UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-K
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2013
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________ to _____________
 
Commission file number: 002-76219NY
 
VICTORY ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
 
Nevada
 
87-0564472
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
3355 Bee Caves Road, Suite 608, Austin, Texas
 
78746
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code: 512-347-7300

Securities registered pursuant to Section 12(b) of the Act: None
 
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value (Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨   No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨   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 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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. ¨
 
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. (Check one):
 
Large Accelerated Filer
o
Accelerated Filer
o
Non-Accelerated Filer
o
Smaller Reporting Company
x
(do not check if Smaller Reporting Company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨   No x
 
The aggregate market value of the voting common equity held by non-affiliates of the registrant, computed by reference to the closing price of such stock on June 28, 2013 was approximately $5,224,799 based on the closing price of such stock and such date of $.25.
 
The number of shares outstanding of the Registrant’s common stock, $0.001 par value, as of March 31, 2014 was 27,563,619.
 


 
 

 
 
VICTORY ENERGY CORPORATION
ANNUAL REPORT ON
 
 FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2013
 
TABLE OF CONTENTS
 
Table of Contents
 
PART I
     
         
Item 1.
Business
   
5
 
           
Item1A.
Risk Factors
   
14
 
           
Item 1B.
Unresolved Staff Comments
   
21
 
           
Item 2.
Properties
   
22
 
           
Item 3.
Legal Proceedings
   
28
 
           
Item 4.
Mine Safety Disclosure
   
28
 
           
PART II
       
           
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
   
29
 
           
Item 6.
Selected Financial Data
   
30
 
           
Item 7.
Management Discussion and Analysis of Financial Condition and Results of Operations
   
30
 
           
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
    36  
           
Item 8.
Consolidated financial statements and Supplementary Data
   
37
 
           
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
   
37
 
           
Item 9A.
Controls and Procedures
   
37
 
           
Item 9B.
Other Information
   
38
 
           
PART III
       
           
Item 10.
Directors, Executive Officers and Corporate Governance
   
39
 
           
Item 11.
Executive Compensation
   
42
 
           
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
   
44
 
           
Item 13.
Certain Relationships and Related Transactions, and Director Independence
   
45
 
           
Item 14.
Principal Accounting Fees and Services
   
45
 
           
PART IV
       
           
Item 15.
Exhibits, Financial Statement Schedules
   
46
 
           
SIGNATURES
   
62
 
         
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
   
F-1
 
         
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
   
F-2
 
 
 
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EXPLANATORY NOTE
 
Unless otherwise indicated or the context otherwise requires, all references in this Annual Report on Form 10-K (“Report”) to “we,” “us,” “our,” “Victory Energy Corporation” and the “Company” are to Victory Energy Corporation, a Nevada corporation, and, unless the context otherwise requires, includes Aurora Energy Partners, a Texas general partnership (“Aurora”). Aurora is a consolidated subsidiary of Victory Energy Corporation for financial statement purposes. Victory Energy Corporation is a 50% partner and the managing partner of Aurora. Unless otherwise indicated, references herein to “$” or “dollars” are to United States dollars and have been presented in accordance with U.S generally accepted accounting principles.
 
The Company has assessed the amount of non-controlling interest that should be separately stated on the face of the Company’s consolidated financial statements.
 
Cautionary Notice Regarding Forward Looking Statements
 
We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. This report contains a number of forward-looking statements that reflect management's current views and expectations with respect to business, strategies, future results and events and financial performance. All statements made in this Annual Report other than statements of historical fact, including statements that address operating performance, events or developments that management expects or anticipates will or may occur in the future, including statements related to revenues, cash flow, profitability, adequacy of funds from operations, statements expressing general optimism about future operating results and non-historical information, are forward looking statements. In particular, the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” “will,” variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements and their absence does not mean that the statement is not forward-looking.
 
 
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Readers should not place undue reliance on these forward-looking statements, which are based on management’s current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions and apply only as of the date of this report. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. In particular, our business, including our financial condition and results of operations and our ability to continue as a going concern may be impacted by a number of factors, including, but not limited to, the following:
 
· continued operating losses;
· investors questioning of our ability to continue as a going concern;
· difficulties in raising additional capital;
· challenges in growing our business;
· designation of our common stock as a “penny stock” under SEC regulations;
· FINRA requirements that may limit the ability to buy and sell our common stock;
· volatility in the price of our common stock;
· the highly speculative nature of an investment in our common stock;
· climate change and greenhouse gas regulations;
· global economic conditions;
· the substantial amount of capital required by our operations;
· the volatility of oil and natural gas prices;
· the high level of risk associated with drilling for and producing oil and natural gas;
· assumptions associated with reserve estimates;
· the potential that drilling activities will not yield oil or natural gas in commercial quantities;
· seismic studies may not guarantee the presence of oil or natural gas in commercial quantities;
· potential exploration, production and acquisitions may not maintain revenue levels in the future;
· future acquisitions may yield revenues or production that differ significantly from our projections;
· difficulties associated with managing a small and growing enterprise;
· strong competition from other oil and natural gas companies;
· the unavailability or high cost of drilling rigs and related equipment;
· our inability to control properties that we do not operate;
· our dependence on key management personnel and technical experts;
· the potential for write-downs in the carrying values of our oil and natural gas properties;
· our compliance with complex laws governing our business;
· our failure to comply with environmental laws and regulations;
· the financial condition of the operators of the properties in which we own an interest;
· terrorist attacks on our operations;
· the dilutive effect of additional issuances of our common stock, options or warrants;
· any impairments of our oil and natural gas properties;
· the results of pending litigation; and
· state regulatory policies regarding spacing of wells and units.
 
 
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PART I
 
Item 1. Business
 
The Company
 
Victory Energy Corporation was organized under the laws of the State of Nevada on January 7, 1982. The Company is authorized to issue 47,500,000 shares of $0.001 par value common stock. On January 12, 2012 the Company implemented a 50:1 reverse stock split. All information in this Annual Report on Form 10-K reflects the stock split.
 
Prior to May 3, 2006 the Company operated as Victory Capital Holdings Corporation among other corporate names.
 
Copies of the initial Articles of Incorporation of the Company and the Certificates of Amendment to the Articles of Incorporation are incorporated herein by reference.

Our Relationship with Aurora Energy Partners

Victory Energy Corporation is the managing partner of Aurora Energy Partners, a Texas General Partnership (“Aurora”), and holds a 50% partnership interest in Aurora. Aurora is a consolidated subsidiary with Victory Energy Corporation for financial statement purposes. The partnership gives Victory Energy Corporation control of the partnership. Article XI of the partnership agreement cannot be modified unless there is a 100% vote of the partners, therefore Victory Energy Corporation cannot be removed as a managing member of the partnership regardless of the partnership interest held by the partners, and thus consolidation is appropriate for all reporting periods. Currently, Victory Energy Corporation conducts all of its oil and natural gas operations through, and holds all of its oil and natural gas assets through, Aurora, which owns record title to all of the oil and natural gas properties, wells and reserves referred to in this Annual Report on Form 10-K. Through its partnership interest in Aurora, Victory Energy Corporation is the beneficial owner of 50% of such oil and gas properties, wells and reserves held of record by Aurora.
 
Operational Overview and Strategy
 
Victory Energy Corporation is a publicly held, independent, growth-oriented exploration and production company, headquartered in Austin, Texas, with additional technical and specialized resources located in Midland, Texas. The company is focused on creating shareholder value by rapidly growing unconventional oil, liquids-rich natural gas reserves and cash-flow via continued low-risk vertical well development on existing properties and through the acquisition of new resource properties, offering better than 20% rates of return (ROR) and break-even points below $65 per barrel oil price. This focus on returns is achieved by targeting the predictable resources plays, favorable operating environment, and consistent reservoir quality across multiple target horizons, long-lived reserve characteristics, and high drilling success rates of the Permian Basin of Texas and southeast New Mexico.

Victory Energy has carefully assembled a management team with more than 117 years of direct and relevant oil and gas experience. The Company also utilizes a team of third-party professionals on an as-needed basis. This team includes geologists for prospect evaluation and assessment and reservoir engineering resources for the analysis of current and new properties. Reserve reporting is performed by a third-party engineer located in Midland, Texas. Each independent operator utilized by the company also has their own array of experts tailored for the specific formations and well completion techniques of each property the company holds an interest in.

The Company strategically utilizes both internal capabilities and strategic industry relationships to acquire non-operated, high-grade working interest positions in predictable, low-to-moderate risk oil and gas prospects. Over the next 18 months, the company anticipates the addition of operating resources and technical capabilities required to manage the anticipated acquisitions in the business plan.

Victory Energy is a SEC current reporting company. The Company is traded under the ticker symbol VYEY on the OTCQB tier, operated by OTC Markets Group (The Venture Stage Marketplace with Reporting Companies).
 
 
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The Company is one of two partners in Aurora Energy Partners (Aurora), a Texas Partnership that was established in January 2008. The second partner is the Navitus Energy Group (Navitus), also a Texas General Partnership. The two entities work together to increase proved reserves and the valuation of Aurora, with a future goal of consolidating the two partners into a single entity and moving to a larger stock exchange such as the NYSE, NASDAQ, etc.
 
On February 24, 2014 the partnership closed a $26.4 million operations and acquisition credit facility with Texas Capital Bank of Dallas, Texas. $1.4 million of this facility will provide operating capital for Aurora. The Company plans to utilize the remaining $25 million of the credit facility and access to $10 million of private placement capital from its partner Navitus, to aggressively grow the Company’s Permian Basin (Texas) assets through targeted acquisitions of producing properties with upside development potential. Several highly desirable properties have already been identified and are being vetted. The Company anticipates deploying all of the credit facility and the $10 million of Navitus private placement capital toward high cash-flow, producing acquisition targets this year.

Among other things, the Navitus private placement is offered to accredited investors and provides these investors with a 10% preferred distribution for five years, to be paid by Victory, one warrant to purchase one share of Victory common stock for every dollar invested and additional benefits. Under this agreement Navitus has the right to contribute up to $15 million dollars into Aurora, and Victory is obligated to match this plus previous contributions made by Navitus and prior Navitus investments; creating a near $53 million portfolio. By utilizing accumulated proved reserves created from the investment of this capital, the Company has the ability to meet its capital matching obligations through a combination of traditional financing sources such as the recently acquire $26.4 million credit facility or via an equity based private placement round, debt, etc. Under the agreement, separation of the partners is not mandatory and Victory may raise funds from other sources. All oil and natural gas assets are held in the Aurora partnership during the 5 year term of Aurora (ends October 2017). Victory is the managing partner and controls the entity.
 
As of March 31, 2014, the Company had 21 wells on production and 2 wells that have been successfully drilled and are in various stages of completion. The Company’s portfolio of producing assets now includes; the Lightnin’ property, the Bootleg Canyon Ellenberger Field, the Adams-Baggett Gas Field, the Morgan property, the Uno-Mas property and the Clear Water Wolfberry resource play. Proved commercial accumulations of hydrocarbons now occur in multiple horizons, at depths ranging from 4,700 to 13,100 feet with the majority of proved reserves being located on properties in the prolific Permian Basin of Texas and New Mexico. As the Company continues to drill available locations on its current properties and add properties that are accessible to the Company through its established deal flow pipeline, it anticipates an accelerated pace toward oil-weighted production and the addition of new reserves.
 
The Company’s capital and exploration expenditures, including projects at year end, totaled $2,196,482 for 2013. At December 31, 2013, the Company had $20,858 of cash on hand with no outstanding long term debt during 2013. Navitus contributed $2.3 million in cash to Aurora for the year ended December 31, 2013, and $1.1 million for the year ended December 31, 2012. The Company anticipates that Navitus will make additional contributions to Aurora as the portfolios of properties are developed.

During February 2012, the Company raised $1,815,000 of new capital by issuing convertible debt via a private placement offering (PPM) to investors. This new capital followed the successful completion of a 50:1 reverse stock split.

Distribution Methods
 
Each of our fields that produce oil distributes the oil through one purchaser for each field. There is significant demand for oil and there are several companies in our operating areas that purchase oil from small oil producers.
 
Each of our fields that produce natural gas distributes all of the natural gas that it produces through one purchaser for each field. We have distribution agreements with these natural gas purchasers that provide us a tap into a distribution line of a natural gas distribution company. We are to be paid for our natural gas at either a market price at the beginning of the month or market price at the time of delivery, less any transportation cost charged by the natural gas distribution company.
 
 
6

 
 
Competition
 
We encounter competition from other oil and natural gas companies in all areas of our operations. Because of record high prices for oil, there are many companies competing for the leasehold rights to good oil and natural gas prospects. Additionally, because so many companies are again exploring for oil and natural gas, there is often a shortage of equipment available to do drilling and work over projects. Many of our competitors are large, well-established companies that have been engaged in the oil and natural gas business for much longer than we have and possess substantially larger operating staffs and greater capital resources than we do.
 
Source and Availability of Raw Materials
 
We have no significant raw materials. However, we make use of numerous oil field service companies in the drilling and work over of wells. We currently operate in areas where there are numerous oil field service and drilling companies that are available to us.
 
Marketing Arrangements
 
There is a ready market for the sale of oil and gas. Each of our fields currently sells all of its oil and gas production on the spot market basis.
 
Federal Regulations
 
Our facilities in the United States are subject to federal, state and local environmental laws and regulations. Compliance with these provisions has not had any material adverse effect upon our capital expenditures, net earnings or competitive position. However, the legislative and regulatory burden placed on the industry raises our cost of doing business and therefore could impact profitability. Please refer to Item 1A, Risk Factors.
 
Regulation of Sale and Transportation of Natural Gas
 
The transportation and sale for resale of natural gas in interstate commerce are regulated pursuant to the Natural Gas Act of 1938 (NGA) and the Natural Gas Policy Act of 1978. The statutes are administered by the Federal Energy Regulatory Commission (FERC). Effective January 1, 1993, the Natural Gas Wellhead Decontrol Act of 1989 deregulated natural gas prices for all “first sales” of natural gas, which includes all sales by the Company of its own production. All other sales subject to a blanket sales certificate under the NGA, which has flexible terms and conditions. Consequently, all of the Company’s sales of natural gas currently may be made at market prices, subject to applicable contract provisions. The Company’s jurisdictional sales, however, are subject to the future possibility of greater federal oversight, including the possibility that the FERC might prospectively impose more restrictive conditions on such sales. Conversely, sales of crude oil and condensate and natural gas liquids by the Company are made at unregulated market prices.
 
Thus, all of our sales of natural gas may be made at market prices, subject to applicable contract provisions. Sales of natural gas are affected by availability, terms and cost of pipeline transportation. Since 1985, FERC has implemented regulations intended to make natural gas transportation more accessible to gas buyers and sellers on an open access, non-discriminatory basis. We cannot predict what further action FERC will take on these matters. Some of FERC’s more recent proposals may, however, adversely affect the availability and reliability of interruptible transportation service on interstate pipelines. We do not believe that we will be affected by any action taken materially differently than other natural gas producers, gatherers and marketers with which we compete. 
 
Our natural gas sales are generally made at the prevailing market price at the time of sale. Therefore, even though we sell significant volumes to major purchasers, we believe that other purchasers would be willing to buy our natural gas at comparable market prices.
 
Natural gas continues to supply a significant portion of North America’s energy needs and we believe the importance of natural gas in meeting this energy need will continue. The impact of the ongoing economic downturn on natural gas supply and demand fundamentals has resulted in extremely volatile natural gas prices, which is expected to continue.
 
