Acres or Gross Wells.  The total acres or wells, as the case may be, in which a working interest is owned.

Mcf.  One thousand cubic feet.

Mcfe.  One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.

Net Acres or Net Wells.  The sum of the fractional working interests owned in gross acres or gross wells, as the case may be.

Oil.  Crude oil, condensate and natural gas liquids.

Productive Well.  A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceeds production expenses and taxes.

Proved Developed Reserves.  Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional natural gas and oil expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery are included in proved developed reserves only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.

Proved Reserves.  Proved natural gas and oil reserves are the estimated quantities of natural gas, natural gas liquids and crude oil which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e. prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based on future conditions.

Proved Undeveloped Drilling Location.  A site on which a development well can be drilled consistent with spacing rules for purposes of recovering proved undeveloped reserves.

Proved Undeveloped Reserves or PUDs.  Reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage are limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units are claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Estimates for proved undeveloped reserves are not attributed to any acreage from which an application
of fluid injection or other improved recovery techniques is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir.

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Reservoir.  A porous and permeable underground formation containing a natural accumulation of produce-able natural gas and/or oil that is confined by impermeable rock or water barriers and is individual and separate from other reserves.

Standardized Measure.  Standardized Measure is the present value of estimated future net revenues to be generated from the production of proved reserves, determined in accordance with the rules and regulations of the SEC (using prices and costs in effect as of the date of estimation) without giving effect to non-property related expenses such as general and administrative expense, debt service and future income tax expenses or to depreciation, depletion and amortization and discounted using an annual discount rate of 10%. Our Standardized Measure does not include future income tax expenses.

Successful Well.  A well capable of producing natural gas and/or oil in commercial quantities.

Undeveloped Acreage.  Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of natural gas and oil regardless of whether such acreage contains proved reserves.

Working Interest.  The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production.

Workover.  Operations on a producing well to restore or increase production.

Item 1. Business

John D. Oil and Gas Company, formerly Liberty Self-Stor, Inc. (the Company), is a corporation organized under the laws of the State of Maryland. In 1999, the Company succeeded to the business of Meridian Point Realty Trust 83. Meridian was a California business trust that commenced operation in 1983. Meridian was originally known as Sierra Real Estate Equity Trust 83, changing its name in 1991.

Liberty Self-Stor, Inc. grew its self-storage company to twenty self-storage facilities from 1999 to 2005. During April 2005, the Company sold 18 self-storage facilities and in May 2007, the Company sold one of the two remaining self-storage facilities. Shortly after the April 2005 sale, the Company changed its name to John D. Oil and Gas Company and entered into the business of extracting and producing oil and natural gas products. The Company is actively drilling oil and natural gas wells in Northeast Ohio. The Company currently has fifty-four producing wells. The Company cannot guarantee success under the new business plan as drilling wells for
oil and natural gas is a high-risk enterprise and there is no guarantee the Company will become profitable.

Oil and Natural Gas Overview.

The Company had redirected its efforts to oil and natural gas exploration to increase cash flow and enhance shareholder value. At December 31, 2008, the Company had fifty-four wells in production. The Companys wells are mostly operator-owned by John D. Oil and Gas Company, although there are a limited number of joint interest wells.

We are also an owner and the managing member of Kykuit Resources, LLC, which leases natural gas and oil rights to 203,842 net acres located in the Montana Breaks area of Montana.

Oil and Natural Gas Competition.  The industry is intensely competitive, and we compete with other companies that have significantly greater resources. Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. Many of our larger competitors not only drill for and produce natural gas and oil, but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis. These companies may be able to pay more for natural
gas and oil properties and evaluate, bid for and purchase a greater number of properties than our financial or human resources permit. In addition, these companies may have a greater ability to continue drilling activities during periods of low natural gas and oil prices and to absorb the burden of present and future federal, state, local and other laws and regulations. Our inability to compete effectively with larger companies could have a material adverse impact on our business activities, financial condition and results of operations.

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Oil and Natural Gas Environmental and Other Regulations.  The oil and natural gas business is regulated extensively at the federal, state and local levels. Environmental and other governmental laws and regulations have increased the costs to plan, design, drill, install, operate and abandon natural gas and oil wells. Under these laws and regulations, industry participants could be liable for personal injuries, property damage and other damages. These laws and regulations may:



          require the acquisition of various permits before drilling commences;

          require the installation of expensive pollution control equipment;

          restrict the types, quantities and concentration of various substances that can be released into the environment in connection with drilling and production activities;

          limit or prohibit drilling activities on lands lying within wilderness, wetland and other protected areas;

          require remedial measures to prevent pollution from former operations, such as pit closure and plugging of abandoned wells;

          impose substantial liabilities for pollution resulting from operations; and

          with respect to operations affecting federal lands or leases, require preparation of a resource management plan, an environmental assessment, and/or an environmental impact statement.Failure to comply with these laws and regulations could result in the suspension or termination of operations and subject companies to administrative, civil and criminal penalties. Moreover, public interest in environmental protection has increased in recent years, and environmental organizations have opposed, with some success, certain drilling projects.

The environmental laws and regulations applicable to the Company and its operations include, among others, the following United States federal laws and regulations:



          Clean Air Act, and its amendments, which governs air emissions;

          Clean Water Act, which governs discharges to waters of the United States;

          Comprehensive Environmental Response, Compensation and Liability Act, which imposes liability where hazardous releases have occurred or are threatened to occur;

          Energy Independence and Security Act of 2007, which prescribes new fuel economy standards and other energy saving measures;

          National Environmental Policy Act, which governs oil and gas production activities on federal lands;

          Resource Conservation and Recovery Act, which governs the management of solid waste;

          Safe Drinking Water Act, which governs the underground injection and disposal of wastewater; and

          U.S. Department of Interior regulations, which impose liability for pollution cleanup and damages.On the state level, significant change in the Ohio oil and natural gas industry occurred in September 2004. House bill 278 became the effective law of Ohio, which recognizes the Ohio Division of Mineral Resources Management, or DMRM, as the sole and exclusive authority to regulate the permitting, location and spacing of oil and gas wells. The result is the effective elimination of township and municipal regulation that significantly disrupted new oil and natural gas development. The change streamlines previously cumbersome permitting and regulation imposed by townships and municipalities, since a centralized agency, the DMRM now handles
all permitting and enforces the laws regulating drilling and producing activities.

Self-Storage Overview.

As of December 31, 2008, the Company owned and operated one self-storage facility which includes retail and office space located in Painesville, Ohio. The Painesville self-storage facility was acquired in

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October of 2000 with 31,660 of rentable square footage situated on 3.20 acres including 363 units with outside space available for parking vehicles. The self-storage units are inside and difficult to rent due to limited accessibility by using an elevator or stairs. In addition, the Painesville building facility has 21,985 square feet of office and retail space to lease.

The self-storage facility is operated through a partnership agreement between Liberty Self-Stor Ltd. (Ltd) and John D. Oil and Gas Company. Ltd has a 70.1% equity interest and the Company has a 29.9% equity interest in the operating partnership of LSS I Limited Partnership (LSS). The members of Ltd consist of Richard M. Osborne, Chairman and Chief Executive Officer of the Company, Thomas J. Smith, the former President and Chief Operating Officer of the Company, and Retirement Management Company, an Ohio corporation owned by Mr. Osborne. These members have Class A limited partnership interests that are redeemable for cash or, at the election of the
Company, convertible into shares of the Companys stock based on an exchange factor. The current exchange factor is .1377148 of a share for each unit. With only one facility, LSSs losses reduced the initial investment to a receivable and therefore the Company wrote-off the minority interest in 2006 as it was deemed not to be collectible.

The Painesville facility is encumbered by a mortgage in the original amount of $2,062,128, maturing on March 31, 2009. Monthly principal and interest payments were $16,612, with a current interest rate of 2.9613%, using a 20-year amortization period. The principal amount of the loan as of December 31, 2008, was $1,260,071. On March 25, 2009, the Company received a letter of commitment from the mortgagor which stated that the loan will be extended on the Painesville facility for five years using a ten year amortization period at a variable rate of the 30 day LIBOR plus 250 basis points.

Discontinued Operations.

On May 21, 2007, the Company completed the sale of its self-storage facility located in Gahanna, Ohio pursuant to the Purchase and Sale Agreement (the Agreement) among Liberty Self-Storage, LTD. (the trade name of the Company), Columbus Tile Yard, LLC and Buckeye Storage of Gahanna LLC, or its nominee, for the purchase price of $1,400,000. The assets of the Gahanna, Ohio self-storage facility consisted primarily of property and equipment with a net book value of approximately $924,000. The liabilities consisted primarily of a mortgage of approximately $708,000. The original purchase price was reduced by $50,000 pursuant to an amendment to
the Agreement in December 2006. $150,000 of the purchase price was allocated to Columbus Tile Yard for the vacant land that it owned. Richard M. Osborne, the Companys Chairman of the Board and Chief Executive Officer, is the owner of Columbus Tile Yard.

The Companys results of operations have been restated to reclassify the net earnings of the self-storage facility sold as discontinued operations for all periods presented.

Investment Policy.

The Board of Directors, in its sole discretion, may change or modify the Companys investment objective. In particular, with the new business plan, the Company was taxed as a C Corp in 2008 and 2007 due to entering into the business of extracting and producing oil and natural gas products. Additionally, the Company engaged in purchasing investments in 2006, held as available for sale securities, which were sold in 2007.

Activities of the Company.  Subject to Maryland law, the Company has the ability to:



          issue senior securities;

          borrow money;

          make loans;

          underwrite securities of other issuers;

          engage in the purchase or sale of investments;

          offer securities in exchange for property;

          repurchase or otherwise reacquire its shares or other securities; and

          provide annual reports and other reports to stockholders which contain annual audited financial statements.

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The Company could borrow money necessary to acquire properties, could offer preferred senior securities, could offer interests of the operating partnership in exchange for properties, and prepare annual reports with audited financial statements. The Company has no current plans to engage in any of the other listed activities. During each of the last three years, the Company filed annual and quarterly reports with the SEC. The Companys ability to engage in any of the above activities is subject to change without the approval of stockholders.

Investment Strategy.  The Company previously focused on the acquisition, expansion and development of a portfolio of self-storage facilities. After the sale of significantly all of its self-storage facilities in April 2005, the Company decided to capitalize on other investment opportunities to increase shareholder value. The Board of Directors approved redirecting the Companys focus to the oil and natural gas business. The name was changed and the Company positioned itself for the business plan change that commenced fully in 2006. The Company plans to pay for its current and future plans with cash, debt, the issuance of debt
securities, the sale of equity securities and funds from operations.

Subsequent Events.

On February 13, 2009, Great Plains Exploration, LLC loaned the Company $600,000 to fund the Companys ongoing capital requirements. Great Plains is owned by Richard M. Osborne, the Companys Chairman and Chief Executive Officer. The loan is evidenced by a cognovit promissory note (the Note). The Note is payable in the amount of $100,000 per month, beginning on March 28, 2009, since revised to May 25, 2009 and bears interest at the rate of 8.0% annually.

On March 25, 2009, the Company received a letter of commitment from the mortgagor which stated that the loan on the Painesville facility will be extended for five years using a ten year amortization period at a variable rate of the 30 day LIBOR plus 250 basis points. The rate on March 31, 2009 was 3.02%.

Our $9.5 million fully-drawn line of credit with RBS Citizens, N.A. d/b/a Charter One is due on August 1, 2009. This line of credit is guaranteed by Mr. Osborne, our CEO and Chairman of the Board. If we, after using our best efforts, are not successful in extending this line of credit or obtaining substitute financing, then Mr. Osborne has committed to loan the Company up to $9.5 million to repay the Charter One line of credit, subject to standard terms and conditions. If this occurs, principal payments to Mr. Osborne would begin on or after January 1, 2010.

Principal Offices.

The Companys principal executive offices are located at 8500 Station Street, Suite 345, Mentor, Ohio 44060 and its telephone number is 440-255-6325.

Federal Income Tax.

Effective January 1, 2006, the Company became a C Corporation for tax purposes.

Employees.

The Company currently employs ten full-time and one part-time employee, including one on-site manager. None of the Companys employees are covered by a collective bargaining agreement. The Company considers its employee relations to be excellent.

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Item 1A. Risk Factors

Risks Related to Our Oil and Natural Gas Business

If we are unable to obtain financing in the amounts and on terms acceptable to us or we are unable to meet our future cash commitments, we may be unable to continue our business and as a result may be required to scale back or cease operations of our business, the result of which would be that you could lose some or all of your investment.

We require substantial capital expenditures to maintain and/or grow oil and gas production and reserves. To date, we have been dependent on debt financing to meet our cash requirements and have incurred losses totaling approximately $2.1 million for the year ended December 31, 2008, our third consecutive year of net losses. As of December 31, 2008, we reported negative net working capital. We do not expect to be profitable in 2009. We can provide no assurance that actual cash requirements will not exceed our estimates. In particular, additional capital may be required in the event that:



          drilling and completion costs for further wells increase beyond our expectations;

          market prices for our production decline beyond our expectations;

          production levels do not meet our expectations; or

          we encounter greater costs associated with general and administrative expenses.The occurrence of any of these events could adversely affect our ability to meet our business plans.

At December 31, 2008, our outstanding debt totaled over $10.7 million, including our $9.5 million fully-drawn line of credit with Charter One. Our line of credit matures on August 1, 2009. This line of credit is guaranteed by Mr. Osborne, our CEO and Chairman of the Board. If we, after using our best efforts, are not successful in extending this line of credit or obtaining substitute financing, then Mr. Osborne has committed to loan the Company up to $9.5 million to repay the Charter One line of credit, subject to standard terms and conditions. If this occurs, principal payments to Mr. Osborne would begin on or after January 1, 2010.

We depend on debt or equity financing to pay for our continued exploration and operations. The current economic environment makes it more difficult to obtain equity financing on acceptable terms to address our liquidity issues. Capital may not continue to be available if necessary to meet these continuing costs, or if capital is available that it will be on terms acceptable to us. In addition, we may not be able to meet our future cash commitments.

If we are unable to obtaining financing in the amounts and on terms acceptable to us or if we are unable to meet our future cash commitments, we may be unable to continue our business and as a result may be required to scale back or cease operations of our business, the result of which would be that you could lose some or all of your investment.

Our Revenues will depend on natural gas prices.

Our revenue, profitability and cash flow depend upon the prices and demand for natural gas. The natural gas market is very volatile and the current drop in market prices has significantly affected our financial results and may impede our growth. This decline in the current market price severely affects the viability of drilling in this market, because the lower cash flow makes it economically difficult to incur the high costs of drilling a well. Developments in federal regulation pertaining to the sale, transportation and marketing of natural gas also will continue to impact future pricing and natural gas contracts.

The price we receive for our natural gas production will be determined by the availability of favorable purchase contracts, market forces, as well as short and long-term volume commitments. Our current plan will be to analyze available markets, with consideration of both price and terms, and to enter into those arrangements we believe to be in the best interest of the Company. We believe market fluctuations can be partly stabilized by effectively combining long-term gas purchase agreements and spot market sales. We expect that we will be able to sell all natural gas produced from our wells to either utility companies, marketing affiliates of pipeline
companies, natural gas marketing firms, or a variety of industrial or commercial consumers of natural gas. However, we cannot guarantee our strategy will be effective.

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Natural gas markets are subject to many factors.

The deliverability and price of natural gas are subject to supply and demand market forces as well as the effects of state and federal regulatory policies and developments. Prices for natural gas may fluctuate widely in response to relatively minor changes in the supply of and demand for natural gas, market uncertainty and a variety of additional factors that are beyond our control, such as:



          the domestic and foreign supply of and demand for natural gas;

          the price and level of foreign imports;

          the level of consumer product demand;

          weather conditions;

          overall domestic and global economic conditions;

          political and economic conditions in natural gas and oil producing countries, including those in the Middle East and South America;

          the ability of members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls;

          the impact of the U.S. dollar exchange rates on natural gas and oil prices;

          technological advances affecting energy consumption;

          domestic and foreign governmental regulations and taxation;

          the impact of energy conservation efforts;

          the proximity and capacity of natural gas pipelines and other transportation facilities; and

          the price and availability of alternative fuels.Prices received for natural gas produced in the Appalachian Basin are generally higher than national averages due to the proximity to markets in the Northeast but remain subject to the seasonal market forces. In the past, the prices of natural gas have been extremely volatile, and we expect this volatility to continue.

Locations that we decide to drill may not be productive.

The cost of drilling, completing and operating a well is often uncertain, and cost factors can adversely affect the economics of a well. Our efforts will be uneconomic if we drill dry holes or wells that are productive but do not produce enough to be commercially viable after drilling, operating and other costs. These wells may need to be written-down. The Company expects to conduct its drilling programs in the Appalachian Basin into sandstone formations of the Clinton group and similar formations. These formations frequently are characterized by low permeability, rapid production decline assuming unrestricted production, and other geological
characteristics which may limit the profit potential of wells drilled to these target formations. Although many wells drilled to these formations are completed, it is possible for a productive well to provide an amount of revenue which is insufficient to return the costs incurred in drilling and completing the well.

Actual quantities and present value of our proved reserves may prove to be lower than we have estimated.

This report contains estimates of our proved reserves and the estimated future net revenue from our proved reserves. Determining these estimates is a complex process with estimates based upon various assumptions relating to review and decisions about engineering and geological data for each well. These estimates are particularly sensitive to lower market prices which tend to reduce reserves since average or lower producing wells may not produce enough to offset the expenses needed to operate the wells. At December 31, 2008, the Company was significantly affected by lower market prices and showed a higher depletion expense in 2008 compared to 2007.

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Our development operations require substantial capital expenditures.

