Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2009
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 33-2249-FW
MILLER PETROLEUM, INC.
----------------------
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1028629
--------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3651 BAKER HIGHWAY, HUNTSVILLE, TN 37756
---------------------------------- -----
(Address of principal executive offices) (Zip Code)
(423) 663-9457
--------------
(Registrant's telephone number, including area code)
N/A
---
(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 Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Title of Class No. of Shares Outstanding at December 9, 2009
-------------- ---------------------------------------------
Common Stock 19,310,956
MILLER PETROLEUM, INC.
FORM 10-Q
OCTOBER 31, 2009
TABLE OF CONTENTS
Page
No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Summary Financial Data at October 31, 2009 (Unaudited),
July 31, 2009 (Unaudited) and April 30, 2009 ................... 3
Condensed Consolidated Balance Sheets at October 31, 2009
(Unaudited) and April 30, 2009 ................................. 4
Condensed Consolidated Statements of Operations for the Three and
Six months ended October 31, 2009 .............................. 6
Condensed Consolidated Statements of Cash Flows for the Six
months ended October 31, 2009 and 2008 (Unaudited) ............. 7
Notes to Condensed Consolidated Financial Statements (Unaudited)... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................... 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 25
Item 4T. Controls and Procedures ........................................... 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 26
Item 1A. Risk Factors ...................................................... 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ....... 26
Item 3. Defaults Upon Senior Securities ................................... 26
Item 4. Submission of Matters to a Vote of Security Holders ............... 26
Item 5. Other Information ................................................. 26
Item 6. Exhibits .......................................................... 26
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These forward-looking
statements were based on various factors and were derived utilizing numerous
assumptions and other factors that could cause our actual results to differ
materially from those in the forward-looking statements. These factors include,
but are not limited to, the availability of sufficient capital to fund the
anticipated growth of our company, fluctuations in the prices of oil and gas,
the competitive nature of our business environment, our dependence on a limited
number of customers, our ability to comply with environmental regulations,
changes in government regulations which could adversely impact our business and
other factors. Most of these factors are difficult to predict accurately and are
generally beyond our control. You should consider the areas of risk described in
connection with any forward-looking statements that may be made herein or in our
Annual Report on Form 10-K for the year ended April 30, 2009. Readers are
cautioned not to place undue reliance on these forward-looking statements and
readers should carefully review this report in its entirety. Except for our
ongoing obligations to disclose material information under the Federal
securities laws, we undertake no obligation to release publicly any revisions to
any forward-looking statements, to report events or to report the occurrence of
unanticipated events. These forward-looking statements speak only as of the date
of this report, and you should not rely on these statements without also
considering the risks and uncertainties associated with these statements and our
business.
OTHER PERTINENT INFORMATION
Unless specifically set forth to the contrary, when used in this report
the terms the "Company," "we," "us," "ours," and similar terms refers to Miller
Petroleum, Inc., a Tennessee corporation doing business as Miller Energy
Resources and our subsidiaries, Miller Rig & Equipment, LLC, Miller Drilling TN,
LLC and Miller Energy Services, LLC, East Tennessee Consultants, Inc., East
Tennessee Consultants II, LLC and Miller Energy GP, LLC.
The information which appears on our web site at www.millerenergyresources.com
is not part of this report.
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MILLER PETROLEUM, INC.
SUMMARY FINANCIAL INFORMATION
(UNAUDITED)
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months ended Months ended
October 31, October 31, October 31, October 31,
2009 2008 2009 2008
------------ ------------ ------------ ------------
Total Revenue ............. 333,404 484,576 861,024 699,841
Total Costs and Expenses .. 1,524,748 1,235,708 2,674,845 2,046,509
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS ...... (1,191,344) (751,132) (1,813,821) (1,346,668)
NET INCOME (LOSS) ......... $ (156,024) $ (571,192) $ (83,811) $ 9,709,430
October 31, July 31, April 30,
2009 2009 2009
Unaudited Unaudited
----------- ----------- -----------
Cash .............................. $ 94,838 $ 100,018 $ 46,566
Cash, restricted .................. 1,982,489 1,976,510 1,982,552
----------- ----------- -----------
Total Cash ........................ 2,077,327 2,076,528 2,029,118
Oil and Gas Properties ............ 4,047,713 3,235,278 1,787,911
Total Assets ...................... 12,456,570 12,234,383 9,941,733
Total Current Liabilities ......... 3,743,949 3,552,707 2,631,746
Total Long-term Liabilities ....... 545,524 661,104 89,251
Total Stockholders' Equity ........ $ 8,167,097 $ 8,020,572 $ 7,220,736
Total Producing Oil Wells ......... 194 173 20
Total Producing Gas Wells ......... 263 253 32
----------- ----------- -----------
Total Producing Wells ............. 457 426 52
Total Oil and Gas Lease Acreage ... 54,506 54,256 14,489
Total Proved Oil Reserves MBOE .... 0.129 (1) 0.129 (1) 0.053 (2)
Total Proved Gas Reserves MMCFE ... 0.335 (3) 0.335 (1) 0.311 (2)
Total Proved, Probable, Possible
Oil Reserves MBOE ............... 0.168 (3) 0.129 (1) 0.053 (2)
Total Proved Probable, Possible Gas
Reserves MMCFE .................. 0.335 (3) 0.335 (1) 0.311 (2)
(1) Based on Reserve Reports dated April 30, 2009, June 8, 2009 and June 18,
2009.
(2) Based on Reserve Report dated April 30, 2009.
(3) Based on Reserve Reports dated April 30, 2009, June 8, 2009, June 18,
2009 and October 31, 2009.
3
MILLER PETROLEUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
October 31, April 30,
2009 2009
Unaudited
------------ ------------
CURRENT ASSETS
Cash ........................................... $ 94,838 $ 46,566
Cash, restricted................................ 1,982,489 1,982,552
Accounts receivable ............................ 129,483 124,815
Accounts receivable - related parties .......... 28,441 19,882
Prepaid expenses................................ 51,627 -
Inventory ...................................... 178,011 87,120
------------ ------------
Total Current Assets ........................... 2,464,889 2,260,935
Fixed Assets 5,907,467 5,751,017
Less: accumulated depreciation ................. (1,230,839) (1,022,017)
------------ ------------
Net Fixed Assets................................ 4,676,628 4,729,000
OIL AND GAS PROPERTIES
(On the basis of successful efforts accounting) 4,047,713 1,787,911
Land ........................................... 526,500 406,500
Deferred interest .............................. 5,684 6,892
Prepaid offering cost........................... 452,853 666,476
Cash - restricted, long-term.................... 281,493 84,019
Other assets.................................... 810 -
------------ ------------
Total Other Assets ............................. 1,267,340 1,163,887
------------ ------------
TOTAL ASSETS ................................... $ 12,456,570 $ 9,941,733
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
MILLER PETROLEUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
October 31, April 30,
2009 2009
Unaudited
------------ ------------
CURRENT LIABILITIES
Accounts payable - trade ....................... $ 914,294 $ 301,082
Accrued expenses ............................... 246,948 271,099
Asset retirement liability...................... 272,008 57,246
Unearned revenue................................ 137,240 131,587
Current portion of notes payable ............... 2,173,459 1,870,732
------------ ------------
Total Current Liabilities ...................... 3,743,949 2,631,746
LONG-TERM LIABILITIES
Deferred income taxes payable................... 471,182 778
Notes payable - other .......................... 74,342 88,473
------------ ------------
Total Long-term Liabilities .................... 545,524 89,251
Total Liabilities .......................... 4,289,473 2,720,997
STOCKHOLDERS' EQUITY
Common stock, 500,000,000 shares authorized at
$0.0001 par value, 18,860,956 and 15,974,356
shares issued and outstanding, respectively . 1,886 1,597
Additional paid-in capital ..................... 9,585,208 8,555,324
Accumulated deficit ............................ (1,419,997) (1,336,185)
------------ ------------
Total Stockholders' Equity ..................... 8,167,097 7,220,736
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 12,456,570 $ 9,941,733
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
MILLER PETROLEUM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months ended Months ended
October 31, October 31, October 31, October 31,
2009 2008 2009 2008
------------ ------------ ------------ ------------
REVENUES
Oil and gas revenue ....................... $ 212,225 $ 196,147 $ 616,617 $ 410,900
Service and drilling revenue .............. 121,179 288,429 244,407 288,941
------------ ------------ ------------ ------------
Total Revenue ............................. 333,404 484,576 861,024 699,841
COSTS AND EXPENSES
Cost of oil and gas revenue ............... 4,333 28,988 28,377 58,399