 
7

 
 
On August 8, 2005, the Energy Policy Act of 2005 (the “2005 EPA”) was signed into law. This comprehensive act contains many provisions that will encourage oil and natural gas exploration and development in the United States. The 2005 EPA directs FERC and other federal agencies to issue regulations that will further the goals set out in the 2005 EPA. The 2005 EPA amends the NGA to make it unlawful for “any entity,” including otherwise non-jurisdictional producers such as us, to use any deceptive or manipulative device or contrivance in connection with the purchase or sale of natural gas or the purchase or sale of transportation services subject to regulation by FERC, in contravention of rules prescribed by FERC. On January 20, 2006, FERC issued rules implementing this provision. The rules make it unlawful in connection with the purchase or sale of natural gas subject to the jurisdiction of FERC, or the purchase or sale of transportation services subject to the jurisdiction of FERC, for any entity, directly or indirectly, to use or employ any device, scheme or artifice to defraud; to make any untrue statement of material fact or omit to make any such statement necessary to make the statements made not misleading; or to engage in any act or practice that operates as a fraud or deceit upon any person. The new anti-manipulation rule does not apply to activities that relate only to intrastate or other non-jurisdictional sales or gathering, but does apply to activities of otherwise non-jurisdictional entities to the extent the activities are conducted “in connection with” gas sales, purchases or transportation subject to FERC jurisdiction. It therefore reflects a significant expansion of FERC’s enforcement authority. We do not believe that we are affected any differently than other producers of natural gas.

In 2007, FERC issued a final rule on annual natural gas transaction reporting requirements, as amended by subsequent orders on rehearing (“Order 704”). Under Order 704, wholesale buyers and sellers of more than 2.2 million MBtu of physical natural gas in the previous calendar year, including interstate and intrastate natural gas pipelines, natural gas gatherers, natural gas processors and natural gas marketers are now required to report, on May 1 of each year, beginning in 2009, aggregate volumes of natural gas purchased or sold at wholesale in the prior calendar year to the extent such transactions utilize, contribute to, or may contribute to the formation of price indices. It is the responsibility of the reporting entity to determine which individual transactions should be reported based on the guidance of Order 704. The monitoring and reporting required by these rules have increased our general and administrative expenses. We do not anticipate that we will be affected any differently than other producers of natural gas.

Regulation of the Sale and Transportation of Oil

Our sales of crude oil, condensate and NGL are not currently regulated, and are subject only to applicable contract provisions negotiated by us and our counterparties. In a number of instances, however, the ability to transport and sell such products is dependent on pipelines whose rates, terms and conditions of service are subject to FERC’s jurisdiction under the Interstate Commerce Act (the “ICA”). In other instances, the ability to transport and sell such products is dependent on pipelines whose rates, terms and conditions of service are subject to regulation by state regulatory bodies under state statutes.

The regulation of pipelines that transport oil, condensate and NGL is generally less restrictive than FERC’s regulation of natural gas pipelines under the NGA. Regulated pipelines that transport crude oil, condensate and NGL are subject to common carrier obligations that generally ensure non-discriminatory access. With respect to interstate pipeline transportation subject to regulation of FERC under the ICA, rates generally must be cost-based, although market-based rates or negotiated settlement rates are permitted in certain circumstances. Pursuant to FERC Order No. 561, pipeline rates are subject to an indexing methodology. Under this indexing methodology, pipeline rates are subject to changes in the Producer Price Index for Finished Goods, minus 1%. A pipeline can seek to increase its rates above index levels provided that the pipeline can establish that there is a substantial divergence between the actual costs experienced by the pipeline and the rate resulting from application of the index. A pipeline can seek to charge market based rates if it establishes that it lacks significant market power. In addition, a pipeline can establish rates pursuant to settlement if agreed upon by all current shippers. A pipeline can seek to establish initial rates for new services through a cost-of-service proceeding, a market-based rate proceeding, or through an agreement between the pipeline and at least one shipper not affiliated with the pipeline.

Federal, State or American Indian Leases. In the event we conduct operations on federal, state or American Indian onshore oil and natural gas leases, such operations must comply with numerous regulatory restrictions, including various nondiscrimination statutes, certain on-site security regulations and must also obtain permits issued by the Bureau of Land Management (the “BLM”) or other appropriate federal, tribal or state agencies.

The Mineral Leasing Act of 1920 (the “Mineral Act”) prohibits direct or indirect ownership of any interest in federal onshore oil and natural gas leases by a foreign citizen of a country that denies “similar or like privileges” to citizens of the United States. Such restrictions on citizens of a “non-reciprocal” country include ownership or holding or controlling stock in a corporation that holds a federal onshore oil and natural gas lease. If this restriction is violated, the corporation’s lease can be cancelled in a proceeding instituted by the United States Attorney General. Although the regulations of the BLM (which administers the Mineral Act) provide for agency designations of non-reciprocal countries, there are presently no such designations in effect. We own interests in numerous federal onshore oil and natural gas leases. It is possible that holders of our equity interests may be citizens of foreign countries, which at some time in the future might be determined to be non-reciprocal under the Mineral Act. If any of our equity holders is deemed to be a citizen of a non-reciprocal country, then our interests in federal onshore oil and natural gas leases may be cancelled. Any such cancellation could have a material adverse effect on our financial condition, cash flows and results of operations.
 
 
8

 

State Regulations

Most states regulate the production and sale of oil and natural gas, including:

 
requirements for obtaining drilling permits;

 
the method of developing new fields;

 
the spacing and operation of wells;

 
the prevention of waste of oil and gas resources; and

 
the plugging and abandonment of wells.

The rate of production may be regulated and the maximum daily production allowable from both oil and natural gas wells may be established on a market demand or conservation basis or both.

We may enter into agreements relating to the construction or operation of a pipeline system for the transportation of natural gas. To the extent that such natural gas is produced, transported and consumed wholly within one state, such operations may, in certain instances, be subject to the jurisdiction of such state’s administrative authority charged with the responsibility of regulating intrastate pipelines. In such event, the rates that we could charge for natural gas, the transportation of natural gas, and the construction and operation of such pipeline would be subject to the rules and regulations governing such matters, if any, of such administrative authority.
 
Environmental, Health and Safety Regulation
 
General. Our activities are subject to existing federal, state and local laws and regulations governing environmental quality and pollution control. Although no assurances can be made, we believe that, absent the occurrence of an extraordinary event, compliance with existing federal, state and local laws, regulations and rules regulating the release of materials in the environment or otherwise relating to the protection of human health, safety and the environment will not have a material effect upon our capital expenditures, earnings or competitive position with respect to our existing assets and operations. We cannot predict what effect additional regulation or legislation, enforcement policies, and claims for damages to property, employees, other persons and the environment resulting from our operations could have on our activities.

Our activities with respect to exploration and production of oil and natural gas, including the drilling of wells, are subject to stringent environmental regulation by state and federal authorities, including the USEPA. Such regulations can increase the cost of our activities. Although we believe that compliance with environmental regulations will not have a material adverse effect on us, risks of substantial costs and liabilities are inherent in oil and natural gas production operations, and there can be no assurance that significant costs and liabilities will not be incurred. Moreover it is possible that other developments, such as spills or other unanticipated releases, stricter environmental laws and regulations, and claims for damages to property or persons resulting from oil and natural gas production, would result in substantial costs and liabilities to us.

Solid and Hazardous Waste. We own or lease numerous properties that have been used for production of oil and natural gas for many years. Although we have utilized operating and disposal practices standard in the industry at the time, hydrocarbons or other solid wastes may have been disposed of or released on, under, or from these properties. In addition, many of these properties have been operated by third parties that controlled the treatment of hydrocarbons and solid wastes and the manner in which such substances may have been disposed or released. State and federal laws applicable to oil and natural gas wastes and properties have gradually become stricter over time. Under these laws, we could be required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination by prior owners or operators) or to perform remedial plugging operations to prevent future contamination.

We generate wastes, including hazardous wastes, which are subject to regulation under the federal Resource Conservation and Recovery Act (the “RCRA”) and state statutes. The USEPA has limited the disposal options for certain hazardous wastes. Furthermore, it is possible that certain wastes generated by our oil and natural gas operations that are currently exempt from regulation as “hazardous wastes” may in the future become regulated as “hazardous wastes” under RCRA or other applicable statutes, and therefore may become subject to more rigorous and costly management and disposal requirements.
 
 
9

 
 
Naturally Occurring Radioactive Materials (“NORM”) are radioactive materials which precipitate on production equipment or area soils during oil and natural gas extraction or processing. NORM wastes are regulated under the RCRA framework, although such wastes may qualify for the oil and gas hazardous waste exclusion. Primary responsibility for NORM regulation has been a state function. Standards have been developed for worker protection; treatment, storage and disposal of NORM waste; management of waste piles, containers and tanks; and limitations upon the release of NORM-contaminated land for unrestricted use. We believe that our operations are in material compliance with all applicable NORM standards.
 
Superfund. The Comprehensive Environmental Response, Compensation and Liability Act. The Comprehensive Environmental Response, Compensation and Liability Act, or “(“CERCLA”,”), also known as the “Superfund” law, imposes joint and several liabilities, without regard to fault or the legality of the original conduct of certain persons with respect to the release or threatened release of a “hazardous substance” into the environment. These persons include the current or former owner or and operator of the site where the release occurred and anyone who and persons that disposed or arranged for the disposal of a hazardous substance to the site where the release occurred. Under CERCLA, such persons may be subject to joint and several liabilities for the costs of cleaning up the hazardous substances that have been released into the environment, damages to natural resources and the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.

We own and lease, and may in the future operate, numerous properties that have been used for oil and natural gas exploitation and production for many years. Hazardous substances may have been released on, at or under the properties owned, leased or operated by us, or on, at or under other locations, including off-site locations, where such substances have been taken for disposal. In addition, some of our properties have been or are operated by a site. CERCLA also authorizes the USEPA and, in some cases, third parties or by previous owners or operators whose handling, treatment and disposal of hazardous substances were not under our control. These properties and the substances disposed or released on, at or under them may be subject to CERCLA, RCRA and analogous state laws. In certain circumstances, we could be responsible for the removal of previously disposed substances and wastes, remediate contaminated property or perform remedial plugging or pit closure operations to prevent future contamination. In addition, federal and state trustees can also seek substantial compensation for damages to natural resources resulting from spills or releases.

Water discharges. The Federal Water Pollution Control Act, or the “Clean Water Act”, and analogous state laws, impose restrictions and strict controls with respect to the discharge of pollutants, including oil and other substances generated by our operations, into waters of the United States or state waters. Under these laws, the discharge of pollutants into regulated waters is prohibited except in accordance with the terms of a permit issued by EPA or an analogous state agency. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with discharge permits or other requirements of the Clean Water Act and analogous state laws and regulations.

The Safe Drinking Water Act, or “SDWA”, and analogous state laws impose requirements relating to underground injection activities. Under these laws, the EPA and state environmental agencies have adopted regulations relating to permitting, testing, monitoring, record keeping and reporting of injection well activities, as well as prohibitions against the migration of injected fluids into underground sources of drinking water.

Air emissions. The Federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, EPA and certain states have developed and continue to develop stringent regulations governing emissions of toxic air pollutants at specified sources. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the Federal Clean Air Act and analogous state laws and regulations.

The Kyoto Protocol to the United Nations Framework Convention on Climate Change became effective in February 2005. Under the Protocol, participating nations are required to implement programs to reduce emissions of certain gases, generally referred to as greenhouse gases that are suspected of contributing to global warming. The United States is not currently a participant in the Protocol, and Congress has not acted upon recent proposed legislation directed at reducing greenhouse gas emissions. However, there has been support in various regions of the country for legislation that requires reductions in greenhouse gas emissions, and some states have already adopted legislation addressing greenhouse gas emissions from various sources, primarily power plants. The oil and natural gas industry is a direct source of certain greenhouse gas emissions, namely carbon dioxide and methane, and future restrictions on such emissions could impact our future operations.

National Environmental Policy Act. Oil and natural gas exploration and production activities on federal lands are subject to the National Environmental Policy Act, or “NEPA”. NEPA requires federal agencies, including the Department of Interior, to evaluate major agency to take actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an Environmental Assessment that assesses the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed Environmental Impact Statement that may be made available for public review and comment. All exploration and production activities on federal lands require governmental permits that are subject to the requirements of NEPA. This process has the potential to delay the development of oil and natural gas projects on federal lands in response to threats to the public health or the environment and to seek to recover from the responsible persons the costs of such action. Certain state statutes impose similar liability. Neither we nor, to our knowledge, our predecessors have been designated as a potentially responsible party by the USEPA under CERCLA or by any state under a similar state law.
 
 
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Health safety and disclosure regulation. Under CERCLA, the term “hazardous substance” does not include “petroleum, including crude oil or any fraction thereof,” unless specifically listed or designated and the term does not include natural gas, NGL, liquefied natural gas, or synthetic gas usable for fuel. While this “petroleum exclusion” lessens the significance of CERCLA to our operations, we may generate waste that may fall within CERCLA's definition of a “hazardous substance” in the course of our ordinary operations. We also currently own or lease properties that for many years have been used for the exploration and production of oil and natural gas. Although we and, to our knowledge, our predecessors have used operating and disposal practices that were standard in the industry at the time, “hazardous substances” may have been disposed or released on, under or from the properties owned or leased by us or on, under or from other locations where these wastes have been taken for disposal. At this time, we do not believe that we have any liability associated with any Superfund site, and we have not been notified of any claim, liability or damages under CERCLA.

Oil Pollution Act. The Oil Pollution Act of 1990 (the “OPA”) and regulations thereunder impose a variety of regulations on “responsible parties” related to the prevention of oil spills and liability for damages resulting from such spills in certain United States waters. A “responsible party” includes the owner or operator of a facility or vessel, or the lessee or permittee of the area in which an offshore facility is located. The OPA assigns liability to each responsible party for oil removal costs and a variety of public and private damages. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if a spill was caused by gross negligence or willful misconduct or resulted from violation of federal safety, construction or operating regulations. If a party fails to report a spill or to cooperate fully in the cleanup, liability limits likewise do not apply. Few defenses exist to the liability imposed by the OPA.

The OPA currently establishes a liability limit for onshore facilities of $350 million and for offshore facilities of all removal costs plus $75 million, and lesser limits for some vessels depending upon their size. The regulations promulgated under OPA impose proof of financial responsibility requirements that can be satisfied through insurance, guarantee, indemnity, surety bond, letter of credit, qualification as a self-insurer, or a combination thereof. The amount of financial responsibility required depends upon a variety of factors including the type of facility or vessel, its size, storage capacity, oil throughput, proximity to sensitive areas, type of oil handled, history of discharges and other factors. We carry insurance coverage to meet these obligations, which we believe is customary for comparable companies in our industry. A failure to comply with OPA's requirements or inadequate cooperation during a spill response action may subject a responsible party to civil or criminal enforcement actions.

Clean Water Act. The Clean Water Act (the “CWA”) regulates the discharge of pollutants into waters of the United States and adjoining shorelines, including wetlands, and requires a permit for the discharge of pollutants, including petroleum and dredged or fill materials, into such waters and wetlands. Certain state regulations and the general permits issued under the federal National Pollutant Discharge Elimination System program prohibit the discharge of produced waters and sand, drilling fluids, drill cuttings and certain other substances related to the oil and natural gas industry operations into certain coastal and offshore waters. Further, the USEPA has adopted regulations requiring certain facilities that store or otherwise handle oil to prepare and implement Spill Prevention, Control and Countermeasure Plans and Facility Response Plans relating to the possible discharge of oil to surface waters. We are required to prepare and comply with such plans and to obtain and comply with discharge permits. The CWA also prohibits spills of oil and hazardous substances to waters of the United States in excess of levels set by regulations and imposes liability in the event of a spill. State laws further provide civil and criminal penalties and liabilities for spills to both surface and groundwater and require permits that set limits on discharges to such waters. We believe we are in substantial compliance with these requirements and that any noncompliance would not have a material adverse effect on us.