The natural gas and oil industry is capital intensive. We make and expect to continue to make substantial capital expenditures in our business for the development, production and acquisition of natural gas reserves. We have financed capital expenditures primarily with equity infusions from existing investors, cash flow from operations and proceeds from loans. We cannot guarantee that these sources of funds will be adequate to fund our capital needs.

We face significant competition.

The natural gas and oil industry is intensely competitive, and we compete with other companies that have significantly greater resources. Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. Many of our larger competitors not only drill for and produce natural gas and oil, but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis. These companies may be able to pay more for natural gas and oil properties and
evaluate, bid for and purchase a greater number of properties than our financial or human resources permit. In addition, these companies may have a greater ability to continue drilling activities during periods of low natural gas and oil prices and to absorb the burden of present and future federal, state, local and other laws and regulations. Our inability to compete effectively with larger companies could have a material adverse impact on our business activities, financial condition and results of operations.

We depend on a third party to manage our business.

We have an agreement with Great Plains Exploration, LLC (Great Plains) to manage our oil and natural gas operations. Great Plains is owned by Richard M. Osborne, our Chairman and CEO. Great Plains assists in the drilling process, tends our wells, transports our natural gas and purchases and resells our production as well. If Great Plains fails to provide us with these services, or if the timeliness and quality of Great Plains services are not adequate, our business would be negatively impacted.

Our business depends on gathering and transportation facilities owned by others.

The marketability of our natural gas production depends in part on the availability, proximity and capacity of gathering and pipeline systems owned by third parties. The amount of natural gas that can be produced and sold is subject to curtailment in certain circumstances, such as pipeline interruptions due to scheduled and unscheduled maintenance, excessive pressure, physical damage to the gathering or transportation system, or lack of contracted capacity in the system. The curtailments arising from these and similar circumstances may last from a few days to several months. To the extent that the Companys wells are shut-in, even temporarily,
revenues otherwise available to the Company will be reduced accordingly.

We depend on a key customer for sales of our natural gas.

We sell all of our natural gas production to Great Plains, which in turn sells a significant portion of our production volume to a limited number of customers. To the extent these customers reduce the volume of natural gas that they purchase from Great Plains, we might not be able to advantageously sell all of our production.

Shortages of drilling rigs, equipment and crews could delay our operations and reduce our revenues.

Higher natural gas prices generally increase the demand for drilling rigs, equipment and crews and can lead to shortages of, and increasing costs for, drilling equipment, services and personnel. Shortages of, or increasing costs for, experienced drilling crews and oil field equipment and services could restrict our ability to drill the wells and conduct the operations which we currently have planned. Any delay in the drilling of new wells or significant increase in drilling costs could reduce our revenues.

Our business is hazardous.

Hazards such as geological unconformities, unexpected pressures and other unforeseen conditions are sometimes encountered in drilling wells. On occasion, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could reduce funds available for drilling, resulting in the loss

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of properties of the Company. We may be subjected to liability for pollution and other damages or may lose a significant portion of our properties due to hazards against which we cannot insure or may not elect to insure because of prohibitive premium costs or for other reasons. Government regulations relating to environmental matters also could increase our costs of doing business or require us to cease operations in certain areas. We will require an independent drilling contractor to insure against hazards and other risks normally encountered in its business. However, there can be no assurance as to the extent and the cost of such coverage. An
uninsured claim against us could reduce our capital significantly or cause us to alter or terminate our drilling program.

The oil and natural gas industry is highly regulated.

Our operations are regulated extensively at the federal, state and local levels. Environmental and other governmental laws and regulations have increased the costs to plan, design, drill, install, operate and abandon natural gas and oil wells. Under these laws and regulations, we could also be liable for personal injuries, property damage and other damages. Failure to comply with these laws and regulations could result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties. Moreover, public interest in environmental protection has increased in recent years, and environmental organizations
have opposed, with some success, certain drilling projects.

Risks Related to the Company

We need to raise additional capital, which may not be available to us and may limit our operations or growth.

We need additional capital to fund the implementation of our business plan. We cannot provide assurances that any necessary subsequent financing will be obtained. The Companys future liquidity and capital requirements are difficult to predict as they depend upon many factors, including the success of its drilling operations and competing market developments. We may need to raise additional funds in order to meet working capital requirements or additional capital expenditures or to take advantage of other opportunities. We cannot be certain that the Company will be able to obtain additional financing on favorable terms or at all. If we are
unable to raise needed capital, our growth and operations may be impeded. In addition, if we raise additional capital by selling additional shares of common or preferred stock, your percentage ownership in the Company will be diluted.

We may not be able to repay or refinance our maturing debt.

If the Company determines to refinance or retire any of its maturing debt, there can be no assurance that the Company will be able to do so. Our cash flow from operating activities is currently not sufficient to retire our debt as it matures. If adequate funds are not available or not available on acceptable terms, the Companys business and results of operations would be materially and adversely affected and the Company may be unable to continue to fund its operations or growth or acquire additional properties or to meet its obligations.

We have a limited history of operating the oil and natural gas assets we have acquired.

In considering whether to invest in the Company, an investor should consider that we commenced our oil and gas operations in January 2006 and there is only limited historical financial and operating information available on which to base an evaluation of our performance. We may fail to implement our business model and strategy successfully or revise our business model and strategy should industry conditions and the competition within the industry change.

Our management team owns a controlling interest in the Company.

Richard M. Osborne, our Chairman and CEO, and Thomas J. Smith, former president and current board member, own or control an aggregate 41.0% of our outstanding shares, 52.3% if their partnership units were converted into shares. Accordingly, management possesses a near controlling vote on all matters submitted to a vote of our shareholders and has the ability to elect all members of our board of directors and to control our management and affairs. This concentration of ownership may have the effect of preventing or discouraging transactions involving an actual or a potential change of control of our Company, regardless of whether a premium is offered
over then-current market prices.

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Our management team is subject to various conflicts of interest.

Great Plains, a company owned by Richard M. Osborne, our Chairman and CEO, manages our oil and natural gas business and purchases all of our natural gas production. In turn, Great Plains sells a portion of our natural gas to Orwell Natural Gas Company, a public utility that is also owned by Mr. Osborne. In addition, Great Plains has loaned the Company $600,000 in the first quarter of 2009 to fund the Companys ongoing capital requirements. We lease our executive offices from OsAir, Inc., a company owned by Mr. Osborne. Mr. Osborne is the sole manager of Liberty Self-Stor II, Ltd., which makes trucks available for short-term rental to the public
at our self-storage facility and also provides other merchandise at this facility. The Companys $9.5 million fully-drawn line of credit maturing on August 1, 2009 with Charter One is guaranteed by Mr. Osborne. If the Company, after using its best efforts, to extend its loan with Charter One or obtain substitute financing upon reasonable terms and conditions is not successful, then Mr. Osborne has committed to loan the Company up to a maximum of $9.5 million to repay the Charter One loan provided that no payment will be due to Mr. Osborne prior to January 1, 2010.

These arrangements create inherent conflicts of interest, although we believe that the terms we receive from Mr. Osbornes companies are competitive with those we would receive from unaffiliated companies. In addition, members of our management team are participating in other affiliated oil and natural gas drilling enterprises or organizations or associations formed for the development of oil and natural gas properties, some of which may be competitive with the Company. The Company may compete with these other companies for drill sites and customers to purchase their products, creating further conflicts of interest. Management is not restricted
in the conduct of any of these additional activities. No specific method for the resolution of these or other conflicts of interest has been devised.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

A companys internal control over financial reporting is a process designed 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. We cannot be certain that our efforts to maintain our internal controls will be successful, that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to comply with our
obligations under Section 404 of the Sarbanes-Oxley Act of 2002. Any failure to maintain effective internal controls, or difficulties encountered in improving our internal controls, could harm our operating results or cause us to fail to meet certain reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our shares.

Item 2. Properties

The Companys principal executive offices are located at 8500 Station Street, Suite 345, Mentor, Ohio 44060. These offices are leased from OsAir, Inc., a company owned by Mr. Osborne. The lease was extended for a three year term on March 26, 2009 at $2,000 per month from $1,350 per month, through April 1, 2012.

Oil and Natural Gas Wells

At December 31, 2008, the Company had fifty-four wells in production. The Company had forty two wells in production at December 31, 2007 and twenty one wells in 2006. The wells are mostly operator-owned by John D. Oil and Gas Company, although there are a limited number of wells in which we own a joint interest. All of our wells are located in Northeast Ohio. Additionally, there were no estimates of total proved net oil or natural gas reserves filed with or included in reports to any federal authority or agency during 2008 or 2007.

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The following table presents the net oil and natural gas production, net sales, average sale price and average unit costs per mcfe for the periods indicated:



2008

          

          2007Net ProductionNatural Gas (mcf)

          

          

          515,106

          

          

          

          349,997Oil (bbl)

          

          

          9,685

          

          

          

          3,715Natural Gas Equivalent (mcfe)

          

          

          573,216

          

          

          

          372,287Net SalesNatural Gas

          

          $

          3,915,208

          

          

          $

          2,730,840Oil

          

          

          652,879

          

          

          

          198,519Total Sales

          

          $

          4,568,087

          

          

          $

          2,929,359Average Sale PriceNatural Gas (mcf)

          

          $

          7.60

          

          

          $

          7.80Oil (bbl)

          

          $

          67.41

          

          

          $

          53.44Natural Gas Equivalent (mcfe)

          

          $

          7.97

          

          

          $

          7.87Average Unit Costs per mcfeWell operating expenses

          

          $

          575,675

          

          

          $

          335,135Average Cost/mcfe

          

          $

          1.00

          

          

          $

          0.90

Estimated Proved Reserves.  The following table presents the Companys estimated gross proved oil and natural gas reserves, which are all located in the continental United States, based on reserve reports prepared by Wright & Company, Inc in 2008 and Schlumberger Data and Consulting Services in 2007. The reserves calculated at December 31, 2008 were significantly impacted by lower pricing compared to the prior year.



2008

          

          2007Natural Gas (MCF)

          

          Oil (BBLs)

          

          Natural Gas (MCF)

          

          Oil (BBLs)Proved developed and undeveloped reserves:Beginning of year

          

          

          2,646,000

          

          

          

          37,300

          

          

          

          1,348,600

          

          

          

          14,800Revision of previous estimates, extensions and other additions

          

          

          (699,900

          )

          

          

          (13,900

          )

          

          

          456,500

          

          

          

          3,400Net reserve additions

          

          

          715,600

          

          

          

          3,800

          

          

          

          1,190,900

          

          

          

          22,800Production

          

          

          (515,100

          )

          

          

          (9,700

          )

          

          

          (350,000

          )

          

          

          (3,700

          )End of year

          

          

          2,146,600

          

          

          

          17,500

          

          

          

          2,646,000

          

          

          

          37,300Proved developed reserves:Beginning of year

          

          

          2,646,000

          

          

          

          37,300

          

          

          

          1,348,600

          

          

          

          14,800End of year

          

          

          2,146,600

          

          

          

          17,500

          

          

          

          2,646,000

          

          

          

          37,300

Productive Wells.  The following table presents the information relating to the productive wells in which we owned a working interest during the periods indicated. Productive wells consist of producing wells and wells capable of production. The Companys wells are drilled to produce natural gas with oil being a by-product. Gross wells are the total number of producing wells in which we have an interest, and net wells are the sum of our fractional working interests owned in gross wells.



2008

          

          2007Gross

          

          Net

          

          Gross

          

          NetProductive Wells:Operated

          

          

          49

          

          

          

          47

          

          

          

          37

          

          

          

          36Non-Operated Properties

          

          

          5

          

          

          

          2

          

          

          

          5

          

          

          

          2Total

          

          

          54

          

          

          

          49

          

          

          

          42

          

          

          

          38

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Drilling Activity.  The Company began its drilling activity in 2006, concentrating its efforts on development properties. The following table presents information relating to wells completed during the periods indicated:



2008

          

          2007Gross

          

          Net

          

          Gross

          

          NetGross wells:Productive

          

          

          12

          

          

          

          12

          

          

          

          21

          

          

          

          18Dry

          

          

          1

          

          

          

          1

          

          

          

          5

          

          

          

          5Total

          

          

          13

          

          

          

          13

          

          

          

          26

          

          

          

          23

The Companys drilling activity declined in 2008 due to less available cash because of the current drop in market prices in the natural gas market. The Company anticipates a continued slowing of its drilling program in 2009. The decline in the current market price severely affects the viability of drilling, because our lower cash flow makes it economically difficult to incur the high costs of drilling a well.

Developed and Undeveloped Acreage.  The following presents information relating to developed and undeveloped acreage that the Company currently has leased. Developed are those properties that are currently drilled and undeveloped acreage relates to lease acres on which wells have not been drilled or completed.



Developed Acreage

          

          Undeveloped AcreageGross

          

          Net

          

          Gross

          

          NetGeographic Area:Ohio

          

          

          2,123

          

          

          

          2,205

          

          

          

          3,807

          

          

          

          3,807

Present Activities.  As of December 31, 2008, the Company had five additional drilled wells to be brought on line.

Leases.  The rights to drill an oil and natural gas well on a parcel of property are dependent on the producer securing a land lease for the mineral rights to drill for the oil and natural gas. Typically the lease agreement will rent the rights to the minerals on the property for a specific time frame, varying from one to ten years. An executed lease with a producer gives exclusive rights for drilling on the property and another agreement cannot be signed until it has expired.

Insurance.  The Company has purchased a commercial liability policy to cover its oil and natural gas activities. The Companys management uses its discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to acquiring appropriate insurance on the Companys investments at a reasonable cost and on suitable terms.

Depreciation.  Development costs of proved oil and natural gas properties, including estimated dismantlement, restoration and abandonment costs and acquisition costs, are depreciated and depleted on a well by well basis by the units-of-production method using estimated proved developed reserves.

Item 3. Legal Proceedings.

There are no material pending legal proceedings to which the Company is a party or to which any of its assets are subject. Therefore, the Company does not believe that any pending proceedings will have a material adverse effect on the Companys financial condition, liquidity or results of operation.

Item 4. Submission of Matters to a Vote of Security Holders.



None.

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PART II

Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information.  The Companys shares of common stock, $0.001 par value per share, trade on the Over-the-Counter Bulletin Board Market, or OTCBB, under the symbol JDOG.

The following table sets forth the high and low closing sale prices as reported on the OTCBB for the Companys common stock for each quarter within the Companys last two fiscal years. Because the Companys common stock is traded on the OTCBB, these quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.



2008

          

          High

          

          LowFirst Quarter

          

          $

          0.89

          

          

          $

          0.57Second Quarter

          

          

          1.50

          

          

          

          0.57Third Quarter

          

          

          1.10

          

          

          

          0.60Fourth Quarter

          

          

          0.85

          

          

          

          0.17



2007

          

          High

          

          LowFirst Quarter

          

          $

          0.65

          

          

          $

          0.52Second Quarter

          

          

          0.75

          

          

          

          0.30Third Quarter

          

          

          1.01

          

          

          

          0.55Fourth Quarter

          

          

          0.90

          

          

          

          0.60

Holders.  As of March 5, 2009, the Companys shares of common stock were held of record by approximately 1,646 shareholders. We estimate that an additional 700 stockholders own stock in their accounts at brokerage firms and other financial institutions.

Dividends.  The Company paid no cash distributions to its stockholders during 2008 and 2007. However, the Company declared and paid $85,140 in preferred stock dividends for the year ended December 31, 2008. The Company is restricted by its loan agreement with RBS Citizens d/b/a Charter One from paying dividends on its common stock or making cash distributions to its stockholders and from paying dividends in excess of those regularly accruing on not more than two million dollars of preferred stock.

Issuance of Common Stock.  In December of 2008, the Board of Directors of the Company granted each of its five outside board members 9,615 shares of common stock valued at $0.26 per share. The total shares awarded of 48,075 were issued as partial compensation for their board participation.

Issuance of Preferred Stock.  The Company sold an aggregate of 1,350 shares of its Series A Convertible Preferred Shares in a private placement to a total of nine accredited investors during the first six months of 2008. All Series A Preferred Shares were sold at a price of $1,000 per share for a total of $1,350,000 with no underwriting discounts or commissions, as no underwriters were used to facilitate the transactions.

Warrant to Purchase Stock.  On June 20, 2008, the Company granted a warrant to purchase 50,000 shares of common stock to Richard M. Osborne in return for Mr. Osborne providing collateral for the Companys credit facility with RBS Citizens, N.A., d/b/a Charter One.

Purchases of Common Stock.  The Company did not purchase any shares of its common stock in 2008 or 2007.

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

John D. Oil and Gas Company, formerly Liberty Self-Stor, Inc. (the Company), is a corporation organized under the laws of the State of Maryland. The Company owned and operated twenty self-storage facilities until April 2005 when it sold eighteen of its self-storage facilities to U-Store-It. After the sale, on June 27, 2005, the Company changed its name from Liberty Self-Stor, Inc. to John D. Oil and Gas Company.

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Shortly thereafter, the Company entered into the business of extracting and producing oil and natural gas products. During May 2007, the Company sold a self- storage facility located in Gahanna, Ohio. The Company currently has two segments: one composed of the remaining self-storage facility located in Painesville, Ohio and one that is actively drilling oil and natural gas wells in Northeast Ohio.

The Company anticipates slowing its drilling program in 2009. The decline in the current market price severely affects the viability of our drilling because our lower cash flow makes it economically difficult to incur the high costs of drilling a well.

The Company is in the process of renegotiating its $9.5 million fully-drawn line of credit for the Charter One loan that matures August 1, 2009. The Companys debt with Charter One Bank is guaranteed by Mr. Osborne. If the Company, after using its best efforts, to extend its loan with Charter One or obtain substitute financing upon reasonable terms and conditions is not successful, then Mr. Osborne has committed to loan the Company up to a maximum of $9.5 million to repay the Charter One loan provided that no payment will be due to Mr. Osborne prior to January 1, 2010.

