PRECISION PETROLEUM CORP - Recent Material Event

TABLE OF CONTENTS Page PART I Item 1. Description of Business 3 Item 1A. Risk Factors 4 Item 2. Description of Property 5 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 7 PART II Item 5. Market For Registrant's Common Equity and Related 7 Stockholder Matters and Small Business Issuer Purchases of Equity Securities Item 6. Selected Financial Data 9 Item 7. Management Discussion and Analysis of Financial 9 Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About 11 Market Risk Item 8. Financial Statements and Supplementary Data 11 Item 9. Changes in and Disagreements With Accountants on 13 Accounting and Financial Disclosure Item 9A. Controls and Procedures 13 Item 9B. Other Information 13 PART III Item 10. Directors, Executive Officers, Promoters, 14 Control Persons and Corporate Governance: Compliance with Section 16(a) of the Exchange Act Item 11. Executive Compensation 16 Item 12. Security Ownership of Certain Beneficial Owners and 17 Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions 19 and Director Independence Item 14. Principal Accountant Fees and Services 19 Item 15. Exhibits 20 Signatures 21 2 PART I ITEM 1. DESCRIPTION OF BUSINESS Incorporation and Organizational Activities Precision Petroleum Corporation (the "Corporation") was incorporated on February 7, 2007, in the State of Nevada under the name "Tidewater Resources Inc.". On the date of our incorporation, we appointed Bernard Perez as our sole officer and director. On October 15, 2007, Mr. Munslow, Mr. Ward and Mr. Lopez were appointed as directors. On September 7, 2008, Messrs Lopez, Munslow, Perez and Ward resigned as officers and directors of the Corporation. On September 14, 2008, Sharon Farris was appointed President, Treasurer and Secretary and elected as the Corporation's sole member of the Board of Directors. On January 20, 2009, the Corporation appointed Mr. Richard F. Porterfield as a member of the Corporation's Board of Directors and as the Corporation's President and Treasurer. On the same date, Ms. Sharron Farris resigned as a member of the Board of Directors and as President and Treasurer. Ms. Farris remains the Corporation's Secretary. On June 3, 2009, Mr. James Kirby was appointed as the Corporation's Chief Financial Officer. We were extra-provincially registered under the laws of the Province of British Columbia, Canada, on March 9, 2007. On October 27, 2008, we changed our name to "Precision Petroleum Corporation". On November 17, 2008, the Corporation authorized a forward stock split of twelve for one (12:1) of our total issued and outstanding shares of common stock and was effective January 8, 2009. Our website is www.precisionpetroleumcorp.com. Our Business ------------ During the fourth quarter of our fiscal year ended September 30, 2009, we acquired varying percentages of working interests and overriding royalties in eighteen (18) operating leases located in Oklahoma. These leases are producing and generate income for the Company. See Item 2. and Note 3 to the financial statements for more information on the oil and gas assets acquired during the fiscal year ended September 30, 2010. 3 ITEM 1A. RISK FACTORS Risk Related to our Business You should carefully consider the following risk factors and all other information contained herein as well as the information included in this Annual Report in evaluating our business and prospects. The risks and uncertainties described below are not the only ones we face. Additional unknown risks and uncertainties, or that we currently believe are immaterial, may also impair our business operations. If any of the following risks occur, our business and financial results could be harmed. You should refer to the other information contained in this Annual Report, including our financial statements and the related notes. We Have a Limited Operating History. We have a limited operating history in the oil and gas industry. Our operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. No assurance can be given that we may be able to operate on a profitable basis. We may Require Significant Additional Financing and There is No Assurance that such Funds will be Available We need to raise at least $120,000 to fund our operations for the next twelve (12) months. There can be no assurance that we will be able to obtain financing on acceptable terms in light of factors such as the market demand for our securities, the state of financial markets generally and other relevant factors. Inability Of Our Officers And Sole Director To Devote Sufficient Time To The Operation Of Our Business May Limit Our Success. Presently, our officers and sole director allocate only a portion of their time to the operation of our business. Should our business develop faster than anticipated, our officers may not be able to devote sufficient time to the operation of our business to ensure that it continues as a going concern. Even if our management's lack of sufficient time is not fatal to our existence, it may result in our limited growth and success. 4 Unproven Profitably Due to Lack of Operating History Makes an Investment in Us an Investment in an Unproven Venture. We were formed on February 7, 2007. From our date of inception until the acquisition of our oil and gas leases and equipment in the summer of 2009, we have not had significant revenues or operations and we have few assets. Due to our lack of operating history, the revenue and income potential of our business is unproven. If we cannot successfully implement our business strategies, we may not be able to generate sufficient revenues to operate profitably. Since our resources are very limited, insufficient revenues would result in termination of our operations, as we cannot fund unprofitable operations unless additional equity or debt financing is obtained. ITEM 2. DESCRIPTION OF PROPERTY. Our Acquisition of the Claims On April 19, 2007, we purchased a 100% undivided interest in six contiguous mineral claims located in the Nanaimo Mining District on Vancouver Island, British Columbia from David A. Zamida for total consideration of CDN$5,000 (approximately $4,464 based on the foreign exchange rate on April 26, 2007, the date we made payment, of $1.00: CDN$1.1191). On April 26, 2007, we entered into a Net Smelter Returns Royalty Agreement with Mr. Zamida whereby Mr. Zamida is entitled to 2% of net smelter royalty returns from the property underlying such claims. During the fiscal year ended September 30, 2009, these claims have expired. On January 27, 2009, the Company entered into a Participation Agreement with Nitro Petroleum Incorporated ("Nitro"), pursuant to which the Company obtained from Nitro the right to participate in Phase One of Nitro's Powder River Basin Project in Montana. Nitro acquired certain oil and gas leases in the Powder River Basin in Montana pursuant to a Memorandum of Understanding dated January 26, 2009 with REDS, LLC. Pursuant to the terms of the Participation Agreement, Nitro is being carried to the tanks with respect to a 25% working interest in Phase One of the Powder River Basin Project. The Company is acquiring a 37.5% working interest in Phase One of the Powder River Basin Project in exchange for an agreement to pay 50% of the expenses of Phase One of the Powder River Basin Project. Additionally, the Company shall have the right to purchase up to a 37.5% working interest in Phase Two and Phase Three of the Powder River Basin Project upon substantially the same terms as Phase One. Nitro will be the operator of all wells drilled during Phase One of the Powder River Basin Project. As of September 30, 2010, the Company has paid $57,500 towards the participation agreement with Nitro Petroleum. The payments have been recorded in the financial statements as Participation deposits. Effective July 1, 2009, the Company purchased various producing properties located in Garvin County, Pottawatomie County, Nowata County and Seminole County, Oklahoma. The Company utilized short-term financing to acquire these properties. The various net revenue acquired range from .2808% to a 67.97% net revenue interest. In 2010, the Company increased their interest in the Mason Burns, Quinlan #1 and Teresa #1 wells. The Company sold all of its interest in 2010 in the Jameson lease and the Heath lease. 