Cost of service and drilling revenue ...... 214,153 395,847 458,653 502,346
Selling, general and administrative ....... 1,028,840 713,596 1,681,232 1,280,918
Depreciation, depletion and amortization .. 277,422 97,277 506,583 204,846
------------ ------------ ------------ ------------
Total Costs and Expenses .................. 1,524,748 1,235,708 2,674,845 2,046,509
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ...................... (1,191,344) (751,132) (1,813,821) (1,346,668)
OTHER INCOME (EXPENSE)
Interest income ........................... 7,498 20,879 15,469 30,219
Interest expense .......................... (6,258) (19,347) (19,127) (50,233)
Loan fees and costs ....................... (62,742) (46,382) (115,377) (74,248)
Gain on sale of equipment ................. - 8,550 (9,755) 8,550
Gain on sale of oil and gas properties .... - - - 11,715,570
Gain on acquisitions ...................... 1,057,564 - 1,818,764 -
------------ ------------ ------------ ------------
Total Other Income (Expense) .............. 996,062 (36,300) 1,689,974 11,629,858
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE INCOME TAXES ..... (195,282) (787,432) (123,847) 10,283,190
INCOME TAX EXPENSE (BENEFIT) .............. (39,258) (216,240) (40,036) 573,760
------------ ------------ ------------ ------------
NET INCOME (LOSS) ......................... $ (156,024) $ (571,192) $ (83,811) $ 9,709,430
============ ============ ============ ============
BASIC AND DILUTED - INCOME (LOSS) PER SHARE $ (0.01) $ (0.04) $ (0.00) $ 0.73
BASIC AND DILUTED - WEIGHTED AVERAGE
SHARES OUTSTANDING ...................... 18,555,604 14,852,182 17,913,621 13,259,519
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
MILLER PETROLEUM, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Six For the Six
Months Ended Months Ended
October 31, 2009 October 31, 2008
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ......................................... $ (83,811) $ 9,709,430
Depreciation, depletion and amortization ......... 506,584 204,846
Adjustments to Reconcile Net Loss to Net Cash
Provided (Used) by Operating Activities:
Loss (gain) on sale of equipment ................. 9,755 (8,550)
Gain on sale of oil and gas properties ........... - (11,715,570)
Gain on acquisitions ............................. (1,818,764) -
Issuance of stock for services ................... 25,798 297,000
Issuance of warrants for financing cost .......... 97,499 -
Issuance of stock options for services ........... - 17,800
Warrants cost .................................... - 73,982
Changes in Operating Assets and Liabilities:
Accounts receivable ............................ 11,677 (87,206)
Inventory ...................................... (90,891) 21,884
Prepaid expense ................................ (51,627) -
Accounts payable ............................... 213,770 (138,089)
Accrued expenses ............................... 190,612 (101,492)
Unearned revenue ............................... 5,653 -
Income taxes payable ........................... (39,259) 573,760
Deferred interest .............................. 1,208 -
------------ ------------
Net Cash Used by Operating Activities ............ (1,021,796) (1,152,205)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and improvements ........... (25,892) (4,153,830)
Purchase of oil and gas properties ............... (20,681) (1,091,423)
Sale of oil and gas properties ................... 25,000 13,514,090
Purchase of land ................................. - (110,000)
Proceeds from sale of equipment .................. 50,000 19,000
Deferred interest ................................ - (8,209)
------------ ------------
Net Cash Provided by Investing Activities ........ 28,427 8,169,628
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable ........................ (12,121) (730,314)
Proceeds from borrowing .......................... 300,000 1,912,159
Proceeds from sale of stock ...................... 336,875 -
Cash acquired through acquisition ................ 203,993 -
Restricted cash .................................. 63 -
Restricted cash non-current ...................... (792) -
Stock repurchase ................................. - (4,350,000)
Prepaid offering cost ............................ 213,623 (105,925)
------------ ------------
Net Cash Provided (Used) by Financing Activities . 1,041,641 (3,274,080)
------------ ------------
NET INCREASE IN CASH ............................... 48,272 3,743,343
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..... 46,566 42,436
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........... $ 94,838 $ 3,785,779
============ ============
CASH PAID FOR INTEREST ............................. $ 101,879 $ 146,955
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued for prepaid offering cost ...... $ - $ 115,000
Financing costs from issuance of warrants and stocks $ 97,499 $ 27,600
The Company reported the following non-cash
investing And financing activities in the period.
Cash acquired through issuance of stock ............ $ 203,993 $ -
Restricted cash acquired through issuance of stock . $ 196,682 $ -
Net assets acquired through issuance of stock ...... $ 1,988,089 $ -
The accompanying notes are an integral part of these
condensed consolidated financial statements.
7
MILLER PETROLEUM, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
These consolidated financial statements include the accounts of Miller
Petroleum, Inc. (the "Company") and the accounts of its subsidiaries, Miller
Drilling TN, LLC and Miller Energy Services, LLC for the comparative periods
ended October 31, 2009 and 2008. Miller Petroleum, Inc.'s subsidiaries Miller
Rig & Equipment, LLC, East Tennessee Consultants, Inc., East Tennessee
Consultants II, LLC and Miller Energy GP, LLC were only included in the
consolidation for the period ended October 31, 2009 only, since these
subsidiaries started up subsequent to the six months ended October 31, 2008. All
inter-company balances have been eliminated in consolidation.
The Company's principal business consists of oil and gas exploration, production
and related property management in the Appalachian region of eastern Tennessee.
The Company's corporate offices are in Huntsville, Tennessee. The Company
operates as one reportable business segment, based on the similarity of
activities.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the Company's April 30, 2009 Annual Report on Form
10-K. The results of operations for the period ended October 31, 2009 are not
necessarily indicative of operating results for the full year. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included.
(2) ACCOUNTING POLICIES
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period amounts presented
to conform to the current period presentations.
INVENTORY
Inventory consists primarily of crude oil in tanks and is carried at cost.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2009, we adopted the FASB guidance for Business Combinations,
which replaces SFAS No. 141, Business Combinations ("SFAS 141R"), and requires
an acquirer to recognize the assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions. This Statement also
requires the acquirer in a business combination achieved in stages to recognize
the identifiable assets and liabilities, as well as the noncontrolling interest
in the acquiree, at the full amounts of their fair values. Additionally, this
Statement requires acquisition- related costs to be expensed in the period in
which the costs were incurred and the services are received instead of including
such costs as part of the acquisition price. This guidance makes various other
amendments to authoritative literature intended to provide additional guidance
or to confirm the guidance in that literature to that provided in this
Statement. Our acquisition of the Ky-Tenn Oil, Inc assets and the stock and
membership interests of East Tennessee Consultants, Inc. and East Tennessee
Consultants II, LLC were recorded in accordance with this guidance. See Note 7.
In April 2009, the FASB issued three related FASB Staff Positions: (i) FASB ASC
320- 10-65-1 (formerly FSP FAS No. 115-2 and FAS No. 124-2, Recognition and
Presentation of Other-Than- Temporary Impairments (FSP FAS 115-2 and FAS
124-2)); (ii) FASB ASC 825- 10-65-1 (formerly FSP FAS No. 107-1 and Accounting
Principles Board Opinion (APB) No. 28-1, Interim Disclosures about Fair Value of
Financial Instruments (FSP FAS 107-1 and APB 28-1)), and; (iii) FASB ASC
820-10-65-4 (formerly FSP FAS No. 157-4, Determining
8
the Fair Value When the Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions That Are Not Orderly
(FSP FAS 157-4)), which are effective for interim and annual reporting periods
ending after June 15, 2009. FASB ASC 320-10-65-1 (formerly FSP FAS 115-2 and FAS
124-2) amend the other-than-temporary impairment guidance in GAAP for debt
securities to modify the requirement for recognizing other- than-temporary
impairments, change the existing impairment model and modify the presentation
and frequency of related disclosures. FASB ASC 825-10-65-1 (formerly FSP FAS
107-1 and APB 28-1) require disclosures about fair value of financial
instruments for interim reporting periods as well as in annual financial
statements. FASB ASC 820-10-65-4 (formerly FSP FAS 157-4) provides additional
guidance for estimating fair value in the current economic environment and
reemphasizes that the objective of a fair value measurement remains an exit
price. If we were to conclude that there has been a significant decrease in the
volume and level of activity of the asset or liability in relation to normal
market activities, quoted market values may not be representative of fair value
and we may conclude that a change in valuation technique or the use of multiple
valuation techniques may be appropriate in accordance with FASB ASC 820-10
(formerly SFAS No. 157). These pronouncements are not expected to have a
material impact on our operations and financial condition.