The Company cannot guarantee success under our business plan as drilling wells for oil and natural gas is a high-risk enterprise and there is no guarantee the Company will become profitable.

Critical Accounting Policies

The Companys discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. A critical accounting policy is one which is both important to the portrayal of a companys financial condition and results, and requires managements most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company believes the following critical accounting
policies present our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Principles of Consolidation

Pursuant to the terms of the partnership agreement of LSS, the Company, as sole general partner, controls LSS. Accordingly, the Company accounts for its investment in LSS utilizing the consolidation method. Our investment in an unconsolidated affiliate, Kykuit Resources LLC (Kykuit,) is accounted for using the equity method. All significant inter-company transactions and balances have been eliminated.

Use of Estimates

The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues, costs and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates all of these estimates, including those related to the provision for possible losses, deferred tax assets and liabilities, depreciation and depletion, and certain accrued liabilities. We base our estimates on historical experience and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. In particular, our depletion which is based on estimated reserves computed with a December 31, 2008 year end price and estimated expenses affects the Company as a non-cash expense. Due largely to lower pricing at the end of 2008, our depletion expense increased $2.6 million from 2007 to 2008.

The Companys financial statements are based on a number of significant estimates, including reliability of receivables, selection of useful lives for property and equipment and timing and costs associated with its retirement obligations. Estimated oil and natural gas reserve quantities are the basis for the calculation of depreciation, depletion and impairment of oil and natural gas properties.

The Companys oil and natural gas business makes it vulnerable to changes in wellhead prices of crude oil and natural gas. Such prices have been volatile in the past and can be expected to continue to be volatile. Proved reserves are based on current oil and natural gas prices and estimated reserves, which is considered a significant estimate by the Company, and is subject to change.

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Accounts Receivable

The Company has certain trade receivables consisting of oil and natural gas sale obligations due under normal trade terms. The Company currently sells its production to a related party through an oil and natural gas agreement, extending credit on an unsecured basis to them. At December 31, 2008, this receivable with Great Plains totaled $1,386,668. In evaluating its allowance for possible losses, the Company performs a review of outstanding receivables. The trade receivables outstanding are typically three months of natural gas production due to the timing and accounting treatment by the main distribution pipeline company in Northeast Ohio. At
December 31, 2008, the Companys credit evaluation indicated that it has no need for an allowance for possible losses.

Property and Equipment

All property and equipment is depreciated using the straight-line method over estimated useful lives of twenty five years for buildings and improvements and five to seven years for furniture and equipment.

The Company uses the successful efforts method of accounting for oil and natural gas producing activities. Under this method, 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 drilling costs, are expensed. Development costs, including the costs to drill and equip development wells and successful exploratory drilling costs to locate proved reserves, are capitalized. Upon sale or retirement of a proved property, the cost and accumulated depreciation and depletion and
amortizations are eliminated from property accounts and the resultant gain or loss is recognized.

Exploratory drilling costs are capitalized when incurred pending the determination of whether a well has found proved reserves. If a well is determined to be successful, the capitalized drilling costs will be reclassified as part of the cost of the well. If a well is determined to be unsuccessful, the capitalized drilling costs will be charged to expense in the period the determination is made. The Company is involved in exploratory drilling only to the extent that it is a partner of Kykuit, which is doing exploratory drilling in Montana.

Development costs of proved oil and natural gas properties, including estimated dismantlement, restoration, abandonment costs and acquisition costs, are depreciated and depleted on a well by well basis by the units-of-production method using estimated proved developed reserves. The costs of unproved oil and natural gas properties are periodically assessed for impairment.

Asset Impairment

The Company reviews its self-storage properties and capitalized well costs for impairment when events or changes in circumstances indicate the carrying amounts of the properties may not be recoverable. When such conditions exist, management estimates future cash flows from operations and ultimate disposition of the individual properties. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related propertys estimated fair market value would be recorded and an impairment loss would be recognized. In 2008, the Company wrote off the costs related to two
wells amounting to $491,224 in 2008 and five wells amounting to $1,041,067 in 2007.

Asset Retirement Obligation

The Company accounts for its asset retirement obligations in accordance with the Financial Accounting Standards Board (FASB) Statement No. 143, Accounting for Asset Retirement Obligations. This Statement requires that the fair value of an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. For the Company, asset retirement obligations primarily relate to the abandonment, dismantling and plugging of oil and natural gas wells. The present value of the estimated asset retirement cost is capitalized as part of the long-lived asset. The
capitalized asset retirement cost is depreciated and the asset retirement obligation is accreted to interest expense over the estimated life of the well.

Revenue Recognition

The Company recognizes revenue from its oil and natural gas interests in producing wells as oil and natural gas is sold to a purchaser at a fixed or determinable price when delivery has occurred, title and risk of loss have transferred to the purchaser and the collectability of revenue is reasonably assured. The Company

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has a management agreement with a related party to transport the Companys natural gas production through the related partys pipeline and include this natural gas with the related partys natural gas in order to fulfill production contracts they currently have in place. The actual funds are typically received within three months due to the accounting treatment by the main distribution pipeline company in Northeast Ohio.

Comprehensive Income

Statement of Financial Accounting Standard (SFAS) No. 130, Reporting Comprehensive Income, requires disclosure of comprehensive income and its components in a full set of financial statements. Comprehensive income is defined as changes in shareholders equity from non-owner sources and, for the Company, includes gains and losses recognized on derivative instruments accounted for as cash flow hedges and fair market value adjustments to available for sale securities, in compliance with SFAS No. 133, as amended.

Income Taxes

Effective January 1, 2006, the Company became a C Corporation for tax purposes.

In establishing a provision for income taxes, the Company must estimate when in the future certain items will affect taxable income. Deferred taxes are recorded for future tax consequences of events that have been recognized in the financial statements or tax returns, based upon enacted tax laws and rates. Deferred tax assets are recognized subject to managements judgment that realization is more likely than not.

In June 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109. FIN No. 48 addresses the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. FIN No. 48 prescribes specific criteria for the financial statement recognition and measurement of the tax effects of a position taken or expected to be taken in a tax return.
This interpretation also provides guidance on de-recognition of previously recognized tax benefits, classification of tax liabilities on the balance sheet, recording interest and penalties on tax underpayments, accounting in interim periods, and disclosure requirements.

The Company adopted the provisions of FIN No. 48 on January 1, 2007. The implementation of FIN No. 48 did not have a material effect on the Companys financial statements. The Company has net operating loss carry forwards (NOLS) and a valuation allowance to offset any tax effects. The Company has no unrecognized tax benefits and therefore, there was no effect on the Companys effective tax rate. Any tax penalties or interest expense will be recognized in income tax expense. No interest and penalties were paid or accrued at December 31, 2008 or 2007. The Company does not anticipate a significant change over the next twelve months of 2009 to
any tax liability.

The Company is open to federal and state tax audits until the applicable statute of limitations expire. There are currently no federal or state income tax examinations underway for the Company. The tax years 2004 through 2008 remain open to examination by the major taxing jurisdictions in which we operate, although no material changes to unrecognized tax positions are expected within the next twelve months. The Company does, however, have prior year net operating losses which remain open for examination.

Liquidity and Capital Resources

Liquidity represents the Company's ability to generate sufficient amounts of cash to meet its financial commitments. The Company believes that cash flow from operating and financing activities will not be sufficient to meet its anticipated operating and capital expenditure requirements on a short-term basis as it expands its oil and natural gas operations. The Company believes that short-term cash flow needs will be met by selling stock in private placements, borrowing from related parties and partnering the working interest of future wells as joint ventures. The Company sold preferred shares in early 2008. As an additional source of liquidity and to
manage its interest rate risk, the Company may attempt to refinance some of its maturing long-term debt in order to satisfy its obligations and to generate additional cash to meet its financial commitments in conjunction with its operations. On February 13, 2009, the Company borrowed $600,000 from Mr. Osborne with principal payments of $100,000 and interest due monthly. Also on March 25, 2009, the Company received a letter of commitment from the mortgagor which stated that the loan on the Painesville

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facility will be extended for five years using a ten year amortization period at a variable rate of the 30 day LIBOR plus 250 basis points. The rate on March 31, 2009 was 3.02%.

The Company requires substantial capital expenditures to maintain and/or grow production and reserves. The current economic environment makes it more difficult to obtain debt or equity financing on acceptable terms to address our liquidity issues. In addition, we reported negative working capital at December 31, 2008 and a third consecutive year of net losses. Our $9.5 million fully-drawn line of credit with RBS Citizens, N.A. d/b/a Charter One is due on August 1, 2009. This line of credit is guaranteed by Mr. Osborne, our CEO and Chairman of the Board. If we, after using our best efforts, are not successful in extending this line of credit or
obtaining substitute financing, then Mr. Osborne has committed to loan the Company up to $9.5 million to repay the Charter One line of credit, subject to standard terms and conditions. If this occurs, principal payments to Mr. Osborne would begin on or after January 1, 2010.

We depend on debt or equity financing to pay for our continued exploration and operations. Capital may not continue to be available if necessary to meet these continuing costs, or if capital is available, it may not be on terms acceptable to us. In addition, we may not be able to meet our future cash commitments.

If the Company determines to refinance or retire any of its maturing debt, there can be no assurance that the Company will be able to do so. A significant portion of the Companys debt is due on demand. If adequate funds are not available or not available on acceptable terms, the Companys business and results of operations would be materially and adversely affected and the Company may be unable to continue to fund its operations or growth or acquire additional properties or to meet its obligations.

Long-term liquidity will depend upon the Companys ability to obtain financing and attain profitable operations. Because all of the Companys debt is tied to variable rates, the Companys liquidity will also depend on interest rate fluctuations. The Company has entered into an interest rate swap to pay a fixed rate of interest for the $9.5 million line of credit through August 2009. Refinancing of existing debt or issuance of any new debt will likely require the personal guarantee of Mr. Osborne, the Companys Chairman and CEO. On September 28, 2006, the Company and Mr. Osborne entered into an unsecured loan agreement with Charter
One Bank for a one year line of credit in the amount of $5.0 million. This agreement was subsequently modified in February 2007 to increase the loan to $7.5 million and in April 2007 to increase the loan to $9.5 million including a security agreement for substantially all of the Companys assets. Additionally during 2007, the Company borrowed a total of $3.8 million from Great Plains Exploration, LLC under six promissory notes. Great Plains is owned by Richard M. Osborne, the Companys Chairman and CEO. The Great Plains notes were satisfied in full and terminated when the Company entered into the Charter One Loan Agreement on March 28, 2008. On February 13, 2009, Great Plains loaned the Company $600,000 to fund the Companys ongoing capital requirements. The loan is evidenced by a cognovit promissory note. This note is payable in the amount of $100,000 per month, beginning on March 28, 2009, since revised to May 25, 2009 and bears interest at the rate of 8.0% annually.

The items affecting operating cash flow and cash and cash equivalents are discussed more fully in the Material Changes in Results of Operations section.

The Companys current assets increased $340,466 or 27.2%, to $1,593,061 at December 31, 2008 from $1,252,595 at December 31, 2007. Current assets at December 31, 2008 were higher than at December 31, 2007 largely due to the increase in accounts receivable related to the increase of the sale of natural gas and oil production with more wells on line in 2008 than 2007.

The Companys current liabilities increased $139,977 to $12,029,223 at December 31, 2008, from $11,889,246 at December 31, 2007. The increase is largely the result of additional accruals.

The Company had a positive cash flow from operating activities of $1,920,860 for the year ended December 31, 2008 compared to a positive cash flow of $1,967,869 for the year ended December 31, 2007.

The Company had a negative cash flow from investing activities of $2,994,016 for the year ended December 31, 2008 compared to a negative cash flow of $7,572,630 for the year ended December 31, 2007. Both of the cash uses were largely due to expenditures for drilling new oil and natural gas wells.

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The Company had a positive cash flow from financing activities of $1,120,978 for the year ended December 31, 2008 compared to a positive cash flow of $5,611,348 for the year ended December 31, 2007. The positive cash flow for the year ended December 31, 2008 was largely due to the receipt of proceeds from a private stock offering. The positive cash flow for the year ended December 31, 2007 was largely the result of borrowing on the line of credit and the related party loan.

The following table sets forth the maturity dates and the total of the Companys long-term debt and line of credit as of December 31, 2008, as well as future commitments under the Companys office space lease.



Payments Due by PeriodContractual Obligations

          

          Less than 1 Year

          

          1  3 Years

          

          4  5 Years

          

          TotalLong-Term Debt

          

          $

          100,504

          

          

          $

          204,663

          

          

          $

          954,904

          

          

          $

          1,260,071Line of Credit

          

          

          9,500,000

          

          

          

          

          

          

          

          

          

          

          

          9,500,000Operating Lease*

          

          

          22,050

          

          

          

          48,000

          

          

          

          6,000

          

          

          

          76,050Total Contractual Cash Obligations

          

          $

          9,622,554

          

          

          $

          252,663

          

          

          $

          960,904

          

          

          $

          10,836,121




*

          The operating lease for office space which was previously at a rental of $1,350 per month was renegotiated on March 26, 2009 with a three year term ending March 2012, at a rental of $2,000 per month, which is reflected in the above table.The items affecting operating cash flow and cash and cash equivalents are discussed more fully in the Material Changes in Results of Operations section.

Material Changes in Results of Operations

Revenues from Continuing Operations

Total revenues from continuing operations and interest income increased $1,562,092, or 47.0%, to $4,883,513 for the year ended December 31, 2008, from $3,321,421 for the year ended December 31, 2007. The increases are largely the result of higher oil and natural gas production from an increase in producing wells and an increase in the market price of oil during the year.

Expenses from Continuing Operations

Interest expense from continuing operations increased $36,602, or 6.7%, to $581,954 for the year ended December 31, 2008 compared to $545,352 for the year ended December 31, 2007. Interest expense increased for 2008 largely due to additional borrowing on the line of credit although the interest rate was lower during 2008 compared to 2007. Also, the Company entered into a new interest rate swap in 2008 which increased interest expense.

Accretion expense from continuing operations increased $20,422 to $44,742 for the year ended December 31, 2008 compared to $24,320 for the year ended December 31, 2007. The increase is largely the result of increasing the estimated liability based on recent plugging costs.

Oil and natural gas production costs from continuing operations increased $240,540, or 71.8%, to $575,675 for the year ended December 31, 2008 compared to $335,135 for the year ended December 31, 2007. The increase is partially the result of the increase in the number of producing wells, fifty-four in 2008 compared to forty two in 2007. Obviously more wells require more expenses, in particular monthly well management, water hauling and service rig expense. Also, four wells were plugged in the third quarter of 2008 resulting in $27,202 of expense incurred over the Asset Retirement Obligation Liability previously estimated and $41,690 of unsalvageable
equipment relating to the plugging.

Self-storage property operating expenses from continuing operations increased $14,070, or 13.9%, to $115,671 for the year ended December 31, 2008 compared to $101,601 for the year ended December 31, 2007.

Legal and professional fees increased $9,302, or 3.9%, to $244,942 for the year ended December 31, 2008 compared to $235,640 for the year ended December 31, 2007.

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Property taxes and insurance expenses from continuing operations increased $46,308, or 40.9%, to $159,601 for the year ended December 31, 2008 compared to $113,293 for the year ended December 31, 2007. Property taxes and property insurance increased largely due to an increase in well liability insurance partially offset by a decrease by the county in the appraised property value on the Painesville self-storage property.

General and administrative expenses from continuing operations increased $99,715, or 12.7%, to $885,736 for the year ended December 31, 2008 compared to $786,021 for the year ended December 31, 2007. The increase in general and administrative expenses is largely due to an increase in staff, normal annual pay increases, training expense and rising health insurance costs.

The Company granted a warrant to purchase 50,000 shares of common stock to Richard M. Osborne on June 20, 2008 in return for Mr. Osborne providing collateral for the Companys credit facility with RBS Citizens, N.A., d/b/a Charter One. The warrant has an exercise price of $1.00 per share and a term of five years. The fair value of the warrant was approximately $48,000 at the date of grant, estimated using the Black-Scholes-Merton option pricing model.

The Companys equity interest in Kykuit Resources LLC shows a loss of $28,627 and $28,817 for the years ended December 31, 2008 and 2007, respectively. The Kykuit joint venture began operations in August 2007 and drilling in late May 2008. While several wells have been drilled, all of the processes to determine if the wells are viable have not been completed at this time. Kykuit management has hired new consultants and staff to analyze the wells already drilled. Drilling efforts in the winter months are particularly difficult with the sub-zero weather. It appears likely that production may be possible at a different level than was originally
anticipated with additional information becoming available later in the summer of 2009.

The Company usually writes off a minimal amount of receivables in the self-storage business. During the second quarter of 2008, however the Company wrote off a large receivable of $40,027 for a retail lease in the Painesville facility that appeared unlikely the Company would collect.

Impairment and dry well costs from continuing operations decreased $549,843 to $491,224 for the year ended December 31, 2008 compared to $1,041,067 for the year ended December 31, 2007. The Company wrote off the costs related to two wells amounting to $491,224 in 2008 and five wells amounting to $1,041,067 in 2007. Impairments and dry wells could happen in future years, particularly in an aggressive drilling program or when market prices of production is very low, as is the current case.

Depreciation, depletion and amortization expenses from continuing operations increased $2,581,207 to $3,874,858 for the year ended December 31, 2008 compared to $1,293,651 for the year ended December 31, 2007. The increase is partially related to higher recorded capitalized well costs from additional wells being drilled and related increased production. A significant increase in expense is from lower reserves at year end. Some of the wells have been in production for three years and therefore are on the downside of the decline curve while many of the wells are affected by the lower pricing at December 31, 2008 that the reserves are based upon
compared to our costs to operate the wells.