Safe Drinking Water Act. The underground injection of oil and natural gas wastes is regulated by the Underground Injection Control (“UIC”) Program, authorized by the federal Safe Drinking Water Act (“SDWA”). The primary objective of injection well operating requirements is to ensure the mechanical integrity of the injection apparatus and to prevent migration of fluids from the injection zone into underground sources of drinking water. In Oklahoma, Louisiana, Mississippi and Texas, no underground injection may take place except as authorized by permit or rule. We currently own and operate various underground injection wells. Failure to comply with our permits could subject us to civil and/or criminal enforcement. We believe that we are in compliance in all material respects with the requirements of applicable state underground injection control programs and our permits and authorizations.

Moreover, our exploration and production activities may involve the use of hydraulic fracturing techniques to stimulate wells and maximize natural gas production. Citing concerns over the potential for hydraulic fracturing to impact drinking water, human health and the environment, and in response to a congressional directive, the USEPA has commissioned a study to identify potential risks associated with hydraulic fracturing. The USEPA published a progress report on this study in December 2012 and a final draft report will be delivered in 2014. Additionally, the BLM proposed to regulate the use of hydraulic fracturing on federal and tribal lands, but following extensive public comment on the proposals, announced it would issue an improved proposal before finalizing new rules. The revised proposal is expected to address disclosure of fluids used in the fracturing process, integrity of well construction, and the management and disposal of wastewater that flows back from the drilling process. Some states now regulate utilization of hydraulic fracturing and others are in the process of developing, or are considering development of, such rules. Depending on the results of the USEPA study and other developments related to the impact of hydraulic fracturing, our drilling activities could be subjected to new or enhanced federal, state and/or local regulatory requirements governing hydraulic fracturing.
 
 
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Air Emissions. Our operations are subject to local, state and federal regulations for the control of emissions from sources of air pollution. The USEPA has promulgated new rules to address air emissions from the oil and natural gas industry which, among other things, would require installation of equipment to capture certain gases released from new or refitted hydraulically fractured natural gas wells by January 1, 2015. Other new rules, many effective in 2012, impose stricter standards on emissions associated with gas production, storage and transport. The proposals would revise New Source Performance Standards for volatile organic compounds and sulfur dioxide, impose controls on toxics emitted at oil and natural gas wells and their associated production facilities, and limit fugitive emissions from the production, storage and transport equipment. In addition, states impose requirements to address emissions from certain production and associated facilities. We have complied and will continue to comply with these regulations as applicable to our operations. Due to the uncertainties surrounding proposed regulations, we are unable to predict the financial impact going forward.

Administrative enforcement actions for failure to comply strictly with air regulations or permits may be resolved by payment of monetary fines and/or correction of any identified deficiencies. Alternatively, civil and criminal liability can be imposed for non-compliance. Any such action could require us to forego construction or operation of certain air emission sources. We believe that we are in substantial compliance with air pollution control requirements and that, if a particular permit application were denied, we would have enough permitted or permittable capacity to continue our operations without a material adverse effect on any particular producing field.

Climate Change. According to certain scientific studies, emissions of carbon dioxide, methane, nitrous oxide and other gases commonly known as greenhouse gases (“GHG”) may be contributing to global warming of the earth's atmosphere and to global climate change. In response to the scientific studies, legislative and regulatory initiatives have been underway to limit GHG emissions. The U.S. Supreme Court determined that GHG emissions fall within the federal Clean Air Act (“CAA”) definition of an “air pollutant”, and in response the USEPA promulgated an endangerment finding paving the way for regulation of GHG emissions under the CAA. The USEPA has also promulgated rules requiring large sources to report their GHG emissions. Sources subject to these reporting requirements include on- and offshore petroleum and natural gas production and onshore natural gas processing and distribution facilities that emit 25,000 metric tons or more of carbon dioxide equivalent per year in aggregate emissions from all site sources. We are not subject to GHG reporting requirements. In addition, the USEPA promulgated rules that significantly increase the GHG emission threshold that would identify major stationary sources of GHG subject to CAA permitting programs. As currently written and based on current operations, we are not subject to federal GHG permitting requirements. Regulation of GHG emissions is new and highly controversial, and further regulatory, legislative and judicial developments are likely to occur. Such developments may affect how these GHG initiatives will impact us. Further, apart from these developments, recent judicial decisions that have not precluded certain state tort claims alleging property damage to proceed against GHG emissions sources may increase our litigation risk for such claims. Due to the uncertainties surrounding the regulation of and other risks associated with GHG emissions, we cannot predict the financial impact of related developments on us.

OSHA. We are subject to the requirements of the federal Occupational Safety and Health Act, or (“OSHA”) and comparable state statutes. The OSHA hazard communication standard, the Emergency Planning and Community Right to Know standards, the USEPA community right-to-know regulations under Title III of the federal Superfund Amendments and Reauthorization Act and similar state statutes require that we use to organize and/or disclose information about hazardous materials stored, used or produced in our operations. Certain of this information must be provided to employees, state and local governmental authorities and local citizens.

We expect to incur capital and other expenditures related to environmental compliance. Although we believe that our compliance with existing requirements will not have a material adverse impact on our financial condition and results of operations, we cannot assure you that the passage of more stringent laws or regulations in the future will not have a negative impact on our financial position or results of operation. 

Employees
 
The Company has 4 full-time employees as of the date of this Annual Report on Form 10-K. We believe that our relationships with our employees are satisfactory. We utilize the services of independent contractors to perform various daily operational duties.
 
Available Information

We make available free of charge through our “Investor Center – SEC Filings” section of our webs-site at www.vyey.com our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and the amendments to such filings, as soon as reasonably practicable after each are electronically filed with, or furnished to the SEC.
 
 
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Glossary of Certain Industry Terms

The definitions set forth below shall apply to the indicated terms as used throughout this Annual Report on Form 10-K.

Bbl. One barrel (of oil or natural gas liquids).

BOE. One barrel of oil equivalent. A Boe is determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids, which approximates the relative energy content of oil, condensate and natural gas liquids as compared to natural gas. Despite holding this ratio constant at six Mcf to one Bbl, prices have historically often been higher or substantially higher for oil than natural gas on an energy equivalent basis, although there have been periods in which they have been lower or substantially lower.

Completion. Installation of permanent equipment for production of oil or gas, or, in the case of a dry well, to reporting to the appropriate authority that the well has been abandoned.

Developed acreage. The number of acres which are allocated or held by producing wells or wells capable of production.

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

Dry hole; dry well. A well found to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well.

Equivalent volumes. Equivalent volumes are computed with oil and natural gas liquid quantities converted to Mcf on an energy equivalent ratio of one barrel to six Mcf.

Exploratory well. A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir. Generally, an exploratory well is any well that is not a development well, an extension well, a service well, or a stratigraphic test well as those items are defined in Regulation S-X.

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

HBP. Held by production.

Liquids. Describes oil, condensate, and natural gas liquids.
 
MBbls. Thousands of barrels of oil or natural gas liquids.

MBoe. Million barrels of oil equivalent.

Mcf. Thousand cubic feet (of natural gas).

Mcfe. Thousand cubic feet equivalent.

MBbls. Millions of barrels of oil or natural gas liquids.

MMcf. Million cubic feet.

MMcfe. Million cubic feet equivalent.

Net acres or net wells. The sum of the fractional working interest owned in gross acres or gross wells expressed in whole numbers.

NGL. Natural gas liquids.
 
 
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NYMEX. New York Mercantile Exchange.

Present value or PV10% or “SEC PV10%.” When used with respect to oil and gas reserves, present value or PV10% or SEC PV10% means the estimated future gross revenue to be generated from the production of net proved reserves, net of estimated production and future development and abandonment costs, using prices and costs in effect at the determination date, without giving effect to non-property related expenses such as general and administrative expenses, debt service, accretion, and future income tax expense or to depreciation, depletion, and amortization, discounted using monthly end-of-period discounting at a nominal discount rate of 10% per annum.

Productive wells. Producing wells and wells that are capable of production in sufficient quantities to justify completion, including injection wells, salt water disposal wells, service wells, and wells that are shut-in.

Proved developed reserves. Estimated proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.

Proved reserves. Those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation.

Proved undeveloped reserves. Estimated proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required.

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

Working Interest or WI. An operating interest which gives the owner the right to drill, produce, and conduct operating activities on the property and a share of production.

Item1A. Risk Factors
 
Our business is subject to a number of risks including, but not limited to, those described below:
 
We continue to incur operating losses through 2013.

While the Company has taken steps to reduce general and administrative costs and add further oil and natural gas reserves through additional investment, there is no guarantee the Company will become profitable, or have continued and sustained profitability over the longer term. Our profitability is affected by, among other factors, our ability to have continued access to high-potential reserves, our success in drilling operations, the economic life of any reserves developed, and the market price of crude oil or natural gas. Future losses may adversely our affect our business, financial condition and cash flows.

A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our operations.
 
A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because our operations are sometimes financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to our liquidity and our continued operations. Any reduction in our ability to raise equity capital in the future would force us to reallocate funds from other planned uses and would have a significant negative effect on our business plans and operations, including our ability to develop new projects and continue our current operations. If our stock price declines, we may not be able to raise additional capital or generate funds from operations sufficient to meet our obligations.
 
If we are not successful in continuing to grow our business, then we may have to scale back or even cease our ongoing business operations.
 
Our success is significantly dependent on a successful acquisition, drilling, completion and production program. We may be unable to locate recoverable reserves or operate on a profitable basis. If our business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment in us.
 
 
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Trading of our stock may be restricted by the SEC's "Penny Stock" regulations which may limit a stockholder's ability to buy and sell our stock.
 
The SEC defines and applies “penny stock” regulations to any equity security that has a market price of less $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers or "accredited investors." The term "accredited investor" refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 (excluding the value of primary residence and mortgage debt on primary residence) or annual income exceeding $200,000 or $300,000 jointly with his or her spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of, our common stock.
 
FINRA sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.
 
In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (“FINRA”) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, the FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
 
Trading in our common shares has been volatile and with low trading volumes, making it more difficult for our stockholders to sell their shares or liquidate their investments with predictability.
 
Our common shares are currently quoted on the OTC Markets. The trading price of our common shares has been subject to wide fluctuations and low trading volumes. Trading prices of our common shares may fluctuate in response to a number of factors, many of which will be beyond our control. The stock market has generally experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies with no current business operation. There can be no assurance that trading prices and price earnings ratios previously experienced by our common shares will be matched or maintained. These broad market and industry factors may adversely affect the market price of our common shares, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted. Such litigation, if instituted, could result in substantial costs for us and a diversion of management's attention and resources.
 
Our securities are considered highly speculative.
 
Our securities are considered highly speculative, generally because of the nature of our business and the early stage we are in of building a long life asset base. While operating revenues are planned to increase over time, through our capital and exploration program, there are risks associated with drilling success, oil and natural gas prices, and our ability to raise additional monies through share offerings or debt. Access to capital is vital and unless the revenue base grows over time that could prove difficult to accomplish.
 
Potential legislative and regulatory actions addressing climate change could increase our costs, reduce our revenue and cash flow from oil and gas sales or otherwise alter the way we conduct our business.

Future changes in the laws and regulations to which we are subject may make it more difficult or expensive to conduct our operations and may have other adverse effects on us. For example, the USEPA has issued a notice of finding and determination that emissions of carbon dioxide, methane and other GHGs present an endangerment to human health and the environment, which allows the USEPA to begin regulating emissions of GHGs under existing provisions of the CAA. The USEPA has begun to implement GHG-related reporting and permitting rules. Similarly, the U.S. Congress has considered and may in the future consider “cap and trade” legislation that would establish an economy-wide cap on emissions of GHGs in the United States and would require most sources of GHG emissions to obtain GHG emission “allowances” corresponding to their annual emissions of GHGs. Any laws or regulations that may be adopted to restrict or reduce emissions of GHGs would likely require us to incur increased operating costs and could have an adverse effect on demand for our production.
 
 
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Federal and state legislation and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays.
 
Congress has considered legislation to amend the SDWA to require the disclosure of chemicals used by the oil and natural gas industry in the hydraulic fracturing process and other legislation regulating hydraulic fracturing has been considered, and in some cases adopted, at various levels of government. Hydraulic fracturing is an important and commonly used process in the completion of unconventional gas wells in shale formations as well as tight conventional formations. This process involves the injection of water, sand and chemicals under pressure into rock formations to stimulate gas production. Sponsors of these bills have asserted that chemicals used in the fracturing process could adversely affect drinking water supplies and/or that hydraulic fracturing could pose a variety of other risks. Any additional level of regulation could lead to operational delays, or increased operating costs and could result in additional regulatory burdens that could make it more difficult to perform hydraulic fracturing, and increase our costs of compliance and doing business.
 
Gas drilling and production operations require adequate sources of water to facilitate the fracturing process and the disposal of that water when it flows back to the wellbore. If we are unable to obtain adequate water supplies and dispose of the water we use or remove at a reasonable cost and within applicable environmental rules, our ability to produce gas commercially and in commercial quantities would be impaired.

New environmental regulations governing the withdrawal, storage and use of surface water or groundwater necessary for hydraulic fracturing of wells may increase operating costs and cause delays, interruptions or termination of operations, the extent of which cannot be predicted, all of which could have an adverse effect on our operations and financial performance. Water that is used to fracture gas wells must be removed when it flows back to the wellbore. Our ability to remove and dispose of water will affect our production and the cost of water treatment and disposal may affect our profitability. The imposition of new environmental initiatives and regulations could include restrictions on our ability to conduct hydraulic fracturing or disposal of waste, including produced water, drilling fluids and other wastes associated with the exploration, development and production of gas.

Proposed changes to U.S. tax laws, if adopted, could have an adverse effect on our business, financial condition, results of operations and cash flows.

The U.S. President’s Fiscal Year 2013 Budget Proposal includes provisions that would, if enacted, make significant changes to U.S. tax laws applicable to oil and gas exploration and production companies. These changes include, but are not limited to:
 
 
the repeal of the limited percentage depletion allowance for oil and natural gas production in the United States;

 
the elimination of current deductions for intangible drilling and development costs;

 
the elimination of the deduction for certain domestic production activities; and

 
an extension of the amortization period for certain geological and geophysical expenditures.

Members of the U.S. Congress have considered similar changes to the existing federal income tax laws that affect oil and natural gas exploration and production companies. It is unclear whether these or similar changes will be enacted. The passage of this legislation or any similar changes in federal income tax laws could eliminate or postpone certain tax deductions that are currently available with respect to U.S. oil and gas exploration and development. Any such changes could have an adverse effect on our financial position, results of operations and cash flows.

The adoption and implementation of new statutory and regulatory requirements for derivative transactions could have an adverse impact on our ability to hedge risks associated with our business and increase the working capital requirements to conduct these activities.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) provides for new statutory and regulatory requirements for derivative transactions, including oil and natural gas hedging transactions. Among other things, the Dodd-Frank Act provides for the creation of position limits for certain derivatives transactions, as well as requiring certain transactions to be cleared on exchanges for which cash collateral will be required. In October 2011, the CFTC approved final rules that establish position limits for futures contracts on 28 physical commodities, including four energy commodities, and swaps, futures and options that are economically equivalent to those contracts. The rules provide an exemption for “bona fide hedging” transactions or positions, but this exemption is narrower than the exemption under existing CFTC position limit rules. These newly approved CFTC position limits rules were vacated by the United States District Court for the District of Columbia in September 2012, although the CFTC has stated that it will appeal the District Court’s decision.
 
 
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It is not possible at this time to predict with certainty the full effect of the Dodd-Frank Act and CFTC rules on us and the timing of such effects. The Dodd-Frank Act may require us to comply with margin requirements and with certain clearing and trade-execution requirements if we do not satisfy certain specific exceptions. The Dodd-Frank Act may also require the counterparties to our derivatives contracts to transfer or assign some of their derivatives contracts to a separate entity, which may not be as creditworthy as the current counterparty. Depending on the rules adopted by the CFTC or similar rules that may be adopted by other regulatory bodies, we might in the future be required to provide cash collateral for our commodities hedging transactions under circumstances in which we do not currently post cash collateral. Posting of such additional cash collateral could impact liquidity and reduce our cash available for capital expenditures. A requirement to post cash collateral could therefore reduce our ability to execute hedges to reduce commodity price uncertainty and thus protect cash flows. If we reduce our use of derivatives as a result of the Dodd-Frank Act and regulations, our results of operations may become more volatile and our cash flows may be less predictable.

