UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

Form 10-Q

(Mark One)

For the quarterly period ended March 31,June 30, 2012

For the transition period from _______________ to _______________.

Commission file number 002-76219NY

VICTORY ENERGY CORPORATION

(Exact Name of Company as Specified in its Charter)

(512)-347-7300

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yesx      Noo¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yesx     Noo¨

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yeso¨   Nox

Applicable only to issuers involved in bankruptcy proceedings during the preceding five years

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.

Yeso¨      Noo¨

Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of May 1,July 24, 2012, 2012, there were 27,170,41827,511,819 shares of common stock, par value $0.001, issued and outstanding.outstanding and held by 1,433 stockholders of record. This reflects the 1:50 reverse stock split that became effective on January 12, 2012.

VICTORY ENERGY CORPORATION

QUARTERLY REPORT ON

FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED MARCH 31,JUNE 30, 2012

TABLE OF CONTENTS

Cautionary Notice Regarding Forward Looking Statements

Victory Energy Corporation desires 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 Quarterly Reportreport 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.

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. Victory Energy Corporation’s actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. FactorsIt is not possible to identify all of these risks, uncertainties or assumptions. Among the important factors that could cause or contributeactual results to such differences include, but are not limited to,differ materially from those in the forward-looking statements are:

Additionally, the information set forth under the heading “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, as well as disclosures made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of this report could cause actual results to differ materially from those in the forward-looking statements. Other unpredictable or unknown factors not discussed elsewhere in this report andcould also cause actual results to differ materially from those in the risks discussed in press releases and other communications to stockholders issued by Victory Energy Corporation from time to timeforward-looking statements. The reader should not place undue reliance on these forward-looking statements, which attempt to advise interested partiesspeak only as of the risks and factors that may affect the business. Except as may bedate of this report. Unless legally required, under the federal securities laws, Victory Energy Corporation undertakeswe undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Part I – Financial Information

Item 1. Financial Statements

VICTORY ENERGY CORPORATION AND SUBSIDIARIESSUBSIDIARY

CONSOLIDATEDCOMBINED BALANCE SHEETS

See the accompanying notes to the combined financial statements.

VICTORY ENERGY CORPORATION AND SUBSIDIARIESSUBSIDIARY

CONSOLIDATEDCOMBINED STATEMENTS OF OPERATIONS

(Unaudited)

See the accompanying notes to the combined financial statements.

VICTORY ENERGY CORPORATION AND SUBSIDIARIESSUBSIDIARY

CONSOLIDATEDCOMBINED STATEMENTS OF CASH FLOW

(Unaudited)

See the accompanying notes to the combined financial statements.

VICTORY ENERGY CORPORATION AND SUBSIDIARY

COMBINED STATEMENTS OF CASH FLOW

(Unaudited)

See the accompanying notes to the combined financial statements.

Victory Energy Corporation and Subsidiary

Notes to the ConsolidatedCombined Financial Statements

(Unaudited)

Note 1 – Financial Statement Presentation

Basis of Presentation

The accompanying consolidatedcombined balance sheet as of December 31, 2011, which has been derived from audited financial statements, and the accompanying interim consolidatedcombined financial statements as of March 31,June 30, 2012, for the three months and six months ended March 31,June 30, 2012 and 2011, have been prepared by management pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. These interim consolidatedcombined financial statements are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments and accruals) necessary to present fairly the financial condition, results of operations and cash flows of Victory Energy Corporation and subsidiary (hereinafter collectively referred to as the "Company""Company," or “we”) as of and for the periods presented in accordance with accounting principles generally accepted in the United States of America ("GAAP").

Operating results for the three and six months ended March 31,June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or for any other interim period during such year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. The accompanying consolidatedcombined financial statements should be read in conjunction with the audited consolidatedcombined financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the SEC on March 30, 2012.

Organization and nature of operations

Victory Energy Corporation (OTCQB symbol VYEY) was organized under the laws of the State of Nevada on January 7, 1982. Prior to May 3, 2006, the Company operated as Victory Capital Holdings Corporation among other corporate names. 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 1:50 reverse stock split. All information in this Form 10-Q reflects this reverse stock split.

The Company is engaged in the exploration, acquisition, development and exploitation of domestic oil and gas properties. Current operations are primarily located onshore in Texas and New Mexico and Oklahoma.Mexico. We are headquartered in Austin, Texas.

VictoryThe Company may invest in oil and gas projects directly, or through its 50% partnership with Aurora Energy Partners, a Texas General Partnershipgeneral partnership (“Aurora”). Currently all of the Company’s oil and gas assets are held through the Aurora partnership. VictoryAurora. The Company is the managing partner of Aurora. On December 6, 2012, Victory increased its ownership of Aurora from 15% to 50% on the signing of the Second Amended Partnership Agreement with the Navitus Energy Group. Our future capital and exploration expenditures will focus primarily on oil or liquid-rich gas projects. The Company will develop its investment opportunities through both internal capabilities and strategic industry relationships.

Going Concern

As reported in the consolidatedcombined financial statements, we had a net loss of $5,009,783$5,406,517 for the threesix months ended March 31,June 30, 2012.  Of this amount, approximately $4,292,025$4,541,451 was for non-cash expenses including the amortization of the debt discount and warrants associated with the Company’s 10% Senior Secured Convertible Debentures, the unamortized portion of the debt discount recognized on the conversion of the debentures to common stock on February 29, 2012, warrants given for services, and stock based compensation.

The cash proceeds from the sale of debentures have allowed the Company to continue operations and invest in new oil and gas properties. Management anticipates that operating losses will continue in the near term.term until new wells are drilled, successfully completed and incremental production increases revenue. As of June 30, 2012 on a year-to-date basis the Company has invested approximately $865,587 in the acquisition of land or the drilling of wells.

At March 31,June 30, 2012, the Company had $611,158$374,386 in working capital and was in active discussions with The Navitus Energy Group and others related to longer term financing required for our capital expenditures planned for the remaining part of 2012 and 2013. We are also discussing capital requirements and funding with other potential investors. Without additional outside investment from the sale of equity securities and/or debt financing our capital expenditures and overhead expenses must be reduced to a level commensurate with available cash flows.

The accompanying consolidatedcombined financial statements are prepared as if the Company will continue as a going concern. The consolidatedcombined 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.

Note 2 – Summary of Significant Accounting Policies

Principles of consolidationcombination

The accompanying consolidatedcombined financial statements are presented in accordance with accounting principles generally accepted in the United States.GAAP. The consolidatedcombined financial statements include the accounts of the Company and Aurora Energy Partners, A Texas General Partnership.Aurora. The Company holds a 50% equity interest in Aurora Energy Partners.Aurora. Since the Company serves as managing partner and is responsible for managing all business operations of the partnership,Aurora, the financial statements of Aurora have been consolidatedcombined with the financial statements of the Company. All significant intercompany transactions have been eliminated. The consolidatedremaining 50% of Aurora is owned by The Navitus Energy Group which, in turn, is controlled by a partner who also serves as a director of the Company and is a major shareholder in the Company. For this reason, the Company has chosen to eliminate all references to presumably unaffiliated non-controlling entities and interests in the combination process. The combined financial statements reflect necessary adjustments, all of which were of a recurring nature and are in the opinion of management necessary for a fair presentation.