Loss from Continuing Operations

The Companys loss from continuing operations increased $1,025,609, to a loss of $2,210,607 for 2008 from a loss of $1,184,998 for 2007. The Companys loss in 2007 was primarily due to impairments totaling $1,041,067. While production increased $1,562,092 in 2008 compared to 2007 with more wells on line in 2008, the expenses also increased in 2008 largely due to an increase in depletion with higher capitalized costs from new wells and depletion expense from lower pricing used to calculate reserve estimates. Additionally, costs to manage the wells increased 71.8% largely due to more wells going on-line and the Company incurred higher than
normal bad debt expense of $43,517 from the Painesville self-storage facility and issued a warrant valued at $47,573.

Income from Discontinued Operations

The Companys income from discontinued operations was $287,104 from the gain on the sale of the Gahanna self-storage facility during May 2007.

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Net Loss

The Company had a net loss from operations of $2,210,607 for 2008 compared to a net loss of $897,894 for 2007. While production was higher in 2008 with more wells on line, the expenses increased in 2008 largely due to an increase in depletion from higher capitalized costs of new wells and from lower year-end prices used to calculate reserve estimates. Additionally, costs to manage the wells increased largely due to more wells going on line and the Company incurred bad debt expense from the Painesville self-storage facility and issued a warrant which did not occur in 2007. The Companys losses in 2007 were primarily due to writing-off five wells
for $1,041,067 offset by the gain on the sale of the Gahanna self-storage facility of $294,587 which is part of discontinued operations.

Interest Rate Risk

Interest rate risk is the risk that interest rates will increase, which will result in an increase in the Companys interest expense on its variable rate loans.

The loan on the Painesville facility, totaling approximately $1.2 million, is tied to variable interest rates. If the Companys interest rates on the loans were to increase by 1% per year, the Companys interest expense would increase approximately $12,000 on an annual basis. The Companys line of credit is currently fixed through the use of an interest rate swap until August 2009. If interest rates increase, the Companys results of operations may be materially and adversely affected.

Off-Balance Sheet Arrangements

The Company had one off-balance sheet arrangement at December 31, 2008, with respect to its investment in the Kykuit partnership. While the Company is not liable for the contribution obligations of other members of Kykuit Resources, LLC, the Company may decide to invest additional funds should any of the other members not meet their future required investments. However, the Company believes that this scenario is highly unlikely at this time.

Forward-Looking Statements

Statements that are not historical facts, including statements about the Companys confidence in its prospects and strategies and its expectations about growth, are forward-looking statements that involve risks and uncertainties. These risks and uncertainties, many of which are beyond our control, may include statements about our:



          business strategy;

          financial strategy;

          liquidity and our ability to meet our debt obligations;

          drilling locations;

          natural gas and oil reserves;

          realized natural gas and oil prices;

          production volumes;

          lease operating expenses, general and administrative expenses and finding and development costs;

          future operating results; and

          plans, objectives, expectations and intentions.All of these types of statements, other than statements of historical fact, included in this report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as may, will, could, should, expect, plan, project, intend, anticipate, believe, estimate, predict, potential, pursue, target, continue, the negative of these terms or other comparable terminology.

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The forward-looking statements contained in this report are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe these estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, managements assumptions about future events may prove to be inaccurate. We caution all readers that the forward-looking statements contained in this report are not guarantees of
future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to factors listed in the Risk Factors section and elsewhere in this report. All forward-looking statements speak only as of the date of this report. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

Income Taxes

Effective January 1, 2006, the Company became a C Corporation for tax purposes.

At December 31, 2008 and 2007, the Company had net operating loss carry forwards (NOLS) for future years of approximately $15.4 million and $13.5 million, respectively. These NOLS will expire at various dates through 2027. Utilization of the NOLs could be limited if there is a substantial change in ownership of the Company and is contingent on future earnings. In addition, the Company has a $41,187 alternative minimum tax (AMT) credit that carries forward indefinitely.

The Company has provided a valuation allowance equal to 100% of the total net deferred asset in recognition of the uncertainty regarding the ultimate amount of the net deferred tax asset that will be realized.

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which establishes a formal framework for measuring fair values of assets and liabilities in financial statements that are already required by U.S. generally accepted accounting principles (GAAP) to be measured at fair value. SFAS No. 157 clarifies guidance in FASB Concepts Statement (CON) No. 7 which discusses present value techniques in measuring fair value. Additional disclosures are also required for transactions measured at fair value. No new fair value measurements are prescribed, and SFAS No. 157 is intended to codify the several definitions of fair
value included in various accounting standards. However, the application of this statement may change current practices for certain companies. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. On February 28, 2008, the FASB released FASB Staff Position, (FSP) SFAS 157-2 Effective Date of FASB Statement No. 157, which delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. The Company adopted SFAS 157 as it applies to financial assets and liabilities as of January 1, 2008. The Company does not anticipate that the implementation of SFAS 157, as it relates to non-financial assets and liabilities will have a material impact on its financial position, results of operations and cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Adoption on January 1, 2008 did not have a material effect on the Company since the Company did not elect to
measure any financial assets or liabilities at fair value.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R). SFAS 141R provides standards that will improve, simplify, and converge internationally the accounting for business combinations in consolidated financial statements. The effective date of SFAS 141R is for fiscal years beginning after December 15, 2008. The Company does not anticipate that the adoption of this statement will have a material impact on its financial position, results of operations or cash flows.

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In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, or SFAS No. 160. SFAS No. 160 amends Accounting Research Bulletin 51, or ARB 51. SFAS No. 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements separate from the parents equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. It also amends certain of ARB No. 51s consolidation procedures for consistency with the requirements of SFAS No.
141(R). SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company does not anticipate that the adoption of this statement will have a material impact on its financial position, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment to FASB Statement No. 133. SFAS No. 161 intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entitys financial position, financial performance, and cash flows. Entities are required to provide enhanced disclosures about: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its
related interpretations; and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early adoption encouraged. The Company does not anticipate that the adoption of this statement will have a material impact on its financial position, results of operations or cash flows.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting principles. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with U.S. GAAP. SFAS 162 directs the GAAP hierarchy to the entity, not the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS No. 162 will be effective sixty days following the Securities and Exchange Commissions approval of the
Public Company Accounting Oversight Board amendments to AU Section 411. The Company does not anticipate that the adoption of this statement will have a material impact on its financial position, results of operations or cash flows.

In December 2008, the United States Securities and Exchange Commission (SEC) released a final rule, Modernization of Oil and Gas Reporting, which amends the oil and gas reporting requirements. The key revisions to the reporting requirements include: using a 12-month average price to determine reserves; including nontraditional resources in reserves if they are intended to be upgraded to synthetic oil and gas; ability to use new technologies to determine and estimate reserves; and permitting the disclosure of probable and possible reserves. In addition, the final rule includes the requirements to report the independence and
qualifications of the reserve preparer or auditor; file a report as an exhibit when a third party is relied upon to prepare reserve estimates or conduct reserve audits; and to disclose the development of any proved undeveloped reserves (PUDs), including the total quantity of PUDs at year-end, material changes to PUDs during the year, investments and progress toward the development of PUDs and an explanation of the reasons why material concentrations of PUDs have remained undeveloped for five years or more after disclosure as PUDs. The accounting changes resulting from changes in definitions and pricing assumptions should be treated as a change in accounting principle that is inseparable from a change in accounting estimate, which is to be applied prospectively. The final rule is effective for annual reports for fiscal years ending on or after December 31, 2009. Early adoption is not permitted. The Company is currently evaluating what impact this final rule may have on its financial
position, results of operations or cash flows.

The Company reviewed all other recently issued, but not yet effective, accounting pronouncements and does not believe any such pronouncements will have a material impact on our financial statements.

Item 8. Financial Statements and Supplementary Data

The Companys Report of Independent Registered Public Accounting Firm and Consolidated Financial Statements are filed as part of this report.

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Item 9A(T). Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of December 31, 2008, the Companys management, with the participation of the Companys principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Companys disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our chief executive officer and chief financial officer concluded that the Companys disclosure controls and procedures were effective as of December 31, 2008.

Managements Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining an adequate system of internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). The Companys internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our Consolidated Financial Statements for external purposes in accordance with generally accepted accounting principles defined in the Exchange Act.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We carried out an evaluation under the direction of our chief executive officer and chief financial officer, of the effectiveness of our internal control over financial reporting. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control over Financial Reporting  Guidance for Smaller Public Companies (2006). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Attestation Report of Independent Registered Public Accounting Firm

This annual report does not include an attestation report of the Companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only managements report in this annual report.

Item 9B. Other Information

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this Item 10 is incorporated herein by reference to the Registrants definitive Proxy Statement, relating to its 2009 Annual Meeting (Proxy Statement,) under the captions Board of Directors, Executive Officers, Section 16(a) Beneficial Ownership Reporting Compliance, Code of Ethics, and Audit Committee Report. The Proxy Statement will be filed with the SEC no later than April 30, 2009.

Item 11. Executive Compensation

The information required by Item 11 is contained under the caption Executive and Director Compensation in the Proxy Statement and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by Item 12 is contained under the caption Equity Compensation Plan Information and Principal Stockholders in the Proxy Statement and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by Item 13 is contained under the caption Certain Relationships and Related Transactions and Director Independence in the Proxy Statement and is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The information required by Item 14 is contained under the caption Principal Accounting Firm Fees and Audit Committee Pre-approval Policies and Procedures in the Proxy Statement and is incorporated herein by reference.

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PART IV

Item 15. Exhibits and Financial Statement Schedules



ExhibitNo.

          

          Description2.1

          

          Agreement and Plan of Merger, dated as of December 28, 1999, by and among Meridian Point Realty Trust 83, the Company and Liberty Self-Stor Limited Partnership (Exhibits A and B to the Agreement and Plan of Merger are Exhibits 3.1 and 3.2, respectively) (Filed as Exhibit 2.1 to Registrants Form 8-K dated January 12, 2000 and incorporated herein by reference.)3.1

          

          Articles of Incorporation of the Company (Filed as Exhibit 3.1 to Registrants Form 8-K dated January 12, 2000 and incorporated herein by reference.)3.2

          

          Articles of Amendment of Articles of Incorporation of the Company dated June 27, 2005 (Filed as Exhibit 3.1 to Registrants Form 8-K dated July 1, 2005 and incorporated herein by reference.)3.3

          

          Articles Supplementary to John D. Oil and Gas Companys Articles of Incorporation, as amended, restated and supplemented dated February 12, 2008 (Filed as Exhibit 3.1 to Registrants Form 8-K dated February 12, 2008 and incorporated herein by reference.)3.4

          

          Bylaws of the Company (Filed as Exhibit 3.2 to Registrants Form 8-K dated January 12, 2000 and incorporated herein by reference.)4.1

          

          Registration Rights Agreement between the Company and the Richard M. Osborne Trust dated February 28, 2006 (Filed as Exhibit 4.1 to Registrants Form 8-K dated February 24, 2006 and incorporated herein by reference.)9.1

          

          Voting Trust Agreement between the Company, Richard M. Osborne and Gregory J. Osborne dated February 16, 2006 (Filed as Exhibit 7.1 to Registrants Form SC 13D/A dated April 11, 2006 and incorporated herein by reference.)10.1

          

          1999 Stock Option and Award Plan of the Company (Filed as Exhibit 10.1 to Registrants Form 8-K dated January 12, 2000 and incorporated herein by reference.)10.2*

          

          First Amendment to the Companys 1999 Stock Option and Award Plan10.3

          

          Lease between OsAir, Inc. and the Company (Filed as Exhibit 10.2 to Registrants Form 8-K dated January 12, 2000 and incorporated herein by reference.)10.4*

          

          Lease between OsAir, Inc and the Company dated March 26, 200910.5

          

          Agreement of Limited Partnership of LSS I Limited Partnership, dated December 29, 1999. (Filed as Exhibit 10.3 to Registrants Form 8-K dated January 12, 2000 and incorporated herein by reference.)10.6

          

          Cost Sharing Agreement, by and between Liberty Self-Stor, Ltd. and Liberty Self-Stor II, Ltd. dated December 28, 1999 (Filed as Exhibit 10.7 to Registrants Form 10-KSB, dated March 15, 2000 and incorporated herein by reference.)10.7

          

          Contract among Acquiport/Amsdell I Limited Partnership and/or its nominee, Liberty Self-Stor, Ltd. and Liberty Self-Stor II, Ltd dated September 7, 2004 (Filed as Exhibit 10.1 to Registrants Form 8-K dated September 10, 2004 and incorporated herein by reference.)10.8

          

          Amended and Restated First Amendment to Agreement of Limited Partnership of LSS I Limited Partnership dated March 29, 2006 (Filed as Exhibit 10.9 to Registrants form 10-KSB, dated March 31, 2006 and incorporated herein by reference)10.9

          

          Stock Subscription Agreement between the Company and the Richard M. Osborne Trust dated February 28, 2006 (Filed as Exhibit 10.1 to Registrants Form 8-K dated March 2, 2006 and incorporated herein by reference.)10.10

          

          Stock Subscription Agreement between the Company and Terence P. Coyne dated February 28, 2006 (Filed as Exhibit 10.2 to Registrants Form 8-K dated March 2, 2006 and incorporated herein by reference.)10.11

          

          Common Stock Purchase Warrant granted to Richard M. Osborne dated June 20, 2008 (Filed as Exhibit 10.1 to Registrants Form 8-K dated June 20, 2008 and incorporated herein by reference.)

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ExhibitNo.

          

          Description10.12

          

          Letter agreement between the Company and Great Plains Exploration, LLC relating to the transfer of oil and natural gas wells dated as of January 1, 2006 (Filed as Exhibit 10.1 to Registrants Form 10-QSB dated March 31, 2006 and incorporated herein by reference.)10.13

          

          Oil and Gas Operations and Sale Agreement between the Company and Great Plains Exploration, LLC dated as of January 1, 2006 (Filed as Exhibit 10.2 to Registrants Form 10-QSB dated March 31, 2006 and incorporated herein by reference.)10.14

          

          Amendment No 1 to Oil and Gas Operations and Sale Agreement between the Company and Great Plains Exploration, LLC dated as of November 14, 2006 (Filed as Exhibit 10.4 to Registrants Form 10-QSB dated September 30, 2006 and incorporated by reference.)10.15

          

          Amendment No. 2 to Oil and Gas Operations and Sale Agreement dated as of January 12, 2009 by and between the Company and Great Plains Exploration, LLC (Filed as Exhibit 10.1 to the Registrants 8-K dated January 12, 2009 and incorporated herein by reference.)10.16

          

          Revolving Demand Note of the Company payable to the Richard M. Osborne Trust dated as of January 1, 2006 (Filed as Exhibit 10.3 to Registrants Form 10-QSB dated March 31, 2006 and incorporated herein by reference.)10.17

          

          Purchase and Sale Agreement between the Company and Buckeye Storage of Gahanna LLC dated as of October 5, 2006 (Filed as Exhibit 10.1 to Registrants Form 8-K dated October 12, 2006 and incorporated herein by reference.)10.18

          

          First Amended and Restated Loan and Security Agreement between RBS Citizens, N.A., d/b/a Charter One, Richard M. Osborne and the Company, dated as of March 28, 2008 (Filed as Exhibit 10.1 to Registrants Form 8-K dated March 28, 2008 and incorporated herein by reference.)10.19

          

          Revolving Credit Note of the Company and Richard M. Osborne in favor of RBS Citizens, N.A., d/b/a Charter One, dated as of March 28, 2008 (Filed as Exhibit 10.2 to Registrants Form 8-K dated March 28, 2008 and incorporated herein by reference.)10.20

          

          Loan Amendment Agreement between the Company, Great Plains Exploration, LLC and Richard M. Osborne dated March 28, 2008 (Filed as Exhibit 10.1 to Registrants Form 10-Q dated March 28, 2008 and incorporated herein by reference.)10.21

          

          Assignment and Assumption of Lease Purchase and Sale Agreement and First Amendment of Lease Purchase and Sale Agreement entered into as of August 3, 2007 between Great Plains Exploration, LLC and Kykuit Resources, LLC (Filed as Exhibit 10.1 to Registrants Form 8-K dated August 3, 2007 and incorporated herein by reference.)10.22

          

          Lease Purchase and Sale Agreement dated March 21, 2007 between Hemus, Ltd. and Great Plains Exploration, LLC and First Amendment to Lease Purchase and Sale Agreement dated July 24, 2007 (Filed as Exhibit 10.2 to Registrants Form 8-K dated August 3, 2007 and incorporated herein by reference.)10.23

          

          Joint Venture Development Agreement between Kykuit Resources, LLC and Hemus, Ltd, effective August 3, 2007 (Filed as Exhibit 10.3 to Registrants Form 8-K dated August 3, 2007 and incorporated herein by reference.)10.24

          

          Assignment of Oil, Gas and Mineral Leases dated May 1, 2008 between Hemus, Ltd. and Kykuit Resources, LLC (Filed as Exhibit 10.1 to Registrants Form 8-K dated May 1, 2008 and incorporated herein by reference.)10.25

          

          Transfer and Acceptance of Membership Interest dated May 29, 2008 between the Company and Geis Coyne Oil and Gas, LLC (Filed as Exhibit 10.2 to Registrants Form 8-K dated May 1, 2008 and incorporated herein by reference.)10.26

          

          Second Amended and Restated Operating Agreement of Kykuit Resources, LLC dated May 29, 2008 (Filed as Exhibit 10.3 to Registrants Form 8-K dated May 1, 2008 and incorporated herein by reference.)

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ExhibitNo.