Oil and gas prices are volatile. Declines in commodity prices have adversely affected, and in the future may adversely affect, our financial condition and results of operations, cash flows, access to the capital markets and ability to grow.
 
Our revenue reserves, cash flows, profitability and future rate of growth substantially depend upon the market prices of oil and natural gas. Our ability to borrow funds or obtain additional capital, as well as the carrying value of our properties, is substantially dependent on prevailing prices of oil and natural gas. Historically, the markets for oil and gas have been volatile, and those markets are likely to continue to be volatile in the future. It is impossible to predict future oil and gasoil and gas price movements with certainty. The prices we receive for our oil and natural gas depend upon factors beyond our control, including, among others:
 
 
changes in the supply of and demand for oil and natural gas;
 
market uncertainty;
 
level of consumer product demands;
 
weather conditions;
 
domestic governmental regulations and taxes;
 
price and availability of alternative fuels;
 
political and economic conditions in oil producing countries;
 
actions by the Organization of Petroleum Exporting Countries;
 
price of oil and natural gas imports; and
 
overall domestic and foreign economic conditions.
 
These factors make it very difficult to predict future commodity price movements with any certainty. Substantially all of our oil and natural gas sales are made in the spot market or pursuant to contracts based on spot market prices and are not long-term fixed price contracts. Further, oil prices and gas prices do not necessarily fluctuate in direct relation to each other.

Drilling for and producing oil and natural gas are high risk activities with many uncertainties that could adversely affect our business, financial condition or results of operations.
 
Our success largely depends on the success of our exploitation, exploration, development and production activities. Our oil and natural gas exploration and production activities are subject to numerous risks beyond our control; including the risk that drilling will not result in commercially viable oil or natural gas production. Our decisions to purchase, explore, develop or otherwise exploit prospects or properties will depend in part on the evaluation of data obtained through geophysical and geological analyses, production data and engineering studies, the results of which are often inconclusive or subject to varying interpretations. Our costs of drilling, completing and operating wells are often uncertain before drilling commences. Overruns in budgeted expenditures are a common risk that can make a particular project uneconomical. Further, many factors may curtail, delay or cancel drilling operations, including the following:
 
 
delays imposed by or resulting from compliance with regulatory requirements;
 
pressure or irregularities in geological formations;
 
shortages of or delays in obtaining equipment and qualified personnel;
 
equipment failures or accidents;
 
adverse weather conditions;
 
reductions in oil and gas prices; and
 
oil and gas property title problems.
 
 
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Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.
 
The process of estimating oil and natural gas reserves is complex. It requires interpretations of available technical data and many assumptions, including assumptions relating to economic factors. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of our reported reserves. In order to prepare our estimates, we must project production rates and the timing of development expenditures. We must also analyze available geological, geophysical, production and engineering data. The extent, quality and reliability of this data can vary. The process also requires that economic assumptions be made about matters such as oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Therefore, estimates of oil and natural gas reserves are inherently imprecise.
 
Actual future production, oil and natural gas prices received, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves most likely will vary from our estimates. Any significant variance could materially affect the estimated quantities and present value of our reported reserves. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing oil and natural gas prices and other factors, many of which are beyond our control.
 
Prospects that we decide to drill may not yield oil or natural gas in commercially viable quantities.
 
There is no way to predict in advance of drilling and testing whether any particular drilling prospect will yield oil or natural gas in sufficient quantities to recover drilling and completion costs or to be economically viable. The use of seismic data and other technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling whether oil or natural gas will be present or, if present, whether oil or natural gas will be present in commercial quantities. We cannot assure you that the analogies we draw from available data from other wells, more fully explored prospects or producing fields will be applicable to our drilling prospects.
 
We depend on successful exploration, development and acquisitions to maintain revenue in the future.
 
In general, the volume of production from oil and gas properties declines as reserves are depleted, with the rate of decline depending on reservoir characteristics. Except to the extent that we conduct successful exploration and development activities or acquire properties containing proved reserves, or both, our proved reserves will decline as reserves are produced. Our future oil and gas production is, therefore, highly dependent on our level of success in finding or acquiring additional reserves. Additionally, the business of exploring for, developing, or acquiring reserves is capital intensive. Recovery of our reserves, particularly undeveloped reserves, will require significant additional capital expenditures and successful drilling operations. To the extent cash flow from operations is reduced and external sources of capital become limited or unavailable, our ability to make the necessary capital investment to maintain or expand our asset base of oil and gas reserves would be impaired. In addition, we may be required to find partners for any future exploratory activity. To the extent that others in the industry do not have the financial resources or choose not to participate in our exploration activities, we will be adversely affected.
 
We are not the operator of our oil and gas properties and therefore are not in a position to control the timing of development efforts, the associated costs or the rate of production of the reserves on such properties.
 
 
the timing and amount of capital expenditures;
 
the availability of suitable drilling equipment, production and transportation infrastructure and qualified operating personnel;
 
the operator’s expertise and financial resources;
 
approval of other participants in drilling wells;
 
selection of technology; and
 
the rate of production of the reserves.
 
In addition, when we are not the majority owner or operator of a particular oil or gas project, if we are not willing or able to fund our capital expenditures relating to such projects when required by the majority owner or operator, our interests in these projects may be reduced or forfeited.

Our future acquisitions may yield revenues and/or production that vary significantly from our projections.
 
In acquiring producing properties we assess the recoverable reserves, future oil and gas prices, operating costs, potential liabilities and other factors relating to such properties. Our assessments are necessarily inexact and their accuracy is inherently uncertain. Our review of a subject property in connection with our acquisition assessment will not reveal all existing or potential problems or permit us to become sufficiently familiar with the property to assess fully its deficiencies and capabilities.
 
 
18

 
 
We may not inspect every well, and we may not be able to identify structural and environmental problems even when we do inspect a well. If problems are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of those problems. Any acquisition of property interests may not be economically successful, and unsuccessful acquisitions may have a material adverse effect on our financial condition and future results of operations.
 
We cannot assure you that:
 
 
we will be able to identify desirable oil and gas prospects and acquire leasehold or other ownership interests in such prospects at a desirable price;
 
any completed, currently planned, or future acquisitions of ownership interests in oil and gas prospects will include prospects that contain proved oil and gas reserves;
 
we will have the ability to develop prospects which contain proven natural gas or oil reserves;
 
we will have the financial ability to consummate additional acquisitions of ownership interests in oil and gas prospects or to develop the prospects which we acquire to the point of production; or
 
we will be able to consummate such additional acquisitions on terms favorable to us.
 
We face strong competition from other oil and gas companies.
 
We encounter competition from other oil and gas companies in all areas of our operations, including the acquisition of exploratory prospects and proved properties. Our competitors include major integrated oil and gas companies and numerous independent oil and gas companies, individuals, and drilling and income programs. Many of our competitors are large, well-established companies that have been engaged in the oil and gas business much longer than we have and possess substantially larger operating staffs and greater capital resources than we do. These companies may be able to pay more for productive oil and gas properties and may be able to define, evaluate, bid for, and purchase a greater number of properties and prospects than our financial or human resources permit. In addition, these companies may be able to expend greater resources on the existing and changing technologies that we believe are and will be increasingly important to attaining success in the industry. We may not be able to conduct our operations, evaluate, and select suitable properties and consummate transactions successfully in this highly competitive environment.
 
The unavailability or high cost of drilling rigs, equipment, supplies or personnel could affect adversely our ability to execute on a timely basis our exploration and development plans within budget, which could have a material adverse effect on our financial condition and results of operations.
 
Shortages or the high cost of drilling rigs, equipment, supplies or personnel could delay or affect adversely our exploration and development operations, which could have a material adverse effect on our financial condition and results of operations. Demand for drilling rigs, equipment, supplies, and personnel are currently very high in the areas in which we operate. An increase in drilling activity in the areas in which we operate could further increase the cost and decrease the availability of necessary drilling rigs, equipment, supplies and personnel.

We depend on key management personnel and technical experts. The loss of key employees or access to third party technical expertise could impact our ability to execute our business.
 
If we lose the services of the senior management, or access to independent land men, geologists and reservoir engineers with whom the Company has strategic relationships, our ability to function and grow could suffer, in turn, negatively affecting our business, financial condition and results of operations.

The marketability of our natural gas production depends on facilities that we typically do not own or control, which could result in a curtailment of production and revenues.
 
The marketability of our gas production depends in part upon the availability, proximity and capacity of gas gathering systems, pipelines and processing facilities. We generally deliver gas through gas gathering systems and gas pipelines that we may not own under interruptible or short-term transportation agreements. Under the interruptible transportation agreements, the transportation of our gas may be interrupted due to capacity constraints on the applicable system, due to maintenance or repair of the system, or for other reasons as dictated by the particular agreements. Our ability to produce and market natural gas on a commercial basis could be harmed by any significant change in the cost or availability of such markets, systems or pipelines.
 
 
19

 
 
If oil and gas prices decrease, we may be required to take write-downs of the carrying values of our oil and natural gas properties, and negatively impacting the trading value of our securities.
 
Accounting rules require that we review periodically the carrying value of our oil and natural gas properties for possible impairment. Based on specific market factors and circumstances at the time of prospective impairment reviews, and the continuing evaluation of development plans, production data, economics and other factors, we may be required to write down the carrying value of our oil and natural gas properties. In the future should our properties serve as collateral for credit facilities, a write down in the carrying values of our properties could require us to repay debt earlier than would otherwise be required. A write-down would also constitute a non-cash charge to earnings. It is likely that the effect of such a write-down could also negatively impact the trading price of our securities.
 
We account for our oil and natural gas properties using the successful efforts method of accounting. Under this method, all development costs and acquisition costs of proved properties are capitalized and amortized on a units-of-production basis over the remaining life of proved developed reserves and proved reserves, respectively. Costs of drilling exploratory wells are initially capitalized, but charged to expenses if and when a well is determined to be unsuccessful. We evaluate impairment of our proved oil and natural gas properties whenever events or changes in circumstances indicate an asset’s carrying amount may not be recoverable. The risk that we will be required to write down the carrying value of our oil and natural gas properties increases when oil and natural gas prices are low or volatile. In addition, write-downs would occur if we were to experience sufficient downward adjustments to our estimated proved reserves or the present value of estimated future net revenues.
 
We are subject to complex laws that can affect the cost, manner or feasibility of doing business.
 
The exploration, development, production and sale of oil and natural gas are subject to extensive federal, state, local and international regulation. We may be required to make large expenditures to comply with such governmental regulations. Matters subject to regulation include:
 
 
natural disasters;
 
permits for drilling operations;
 
drilling and plugging bonds;
 
reports concerning operations;
 
the spacing and density of wells;
 
unitization and pooling of properties;
 
environmental maintenance and cleanup of drill sites and surface facilities; and
 
Protection of human health.
 
From time to time, regulatory agencies have also imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas.
 
Under these laws, we could be liable for personal injuries, property damage and other damages. Failure to comply with these laws also may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties. Moreover, these laws could change in ways that substantially increase our costs. Any such liabilities, penalties, suspensions, terminations or regulatory changes could materially adversely affect our financial condition and results of operations.
 
The financial condition of our operators could negatively impact our ability to collect revenues from operations.
 
We may not operate all of the properties in the future in which we have working interests. In the event that an operator of our properties experiences financial difficulties, this may negatively impact our ability to receive payments for our share of net production that we are entitled to under our contractual arrangements with such operator. While we seek to minimize such risk by structuring our contractual arrangements to provide for production payments to be made directly to us by first purchasers of the hydrocarbons, there can be no assurances that we can do so in all situations covering our non-operated properties.
 
 
20

 
 
We may issue additional shares of capital stock that could affect the value of existing holders of the Company’s stock, stock options, or warrants.
 
Our board of directors is authorized to issue additional classes or series of shares of our capital stock without any action on the part of our stockholders. Our board of directors also has the power, without stockholder approval, to set the terms of any such classes or series of shares of our capital stock that may be issued, including voting rights, dividend rights, conversion features, preferences over shares of our existing class of common stock with respect to dividends or if we liquidate, dissolve or wind up our business and other terms. If we issue shares of our capital stock in the future that have preference over shares of our existing class of common stock with respect to the payment of dividends or upon our liquidation, dissolution or winding up, or if we issue shares of capital stock with voting rights that dilute the voting power of shares of our existing class of common stock, the rights of holders of shares of our common stock or the trading price of shares of our common stock and, as a result, the market value of the options and warrants into shares of common stock could be adversely affected.
 
Our results of operations could be adversely affected as a result of impairments of oil and natural gas properties.
 
While we provide that our assets will be depleted over the estimated productive reserves of the oil and natural gas wells, these assets must also be tested at least annually for impairment. Management makes certain estimates and assumptions when determining the fair value of net assets and liabilities, including, among other things, an assessment of market conditions, projected cash flows, investment rates, cost of capital and growth rates, which could significantly impact the reported value of drilling costs and other intangible assets. Fair value is determined using a combination of the discounted cash flow, market multiple and market capitalization valuation approaches. Absent any impairment indicators, we perform our impairment tests annually during the fourth quarter. Any future impairment, including impairments of the carrying values of drilling costs and other intangible assets, would negatively impact our results of operations for the period in which the impairment is recognized.
 
Pending litigation may place a financial burden on our resources and the outcome of the litigation may not be favorable to the Company.
 
We are currently defending two lawsuits filed against us by landowners for trespass. Litigation continues and the outcome is uncertain. The risk is that our investment in two Adams-Baggett gas wells could be lost.
 
We are also prosecuting a lawsuit against our former drilling contractor, former operator, and other related parties. In that case, an interlocutory Default Judgment against the defendants was awarded to Victory and James Capital, which is a general partner of Navitus. The judgment amounted to $17,183,987. No monies have yet been received related to this favorable judgment.

Item 1B. Unresolved Staff Comments

We are a “smaller reporting company” as defined by Rule 12b-2 under the Securities Exchange Act, and as such, are not required to provide the information required under this item.
 
 
21

 
 
Item 2. Properties
 
Office Space Leases.
 
Our executive office space lease is set to expire on June 30, 2014 and is for approximately 1,200 square feet at 3355 Bee Caves Road, Suite 608, Austin, TX 78746. The monthly lease cost is $2,250.
 
Portfolio.

As of December 31, 2013, the Company, through Aurora had 21 wells in production and 2 wells that have been successfully drilled and were in various stages of completion. The Company’s portfolio of producing assets now includes; the Lightnin’ property, the Bootleg Canyon Ellenberger Field, the Adams-Baggett Gas Field, the Chapman Ranch, the Morgan property, and the Clear Water Wolfberry resource play. Details for each property are further discussed in this section of the report.

Proved commercial accumulations of hydrocarbons now occur in multiple target zones at depths ranging from 4,700 to 13,100 feet, with the majority of proved reserves being located on properties in the prolific Permian Basin of Texas and New Mexico. As the Company continues to drill available locations on its current properties and add properties that are accessible to the Company through its established deal flow pipeline, it anticipates an accelerated pace toward oil-weighted production and the addition of new reserves.

On February 24, 2014 the Aurora partnership closed a $26.4 million operations and acquisition credit facility with Texas Capital Bank of Dallas, Texas. $1.4 million of this facility will provide operating capital for Aurora. The company plans to utilize the remaining $25 million of the credit facility and access to $10 million of private placement capital from its partner Navitus, to aggressively grow the Company’s Permian Basin (Texas) assets through targeted acquisitions of producing properties with upside development potential. Several highly desirable properties have already been identified and are being vetted. The Company anticipates deploying all of the credit facility and the $10 million of Navitus private placement capital toward high cash-flow, producing acquisition targets this year.