Reclassification

Some balances on the prior’s year’s consolidatedcombined financial statements have been reclassified to conform to the current year presentation. Such reclassifications had no effect on net income or earnings per share.

Property and equipmentEarnings per share

PropertyBasic 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 equipmentconvertible securities. Given the historical and projected future losses of the Company, all potentially dilutive common stock equivalents are recorded at cost. Cost of repairs and maintenance are expensed as they are incurred. Major repairs that extend the useful life of equipment are capitalized and depreciated over the remaining estimated useful life. When property and equipment are sold or otherwise disposed, the related costs and accumulated depreciation are removed from the respective accounts and the gains or losses realized on the disposition are reflected in operations. The Company uses the straight-line method in computing depreciation for financial reporting purposes.considered anti-dilutive.

Revenue Recognition

The Company uses the sales method of accounting for oil and natural gas revenues. Under this method, revenues are recognized based on actual volumes of gas and oil sold to purchasers. The volumes sold may differ from the volumes to which the company is entitled based on our interests in the properties. Differences between volumes sold and entitled volumes create oil and gas imbalances which are generally reflected as adjustments to reported proved oil and gas reserves and future cash flows in their supplemental oil and gas disclosures. If their excess takes of natural gas or oil exceed their estimated remaining proved reserves for a property, a natural gas or oil imbalance liability is recorded in the consolidated balance sheet.

Allowance for Doubtful Accounts

We recognize an allowance for doubtful accounts to ensure trade receivables are not overstated due to uncollectability. Accounts receivable for the sale of oil are typically collected in the month following the month of production. Accounts receivable for the sale of gas are typically collected in the second month following the month of production. There were no allowances for doubtful account balances at March 31, 2012 or December 31, 2011.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, other assets, fixed assets, derivative liability, deferred revenue, accounts payable, accrued liabilities and short-term debt.  The estimated fair value of cash, accounts receivable, other assets, accounts payable, deferred revenue and accrued liabilities approximated their carrying amounts due to the short-term nature of these instruments.  The carrying value of short-term debt also approximates fair value since their terms are similar to those in the lending market for comparable loans with comparable risks.  None of these instruments are held for trading purposes.

The Company utilizes various types of financing to fund its business needs, including debt with warrants attached and other instruments indexed to its stock.  The Company reviews its warrants and conversion features of securities issued as to whether they are freestanding or contain an embedded derivative and if so, whether they are classified as a liability at each reporting period until the amount is settled and reclassified into equity with changes in fair value recognized in current earnings.

Inputs used in the valuation to derive fair value are classified based on a fair value hierarchy which distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs).  The hierarchy consists of three levels:

Determining which category an asset or liability falls within the hierarchy requires significant judgment.  The Company evaluates its hierarchy disclosures each quarter.  The following table presents all assets that were measured and recognized at fair value as of March 31,June 30, 2012 and for the three months then ended on a non-recurring basis. The assets shown below were presented at fair value due to the impairment analysis indicating an estimated fair value below the carrying value for the proved oil and gas properties.

Fair value of assets measured and recognized at fair value on a non-recurring basis as of March 31,June 30, 2012 were as follows:

The Company valued the producing properties at their fair value in accordance with the applicable Accounting Standards Codification (“ASC”) standard due to the impairment indicators prevalent as of March 31,June 30, 2012.  The inputs that were used in determining the fair value of these assets were Level 3 inputs. These inputs consist of but are not limited to the following: estimates of reserve quantities, estimates of future production costs and taxes, estimates of consistent pricing of commodities, 10% discount rate, etc. No impairment expense was recorded as of March 31,June 30, 2012.

Concentrations

There is a ready market for the sale of crude oil and natural gas. During the three months ended March 31, 2012, each of our fields sold all of its oil and natural gas production to one purchaser for each field and all of its natural gas production to one purchaser for each field. However, because alternate purchasers of oil and natural gas are readily available at similar prices, we believe that the loss of any of our purchasers would not have a material adverse effect on our financial results

Accounting estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the 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

The Company accounts for its oil and natural gas properties using the successful efforts method of accounting. Under this method, all costs associated with property acquisitions, successful exploratory wells, all development wells, including dry hole development wells, and asset retirement obligation assets are capitalized. Additionally, interest is capitalized while wells are being drilled and the underlying property is in development. Costs of exploratory wells are capitalized pending determination of whether each well has resulted in the discovery of proved reserves. Oil and natural gas mineral leasehold costs are capitalized as incurred. Items charged to expense generally include geological and geophysical costs, costs of unsuccessful exploratory wells, and oil and natural gas production costs. Capitalized costs of proved properties including associated salvage are depleted on a well-by-well or field-by-field (common reservoir) basis using the units-of-production method based upon proved producing oil and natural gas reserves. 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.  Dispositions of oil and natural gas properties are accounted for as adjustments to capitalized costs with gain or loss recognized upon sale.  A gain (loss) is recognized to the extent the sales price exceeds or is less than original cost or the carrying value, net of impairment.  Oil and natural gas properties are also subject to impairment at the end of each reporting period. Unproved property costs are excluded from depletable costs until the related properties are developed. See impairment discussed in “Long-lived assets and intangible assets” below.

The Company depreciates 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 applicable ASC.   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. While there are prospects for possible capital funding (either debt or equity), much is left to the market and outside instability.  As such, at this time, management cannot anticipate with a comfortable degree of certainty if the appropriate amount of funding will be achieved and any funding will be diverted fully to its E&P activities.  This will further postpone the Company’s ability to dedicate financial as well as human resources to its technology division in the short term future.  As such, the Company has eliminated the division entirely.

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 for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 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 are discounted at 10%, which the Company believes approximates fair value, to determine the amount of impairment.

The Company recorded no impairment loss for the three months ended March 31, 2012.

Asset retirement obligation

In accordance with the applicable ASC, the Company recognizes  the fair value of the liability for asset retirement costs in an entity’s balance sheet, as both a liability and an increase in the carrying values of such assets, in the periods in which such liabilities can be reasonably estimated. The present value of the estimated future asset retirement obligation (“ARO”), as of the date of acquisition or the date at which a successful well is drilled, is capitalized as part of the costs of proved oil and natural gas properties and recorded as a liability. The asset retirement costs are depleted over the production life of the oil and natural gas property on a unit-of-production basis.

The ARO is recorded at fair value and accretion expense is recognized as the discounted liability is accreted to its expected settlement value at least once per year. The fair value of the ARO liability is measured by using expected future cash outflows discounted at the Company’s credit adjusted risk free interest rate.

Amounts incurred to settle plugging and abandonment obligations that are either less than or greater than amounts accrued are recorded as a gain or loss in current operations.  Revisions to previous estimates, such as the estimated cost to plug a well or the estimated future economic life of a well, are generally done at the end of the fiscal year and may require adjustments to the ARO and are capitalized as part of the costs of proved oil and natural gas property.