In April 2009, the FASB issued FASB ASC 805-20 (formerly FSP SFASNo. 141R-1,
Accounting for Assets Acquired and Liabilities Assumed in a Business Combination
That Arise from Contingencies. FASB ASC 805-20 amends the guidance in FASB ASC
805 (formerly SFAS 141R) relating to the initial recognition and measurement,
subsequent measurement and accounting and disclosures of assets and liabilities
arising from contingencies in a business combination. FASB ASC 805 (formerly FSP
SFAS 141R) is effective for fiscal years beginning after December 15, 2008. We
adopted FASB ASC 805 (formerly FSP SFAS 141R) as of the beginning of fiscal
2009. We will apply the requirements of FASB ASC 805-20 (formerly FSP FAS
141R-1) prospectively to any future acquisitions.
In May 2009, the FASB issued FASB ASC 855-10 (formerly SFAS No. 165, Subsequent
Events (SFAS 165)), which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The provisions of
FASB ASC 855-10 (formerly SFAS 165) are effective for interim and annual
reporting periods ending after June 15, 2009. The adoption of FASB ASC 855-10
(formerly SFAS 165) did not have any impact on our financial statements. The
subsequent events have been evaluated through December 21, 2009, which was the
date the Financial Statements were issued.
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles - a
replacement of FASB Statement No. 162 (SFAS 162). Effective for our financial
statements issued for interim and annual periods commencing with the quarterly
period ended October 31, 2009, the FASB Accounting Standards Codification
(Codification or ASC) is the source of authoritative U.S. GAAP recognized by the
FASB to be applied by nongovernmental entities. Rules and interpretive releases
of the SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. The Codification supersedes all
then-existing, non-SEC accounting and reporting standards. In the FASB's view,
the Codification does not change GAAP, and therefore the adoption of SFAS 168,
now referred to as FASB ASC 105, Generally Accepted Accounting Principles, did
not have an effect on our consolidated financial position, results of operations
or cash flows. However, where we have referred to specific authoritative
accounting literature, both the Codification and pre-Codification GAAP
literature are disclosed. FASB ASC 820, Fair Value Measurements and Disclosures
(formerly SFAS 157, Fair Value Instruments and FASB Staff Position No. FAS
157-2, Effective Date of FASB Statement No. 157) (Topic 820) defines fair value,
establishes a framework for measuring fair value in accordance with GAAP and
expands disclosures about fair value measurement. Topic 820 applies to other
accounting pronouncements that require or permit fair value measurements but
does not require any new fair value measurements. The adoption of Topic 820 for
financial assets and liabilities, as of January 1, 2008, did not have a material
impact on our financial position or operations. Topic 820 delayed the effective
date of Topic 820's fair value measurement
9
requirements for nonfinancial assets and liabilities that are not required or
permitted to be measured at fair value on a recurring basis. Fair value
measurements identified in Topic 820 is effective for our fiscal year beginning
May 1, 2009 and did not have any impact on our consolidated financial position,
results of operations or cash flows.
The Securities and Exchange Commission has issued new disclosure requirements
for entities in the oil and gas production and extractive industries. Such rules
are effective January 1, 2010, the Company does not expect the additional
disclosures to be burdensome.
All other issued accounting pronouncements but not yet effective have been
determined to be not applicable by management and once adopted is not expected
to have a material impact on the financial position of the Company.
(3) SALE OF OIL AND GAS PROPERTIES AND EQUIPMENT PURCHASES
On June 13, 2008 we sold approximately 30,000 acres of oil and gas leases and
eight drilled but not completed wells to Atlas America, LLC ("Atlas") for
$19.625 million. At that time Wind City Oil & Gas, LLC and related entities were
paid $10.6 million for 2.9 million shares of the Company's common stock, eight
drilled but not completed gas wells, two producing gas wells, and a RD20
drilling rig and related equipment in settlement of all litigation between the
parties.
On November 10, 2008, the Company finalized a drilling contract with Atlas
Energy Resources, LLC, an affiliate of Atlas. This is a two year agreement that
will utilize two of the Company's drilling rigs operating in the East Tennessee
area of the Appalachian Basin. We acquired a 2007 COPCO Model RD III drilling
rig and related equipment drilling rig from Atlas to assist in drilling the
wells. This rig has been mobilized to the site and has commenced drilling
operations. The Company borrowed $1,850,125, secured by a certificate of
deposit, to purchase this drilling rig.
After the sale was completed, the Company paid off all notes, all undisputed
payables, transaction fees of $600,000 to Cresta Capital/Consortium, and paid a
transaction fee of $300,000 and issued 2,500,000 shares of common stock valued
at $825,000 to Mr. Scott Boruff, a former associate of Cresta Capital. Mr.
Boruff was subsequently hired effective August 1, 2008 as the new CEO of the
Company (see Commitments note below). He is a son-in-law of Deloy Miller the
former CEO and current Chairman of the Board of Directors. Cresta was also
granted a warrant to purchase one million shares of the Company's common stock
for $1.00 per share for a period expiring three years after the grant date and
cancelled the five million performance warrants that it held.
The net gain on this sale of oil and gas property transaction was $11,715,570.
A third party interested in aforementioned sale of the oil and gas properties is
contesting the sale, see the Litigation note below.
(4) PARTICIPANT RECEIVABLES AND RELATED PARTY RECEIVABLES
Participant and related party receivables consist of receivables contractually
due from our various joint venture partners in connection with routine
exploration, betterment and maintenance activities. Our collateral for these
receivables generally consists of lien rights over the related oil producing
properties at both April 30, 2009 and October 31, 2009.
10
(5) LONG-TERM DEBT, WARRANTS, LOAN FEES AND RESTRICTED CASH
The Company had the following debt obligations at October 31, 2009 and April 30,
2009
October 31, April 30,
2009 2009
---------- ----------
Note payable to Commercial Bank, secured by cash,
bearing interest at 3.75%, due December 22, 2009 ... 1,850,000 1,850,000
Note payable to Commercial Bank, secured by vehicle,
dated March 31, 2009, bearing interest at 7.50%, due
in monthly payments of $1,376.22, with the final
payment due March 31, 2013 ......................... 49,552 55,786
Note payable to GMAC Financing, secured by vehicle,
dated June 27, 2008, bearing zero interest, due in
monthly payments of $861.58, with the final payment
due June 27, 2012 .................................. 48,249 53,419
Note payable to Commercial Bank, secured by the
Company's main Headquarters and land, located in
Huntsville, Tennessee, dated July 16, 2009, bearing
interest at 10.00%, due in interest only monthly
payments, with the principal payment due January 16,
2010 ............................................... 300,000 -
---------- ----------
Total Notes Payable ........................... 2,247,801 1,959,205
Less current maturities on other notes payable 2,173,459 1,870,732
---------- ----------
Notes Payable - Long-term ..................... $ 74,342 $ 88,473
========== ==========
(6) STOCKHOLDERS' EQUITY
During the six months ended October 31, 2009, we issued the following
securities: 2,886,600 shares, which included 350,000 shares issued to an
investor for $0.34 per share and expensed at $119,000, 2,000,000 shares for
acquisitions that occurred during the first quarter (see note 7), 39,100 shares
issued to a vendor in lieu of cash and expensed at $25,795 and 497,500 shares
issued to new inventors as an incentive to invest in the Miller Energy Income
2009-A, LP partnership and capitalized at $217,875. Miller Energy Income 2009-A,
LP's general partner is Miller Energy GP, LLC, a 100% owned subsidiary of Miller
Petroleum, Inc.
In May 2005 the Company entered into a $4.15 million credit agreement which had
terms that specified that the Company would prepare, and file a Registration
Statement that would cover the resale of all of the Registrable Securities,
which Registration Statement, to the extent allowable under the Securities Act
of 1933, as amended, and the rules and regulations promulgated hereunder
(including Rule 416), shall state that such Registration Statement also covers
such indeterminate number of additional shares of Common Stock as may become
issuable upon conversion of or otherwise pursuant to the Notes and Warrants to
prevent dilution resulting from stock splits, stock dividends or similar
transactions. Company would agree to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute, and applicable state securities
laws. The Company is required to issue 40,000 penalty warrants each month the
Company has not registered the aforementioned underlying securities. The shares
are not registered and throughout the six months ended October 31, 2009, the
Company issued 240,000 penalty warrants at an average exercise price of $1.15
per share with a five-year term valued and expensed at $84,079.