The Lightnin’ Property, Glascock County, Texas

With the March 2012 acquisition of the first 320-acre Cotter parcel at Lightnin’, the company, via its partnership interest in Aurora began a new focus on the expansion of high-value, low-risk, multi-well properties within the prolific Permian Basin of west Texas and the adjoining area of southeastern New Mexico. The May 2013 addition of the McCauley parcel brings the total gross acres held at Lightnin’ to 640.

The first vertical well (Cotter #1) was spud in January 2013, completed in February and brought into production in late March. September production averaged 51 barrels of oil per day and 110 Mcf of high value sweet natural gas. The second well (McCauley "6" #2) was spud on May 14 and went into production in late June. February production is averaging 51 barrels of oil per day and 85 MCF of natural gas per day. A third well (McCauley “6” #3) was successfully completed and brought into production in September. This well has not yet stabilized its production but has averaged 52 barrels of oil and 58 Mcf of liquids rich gas per day since December 12, 2013.

The Lightnin’ property holds at least four more development well locations. Each well undergoes a multi-stage frac procedure as part of the completion. Each well offers an estimated 105,000 gross barrels of oil equivalent (BOE) or 15,750 BOE net to the Company interest (15% NRI, 20% WI). These wells should produce 84 percent oil and 16 percent natural gas liquids (NGL) and gas.

The Lightnin’ property is located in the very active resource play known as the Spraberry / Wolfcamp, which is composed of the lower Sprayberry, Dean, Wolfcamp, Cline Shale and Fusselman into the Pennsylvanian. The 640 acre prospect is surrounded by existing production and some of the nation’s largest independent operators. Aurora joins some very well-known explorers who are also drilling in the area. The most active operators in the area are Apache Corporation, Laredo Petroleum, Pioneer Natural Resources, Energen Resources, Endeavor and Nadel and Gussman.

Development capital required for the remaining five well locations is estimated to be $1.7 million.
 
 
22

 

The Bootleg Canyon Property, Pecos County, Texas

Acquired in 2011, this 4,000+ acre lease is located in Pecos County, Texas. There are now two producing Ellenberger oil wells and one producing Connell gas well on this 3D seismic-controlled property. The gas well (University 7 #1) spud on December 23, 2012 and went into completion on March 6, 2013. The well is currently averaging daily gas flow of between 475 and 650 MCF per day.

A third-party SEC reservoir report allocates a gross EUR for each Ellenberger oil well at 187,240 BO (100% oil). Gross reserves for the gas well are 471,130 Mcf.

The two completed oil wells and the one Proved Undeveloped oil well represent nearly $1 million of future undiscounted cash flow to the partnership. The acreage held currently provides 160 acre spacing between wells and thus an opportunity to drill additional wells on the prospect acreage. It’s estimated there may be ten total well locations on the property. The Company through its interest in Aurora holds a 5 percent working interest and a 3.75 percent net revenue interest.

Development capital required for the remaining ten well locations is estimated to be $780,000.

The Adams-Baggett Property, Crockett County, Texas

The Company, via its partnership interest in Aurora received its first production revenue from this field in March of 2008 and continues to receive income today. Canyon sandstones are the primary hydrocarbon target within this prospect and they form a prolific low-permeability gas play located in the famous Val Verde Basin of this Southwest Texas. Natural gas from the Canyon Sandstone generally receives a premium in price above the standard market price for natural gas due to its higher BTU content per cubic foot.

The Canyon Sandstone gas play is part of the large prolific Adams-Baggett Canyon Sandstone gas field. The Canyon Sandstone formation is found at a depth of 4,300 feet to 4,900 feet. The average life span of a Canyon Sandstone gas well is approximately 30 years.

Aurora Energy Partners holds a working interest in nine wells; 100% WI and a 75% NRI in seven wells and a 50% WI with 38% NRI in two wells.

Clearwater Wolfberry Resource Play, Howard County, Texas

In April 2011, the Company, through its ownership in Aurora acquired a 1.5% working interest and a 1.125% net revenue interest in 3,186 gross acres known as the Clearwater Property. At the time of acquisition this property held two producing wells and a third exploration well was in progress. At year-end 2011, there were three producing oil wells on this property. During February 1, 2012 the Company assigned approximately 944 gross acres of mineral rights related to the Hamlin 26 and Hamlin 24 tracts to another operator in exchange for an overriding royalty interest proportional to the working interest held by the Company. In exchange for the assignment, the Company retained a 0.375% overriding royalty interest in the 944 gross acres. The Company still owns a 1.5% working interest and a 1.125% net revenue interest in the remaining 2,242 acres.

The Chapman Ranch Property, Nueces County, Texas

The Company through its interest in Aurora acquired this prospect in April 2012. The prospect is located in south central Nueces County, Texas. The prospect wells are a conventional drilling play targeting the Frio Sands formation.

The first well was drilled and completed in July of 2012. Multiple pay zones were present in the well-logs; however oil and gas production from the target formation was not of a commercial quantity. A second well location is up-dip of the first well site and is in a different fault block.

This second well spud on December 22, 2013 and reached total depth of 7,800 feet on January 7, 2014. The well was perforated in several sections and was successfully flow tested from the Frio Sands on January 21, 2014 at 67 barrels of oil and 10 Mcf of dry gas per day. The well will be put on production after the installation of storage tanks and other surface equipment are completed. Aurora acquired this prospect in early 2012 before shifting its focus to the Permian.

Estimated recoverable reserves have not yet been determined.

The Company through its interest in Aurora holds a 5 percent working interest and a 3.75 percent net revenue interest.
 
 
23

 
 
Developed and Undeveloped Lease Acreage
 
The following table sets forth certain information regarding developed and undeveloped leasehold acreage held by Aurora as of December 31, 2013. “Developed Acreage” refers to acreage on which wells have been drilled or completed to a point that would permit production of oil and natural gas in commercial quantities. “Undeveloped Acreage” refers to acreage on which wells have not been drilled or completed to a point that would permit production of oil and natural gas in commercial quantities whether or not the acreage contains proved reserves.
 
         
Developed Acreage
   
Undeveloped Acreage
   
Total Acreage
 
   
WI %
   
Gross
   
Net
   
Gross
   
Net
   
Gross
   
Net
 
Adams-Baggett Ranch
                                         
Adams-Baggett Ranch
   
100
%
   
140.0
     
140.0
     
-
     
-
     
140.0
     
140.0
 
Adams-Baggett Ranch
   
50
%
   
40.0
     
20.0
     
-
     
-
     
40.0
     
20.0
 
                                                         
The Bootleg Canyon Property
                                                       
Bootleg Prospect
   
5.00
%
   
480.0
     
24.0
     
4,164.7
     
198.2
     
4,644.7
     
222.2
 
                                                         
Saddle Butte Prospect
   
3.00
%
   
-
     
-
     
2,560.0
     
76.8
     
2,560.0
     
76.8
 
                                                         
The Lightnin’ Property
   
20.00
%
   
 320.0
     
64.0
     
320.0
     
64.0
     
640.0
     
128.0
 
                                                         
The Uno-Mas Property
   
10
%
   
160.0
     
16.0
     
160.0
     
2.0
     
320.0
     
18.0
 
                                                         
The Morgan Property
   
3.00
%
   
40.0
     
1.2
     
46.0
     
1.4
     
86.0
     
2.6
 
                                                         
The Chapman Ranch Property
   
5.00
%
   
80.0
     
4.0
     
240.0
     
12.0
     
320.0
     
16.0
 
                                                         
The Pinetop Property
   
4.00
%
   
80.0
     
3.2
     
1,120.0
     
44.8
     
1,200.0
     
48.0
 
                                                         
Clearwater Wolfberry Resource Play
   
1.50
%
   
320.0
     
4.8
     
1,922.0
     
28.8
     
2,242.0
     
33.6
 
*Royalty Interest Acreage
   
-
     
-
     
-
     
944.0
     
3.5
     
944.0
     
3.5
 
Total Acreage
           
1,660.0
     
277.2
     
11,476.7
     
431.5
     
13,136.7
     
708.7
 
 
Internal Controls Over Reserve Estimates, Technical Qualifications and Technologies Used

The Company’s policies regarding internal controls over reserve estimates requires reserves to be in compliance with the SEC definitions and guidance, and for reserves to be prepared by an independent third party reserve engineering firm and reviewed by certain members of senior management.
 
Estimates of our reserves were prepared by an independent reserve engineer, Mr. James Nicolson who specializes in preparing reservoir studies, reserve estimates, and property evaluations. Mr. Nicolson, a Registered Professional Engineer, is a member of the Society of Petroleum Engineers, and a former chairman of the Permian Basin Oil & Gas Recovery Conference. Our independent consultants, including a geologist and an oil and gas operations professional have reviewed and approved the reserve report which is filed as an exhibit to this Annual Report on Form 10-K.
 
 
24

 
 
At December 31, 2013, the Company’s proved developed reserves were 18% oil and 82% gas and liquids, respectively. The following table sets forth our estimated proved oil and natural gas reserves for the 23 wells and the PW value of such reserves as of December 31, 2013 and 2012.
 
Total Estimated Proved Reserves
 
2013
   
2012
 
Oil (MBbl)
   
49.0
     
24.3
 
Gas (Mmcf)
   
723.2
     
679.4
 
% Oil
   
30
%
   
18
%
% Proved Developed
   
88
%
   
92
%
PV – 10% (in thousands)
 
$
2,422.1
   
$
1,745.3
 
 
Reconciliation of PV-10 to Standardized Measure
 
PV-10 is derived from the Standardized Measure of discounted future net cash flows, which is the most directly comparable GAAP financial measure. PV-10 is a computation of the Standardized Measure of discounted future net cash flows on a pre-tax basis. PV-10 is equal to the Standardized Measure of discounted future net cash flows at the applicable date, before deducting future income taxes, discounted at 10 percent. We believe that the presentation of PV-10 is relevant and useful to investors because it presents the discounted future net cash flows attributable to our estimated net proved reserves prior to taking into account future corporate income taxes, and it is a useful measure for evaluating the relative monetary significance of our oil and natural gas properties. Further, investors may utilize the measure as a basis for comparison of the relative size and value of our reserves to other companies. We use this measure when assessing the potential return on investment related to our oil and natural gas properties. PV-10, however, is not a substitute for the Standardized Measure of discounted future net cash flows. Our PV-10 measure and the Standardized Measure of discounted future net cash flows do not purport to represent the fair value of our oil and natural gas reserves.
 
The following table provides a reconciliation of PV-10 to the Standardized Measure of discounted future net cash flows at December 31, 2013 and 2012 for the Company:
 
   
December 31,
 
 
 
2013
 
 
2012
 
 
 
(In Thousands)
 
PV-10
 
$
2,422.1
 
 
$
1,745.3
 
Present value of future income taxes discounted at 10%
 
 
823.5
 
 
 
601.1
 
 
 
     
 
     
Standardized Measure of discounted future net cash flows
 
$
1,598.6
 
 
$
1,144.2
 
 
Estimated future net revenues
 
The following table sets forth the estimated future net revenues, excluding derivative contracts, from proved reserves, the present value of those net revenues (PV-10) and the standardized measure values at December 31, 2013 and 2012 for the Company:
 
 
 
December 31,
 
 
 
2013
   
2012
 
   
(In Thousands)
 
Future net revenues
 
$
4,230.8
   
$
3,342.6
 
Present value of net revenues:
               
Before income tax (PV-10)
   
2,422.1
     
1,745.3
 
After income tax (Standardized Measure)
   
1,598.6
     
1,144.2
 
 
 
25

 
 
Productive Wells

Productive wells are producing wells or wells capable of production. This does not include water source wells, water injection wells or water disposal wells. Productive wells do not include any wells in the process of being drilled and completed that are not yet capable of production, but does include old productive wells that are currently shut-in, because they are still capable of production. The following table sets forth the number of productive oil and natural gas wells in which we owned an interest as of December 31, 2013 and 2012 for the Company.
 
   
December 31,
 
   
2013
   
2012
 
   
Gross
   
Net
   
Gross
   
Net
 
Natural Gas
   
10.0
     
8.1
     
10.0
     
8.1
 
Oil
   
11.0
     
0.9
     
11.0
     
0.4
 
Totals
   
21.0
     
9.0
     
21.0
     
8.5
 
 
Technologies Used in Establishing Proved Reserves in 2013 and 2012
 
Our proved reserves in 2013 and 2012 were based on estimates generated through the integration of available and appropriate data, utilizing well established technologies that have been demonstrated in the field to yield repeatable and consistent results.
 
Data used in these integrated assessments included information obtained directly from the subsurface via wellbores, such as well logs, reservoir core samples, fluid samples, static and dynamic pressure information, production test data, and surveillance and performance information. The data utilized also included subsurface information obtained through indirect measurements, including high-quality 2-D and 3-D seismic data, calibrated with available well control. Surface geological information was also utilized in the preparation of the data where applicable. The tools used to interpret the data included proprietary seismic processing software, proprietary reservoir modeling and simulation software, and commercially available data analysis packages.
 
Proved Undeveloped Reserves
 
At December 31, 2013 and 2012, our proved undeveloped reserves were 2 prospects (the Cotter 6 #2 and the University 6 #3) and 3 prospects (the University 7 #1, the Morgan #1, and the Morgan #2), respectively.
 
 
26

 
 
Oil and natural gas Production, Production Prices and Production Costs

The following table sets forth certain information regarding our production volume, and average sales and production costs for the periods indicated for the Company.
 
 
 
Years Ended December 31,
 
 
 
2013
   
2012
 
Production:
           
Oil (Bbls)
   
5,810
     
1,659
 
Natural gas (Mcf)
   
44,833
     
61,582
 
BOE
   
13,282
     
11,923
 
Average sales prices:
               
Oil (per Bbl)
 
$
84.81
   
$
83.98
 
Natural gas (per Mcf)
 
$
5.35
   
$
4.55
 
BOE
 
$
55.17
   
$
27.37
 
Average production costs
               
Lease operating expense
 
$
218,036
   
$
126,131
 
Production tax
 
$
44,218
   
$
24,649
 
BOE
 
$
19.74
   
$
12.65
 
 
Drilling and Other Exploratory and Development Activities
 
The following table sets forth our drilling activity for the periods indicated.
 
 
 
Years Ended December 31,
 
 
 
2013
   
2012
 
 
 
Gross
   
Net
   
Gross
   
Net
 
Exploratory Wells
                       
Productive
   
4
     
.5
     
3.0
     
0.1
 
Dry
   
1
     
.1
     
3.0
     
0.1
 
Developmental Wells
                               
Productive
   
2
     
.3
     
2.0
     
0.1
 
Dry
   
-
     
-
     
-
     
-
 
 
During the period beginning January 1, 2014 and ending March 28, 2014, we participated in the drilling of 2 gross (.25 net) wells, all of which were completed.

Title to Properties

We believe that we have satisfactory title to substantially all of our active properties in accordance with standards generally accepted in the oil and natural gas industry. Our properties are subject to customary royalty interests, liens for current taxes and other burdens, which we believe do not materially interfere with the use of or affect the value of such properties. Prior to acquiring undeveloped properties, we perform a title investigation that is thorough but less vigorous than that conducted prior to drilling, which is consistent with standard practice in the oil and natural gas industry. Before we commence drilling operations, we conduct a thorough title examination and perform curative work with respect to significant defects before proceeding with operations. We have performed a thorough title examination with respect to substantially all of our active properties.
 
 
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Item 3. LEGAL PROCEEDINGS
 
Cause No. 08-04-07047-CV; Oz Gas Corporation v. Remuda Operating Company, et al. v. Victory Energy Corporation.; In the 112th District Court of Crockett County, Texas.
 
Plaintiff Oz Gas Corporation sued Victory Energy Corporation and other parties for bad faith trespass, among other claims, regarding the drilling of two wells on lands that Oz (“OZ”) claims title to. Victory Energy Corporation has a 50% interest in one of the named wells involved in this lawsuit (that being well 155-2 on the Adams Baggett Ranch in Crockett County, Texas). The lawsuit was originally filed against other parties in April 2008, and Victory intervened in the case on November 18, 2009 to protect its interest in the 155-2 well.
 