          

          Description10.27

          

          Purchase and Sale Agreement dated June 11, 2008 between Macum Energy, Inc., Harold and Eva Holden Living Trust dated 1995, Harold and Eva Holden, Trustees, Winifred Gas Partnership, Goodridge Resources, Inc., Vincent T. Larse, Dr. David T. Larsen, Pic Productions, Inc., Stanley and Beverly Stott Living Trust dated 4/30/96, Stanley and Beverly Stott, Trustees, Faith Drilling Inc., and Kykuit Resources, LLC (Filed as Exhibit 10.4 to Registrants Form 8-K dated May 1, 2008 and incorporated herein by reference.)10.28

          

          Cognovit Promissory Note of the Company dated August 3, 2007 (Filed as Exhibit 10.4 to Registrants Form 8-K dated August 3, 2007 and incorporated herein by reference.)10.29

          

          Cognovit Promissory Note of the Company dated August 28, 2007 (Filed as Exhibit 10.1 to Registrants Form 8-K dated August 28, 2007 and incorporated herein by reference.)10.30

          

          Cognovit Promissory Note of the Company dated September 12, 2007 (Filed as Exhibit 10.1 to Registrants Form 8-K dated September 12, 2007 and incorporated herein by reference.)10.31

          

          Cognovit Promissory Note of the Company dated October 10, 2007 (Filed as Exhibit 10.1 to Registrants Form 8-K dated October 10, 2007 and incorporated herein by reference.)10.32

          

          Cognovit Promissory Note of the Company dated November 20, 2007 (Filed as Exhibit 10.1 to Registrants Form 8-K dated November 20, 2007 and incorporated herein by reference.)10.33

          

          Cognovit Promissory Note of the Company dated November 30, 2007 (Filed as Exhibit 10.1 to Registrants Form 8-K dated November 30, 2007 and incorporated herein by reference.)10.34

          

          Cognovit Promissory Note of the Company dated May 23, 2008 (Filed as Exhibit 10.5 to Registrants Form 8-K dated May 1, 2008 and incorporated herein by reference.)10.35

          

          Cognovit Promissory Note of the Company dated May 27, 2008 (Filed as Exhibit 10.6 to Registrants Form 8-K dated May 1, 2008 and incorporated herein by reference.)10.36

          

          Cognovit Promissory Note of the Company dated February 13, 2009 (Filed as Exhibit 10.1 to Registrants Form 8-K dated February 13, 2009 and incorporated herein by reference.)10.37*

          

          Letter from Richard M. Osborne regarding debt commitment dated March 26, 2009.10.38*

          

          Cognovit Promissory Note of John D Oil and Gas Company dated April 7, 2009.10.39

          

          Purchase and Sale Agreement effective as of January 30, 2008 between Liberty Self Stor, Ltd. and Richard M. Osborne, Trustee (Filed as Exhibit 10.1 to Registrants Form 8-K dated December 28, 2007 and incorporated herein by reference.)10.40

          

          Operating Agreement of Lucky Brothers, LLC dated October 7, 2008 (Filed as Exhibit 10.1 to Registrants Form 10-Q dated September 30, 2008 and incorporated herein by reference.)10.41

          

          Operating Contract between the Company, Lucky Brothers, LLC and Great Plains Exploration, LLC dated October 7, 2008 (Filed as Exhibit 10.2 to Registrants Form 10-Q dated September 30, 2008 and incorporated herein by reference.)10.42

          

          Drilling Contract between the Company and Great Plains Exploration, LLC dated October 7, 2008 (Filed as Exhibit 10.3 to Registrants Form 10-Q dated September 30, 2008 and incorporated herein by reference.)31.1*

          

          Section 302 Certification of Chairman of the Board and Chief Executive Officer (principal executive officer) pursuant to the Sarbanes-Oxley Act of 200231.2*

          

          Section 302 Certification of Chief Financial Officer (principal financial officer) pursuant to the Sarbanes-Oxley Act of 200232.1*

          

          Certification of Chairman of the Board and Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




*

          Filed herewith

          Management agreement or compensatory plan or arrangement

27

TABLE OF CONTENTS

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



Dated: April 6, 2009

          

          JOHN D. OIL AND GAS COMPANYBy:/s/ Richard M. OsborneRichard M. OsborneChairman and Chief Executive Officer(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



Name

          

          Position

          

          Date/s/ Richard M. OsborneRichard M. Osborne

          

          Chairman, Chief Executive Officer and Director(Principal Executive Officer)

          

          April 6, 2009/s/ C. Jean MihitschC. Jean Mihitsch

          

          Chief Financial Officer(Principal Financial and Accounting Officer)

          

          April 6, 2009/s/ Steven A. CalabreseSteven A. Calabrese

          

          Director

          

          April 6, 2009/s/ Richard T. Flenner Jr.Richard T. Flenner Jr.

          

          Director

          

          April 6, 2009/s/ Marc C. KrantzMarc C. Krantz

          

          Secretary and Director

          

          April 6, 2009/s/ James R. SmailJames R. Smail

          

          Director

          

          April 6, 2009/s/ Terence P. CoyneTerence P. Coyne

          

          Director

          

          April 6, 2009/s/ Mark D. GrossiMark D. Grossi

          

          Director

          

          April 6, 2009/s/ Gregory J. OsborneGregory J. Osborne

          

          President and Director

          

          April 6, 2009/s/ Thomas J. SmithThomas J. Smith

          

          Director

          

          April 6, 2009

28

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of John D. Oil and Gas Company

We have audited the accompanying consolidated balance sheets of John D. Oil and Gas Company (a Maryland corporation) and Subsidiary as of December 31, 2008 and 2007, and the related consolidated statements of operations and comprehensive loss, shareholders' equity, and cash flows for each of the two years in the period ended December 31, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits, provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of John D. Oil and Gas Company and Subsidiary as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

/s/ Maloney + Novotny LLC

Cleveland, Ohio April 6, 2009

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   CONSOLIDATED BALANCE SHEETS



December 31, 2008

          

          December 31, 2007ASSETSCurrent Assets:Cash

          

          $

          78,301

          

          

          $

          30,479Accounts Receivable

          

          

          40,879

          

          

          

          63,739Accounts Receivable from Related Parties

          

          

          1,417,679

          

          

          

          919,542Assets Held for Sale

          

          

          

          

          

          

          204,762Other Current Assets

          

          

          56,202

          

          

          

          34,073Total Current Assets

          

          

          1,593,061

          

          

          

          1,252,595Property and Equipment, Net

          

          

          12,173,673

          

          

          

          12,874,148Investment in Unconsolidated Affiliate

          

          

          989,258

          

          

          

          1,261,930Other Assets

          

          

          60,624

          

          

          

          13,894Total Assets

          

          $

          14,816,616

          

          

          $

          15,402,567LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Line of Credit

          

          $

          9,500,000

          

          

          $

          5,700,000Current Maturities of Long Term Debt

          

          

          100,504

          

          

          

          100,725Note Payable to Related Party

          

          

          

          

          

          

          3,800,000Accounts Payable

          

          

          1,332,504

          

          

          

          2,063,318Accounts Payable to Related Parties

          

          

          697,377

          

          

          

          16,468Accrued Expenses

          

          

          398,838

          

          

          

          208,735Total Current Liabilities

          

          

          12,029,223

          

          

          

          11,889,246Long Term Debt, Net of Current Maturities

          

          

          1,159,567

          

          

          

          1,285,732Asset Retirement Obligation

          

          

          644,517

          

          

          

          211,777Commitments and Contingencies

          

          

          

          

          

          

          Shareholders Equity:Serial Preferred Stock  $.001 par value: 2,000,000 shares authorized, 1,350 and 0 shares issued and outstanding, respectively

          

          

          1

          

          

          

          Common Stock  $.001 par value: 50,000,000 shares authorized; 9,067,090 and 9,019,015 shares issued and outstanding, respectively

          

          

          9,067

          

          

          

          9,019Paid-in Capital

          

          

          30,268,691

          

          

          

          28,871,616Accumulated Deficit

          

          

          (29,160,570

          )

          

          

          (26,864,823

          )Accumulated Other Comprehensive Loss

          

          

          (133,880

          )

          

          

          Total Shareholders Equity

          

          

          983,309

          

          

          

          2,015,812Total Liabilities and Shareholders Equity

          

          $

          14,816,616

          

          

          $

          15,402,567

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

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS For the Years Ended December 31, 2008 and 2007



2008

          

          2007RevenuesOil and Natural Gas Sales

          

          $

          4,568,087

          

          

          $

          2,929,359Self-Storage Operation Revenues

          

          

          312,108

          

          

          

          348,537Interest and Other

          

          

          3,318

          

          

          

          43,525Total Revenues

          

          

          4,883,513

          

          

          

          3,321,421Operating ExpensesInterest

          

          

          581,954

          

          

          

          545,352Accretion

          

          

          44,742

          

          

          

          24,320Oil and Natural Gas Production Costs

          

          

          575,675

          

          

          

          335,135Self-Storage Property Operating Expense

          

          

          115,671

          

          

          

          101,601Legal and Professional Fees

          

          

          244,942

          

          

          

          235,640Property Taxes and Insurance

          

          

          159,601

          

          

          

          113,293General and Administrative

          

          

          885,736

          

          

          

          786,021Warrant

          

          

          47,573

          

          

          

          Loss from Unconsolidated Affiliate

          

          

          28,627

          

          

          

          28,817Bad Debt

          

          

          43,517

          

          

          

          1,522Impairments

          

          

          491,224

          

          

          

          1,041,067Depreciation, Depletion and Amortization

          

          

          3,874,858

          

          

          

          1,293,651Total Operating Expenses

          

          

          7,094,120

          

          

          

          4,506,419Loss from Continuing Operations

          

          

          (2,210,607

          )

          

          

          (1,184,998

          )Loss from Discontinued Operations

          

          

          

          

          

          

          (7,483

          )Gain on Sale of Assets from Discontinued Operations

          

          

          

          

          

          

          294,587Income from Discontinued Operations

          

          

          

          

          

          

          287,104Net Loss

          

          $

          (2,210,607

          )

          

          $

          (897,894

          )Other Comprehensive Loss:Change in Fair Value of Cash Flow Hedge

          

          

          (133,880

          )

          

          

          Change in Fair Value of Available for Sale Securities

          

          

          

          

          

          

          (34

          )Comprehensive Loss

          

          $

          (2,344,487

          )

          

          $

          (897,928

          )Weighted Average Basic and Diluted Shares Outstanding

          

          

          9,020,859

          

          

          

          8,999,436Loss per Common Share from Continuing Operations  Basic and Diluted

          

          $

          (0.25

          )

          

          $

          (0.13

          )Income per Common Share from Discontinued Operations  Basic and Diluted

          

          

          

          

          

          

          0.03Loss per Common Share  Basic and Diluted

          

          $

          (0.25

          )

          

          $

          (0.10

          )

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

31

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY For the Years Ended December 31, 2008 and 2007



Preferred Stock

          

          Common Stock

          

          Paid-In Capital

          

          Accumulated Deficit

          

          Accumulated Other Comprehensive Loss

          

          TotalBalance at December 31, 2006

          

          $

          

          

          

          $

          8,998

          

          

          $

          28,854,588

          

          

          $

          (25,966,929

          )

          

          $

          34

          

          

          $

          2,896,691Common Stock Issued for Director Compensation

          

          

          

          

          

          

          21

          

          

          

          12,480

          

          

          

          

          

          

          

          

          

          

          

          12,501Restricted Common Stock Award

          

          

          

          

          

          

          

          

          

          

          4,548

          

          

          

          

          

          

          

          

          

          

          

          4,548Net Loss

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (897,894

          )

          

          

          

          

          

          

          (897,894

          )Change in Fair Market Value of Available for Sale Securities

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (34

          )

          

          

          (34

          )Balance at December 31, 2007

          

          $

          

          

          

          $

          9,019

          

          

          $

          28,871,616

          

          

          $

          (26,864,823

          )

          

          $

          

          

          

          $

          2,015,812Preferred Stock Issued in Private Placement, Net of Offering Costs

          

          

          1

          

          

          

          

          

          

          

          1,332,503

          

          

          

          

          

          

          

          

          

          

          

          1,332,504Common Stock Issued for Director Compensation

          

          

          

          

          

          

          48

          

          

          

          12,451

          

          

          

          

          

          

          

          

          

          

          

          12,499Restricted Common Stock Award

          

          

          

          

          

          

          

          

          

          

          4,548

          

          

          

          

          

          

          

          

          

          

          

          4,548Dividends Declared

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (85,140

          )

          

          

          

          

          

          

          (85,140

          )Director Warrant Issued

          

          

          

          

          

          

          

          

          

          

          47,573

          

          

          

          

          

          

          

          

          

          

          

          47,573Net Loss

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (2,210,607

          )

          

          

          

          

          

          

          (2,210,607

          )Change in Fair Market Value of Cash flow Hedge

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (133,880

          )

          

          

          (133,880

          )Balance at December 31, 2008

          

          $

          1

          

          

          $

          9,067

          

          

          $

          30,268,691

          

          

          $

          (29,160,570

          )

          

          $

          (133,880

          )

          

          $

          983,309

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

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2008 and 2007



2008

          

          2007Cash Flows from Operating Activities:Net Loss

          

          $

          (2,210,607

          )

          

          $

          (897,894

          )Adjustments to Reconcile Net Loss to Net Cash Provided By Operating ActivitiesBad Debt

          

          

          43,517

          

          

          

          1,522Impairments

          

          

          491,224

          

          

          

          1,041,067Depreciation, Depletion and Amortization

          

          

          3,874,858

          

          

          

          1,293,651Accretion

          

          

          44,742

          

          

          

          24,320Loss from Unconsolidated Affiliate

          

          

          28,627

          

          

          

          28,817Gain on Sale of Securities

          

          

          

          

          

          

          (36,260

          )(Gain) Loss on Sale of Equipment

          

          

          (199

          )

          

          

          3,703Common Stock Issued as Compensation

          

          

          12,499

          

          

          

          12,501Restricted Common Stock Award

          

          

          4,548

          

          

          

          4,548Director Warrant Issued

          

          

          47,573

          

          

          

          Changes in Operating Assets and Liabilities:Accounts Receivable

          

          

          (518,794

          )

          

          

          (222,167

          )Other Current Assets

          

          

          182,633

          

          

          

          (2,946

          )Other Assets

          

          

          (46,730

          )

          

          

          18,340Accounts Payable

          

          

          (57,385

          )

          

          

          1,125,107Accrued Expenses

          

          

          24,354

          

          

          

          (109,504

          )Change in Discontinued Operations, Net

          

          

          

          

          

          

          (316,936

          )Net Cash Provided By Operating Activities

          

          

          1,920,860

          

          

          

          1,967,869Cash Flows from Investing Activities:Purchases of Property and Equipment

          

          

          (1,437

          )

          

          

          (31,903

          )Proceeds from Sale of Securities

          

          

          

          

          

          

          474,648Proceeds from Sale of Equipment

          

          

          830

          

          

          

          1,245,889Proceeds from Sale of Interest in Unconsolidated Affiliate

          

          

          731,747

          

          

          

          Expenditures for Unconsolidated Affiliate

          

          

          (480,222

          )

          

          

          (1,290,747

          )Expenditures for Oil and Natural Gas Wells

          

          

          (3,244,934

          )

          

          

          (7,970,517

          )Net Cash Used In Investing Activities

          

          

          (2,994,016

          )

          

          

          (7,572,630

          )Cash Flows from Financing Activities:Proceeds from Line of Credit, Net

          

          

          

          

          

          

          2,615,000Proceeds from Preferred Stock Private Placement

          

          

          1,332,504

          

          

          

          Dividends Paid to Preferred Stockholders

          

          

          (85,140

          )

          

          

          Proceeds from Related Party Loan

          

          

          500,000

          

          

          

          3,800,000Principal Payments on Related Party Loan

          

          

          (500,000

          )

          

          

          Principal Payments on Long Term Debt

          

          

          (126,386

          )

          

          

          (86,745

          )Change in Discontinued Operations, Net

          

          

          

          

          

          

          (716,907

          )Net Cash Provided By Financing Activities

          

          

          1,120,978

          

          

          

          5,611,348Net Increase in Cash

          

          

          47,822

          

          

          

          6,587Cash, Beginning of Period

          

          

          30,479

          

          

          

          23,892Cash, End of Period

          

          $

          78,301

          

          

          $

          30,479Supplemental Disclosure of Cash flow InformationInterest Paid on Borrowings

          

          $

          551,132

          

          

          $

          498,504Federal Income Taxes Paid

          

          $

          

          

          

          $

          

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

33

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

1. Summary of Significant Accounting Policies

General

John D. Oil and Gas Company, formerly Liberty Self-Stor, Inc. (the Company), is a corporation organized under the laws of the State of Maryland. On June 27, 2005, the Company changed its name to John D. Oil and Gas Company.

The Company is in the business of acquiring, exploring, developing, and producing oil and natural gas in Northeast Ohio. The Company currently has fifty-four producing wells. The Company cannot guarantee success under its business plan as drilling wells for oil and natural gas is a high-risk enterprise and there is no guarantee the Company will become profitable.

Of lesser significance, the Company still retains one self storage facility located in Painesville, Ohio from the partnership with Liberty Self-Stor, Ltd., an Ohio limited liability company (the Ohio LLC). The members of the Ohio LLC consisted of Richard M. Osborne, Chairman and Chief Executive Officer of the Company, Thomas J. Smith, the former President and Chief Operating Officer of the Company, and Retirement Management Company, an Ohio corporation owned by Mr. Osborne.