5 On November 5th, 2009, the Company signed an agreement to purchase a 57.2682% working interest in the Ed Thompson #2-18, located in Garvin County, Oklahoma for $28,634. The company has paid $28,000 toward this amount. On September 1, 2010, the Company purchased a 5% working interest in a 7 well package located in Garvin County, Oklahoma in the amount of $34,500. The company financed this transaction with an account payable to the operator of the wells, Nitro Petroleum Incorporated. The following table reflects the Company's ownership as of September 30, 2010 in its oil and gas properties located in Oklahoma. Net Revenue Lease Name Property Location Ownership Interest ---------- ----------------- ------------------ Jessica 23-A Seminole County 18.0296496% Karsyn Seminole County 19.6500000% Thompson #1 Garvin County 23.1222014% Teresa #1 Garvin County 26.8145000% Mason Burns Garvin County 38.1653000% White #12-1 Pottawatomie County 67.9687500% Crown #1 & #3 Pottawatomie County 8.7890625% Quinlan #1 Pottawatomie County 22.3945400% Quinlan #2 Pottawatomie County 0.2808000% Quinlan #3 Pottawatomie County 8.7750000% Sharon #1 Garvin County 6.3400000% Ward McNeil Garvin County 22.6230400% Fuller #2 Garvin County 3.7898000% Fuller #3 Garvin County 3.7898000% Kimberly #3 Garvin County 3.7898000% Plummer #1 Garvin County 3.9867000% Plummber #2 Garvin County 3.6914000% Bromide #1 Garvin County 3.7898000% Roach SWD well Garvin County 5.0000000% East & West Moreland Nowata County 3.0000000% Thompson #2 Garvin County 46.1249365% See Note 9 of the financial statements for production and reserve study information. 6 ITEM 3. LEGAL PROCEEDINGS. On September 16, 2010, the Company, along with Global Energy, LLC (Plaintiffs), filed a joint petition against Reed Power Tongs, Inc. and 4K Energy, LLC (Defendants), alleging breach of contract of the joint operating agreement the Plaintiffs entered into with the Defendants covering the Karsyn No. 1, the Heath well and the Josh well. The Plaintiffs are alleging that the Defendants charged excessive fees for services rendered by unrelated entities, failed to obtain written approval from working interest owners before charging inflated fees with their affiliated companies and knowingly and intentionally withholding of production revenue from both Precision and Global. The Plaintiffs are demanding an accounting of all charges and revenue for the Karsyn, Josh and Heath wells and are asking for damages related to breach of contract and fraud. The Plaintiffs are asking for damages in excess of $10,000 for four different actions and also for sums in excess of $10,000 for punitive and exemplary damages for the Defendants conduct described in the petition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. We have not yet held our annual shareholders' meeting or submitted any matters to a vote of shareholders during the fiscal year to which this Annual Report pertains. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market for Common Equity and Related Stockholder Matters (a) Market Information Our shares of common stock, par value $0.001 per share, were quoted on the OTC Bulletin Board from July 3, 2008 to January 7, 2008 under the symbol "TIWR". Since January 8, 2008, our stock has been quoted on the OTCBB reader under the symbol "PPTO". The table below sets for the high and low closing bid price of our stock for the last two fiscal years. The information was acquired from www.alphatrade.com. Fiscal Year Ended September 30, 2010 Quarter Ended 12/31/09 3/31/10 6/30/10 9/30/10 ------------- -------- ------- ------- ------- High $0.22 $0.13 $0.11 $0.04 Low $0.09 $0.04 $0.05 $0.02 Fiscal Year Ended September 30, 2009 Quarter Ended 12/31/08* 3/31/09 6/30/09 9/30/09 ------------- -------- ------- ------- ------- High - $1.58 $1.12 $0.60 Low - $0.55 $0.55 $0.13 * Prior to February 2009, there were no trading of our shares on the OTC.BB. 7 (b) Holders As of September 30, 2010, there were fourteen (14) shareholders of record of our common stock. (c) Dividend Policy We have never declared or paid dividends on our common stock. We intend to retain earnings, if any, to support the development of our business and therefore do not anticipate paying cash dividends for the foreseeable future. Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs. (d) Securities authorized for issuance under equity compensation plans None. RECENT SALES OF UNREGISTERED SECURITIES During the period covered by this report, we have not sold any unregistered securities. USE OF PROCEEDS FROM REGISTERED SECURITIES Not applicable. DESCRIPTION OF SECURITIES Common Stock There are presently 44,400,000 shares of common stock issued and outstanding. Each record holder of common stock is entitled to one vote for each share held in all matters properly submitted to the stockholders for their vote. Cumulative voting for the election of directors is not permitted by the By-Laws of the Company. Holders of outstanding shares of common stock are entitled to such dividends as may be declared from time to time by the Board of Directors out of legally available funds; and, in the event of liquidation, dissolution or winding up of the affairs of the Company, holders are entitled to receive, ratably, the net assets of the Company available to stockholders. Holders of outstanding shares of common stock have no preemptive, conversion or redemptive rights. To the extent that additional shares of the Company's common stock are issued, the relative interest of the existing stockholders may be diluted. Stock Purchase Warrants None. Stock Purchase Options None. 8 ITEM 6. SELECTED FINANCIAL DATA This item is not required for Smaller Reporting Companies ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS We have generated no operating revenues since our inception. The following should be read jointly with the financial statements, related notes, and the cautionary statement regarding forward-looking statements, which appear elsewhere in this filing. As used in this Annual Report: (i) the terms "we", "us", "our" and the "Company" mean Precision Petroleum Corporation (ii) "SEC" refers to the Securities and Exchange Commission; (iii) "Exchange Act" refers to the United States Securities Exchange Act of 1934, as amended; and (iv) all dollar amounts refer to United States dollars unless otherwise indicated. The following is a discussion of our plan of operations, results of operations and financial condition as at and for the years ended September 30, 2010 and 2009. Liquidity and Capital Resources The Company had a cash balance of $8,495 as of September 30, 2010, compared to cash balance of $12,944 as of September 30, 2009. The Company had a working capital deficiency of $1,245,192 as of September 30, 2010, compared to working capital deficiency of $1,072,250 as of September 30, 2009. Our accumulated deficit during the Exploration Stage increased during the fiscal year ended September 30, 2010 to $405,616 from $185,803. Our accumulated deficit during the Production Stage increased $219,813. During this time, our total stockholders' deficit increased to $278,525 from $58,712. These increases were the result of incurring a net loss from our operations in the amount of $219,813 for the fiscal year ended September 30, 2010. The Company will continue to utilize the free labor of its directors and stockholder until such time as funding is sourced from the capital markets. It is anticipated that funding for the next twelve months will be required to maintain the Company. 9 Results of Operations For the fiscal year ended September 30, 2010, the Company had revenue of $190,143 from production of oil and gas, as compared to $59,723 for the fiscal year ended September 30, 2009. Operating expenses for the fiscal year ended September 30, 2010 were $296,760, resulting in a net loss for the period of $219,813. Operating expenses for the fiscal year ended September 30, 2009 was $123,236, resulting in a net loss for the period of $63,513. During the fiscal year end September 30, 2010, the amount of cash used in our operating activities was $18,074 compared to $23,041 of cash used on operations during the prior fiscal year. During the fiscal year, we used $11,291 of cash in investing activities, due to the purchase of our oil and gas leases and equipment. We used $1,039,980 of cash in investing activities during the prior fiscal year. The Company received $24,916 in advances from third parties to finance its activities during the fiscal year compared to financing in the prior year in the amount of $1,076,262. The Company expects to continue to receive revenues from the properties on the Oklahoma properties and the Company expects for these revenues to increase. Planned exploration ventures should increase revenues for the fiscal year ending September 30, 2011. Going Concern The Company has not attained profitable operations and is dependent upon obtaining financing to pursue any extensive acquisitions and exploration activities. For these reasons, the Company's auditors stated in their report on the Company's audited financial statements that they have substantial doubt the Company will be able to continue as a going concern without further financing. Off-Balance Sheet Arrangements We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes of financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Plan of Operation for the Next Twelve (12) Months The following discussion of our plan of operation, financial condition, results of operations, cash flows and changes in financial position should be read in conjunction with our most recent financial statements and notes appearing elsewhere in this Form 10-K annual report; our Form 10-Q filed February 12, 2010, our Form 10-Q filed May 20, 2010 and our Form 10-Q filed August 23, 2010. 