The case was tried on February 8th and 9th, 2012. The Court found in favor of Oz and rendered a trespass finding against Victory and the other defendants. This case has been appeales to the 8th Court of Appeals in El Paso, Texas, and has been fully briefed and submitted. Victory has no monetary liability beyond those funds that were held in the registry of the Court on the date of judgement.
 
Cause No. CV-47,230; James Capital Energy, LLC and Victory Energy Corporation v. Jim Dial, et al.; In the 142nd District Court of Midland County, Texas.
 
This lawsuit was filed in the 142nd District Court of Midland County, Texas on January 19, 2010 by James Capital Energy, LLC and Victory Energy Corporation against Jim Dial, et al, for fraud, fraudulent inducement, and negligent misrepresentation, breach of contract, breach of fiduciary duty, trespass, conversion and a few other related causes of action. This lawsuit stems from an investment made by Victory for the purchase of six wells on the Adams Baggett Ranch.
 
On September 9, 2010, Victory was granted an interlocutory Default Judgment against Defendants Jim Dial, 1st Texas Natural Gas Company, Inc., Universal Energy Resources, Inc., Grifco International, Inc., and Precision Drilling & Exploration, Inc. The total judgment amounted to approximately $17.2 million. Recently Victory has added additional parties to this lawsuit. Discovery is ongoing in this case and no trial date has been set at this time.
 
Victory believes that it will be victorious against all the remaining Defendants in this case.
 
On October 20, 2011 Defendant Remuda filed a Motion to Consolidate and a Counterclaim against Victory. Remuda is seeking to consolidate this case with two other cases in which Remuda is the named Defendant. An objection to this motion was filed and the cases have not been consolidated. Additionally, we do not believe that the counterclaim made by Remuda has any legal merit.

Cause No. 10-09-07213; Perry Howell, et al. v. Charles Gary Garlitz, et al.; In the 112th District Court of Crockett County, Texas.
 
The above referenced lawsuit was filed in the 112th District Court of Crockett County, Texas on September 6, 2010. This lawsuit alleges that Cambrian Management, Ltd. and Victory Energy Corporation trespassed on lands owned by the Plaintiffs in the drilling of the Adams-Baggett 115-8 well in Crockett County, Texas.

Discovery is ongoing in this case and the case is set for trial in July 2014. Victory Energy Corporation believes that the claims have no merit and that it will prevail.

Cause No. D-1-GN-13-00044; Aurora Energy Partners and Victory Energy Corporation v. Crooked Oaks; In the 261st District Court of Travis County, Texas.

The Company has yet to collect an installment balance of $200,000 for the sale of its Jones County, Texas oil and gas interests in May of 2012. The Company believes it will ultimately recover this receivable, but has provided for it as an allowance for doubtful accounts, and has not included it in the net accounts receivable balance of the Company’s 2012 consolidated financial statements.
 
Item 4. MINE SAFETY DISCLOSURE

Not applicable.
 
 
28

 
 
PART II
 
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock is currently quoted on the OTC Markets under the symbol “VYEY.” The following table sets forth the high and low bid information for each quarter for the years ended December 31, 2013 and 2012. The information reflects prices between dealers, and does not include retail markup, markdown, or commission, and may not represent actual transactions.
 
       
Bid Prices
 
Fiscal Year Ended December 31,
 
Period
 
High
   
Low
 
                 
2013
 
First Quarter
 
$
.39
   
$
.10
 
   
Second Quarter
 
$
.33
   
$
.01
 
   
Third Quarter
 
$
.25
   
$
.02
 
   
Fourth Quarter
 
$
.30
   
$
.02
 
                     
2012
 
First Quarter
 
$
2.35
   
$
1.07
 
   
Second Quarter
 
$
1.10
   
$
0.55
 
   
Third Quarter
 
$
1.04
   
$
0.21
 
   
Fourth Quarter
 
$
0.50
   
$
0.15
 
 

Holders
 
As of March 28, 2014, the high and low bid prices for our common stock on the OTC Market was $0.35 and $0.35, respectively. As of March 28, 2014, there were approximately 1434 holders of record of our common stock.
 
The transfer agent for our common stock is Transfer Online, Inc., 512 SE Salmon Street, Portland, Oregon 97214.
 
Dividend Policy
 
We have not paid any cash dividends on our common stock and do not expect to do so in the foreseeable future. We intend to apply our earnings, if any, in expanding our operations and related activities. The payment of cash dividends in the future will be at the discretion of the board of directors and will depend upon such factors as earnings levels, capital requirements, our financial condition and other factors deemed relevant by the board of directors.
 
Recent Sales of Unregistered Securities
 
The following securities were issued through December 31, 2013:

Period
 
Investment
   
Warrants
 
First quarter ended March 31, 2013
 
$
784,000
     
784,000
 
Second quarter ended June 30, 2013
 
$
1,085,000
     
1,085,000
 
Third quarter ended September 30, 2013
 
$
187,000
     
187,000
 
Fourth quarter ended December 31, 2013
 
$
280,000
     
280,000
 
Totals
 
$
2,336,000
     
2,336,000
 
 
 
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The following securities were issued through December 31, 2013 include the following:
 
Purpose
 
Granted
   
Outstanding
 
Board Services
   
120,000
     
120,000
 
Employee Options
   
60,000
     
60,000
 
Totals
   
180,000
     
180,000
 

We did not purchase any of our own common stock during the year ended December 31, 2013.

Item 5.02. Departure of Directors or Principal Officers; Appointment of Principal Officers
 
On October 17, 2013, Victory Energy Corporation (the “Company”) received and accepted the resignation of Robert J. Miranda, Chairman of the Board of Directors and Audit Committee of the Company. Mr. Miranda’s resignation was not the result of any disagreement with the Company regarding its operations, policies or practices.
 
Item 6. SELECTED FINANCIAL DATA

We are a “smaller reporting company” as defined by Rule 12b-2 under the Securities Exchange Act, and as such, are not required to provide the information required under this Item.
 
 Item 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion is intended to assist you in understanding our business and results of operations together with our present financial condition. This section should be read in conjunction with our consolidated financial statements and the accompanying notes included elsewhere in this report. Statements in our discussion may be forward-looking statements. These forward-looking statements involve risks and uncertainties. We caution that a number of factors could cause future production, revenues and expenses to differ materially from our expectations.
 
The following is management’s discussion and analysis of certain significant factors that have affected certain aspects of our financial position and results of operations during the periods included in the accompanying audited consolidated financial statements.
 
Forward Looking Statements
 
This Annual Report on Form 10-K contains forward-looking statements concerning our beliefs, plans, objectives, goals, expectations, anticipations, estimates, intentions, operations, future results and prospects, including statements that include the words “may,” “could,” “should,” “would,” “believe,” “expect,” “will,” “shall,” “anticipate,” “estimate,” “intend,” “plan” and similar expressions. These forward-looking statements are based upon current expectations and are subject to risk, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed. We provide the following cautionary statement identifying important factors (some of which are beyond our control) which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.
 
General Overview
 
The Company is an independent, growth oriented oil and natural gas company engaged in the acquisition, exploration, development and production of oil and natural gas properties, through its partnership with Navitus in Aurora. The Company’s objective is to create long-term shareholder value by increasing oil and natural gas reserves, improving financial returns (higher production volumes and lower costs), and managing the capital on its balance sheets.

We are geographically focused onshore, with a primary focus in the Permian Basin of Texas and southeast New Mexico. The Company leverages both internal capabilities and strategic industry relationships to acquire working interest positions in low-to-moderate risk oil and natural gas prospects. Our focus is on oil or liquid-rich gas projects with longer-life reserves that offer competitive finding and development (F&D) costs.

At the end of 2013, the Company held a working interest in 21 completed wells located in Texas and New Mexico, predominantly in the Permian Basin of West Texas, with an additional 2 wells in progress toward successful completion.
 
 
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Our primary company business objective is to grow proved reserves through new drilling and grow the value of those reserves by focusing on oil. For 2012, we achieved both a shift toward oil and increase in proved reserves through successful drilling. This continued throughout the year ended December 31, 2013. We also added properties large enough to offer new multi-well drilling opportunities in the future. These efforts created a year to year increase of 102% in proved oil reserves, and 6.5% in proved gas reserves for 2013.
 
Our revenue, profitability, cash flow, oil and natural gas reserves value, future growth, and ability to borrow funds or obtain additional capital, as well as the carrying value of our properties, are substantially dependent on prevailing prices oil and natural gas. Historically, the markets for oil and natural gas have been volatile, and those markets are likely to continue to be volatile in the future. It is impossible to predict with certainty future prices for oil and natural gas, as such prices are subject to wide fluctuations in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty, and a variety of additional factors beyond our control.

Going Concern
 
As presented in the consolidated financial statements, Victory has incurred a net loss of $1,686,627 during the twelve months ended December 31, 2013, and losses are expected to continue in the near term. The accumulated deficit at December 31, 2013 was $36,901,894. The Company has been funding its operations through the sale of senior convertible 10% Senior Secured Convertible Debentures and from contributions made by Aurora. Management anticipates that significant additional capital expenditures will be necessary to develop the Company’s oil and natural gas properties, which consist of proved and unproved reserves, some of which may be non-producing, before significant positive operating cash flows will be achieved.
 
Management is pursuing business partnering arrangements for the acquisition and development of its properties as well as debt and equity funding through private placements. Without outside investment from the sale of equity securities, debt financing or partnering with other oil and natural gas companies, operating activities and overhead expenses will be reduced to a pace that will match available operating cash flows.
 
The accompanying consolidated financial statements are prepared as if the Company will continue as a going concern. The consolidated financial statements do not contain adjustments, including adjustments to recorded assets and liabilities, which might be necessary if the Company were unable to continue as a going concern.
 
Results of Operations

Comparison of Year Ended December 31, 2013 to Year Ended December 31, 2012
 
Revenues: All of our revenue was derived from the sale of oil and natural gas. Revenues consist of the proceeds of sales, net of royalty, and gas transportation deductions. Our net revenue increased $409,029 or 125% to $735,413 for the twelve months ended December 31, 2013 from $326,384 for the twelve months ended December 31, 2012. The increase reflects primarily the increase in oil production revenues which increased $353,433 to $492,753 for the 12 months ended December 31, 2013, from $139,320 for the twelve months ended December 31, 2012.
 
Lease Operating Expenses: Lease operating expenses which include the operating expenses of obtaining the oil and natural gas increased $77,001 or 61% to $203,132 for the twelve months ended December 31, 2013 from $126,131 for the twelve months ended December 31, 2012. The increase in lease operating expenses reflects an increase in the number of operating properties as well as the focus on oil production for the year ended December 31, 2013. 

Dry Hole Costs: Dry Hole costs increased $38,617 or 71% to $93,295 for the twelve months ended December 31, 2013 from $54,678 for the twelve months ended December 31, 2012. The Company incurred dry holes costs in connection with the drilling of the Ligon well in 2013.

Production Taxes: Production taxes are charged at the well head for the production of gas and oil. Production taxes increased $19,569 or 79% to $44,218 for the twelve months ended December 31, 2013 from $24,649 for the twelve months ended December 31, 2012. This results primarily from the increase in production year to year.
 
Exploration Expense: Exploration expenses decreased $247,686 or 132% to $18,828 for the twelve months ended December 31, 2013 from $266,514 for the twelve months ending December 31, 2012. The change reflects the timing of expenses for exploration activities.
 
 
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General and Administrative Expense: General and administrative expenses decreased $1,316,199 or 47% to $1,507,740 for the year ended December 31, 2013 from $2,823,939 for the year ending December 31, 2012. The decrease is due to the Company no longer utilizing outside services for consultants, software, accounting, and tax.

Depletion, Depreciation, and Amortization: Depletion, depreciation, and amortization expenses increased $327,226 or 639% to $378,398 for the twelve months ended December 31, 2013 from $51,172 for the twelve months ended December 31, 2012. The increase reflects the increase in the amount of oil production during the respective periods.
 
Impairment of Oil and Natural Gas Properties: Impairment of oil and natural gas properties increased $296,230 or 86% to $640,583 from $344,353 for the twelve months ended December 31, 2013. This is primarily due to lower reserve estimates for the University 7 #1 and the McCauley 6 #2 wells
 
Gain on Sale of Oil and Natural Gas Properties: Gain on sale of oil and natural gas properties decreased $254,724 or 92% for the twelve months ended December 31, 2013. This is due to unrelated sales in each of the respective years and is not comparatively meaningful.

Management Fee Income: Management fee income increased $14,708 or 100% for the twelve months ended December 31, 2013 compared to the twelve months ended December 31, 2012.

Interest Expense: Interest expense decreased $4,009,149 to $830 for the twelve months ended December 31, 2013 from $4,009,979 for the twelve months ended December 31, 2012. Virtually all of the interest expense was associated with the Company’s 10% Senior Secured Convertible Debentures which were converted to common stock on February 29, 2012.
 
Income Taxes: There is no provision for income tax expenses recorded for either the twelve months ended December 31, 2013 or ended December 31, 2012 due to the expected net operating losses (NOL) of both years.

The realization of future tax benefits is dependent on our ability to generate taxable income within the carry forward period. Given the Company’s history of net operating losses, management has determined that it is more-likely-than-not the Company will not be able to realize the tax benefit of the carry forwards. Current standards require that a valuation allowance thus be established when it is more likely than not that all or a portion of deferred tax assets will not be realized.

All tax benefits recognized in 2013 and 2012 due to the temporary difference in tax effect between the accounting and tax basis of the 10% Senior Secured Convertible Debentures were eliminated when the Debenture were converted to common stock on February 29, 2012.

Net Loss: Net losses decreased 70% or $4,983,404 to $2,116,138 for the twelve months ended December 31, 2013 from a net loss of $7,099,542 for the twelve months ended December 31, 2012. This net loss should be viewed in light of the cash flow from operations discussed below. The net loss attributable to Victory decreased 75% or $5,053,051 to $1,686,627 for the twelve months ended December 31, 2013, after taking into account the loss attributable to non-controlling interest.
 
During the year ended December 31, 2013, as with the year ended December 31, 2012, after adjusting for one-time gains, we did not generate positive cash flow from on-going operations. As a result, we funded our operations through the private sale of equity and debt securities, the issuance of our securities in exchange for services, and loans.
 
Liquidity and Capital Resources
 
Our cash and cash equivalents, total current assets, total assets, total current liabilities, and total liabilities as of December 31, 2013 as compared to December 31, 2012, are as follows:

   
December 31, 2013
   
December 31, 2012
 
Cash
  $ 20,858     $ 158,165  
Total current assets
    244,634       384,339  
Total assets
    2,474,022       1,859,981  
Total current liabilities
    576,173       273,209  
Total liabilities
    628,127       313,114  
 
 
32

 
 
At December 31, 2013, we had a working capital deficit of $331,539 compared to a working capital surplus of $111,130 at December 31, 2012. Current liabilities increased to $576,173 at December 31, 2013 from $273,209 at December 31, 2012 primarily due to an increase of $347,096 in accounts payable.
 
The Company had a $2,116,138 net loss, of which $1,385,836 was in non-cash changes and changes to working capital accounts, resulting in $730,275 net cash used by operating activities. This compares to cash used by operating activities for the twelve months ended December 31, 2012 of $2,649,428 after the net loss for the period of $7,099,542 was decreased by $4,450,114 in non-cash charges and changes to the working capital accounts.
 