11
In October 2009 we issued 497,500 warrants were issued to new inventors as an
incentive to invest in the Miller Energy Income 2009-A, LP partnership. These
warrants have a term of five years, an exercise price of $1.00 per share and
were capitalized at $13,420.
The Company presents "basic" earnings (loss) per share and, if applicable,
"diluted" earnings per share pursuant to the provisions of Statement of
Financial Accounting Standards No. 128. The calculation of diluted earnings per
share is similar to that of basic earnings per share, except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if all potentially dilutive common shares, such as
those issuable upon the exercise of stock options and warrants, were issued
during the period.
There were no dilutive effects of the common stock equivalents for the
outstanding vested stock options and warrants for the three and six months ended
October 31, 2008 and October 31, 2009 since the exercise price of such warrants
and options exceeded the market price of the Company's common stock at October
31, 2008, or there were losses in 2009, which would render the common stock
equivalent Of 1,187,500 in October 31, 2009 to be antidilutive.
(7) ACQUISITIONS
On June 8, 2009, we closed on the acquisition of certain assets of privately
owned Ky-Tenn Oil, Inc., ("KTO") which includes approximately 35,325 leased
acres located on the Chattanooga Shale and 153 natural gas and oil producing
wells. The primary reason for this acquisition was that it provided the Company
with a large lease position in the middle of Tennessee's prolific Chattanooga
Shale play for future drilling development. Another key to this acquisition is
the fact that in addition to the 153 wells that we will be operating on the KTO
leases, there are over 100 additional wells that can be reworked and put back
into production. In addition, expected synergies are anticipated from combining
operations and personnel. For these assets we issued 1,000,000 shares of our
common stock, which was valued at $320,000 on the date of acquisition. The
acquired assets included 35,325 leased acres with 153 producing oil and gas
wells and $194,400 in restricted bond certificates for well reclamation with a
related liability. In addition a complaint has been filed in United States
District Court for the Eastern District of Tennessee, Northern Division by
Gunsight Holdings, LLC, a Florida limited liability company pertaining to
Ky-Tenn and the Company. The lease which is the subject of the litigation was
included in the assets purchased by us from Ky-Tenn. The Plaintiff is alleging
that the Company and Ky-Tenn have failed or refused to pay royalties due to the
Plaintiff's predecessors and have breached the implied duty of further
exploration by failing to drill required wells, failing to reasonably develop or
explore the property, failing to maintain an active interest in further
development of the property and otherwise failing to act as a prudent operator
of the property thereby causing damages to the Plaintiff exceeding $75,000. The
Plaintiff is seeking a declaratory judgment of its allegations, removal of the
Company and Ky-Tenn from the property, a full accounting of activities related
to the property and all monies received from those activities, damages and costs
of action. We have filed an answer denying the various claims and asserting
affirmative defenses including that there has been continuous production from
the subject lease. While we intend to vigorously defend this action, we are
unable at this time to predict the outcome of the action or whether the company
will have any liability to the Plaintiff. See Note 10. No cash or receivables
were acquired from KTO. A third-party analysis was performed to determine the
fair value of the assets acquired. The report was prepared utilizing methods and
procedures regularly used by petroleum engineers to estimate oil and gas
reserves for properties of this type and character. The recovery of oil and gas
reserves and projection of producing rates are dependent upon many variable
factors including prudent operation, compression of gas when needed, market
demand, installation of lifting equipment and remedial work when required. The
reserves included in this report have been based upon the assumption that the
wells will be operated in a prudent manner under the same conditions existing on
the effective date. The value as determined by this report was $252,455. The
value of the restricted bond certificates had an offsetting retirement
12
liability, therefore, under the FASB guidance, the difference between
the value of the oil and gas properties less the value of the common stock
resulted in a loss of $67,545 was recorded in the Condensed Consolidated
Statements of Operations as a net to Gain on Acquisitions. During the quarter
ended October 31, 2009 the same third-party analyst completed the determination
of the value of all undeveloped reserves, and our Condensed Consolidated Balance
Sheet at October 31, 2009 includes an additional gain of $1,057,564 and an
additional $987,142 in oil and gas properties.
On June 18, 2009 the Company acquired 100% of the stock of East Tennessee
Consultants, Inc., a Tennessee corporation ("ETC") and 100% of the membership
interests in East Tennessee Consultants II, LLC, a Tennessee limited liability
company ("LLC") from the owners of these entities. The acquisition included 221
producing oil and gas wells and consisted of approximately 4,442 acres. ETC was
formed in 1983 to provide oil and gas well operating services and it represented
various working interest owners and the LLC was formed in 1996. The primary
reason for this acquisition is that it is anticipated that these subsidiaries
will operate the wells they own as well as the recently purchased wells from
KY-Tenn Oil, Inc, which will provide the Company economies of scale. It is also
anticipated that the old wells from these acquisitions will be reworked and that
new wells will be drilled from the extensive acreage now owned by the Company.
The Chattanooga Shale, an emerging gas play in the Appalachian region, is
present in a majority of the wells acquired, is a prime candidate for
exploitation by the Company. Completion and reworking of existing oil zones
should add to reserves at a relatively inexpensive price. The Company issued
1,000,000 shares for all of ETC and LLC membership interest. Our common shares
were valued at $250,000 on the date of acquisition. Expected synergies are
anticipated from combining operations and personnel, especially when considering
the acquisition of previously mentioned KTO. The acquisition included the
following balance sheet items.
Assets Liabilities and equity
Cash ................. $ 203,993 Accounts payable ......... $ 202,760
Receivables .......... 24,904 Deferred tax ............. 580,864
Fixed assets, net .... 313,458 Value of shares issued ... 250,000
Oil and gas properties 1,319,140 Gain ..................... 828,745
Other assets ......... 874
---------- ----------
Total assets ........... $1,862,369 Total liabilities and equity $1,862,369
========== ==========
We valued this acquisition under the FASB guidance and, accordingly, a gain of
$828,745 was recorded as of the acquisition date. For the six months ended
October 31, 2009 the consolidation of this entity increased the Company revenues
by $361,139 and increased costs of revenues by $151,860. The impacts of
consolidation on all other line items within our Condensed Consolidated
Statements of Operations were not significant. Our Condensed Consolidated
Balance Sheet at October 31, 2009 reflects consolidation of this entity by
$1,319,140 in oil and gas properties.
(8) STOCK OPTIONS
We record share-based payments at fair value and record compensation expense for
all share-based awards granted, modified, repurchased or cancelled after the
effective date, in accord with FASB guidance for "Share-Based Payments". We
record compensation expense for outstanding awards for which the requisite
service had not been rendered as of the effective date over the remaining
service period. We adopted Statement this FASB guidance using a modified
prospective application.
13
We estimated the fair value of options granted during the years ended October
31, 2009 and 2008 on the date of grant, using the Black-Scholes pricing model
with the following assumptions:
2009 2008
-------- --------
Weighted average of expected risk-free interest
rates (Approximate 3 year Treasury Bill rate) ..... 1.50% 2.37%
Expected years from vest date to exercise date ..... 2.5 2.5
Expected stock volatility .......................... 371-394% 432-527%
Expected dividend yield ............................ 0% 0%
The Company recorded $0 and $17,800 of compensation expense, net of related tax
effects, relative to stock options for the six months ended October 31, 2009 and
2008, respectively in accordance with SFAS 123R. Net loss per share basic and
diluted for this expense is $0.00 and $0.00.