10 Our plan of operations for the next twelve months is to maintain the current properties we have and recomplete some of the properties that we feel will generate more revenue. We estimate that our expenditures over the next twelve months will be $120,000 to cover ongoing general and administrative expenses. As at September 30, 2010, we had cash and cash equivalents of $8,495 and working deficit of $1,245,192. We have enough cash on hand to meet our overhead requirements for the next 6 months. We will need to raise approximately $120,000 to meet our overhead requirements for the next 12 months. During the twelve-month period following the date of this report, we anticipate that we will continue to generate revenue from our oil and gas leases. However, we anticipate that such revenue will not be sufficient to cover all of our expenses. Accordingly, we will be required to obtain additional financing in order to continue our plan of operations during and beyond the next twelve months. We anticipate that additional funding could be in the form of either debt or equity financing from the sale of our common stock. However, we do not have any financing arranged and we cannot provide investors with any assurance that we will be able to raise sufficient funding to fund our operations. In the absence of such financing, our business plan will fail. Even if we are successful in obtaining financing to fund our operations, there is no assurance that we will obtain the funding necessary to pursue any further exploration of our properties. If we do not obtain additional financing, we may be forced to dispose of operating oil and gas leases located in Oklahoma. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK This item is not required for Smaller Reporting Companies ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required by this Item 8 begin on Page F-1 of this Form 10-K, and include: (1) Report of Independent Registered Public Accounting Firm; (2) Balance Sheets; (3) Statements of Operations, Statements of Cash Flows, Statement of Stockholders' Deficit; and (4) Notes to Financial Statements. 11 Precision Petroleum Corporation (A Production Stage Company) Financial Statements (Expressed in U.S. Dollars) September 30, 2010 and 2009 INDEX TO FINANCIAL STATEMENTS Report from Independent Registered Public Accounting Firm F-1 Balance Sheets F-2 Statements of Operations F-3 Statement of Stockholders' Deficit F-4 Statements of Cash Flows F-5 Notes to the Financial Statements F-6 - F-22 12 De Joya Griffith & Company, LLC ------------------------------------------ CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS Report of Independent Registered Public Accounting Firm ------------------------------------------------------- To The Board of Directors and Stockholders Precision Petroleum Corporation Shawnee, OK 74804 We have audited the accompanying balance sheets of Precision Petroleum Corporation as of September 30, 2010 and 2009, and the related statements of operations, stockholders' deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Precision Petroleum Corporation as of September 30, 2010 and 2009, and the results of their operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. De Joya Griffith & Company, LLC /s/ De Joya Griffith & Company, LLC Henderson, Nevada January 11, 2011 2580 Anthem Village Drive, Henderson, NV 89052 Telephone (702) 563-1600 o Facsimile (702) 920-8049 F-1 PRECISION PETROLEUM CORPORATION BALANCE SHEETS (AUDITED) <TABLE> <CAPTION> September 30, September 30, 2010 2009 ------------ ------------ <S> <C> <C> ASSETS Current Cash and cash equivalents $ 8,495 $ 12,944 Accounts receivable, net 50,417 14,600 Other receivables - 10,028 ------------ ------------ Total current assets 58,912 37,572 Oil and gas properties, -using full cost accounting- net of $82,520 and $26,442 of depletion, respectively 932,079 967,538 Long term assets Participation deposits 57,500 46,000 ------------ ------------ Total long term assets 989,579 1,013,538 ------------ ------------ Total assets $ 1,048,491 $ 1,051,110 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities Accounts payable and accrued liabilities $ 217,708 $ 48,342 Advances 92,416 67,500 Short-term notes payable 993,980 993,980 ------------ ------------ Total current liabilities 1,304,104 1,109,822 ------------ ------------ Long term liabilities Asset retirement obligation 22,912 - ------------ ------------ Total long term liabilities 22,912 - ------------ ------------ Total liabilities 1,327,016 1,109,822 ------------ ------------ Capital stock Authorized: 200,000,000 common stock, $0.001 par value; Issued and outstanding: 44,400,000 common shares (2009: 44,400,000) 44,400 44,400 Additional paid-in capital 82,691 82,691 Accumulated deficit (405,616) (185,803) ------------ ------------ Total stockholders' deficit (278,525) (58,712) ------------ ------------ Total liabilities and stockholders' deficit $ 1,048,491 $ 1,051,110 ============ ============ </TABLE> See accompanying notes F-2 PRECISION PETROLEUM CORPORATION STATEMENTS OF OPERATIONS (AUDITED) <TABLE> <CAPTION> September 30, ------------- 2010 2009 ------------ ------------ <S> <C> <C> Revenues Oil and gas sales $ 190,143 $ 59,723 ------------ ------------ Total revenues 190,143 59,723 ------------ ------------ Expenses Lease operating 75,910 32,313 Production taxes 13,522 4,298 Depletion 56,078 26,442 Accretion expense 2,083 - Bad debt expense 16,525 - Legal and accounting 42,090 26,043 Management fees 12,000 18,000 General and administrative 78,552 16,140 ------------ ------------ Total operating expenses 296,760 123,236 ------------ ------------ Other expense Interest 113,196 - ------------ ------------ Total other expense 113,196 - ------------ ------------ Net loss $ (219,813) $ (63,513) ============ ============ Basic loss per share $ (0.00) $ (0.00) ============ ============ Weighted average number of shares outstanding- basic 44,400,000 44,400,000 ============ ============ </TABLE> See accompanying notes F-3 PRECISION PETROLEUM CORPORATION STATEMENTS OF STOCKHOLDERS' DEFICIT For the years ended September 30, 2010 and 2009 <TABLE> <CAPTION> Common Shares Addi- Other ------------------ tional Accum- Compre- Par Paid-in ulated hensive Number Value Capital Deficit Income Total ---------- ------- ------- ---------- ------ ---------- <S> <C> <C> <C> <C> <C> <C> Balance, as of Sept. 30, 2008 44,400,000 44,400 67,635 (122,290) 297 (9,958) Payable paid by previous directors and officers - - 15,056 - - 15,056 Foreign currency gain (loss) - - - - (297) (297) Net loss for the year - - - (63,513) - (63,513) ---------- ------- ------- ---------- ------ ---------- Balance, as of Sept. 30, 2009 44,400,000 44,400 82,691 (185,803) - (58,712) Net loss for the year (219,813) (219,813) ---------- ------- ------- ---------- ------ ---------- Balance as of Sept. 30, 2010 44,400,000 $44,400 $82,691 $(405,616) $ - $(278,525) ========== ======= ======= ========== ====== ========== </TABLE> See accompanying notes F-4 PRECISION PETROLEUM CORPORATION STATEMENTS OF CASH FLOWS (AUDITED) <TABLE> <CAPTION> September 30, ------------- 2010 2009 ------------ ------------ <S> <C> <C> Operating activities Net loss for the period $ (219,813) $ (63,513) Adjustments to reconcile net loss to net cash used in operating activities: Depletion 56,078 26,442 Accretion expense 2,083 - Mineral claim fee - 4,464 Changes in operating assets and liabilities Accounts receivable (35,816) (14,600) Other receivables 10,028 (10,028) Accounts payable and accrued liabilities 169,366 34,194 ------------ ------------ Net cash used in operating activities (18,074) (23,041) ------------ ------------ Investing activities Proceeds from sale of assets 65,000 - Acquisition of oil and gas properties (64,791) (993,980) Participation deposits (11,500) (46,000) ------------ ------------ Net cash used in investing activities (11,291) (1,039,980) ------------ ------------ Financing activities Cash overdraft - (274) Proceeds from short term note payable - 993,980 Contribution of capital - 15,056 Advances 24,916 67,500 ------------ ------------ Net cash provided by financing activities 24,916 1,076,262 ------------ ------------ Effect of foreign currency translation - (297) ------------ ------------ Increase (decrease) in cash during the year (4,449) 12,944 Cash, beginning of the year 12,944 - ------------ ------------ Cash, end of the year $ 8,495 $ 12,944 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the year for income taxes $ - $ - ============ ============ Cash paid during the year for interest $ - $ - ============ ============ Non cash investing and financing activities: Increase in oil and gas properties for asset retirement obligation $ 20,829 $ - ============ ============ </TABLE> See accompanying notes F-5 PRECISION PETROLEUM CORPORATION NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2010 AND 2009 (Audited) Note 1 Nature and Continuance of Operations Precision Petroleum Corporation (the "Company") was incorporated under the name of "Tidewater Resources, Inc." under the laws of the State of Nevada on February 7, 2007. On October 27, 2008 the Company changed its name to Precision Petroleum Corporation. The Company has established its corporate offices in Shawnee, Oklahoma. The Company is engaged primarily in the acquisition, development, production, exploration for, and the sale of oil, gas and natural gas liquids. All business activities are conducted in Oklahoma and the Company sells its oil and gas to a limited number of domestic purchasers. The Company does not operate the leases; they own a working and overriding royalty interest and are invoiced monthly for joint operating costs and receive revenues from third party purchasers of oil and gas chosen by the operators. The company was an exploration stage company in the years prior to the year ended September 30, 2009. These financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year. Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying values and classifications of assets and liabilities should the Company be unable to continue as a going concern. At September 30, 2010, the Company had not yet achieved profitable operations, has accumulated losses of $405,616 since its inception, has a working capital deficiency of $1,245,192 and expects to incur further losses in the development of its business, all of which casts substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management has no formal plan in place to address this concern but considers that the Company will be able to obtain additional funds by equity financing and/or related party advances, however there is no assurance of additional funding being available. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from the outcome of this uncertainty. F-6 PRECISION PETROLEUM CORPORATION NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2010 AND 2009 (Audited) Note 2 Summary of Significant Accounting Policies The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America. Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements for a period necessarily involves the use of estimates, which have been made using careful judgment. Actual results may vary from these estimates. The financial statements have, in management's opinion, been properly prepared within the framework of the significant accounting policies summarized below: Cash and cash equivalents The Company considers cash and cash equivalents to be all highly liquid debt instruments with a maturity when purchased of three months or less. The Company maintains its cash balances in one financial institution in Shawnee, Oklahoma The balance at this institution is generally insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. As of September 30, 2010 and 2009, the Company's cash in this financial institution was less than the federally insured limits. Allowance for doubtful accounts Accounts receivable are stated at the amount management expects to collect from balances outstanding at year end. Management provides for probable uncollectible amounts through a charge to earnings and a credit to an allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance. Changes in the allowance have not been material to the financial statements. Property and equipment Equipment is recorded at cost. Depreciation is provided using the straight line method. As of September 30, 2010 and 2009 the Company did not have any property or equipment. F-7 PRECISION PETROLEUM CORPORATION NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2010 AND 2009 (Audited) Oil and Gas Properties The Company follows the full cost method of accounting for oil and gas operations whereby all costs of exploring for and developing oil and gas reserves are initially capitalized on a country-by-country (cost center) basis. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling and overhead charges directly related to acquisition and exploration activities. Costs capitalized, together with the costs of production equipment, are depleted and amortized on the unit-of-production method based on the estimated gross proved reserves. Petroleum products and reserves are converted to a common unit of measure, using 6 MCF of natural gas to one barrel of oil. Costs of acquiring and evaluating unproved properties are initially excluded from depletion calculations. These unevaluated properties are assessed annually to ascertain whether impairment has occurred. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion calculations. Future net cash flows from proved reserves using period-end, non-escalated prices and costs are discounted to present value and compared to the carrying value of oil and gas properties. Proceeds from a sale of petroleum and natural gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would alter the rate of depletion by more than 25%. Asset Retirement Obligations The Company recognizes the fair value of a liability for an asset retirement obligation in the year in which it is incurred when a reasonable estimate of fair value can be made. The carrying amount of the related long-lived asset is increased by the same amount as the liability. F-8 PRECISION PETROLEUM CORPORATION NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2010 AND 2009 (Audited) Changes in the liability for an asset retirement obligation due to the passage of time will be measured by applying an interest method of allocation. The amount will be recognized as an increase in the liability and an accretion expense in the statement of operations. Changes resulting from revisions to the timing or the amount of the original estimate of undiscounted cash flows are recognized as an increase or a decrease in the carrying amount of the liability for an asset retirement obligation and the related asset retirement cost capitalized as part of the carrying amount of the related long-lived asset. The Company owns interests in oil and natural gas properties, which may require expenditures to plug and abandon the wells when the oil and natural gas reserves in the wells are depleted. Fair value of legal obligations to retire and remove long-lived assets is recorded in the period in which the obligation is incurred (typically when the asset is installed at the production location). When the liability is initially recorded, this cost is capitalized by increasing the carrying amount of the related properties and equipment. Over time the liability is increased for the change in its present value, and the capitalized cost in properties and equipment is depreciated over the useful life of the remaining asset. The Company does not have any assets restricted for the purpose of settling the plugging liabilities. The following table shows the activity for the years ended September 30, 2010 and 2009 relating to the Company's retirement obligation for plugging liability: 2010 2009 ---- ---- Beginning balance at October 1 $ - $ - Liabilities incurred 20,829 - Liabilities settled - - Accretion expense 2,083 - Revision estimate - - --------- --------- Ending balance at September 30 $ 22,912 $ - ========= ========= F-9 PRECISION PETROLEUM CORPORATION NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2010 AND 2009 (Audited) Impairment of Long-Lived Assets The Company has adopted FASB Codification Topic 360-10 ("ASC 360-10"), "Property, Plant, and Equipment", which requires that long-lived assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Oil and gas properties accounted for using the full cost method of accounting, a method utilized by the Company, are excluded from this requirement, but will continue to be subject to the ceiling test limitations. At September 30, 2010 and 2009, the Company had not recognized any impairment to its oil and gas properties. Income Taxes The Company accounts for income taxes under FASB Codification Topic 740 ("ASC 740"). Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. As of September 30, 2010 and 2009, the Company has a net operating loss carryforward of approximately $339,966 and $185,803 available to offset taxable income through 2030 (Refer to Note 6). Basic and Diluted Loss Per Share Basic loss per share is computed using the weighted average number of shares outstanding defined by FASB Accounting Standards Codification Topic 260, "Earnings Per Share" during the period. Fully diluted earnings (loss) per share are computed similar to basic income (loss) per share except that the denominator is increased to include the number of common stock equivalents (primarily outstanding options and warrants). Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method, at either the beginning of the respective period presented or the date of issuance, whichever is later, and only if the common stock equivalents are considered dilutive based upon the Company's net income (loss) position at the calculated date. Diluted loss per share has not been provided as it would be anti-dilutive. As of September 30, 2010 and 2009, the Company did not have any outstanding stock options or warrants. F-10 PRECISION PETROLEUM CORPORATION NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2010 AND 2009 (Audited) Financial Instruments Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non- performance risk including our own credit risk. In addition to defining fair value, the disclosure requirements around fair value establishes a fair value hierarchy for valuation inputs which is expanded. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are: Level 1 - inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. Level 2 - inputs are based upon significant observable inputs other than quoted prices included in Level 1, such as quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 - inputs are generally unobservable and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. The carrying value of the Company's financial assets and liabilities which consist of cash, accounts payable and accrued liabilities, and notes payable are valued using level 1 inputs. The Company believes that the recorded values approximate their fair value due to the short maturity of such instruments. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, exchange or credit risks arising from these financial instruments. F-11 PRECISION PETROLEUM CORPORATION NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2010 AND 2009 (Audited) Revenue Recognition Revenue from the sale of the oil and gas production is recognized when title passes from the operator of the oil and gas properties to purchasers. Newly Issued Accounting Pronouncements In June 2009 the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") 105, "Generally Accepted Accounting Principles". ASC 105 establishes the Codification as the sole source of authoritative accounting principles to be applied in the preparation of financial statements in conformity with GAAP. The adoption of this statement did not have a material impact on the Company's financial position or results of operations. In January 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-03 (ASU 2010-03), Extractive Activities-Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosures. This amendment to Topic 932 has improved the reserve estimation and disclosure requirements by (1) updating the reserve estimation requirements for changes in practice and technology that have occurred over the last several decades and (2) expanding the disclosure requirements for equity method investments. This is effective for annual reporting periods ending on or after December 31, 2009. However, an entity that becomes subject to the disclosures because of the change to the definition oil- and gas- producing activities may elect to provide those disclosures in annual periods beginning after December 31, 2009. Early adoption is not permitted. The Company does not expect the provisions of ASU 2010-03 to have a material effect on the financial position, results of operations or cash flows of the Company. In January 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-06 (ASU 2010-06), Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This amendment to Topic 820 has improved disclosures about fair value measurements on the basis of input received from the users of financial statements. This is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the provisions of ASU 2010-06 to have a material effect on the financial position, results of operations or cash flows of the Company. F-12 PRECISION PETROLEUM CORPORATION NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2010 AND 2009 (Audited) In February 2010, the FASB issued Accounting Standards Update 2010-09 (ASU 2010-09), Subsequent Events (Topic 855), amending guidance on subsequent events to alleviate potential conflicts between FASB guidance and SEC requirements. Under this amended guidance, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. This guidance was effective immediately and we adopted these new requirements for the period ended September 30, 2010. The adoption of this guidance did not have a material impact on our financial statements. In April 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-14 (ASU 2010-14), Accounting for Extractive Activities - Oil and Gas. This amendment makes amendments to paragraph 932- 10-S99-1 due to SEC release No. 33-8995, Modernization of Oil and Gas Reporting. The Company does not expect the provisions of ASU 2010-14 to have a material effect on the financial position, results of operations or cash flows of the Company. Note 3 Oil and Gas Properties At September 30, 2010 and 2009 the producing oil and gas properties were as follows: 2010 2009 Cost ---- ---- Oklahoma Properties $1,014,599 $ 993,880 Less: Accumulated depletion 82,520 26,442 ---------- --------- $ 932,079 $ 967,538 ========== ========= Depletion expense for the years ended September 30, 2010 and 2009, was $56,078 and $26,442, respectively. F-13 PRECISION PETROLEUM CORPORATION NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2010 AND 2009 (Audited) The following are descriptions of the oil and gas activities in 2010 and 2009: a) Effective July 1, 2009, the Company purchased various producing properties located in Garvin County, Pottawatomie County, Nowata County and Seminole County, Oklahoma. The Company utilized short-term financing to acquire these properties. The various net revenue acquired range from .2808% to a 67.97% net revenue interest. Lease Interest Name Purchased Total ----- --------- ----- Jessica #23-A 18.0296496% $ 14,481 Karsyn 19.6500000% 118,036 Heath 7.8000000% 50,602 Thompson #1 23.1222014% 249,658 Teresa 18.8585400% 39,295 Mason Burns 17.8527800% 33,609 White #12-1 67.9687500% 237,242 Crown #1 & #3 8.7890625% 26,946 Quinlan #1 22.3945400% 110,276 Quinlan #2 .2808000% 710 Quinlan #3 8.7750000% 60,609 Jameson 5 wells 1 swd 100.0000000% 23,900 Sharon #1 6.3400000% 23,413 Ward McNeil 22.6230400% 5,203 East & West Moreland 3% overriding royalty - ---------- Total original cost $ 993,980 ========== b) In an agreement dated on December 1, 2009, but made effective January 1, 2010, the Company sold all of its working interest in the Heath lease located in Seminole County, Oklahoma. The sales price for this transaction was $55,000, to be paid on or before one year from the date of the agreement. The Company received a payment in the amount of $4,583 from the purchaser with a balance due of $50,417. Although the amount due is part of a lawsuit and no payments have been received, the amount is not considered in default as of September 30, 2010. F-14 PRECISION PETROLEUM CORPORATION NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2010 AND 2009 (Audited) On September 16, 2010, the Company, along with Global Energy, LLC (Plaintiffs), filed a joint petition against Reed Power Tongs, Inc. and 4K Energy, LLC (Defendants), alleging breach of contract of the joint operating agreement the Plaintiffs entered into with the Defendants covering the Karsyn No. 1, the Heath well and the Josh well. The Plaintiffs are alleging that the Defendants charged excessive fees for services rendered by unrelated entities, failed to obtain written approval from working interest owners before charging inflated fees with their affiliated companies and knowingly and intentionally withholding of production revenue from both Precision and Global. The Plaintiffs are demanding an accounting of all charges and revenue for the Karsyn, Josh and Heath wells and are asking for damages related to breach of contract and fraud. The Plaintiffs are asking for damages in excess of $10,000 for four different actions and also for sums in excess of $10,000 for punitive and exemplary damages for the Defendants conduct described in the petition. On February 22, 2010, the