Net cash used in investing activities, excluding exploration-related charges taken directly to income and prepaid receivables for drilling cost, for the twelve months ended December 31, 2013 was $1,743,032. This includes $2,196,482 for the drilling and completion of wells, $81,550 for the acquisition of leaseholds, $160,000 for sale-farm out leaseholds, and $375,000 of proceeds from the sale of oil and natural gas properties. This compares to $516,533 of net cash used by investing activities for the twelve month period ended December 31, 2012 which included $675,058 for the acquisition of lands, $8,925 for the drilling and completion of wells, $200,000 of proceeds from the sale of oil and natural gas properties, and $32,550 for the purchase of furniture and fixtures.
 
Net cash provided by financing activities for the twelve months ended December 31, 2013 was $2,336,000 which came from contributions from Navitus. This compares to the $2,848,503 in cash provided by financing activities during the twelve months ended December 31, 2012, which came primarily from the sale of $1,815,000 10% Senior Secured Convertible Debentures and $1,089,900 came from contributions from Navitus.
 
Recently Issued Accounting Pronouncements
 
Recent Accounting Pronouncements

During the period ended December 31, 2012, the FASB issued ASU 2013-07, "Presentation of Consolidated financial statements (Topic 205): Liquidation Basis of Accounting." The ASU requires entities to prepare consolidated financial statements using the liquidation basis of accounting when liquidation is "imminent." Liquidation is considered imminent when the likelihood is remote that the organization will return from liquidation and either: (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties; or (b) a plan for liquidation is being imposed by other forces (e.g., involuntary bankruptcy). In cases where a plan for liquidation was specified in the organization's governing documents at inception (e.g., limited-life entities), the organization should apply the liquidation basis of accounting only if the approved plan for liquidation differs from the plan for liquidation that was specified in the organization's governing documents. This ASU is effective for interim and annual reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this standard is not expected to have an impact on the Company's consolidated financial position and results of operations.

During the period ended December 31, 2012, the FASB has issued ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2014, and interim periods and annual periods thereafter. The adoption of this standard is not expected to have a material impact on the Company's (consolidated) financial position and results of operations.
 
 
33

 
 
Summary of Critical Accounting Policies
 
Consolidation Policy

The Company’s management, in considering accounting policies pertaining to consolidation, has reviewed the relevant authoritative guidance. The Company follows this authoritative, in assessing whether the rights of the non-controlling interests should overcome the presumption of consolidation when a majority voting, or controlling interest in its investee “is a matter of judgment that depends on facts and circumstances.” In applying the circumstances and contractual provisions of the Partnership Agreement, management determines that the non-controlling rights do not, individually or in the aggregate, provide for the non-controlling interest to “effectively participate in significant decisions that would be expected to be made in the ordinary course of business.” The rights of the non-controlling interest are protective in nature.

Use of Estimates
 
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods reported. Actual results could differ from these estimates. 
 
Significant estimates include volumes of oil and natural gas reserves used in calculating depletion of proved oil and natural gas properties, future net revenues and abandonment obligations, impairment of proved and unproved properties, future income taxes and related assets and liabilities, the fair value of various common stock, warrants and option transactions, and contingencies. Oil and natural gas reserve estimates, which are the basis for unit-of-production depletion and the calculation of impairment, have numerous inherent uncertainties. The accuracy of any reserve estimate is a function of the quality of available data, the engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify revision of such estimate. Accordingly, reserve estimates are often different from the quantities of oil and natural gas that are ultimately recovered. In addition, reserve estimates are 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 be volatile in the future.
 
These significant estimates are based on current assumptions that may be materially affected by changes to future economic conditions such as the market prices received for sales of volumes of oil and natural gas, interest rates, the fair value of the Company’s common stock and corresponding volatility, and the Company’s ability to generate future taxable income. Future changes to these assumptions may affect these significant estimates materially in the near term.
 
Oil and Natural Gas Properties
 
We account for investments in oil and natural gas properties using the successful efforts method of accounting. Under this method of accounting, only successful exploration drilling costs that directly result in the discovery of proved reserves are capitalized. Unsuccessful exploration drilling costs that do not result in an asset with future economic benefit are expensed. All development costs are capitalized because the purpose of development activities is considered to be building a producing system of wells, and related equipment facilities, rather than searching for oil and natural gas. Items charged to expense generally include geological and geophysical costs. Capitalized costs for producing wells and associated land and other assets are depleted using a Units of Production methodology based on the proved, developed reserves and calculated on a by well basis, based upon reserve reports prepared by an independent petroleum engineer in accordance with SEC rules.
 
 
34

 
 
The net capitalized costs of proved oil and natural gas properties are subject to an impairment test which compares the net book value of assets, based on historical cost, to the undiscounted future cash flow of remaining oil and natural gas reserves based on current economic and operating conditions. Impairment of an individual producing oil and natural gas field is first determined by comparing the undiscounted future net cash flows associated with the proved property to the carrying value of the underlying property. If the cost of the underlying property is in excess of the undiscounted future net cash flows the carrying cost of the impaired property is compared to the estimated fair value and the difference is recorded as an impairment loss. Management’s estimate of fair value takes into account many factors such as the present value discount rate, pricing, and when appropriate, possible and probable reserves when activities justified by economic conditions and actual or planned drilling or other development. 
 
Under the successful efforts method of accounting, the depletion rate is the current period production as a percentage of the total proved producing reserves. The depletion rate is applied to the net book value of property costs to calculate the depletion expense. Proved reserves materially impact depletion expense. If the proved reserves decline, then the depletion rate (the rate at which we record depletion expense) increases, reducing net income.
 
We depreciate other property and equipment using the straight-line method based on estimated useful lives ranging from five to 10 years.
 
Long-lived Assets and Intangible Assets
 
The Company accounts for intangible assets in accordance with the provisions of the applicable Accounting Standards Code (“ASC”) standard. Intangible assets that have defined lives are subject to amortization over the useful life of the assets. Intangible assets held having no contractual factors or other factors limiting the useful life of the asset are not subject to amortization but are reviewed at least annually for impairment or when indicators suggest that impairment may be needed. Intangible assets are subject to impairment review at least annually or when there is an indication that an asset has been impaired. 
 
For unproved property costs, management reviews these investments for impairment on a property-by-property basis if a triggering event should occur that may suggest that impairment may be required.
 
The Company reviews its long-lived assets and proved oil and natural gas properties for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with the applicable ASC standard. Proved oil and natural gas assets are evaluated for impairment at least annually. If the carrying amount of the asset, including any intangible assets associated with that asset, exceeds its estimated future undiscounted net cash flows, the Company will recognize an impairment loss equal to the difference between its carrying amount and its estimated fair value. The fair value used to calculate the impairment for producing oil and natural gas field that produces from a common reservoir is first determined by comparing the undiscounted future net cash flows associated with total proved properties to the carrying value of the underlying evaluated property. If the cost of the underlying evaluated property is in excess of the undiscounted future net cash flows, the future net cash flows discounted at 10%, which the Company believes approximates fair value, the Company will determine the amount of impairment.
 
Stock Based Compensation
 
The Company adopted the ASC standard related to stock compensation to account for its warrants and options issued to key partners, directors and officers. The fair value of common warrants granted is estimated at the date of grant using the Black-Scholes option pricing model by using the historical volatility of the Company’s stock. The calculation also takes into account the common stock fair market value at the grant date, the exercise price, the expected life of the common stock option or warrant, the dividend yield and the risk-free interest rate.
 
The Company from time to time may issue warrants and restricted stock to acquire goods or services from third parties. Restricted stock, options or warrants issued are recorded on the basis of their fair value, which is measured as of the date issued. In accordance with the standard, the options or warrants are valued using the Black-Scholes option pricing model on the basis of the market price of the underlying equity instrument on the “valuation date,” which for warrants related to contracts that have substantial disincentives to non-performance, is the date of the contract, and for all other contracts is the vesting date. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period.
 
 
35

 
 
Earnings per Share
 
Basic earnings per share are computed using the weighted average number of common shares outstanding. Diluted earnings per share reflect the potential dilutive effects of common stock equivalents such as options, warrants and convertible securities. Due to the Company incurring a net loss from continuing operations, basic and diluted loss per share are the same for the years ended December 31, 2013 and 2012 as all potentially dilutive common stock equivalents become anti-dilutive in nature.
 
Income Taxes
 
Under the applicable ASC standard, deferred income taxes are recognized at each year end for the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts based on tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. We routinely assess the reliability of our deferred tax assets. We consider future taxable income in making such assessments. If we conclude that it is more likely than not that some portion or all of the deferred tax assets will not be realized under accounting standards, it is reduced by a valuation allowance. However, despite our attempt to make an accurate estimate, the ultimate utilization of our deferred tax assets is highly dependent upon our actual production and the realization of taxable income in future periods.

Contingencies
 
Liabilities and other contingencies are recognized upon determination of an exposure, which when analyzed indicates that it is both probable that an asset has been impaired or that a liability has been incurred and that the amount of such loss is reasonably estimable.
 
Volatility of Oil and Natural Gas Prices
 
Our revenues, future rate of growth, results of operations, financial condition and ability to borrow funds or obtain additional capital, as well as the carrying value of our properties, are substantially dependent upon prevailing prices of oil and natural gas.
 
Off-Balance Sheet Arrangements
 
For the years ended December 31, 2013 and 2012, we had no off-balance sheet arrangements that were reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is deemed by our management to be material to investors.
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 
Commodity Risk
 
Our revenues, future rate of growth, results of operations, financial condition and ability to borrow funds or obtain additional capital, as well as the carrying value of our properties, are substantially dependent upon prevailing prices of oil and natural gas.
 
 
36

 
 
Volatility of Natural Gas Prices
 
As an indication of the dramatic way in which the price of natural gas can change, the following table provides the average price per thousand cubic feet (MCF) of gas which the Company received for the periods indicated:
 
Three Months Ending
 
Average
Price per
MCF
 
March 31, 2013
 
$
5.23
 
June 30, 2013
 
$
5.58
 
September 30, 2013
 
$
5.21
 
December 31, 2013
 
$
5.33
 
 
Volatility of Oil Prices
 
The following table provides the average price per barrel of oil which the Company received for the periods indicated:
 
Three Months Ending
 
Average
Price per
Barrel
 
March 31, 2013
 
$
81.34
 
June 30, 2013
 
$
89.54
 
September 30, 2013
 
$
102.19
 
December 31, 2013
 
$
91.83
 
 
Item 8. Consolidated financial statements and Supplementary Data
 
The information required by this Item 8 is incorporated by reference to the Index to Consolidated Financial Statements beginning at page F-1 of this Annual Report on Form 10-K.
 
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
 
None.
 
Item 9A. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
Pursuant to Rule 13a-15(e) under the Exchange Act, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) (the Company's principal executive officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of December 31, 2013. Based upon that evaluation, our management concluded that our control over financial reporting and related disclosure controls and procedures reflect a material weakness due to the size and nature of our Company.
 
 
37

 

Management’s Report on Internal Control over Financial Reporting
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. 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.
 
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. Based on this assessment, management identified the following material weaknesses that have caused management to conclude that, as of December 31, 2013, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:
 
1.
We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
 
2.
To address this material weaknesses, management performed additional analyses and other procedures to ensure that the consolidated financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
 
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only our management’s report in this Annual Report.
 
Changes in Internal Controls
 
Management has taken steps to remediate the material weakness over our control over financial reporting and related disclosure controls and procedures by implementing the following controls:
 
1.
While the Company is still small, we now have a full-time employee serving as the Chief Executive Officer. Moreover, the Board of Directors continues to be proactively involved in the management of the business. Thus, risks associated with adequate segregation of duties have been addressed. Also, the skills and capabilities of the team, as well as ongoing advice and expertise provided by outside advisors gives assurance that our financial reporting is accurate and timely. We have disclosure processes in place to identify transactions and events to be reported, as applicable. Additional internal control enhancements are always taken into consideration and implemented as needed.
 
2.
Effective January 1, 2013, the Company installed a new accounting system designed for the oil and gas industry , which includes more stringent controls and safeguards of internal data and provides audit trails for transactional research and reviews. Effective June 1, 2013, the Company hired a full-time controller with oil and gas and SEC experience, and plans to seek additional public reporting assistance on an as needed basis.
 
Item 9B. Other Information

There are no other events required to be disclosed by this Item.
 
 
38

 
 
PART III
 
Item 10. Directors, Executive Officers and Corporate Governance

The following table sets forth information regarding the names, ages (as of March 31, 2014) and positions held by each of our executive officers, followed by biographies describing the business experience of our executive officers for at least the past five years. Our executive officers serve at the discretion of the board of directors.
 
Name
 
Age
 
Positions Held
Kenneth Hill
 
50
 
Director, Chief Executive Officer, and President
David McCall
 
65
 
Director, General Counsel
Robert Grenley
 
57
 
Director
Ronald Zamber
 
54
 
Director, Interim Board Chairman
Patrick Barry
 
52
 
Director, Audit Committee Chairman
 
Kenneth HillChief Executive Officer and Directory
Mr. Hill was appointed CEO in January 2012. Mr. Hill previously served as Victory’s Vice President and Chief Operating Officer from January 2011 to January 2012 and has been a member of the Board of Directors since April 2011. Prior to joining the Company, Mr. Hill held titles of Interim CEO, VP of Operations and VP of Investor Relations for the U.S. subsidiary of a publicly traded oil and gas company on the Australian Stock Exchange.
 
Since 2001, Hill through his private company has raised several million dollars of venture capital, personally invested in and consulted for a number of successful entrepreneurial ventures across a variety of industries, including oil and gas. Prior to 2001, Hill was employed for 16 years at Dell, Inc. As one of the first 20 employees at Dell he served in variety of management positions including manufacturing, sales, marketing, and business development. Prior to joining Dell, Hill studied Business Management and Business Marketing at Southwest Texas State University (now Texas State University). While at Dell, Mr. Hill continued his education at The University of Texas Graduate School of Business Executive Education program, The Aspen Institute and the Center for Creative Leadership. He is a team builder with a unique set of proven leadership, management and technical skills.
 
David McCall – Board Member, Director and General Counsel
Mr. McCall has over 35 years of experience in the oil and gas industry, and is currently a partner in The McCall Firm in Austin, Texas. Mr. McCall's law practice has centered on the upstream, midstream and downstream activities of major and independent oil companies.
 
His expertise encompasses all aspects of oil and gas operations. He has been instrumental in negotiating operating leases and agreements; production purchase and sale agreements; pipeline and exploration agreements.
 
He has been lead counsel on complex oil and gas litigation matters including disputes between interest holders in producing properties; contract and lease disputes; title controversies and other traditional oil and gas matters. He has represented clients in federal royalty valuation disputes and Minerals Management Service (MMS) administrative proceedings.

Mr. McCall is also experienced in the preparation of drilling title opinions, loan opinions, division order title opinions, and acquisition opinions. He is board-certified in oil, gas and mineral law. Mr. McCall is an author and has served as an expert witness in title matters involving oil and gas properties.

In 1971, Mr. McCall received a Bachelor of Arts in marketing from McMurry University, Abilene, Texas. He graduated from Texas Tech School of Law, Lubbock, Texas in 1974. He is a Member of the Bar, State of Texas; a Life Fellow, Texas Bar Foundation; and a Founding Fellow, Austin Bar Foundation.

 
39

 

Robert Grenley – Board Member, Director and Audit Committee Member

Mr. Grenley has over 25 years of experience in financial management, business development and entrepreneurial experience. This financial experience includes 12 years managing early stage organizations with equity capital.

Mr. Grenley's broader financial management experience includes over 10 years of direct portfolio management and investment expertise including common and preferred stock, stock options, corporate and municipal bonds as well as syndicated investments and private placements.
 
Mr. Grenley holds a BA in Economics from Duke University.
 
Ronald W. Zamber, M.D. Director – Chairman of the Board and Audit Committee Member

Dr. Zamber is founder, Managing Director and Chairman of Visionary Private Equity Group. He brings more than 20 years of experience in corporate management and business development extending across the public, private and non-profit arenas. Dr. Zamber has helped build profitable companies in healthcare, private and public petroleum E&P, consumer products and Internet technology industries. He is a Managing Director of Navitus Energy Group, Navitus Partners and James Capital Energy.