The Company has adopted the FASB guidance, "Share Based Payments". This guidance
requires companies to expense the value of employee stock options and similar
awards and applies to all outstanding and vested stock-based awards. In
computing the impact, the fair value of each option is estimated on the date of
grant based on the Black-Scholes options-pricing model utilizing certain
assumptions for a risk free interest rate; volatility; and expected remaining
lives of the awards. The assumptions used in calculating the fair value of
share-based payment awards represent management's best estimates, but these
estimates involve inherent uncertainties and the application of management
judgment. As a result, if factors change and the Company uses different
assumptions, the Company's stock-based compensation expense could be materially
different in the future. In addition, the Company is required to estimate the
expected forfeiture rate and only recognize expense for those shares expected to
vest. In estimating the Company's forfeiture rate, the Company analyzed its
historical forfeiture rate, the remaining lives of unvested options, and the
amount of vested options as a percentage of total options outstanding. If the
Company's actual forfeiture rate is materially different from its estimate, or
if the Company reevaluates the forfeiture rate in the future, the stock-based
compensation expense could be significantly different from what we have recorded
in the current period. The impact of applying this FASB guidance approximated $0
in additional compensation expense during the six months ended October 31, 2009
and $1,117,800 in 2008. Such amount is included in general and administrative
expenses on the statement of operations.
The aggregate intrinsic value is calculated as the difference between the
exercise price of the underlying awards and the quoted price of our common stock
for those awards that have an exercise price currently below the closing price.
During the six months ended October 31, 2009 and 2008, the aggregate intrinsic
value of stock options and warrants exercised was $0 and $0, respectively,
determined as of the date of exercise.
A summary of the stock options and warrants as of October 31, 2009 and 2008 and
changes during the periods is presented below:
14
Six months ended Six months ended
October 31, 2009 October 31, 2008
---------------------------- ----------------------------
Number of Weighted Number of Weighted
Options and Average Options and Average
Warrants Exercise Price Warrants Exercise Price
----------- -------------- ----------- --------------
Balance at April 30 4,090,000 $ 0.88 7,535,000 $ 0.20
Granted ........... 737,500 1.05 1,615,000 0.84
Exercised ......... - - - -
Expired ........... 50,000 0.81 - -
Cancelled ......... - - 5,000,000 0.22
----------- -------------- ----------- --------------
Balance at
October 31 ........ 4,777,500 0.90 4,150,000 0.84
Options exercisable
at October 31 ..... 4,590,000 $ 0.93 3,790,625 $ 0.42
=========== ============== =========== ==============
The following table summarizes information concerning stock options and warrants
outstanding and exercisable at October 31, 2009:
Options and Warrants
Options and Warrants Outstanding Exercisable
---------------------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
------------- ----------- ----------- -------- ----------- --------
$0.33 to 0.44 375,000 6.5 $ 0.37 187,500 $ 0.40
0.50 1,000,000 0.5 0.50 1,000,000 0.50
0.86 to 1.15 3,402,500 2.9 1.08 3,402,500 1.08
----------- -------- ----------- --------
4,777,500 2.7 0.90 4,590,000 0.93
=========== ======== =========== ========
All options and warrants were issued at no less than the fair market of common
stock on the date of grant.
(9) COMMITMENTS
On August 6, 2008 the Board of Directors employed Scott M. Boruff as CEO of the
Company. The employment contract, as amended, provided for the following
compensation:
o Base salary of $250,000 per annum, with provision for cost-of-living
increases.
o Options to purchase 250,000 shares of the Company's common stock at an
exercise price per share of $0.33, with vesting in equal annual
installments over a period of four years.
o A restricted stock grant of 250,000 shares of common stock, with vesting
in equal annual installments over a period of four years.
o Incentive Compensation - For each year of the employment term, (i) cash up
to 100% of base salary and (ii) up to 100,000 shares of restricted common
stock, in both instances based upon, and subject to, two performance
benchmarks, gross revenue and EBITDA. One half of each element of
incentive compensation is earned if the gross revenue benchmark is
achieved, and the other half of each element is earned if the EBITDA
benchmark is achieved.
15
In August 2008 we engaged a broker-dealer and member of FINRA to assist us in
raising capital by means of a private placement of securities. As initial
compensation for their services, we paid the firm a $25,000 retainer, issued the
firm's assigns 250,000 shares of our common stock, valued at $115,000 and agreed
to pay a monthly consulting fee of $5,000. Upon the successful completion of the
private offering we will be obligated to pay the firm certain cash compensation
and issue them up to an additional 150,000 shares of our common stock in amounts
to be determined based upon the gross proceeds received by us from the
financing.
(10) LITIGATION
CNX Gas Company, LLC (CNX) commenced litigation in the Chancery Court of
Campbell County, State of Tennessee on June 11, 2008 (CNX Gas Company, LLC vs.
Miller Petroleum Inc., Civil Action No. 08-071) to enjoin the Company from
assigning or conveying certain leases described in the Letter of Intent signed
by CNX and the Company on May 30, 2008 (the "Letter of Intent"); to compel the
Company to specifically perform the assignments as described in the Letter of
Intent; and for damages. A Notice of Lien Lis Pendens was issued June 11, 2008.
The Company moved for entry of summary judgment dismissing the claims asserted
against it by CNX and on January 30, 2009 the court found that the claims of CNX
had no merit. The court granted the Company's motion and dismissed all claims
asserted by CNX in that action. CNX has appealed the ruling.
On May 20, 2009 Gunsight Holdings, LLC, a Florida limited liability company,
filed a complaint in the United States District Court for the Eastern District
of Tennessee, Northern Division, against the Company styled Gunsight Holdings,
LLC, Plaintiff, v Miller Petroleum, Inc. and Ky-Tenn Oil, Inc., Defendants, Case
No. 3-09-CV-221. The litigation surrounds certain rights related to
approximately 6,800 acres in Scott County, Tennessee which KTO purportedly
acquired under a lease assignment from an unrelated party in August 2004. In
September 2008, KTO assigned the Company 75% of its interest in the subject
lease and the working interest in all the wells on the leased land, retaining a
25% interest in the wells consisting of landowner's royalty and overriding
royalty. On June 8, 2009 the Company acquired certain assets from KTO including
KTO's undivided interest in approximately 170 oil and gas wells in Morgan, Scott
and Fentress counties Tennessee, together with all property, fixtures and
improvements, leasehold interest and contract rights related to these wells and
undivided interest in approximately 35,325 acres of oil and gas leases in Scott
and Morgan counties, Tennessee. The lease which is the subject of the litigation
was included in the assets purchased by the Company from KTO in June 2009. The
Plaintiff is alleging that the Company and KTO have failed or refused to pay
royalties due to the Plaintiff's predecessors and have breached the implied duty
of further exploration by failing to drill required wells, failing to reasonably
develop or explore the property, failing to maintain an active interest in
further development of the property and otherwise failing to act as a prudent
operator of the property thereby causing damages to the Plaintiff exceeding
$75,000. The Plaintiff is seeking a declaratory judgment of its allegations,
removal of the Company and KTO from the property, a full accounting of
activities related to the property and all monies received from those
activities, damages and costs of action. We have filed an answer denying the
various claims and asserting affirmative defenses including that there has been
continuous production from the subject lease. While we intend to vigorously
defend this action, we are unable at this time to predict the outcome of the
action or whether the company will have any liability to the Plaintiff. In
addition, in the Company's agreement with KTO dated June 8, 2009, KTO states
that they shall defend, indemnify and save and hold harmless the Company against
all losses or claims with respect to transferred assets that accrue or relate to
times prior to the closing date or any debts, claims, liabilities or obligations
of KTO not expressly assumed by the Company that accrue at any time.
16
On October 8, 2009 the Company filed an action styled Miller Petroleum, Inc. v.
Maynard, Civil Action No. 9992 in the Chancery Court for Scott County,
Tennessee, seeking a declaratory judgment that because there has been continuing
commercial production of oil, an oil and gas lease owned by the Company is still
in full force and effect. Defendant Brad Maynard filed an Answer and
Counterclaim, seeking in the Counterclaim a declaration that the oil and gas
lease has expired. Although no compensatory monetary damages have been sought
against the Company the Counterclaim does seek attorney fees, expenses and
costs. There has been no discovery to date and a trial date has not been
assigned.