Company sold all of its working interest in the Jameson lease, retaining a three percent (3%) overriding royalty interest. The sale price for this transaction was $10,000 and has been paid in full. In June of 2010, the Company acquired an additional 25% working interest in the Mason Burns well in exchange for the assumption of the seller's debt to the operator of the well in the amount of $1,657. The Company also increased their working interest in the Teresa #1 well by 11% and in the Quinlan #1 by 2%. c) On January 27, 2009, the Company entered into a Participation Agreement with Nitro Petroleum Incorporated ("Nitro"), pursuant to which the Company obtained from Nitro the right to participate in Phase One of Nitro's Powder river Basin Project in Montana. Nitro acquired certain oil and gas leases in the Powder River Basin in Montana pursuant to a Memorandum of Understanding dated January 26, 2009 with REDS, LLC. F-15 PRECISION PETROLEUM CORPORATION NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2010 AND 2009 (Audited) Pursuant to the terms of the Participation Agreement, Nitro is being carried to the tanks with respect to a 25% working interest in Phase One of the Powder River Basin Project. The Company is acquiring a 37.5% working interest in Phase One of the Powder River Basin Project in exchange for an agreement to pay 50% of the expenses of Phase One of the Powder River Basin Project. Additionally, the Company shall have the right to purchase up to a 37.5% working interest in Phase Two and Phase Three of the Powder River Basin Project upon substantially the same terms as Phase One. Nitro will be the operator of all wells drilled during Phase One of the Powder River Basin Project. During the year the Company paid $11,500 towards the Participation Agreement with Nitro. The payments have been recorded in the financial statements as participation deposits. d) On November 5th, 2009, the Company signed an agreement to purchase a 57.2682% working interest in the Ed Thompson #2-18 for $28,634. The company has paid $28,000 toward this amount. e) On September 1, 2010, the Company purchased a 5% working interest in a 7 well package located in Garvin County, Oklahoma in the amount of $34,500. Note 4 Mineral Property Pursuant to a mineral property staking and Net Smelter Returns Royalty agreement (the "Agreement") dated April 19, 2007, the Company acquired a 50% undivided right, title and interest in a gold/silver/copper mineral claim unit of the Kammatika Claims (the "Claims"), located in the province of British Columbia, Canada for a cash payment of $4,464. As of September 30, 2009, the Company's claims have expired. Consequently, the Company expensed the claims during the year ended September 30, 2009. Note 5 Notes Payable and Short-Term Financing At September 30, 2010, the Company had an unsecured short term note payable to Sierra Growth, Inc., an investment company located in Charlestown, Nevis, West Indies. This note bears an interest rate of 10% per annum and is due upon demand. If the Holder makes a demand for repayment, the Company must repay the principal balance of this note and accrued and unpaid interest thereon within sixty (60) days. Interest has been accrued in the amount of $75,171 as of September 30, 2010 (2009, $0) and has a principal balance of $751,714 (2009, $751,714). F-16 PRECISION PETROLEUM CORPORATION NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2010 AND 2009 (Audited) At September 30, 2010, the Company had an unsecured short term note payable to Global Energy, LLC, an oil and gas company located in Shawnee, Oklahoma. This note bears an interest rate of 10% per annum and is payable upon demand. If the Holder makes a demand for repayment, the Company must repay the principal balance of this note and accrued and unpaid interest thereon within sixty (60) days. Interest has been accrued in the amount of $24,227 as of September 30, 2010 (2009, $0) and has a principal balance of $242,266 (2009, $242,266). The Company has also obtained financing from a consultant with a balance of $31,754 (2009, $20,518) and also has received advances of $92,416 (2009, $67,500) from unrelated third parties. The balances are due on demand and are not interest bearing. However, Generally Accepted Account Principles (GAAP) requires interest expense to be imputed on the outstanding balances of the advances. The Company has accrued interest in the amount of $13,030 for these advances as of September 30, 2010 (2009, $0). Note 6 Income Taxes At September 30, 2010, the Company has accumulated net operating loss carry forwards totaling $339,966 (2009, $185,803), which may be applied against future years income and expire commencing in 2029. Significant components of the Company's future tax assets and liabilities, after applying enacted corporate income tax rates, are as follows: 2010 2009 ---- ---- Future income tax assets Net tax operating loss carryforward $ 117,446 $ 65,031 Sale of oil and gas properties 22,100 - Less: Valuation allowance (139,546) (65,031) --------------- ------------ $ - $ - =============== ============ The Company recorded no income tax expense for the years ended September 30, 2010 and 2009, as a result of the net loss recognized in each of these years. Further, an income tax benefit was not recognized in either of the years due to the uncertainty of the Company's ability to recognize the benefit from the net operating losses and, therefore, has recorded a full valuation allowance against the deferred tax assets. F-17 PRECISION PETROLEUM CORPORATION NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2010 AND 2009 (Audited) The benefit for income taxes is different from the amount computed by applying the U.S. statutory corporate federal income tax rate to pre-tax loss as follows: 2010 2009 Amount Amount ------ ------ Income tax benefit computed at the statutory rate of 34% $ 74,736 $ 65,031 Increase (reduction) in tax benefit Resulting from: Permanent items (221) - Valuation allowance (74,515) (65,031) ----------- ------------ Income tax benefit $ - $ - =========== ============ Note 7 Related Party Transactions During the year ended September 30, 2010 and 2009, the Company incurred management fees charged by a director of the Company totaling $12,000 and $18,000, respectively. Note 8 Common Stock The Company's capitalization is 200,000,000 common shares with par value of $.001 per share. On November 17, 2008, the Company authorized a forward stock split of twelve for one (12:1) of our total issued and outstanding shares of common stock and was effective January 8, 2009. All references in these financial statements to number of shares, price per share, and weighted average number of common shares outstanding prior to the 12:1 forward stock split have been adjusted to reflect the split on a retroactive basis unless otherwise noted. a. Upon incorporation on February 7, 2007, the Company issued 12 post split share of common stock to its founding officer and director for nominal consideration. b. In October 2007, the Company issued 36,000,000 shares of common stock at $0.001 per share to directors of the Company for gross proceeds of $3,000. F-18 PRECISION PETROLEUM CORPORATION NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2010 AND 2009 (Audited) c. In October 2007, the Company issued 48,000,000 shares of common stock at $0.02 per share for gross proceeds of $80,135. d. In September 2008, the Company's officers and directors resigned from their positions with the Company. In connection with such resignations, such officers and directors surrendered all of their shares of the Company's common stock, totaling 39,600,012 post split shares, which were then cancelled and returned to treasury. No compensation was paid for the surrender of these shares. Note 9 Supplemental Oil and Gas Information (Unaudited) Full Cost --------------------------------- 2010 2009 --------------- ---------------- Capitalized Costs Relating to Oil and Gas Producing Activities at September 30, 2010 and 2009 Unproved oil and gas properties $ - $ - Proved oil and gas properties 1,014,599 993,980 Support equipment and facilities - - --------------- ---------------- 1,014,599 993,980 Less accumulated depletion, (82,520) (26,442) --------------- ---------------- Net capitalized costs $ 932,079 $ 967,538 =============== ================ Costs Incurred in Oil and Gas Producing Activities for the Year Ended September 30, 2010 and 2009 Property acquisition costs Proved $ 64,791 $ 993,980 Unproved $ - $ - Exploration costs $ - $ - Asset retirement obligation $ 20,829 $ - Development costs $ - $ - Amortization rate per equivalent barrel of production $ 18 $ 25 F-19 PRECISION PETROLEUM CORPORATION NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2010 