Dr. Zamber is a Board Certified Ophthalmologist and founder of International Vision Quest, a non-profit organization that performs humanitarian medical and surgical missions, builds water treatment facilities and supports food delivery programs to impoverished communities around the world. He has served as an examiner with the American Board of Ophthalmologists and Secretariat for State Affairs with the American Academy of Ophthalmology.

He is the 2009 recipient of Notre Dame’s prestigious Harvey Foster Humanitarian Award. He now serves on the advisory board of Feed My Starving Children, one of the highest rated and fastest growing charities in the country. Dr. Zamber received his bachelor's degree with high honors from the University of Notre Dame and his medical degree with honors from the University of Washington.
 
Patrick BarryBoard Member, Director and Audit Committee Chairman
 
Prior to joining the Board, Mr. Barry served as a financial and operations consultant for the Company. He is an experienced general manager with strengths in financial management, profitability improvement, strategy development, and implementing disciplined operating processes in both public and private companies.
 
Mr. Barry has a Bachelor of Science in Mechanical Engineering from the University of Notre Dame and a MBA in Finance from Wharton. Mr. Barry is a principal in Visionary Private Equity, a major investor in the Company.
 
Mr. Barry is a former Managing Director of the Gigot Center for Entrepreneurial Studies at the University of Notre Dame where he was also an Adjunct Professor. Prior to Notre Dame, he spent eight years turning around Quality Dining, Inc., a publicly held restaurant company headquartered in South Bend, IN. Mr. Barry was a consultant with Andersen Consulting in their Strategic Service Group, focusing in strategy development and general management consulting. 
 
Patrick’s extensive practical business experiences coupled with his impressive education credentials in the fields of engineering and finance make him a significant and timely addition to the company.
 
 
40

 
 
Involvement in Certain Legal Proceedings
 
The foregoing directors or executive officers have not been involved during the last five years in any of the following events:
 
Bankruptcy petitions filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
 
Conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
 
Being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring or suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
 
Being found by a court of competition jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
 
Corporate Governance and Board Composition
 
Our business and affairs are organized under the direction of our board of directors, which currently consists of five (5) members. The primary responsibilities of our board of directors are to provide oversight, strategic guidance, counseling and direction to our management. Our board of directors meets on a regular basis and additionally as required. Written board materials are distributed in advance as a general rule, and our board of directors schedules meetings with and presentations from members of our senior management on a regular basis and as required.
 
Our board of directors set schedules to meet throughout the year and also can hold special meetings and act by written consent under certain circumstances. Our board of directors met 4 times during the year ended December 31, 2013.
 
Limitation of Liability and Indemnification
 
We intend to enter into indemnification agreements with each of our directors and executive officers and certain other key employees. The form of agreement provides that we will indemnify each of our directors, executive officers, and such other key employees against any and all expenses incurred by that director, executive officer or key employee because of his or her status as one of our directors, executive officers or key employees, to the fullest extent permitted by law and our bylaws (except in a proceeding initiated by such person without board approval). In addition, the form agreement provides that, to the fullest extent permitted by law, we will advance all expenses incurred by our directors, executive officers, and such key employees in connection with a legal proceeding.
 
The Nevada Revised Statutes and our bylaws contain provisions relating to the limitation of liability and indemnification of directors and officers.
 
Our bylaws provide that we will indemnify our directors and officers to the fullest extent permitted by law, as it now exists or may in the future be amended, against all expenses and liabilities reasonably incurred in connection with their service for or on our behalf. Our bylaws provide that we shall advance the expenses incurred by a director or officer in advance of the final disposition of an action or proceeding. Our bylaws also authorize us to indemnify any of our employees or agents and permit us to secure insurance on behalf of any officer, director, employee or agent for any liability arising out of their action in that capacity, whether or not the law would otherwise permit indemnification.
 
The Company maintains Directors and Officers insurance on behalf of if officers and directors.
 
Shareholder Communications

Any shareholder of the Company wishing to communicate to the Board of Directors may do so by sending written communication to the Board of Directors to the attention of Mr. Kenneth Hill, Chief Executive Officer, at the principal executive offices of the Company. The Board of Directors will consider any such written communication at its next regularly scheduled meeting.
 
 
41

 
 
Compliance with Section 16(a) of the Exchange Act:
 
Under the securities laws of the United States, the Company's directors, its executive officers and any persons holding more than 10% of our common stock are required to report their ownership of our common stock and any changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established by rules adopted by the SEC and we are required to report in this Annual Report any failure to file by those deadlines.
 
Based solely upon a review of Forms 3, 4, and 5, and amendments to these forms furnished to us, except as provided below, all parties subject to the reporting requirements of Section 16(a) of the Exchange Act filed on a timely basis all such required reports during and with respect to our 2012 fiscal year.
 
To the best of our knowledge, the number of late reports for Kenneth Hill was 1.
 
To the best of our knowledge, the number of late reports for David McCall was 1.
 
To the best of our knowledge, the number of late reports for Robert Grenley was 1.
 
To the best of our knowledge, the number of late reports for Ron Zamber was 1.
 
To the best of our knowledge, the number of late reports for Robert Miranda was 1.
 
Code of Ethics
 
We have prepared and adopted a code of ethics to apply to our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions during the year ended December 31, 2013.
 
Item 11. Executive Compensation
 
The following table sets forth the total compensation awarded to, earned by, or paid to our principal executive officers, and our other named executive officers for all services rendered in all capacities to us in 2013 and 2012.
 
Name and Principal
     
Salary
   
Bonus
   
Stock
Awards
   
Warrant/
Option Awards
   
Non-Equity Incentive Plan Compensation
   
Nonqualified Deferred Compensation
   
All Other Compensation
   
Total
 
Position
 
Year
 
($)
   
($)
   
($)
   
($)
   
($)
   
($)
   
($)
   
($)
 
                                                     
Kenneth Hill
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
President and CEO
 
2013
   
180,000
     
-
     
-
     
46,140
     
-
     
-
     
-
     
226,140
 
VP and COO
 
2012
   
180,000
     
-
     
-
     
55,260
     
-
     
-
     
-
     
235,260
 
                                                                     
Mark Biggers (1)
 
 
                                                               
Chief Financial Officer
 
2013
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
   
2012
   
220,000
     
-
     
-
     
101,400
     
-
     
-
     
-
     
461,400
 
 
(1)
Mark Biggers voluntarily resigned from the Company, for personal reasons, in November 2012.
 
 
42

 
 
Director Compensation
 
The following table sets forth the total compensation awarded to, earned by, or paid to each person who served as a director during the years ended December 31, 2013 and 2012, other than a director who also served as a named executive officer. Our directors who are not executive officers did not receive any cash compensation for serving on our board of directors. We have a policy of reimbursing our directors for their reasonable out-of-pocket expenses incurred in attending Board and committee meetings. Each director is paid for his or her director services in the form of 6,000 warrants granted monthly for each month of service. These five (5) year warrants are exercisable into common stock at an exercise price $0.01, and vest immediately upon issuance.
 
Name
 
Year
 
Fees Earned or paid in Cash
($)
   
Stock Awards
($)
   
Warrant/Option Awards
($)
   
Non-Equity Incentive Compensation
($)
   
Nonqualified Deferred Compensation Earnings
($)
   
All Other Compensation
($)
   
Total
($)
 
                                               
Ronald Zamber
 
2013
   
-
     
-
     
5,640
     
-
     
-
     
-
     
5,640
 
   
2012
   
-
     
-
     
230,781
     
-
     
-
     
-
     
230,781
 
                                                             
Robert Grenley (1)
 
2013
   
-
     
-
     
5,640
     
-
     
-
     
-
     
5,640
 
   
2012
   
-
     
-
     
14,760
     
-
     
-
     
-
     
14,760
 
                                                             
David McCall (2)
 
2013
   
-
     
-
     
5,640
     
-
     
-
     
-
     
5,640
 
   
2012
   
-
     
-
     
112,702
     
-
     
-
     
-
     
112,702
 
                                                             
Patrick Barry (3)
 
2013
   
-
     
-
     
1,140
     
-
     
-
     
-
     
1,140
 
   
2012
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
                                                             
Robert Miranda (4)
 
2013
                   
4,500
                             
4,500
 
   
2012
                   
17,685
                             
17,685
 
___________________
(1)
Robert Grenley was appointed on June 1, 2010.
(2)
David McCall was appointed on January 20, 2011.
(3)
Patrick Barry was appointed on October 21, 2013.
(4)
Robert Miranda resigned on October 18, 2013.
 
Outstanding Equity Awards at Fiscal Year-End

The following table sets forth certain information concerning outstanding stock awards held by the named executive officers as of December 31, 2013 and 2012 which reflect a 50:1 reverse stock split in January 2012.
 
 
Option Awards
 
Stock Awards
 
Name
 
Year
 
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
 
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
 
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
 
Warrant/
Option
Exercise
Price
($)
 
Warrant/
Option
Expiration
Date
 
Number
of
Shares
or Units
of
Stock
That
Have
Not
Vested
(#)
 
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)
 
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)
 
Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Kenneth Hill,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
President and
 
2011
 
30,000
 
-
 
-
 
$
.50
 
12/31/ 2016
 
-
 
-
 
-
 
-
 
Chief Executive Officer
 
2011
 
60,000
 
-
 
-
 
$
1.00
 
12/31/ 2016
 
-
 
-
 
-
 
-
 
 
 
43

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
As of December 31, 2013, the Company had no outstanding equity compensation plans under which our securities are authorized for issuance.
 
Security Ownership of Certain Beneficial Owners
 
Beneficial ownership is determined in accordance with the rules of the SEC, and generally includes voting power and/or investment power with respect to the securities held. Shares of common stock subject to options or warrants currently exercisable or exercisable within 60 days of December 31, 2013, are deemed outstanding and beneficially owned by the person holding such options or warrants for purposes of computing the number of shares and percentage beneficially owned by such person, but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person. Except as indicated in the footnotes to these tables, and subject to applicable community property laws, the persons or entities named have sole voting and investment power with respect to all shares of our common stock shown as beneficially owned by them.
 
The following table sets forth, as of December 31, 2013, certain information with respect to the Company’s equity securities owned or record or beneficially by (i) each officer and director of the Company; (ii) each person who owns beneficially more than 5% of each class of the Company’s outstanding equity securities; and (iii) all directors and executive officer as a group:
 
Name and Position
 
Business Address
 
Common
Stock
   
Vested
Options
   
Warrants
(1)
   
Total
   
Percent of Class
(2)
 
                                   
Kenneth Hill,
 
3355 Bee Caves Rd Ste
                             
President and Chief
 
608 Austin, TX 78746
                             
Executive Officer
       
207,288
     
90,000
     
143,900
     
441,188
     
1.4
%
                                             
David McCall,
 
2600 Via Fortuna,
                                       
General Counsel,
 
Suite 200, Austin TX
                                       
Director (3)
 
78746
   
145,233
     
-
     
244,150
     
389,383
     
1.2
%
                                             
Robert Grenley,
 
40 Loch Lane SW,
                                       
Director
 
Lakewood, WA 98499
   
43,934
     
-
     
86,200
     
130,934
     
0.4
%
                                             
Ronald Zamber,
 
1919 Lathrop Suite
                                       
Director (4),
 
103, Fairbanks, AK
                                       
Interim Board Chairman  
99701
   
5,662,102
     
-
     
1,622,341
     
7,284,443
     
22.3
%
                                             
Patrick Barry
 
51551 Norwich Dr.
                                       
Audit Committee Chairman
 
Granger, IN 46530
   
487,320
     
-
     
98,400
     
585,720
     
1.8
%
                                             
All Officers and Directors As a Group (5 Persons)
   
6,545,877
     
90,000
     
2,194,991
     
8,830,868
     
27.1
%
__________________
(1)
All warrants are exercisable immediately
(2) 
Based on total shares outstanding which consists of 27,563,619 shares of common stock outstanding, 150,000 vested options, and 4,931,386 unexercised warrants.
(3)
Includes 145,233 shares owned by 1519 Partners LLC; David McCall is the controlling partner and of 1519 Partners LLC.
(4)
Includes 2,468,138 shares owned by Visionary Investments, LLC of which Ronald Zamber is sole member; 2,437,481 shares owned by Visionary Private Equity Group I, LP of which Ronald Zamber is chairman, and managing director, and 104,845 shares owned by James Capital Consulting of which Ronald Zamber is the managing member.
 
 
44

 
 
There are no classes of stock other than common stock issued or outstanding.
 
The Company is not aware of any current arrangements which will result in a change in control.
 
Item 13. Certain Relationships and Related Transactions, and Director Independence
 
Related Party Transactions
 
During the year ended December 31, 2013, we incurred a total of $19,900 of accounting services with Miranda & Associates, a Professional Accountancy Corporation (“Miranda”). As of December 31, 2013, Miranda was owed $6,000 for these professional services as our past director who resigned on October 18, 2013.
 
During the year ended December 31, 2013 we incurred a total of $206,456 in legal fees with The McCall Firm. David McCall, our general counsel and a director, is a partner in The McCall Firm. The fees are attributable to litigation involving the Company’s oil and natural gas operations in Texas. As of December 31, 2013, the Company owed The McCall Firm approximately $9,047 for these professional services.

During the year ended December 31, 2013 we incurred a total of $3,495 in consulting fees with Patrick Barry of which the full amount is owed as of the end of the year 2013.
 
Director Independence
 
Our Board has determined that each of our directors qualifies as an independent director under applicable rules promulgated by the SEC and the NASDAQ Stock Market listing standards, although our common stock is not listed on NASDAQ, and has concluded that none of these directors has a material relationship with the Company that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
 
Item 14. Principal Accounting Fees and Services
 
Audit Fees
 
For the years ended December 31, 2013 and 2012 respectively, we paid $51,667 and $88,257, respectively, in fees to our principal accountants.

Tax Fees
 
For the fiscal years ended December 31, 2013 and 2012, our principal accountants did not render any services for tax compliance, tax advice, and tax planning work.
 
All Other Fees
 
None.
 
All fees described above for the years ended December 31, 2013 and 2012, were approved by the entire board of directors.
 
 
45

 
 
PART IV
 
Item 15. Exhibits, Financial Statement Schedules
 
(a) (1) and (2) Consolidated financial statements and Schedules
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
Page
 
 
 
 
 
Report of Independent Registered Public Accounting Firms
   
F-1
 
         
Report of Independent Registered Public Accounting Firms
   
F-2
 
 
       
Consolidated Balance Sheets as of December 31, 2013 and 2012
   
F-3
 
 
       
Consolidated Statements of Operations for the Years Ended December 31, 2013 and 2012
   
F-4
 
 
       
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013 and 2012
   
F-5
 
 
       
Consolidated Statement of Stockholders Deficit for the Years Ended December 31, 2013 and 2012
   
F-6
 
 
       
Notes to Consolidated financial statements for the Years Ended December 31, 2013 and 2012
   
F-7
 
 
 
46

 
 
(a)(3) Exhibits
 
Refer to (b) below.
 
(b)
 
Exhibits
 
 
 
3.1
 
Articles of Incorporation of All Things, Inc., filed on January 7, 1982 incorporated by reference to Exhibit 3.1 of the Company’s Annual Report on Form 10-K filed with the SEC on March 29, 2011.
 
 
 
3.2
 
Certificate of Amendment of Articles of Incorporation, filed on January 7, 1982 incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K filed with the SEC on March 29, 2011.
 
 
 
3.3
 
Certificate of Amendment of Articles of Incorporation, filed on March 21, 1985 incorporated by reference to Exhibit 3.3 of the Company’s Annual Report on Form 10-K filed with the SEC on March 29, 2011.
 
 
 
3.4
 
Certificate of Amendment of Articles of Incorporation, filed on November 1, 1995 incorporated by reference to Exhibit 3.4 of the Company’s Annual Report on Form 10-K filed with the SEC on March 29, 2011.