Income taxes

The Company accounts for income taxes in accordance with ASC 740 “Income Taxes” which requires an asset and liability approach for financial accounting and reporting of income taxes.   Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Deferred tax assets include tax loss and credit carry forwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

On January 1, 2007, the Company adopted the Financial Accounting Standards Board (“FASB”) issued guidance to clarify the accounting for uncertainty in income taxes.  The guidance prescribes a measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return.  Additionally, the it provides guidance regarding uncertain tax positions relating to derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The Company will classify any interest and penalties associated with income taxes as interest expense. The provisions of this guidance have been incorporated into Accounting Standards Codification ("ASC") 740-10.

Stock based compensation

Beginning January 1, 2006, the Company adopted the FASB standard for accounting for stock based compensation to account for its issuance of warrants to key partners, directors and officers. The standard requires all share-based payments, including employee stock options, warrants and restricted stock, be measured at the fair value of the award and expensed over the requisite service period (generally the vesting period). The fair value of stock options and common warrants granted to key partners, directors and officers 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 stock options, 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.   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 options and 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.

The Company recognized stock-based compensation expense of $345,975 from warrants granted to consultants and directors for their services and from stock options issued to officers for the three months ended March 31, 2012. For the three months ended March 31, 2011, the Company recognized $18,960 in expense for warrants granted to directors for their service as directors.

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. Given the historical and projected future losses of the Company, all potentially dilutive common stock equivalents are considered anti-dilutive.

Note 3 – Oil and natural gas properties

On April 3, 2012, the Company, through its partnership with Aurora, acquired a 5% working interest stake in the Chapman Ranch prospect area located in Nueces County, Texas. Two wells are planned for 2012 on this acreage. The first well was spud on June 11, 2012. The well has reached total depth and is currently in completion and production testing. Year-to-date 2012 expenditures for land and drilling on Chapman Ranch is about $76,780 net to our working interest.

On May 10, 2012, the Company, through its partnership with Aurora, sold its interests in the Jones County Oil Play and the Atwood Secondary Oil Recovery project for $400,000 in cash and recognized a pre-tax gain of $268,169. The Company no longer has producing properties in Oklahoma. The Company will receive the $400,000 proceeds on an installment basis.

On April 18, 2012, the Company spud a development well in our Bootleg Canyon prospect (5% working interest). The well has been completed and is currently in production testing. Thus far in 2012 the expenditures for land and drilling in the Bootleg Canyon area is $82,760, net to our working interest. Another well is planned for late 2012.

On June 5, 2012, the Company, through its partnership with Aurora, acquired 335 gross acres of land just east of the Eagle Lake, Texas in Colorado County. The Company holds a 50% working interest in theSRV prospect. Land acquisition costs of $32,011 were incurred to-date for SRV.

On June 13, 2012, the Company, through its partnership with Aurora, acquired a 4% working interest before payout, and a 3% (after pay-out) working interest in the Pinetop oil and gas prospect located in Lea County, New Mexico. The first well was spud on June 25, 2012. The well has reached total depth and is currently in completion and production testing. Capital expenditures in June to acquire land and advance funds for the initial well totaled $159,703 net to our working interest.

Other capital expenditures were incurred in the first quarter of 2012, as reported previously, including a position in undeveloped land in Glasscock County, Texas. The land acquisition there cost $480,000. We refer to this area as the Lightnin’ prospect. The Company plans to farm-out a portion of its working interest prior to drilling the first well on this acreage, leaving us with about a 25% working interest position. Up to two wells could be drilled in 2012.

The year-to-date capital expenditures total about $865,587, which excludes exploration expense.

The Company formally updates its oil and gas reserves on an annual basis. We expect that our 2012 drilling program will result in additions to our proved developed and proved undeveloped reserves position.

At June 30, 2012, oil and natural gas properties, net of property sales in May 2012, are comprised of the following as of:

Depletion expense for the three months ended March 31,June 30, 2012 and 2011 was $18,456$13,272 and $12,005,$18,402, respectively. Depletion expense for the six months ended June 30, 2012 and 2011 was $32,081 and $30,604, respectively.

During the threesix months ended March 31,June 30, 2012 and 2011, respectively, the Company recorded no impairment losses on its oil and gas properties.

Note 4 – Liability for Unauthorized Preferred Stock Issued

During the year ended December 31, 2006, the Company authorized 10,000,000 shares of Preferred Stock, convertible to common stock at the rate of 100 shares of common for every share of preferred. During 2006, the Company issued 715,517 shares of this preferred stock for cash of $246,950.  The Company subsequently issued additional preferred stock and had several preferred shareholders converted their shares into common stock during the years ended December 31, 2010, 2009, 2008, and 2007.

During the course of the Company’s internal investigation, it was determined by the Company’s legal counsel that the preferred shares had not been duly authorized by the State of Nevada. Since the Company had issued and received consideration for the preferred stock, notwithstanding that the stock was not legally authorized, the Company reclassified the preferred stock into a liability and does not present preferred stock in the equity section of the balance sheet. The Company has offered to settle the debt with the remaining holders of the unauthorized preferred stock by honoring the terms of conversion of one share of preferred into 100 shares of common stock on a pre-split basis. The Company intends to cancel the preferred stock once all remaining preferred stockholders have converted.

There were 238,966. shares68,966 and 238,966.shares of unconverted preferred stock were outstanding at March 31,June 30, 2012 and December 31, 2011, respectively.

The remaining liability for the unconverted preferred stock is based on the original cash tendered and consisted of the following as of:

Note 5 – Senior Secured Convertible Debentures

On February 29, 2012, all of the then outstanding Debentures were converted into shares of the Company’s common stock in accordance with their terms.

In the following discussion, all share references have been adjusted to reflect a 1:50 reverse stock split by the Company on January 12, 2012.

Between October 15, 2010, and February 29, 2012, the Company entered into agreements with accredited investors for the cash sale by the Company of an aggregate of $5,120,000 of 10% Senior Secured Convertible Debentures (the “Debentures”) which were convertible into an aggregate of 20,480,000 shares of the Company’s common stock at a conversion price of $0.25 per share of common stock, subject to the customary adjustments for stock splits, stock dividends, recapitalizations and the like. There are no registration rights for the converted shares. All share references have been adjusted to reflect a 1:50 reverse stock split by the Company on January 12, 2012.

In addition, on December 31, 2010,On February 29, 2012, all of the Company$4,559,775 then outstanding Debentures were converted a note payable and accrued interest due to a related party of $552,275 to the same 10% Senior Secured Convertible Debenture which is convertible into an aggregate of 2,209,10018,239,101 shares of the Company’s common stock at a conversion pricein accordance with their terms. Accrued interest in the amount of $0.25 per share of common stock, subject to customary adjustments for stock splits, stock dividends, recapitalizations and$206,731 on the like.  There are no registration rights for the converted shares.