Each member of the Ohio LLC exchanged their membership interests for Class A limited partnership interests in LSS I Limited Partnership, a Delaware limited partnership (LSS), resulting in LSS being the sole member of the Ohio LLC. The Company contributed its net assets, primarily cash and investments, to LSS in exchange for the sole general partner interest therein and Class B limited partnership interests. The Class A limited partnership interests are redeemable for cash or, at the election of the Company, convertible into shares of the Companys stock based on the current exchange factor of .1377148 of a share for each unit. The
Class B limited partnership interests are not entitled to redemption, conversion or a preferred return. The Company has a 29.9% minority interest in LSS. Due to the losses incurred by the self-storage facilities, current and previously owned, the initial investment by the minority interest was reduced to a receivable and previously written off. The Company may, if business and time warrant, sell the Painesville facility in the future.

Principles of Consolidation

Pursuant to the terms of the partnership agreement of LSS, the Company, as sole general partner, controls LSS. Accordingly, the Company accounts for its investment in LSS utilizing the consolidation method. Our investment in an unconsolidated affiliate, Kykuit Resources LLC (Kykuit,) is accounted for using the equity method. All significant inter-company transactions and balances have been eliminated.

Cash and Cash Equivalents

The Company maintains cash at various financial institutions which, at times, may exceed federally insured amounts and may significantly exceed balance sheet amounts due to outstanding checks. The Company considers highly liquid debt instruments with original maturities of three months or less to be cash equivalents.

Accounts Receivable

The Company has certain trade receivables consisting of oil and natural gas sale obligations due under normal trade terms. The Company currently sells its production to a related party through an oil and natural gas agreement, extending credit on an unsecured basis to them. In evaluating its allowance for possible losses, the Company performs a review of outstanding receivables. The trade receivables outstanding are typically three months of natural gas production due to the timing and accounting treatment by the main distribution pipeline company in Northeast Ohio. At December 31, 2008 and 2007, the Companys credit evaluation indicated that it
has no need for an allowance for possible losses.

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

1. Summary of Significant Accounting Policies   (continued)

The Companys accounts receivable, arising from the self-storage business, are due from individuals as well as business entities. Tenants are required to pay their rent on the first of each month. Past due amounts are those that are outstanding longer than the contractual payment terms. If an account is more than 75 days past due, the Company generally writes off the balance directly to expense. For such past due accounts, the Company has the right to auction the contents of the rented space, which allows for recovery of written-off balances. Any such recoveries are credited to income when received.

Property and Equipment

All property and equipment is depreciated using the straight-line method over estimated useful lives of twenty five years for buildings and improvements and five to seven years for furniture and equipment.

The Company uses the successful efforts method of accounting for oil and natural gas producing activities. Under this method, 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 drilling costs, are expensed. Development costs, including the costs to drill and equip development wells and successful exploratory drilling costs to locate proved reserves, are capitalized. Upon sale or retirement of a proved property, the cost and accumulated depreciation and depletion and
amortizations are eliminated from property accounts and the resultant gain or loss is recognized.

Exploratory drilling costs are capitalized when incurred pending the determination of whether a well has found proved reserves. If a well is determined to be successful, the capitalized drilling costs will be reclassified as part of the cost of the well. If a well is determined to be unsuccessful, the capitalized drilling costs will be charged to expense in the period the determination is made. The Company is involved in exploratory drilling only to the extent that it is a partner of Kykuit, which is doing exploratory drilling in Montana.

Development costs of proved oil and natural gas properties, including estimated dismantlement, restoration, abandonment costs and acquisition costs, are depreciated and depleted on a well by well basis by the units-of-production method using estimated proved developed reserves. The costs of unproved oil and natural gas properties are periodically assessed for impairment.

Asset Impairment

The Company reviews its self-storage properties and capitalized well costs for impairment when events or changes in circumstances indicate the carrying amounts of the properties may not be recoverable. When such conditions exist, management estimates future cash flows from operations and ultimate disposition of the individual properties. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related propertys estimated fair market value would be recorded and an impairment loss would be recognized. The Company wrote off the costs related to two wells
amounting to $491,224 in 2008 and five wells amounting to $1,041,067 in 2007.

Asset Retirement Obligation

The Company accounts for its asset retirement obligations in accordance with the Financial Accounting Standards Board (FASB) Statement No. 143, Accounting for Asset Retirement Obligations. This Statement requires that the fair value of an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. For the Company, asset retirement obligations primarily relate to the abandonment, dismantling and plugging of oil and natural gas wells. The present value of the estimated asset retirement cost is capitalized as part of the long-lived asset. The
capitalized asset retirement cost is depreciated and the asset retirement obligation is accreted to interest expense over the estimated life of the well.

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

1. Summary of Significant Accounting Policies   (continued)

The following table presents the Companys asset retirement obligation activity for the years ended December 31:



2008

          

          2007Asset retirement obligations, beginning of the year

          

          $

          241,777

          

          

          $

          90,324Liabilities incurred during the year

          

          

          169,623

          

          

          

          127,133Revisions in estimated cash flows

          

          

          243,375

          

          

          

          Liabilities settled during the year

          

          

          (25,000

          )

          

          

          Accretion expense

          

          

          44,742

          

          

          

          24,320Asset retirement obligations, end of year

          

          

          674,517

          

          

          

          241,777Less current liabilities

          

          

          30,000

          

          

          

          30,000Asset retirement obligations, net of current maturities

          

          $

          644,517

          

          

          $

          211,777

At December 31, 2008 and 2007, the Companys current portion of the asset retirement obligations is included in accrued expenses and was $30,000 at December 31, 2008 and 2007. The Company plugged four wells during the third quarter of 2008 and may plug three more during 2009.

Revenue Recognition

The Company recognizes revenue from its oil and natural gas interests in producing wells as oil and natural gas is sold to a purchaser at a fixed or determinable price when delivery has occurred, title and risk of loss have transferred to the purchaser and the collectability of revenue is reasonably assured. The Company has a management agreement with a related party to transport the Companys natural gas production through the related partys pipeline and include this natural gas with the related partys natural gas in order to fulfill production contracts they currently have in place. The actual funds are typically received within
three months due to the accounting treatment by the main distribution pipeline company in Northeast Ohio.

The Companys revenue from self-storage operations is derived primarily from monthly rentals of self-storage units. Rental revenue is recognized in the period the rent is earned which is typically on a monthly basis.

The Company also leases certain commercial space in its Painesville property under long-term lease agreements through December 31, 2013. Total lease revenue related to these leases was $172,998 and $187,225 for the years ended December 31, 2008 and 2007, respectively. Revenue under these long-term lease agreements is recognized on a straight-line basis over the respective lease terms. In June of 2008, the Company decided to write-off an outstanding receivable of $40,027 for a leased vacant space to bad debt expense. While the Company has received a court judgment against the lease holder, the Company is uncertain as to the collection of the
outstanding receivable.

Future minimum lease revenue for continuing operations under non-cancelable leases for each of the five succeeding annual periods ending December 31 are as follows:



2009

          

          $

          188,2202010

          

          

          106,5602011

          

          

          37,5962012

          

          

          24,7962013

          

          

          18,396$

          375,568

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

1. Summary of Significant Accounting Policies   (continued)

Additionally, one other lease has been on a month to month basis since August of 2007 and is not included in the above chart. The Company is in the process of renegotiating the lease for a longer time period.

Comprehensive Income

Statement of Financial Accounting Standard (SFAS) No. 130, Reporting Comprehensive Income, requires disclosure of comprehensive income and its components in a full set of financial statements. Comprehensive income is defined as changes in shareholders equity from non-owner sources and, for the Company, includes gains and losses recognized on derivative instruments accounted for as cash flow hedges and fair market value adjustments to available for sale securities, in compliance with SFAS No. 133, as amended.

Stock-Based Compensation

The 1999 Stock Option Plan (the Plan), which was approved by stockholders, permits the grant of non-statutory stock options (NSSOs), incentive stock options (ISOs and together with NSSOs, options) and restricted shares. The Plan was adopted to attract and retain qualified and competent persons who are valuable to the Company, including key employees, officers, and directors. The Plan provides for the grant to employees of ISOs within the meaning of Section 422 of the Code, for grant of NSSOs to eligible employees (including officers and directors) and non-employee directors and for the grant of
restricted share awards. The Company may grant up to 300,000 options or restricted shares pursuant to the Plan. As of December 31, 2008 and December 31, 2007, 25,000 and 35,000 stock options were outstanding, respectively. During the second quarter of 2006, the former President and Chief Operating Officer of the Company was awarded 35,000 restricted shares with a fair value of $22,750 with compensation expense to be amortized ratably over a five year vesting period. The compensation expense recorded for the restricted shares for the years ended December 31, 2008 and 2007 was $4,548.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, Share-Based Payment, using the modified prospective transition method, and thus the results of operations for prior periods will not be restated. Prior to the adoption of SFAS 123R, the Company applied the intrinsic-value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.

The following table presents the stock options outstanding at December 31:



2008

          

          2007Shares

          

          WeightedAveragePrice

          

          Shares

          

          WeightedAveragePriceOutstanding at beginning of year

          

          

          35,000

          

          

          $

          0.56

          

          

          

          35,000

          

          

          $

          0.56Granted

          

          

          

          

          

          

          

          

          

          

          Exercised

          

          

          

          

          

          

          

          

          

          

          Forfeited

          

          

          10,000

          

          

          

          0.56

          

          

          

          Outstanding at end of year

          

          

          25,000

          

          

          $

          0.56

          

          

          

          35,000

          

          

          $

          0.56Options available for grant

          

          

          275,000

          

          

          

          

          

          

          

          265,000Exercisable at end of year

          

          

          25,000

          

          

          $

          0.56

          

          

          

          35,000

          

          

          $

          0.56

On June 20, 2008, the Company granted a warrant to purchase 50,000 shares of common stock to Richard M. Osborne in return for Mr. Osborne providing collateral for the Companys credit facility with RBS Citizens, N.A., d/b/a Charter One. The warrant has an exercise price of $1.00 per share and a term of five years. The fair value of the warrant was approximately $48,000 at the date of grant, estimated using the Black-Scholes-Merton option pricing model. Determining the fair value of the warrant charge requires us to make highly subjective assumptions, including expected contractual life of the warrant and the price volatility

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

1. Summary of Significant Accounting Policies   (continued)

of the underlying shares. We estimate stock price volatility based on our historical volatility of stock. The assumptions used in calculating the fair value of the warrant represent our managements best estimates, but these estimates involve inherent uncertainties and the application of managements judgment.

Income Taxes

Effective January 1, 2006, the Company became a C Corporation for tax purposes.

In establishing a provision for income taxes, the Company must estimate when in the future certain items will affect taxable income. Deferred taxes are recorded for future tax consequences of events that have been recognized in the financial statements or tax returns, based upon enacted tax laws and rates. Deferred tax assets are recognized subject to managements judgment that realization is more likely than not.

In June 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109. FIN No. 48 addresses the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. FIN No. 48 prescribes specific criteria for the financial statement recognition and measurement of the tax effects of a position taken or expected to be taken in a tax return.
This interpretation also provides guidance on de-recognition of previously recognized tax benefits, classification of tax liabilities on the balance sheet, recording interest and penalties on tax underpayments, accounting in interim periods, and disclosure requirements.

The Company adopted the provisions of FIN No. 48 on January 1, 2007. The implementation of FIN No. 48 did not have a material effect on the Companys financial statements. The Company has net operating loss carry forwards (NOLS) and a valuation allowance to offset any tax effects. The Company has no unrecognized tax benefits and therefore, there is no anticipated effect on the Companys effective tax rate. Any tax penalties or interest expense will be recognized in income tax expense. No interest and penalties were paid or accrued at December 31, 2008 or 2007. The Company does not anticipate a significant change over the next twelve months
to any tax liability.

The Company is open to federal and state tax audits until the applicable statute of limitations expire. There are currently no federal or state income tax examinations underway for the Company. The tax years 2004 through 2008 remain open to examination by the major taxing jurisdictions in which we operate, although no material changes to unrecognized tax positions are expected within the next twelve months. The Company does, however, have prior year net operating losses which remain open for examination.

Use of Estimates

The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues, costs and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates all of these estimates, including those related to the provision for possible losses, deferred tax assets and liabilities, depreciation and depletion, and certain accrued liabilities. We base our estimates on historical experience and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. In particular, our depletion which is based on estimated reserves computed with a December 31, 2008 year end price and estimated expenses affects the Company as a non-cash expense. Due largely to lower pricing at the end of 2008, our depletion expense increased $2.6 million from 2007 to 2008.

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

1. Summary of Significant Accounting Policies   (continued)

The Companys financial statements are based on a number of significant estimates, including reliability of receivables, selection of useful lives for property and equipment and timing and costs associated with its retirement obligations. Estimated oil and natural gas reserve quantities are the basis for the calculation of depreciation, depletion and impairment of oil and natural gas properties.

The Companys oil and natural gas business makes it vulnerable to changes in wellhead prices of crude oil and natural gas. Such prices have been volatile in the past and can be expected to continue to be volatile. Proved reserves are based on current oil and natural gas prices and estimated reserves, which is considered a significant estimate by the Company, and is subject to change.

Fair Value of Financial Instruments

The fair value of the Companys financial instruments is determined by using available market information and appropriate valuation methodologies. The Companys principal financial instruments are cash, accounts receivable, accounts payable and long term debt. Cash, accounts receivable and accounts payable, due to their short maturities, and liquidity, are carried at amounts which reasonably approximate fair value. Based upon rates available for similar borrowings, the Companys book value approximated the fair value of its long-term debt at December 31, 2008 and 2007.

The Company measures the fair value of its financial instruments using the procedures set forth below for all assets and liabilities measured at fair value that were previously carried at fair value pursuant to other accounting guidelines.

Under SFAS No. 157, Fair Value Measurements fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

SFAS 157 establishes a three-level hierarchy for disclosure to show the extent and level of judgment used to estimate fair value measurements.

Level 1 Uses unadjusted quoted prices that are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 Uses inputs other than Level 1 that are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data. Instruments in this category include non-exchange-traded derivatives,
including interest rate swaps.

Level 3 Uses inputs that are unobservable and are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize managements estimates of market participant assumptions.

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

1. Summary of Significant Accounting Policies   (continued)

The table below sets forth our financial assets and liabilities that were accounted for at fair value as of December 31, 2008. The table does not include cash on hand or assets and liabilities that are measured at historical cost or any basis other than fair value.



Fair Value at December 31, 2008Level 1

          

          Level 2

          

          Level 3Item measured at fair value on a recurring basis:Interest rate swap

          

          $

          0

          

          

          

          ($133,880

          )

          

          $

          0

The Companys derivative financial instrument is an interest rate cash flow hedge in which the Company pays a fixed rate and receives a variable interest rate that is observable based upon a forward interest rate curve and is therefore considered a Level 2 input.

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which establishes a formal framework for measuring fair values of assets and liabilities in financial statements that are already required by U.S. generally accepted accounting principles (GAAP) to be measured at fair value. SFAS No. 157 clarifies guidance in FASB Concepts Statement (CON) No. 7 which discusses present value techniques in measuring fair value. Additional disclosures are also required for transactions measured at fair value. No new fair value measurements are prescribed, and SFAS No. 157 is intended to codify the several definitions of fair
value included in various accounting standards. However, the application of this statement may change current practices for certain companies. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. On February 28, 2008, the FASB released FASB Staff Position, (FSP) SFAS 157-2   Effective Date of FASB Statement No. 157, which delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. The Company adopted SFAS 157 as it applies to financial assets and liabilities as of January 1, 2008. The Company does not anticipate that the implementation of SFAS 157, as it relates to non-financial assets and liabilities will have a material impact on its financial position, results of operations and cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Adoption on January 1, 2008 did not have a material effect on the Company since the Company did not elect to
measure any financial assets or liabilities at fair value.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R). SFAS 141R provides standards that will improve, simplify, and converge internationally the accounting for business combinations in consolidated financial statements. The effective date of SFAS 141R is for fiscal years beginning after December 15, 2008. The Company does not anticipate that the adoption of this statement will have a material impact on its financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, or SFAS No. 160. SFAS No. 160 amends Accounting Research Bulletin 51, or ARB 51. SFAS No. 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements separate from the parents equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. It also amends certain of ARB No. 51s consolidation procedures for consistency with the requirements of SFAS No.
141(R). SFAS No. 160 also includes expanded disclosure requirements regarding the interests of

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

1. Summary of Significant Accounting Policies   (continued)

the parent and its noncontrolling interest. SFAS No. 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company does not anticipate that the adoption of this statement will have a material impact on its financial position, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities  an amendment to FASB Statement No. 133. SFAS No. 161 intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entitys financial position, financial performance, and cash flows. Entities are required to provide enhanced disclosures about: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early adoption encouraged. The Company does not anticipate that the adoption of this statement will have a material impact on its financial position, results of operations or cash flows.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting principles. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with U.S. GAAP. SFAS 162 directs the GAAP hierarchy to the entity, not the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS No. 162 will be effective sixty days following the Securities and Exchange Commissions approval of the
Public Company Accounting Oversight Board amendments to AU Section 411. The Company is currently evaluating what impact SFAS No. 162 may have on its financial position, results of operations or cash flows.

In December 2008, the United States Securities and Exchange Commission (SEC) released a final rule, Modernization of Oil and Gas Reporting, which amends the oil and gas reporting requirements. The key revisions to the reporting requirements include: using a 12-month average price to determine reserves; including nontraditional resources in reserves if they are intended to be upgraded to synthetic oil and gas; ability to use new technologies to determine and estimate reserves; and permitting the disclosure of probable and possible reserves. In addition, the final rule includes the requirements to report the independence and
qualifications of the reserve preparer or auditor; file a report as an exhibit when a third party is relied upon to prepare reserve estimates or conduct reserve audits; and to disclose the development of any proved undeveloped reserves (PUDs), including the total quantity of PUDs at year-end, material changes to PUDs during the year, investments and progress toward the development of PUDs and an explanation of the reasons why material concentrations of PUDs have remained undeveloped for five years or more after disclosure as PUDs. The accounting changes resulting from changes in definitions and pricing assumptions should be treated as a change in accounting principle that is inseparable from a change in accounting estimate, which is to be applied prospectively. The final rule is effective for annual reports for fiscal years ending on or after December 31, 2009. Early adoption is not permitted. The Company is currently evaluating what impact this final rule may have on its financial
position, results of operations or cash flows.