(11) SUBSEQUENT EVENTS
On December 11, 2009, the Company acquired former Alaskan assets of Pacific
Energy Resources ("Pacific Energy") valued at more than $300 million through a
Delaware Chapter 11 Bankruptcy proceeding. The Company paid a total of $2.25
million to acquire and obtain the Alaskan oil and gas assets which include
onshore and offshore production facilities, $119 million in proven energy
reserves, $185 million in probable energy reserves and $23 million in possible
energy reserves, providing total reserves of $327 million. The purchased assets
includes the West McArthur River oil field, the West Foreland natural gas field,
and the Redoubt unit with the Osprey offshore platform, all located along the
west side of the Cook Inlet. Also included in the asset purchase are 602,000
acres of oil and gas leases as well as completed 3D seismic geology and other
production facilities. At closing Miller paid Pacific Energy a purchase price of
$2.25 million and provided $2.22 million for bonds, contract cure payments and
other federal and State of Alaska requirements to operate the facilities. The
Company will operate the facilities through its recently acquired wholly-owned
subsidiary, Cook Inlet Energy LLC ("Cook"), which has been approved by the State
of Alaska as the long-term operator for the Alaskan oil and gas wells. In
October 2009, the Company entered into an agreement to acquire the majority of
Pacific Energy's Alaskan assets. In November of 2009, the Court approved the
sale and the acquisition closed on December 11, 2009.
On December 10, 2009, the Company acquired 100% of the membership interests in
Cook Inlet Energy, LLC, an Alaska limited liability company from the owners of
this entity. As consideration for these companies we issued the sellers, who
were unrelated third parties, stock warrants to purchase three million five
hundred thousand (3,500,000) shares of our common stock. The Warrants are to be
issued in three tranches with vesting features ranging from immediate to four
years and with exercise prices ranging from $0.01 to $2.00. In addition, within
90 days of closing, the Company is to deliver $250,000 in cash to satisfy
certain expenses as well as reimbursement for reasonable out of pocket expenses.
Under the terms of the stock purchase agreement, the sellers agreed not to
engage in oil and gas operations for a period of three years following the
closing date. We also agreed that each of the sellers, Mr. David M. Hall,
Walter J. Wilcox II and Troy Stafford, would continue their employment with the
acquired company for at least three years from the closing date of the
transaction at their specifically defined compensation and benefit levels. In
addition, Mr. Hall was appointed as a member of the Company's Board of Directors
and as Chief Executive Officer of Cook Inlet Energy, LLC., Mr. Hall will receive
an annual salary of $195,000.
In addition, in a related transaction, the Company issued a $3,000,000 6%
Convertible Secured Promissory Note program ("Note"). As of the filing date, the
Company had raised $2,825,000 through this program to provide to the Alaskan
asset transaction. $500,000 of this came from related parties; Director and
Chief Executive Officer Scott Boruff and Director Deloy Miller. Interest on the
Notes is paid quarterly and the principal is due December 4, 2016. The Note
contains a convertible feature which the Note holder has the right, but not the
obligation, at the Holder's option, at any time prior to payment in full of the
principal balance of the Note, to convert the unpaid principal amount of the
Note, in whole or in part, into fully paid and nonassessable shares of Miller's
Common Stock at the conversion price of $0.55 per share, which was a 10%
discount to the market on December 4, 2009.
On December 10, 2009, the Company appointed Ford F. Graham as Vice-Chairman of
the Board of Directors of Miller and as President of the Company. Mr. Graham is
to receive a signing bonus of $200,000, an annual initial salary of $200,000 and
initial stock warrants to purchase 1,000,000 shares of Company stock which
exercise prices ranging from $0.01 to $2.00.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
EXECUTIVE SUMMARY
We are a high-growth oil and natural gas exploration, production and drilling
company operating in multiple exploration and production projects in North
America. Our focus is in Cook Inlet, Alaska and in the heart of Tennessee's
prolific and hydrocarbon-rich Appalachian Basin. We are a Tennessee registered
company that has been in existence for over 40 years and been publicly traded
for 12 years. We have partial ownership in 194 producing oil wells and 263
producing gas wells. In addition to our engineering and geological capabilities,
we have work-over rigs, dozers, roustabout crews and equipment to set pumping
units, tanks and lay flow lines, winch trucks and trailers for traveling
support, backhoes, ditchers, fusion machines and welders for pipeline and
compression installation, as well as other equipment necessary to take a
drilling program from the development stage to completion.
During the first six months of fiscal year 2009 we completed two transactions
which we believe had both a positive impact on our balance sheet and will assist
us in our continued growth. These transactions included:
ACQUISITION OF KY-TENN OIL, INC. ASSETS
On June 8, 2009 we acquired certain assets from Ky-Tenn Oil, Inc., a Kentucky
corporation ("KTO"), an unrelated third party, including KTO's:
o undivided interest in approximately 170 oil and gas wells in Morgan, Scott
and Fentress counties Tennessee, together with all property, fixtures and
improvements, leasehold interest and contract rights related to these
wells;
o undivided interest in approximately 35,325 acres of oil and gas leases in
Scott and Morgan counties, Tennessee;
o interest in an operating agreement with the Tennessee State Energy
Development Partnership;
o interest in a gas gathering pipeline system; and
o other rights related to these assets, including royalty and working
interests, licenses and permits and similar incidental rights.
As consideration for these assets we issued KTO 1,000,000 shares of our common
stock valued at $320,000 and we granted the seller piggy-back registration
rights covering these shares. Pursuant to this FASB guidance, we originally
valued these assets at $252,455 and recorded a loss on the transaction of
$67,545. However, as previously stated, we completed the determination of the
value of all undeveloped reserves for this acreage during the quarter ended
October 31, 2009 and accordingly we recorded an additional gain of $1,057,564 on
this transaction.
ACQUISITION OF EAST TENNESSEE CONSULTANTS
On June 18, 2009 we acquired 100% of the stock of East Tennessee Consultants,
Inc., a Tennessee corporation ("ETC") and 100% of the membership interests in
East Tennessee Consultants II, LLC, a Tennessee limited liability company
("LLC") from the owners of these entities. Pursuant to SFAS 141(R), we have
valued these companies at $1,862,369 and have recorded a gain on the transaction
of $828,745. As consideration for these companies we issued the sellers, who
were unrelated third parties, 1,000,000 shares of our common stock valued at
$250,000. We granted the sellers registration rights covering these shares. ETC
was formed in 1983 to provide oil and gas well operating services and it
represented various working interest owners and the LLC was formed in 1996.
18
Following the closing, it is anticipated that these subsidiaries will operate
the wells they own as well as the recently purchased wells from KTO. It is also
anticipated that the old wells will be reworked and that new wells will be
drilled from the extensive acreage now owned by us. The Chattanooga Shale, which
is present in a majority of the wells acquired, is a candidate for stimulation.
Completion and reworking of existing oil zones should add to reserves at a
relatively inexpensive price.
Under the terms of the stock purchase agreement, the sellers agreed not to
engage in oil and gas operations for a period of three years following the
closing date. We also agreed that each of the sellers, Messrs. Eugene D.
Lockyear, Douglas G. Melton and Jerry G. Southwood, would continue their
employment with the acquired companies for at least three years from the closing
date of the transaction at their same compensation and benefit levels to which
they were entitled in May 2009. In addition, Mr. Lockyear was appointed Vice
President of Operations of our company. We also agreed that if any or all of the
sellers incur any income tax liability as a result of the receipt of the above
shares as consideration for the stock purchase, we agreed to pay a bonus to such
seller equal to the amount of his tax liability within 30 days from the closing
date.
LEASES
During the first two quarters of fiscal 2010 these two acquisitions resulted in
additional leases for an additional 40,017 acres for aggregate consideration of
approximately $603,285, bringing the total oil and gas leases held by us to
approximately 54,506 acres. The terms of these new leases have a net revenue
interest ranging from 0.1% to 100.0% and run from three to five years. We are
presently reviewing these leases, as well as our other existing leases, to
determine the capital requirements and timing for drilling additional wells. To
expand our operations by drilling on these leases will require additional
capital. As a part of our fiscal 2009 sale to Atlas Energy, we retained a 5%
royalty interest on a 1,930 acre tract that we expect to be the subject of Atlas
Energy drilling. When wells are developed on this acreage, we stand to share in
any profit they create. Additionally, we retained the right to participate in up
to ten wells with a 25% working interest without promote.
OUR CURRENT FOCUS
With the closing of these three acquisitions, our management is now able to
focus the majority of its efforts on growing our company. In addition to capital
raising we are also continuing to focus our short-term efforts on five distinct
areas, including:
o Investment partnership management pursuant to which we will seek to drill
additional wells, concentrating on the East Tennessee portion of the
Southern Appalachian Basin with emphasis in horizontal drilling in
Devonian Shale,
o Organically growing production through drilling for own benefit on
existing leases, leveraging our 100,000 plus well log database with a view
towards retaining the majority of working interest in the new wells,
o Expanding our contract drilling and service capabilities and revenues,
including through our drilling contract with Atlas Energy and through the
purchase of an additional vertical and horizontal drilling rig,
o Expand our leasing capabilities by implementing strategies unique to the
gas and oil industry to secured leases and enter into new partnerships to
increase monetary capabilities, and
o Increase our overall production through economically viable acquisitions
of additional wells.