The maturity date of theoutstanding Debentures is September 30, 2013, but may be extended at the sole discretiontime of the Company to December 31, 2013. 

In connection with the Debenture offering, the Company also issued five (5) year warrants to purchase an aggregate of 102,400conversion was converted into 903,464 shares of the Company’s common stock at an exercise price of $0.25 per share, subject to customary adjustments for stock splits, stock dividends, recapitalizations and the like, to the investors.

The Company has the right to force conversion of the Debentures under certain terms and conditions

The Debentures are secured under the terms of a Security Agreement by a security interest in all of the Company’s personal property. The relative fair value of the warrants and beneficial conversion features of the debentures were determined at the time of issuance using the methodology prescribed by current accounting guidance.

The cash proceeds of $5,120,000 were allocated to working capital and investments in oil and gas.stock.

During the two months ended February 29, 2012, the Company issued $1,725,000 of thesethe senior convertible Debentures for cash of $1,725,000.cash. The Company determined the initial fair value of the beneficial conversion feature was approximately $1,725,000.$1,663,351. The Company also determined that the relative fair value of the warrants upon issuanceissued with the debentures was $61,649 which was calculated underusing a Black-Scholes option pricing model using as assumptions of an expected life of 5 years, a stock volatility ranging from 673.2% to 674.8% , a risk free interest rate ranging from .71% to .87%, and no expected dividend yield. The initial fair value of the warrants of $61,649 and the beneficial conversion feature of $1,663,351 were recorded by the Company as a total financing discount of $1,725,000 which the Company iswas amortizing to interest expense over the life of the Debentures.

On June 30, 2011, $1,112,500 of the Debentures were converted into 4,450,000 shares of the Company’s common stock in accordance with their terms.

On February 29, 2012, all of the $4,559,775 then outstanding Debentures were converted into 18,239,100 shares of the Company’s common stock in accordance with their terms.

Senior secured convertible debentures consisted of the following as of:

At the time of conversion on February 29, 2012 amortization of the debt discount and related financing warrants for the two months then ended totaled $265,460.

Note 6 – Shareholders Equity

The Company estimates the fair value of employee stock options and warrants granted using the Black-Scholes Option Pricing Model. Key assumptions used to estimate the fair value of warrants and stock options include the exercise price of the award, the fair value of the Company’s common stock on the date of grant, the expected warrant or option term, the risk free interest rate at the date of grant, the expected volatility and the expected annual dividend yield on the Company’s common stock.

The Company recognized non-cash compensation expense of $268,235 and $614,210 from warrants granted to consultants and directors for their services and from stock options issued to officers and employees for the three and six months ended June 30, 2012, respectively. For the three and six months ended June 30, 2011, the Company recognized $16,240 and $35,200 in non-cash expense for warrants granted to directors for their service as directors.

The following weighted average assumptions were used in estimating the fair value of share-based payment arrangements during the three months ended March 31,June 30, 2012:

During the three months ended March 31,June 30, 2012, the following unregistered securities were issued for the purposes noted. Allnoted (all shares and prices have been adjusted for the 1:50 reverse stock split effective for the Company on January 12, 2012.2012):

During the three months ended March 31,On April 26, 2012, we issued 10% Senior Secured Convertible Debentures with the total face value of $1,170,000 to 34 individuals or investment entities who are non-affiliates of the Company in exchange for $1,170,000.  The debentures are convertible into 4,680,000 shares of common stock at a conversion price of $0.25 per share.

During the three months ended March 31, 2012, we issued warrants to purchase a total of 23,400 shares of common stock to 34 individuals or investment entities who are non-affiliates of the Company at an exercise price of $0.25 as part of the terms of the sale of the debentures. The warrants are convertible into 23,400 shares of the Company’s common stock.

During the three months ended March 31, 2012, we issued 10% Senior Secured Convertible Debentures with the total face value of $555,000 to four individuals or investment entities who are affiliates of the Company in exchange for $555,000.  The debentures are convertible into 2,220,000 shares of common stock at a conversion price of $0.25 per share.

During the three months ended March 31, 2012, we issued warrants to purchase a total of 4,100 shares of common stock to four individuals or investment entities who are affiliates of the Company at an exercise price of $0.25 as part of the terms of the sale of the debentures. The warrants are convertible into 4,100 shares of the Company’s common stock.

During the three months ended March 31, 2012, we issued 30,00015,000 non-qualified stock options to an officer employee of the Company to purchase the common stock of the Company for $0.50$0.60 per share as part of their compensation. The options have a four year life and vest immediately.

During The Board valued the options at $9,750 under the Black Scholes parameters above and recognized a charge of that amount as non-cash stock based compensation during the three months ended March 31,June 30, 2012.

On April 26, 2012, we issued 60,00025,000 non-qualified stock options to an officer employee of the Company to purchase the common stock of the Company for $1.00 per share as part of his compensation. The options have a six year life and vest over 24 months.

The Company determined that the fair value ofBoard valued the options upon grant was $148,500at $16,250 under the Black Scholes parameters above and recognized a charge of which $49,500 was recognizable immediately and $99,000 would be amortized over$2,031 as non-cash stock based compensation during the remaining 24three months of vesting, The value was calculated under a Black-Scholes option pricing model using as assumptions an expected life of 4 and 6 years, a stock volatility of 700.2%, a risk free interest rate of 0.86%, and no expected dividend.ended June 30, 2012.

On January 3,May 2, 2012, we issued warrants to purchase a total of 15,000357,300 shares of common stock at an exercise price of $.50 andto seven affiliates of the Company for assistance in raising funds under the recently completed senior convertible debenture private placement program as provided for in the program prospectus. The Board valued the warrants to purchase 30,000 shares of common stock at an exercise price of $1.00 to a board member in return for services as General Counsel to$232,243 under the Company. The Company determined that the fair value of these warrants was $74,250Black Scholes parameters above which was calculated underrecorded as a Black-Scholes option pricing model using as assumptions an expected lifecost against the funds raised in the equity accounts of 5 years, a stock volatility of 514.9%, a risk free interest rate of 0.89%, and no expected dividend yield.the Company.

On February 20,May 2, 2012, we issued warrants to purchase 30,000 shares of common stock at an exercise price of $.50 and warrants to purchase 60,000 shares of common stock at an exercise price$.50 per share and 120,000 warrants to purchase common stock of the Company at $1.00 per share to a consultanttwo non-affiliates for outside consultation in regards to the Company as partoperations of the compensation for services rendered to the Company. The Company determinedBoard valued the warrants at $117,000 under the Black Scholes parameters above and recognized a non-cash charge of that amount for services during the fair value of these warrants was $156,600 which was calculated under a Black-Scholes option pricing model using as assumptions an expected life of 5 years, a stock volatility of 517.1%, a risk free interest rate of 0.81%, and no expected dividend yield.three months ended June 30, 2012.

On March 31,May 2, 2012, we issued warrants to purchase 115,891 shares of common stock at $.50 per shares to two affiliates for outside consultation in regards to the operations of the Company. The Board valued the warrants at $75,329 under the Black Scholes parameters above and recognized a non-cash charge of that amount for services during the three months ended June 30, 2012.