The Company reviewed all other recently issued, but not yet effective, accounting pronouncements and does not believe any such pronouncements will have a material impact on our financial statements.

Reclassifications

Certain prior year amounts have been reclassified to conform to the December 31, 2008 presentation. These reclassifications had no effect on net loss or shareholders equity as previously reported.

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

2. Stockholders Equity

Effective February 12, 2008, the Company filed Articles Supplementary to its Articles of Incorporation, as amended, restated and supplemented with the State Department of Assessment and Taxation of Maryland designating 5,000 Series A Preferred Shares, par value $0.001 per share. Dividends accumulate on the Series A Preferred Shares at the rate of 8% per annum and must be paid on a quarterly basis. Failure to pay dividends on a timely basis results in the imposition of a default rate of 10% per annum that continues until the default is cured by the Company by payment of all accrued dividends. Further, the initial default by the Company entitles the
holders of the Series A Preferred Shares to elect, as a class, one director to the Companys Board of Directors who shall serve until the Series A Preferred Shares are liquidated or converted.

The Series A Preferred Shares have voting rights only with respect to certain extraordinary actions that would impair the rights of holders of the Series A Preferred Shares, such as a merger, reorganization or issuance of a class or series of stock on parity with or senior to the Series A Preferred Shares. Each of the Series A Preferred Shares is convertible into common shares by dividing the sum of $1,000 and any accrued but unpaid dividends on the Series A Preferred Shares by the conversion price of $1.00 (the Conversion Price). The Conversion Price is proportionately increased (or decreased, as the case may be) for combinations, stock
splits and similar events that would affect the number of shares of the Companys common stock outstanding. The Series A Preferred Shares have a liquidation preference of $1,000 per share, plus any accrued but unpaid dividends.

The Company sold an aggregate of 1,350 shares of its Series A Convertible Preferred Shares in a private placement to a total of nine accredited investors during the first six months of 2008. All Series A Preferred Shares were sold at a price of $1,000 per share for a total of $1,350,000 with no underwriting discounts or commissions, as no underwriters were used to facilitate the transactions.

In December of 2007, the Board of Directors of the Company granted each of its five outside board members 4,167 shares of common stock valued at $0.60 per share. The total shares awarded of 20,835 were issued as partial compensation for their board participation.

In December of 2008, the Board of Directors of the Company granted each of its five outside board members 9,615 shares of common stock valued at $0.26 per share. The total shares awarded of 48,075 were issued as partial compensation for their board participation.

3. Warrant Issued

Pursuant to a warrant agreement dated June 20, 2008 between the Company and Richard M. Osborne, the Company issued a warrant to Mr. Osborne to purchase up to 50,000 shares of the Companys common stock at $1.00 per share. The warrant is immediately exercisable. The fair value of the warrant was approximately $48,000 at the grant date, estimated on the basis of the Black-Scholes-Merton option-pricing formula. The following assumptions were used: expected volatility of 153.15%; risk-free interest rate of 3.57%; expected dividend yield of 0.00% and contractual life of the warrant as 4.5 years. The fair value of the warrant has been recorded as an
increase to additional paid in capital and expense accounts, which was fully recognized as of June 30, 2008.

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

4. Property and Equipment

Property and equipment consists of the following at December 31:



2008

          

          2007Oil and Natural Gas Properties:Proved Properties

          

          $

          13,859,634

          

          

          $

          12,173,194Unproved Properties

          

          

          3,652,790

          

          

          

          1,803,800Well Material Inventory

          

          

          122,502

          

          

          

          Accumulated Depletion

          

          

          (7,103,584

          )

          

          

          (2,885,433

          )Total Oil and Natural Gas Properties

          

          

          10,531,342

          

          

          

          11,091,561Other Property and Equipment:Land

          

          

          307,780

          

          

          

          307,780Building and Improvements

          

          

          2,357,822

          

          

          

          2,357,822Furniture and Equipment

          

          

          199,657

          

          

          

          200,212Accumulated Depreciation

          

          

          (1,222,928

          )

          

          

          (1,083,227

          )Total Other Property and Equipment

          

          

          1,642,331

          

          

          

          1,782,587Property and Equipment, Net

          

          $

          12,173,673

          

          

          $

          12,874,148

5. Available for Sale Securities

The Company, with Board approval, decided in October 2006 to invest in the stock of a Nasdaq Small Cap listed public oil and natural gas company. During April 2007, the stock was sold and the Company recorded a gain on the sale of $36,260 and a fair value adjustment of ($34) was recorded to comprehensive income.

6. Investment in Unconsolidated Affiliates

The Company is an owner and managing member of an unconsolidated affiliate, Kykuit Resources LLC, which is accounted for using the equity method of accounting. The Company began investing in Kykuit during the third quarter of 2007. At that time Kykuit had a 75% interest in certain oil, natural gas and mineral rights located in the Montana Breaks area of Montana. Subsequently, on May 1, 2008 Kykuit entered into an Assignment of Oil, Gas and Mineral Leases pursuant to which Hemus, Ltd. assigned all of the remaining 25% interest in rights, title and interest in certain oil, natural gas and mineral leases located in Montana to Kykuit for $250,000.
Drilling began in late May 2008. While several wells have been drilled, all of the processes to determine if the wells are viable have not been completed at this time. Kykuit management has hired new consultants and staff to analyze the wells already drilled. Drilling efforts in the winter months are particularly difficult with the sub-zero weather. It appears likely that production may be possible at a different level than was originally anticipated with additional information becoming available in the summer of 2009.

The Company initially owned 43.8% of Kykuit. At December 31, 2007, the Company had invested $1,140,000 in cash, incurred an outstanding payable of $150,748 and carried a loss of $28,818 against its investment. During the first quarter of 2008, the Company invested $8,600 and during the second quarter $25,800 in cash. Additionally the Company incurred two cash calls in the second quarter totaling $1,116,017, resulting in a gross investment of $2,441,165. The Company is the current managing member of Kykuit and now owns 18.8% of Kykuit after selling 25% of its interest on May 29, 2008. The 25% interest was sold for approximately $1.4 million of which
the Company received $731,747 in cash and wrote off an accounts payable of $662,716. No gain was realized on the sale. A full disclosure of these items is included in a Form 8-K dated May 1, 2008 filed with the Securities and Exchange Commission on July 9, 2008. During the third quarter the Company invested $110,872 and during the fourth quarter $334,950 in cash. These two cash payments reduced the prior outstanding accounts payable on the Companys books. The investment by the

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

6. Investment in Unconsolidated Affiliates   (continued)

Company in this venture is $989,258 which includes an account payable for $158,225 and a cumulative net book loss of $57,444 at December 31, 2008. The following table displays the balance sheet of Kykuit at December 31, 2008, and 2007 and the income statement for the same years ended.

Kykuit Resources LLC Balance Sheet



December 31,2008

          

          December 31, 2007Current Assets

          

          $

          210,978

          

          

          $

          316,752Unproved Leaseholds and Development Costs

          

          

          6,320,929

          

          

          

          2,707,773Furniture and Fixtures, Net of Depreciation

          

          

          37,155

          

          

          

          31,536Other Assets

          

          

          33,111

          

          

          

          42,135$

          6,602,173

          

          

          $

          3,098,196Current Liabilities

          

          $

          1,129,350

          

          

          $

          214,791Paid in Capital

          

          

          5,658,891

          

          

          

          2,949,248Accumulated Deficit

          

          

          (186,068

          )

          

          

          (65,843

          )$

          6,602,173

          

          

          $

          3,098,196

Kykuit Resources LLC Statement of Operations



For the Years Ended December 31,2008

          

          2007Total Revenues

          

          $

          

          

          

          $

          Total Expenses

          

          

          120,225

          

          

          

          65,843Net Loss

          

          $

          (120,225

          )

          

          $

          (65,843

          )

7. Assets Held for Sale

At December 31, 2007, two parcels of land were categorized as Assets Held for Sale totaling $204,762. This land is adjacent to one of the self-storage facilities sold to U-Store-It in April 2005. At December 31, 2007, the Company had entered into an agreement for a possible sale of the land. Subsequently on February 1, 2008, the land was sold to Richard M. Osborne at its book value.

8. Discontinued Operations

On May 21, 2007, the Company completed the sale of its self-storage facility located in Gahanna, Ohio pursuant to the Purchase and Sale Agreement (the Agreement) among Liberty Self-Storage, LTD. (the trade name of the Company), Columbus Tile Yard, LLC and Buckeye Storage of Gahanna LLC, or its nominee, for the purchase price of $1,400,000. The assets of the Gahanna, Ohio self-storage facility consisted primarily of property and equipment with a net book value of approximately $924,000. The liabilities consisted primarily of a mortgage of approximately $708,000. The original purchase price was reduced by $50,000 pursuant to an amendment to
the Agreement in December 2006. $150,000 of the purchase price was allocated to Columbus Tile Yard for the vacant land that it owned. Richard M. Osborne, the Companys Chairman of the Board and Chief Executive Officer, is the owner of Columbus Tile Yard.

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

8. Discontinued Operations   (continued)

The Companys results of operations have been restated to reclassify the net earnings of the self-storage facility sold as discontinued operations for all periods presented. The following table summarizes income and loss from discontinued operations for the twelve months ended December 31:



2007RevenuesRevenues from real estate operations

          

          $

          72,771Operating expensesInterest expense

          

          

          22,982Property taxes and insurance

          

          

          11,654Property operating expense

          

          

          30,318Legal and professional fees

          

          

          2,217Depreciation and amortization

          

          

          13,083Total Expenses

          

          

          80,254Loss from discontinued operations

          

          

          (7,483

          )Gain on Sale of Discontinued Operations

          

          

          294,587Income from Discontinued Operations

          

          $

          287,104

9. Line of Credit and Long-Term Debt

On September 28, 2006, the Company entered into an unsecured loan agreement with Mr. Richard Osborne and Charter One Bank. The Company and Mr. Osborne at that time were co-borrowers on a one year line of credit which provided for up to $5.0 million dollars in total borrowings with interest at a rate of 1.75% over LIBOR adjusted monthly. The Charter One liability was jointly loaned, so the Company and Mr. Osborne were each liable for the debt of the other.

At December 31, 2006, the Company had drawn $3,085,000 and Mr. Osborne had drawn $1.5 million of the available balance on the line of credit. Subsequently on February 20, 2007, the Company entered into a Modification Agreement between the Company, Mr. Osborne and Charter One Bank. The Modification Agreement increased the available line of credit from $5.0 million to $7.5 million until May 21, 2007, at which time the available amount reverted back to $5.0 million. In order to increase the line of credit, the Company granted Charter One Bank a security interest in and lien on substantially all of the Companys assets. A second modification
agreement dated April 6, 2007 was negotiated and increased the available line of credit from $7.5 million to $9.5 million for an additional 90 days, at which time the available amount would revert back to $5.0 million. Subsequently, the loan was extended to March 31, 2008 at the $9.5 million level. At December 31, 2007, the Company had drawn $5.7 million and Mr. Osborne had drawn $3.8 million of the available balance on the line of credit.

On March 28, 2008, the Company entered into the First Amended and Restated Loan and Security Agreement (the Loan Agreement) between the Company, Richard M. Osborne (the Company and Mr. Osborne together, the Borrowers), and RBS Citizens, N.A., d/b/a Charter One. The Loan Agreement extends the maturity date to August 1, 2009, continuing with the original interest rate calculation of 1.75% over LIBOR adjusted monthly. Under the new agreement, only the Company may borrow on the line of credit when any amounts are paid down against the $9.5 million outstanding on the loan. The Company and Great Plains Exploration LLC a company
owned by Mr. Osborne (Great Plains), agreed that the related party loan of $3.8 million from Great Plains was satisfied in full and terminated upon the Companys entry into the new Charter One loan and assumption of the $3.8 million portion of the line of credit drawn by Mr. Osborne. Therefore, the Company had $9.5 million in outstanding debt to Charter One and $0 in outstanding debt to Great Plains at March 31, 2008. As part of this loan agreement, Mr. Osborne has pledged several real estate

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

9. Line of Credit and Long-Term Debt   (continued)

properties that he personally owns, so that sufficient collateral would allow the Company to enter into the loan agreement. While the Company is building its reserves with each well that it drills, it has not met the reserve collateral requirements for a loan this large at this time without the pledged assets of Mr. Osborne. The rate on the line of credit at December 31, 2008 was 3.65%. The average balance during 2007 was $8.2 million and the weighted average interest rate was 7.08%. The average balance during 2008 was $9.5 million and the weighted average interest rate was 6.13%.

On April 16, 2008, the Company entered into an interest rate swap agreement for a cash flow hedge with RBS Citizens, N.A. The swap began on May 1, 2008 and ends on August 3, 2009 in connection with the $9.5 million loan to RBS Citizens, N.A., d/b/a Charter One. The notational amount of the swap is $9.5 million and the swap changes the variable-rate interest on the loan from the 30 day LIBOR rate plus 1.75% to a fixed-rate interest of 2.95% plus 1.75%. The terms of the interest rate swap consist of calculating the difference between the fixed rate of 2.95% per year and the current 30-day LIBOR rate. In the event that the fixed rate of 2.95% exceeds
the 30-day LIBOR rate, the Company pays the bank the difference. In the event that the 30-day LIBOR exceeds the fixed rate of 2.95%, the bank pays the Company the difference. The estimated fair value of the swap at December 31, 2008 was a liability of $133,880, which is included in accrued expenses. The interest rate swap is accounted for as a cash flow hedge pursuant to SFAS No. 133. As there are no differences between the critical terms of the interest rate swap and the hedged debt obligation, the Company assumes no ineffectiveness in the hedging relationship.

The Painesville facility was encumbered by a mortgage in the original amount of $2,062,128, maturing on March 30, 2009. This long-term debt had an interest rate tied to the 30 day LIBOR plus 2.50%. Monthly principal and interest payments are $16,612, with a current interest rate of 2.9613%, using a 20-year amortization period. The principal amount of the loan as of December 31, 2008 and 2007 was $ 1,260,071 and $1,386,457, respectively. On March 25, 2009, the Company received a letter of commitment from the mortgagor which stated that the loan will be extended on the Painesville facility for five years using a ten year amortization period at a
variable rate of the 30 day LIBOR plus 250 basis points. The rate on March 31, 2009 was 3.02%.

The Painesville loan includes the following principal amortization over the next five years: less than 1 year equals $100,504, 1-3 years equals $204,663 and 4-5 years equals $954,904.

The Company is in the process of renegotiating the Line of Credit for the Charter One loan that matures August 1, 2009. The Company cannot provide any assurances to the stockholders that extensions or new terms will be available to them.

For the years ended December 31, 2008 and 2007 respectively, the Company expensed $573,055 and $497,299 in interest on its debt instruments.

10. Notes Payable to Related Party

The Company entered into an agreement with Mr. Osborne for an unsecured revolving demand note dated January 1, 2006. Interest is payable annually at the prime rate with principal being due on demand. The revolving demand note does not include an expiration date or a limit on the amount that the Company may borrow. The prime rate at December 31, 2008 was 3.25%. There were no outstanding balances under the note at December 31, 2008 and 2007, respectively.

At December 31, 2007, the Company had entered into loans with Great Plains (a company owned by Richard M. Osborne) totaling $3.8 million evidenced by six promissory notes. The loans did not include an expiration date or a limit on the amount that the Company could borrow. The notes were payable on demand and bore interest at the rate of LIBOR plus 1.75% per year. The Great Plains notes were satisfied in full and

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

10. Notes Payable to Related Party   (continued)

terminated when the Company entered into the Charter One Loan Agreement on March 28, 2008. Therefore, the Company had $9.5 million in outstanding debt to Charter One and $0 in outstanding debt to Great Plains at March 31, 2008.

During the loan negotiations with Charter One, it was anticipated that the Company would become responsible for the $9.5 million and therefore did not record any related party interest on the Great Plains loan for the three months ended March 31, 2008.

At June 30, 2008, the Company had $9.5 million outstanding on the Line of Credit to Charter One and had entered into loans with Great Plains totaling $500,000 evidenced by two promissory notes. The loans from Great Plains did not include an expiration date or a limit on the amount that the Company could borrow. The notes were payable on demand and bore interest at the rate of 8% per year. The Great Plains notes principal balances were fully paid by September 30, 2008. No additional borrowings occurred in the fourth quarter of 2008 from Great Plains.

Interest expense on related party notes payable, included in total interest was $8,899 and $48,053 for the years ended December 31, 2008 and 2007, respectively.

11. Earnings/Loss per Share

Basic income (loss) per share of common stock for the years ended December 31, 2008 and 2007 is determined by dividing net income (loss) less declared preferred stock dividends by the weighted average number of shares of common stock outstanding during the period.

The stock options, restricted stock awards, Class A Limited Partnership conversion and warrants for the years ended December 31, 2008 and 2007 were anti-dilutive and had no effect on diluted earnings per share. The Companys Class A Limited Partnership exchange factor is .1377148 per share.

The Company paid no cash distributions to its common stockholders during 2008 and 2007. However, the Company declared and paid $85,140 in preferred stock dividends for the year ended December 31, 2008.