19
Our ability, however, to implement one or more of these goals is dependent both
upon the availability of additional capital. To fully expand our operations as
set forth above, we will need up to $50 million to fund the balance of our
expansion plans. To provide the expansion capital, we are seeking to leverage
our existing assets as well as seek to raise additional capital through the sale
of equity and/or debt securities. To facilitate these capital raising efforts,
during fiscal 2009 we retained a broker-dealer and member of FINRA to assist us
and are raising capital in a private offering. Our management has devoted
significant time to these efforts during 2009 and in the first two quarters of
2010, we have had limited success in raising some of these funds. Our ability to
fully implement our expanded business model, however, is dependent on our
ability to raise the additional capital on a timely basis so as to take
advantage of the opportunities we presently have available to us. We face a
number of obstacles, however, in raising the additional capital, including the
relative size of our company, the low trading price of our stock and the lack of
liquidity in the capital markets in general and small-cap companies in
particular. If we are not able to raise the capital as required, we will be
unable to fully implement our expanded business model and will need to delay
future expansion as well as further purchases of leases.
RESULTS OF OPERATIONS
REVENUES
--------
The following table shows the components of our revenues for the three and six
months ended October 31, 2009 and 2008, together with their percentages of total
revenue in 2009 and percentage change on a period-over-period basis.
For the Three Months Ended
------------------------------------------------
October 31, % of October 31,
2009 Revenue 2008 % Change
----------- ------- ----------- --------
REVENUES
Oil and gas revenue $ 212,225 64% $ 196,147 8%
Service and drilling revenue 121,179 36% 288,429 (58)%
--------- ---------
Total Revenue .............. $ 333,404 100% $ 484,576 (31)%
For the Six Months Ended
------------------------------------------------
October 31, % of October 31,
2009 Revenue 2008 % Change
----------- ------- ----------- --------
REVENUES
Oil and gas revenue $ 616,617 72% $ 410,900 50%
Service and drilling revenue 244,407 28% 288,941 (15)%
--------- ---------
Total Revenue .............. $ 861,024 100% $ 699,841 23%
Oil and gas revenue represents revenues generated from the sale of oil and
natural gas produced from the wells in which we have a partial ownership
interest. Oil and gas revenue is recognized as income as production is extracted
and sold. We reported an 8% increase in oil and gas revenues for the three
months ended October 31, 2009 over the three months ended October 31, 2008, and
a 50% increase in oil and gas revenues for the six months ended October 31, 2009
over the six months ended October 31, 2008. The three month periods were only
grew slightly even though we had more wells during the quarter ended October 31,
2009, but this was offset by the lower oil and gas prices experienced during the
current quarter. The six month increase in oil and gas revenue was due to the
Company having more wells producing oil and gas in 2009,
20
notwithstanding the end of period decrease in both oil and gas prices. At
October 31, 2009 oil was priced at $66.37 per barrel versus $72.75 at October
31, 2008 and at October 31, 2009 natural gas was $3.35 per Mcf as compared to
$7.16 per Mcf at October 31, 2008. However, we had 194 producing oil wells and
263 producing gas wells on October 31, 2009 compared to 20 producing oil wells
and 30 producing gas wells on October 31, 2008. For the three months ended
October 31, 2009 we produced 3,482 barrels of oil and 23,527 Mcf of natural gas
as compared to 1,277 barrels of oil and 10,416 Mcf of natural gas during the
three months ended October 31, 2008. For the six months ended October 31, 2009
we produced 5,931 barrels of oil and 42,658 Mcf of natural gas as compared to
2,384 barrels of oil and 20,758 Mcf of natural gas during the three months ended
October 31, 2008.
Service and drilling revenue represents revenues generated from drilling,
maintenance and repair of third party wells. Service and drilling income is
recognized at the time it is both earned and we have a contractual right to
receive the revenue. Our service and drilling revenue decreased 58% for the
three months ended October 31, 2009 as compared to the three months ended
October 31, 2008 and decreased 15% for the six months ended October 31, 2009 as
compared to the six months ended October 31, 2008. During the six months ended
October 31, 2009 we had no drilling rig income, compared to $208,325 for the
three months ended October 31, 2008 and $208,325 for the six months ended
October 31, 2008 however subsequent to the quarter we are actively engaged in a
ten well drilling program for Atlas Energy Resources, LLC.
DIRECT EXPENSES
---------------
The following tables show the components of our direct expenses for the three
and six months ended October 31, 2009 and 2008. Percentages listed in the table
reflect margins for each component of direct expenses and percentages of total
revenue for each component of other expenses.
For the Three Months Ended
------------------------------------------------
October 31, October 31,
2009 Margin 2008 Margin
----------- ------ ----------- --------
DIRECT EXPENSES
Oil and gas ................ $ 4,333 98% $ 28,988 85%
Service and drilling ....... 214,153 (77)% 395,847 (37)%
Depletion expense .......... 177,183 n/a 32,205 n/a
--------- ---------
Total direct expenses ...... $ 395,669 (19)% $ 457,040 6%
For the Six Months Ended
------------------------------------------------
October 31, October 31,
2009 Margin 2008 Margin
--------- ------ --------- --------
DIRECT EXPENSES
Oil and gas ................ $ 28,377 95% $ 58,399 86%
Service and drilling ....... 458,653 (88)% 502,346 (74)%
Depletion expense .......... 294,617 n/a 68,457 n/a
--------- ---------
Total direct expenses ...... $ 781,647 9% $ 629,202 10%
21
We follow the successful efforts method of accounting for our oil and gas
activities. Accordingly, costs associated with the acquisition, drilling and
equipping of successful exploratory wells are capitalized. During the six months
ended October 31, 2009 we capitalized approximately $21,511 of costs associated
with the acquisition, drilling and equipping of these wells as compared to
$310,000 during the six months ended October 31, 2008. However, geological and
geophysical costs, delay and surface rentals and drilling costs of unsuccessful
exploratory wells are charged to expense as incurred and are included in the
cost of service and drilling revenue. Finally, costs of drilling development
wells are capitalized. Upon the sale or retirement of oil and gas properties,
the cost thereof and the accumulated depreciation or depletion are removed from
the accounts and any gain or loss is credited or charged to operations.
The cost of service and drilling revenue represents direct labor costs of
employees associated with these services, as well as costs associated with
equipment, parts and repairs. During the three and six months ended October 31,
2009 and 2008, we spent significant time and expense maintaining and repairing
our drilling equipment. This is the primary reason this category reflects the
negative margins.
Depletion of capitalized costs of proved oil and gas properties is provided on a
pooled basis using the units-of-production method based upon proved reserves.
Acquisition costs of proved properties are amortized by using total estimated
units of proved reserves as the denominator. All other costs are amortized using
total estimated units of proved developed reserves. During the three and six
months ended October 31, 2009 depletion expense was $177,183 or 53% of total
revenue and $294,617 or 34% of total revenue, respectively, as compared to 7%
and 10%, respectively, for the three and six months ended October 31, 2008. As a
result of these components, total direct expenses reflected a negative margin of
19% for the three months ended October 31, 2009, and a positive margin of 9% for
the six months ended October 31, 2009. This represented a decreased margin of
25% experienced for the three months ended October 31, 2008 but a decrease of
only 1% for the six months ended October 31, 2008.
Other EXPENSES (REVENUES)
-------------------------
The following tables show the components of our other expenses (revenues) for
the three and six months ended October 31, 2009 and 2008. Percentages listed in
the table reflect percentages of total revenue for each component of other
expenses.