On June 29, 2012 we authorized warrants to be issued to purchase a total of 30,000 shares of common stock at an exercise price of $.50$1.05 to members of the board in return for their board service. Each board member earns warrants to purchase 2,000 shares for each monthly meeting attended.  These warrants will be physically issued by us to the individuals on December 31, 2012.

The Company determined that the fair value ofBoard valued the warrants granted toat $31,500 under the board members was $33,000 which was calculated underBlack Scholes parameters above and recognized a Black-Scholes option pricing model using as assumptions an expected lifenon-cash charge of 5 years, a stock volatility of 518.4%, a risk free interest rate of 1.04%, and no expected dividend yield.

Note 7 – Income Taxes

As a result of net operating losses and the inability to record a benefitthat amount for its deferred income tax assets, the Company has no income tax provision forservices during the three months ended March 31,June 30, 2012. The Company had no income tax provision for the year ended December 31, 2011.

The Internal Revenue Code of 1986, as amended, imposes substantial restrictions on the utilization of net operating losses in the event of an “ownership change” of a corporation.  Accordingly, a company’s ability to use net operating losses may be limited as prescribed under Internal Revenue Code Section 382 (“IRC Section 382”).  Events which may cause limitations in the amount of the net operating losses that the company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period.  There have been transactions that have changed the Company’s ownership structure since inception that may have resulted in one or more ownership changes as defined by the Internal Revenue Code of 1986.

At December 31, 2011, the Company had available Federal and state net operating loss carry forwards to reduce future taxable income of approximately $13,130,000. The Federal net operating loss carry forward begins to expire in 2025.

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 be established when it is more likely than not that all or a portion of deferred tax assets will not be realized.

Accordingly, the Company has recorded a full valuation allowance against its net deferred tax assets at March 31, 2012 and December 31, 2011, respectively.  Upon the attainment of taxable income by the Company, management will assess the likelihood of realizing the tax benefit associated with the use of the carry forwards and will recognize a deferred tax asset at that time.

Note 87 – Subsequent Events

On May 7, 2010, the Company entered into an agreementThere is no information required to sell our working interests in the Jones County and Atwood properties to CO Energy who is the current Operator of the properties for $400,000 which is expected to result in a gain for the Company on the sale. Cash proceeds will be paid to us in equal installments of $200,000 in May and July, 2012.reported under this Item.

Item 2. Management’s 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 consolidatedcombined financial statements and the accompanying notes included elsewhere in this report. Statements in this section of our discussionquarterly report 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 unaudited consolidatedcombined financial statements. You should read this in conjunction with the discussion under “Financial Information” and the audited consolidatedcombined financial statements included in our Annual Report on Form 10-K for the years ended December 31, 2011 and 2010.

Forward Looking Statements

This Quarterly Report on Form 10-Q 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

We are an independent oil and natural gas company engaged in the production, acquisition, exploration and exploitationproduction of oil and natural gas properties, through our partnership with Aurora Energy Partners.Aurora.  We are geographically focused onshore in the United States in Texas and New Mexico. The Company attempts to increase long-term shareholder value by implementing a strategy to increase oil reserves, improve financial returns (higher production, lower G&A costs per BOE produced) and effectively managing the capital on our balance sheet. Profitability and cash flow should improve as a result of our capital budget expenditures and the onshore United States. Our operational focus isdrilling of commercially successful wells. Year-to-date 2012 capital expenditures as of June 30, 2012 total $865,587, with over half of that being for land assets. During the acquisition, throughlast half of 2012 most of the most cost effective means possible, of production or near production oil and natural gas field assets. Our areas of operation include Texas, New Mexico and Oklahoma.planned capital investment will be on wells.

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 of natural gas and oil. Historically, the markets for natural gas and oil have been volatile, and those markets are likely to continue to be volatile in the future. It is impossible to predict future natural gas and oil price movements with certainty. Prices for natural gas and oil are subject to wide fluctuations in response to relatively minor changes in the supply of and demand for natural gas and oil, market uncertainty, and a variety of additional factors beyond our control.

Going Concern

As reported in the consolidatedcombined financial statements, we had a net loss of $5,009,783$5,406,517 for the threesix months ended March 31,June 30, 2012.  Of this amount, approximately $4,292,025$4,541,451 was for non cashnon-cash expenses of the Company during the period including the amortization of the debt discount and warrants associated with the Company’s 10% Senior Secured Convertible Debentures, the recognition of the unamortized portion of the debt discount recognized on the conversion of the debentures to common stock on February 29, 2012, warrants given for services, and stock based compensation. Our accumulated deficit is $41,101,072 as of quarter end 2012.

The cash proceeds from the sale of debentures have allowed the Company to continue operations and invest in new oil and gas properties. Management anticipates that operating losses will continue in the near term until new wells are drilled, successfully completed and incremental production increases revenue. As of June 30, 2012 on a year-to-date basis the Company has invested approximately $865,587 in the acquisition of land or the drilling of wells.

At quarter end, weJune 30, 2012, the Company had $611,158$374,386 in net working capital. Management intends to fund the 2012 investment program using this working capital the proceeds from asset sales in the second quarter, cash generated from operations and additional capital provided by The Navitus Energy Group or other parties. We arewas in active discussions with The Navitus Energy Group and others related to receivelonger term financing required for our capital underexpenditures planned for the termsremaining part of 2012 and conditions already agreed last year when the Aurora Partnership Agreement was amended.2013. Without additional capital receivedoutside investment from the sale of equity securities and/or debt financing our operating activitiescapital expenditures and overhead expenses must be scaled backreduced to a level commensurate with available cash flow from existing operations.flows.

The accompanying consolidatedcombined financial statements are prepared as if the Company will continue as a going concern. The consolidatedcombined 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.

Three Months Ended March 31,June 30, 2012 Comparedcompared to the Three Months Ended March 31,June 30, 2011

Our revenue, operating expenses, and net income for the three months ended March 31,June 30, 2012 as compared to the three months ended March 31,June 30, 2011 were as follows:

Revenues: All of our revenue was derived from the sale of oil and natural gas.  Our revenues decreased $21,821$13,722 or 25.4%16.8% to $63,965$68,151 for the three months ended March 31,June 30, 2012 from $85,786$81,873 for the three months ended March 31,June 30, 2011.  The decrease primarily reflects a decline in the amountprice and volume of natural gas sold to 10,386$3.51 per Mcf (thousand cubic feet) at $4.77 perfor the 10,549 Mcf of gas sold for the three months ending March 31,June 30, 2012 from 11,675$6.51 per Mcf for the 10,931 Mcf of gas sold at $6.49 per Mcf in the three months ended March 31,June 30, 2011. The decline in physical gas production is attributable to the normal productivity decline that occurs with these types of wells over time. During the three months ended March 31,June 30, 2012, we also sold 184289 barrels of oil at $92.24$90.90 per barrel. There were no sales of oil in the three months ended March 31,June 30, 2011.