12. Income Taxes

The reconciliation of the federal statutory income tax rate to the Companys effective income tax rate applicable to income from continuing operations is as follows:



2008

          

          2007Amount

          

          %

          

          Amount

          

          %Provision (benefit) based on the federal statutory rate

          

          $

          (751,600

          )

          

          

          (34.0

          )

          

          $

          (305,000

          )

          

          

          (34.0

          )Increase in valuation allowance

          

          

          751,600

          

          

          

          34.0

          

          

          

          305,000

          

          

          

          34.0$

          

          

          

          

          

          

          

          $

          

          

          

          

          

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

12. Income Taxes   (continued)

The following table represents the Companys significant deferred tax assets and liabilities at December 31, 2008 and 2007:



2008

          

          2007Deferred tax assetsNet operating loss carry forwards

          

          $

          5,290,000

          

          

          $

          4,610,000AMT credit

          

          

          41,100

          

          

          

          41,100Total Deferred assets

          

          

          5,331,100

          

          

          

          4,651,100Deferred tax liabilitiesOil and natural gas properties, principally due to differences in depreciation, depletion and amortization

          

          

          (2,830,000

          )

          

          

          (2,920,000

          )Net Deferred tax assets

          

          

          2,501,100

          

          

          

          1,731,100Valuation allowance

          

          

          (2,501,100

          )

          

          

          (1,731,100

          )Net Deferred tax assets

          

          $

          

          

          

          $

          

At December 31, 2008, the Company had net operating loss carry forwards (NOLS) for future years of approximately $15.4 million. These NOLS will expire at various dates through 2027. Utilization of the NOLs could be limited if there is a substantial change in ownership of the Company and is contingent on future earnings. In addition, the Company paid $41,187 for alternative minimum tax (AMT) in 2006, creating a tax credit that carries forward indefinitely.

The Company has provided a valuation allowance equal to 100% of the total net deferred asset in recognition of the uncertainty regarding the ultimate amount of the net deferred tax asset that will be realized. In 2006, the Company began operating in the oil and natural gas business, which is subject to many risks. The Company also expects to continue generating tax losses in the next few years due to timing differences.

13. Other Related Party Transactions

Richard M. Osborne is the sole manager of Liberty Self-Stor II, Ltd., an Ohio limited liability company, which is the owner of a truck rental business, which makes trucks available for short-term rental to the general public, including tenants of the Companys self-storage facility, and provides for the retail sale of locks, boxes, packing materials and related merchandise at the self-storage facility. The Company has entered into a cost sharing agreement with Liberty Self-Stor II, Ltd. with respect to the sharing of employees and space at the office of the self-storage facility for the benefit of both companies. As of December 31, 2008 and
December 31, 2007, the Company owed Liberty Self-Stor II, Ltd. $1,263 and $16,468, respectively, associated with these transactions, as well as for cash advances between the companies, which are included in accounts payable to related parties in the accompanying consolidated balance sheets.

On December 28, 1999, the stockholders approved the Companys lease of its executive offices from OsAir, Inc., a company owned by Mr. Osborne. The current lease has a three year term maturing on March 31, 2009 for $1,350 per month. Rent expense totaled $16,200 for the years ending December 31, 2008 and 2007 and is included in general and administrative expenses. The lease was extended on March 25, 2009 for a three year term at $2,000 per month.

At December 31, 2008 and 2007, the Company included $569 and $5,063, respectively in accounts receivable from related parties in the accompanying consolidated balance sheets. The balances represent amounts owed to the Company by various companies owned by Mr. Osborne. The amounts primarily relate to cost sharing in well joint ventures.

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

13. Other Related Party Transactions   (continued)

Effective January 1, 2006, the Company entered into a contract with Great Plains for well operations and to sell natural gas and oil production net of pipeline transportation costs. Great Plains is wholly owned by Mr. Osborne. The Company paid Great Plains $1,422,220 and $2,139,233 for capitalized costs to manage and drill wells per the operating agreement for the years ended December 31, 2008 and 2007, respectively. The Company also had $1,386,668 and $907,499 included in accounts receivable from related parties that is due from Great Plains at December 31, 2008 and 2007 for oil and natural gas sales, respectively. Additionally, the Company owed
Great Plains accounts payable of $696,114 at December 31, 2008 for drilling, water hauling, service rig and monthly well management.

The following table summarizes the payments received for oil and natural gas production and payments paid for expenses to Great Plains for the periods indicated.



For the Years EndedDecember 31,2008

          

          2007RevenuesRevenue From the Sale of Oil and Natural Gas Production, net of pipeline transportation costs

          

          $

          4,197,216

          

          

          $

          2,767,561Operating expensesWell Management, Water Hauling and Service Rig

          

          $

          379,301

          

          

          $

          202,582

The Company has non-operator joint venture operating agreements with J. R. Smail, Inc., a corporation owned by James R. Smail, a director of the Company. The Company had $30,442 and $6,980 included in accounts receivable from related parties that is due from J. R. Smail, Inc. at December 31, 2008 and 2007 for oil and natural gas sales, respectively. The Company paid J. R. Smail Inc. $7,296 and $654,700 for capitalized costs to manage and drill wells per the operating agreement for the years ended December 31, 2008 and 2007, respectively. Net revenue received from J. R. Smail, Inc. for the sale of natural gas and oil from the joint venture wells for
the years ended December 31, 2008 and 2007 was $188,221 and $9,938, respectively. Additionally, Mr. Smail owns a drilling company, Poulson Drilling Corporation, which was paid $294,299 for drilling wells for the Company for the year ended December 31, 2007. The costs are recorded in proved properties. Operating expenses paid for the well management, water hauling and transportation costs totaled $46,058 and $0 for the years ended December 31, 2008 and 2007, respectively to J. R. Smail, Inc.

On August 3, 2007, Kykuit Resources, LLC purchased from Hemus, Ltd. (Hemus) a 75% interest in certain oil, natural gas and mineral rights located in the Montana Breaks area of Montana. Subsequently, on May 1, 2008 Kykuit entered into an Assignment of Oil, Gas and Mineral Leases pursuant to which Hemus, Ltd. assigned all of its remaining rights, title and interest in certain oil, natural gas and mineral leases located in Montana to Kykuit for $250,000. The Company is the managing member of Kykuit and currently owns 18.8% of Kykuit. A full disclosure of these items is included in a Form 8-K dated May 1, 2008 filed with the Securities and
Exchange Commission on July 9, 2008. The current investment by the Company in this venture is $989,258.

Richard M. Osborne, the Companys Chairman and Chief Executive Officer, and Steven A. Calabrese, a director of the Company, also own interests in Kykuit. Energy West Incorporated, a publicly-held public utility company of which Richard Osborne is the chairman and a significant stockholder, also owns an interest in Kykuit.

Marc C. Krantz, a director and secretary of the Company, is the managing partner of the law firm of Kohrman Jackson & Krantz PLL, which provides legal services to the Company.

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

14. Financial Information Relating to Industry Segments

The Company reports operating segments and reportable segments by business activity according to SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. The Company includes revenues from external customers, interest revenue and expense, depreciation, depletion and amortization and other operating expenses in its measure of segment profit or loss.

The Companys operations are classified into two principal industry segments. The following table presents the twelve months ended December 31, 2008 and 2007.



Twelve Months Ended December 31, 2008

          

          Oil and GasProduction

          

          Self-StorageFacilities

          

          TotalRevenues from external customers

          

          $

          4,568,087

          

          

          $

          312,108

          

          

          $

          4,880,195Interest revenue

          

          

          3,318

          

          

          

          

          

          

          

          3,3184,571,405

          

          

          

          312,108

          

          

          

          4,883,513Interest Expense

          

          

          507,754

          

          

          

          74,200

          

          

          

          581,954Accretion Expense

          

          

          44,742

          

          

          

          

          

          

          

          44,742Property Operating Costs

          

          

          575,675

          

          

          

          115,671

          

          

          

          691,346Other Operating expenses

          

          

          1,117,795

          

          

          

          220,057

          

          

          

          1,337,852Loss from Unconsolidated Affiliate

          

          

          28,627

          

          

          

          

          

          

          

          28,627Bad Debt

          

          

          

          

          

          

          43,517

          

          

          

          43,517Impairments

          

          

          491,224

          

          

          

          

          

          

          

          491,224Depreciation, depletion and amortization

          

          

          3,753,926

          

          

          

          120,932

          

          

          

          3,874,8586,519,743

          

          

          

          574,377

          

          

          

          7,094,120Net Loss from Continuing Operations

          

          $

          (1,948,338

          )

          

          $

          (262,269

          )

          

          $

          (2,210,607

          )Property and Equipment additions

          

          $

          3,244,934

          

          

          $

          1,437

          

          

          $

          3,246,371Total Assets

          

          $

          13,246,219

          

          

          $

          1,570,397

          

          

          $

          14,816,616



Twelve Months Ended December 31, 2007

          

          Oil and GasProduction

          

          Self-StorageFacilities

          

          TotalRevenues from external customers

          

          $

          2,929,359

          

          

          $

          348,537

          

          

          $

          3,277,896Interest revenue

          

          

          43,525

          

          

          

          

          

          

          

          43,5252,972,884

          

          

          

          348,537

          

          

          

          3,321,421Interest Expense

          

          

          428,571

          

          

          

          116,781

          

          

          

          545,352Accretion Expense

          

          

          24,320

          

          

          

          

          

          

          

          24,320Property Operating Costs

          

          

          335,135

          

          

          

          101,601

          

          

          

          436,736Other Operating expenses

          

          

          957,074

          

          

          

          179,402

          

          

          

          1,136,476Loss from Unconsolidated Affiliate

          

          

          28,817

          

          

          

          

          

          

          

          28,817Impairments

          

          

          1,041,067

          

          

          

          

          

          

          

          1,041,067Depreciation, depletion and amortization

          

          

          1,170,773

          

          

          

          122,878

          

          

          

          1,293,6513,985,757

          

          

          

          520,662

          

          

          

          4,506,419Net Loss from Continuing Operations

          

          

          (1,012,873

          )

          

          

          (172,125

          )

          

          

          (1,184,998

          )Net Income from Discontinued Operations

          

          

          

          

          

          

          287,104

          

          

          

          287,104Net Income (Loss)

          

          $

          (1,012,873

          )

          

          $

          114,979

          

          

          $

          (897,894

          )Property and Equipment additions

          

          $

          7,970,517

          

          

          $

          31,903

          

          

          $

          8,002,420Total Assets

          

          $

          13,465,139

          

          

          $

          1,937,438

          

          

          $

          15,402,567

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

15. Commitments and Contingencies

Environmental Matters

The oil and gas industry is subject, by its nature, to environmental hazards and clean-up costs. At this time, management knows of no substantial costs from environmental accidents or events for which it may be currently liable.

Oil and Gas Contracts

Effective January 1, 2006, the Company entered into a contract with Great Plains Exploration, LLC for well operations and sale of natural gas and oil production to third parties. The term of the agreement was one year from the effective date. It was extended as of January 1, 2007 and shall be extended for consecutive one year periods unless terminated earlier. The original contract was amended November 14, 2006 and filed as exhibit 10.4 to the 10-QSB for September 30, 2006. The Amendment No. 1 to the Oil and Gas Operations and Sale Agreement modified the original terms to create less cumbersome paperwork in tracking cost sharing between the
companies.

16. Subsequent Events

On February 13, 2009, Great Plains Exploration, LLC loaned the Company $600,000 to fund the Companys ongoing capital requirements. Great Plains is owned by Richard M. Osborne, the Companys chairman and chief executive officer. The loan is evidenced by a cognovit promissory note (the Note). The Note is payable in the amount of $100,000 per month, beginning on March 28, 2009, since revised to May 25, 2009 and bears interest at the rate of 8.0% annually.

On March 25, 2009, the Company received a letter of commitment from the mortgagor which stated that the loan on the Painesville facility will be extended for five years using a ten year amortization period at a variable rate of the 30 day LIBOR plus 250 basis points. The rate on March 31, 2009 was 3.02%.

Our $9.5 million fully-drawn line of credit with RBS Citizens, N.A. d/b/a Charter One is due on August 1, 2009. This line of credit is guaranteed by Mr. Osborne, our CEO and Chairman of the Board. If we, after using our best efforts, are not successful in extending this line of credit or obtaining substitute financing, then Mr. Osborne has committed to loan the Company up to $9.5 million to repay the Charter One line of credit, subject to standard terms and conditions. If this occurs, principal payments to Mr. Osborne would begin on or after January 1, 2010.

17. Supplemental Disclosures About Oil and Natural Gas Producing Activities  Unaudited

Estimated Proved Reserves

Users of this information should be aware that the process of estimating quantities of proved crude oil and natural gas reserves is very complex. There are numerous uncertainties inherent in estimating quantities of proved reserves, including many factors beyond the control of the Company, such as additional development activity, evolving production history and reassessment of the viability of production under varying prices and other economic conditions. As a result, revision to existing estimates may occur.

There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures including many factors beyond the control of the Company. The estimated future cash flows are determined based on year-end prices for crude oil, current allowable prices (adjusted for periods beyond the contract period to year-end market prices) applicable to expected natural gas production, estimated production of proved crude oil and natural gas reserves, estimated future production and development costs of reserves and future retirement obligations (net of salvage), based on
current economic conditions, and the estimated future income tax expense, based on year-end statutory tax rates (with consideration of future tax rates already legislated) to be incurred on pretax net cash flows less the tax basis of the properties involved. Such cash flows are then discounted using a 10% rate.

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

17. Supplemental Disclosures About Oil and Natural Gas Producing Activities  Unaudited   (continued)

The following table presents the Companys estimated gross proved oil and natural gas reserves, which are all located in the continental United States, based on reserve reports prepared by Wright & Company, Inc. for 2008 and Schlumberger Data and Consulting Services for 2007:



2008

          

          2007Natural Gas (MCF)

          

          Oil (BBLs)

          

          Natural Gas (MCF)

          

          Oil (BBLs)Proved developed and undeveloped reserves:Beginning of year

          

          

          2,646,000

          

          

          

          37,300

          

          

          

          1,348,600

          

          

          

          14,800Revision of previous estimates, extensions and other additions

          

          

          (699,900

          )

          

          

          (13,900

          )

          

          

          456,500

          

          

          

          3,400Net reserve additions

          

          

          715,600

          

          

          

          3,800

          

          

          

          1,190,900

          

          

          

          22,800Production

          

          

          (515,100

          )

          

          

          (9,700

          )

          

          

          (350,000

          )

          

          

          (3,700

          )End of year

          

          

          2,146,600

          

          

          

          17,500

          

          

          

          2,646,000

          

          

          

          37,300Proved developed reserves:Beginning of year

          

          

          2,646,000

          

          

          

          37,300

          

          

          

          1,348,600

          

          

          

          14,800End of year

          

          

          2,146,600

          

          

          

          17,500

          

          

          

          2,646,000

          

          

          

          37,300

Capitalized Costs Relating to Oil and Natural Gas Producing Activities



December 31,2008

          

          2007Proved oil and natural gas properties

          

          $

          13,859,634

          

          

          $

          12,173,194Unproved oil and natural gas properties

          

          

          3,652,790

          

          

          

          1,803,800Well Material inventory

          

          

          122,502

          

          

          

          Total

          

          

          17,634,926

          

          

          

          13,976,994Accumulated depreciation, depletion and amortization

          

          

          (7,103,584

          )

          

          

          (2,885,433

          )Net capitalized costs

          

          $

          10,531,342

          

          

          $

          11,091,561

Costs Incurred in Oil and Natural Gas Producing Activities



December 31,2008

          

          2007Property acquisition costs

          

          $

          2,337

          

          

          $

          9,724Development costs

          

          $

          3,242,597

          

          

          $

          8,046,599

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JOHN D. OIL AND GAS COMPANY AND SUBSIDIARY   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007

17. Supplemental Disclosures About Oil and Natural Gas Producing Activities  Unaudited   (continued)

Standardized Measure of Discounted Future Net Cash Flows at December 31, 2008 and 2007 (In Thousands of Dollars)



2008

          

          2007Future cash inflows from sales of oil and gas

          

          $

          16,008

          

          

          $

          23,737Future production and development costs

          

          

          (7,531

          )

          

          

          (8,831

          )Future asset retirement obligations

          

          

          (1,385

          )

          

          

          (853

          )Future income tax expense

          

          

          (2,411

          )

          

          

          (4,778

          )Future net cash flows

          

          

          4,681

          

          

          

          9,275Future net cash flows 10% annual discount for estimated timing of cash flows

          

          

          (1,159

          )

          

          

          (3,384

          )Standardized measure of discounted future net cash flows

          

          $

          3,522

          

          

          $

          5,891

Future net cash flows were computed using future contracts and year-end prices and costs and federal statutory income tax rates.

Changes in the Standardized Measure of Discounted Future Net Cash Flow (In Thousands of Dollars).



2008

          

          2007Balance, beginning of year

          

          $

          5,891

          

          

          $

          2,807Extensions, discoveries and other additions

          

          

          2,164

          

          

          

          5,300Revision of quantity estimates

          

          

          (4,177

          )

          

          

          2,427Sales of oil and gas, net of production costs

          

          

          (2,855

          )

          

          

          (1,637

          )Net change in prices and production costs

          

          

          (1,236

          )

          

          

          1,691Net change in income taxes

          

          

          2,367

          

          

          

          (2,778

          )Accretion of discount

          

          

          589

          

          

          

          281Other

          

          

          779

          

          

          

          (2,200

          )Balance, end of year

          

          $

          3,522

          

          

          $

          5,891

The methodology and assumptions used in calculating the standardized measure are those required by SFAS No. 69. It is not intended to be representative of the fair market value of the Companys proved reserves. The valuation of revenues and costs does not necessarily reflect the amounts to be received or expended by the Company. In addition to the valuations used, numerous other factors are considered in evaluating known and prospective oil and gas reserves.

53