AND 2009 (Audited) Results of Operations for Oil and Gas Producing Activities for the Year Ended September 30, 2010 and 2009 Oil and gas sales $ 190,143 $ 59,723 Production costs 89,431 36,610 Accretion expense 2,083 - Exploration costs - - Depreciation, depletion, and amortization 56,078 26,442 --------------- ---------------- 42,551 (3,329) Income tax expense - - --------------- ---------------- Results of operations for oil and gas producing activities (excluding corporate overhead and financing costs) $ 42,551 $ (3,329) =============== ================ Reserve Information The following estimates of proved and proved developed reserve quantities and related standardized measure of discounted net cash flow are estimates only, and do not purport to reflect realizable values or fair market values of the Company's reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available. All of the Company's reserves are located in the United States. Proved reserves are estimated reserves of crude oil (including condensate and natural gas liquids) and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells, equipment, and operating methods. F-20 PRECISION PETROLEUM CORPORATION NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2010 AND 2009 (Audited) The standardized measure of discounted future net cash flows is computed by applying year-end prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses (based on year-end statutory tax rates, with consideration of future tax rates already legislated) to be incurred on pretax net cash flows less tax basis of the properties and available credits, and assuming continuation of existing economic conditions. The estimated future net cash flows are then discounted using a rate of 10 percent a year to reflect the estimated timing of the future cash flows. For the year ended For the year ended September 30, 2010 September 30, 2009 ------------------- ------------------- Oil Gas Oil Gas (Bbls) (Mcf) (Bbls) (Mcf) ------- ---------- ------- ---------- Proved developed and undeveloped reserves Beginning of year 28,932 57,013 - - Revisions of previous estimates 4,900 35,726 - - Improved recovery Purchases of minerals in place 2,540 11,902 29,770 58,290 Extensions and discoveries - - - - Production (2,102) (5,711) (838) (1,277) ------- ---------- ------- ---------- Sales of minerals in place End of year 34,270 98,930 28,932 57,013 ------- ---------- ------- ---------- Proved developed reserves Beginning of year 28,932 57,013 - - End of year 21,544 58,045 28,932 57,013 Standardized Measure of Discounted Future Net Cash Flows at September 30, 2010 and 2009 Future cash inflows $3,097,543 1,959,859 Future production costs 1,028,222 715,002 Future development costs 93,899 - Future income tax expenses 703,569 435,700 ---------- --------- Future net cash flows 1,271,853 809,157 10% annual discount for estimated timing of cash flows (620,505) (275,113) ---------- --------- F-21 PRECISION PETROLEUM CORPORATION NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2010 AND 2009 (Audited) Standardized measures of discounted future net cash flows relating to proved oil and gas reserves $ 651,348 $ 534,044 ========== ========== The following reconciles the change in the standardized measure of discounted Future net cash flow during 2010 and 2009. Beginning of year $ 534,044 $ - Sales of oil and gas produced, net of production costs (100,712) (23,112) Net changes in prices and production costs - - Extensions, discoveries, and improved recovery, less related costs - - Development costs incurred during the year which were previously estimated - - Net change in estimated future development Costs (93,899) - Revisions of previous quantity estimates 628,406 - Net change from purchases and sales of minerals in place 314,770 1,267,969 Change of discount (363,392) (275,113) Net change in income taxes (267,869) (435,700) Other - - ---------- ---------- End of year $ 651,348 $ 534,044 ========== ========== NOTE 10 -SUBSEQUENT EVENTS The Company has sold interests in oil and gas leases that it presently owns after the fiscal year ended September 30, 2010. The Company sold a 30% working interest it owned in the Ed Thompson #2-18 for $8,400 and 19.003906% of their working interest in the Ward McNeil for $19,440. F-22 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. Controls and procedures Disclosure Controls and Procedures The Company, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of September 30, 2010. Based on that evaluation, the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2010. ITEM 9(A)T. INTERNAL CONTROLS AND PROCEDURES Management's Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f). Our Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO Framework"). Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of September 30, 2010. This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report on internal control in this annual report. Changes in Internal Control over Financial Reporting There were no changes in internal control over financial reporting that occurred during the last fiscal quarter covered by this report that have materially affected, or are reasonably likely to affect, the Company's internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. 13 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE: COMPLIANCE WITH SECTION 16A OF THE EXCHANGE ACT Directors and Executive Officers The following sets forth the names, ages and positions of our current directors and executive officers (and persons nominated or chosen to become such) including their term(s) of office as a director and the period during which the person has served: a brief description of the person's business experience during the past five (5) years; and if a director, or any other directorship held in reporting companies naming such company. Name Age Offices Held Richard Porterfield 64 Director; President James Kirby 50 Chief Financial Officer Sharon Farris 50 Secretary Mr. Richard Porterfield - member of the Board of Directors; President Mr. Porterfield was appointed as a member of the Corporation's Board of Directors and as the Corporation's President and Secretary on January 20, 2009. Mr. Porterfield has been working in the oil and gas industry for over 30 years. From November 2008 to May 2009, he worked as a Geologist for Nitro Petroleum Corp. From January 2004 to April 2006, he worked as a geologist for Hoco, Inc. and from November 2006 to March 2008, he worked as a geologist for Bentrock, Inc. Mr. Porterfield earned an AA degree in Business Management from Rose State College in Midwest City, Oklahoma. Mr. James Kirby - Chief Financial Officer Mr. Kirby was appointed as the Company's Chief Financial Officer on June 3, 2009. From September 1997 to present he has been the Vice President of First National Bank of Shawnee. Mr. Kirby has also been a member of the Board of Directors of Nitro Petroleum Incorporated since December 2007. Nitro Petroleum is a public company registered with the SEC. He studied banking at Seminole College and business at Oklahoma State University. The Company has not entered into any transaction with Mr. Kirby that would be regarded as related party transactions. 14 Ms. Sharon Farris - Secretary From September 7, 2008, to January 20, 2009, Ms. Farris served as a member of the Board of Directors and as the Corporation's President, Treasurer and Secretary. On January 20, 2009, Ms. Farris resigned as a member of the Board and as President and Treasurer. Mr. Farris continues to serve as the Corporation's Secretary. On Ms. Farris has been working in the oil and gas industry for the past several years. She has worked for Buccaneer Energy Corporation and HoCo, Inc. for the past two and a half years, working with the Oklahoma Corporation Commission, Oklahoma Tax Commission, Petroleum Engineers, Geologist, Landowners, Attorneys, Crude Purchasers as well as various oil field workers. Ms. Farris was born and raised in Norman, Oklahoma. She studied overseas at the International School in Islamabad, Pakistan for two years and spent her last semester at Norman High School, where she graduated. She then attended the University of Oklahoma, graduating with a Bachelors of Arts and Science. She has over fifteen years of management experience and over five years as a Certified Manager Trainer. She has a family background in the oil and gas industry. Significant Employees We have no employees at this time. Family Relationships None Involvement In Certain Legal Proceedings None. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities and Exchange Act of 1934 requires any person who is a director or executive officer or who beneficially holds more than ten percent (10%) of any class of our securities which have been registered with the Securities and Exchange Commission, to file reports of initial ownership and changes in ownership with the Securities and Exchange Commission. These persons are also required under the regulations of the Securities and Exchange Commission to furnish us with copies of all Section 16(a) reports they file. To our knowledge, based solely on our review of the copies of the Section 16(a) reports furnished to us and a review of our shareholders of record for the fiscal year ended September 30, 2010, there were no filing delinquencies. 15 Code of Ethics We have not yet prepared a written code of ethics and employment standards. We have only recently commenced operations. We expect to implement a Code of Ethics during the current fiscal year. Corporate Governance; Audit Committee Financial Expert Nominating Committee We currently do not have a nominating committee. Our Board as a whole acts as our nominating committee. Audit Committee As we currently do not have an audit committee financial expert or an independent audit committee expert due to the fact that our Board currently does not have an independent audit committee. Our Board does not have any (1) independent member, and thus, does not have the ability to create a proper independent audit committee. Presently, our Board is performing the duties that would normally be performed by an audit committee. We intend to form a separate audit committee, and are seeking potential independent directors. We are seeking experienced business people and plan to appoint an individual qualified as an audit committee financial expert. ITEM 11. EXECUTIVE COMPENSATION. Other than as described below, our executive officers have not received any compensation since the date of our incorporation, and we did not accrue any compensation. There are no securities authorized for issuance under any equity compensation plan, or any options, warrants, or rights to purchase our common stock. During the fiscal year ended September 30, 2010, we paid our President and Treasurer, Mr. Porterfield, a total of $12,000 in compensation for his services as our sole executive officer. During the fiscal year ended September 30, 2009, we paid our President and Treasurer, Mr. Porterfield, a total of $18,000 in compensation for his services as our sole executive officer. Compensation of Directors We do not compensate our directors for their time spent on our behalf, but they are entitled to receive reimbursement for all out of pocket expenses incurred for attendance at our Board of Directors meetings. 16 Pension and Retirement Plans Currently, we do not offer any annuity, pension or retirement benefits to be paid to any of our officers, directors or employees, in the event of retirement. There are also no compensatory plans or arrangements with respect to any individual named above which results or will result from the resignation, retirement or any other termination of employment with us, or from a change in our control. Employment Agreements We do not have written employment agreements. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Securities Authorized for Issuance Under Equity Compensation Plans There are no securities authorized for issuance under any equity compensation plan, or any options, warrants, or rights to purchase our common stock. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT We are required under Regulation S-K of the Securities Exchange Act of 1934 (the "Exchange Act") to provide certain information, with respect to any person (including any "group", as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) who is known to us to be the beneficial owner of more than five (5) percent of any class of our voting securities, and as to those shares of our equity securities beneficially owned by each of our directors, our executive officers and all of our directors and executive officers and all of our directors and executive officers as a group. Based on our review of statements filed with the Securities and Exchange Commission (the "Commission") pursuant to Sections 13 (d), 13 (f), and 13 (g) of the Exchange Act with respect to our common stock and a review of our shareholders list, as of January 13, 2011, we had only two (2) shareholders who held 5% or more of our common stock, which is our only class of capital stock. As of January 13, 2011, there were 44,400,000 shares of our common stock outstanding. 17 The number of shares of common stock beneficially owned by each person is determined under the rules of the Commission and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which such person has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within sixty (60) days after the date hereof, through the exercise of any stock option, warrant or other right. Unless otherwise indicated, each person has sole investment and voting power (or shares such power with his or her spouse) with respect to the shares set forth in the following table. The inclusion herein of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of those shares. The table also shows the number of shares beneficially owned as of December 31, 2010 by each of the individual directors and executive officers and by all directors and executive officers as a group. Title of Name and Address of Amount and Nature of Percent of Class Beneficial Owner Beneficial Ownership Class -------- --------------------- ------------------------- ---------- Common Richard Porterfield -0- 0% 2205 Rushing Meadows Edmond, OK 73013 Common James Kirby -0- 0% P.O. Box 1025 McLoud, OK 74851 Common Sharon Farris -0- 0% Secretary 9250 75th Street Lexington, OK 73051 All officers and directors as a group -0- 0% Beneficial Owners: 2,350,000 5.3% Common Stonehurst Limited Suite 13, Oliaji Trade Centre Francis Rachel St, Victoria Mahe Seychelles Common Terra Equity LLC 5,170,000 11.6% Henville Building Charleston, Nevis (1) Percent of Ownership is calculated in accordance with the Securities and Exchange Commission's Rule 13(d) - 13(d)(1) Changes in Control We have not entered into any arrangements which may result in a change in our control 18 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Transactions With Related Persons Other than the stock transactions disclosed below, we have not entered into any transactions in which any of our directors, executive officers, or affiliates, including any member of an immediate family that had or are to have a direct or indirect material interest. Parents None Promoters and Control Persons None. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit and Audit Related Fees. The aggregate fees billed by our auditors, for audit fees during the years ended September 30, 2010, and 2009, were $16,500 and $18,750, respectively. We did not incur any fees billed by our auditors for audited related services. Tax Fees. We did not incur any fees billed by our auditors for tax compliance, tax advice or tax compliance services during the fiscal year ended September 30, 2010 and 2009. All Other Fees. We did not incur any other fees billed by auditors for services rendered to us other than the services covered in "Audit Fees" for the fiscal years ended September 30, 2010 and 2009. The Board has considered whether the provision of non-audit services is compatible with maintaining the principal accountant's independence. Since there is no audit committee, there are no audit committee pre-approval policies and procedures. 19 ITEM 15. EXHIBITS Exhibit Index 3.1 (a) Articles of Incorporation* 3.1 (b) Amendments to Articles of Incorporation filed with the Secretary of State of the State of Nevada on October 17, 2008, October 27, 2008, November 17, 2008, and December 5, 2008.* 3.2 By-laws* 31.1 Section 302 Certification - President 31.2 Section 302 Certification - Chief Financial Officer 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the President. 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Chief Financial Officer. *Incorporated by reference to our Registration Statement on Form S-1 file number 333-149823, filed on March 20, 2008. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 13th day of January, 2011. PRECISION PETROLEUM CORPORATION Date: January 13, 2011 By: /s/ Richard Porterfield ------------------------------------- Name: Richard Porterfield Title: President, Principal Executive Officer, By: /s/ James Kirby ------------------------------------- Name: James Kirby Title: Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer Pursuant to the requirements of the Securities Act of 1933, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated and on the dates indicated: PRECISION PETROLEUM CORPORATION Dated: January 13, 2011 By: /s/ Richard Porterfield ------------------------------------- Name: Richard Porterfield Title: Director 21 </TEXT> </DOCUMENT>