Lease Operating Expenses:  Our cost of production includes a one-time credit of $35,157 received from an Operator that had received the credit from one of its vendors. Had this credit not been recognized in the period, our cost of production would have been approximately $21,002 for the three months ending March 31, 2012 which would have represented a decrease of $20,496increased $27,063 or 49.4% from $41,49888.7% to $57,565 for the three months ended March 31,June 30, 2012 from $30,502 for the three months ended June 30, 2011. The increase in lease operating expenses reflects an increase in the number of operating properties in the three months ended June 30, 2012 compared to the three months ended June 30, 2011.

Production Taxes: Production taxes increased $1,352decreased $2,901 or 26.4%33.8% to $6,479$5,671 for the three months ended March 31,June 30, 2012 from $5,127$8,572 for the three months ended March 31,June 30, 2011. The change is not considered meaningful and reflects the timing of the calculation and payment of production taxes.

Exploration Expense: Exploration expense increased $13,610$1,753 or 18.6%3.0% to $86,742$60,204 for the three months ended March 31,June 30, 2012 from $73,132$58,451 for the three months ended March 31,June 30, 2011. This increaseThe change is not considered meaningful and simply reflects the higher tempotiming of expenses for exploration activities as the Company had only just hired a full time exploration officer employee in the three months ended March 31, 2011.activities.

Exploration Expense – non cash:Exploration non-cash expense increased $10,125 for the three months ended March 31,June 30, 2012 from $0 for the three months ended March 31,June 30, 2011. This increase reflects the vesting of exploration-dedicated employee stock options during the three months ended March 31,June 30, 2012. There were no stock options outstanding during the three months ending June 30, 2011.

General and Administrative Expense: General and administrative expenses increased $49,538decreased $71,212 or 8.3%17.8% to $645,875$327,790 for the three months ended March 31,June 30, 2012 from $596,337$399,002 for the three months ended March 31,June 30, 2011.  For the most part, the increasedecrease reflects the additionreduction in professional and consulting fees with the consolidation of a new chief financial officer, ongoing investor relations activities, and outside management consulting services which were not part of general and administrative expensethe Company’s operations in the three months ended March 31, 2011.Austin, Texas.

General and Administrative Expense – non cash:  General and administrative non-cash expenses increased $316,890$241,870 to $335,850$258,110 for the three months ended March 31,June 30, 2012 from $18,960$16,240 for the three months ended March 31,June 30, 2011.   The increase reflects the non cashnon-cash charges related to the issuancegrant of warrants to board members for their service as members of the board, additional warrants to a related party to serve as general counsel of the Company, warrants to a management consultant for services in that capacity, employee stock options to the new Chief Financial Officer, and the amortization of employeeprevious of stock options as such options vest.they vest over time and the cost of warrants granted to one affiliate and two non-affiliates of the Company for special consulting assistance in certain undertakings of the Company. Such non-cash compensation totaled $18,960 in the three months ended March 31,June 30, 2011 infor warrants to the board members for their service as members of the board.

Depletion and Accretion:  Depletion, accretion, and depreciation increased $6,607decreased $5,130 or 54.1%27.9% to $18,809$13,272 for the three months ended March 31,June 30, 2012 from $12,202$18,402 for the three months ended March 31,June 30, 2011.  The increasedecrease is due to the additionalreduction in amount of assets subject to depletion as a result of the operating oil wellssale of the Jones County/Atwood properties in May, 2012.

Gain on Sale of Assets:On May 10, 2012, which the company did not haveCompany sold its interests in the three months ending March 31, 2011.Jones County Oil Play and the Atwood Secondary Oil Recovery project for $400,000 in cash payable in two even installments in May and July, 2012. The sale resulted in a one-time pre-tax gain of $268,169.

Interest Expense: Interest expense increased $3,770,911decreased $318 to $3,984,023$964,985 for the three months ended March 31,June 30, 2012 from $213,112$965,303 for the three months ended March 31,June 30, 2011. ForThe decrease was due to the three months ended March 31, 2012, $265,460 represents the amortizationconversion of the non-cash debt discount associated with the sale of the outstanding 10% Senior Secured Convertible Debentures from January 1, 2012 up to the point where the debentures were converted toCompany’s common stock on February 29, 2012 $3,661,781 representswhich eliminated the recognitionsource of the remaining non-cash debt discountinterest expense. The $318 in interest expense results from the financing associated with one of the conversion of all the outstanding debentures to common stock on February 29, 2012, and $56,782, for the most part, represents the actual interest expense accrued on the 10% Senior Secured Convertible Debentures outstanding until their conversion on February 29, 2012.Company’s insurance policies.

Income Taxes: There is no provision for income tax recorded for either the three months ended March 31,June 30, 2012 or for the three months ended March 31,June 30, 2011 due to the expected operating losses of both years.  We had available Federal income tax net operating loss (“NOL”) carry forwards of approximately $13,130,000 at December 31, 2011. Our NOL generally beginsbegin to expire in 2025.

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 2011 and 2012 due to the timing difference in tax effect between the accounting and tax basis of the Debentures were eliminated when the Debentures were converted to common stock during the three month period ended June 30, 2012.

Net Loss: We had a net loss of $396,735 for the three months ended June 30, 2012 compared to a net loss of $1,082,672 for the three months ended June 30, 2011.  The net loss improvement in 2012 was helped by the gain on sale of assets of $268,169 in May 2012. Without considering the gain, the loss for the three months ended June 30 2012 would have been $664,904. In 2012, the lower net loss was lower primarily due to the lack of interest expense associated with convertible debt, which was converted to common shares early in 2012. However, partially offsetting the lower interest charge in 2012 would be higher non-cash G&A expenses incurred in the second quarter of 2012 related to the issuance of warrants and employee-related stock options. This net loss for the three months ended June 30, 2012 should be viewed in light of the cash flow from operations discussed below.

Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011

Our revenue, operating expenses, and net income for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 were as follows:

Revenues: All of our revenue was derived from the sale of oil and natural gas.  Our revenues decreased $35,541 or 21.2% to $132,118 for the six months ended June 30, 2012 from $167,659 for the six months ended June 30, 2011.  The decrease reflects a decline in the price and volume of natural gas sold to $4.15 per Mcf (thousand cubic feet) for the 20,892 Mcf of gas sold for the six months ending June 30, 2012 from $6.70 per Mcf for the 22,606 Mcf of gas sold in the six months ended June 30, 2011. The decline in physical gas production is attributable to the normal productivity decline that occurs with these types of wells over time. During the six months ended June 30, 2012, we also sold 492 barrels of oil at $92.88 per barrel. There were no sales of oil in the six months ended June 30, 2011.

Lease Operating Expenses:  Our cost of production decreased $28,590 or 39.7% to $43,411 for the six months ended June 30, 2012 from $72,001 for the six months ended June 30, 2011. The decrease in lease operating expenses resulted from a large one-time credit from a 2011 sub-contractor billing error in favor of one of our field operators during the three months ended March 31, 2012. Had this credit not been received, our cost of production for the six months ended June 30, 2012 would have been $61,055. This would have been a decrease of $10,946 from $72,001 for the six month period ended June 30, 2011. This decrease is not meaningful and reflects the timing of operator activities on the properties. There was an increase in the number of oil and gas properties during the six months ended June 30, 2012 compared to the six months ended June 30, 2012, notwithstanding our sale of the Jones County Oil Play and the Atwood Secondary Oil Recovery project in May, 2012.