For the Three Months Ended
--------------------------------------------------
October 31, % of October 31, % of
2009 Revenue 2008 Revenue
----------- ------- ------------ --------
OTHER EXPENSES (REVENUES)
Selling, general and administrative .... $ 1,028,840 309% $ 713,596 147%
Depreciation and amortization .......... 100,240 30% 65,072 13%
Interest expense, net of interest income (1,240) <1% (1,532) <1%
Loan fees and costs .................... 62,742 19% 46,382 10%
Gain on sale of equipment .............. - n/a (8,550) n/a
Gain on sale of oil and gas properties . - n/a - n/a
Gain on acquisitions ................... (1,057,564) (317)% - n/a
----------- ------------
Total other expenses (revenues) ........ $ 133,018 40% $ 814,968 168%
22
For the Six Months Ended
--------------------------------------------------
October 31, % of October 31, % of
2009 Revenue 2008 Revenue
----------- ------- ------------ --------
OTHER EXPENSES (REVENUES)
Selling, general and administrative .... $ 1,681,232 195% $ 1,280,918 183%
Depreciation and amortization .......... 211,967 25% 136,389 19%
Interest expense, net of interest income 3,658 <1% 20,014 3%
Loan fees and costs .................... 115,378 13% 74,248 11%
Gain on sale of equipment .............. 9,755 1% (8,550) n/a
Gain on sale of oil and gas properties . - n/a (11,715,570) (1,674)%
Gain on acquisitions ................... (1,818,764) (211)% - n/a
----------- ------------
Total other expenses (revenues) ........ $ 203,226 24% $(10,212,551) (1,459)%
OTHER EXPENSES (REVENUES)
Selling, general and administrative expense includes salaries, general overhead
expenses, insurance costs, professional fees and consulting fees. The increase
for the three and six months ended October 31, 2009 as compared to the three and
six months ended October 31, 2008 primarily reflects the write-off of prepaid
offering costs of $344,795 in the second fiscal quarter associated with the
Miller Rig & Equipment, LLC company. The offering associated with this company
ended on December 1, 2009 and no funds were raised. As a percentage of total
revenue, selling, general and administrative expense increased to 309% due to
this one-time write-off for the three months ended October 31, 2009 as compared
to 147% for the three months ended October 31, 2008. As a percentage of total
revenue, selling, general and administrative expense increased to 195% for the
six months ended October 31, 2009 as compared to 183% for the six months ended
October 31, 2008 due to this same one-time write-off.
Depreciation and amortization expenses reflect the usage of our fixed assets
over time. The increase in depreciation and amortization for the three and six
months ended October 31, 2009 as compared to the three and six months ended
October 31, 2008 reflects an increase in the amount of depreciation due to the
purchase of equipment as well as the recording of the equipment from the new
acquisitions, as previously mentioned.
Loan fees and costs of $62,741 and $115,377 for the three and six months ended
October 31, 2009, respectively, primarily represents non-cash expenses related
to the fair value of warrants owed in connection with a prior financing
transaction.
During the six months ended October 31, 2008 we recorded a gain of $11,715,570
on the sale of the oil and gas leases to Atlas Energy and the concurrent
settlement of the Wind City litigation as described elsewhere herein. As part of
the settlement we repurchased 2,900,000 shares of our common stock for
$4,350,000 which is reflected on our balance sheet as shares subject to
redemption. As a result of the one-time settlement transaction, we reported a
net income of $9,709,430 for the six months ended October 31, 2008. We do not
anticipate that we will enter into similar transactions in future periods.
As described earlier in this report, during the three and six months ended
October 31, 2009 we recorded an original loss of $67,545 in the three months
ended July 31, 2009, and subsequent gain of $1,057,564 in the three months ended
October 31, 2009 in connection with our acquisition of assets from KTO and we
recorded a gain of $828,745 during the three months ended July 31, 2009 in
connection with our acquisitions of ETC and LLC. The net gain for the three
months ended October 31, 2009 was $1,057,564 and $1,818,764 for the six months
ended October 31, 2009.
23
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate adequate amounts of cash to
meet the enterprise's needs for cash. At October 31, 2009 we had a working
capital deficit of $1,279,059 as compared to a working capital deficit of
$370,811 at April 30, 2009. This increase in capital deficit is primary due to
losses from operations.
Net cash used by operating activities for the six months ended October 31, 2009
period was $1,021,796. This primarily reflects the cash paid for the costs of
revenues and selling, general and administrative expense in excess of revenues
received for the period. Net cash used by operating activities for the six
months ended October 31, 2008 primarily reflects cash used to reduce our
accounts payables and accrued expenses as a result of the settlement of the Wind
City litigation and an increase in our income taxes payable.
Net cash provided by investing activities for the six months ended October 31,
2009 of $28,427 reflects the net cash we received from the sale of equipment and
oil and gas properties, partially offset by the purchase of additional equipment
and oil and gas properties. Net cash provided by investing activities for the
six months ended October 31, 2008 reflects the net cash we received from the
Atlas Energy transaction offset by the funds used to satisfy certain notes
payables and accounts payable, purchase additional drilling equipment and
vehicles and funds used for the purchase of a lease and capitalized costs
associated with the receipt of two producing gas wells from Wind City.
Net cash provided by financing activities of $1,041,641 for the six months ended
October 31, 2009 primarily reflects cash received from the proceeds of
borrowings of $300,000, the sale of stock for $336,875, cash acquired through
acquisitions of $203,993 and the net reduction of prepaid offering costs of
$213,623. Net cash used in financing activities for the six months ended October
31, 2008 reflects the repayment of notes payable and the repurchase of shares of
our common stock as part of the Wind City settlement offset by proceeds from
borrowings to finance the purchase of equipment.
Within the next 12 months, we have debt obligations that total $2,173,459. Of
this, the most significant piece is a note payable to Commercial Bank, secured
by cash and due December 22, 2009. As this note is secured by cash, this
obligation, if still outstanding at that time, will either be renewed or paid
off using the cash security. The Company believes it will have sufficient funds
to honor its obligations on the remaining $323,459.
In order to implement our business strategy to expand our operations we will
need to raise additional capital. During fiscal 2009 we also commenced a capital
raising effort to raise funds to purchase drilling and work over rigs and other
equipment. The additional equipment could also be used on the Atlas Energy
agreement but would be available for proprietary drilling. This private
offering, however, was closed on December 1, 2009 we did not sell any securities
in this offering. We now seek alternative sources of financing for the purchase
of the additional rigs and equipment and there are no assurances that this
capital would be available to us.
In addition, our long-term cash flows are subject to a number of variables
including the level of production and prices as well as various economic
conditions that have historically affected the oil and gas business. A material
drop in oil and gas prices has recently reduced our liquidity. At October 31,
2009 oil was priced at $77.04 per barrel versus $68.10 at October 31, 2008 and
at October 31, 2009 natural gas was $5.05 per Mcf as compared to $6.78 per Mcf
at October 31, 2008. Also, a reduction in production and reserves would reduce
our operating results in future periods. We operate in an environment with
numerous financial and operating risks, including, but not limited to, the
inherent risks of the search for, development and production of oil and gas, the
ability to buy properties and sell production at prices which provide an
attractive return and the highly competitive nature of the industry. While we do
not anticipate a worse case scenario, if we are not successful in securing new
capital and the price of oil and gas does not rise significantly and if we were
unable to secure more drilling and servicing contracts, we would need to
consider reducing overhead in an attempt to achieve an operating profit, based
on the revenue of our existing producing oil and gas wells.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable to a smaller reporting company.
ITEM 4T. CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and our Chief Financial Officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) under the Securities
Exchange Act of 1934, as amended, at the end of the period covered by this
report (the "Evaluation Date"). Based on this evaluation, our Chief Executive
Officer and our Chief Financial Officer have concluded as of the Evaluation Date
that our disclosure controls and procedures were effective such that the
information relating to our company required to be disclosed in our reports
filed with the Securities and Exchange Commission (i) is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms
and (ii) is accumulated and communicated to our management, including our Chief
Executive Officer and our Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
Our management, including the Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures will
prevent all error and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control system's objectives will be met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, have
been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. The design of any system of controls is based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions.
There was no change in our internal control over financial reporting identified
in connection with the evaluation that occurred during our last fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 1A. RISK FACTORS.
Not applicable to a smaller reporting company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
31.1 Rule 13a-14(a)/15d-14(a) certificate of Chief Executive Officer 2002
31.2 Rule 13a-14(a)/15d-14(a) certificate of Chief Financial Officer
32.1 Section 1350 certification of Chief Executive Officer
32.2 Section 1350 certification of Chief Financial Officer
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MILLER PETROLEUM, INC.
Date: December 21, 2009 By: /s/ Scott M. Boruff
-------------------
Scott M. Boruff
Chief Executive Officer,
principal executive officer
Date: December 21, 2009 By: /s/ Paul W. Boyd
----------------
Paul W. Boyd
Chief Financial Officer, principal
financial and accounting officer
2