Production Taxes: Production taxes decreased $1,549 to $12,150 for the six months ended June 30, 2012 from $13,699 for the six months ended June 30, 2011. The change is not considered meaningful and reflects the timing of the calculation and payment of production taxes.

Exploration Expense: Exploration expense increased $29,023 or 24.6% to $146,946 for the six months ended June 30, 2012 from $117,923 for the six months ended June 30, 2011. The increase reflects the higher overall level of exploration activities for the six months ended June 30, 2012 compared to the six month period ended June 30, 2011.

Exploration Expense – non cash:Exploration non-cash expense increased $20,250 for the six months ended June 30, 2012 from $0 for the three months ended June 30, 2011. This increase reflects the vesting of exploration-dedicated employee stock options during the six months ended June 30, 2012. During the six months ended June 30, 2011, there were no option grants outstanding.

General and Administrative Expense: General and administrative expenses decreased $35,333 or 3.5% to $973,665 for the six months ended June 30, 2012 from $1,008,998 for the six months ended June 30, 2011.   For the most part, the decrease reflects the net effect of the addition of a new chief financial officer, ongoing investor relations activities, and outside management consulting services which were not part of general and administrative expense in the six months ended June 30, 2011 offset by lower audit, accounting, and legal fees associated with the extensive restatement and catch up effort to bring the Company current on its SEC filings undertaken as well as the legal settlement with a former officer of the Company during the six months ended June 30, 2011. .

General and Administrative Expense – non cash:  General and administrative non-cash expenses increased $558,760 to $593,960 for the six months ended June 30, 2012 from $35,200 for the six months ended June 30, 2011.   The increase reflects the non-cash charges related to grants of non-qualified stock options to employees and offices of the Company and the amortization of previous of stock option as they vest over time, the cost of warrants granted to affiliates and non-affiliates is of the Company for special consulting assistance in certain undertakings of the Company, and warrants granted to a related party to serve as general counsel of the Company. Such non-cash compensation totaled $35,200 in the six months ended June 30, 2011 for warrants to the board members for their service as members of the board.

Depletion and Accretion:  Depletion, accretion, and depreciation increased $1,477 or 4.8% to $32,081 for the six months ended June 30, 2012 from $30,604 for the six months ended June 30, 2011.  The increase is not considered meaningful and due to the additional depletion of the operating oil wells in early 2012 which the Company did not have in the six months ending June 30, 2011 which was somewhat offset by the reduction in amount of assets subject to depletion as a result of the sale of the Jones County/Atwood properties in May, 2012.

Gain on Sale of Assets:On May 10, 2012, the Company sold its interests in the Jones County Oil Play and the Atwood Secondary Oil Recovery project for $400,000 in cash payable in two even installments in May and July, 2012. The sale resulted in a one-time gain of $268,169.

Interest Expense: Interest expense increased $2,805,926 to $3,984,341 for the six months ended June 30, 2012 from $1,178,415 for the six months ended June 30, 2011. For the six months ended June 30, 2012, $265,460 represents the amortization of the non-cash debt discount associated with the sale of the Debentures from January 1, 2012 up to the point where the Debentures were converted to common stock on February 29, 2012, $3,661,781 represents the recognition of the remaining non-cash debt discount associated with the conversion of all the outstanding Debentures to common stock on February 29, 2012, and $56,782, for the most part, represents the actual interest expense accrued on the Debentures outstanding until the conversion of the Debentures on February 29, 2012.

Income Taxes: There is no provision for income tax recorded for either the six months ended June 30, 2012 or for the six months ended June 30, 2011 due to the expected operating losses of both years.  We had available NOL carry forwards of approximately $13,130,000 at December 31, 2011. Our NOL generally begins to expire in 2025.

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 2011 and 20122 due to the timing difference in tax effect between the accounting and tax basis of the Company’s 10% Senior Secured Convertible Debentures were eliminated when the debenturesDebentures were converted to common stock during the three month period ended March 31,June 30, 2012.

Net Loss:  We had a net loss of $5,009,783$5,406,517 for the threesix months ended March 31,June 30, 2012 compared to a net loss of $816,477$1,899,149 for the threesix months ended March 31,June 30, 2011.  The net loss was reduced by the gain on the sale of assets of $268,169. Without considering the gain, the loss for the six months ended June 30 2012 would have been $5,674,686. For the threesix months ended March 31,June 30, 2012 approximately $4,292,025$4,541,451 of this loss was related to the non-cash charges related to the debt discount on the Companies 10% Senior Secured Convertible Debentures which were converted to common stock on February 29, 2012 and to non cashnon-cash compensation awards to individuals for board service, employee stock options, and other management and consulting services. This net loss should be viewed in light of the cash flow from operations discussed below.

Liquidity and Capital Resources

The global financial and credit crisis may have impacts on our liquidity and financial condition that we currently cannot predict.

The continued credit crisis and related turmoil in the global financial system may have a material impact on our liquidity and our financial condition, and we may ultimately face major challenges if conditions in the financial markets do not improve. Our ability to access the capital markets or borrow money may be restricted at a time when we would like, or need, to raise capital, which could have an adverse impact on our flexibility to react to changing economic and business conditions and on our ability to fund our operations and capital expenditures in the future. Additionally, the current economic situation could lead to reduced demand for natural gas and oil, or further reductions in the prices of natural gas and oil, or both, which could have a negative impact on our financial position, results of operations and cash flows. While the ultimate outcome and impact of the current financial crisis cannot be predicted, it may have a material adverse effect on our future liquidity, results of operations and financial condition.

Our cash, and cash equivalents, total current assets, total assets, total current liabilities, and total liabilities as of March 31,June 30, 2012 as compared to March 31,June 30, 2011, are as follows:

At March 31,June 30, 2012, we had working capital of $611,158$374,386 compared to a working capital deficit of $397,074$1,413 at March 31,June 30, 2011. Current liabilities decreased to $423,312$215,872 at March 31,June 30, 2012 from $677,879$554,779 at March 31,June 30, 2011 primarily due to the payoff of the amount due thea bank, the amount due a related party, the conversion of unauthorized preferred stock to common stock, and the conversion of accrued interest to common stock.

Net cash used in operating activities for the threesix months ended March 31,June 30, 2012 totaled $830,461$1,299,012 after the net loss of $5,009,783$5,406,517 was decreased by $4,292,025$4,305,362 in non-cash charges and offset by $112,703$197,857 in changes to the working capital accounts. This compares to cash used in operating activities for the threesix months ended March 31,June 30, 2011 of $563,610$1,063,684 after the net loss for the period of $816,477$1,899,149 was decreased by $143,143$750,198 in non cashnon-cash charges and $109,724$85,267 in changes to the working capital accounts.

Net cash used in investing activities for the threesix months ended March 31,June 30, 2012 was $587,795$875,946 of which $82,795$159,494 was for drilling and related costs for exploration efforts, and $505,000$706,093 was used to acquire land and rights to land for drilling.drilling, and $10,359 was used to purchase furniture and fixtures for the Austin, Texas office. This compares to $205,539$308,167 in drilling costs and $8,329 in purchases of furniture and fixtures for the then new Austin, Texas office during the threesix months ended March 31,June 30, 2011.

Net cash provided by financing activities for the threesix months ended March 31,June 30, 2012 was $1,815,000$2,019,350 of which $1,725,000$1,815,000 came from the sale of the Debentures, $200,000 came from the sale of the Company’s 10% Senior Secured Convertible Debenturesinvestment in the Jones County/Atwood properties and $90,000$4,350 came from the saleexercise of stock.warrants . This compares to $853,400$1,736,320 provided by financing activities during the threesix months ended March 31,June 30, 2011 of which $910,000$1,792,500 came from the sale of the Company’s 10% Senior Secured Convertible Debentures$6,600 while $6,180 was used to pay down thea bank line of credit and $50,000 was used to pay off a note due a related party.

Item 3. Qualitative and Quantitative Discussions About Market Risk

As a smaller reporting company we are not required to provide the information required by this Item.  However, we did include market risk factors in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 30, 2012.

Item 4. 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) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting 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 March 31,June 30, 2012. Based upon that evaluation, our management concluded that our control over financial reporting and related disclosure controls and procedures are now effective.

Changes in Internal Controls

While the Company is still small we nowThere have separate full-time employees serving as the CEO and CFO. Moreover, the Board of Directors continues to be proactively involvedbeen no changes in the management of the business. Thus, risks associated with adequate segregation of duties have been addressed. Also, the skills and capabilities of the new CFO as well as ongoing advice and expertise provided by outside advisors gives assurance that ourCompany’s internal control over financial reporting is accurate and timely. Weduring the period covered by this report that have disclosure processes in placematerially affected, or that are reasonably likely to identify transactions and events to be reported, as applicable. Additionalmaterially affect, the Company’s internal control enhancements are planned for implementation in the second and third quarters of 2012.over financial reporting.

Part II– Other Information

Item 1.     Legal Proceedings

There have been no material developments in the status of the litigation as reported in Item 3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 30, 2012.

Item 1A. Risk Factors

As a smaller reporting company we are not required to provide the information required by this Item.  However, we did include risk factors in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 30, 2012.

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended March 31,June 30, 2012, the following unregistered securities were issued for the purposes noted. All shares and prices have been adjusted for the 1:50 reverse stock split effective for the Company on January 12, 2012.

During the three months ended March 31,On April 26, 2012, we issued 10% Senior Secured Convertible Debentures with the total face value of $1,170,000 to 34 individuals or investment entities who are non-affiliates of the Company in exchange for $1,170,000.  The debentures are convertible into 4,680,000 shares of common stock on a post-split basis at a conversion price of $0.25 per share.

During the three months ended March 31, 2012, we issued warrants to purchase a total of 23,400 shares of common stock to 34 individuals or investment entities who are non-affiliates of the Company at an exercise price of $0.25 as part of the terms of the sale of the debentures. The warrants are convertible into 23,400 shares of the Company’s common stock.

During the three months ended March 31, 2012, we issued 10% Senior Secured Convertible Debentures with the total face value of $555,000 to four individuals or investment entities who are affiliates of the Company in exchange for $555,000.  The debentures are convertible into 2,220,000 shares of common stock at a conversion price of $0.25 per share.

During the three months ended March 31, 2012, we issued warrants to purchase a total of 4,100 shares of common stock to four individuals or investment entities who are affiliates of the Company at an exercise price of $0.25 as part of the terms of the sale of the debentures. The warrants are convertible into 4,100 shares of the Company’s common stock.

During the three months ended March 31, 2012, we issued 30,00015,000 non-qualified stock options to an officer employee of the Company to purchase the common stock of the Company for $0.50$0.60 per share as part of their compensation. The options have a four year life and vest immediately. The Board valued the options at $9,750 under the Black Scholes parameters above.

During the three months ended March 31,On April 26, 2012, we issued 60,00025,000 non-qualified stock options to an officer employee of the Company to purchase the common stock of the Company for $01.00$1.00 per share as part of his compensation. The options have a six year life and vest over 24 months. The Board valued the options at $16,250 under the Black Scholes parameters above.

On January 3,May 2, 2012, we issued warrants to purchase a total of 15,000357,300 shares of common stock at an exercise price of $.50 andto seven affiliates of the Company for assistance in raising funds under the recently completed convertible debenture private placement program as provided for in the program prospectus. The Board valued the warrants to purchase 30,000 shares of common stock at an exercise price of $1.00 to$232,243 under the Black Scholes parameters above which was recorded as a Board member in return for services as General Counsel tocost against the Company.funds raised.

On February 20,May 2, 2012, we issued warrants to purchase 30,000 shares of common stock at an exercise price of $.50 and warrants to purchase 60,000 shares of common stock at an exercise price$.50 per shares and 120,000 warrants to purchase common stock of the company at $1.00 per share to a consultanttwo non-affiliates for outside consultation in regards to the Company as partoperations of the compensation for services rendered toCompany. The Board valued the Company.warrants at $117,000 under the Black Scholes parameters above.

On March 31,May 2, 2012, we issued warrants to purchase 115,891 shares of common stock at $.50 per shares to two affiliates for outside consultation in regards to the operations of the Company. Board valued the warrants at $75,329 under the Black Scholes parameters above.

On June 29, 2012 we authorized warrants to be issued to purchase a total of 30,000 shares of common stock at an exercise price of $.50$1.05 to members of the board in return for their board service. Each board member earns warrants to purchase 2,000 shares for each monthly meeting attended.  These warrants will be physically issued by us to the individuals on December 31, 2012. Board valued the warrants at $31,500 under the Black Scholes parameters above

Unless otherwise indicated, we relied on the exemption from registration relating to offerings that do not involve any public offering pursuant to Section 4(2) under the Securities Act of 1933 (the “Act”) and/or Rule 506 of Regulation D of the Act. We believe that each investor had adequate access to information about us through the investor’s relationship with us.

Item 3.   Default Upon Senior Securities

There is no information required to be reported under this Item.

Item 4.   Removed and Reserved

There is no information required to be reported under this Item.

Item 5. Other Information

On January 12, 2012, the Company implemented a 1:50 reverse stock split first announced on October 13, 2011. This matter wasThere is no information required to be reported on Form 8-K filed with the SEC on January 13, 2012under this Item.

On February 29, 2012, all the outstanding 10% Senior Secured Convertible Debentures were converted to common shares of the Company in accordance with the terms of the underlying debentures. The matter was reported on Form 8-K filed with the SEC on March 6, 2012.

Item 6.       Exhibits

(a)             Exhibits

Signature

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