UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended July 31, 2014

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______.

 

Commission file number: 000-49760

 

PETRO RIVER OIL CORP.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		98-0611188
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

 

1980 Post Oak Blvd., Suite 2020, Houston, TX 77056

(Address of Principal Executive Offices, Zip Code)

 

(469) 828-3900

(Registrant’s Telephone Number, Including Area Code)

 

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 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). 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]

 

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.

 

Class		Outstanding at September 22, 2014
Common Stock, $.00001 par value per share		818,567,746 shares

 

 

 

TABLE OF CONTENTS

 

			Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements		F-1
	Condensed Consolidated Balance Sheets		F-1
	Condensed Consolidated Statements of Operations		F-2
	Condensed Consolidated Statements of Cash Flows		F-3
	Notes to Condensed Consolidated Financial Statements		F-4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation		3
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		9
Item 4.	Controls and Procedures		9
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings		10
Item 1A.	Risk Factors		10
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		10
Item 3.	Default Upon Senior Securities		10
Item 4.	Mine Safety Disclosures		10
Item 5.	Other Information		10
Item 6.	Exhibits		11
SIGNATURES			12

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

Petro River Oil Corp. and Subsidiaries

Condensed Consolidated Balance Sheets

 

		As of
		July 31, 2014				April 30, 2014
		(unaudited)
Assets
Current Assets:
Cash and cash equivalents		$	3,407,129			$	8,352,949
Accounts receivable			818,984				51,979
Prepaid expenses and other current assets			32,977				40,297
Total Current Assets			4,259,090				8,445,225
Oil and gas assets, net			17,155,285				8,941,592
Property, plant and equipment, net of accumulated depreciation of $315,238 and $314,308			3,796				930
Other assets			6,000				6,000
Total Other Assets			17,165,081				8,948,522
Total Assets		$	21,424,171			$	17,393,747
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses		$	950,677			$	480,637
Current portion of asset retirement obligations			484,939				481,658
Total Current Liabilities			1,435,616				962,295
Long-term liabilities:
Asset retirement obligations, net of current portion			422,254				336,352
Total Liabilities			1,857,870				1,298,647
Commitments and contingencies
Stockholders’ Equity:
Preferred Shares - 5,000,000 authorized; par value $0.00001 per share			-				-
Preferred B shares - 29,500 authorized; 0 issued with a $100 stated value, par value $0.00001 per share			-				-
Common shares - 2,250,000,000 authorized; par value $0.00001 per share; issued and outstanding; 818,567,746 and 818,567,746, respectively			8,186				8,186
Additional paid-in capital			27,937,289				27,748,045
Accumulated deficit			(12,976,463	)			(11,661,131	)
Total Stockholders’ Equity			14,969,012				16,095,100
Non-controlling interests			4,597,289				-
Total Stockholders’ Equity			19,566,301				16,095,100
Total Liabilities and Stockholders’ Equity		$	21,424,171			$	17,393,747

 

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

 

 

Petro River Oil Corp. and Subsidiaries

Condensed Consolidated Statements of Operations

(unaudited)

 

		For the Three Months				For the Three Months
		Ended				Ended
		July 31, 2014				July 31, 2013
Operations
Revenues
Oil and natural gas sales		$	666,276			$	104,840
Total Revenues			666,276				104,840
Operating Expenses
Operating			340,668				64,079
General and administrative			1,861,532				2,219,028
Depreciation, depletion and accretion			182,152				26,354
Total Expenses			2,384,352				2,309,461
Operating loss			(1,718,076	)			(2,204,621	)
Other income (expense)			33				(5	)
Net Loss			(1,718,043	)			(2,204,626	)
Net Loss attributable to non-controlling interest			(402,711	)			-
Net Loss attributable to Petro River Oil Corp. and Subsidiaries		$	(1,315,332	)		$	(2,204,626	)
Net Loss per Common Share Basic and Diluted		$	(0.00	)		$	(0.00	)
Weighted Average Number of Common Shares Outstanding - Basic and Diluted			818,567,746				737,311,224

 

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

 

 

Petro River Oil Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

		For the Three Months				For the Three Months
		Ended				Ended
		July 31, 2014				July 31, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(1,718,043	)		$	(2,204,626	)
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation			189,244				1,539,500
Depreciation, depletion and amortization			169,510				13,098
Accretion of asset retirement obligation			12,642				13,256
Changes in operating assets and liabilities:
Accounts receivable			(767,005	)			(13,736	)
Prepaid expenses and other assets			7,320				9,001
Accounts payable and accrued expenses			470,040				274,761
Net Cash Used in Operating Activities			(1,636,292	)			(368,746	)
Cash Flows From Investing Activities:
Capitalized expenditures on oil and gas assets			(8,305,732	)			(295,965	)
Purchase of office equipment			(3,796	)			-
Net Cash Used in Investing Activities			(8,309,528	)			(295,965	)
Cash Flows From Financing Activities:
Cash received from non-controlling interest contribution			5,000,000				-
Net Cash Provided by Financing Activities			5,000,000				-
Change in cash and cash equivalents			(4,945,820	)			(664,711	)
Cash and cash equivalents, beginning of period			8,352,949				5,703,082
Cash and cash equivalents, end of period		$	3,407,129			$	5,038,371
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes		$	-			$	-
Interest paid		$	-			$	-
Non-cash investing and financing activities:
Conversion of accrued settlement liability into common stock		$	-			$	80,000
Acquisition of oil and gas assets		$	76,541			$	-

 

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

 

 

PETRO RIVER OIL CORP.

Notes to the Condensed Consolidated Financial Statements

For the three months ended July 31, 2014 and 2013

 

1.

Organization and Liquidity:

 

Petro River Oil Corp (the “Company”) is an enterprise engaged in the exploration and exploitation of heavy oil properties. The Company’s principal administrative office is located in Houston, Texas and its principal operations are in Oklahoma, Kansas and Western Missouri. The Company also has an office in New York, New York.

 

Petro River Oil Corp. is an independent exploration and production company with a focus on drilling, completion, recompletions, and applying modern technologies to both conventional and unconventional oil and gas assets. The Company’s core holdings are in the Mid Continent region in Oklahoma and Kansas. The Company’s operations are currently focused on the Mississippi Lime Play, capitalizing on the experience, knowledge, and drilling techniques of its team. The Company is driven to utilize our expertise both in the region and in similar formations to exploit hydrocarbon prone resources with tight and/or challenging characteristics in order to create value for the company and our shareholders.

 

Petro River Oil LLC (“Petro”) was incorporated under the laws of the State of Delaware on March 3, 2011. Through proceeds received from the issuance of various promissory notes, on February 1, 2012, Petro purchased various interests in oil and gas leases, wells, records, data and related personal property located along the Mississippi Lime play in the state of Kansas from Metro Energy Corporation (“Metro”), a Louisiana company, and other interrelated entities, which were in financial distress. These assets were purchased by Petro from Metro through a court approved order as Metro was undergoing Chapter 11 Bankruptcy proceedings as a Debtor-In-Possession of these various oil and gas assets. Petro purchased these assets for cash consideration of $2,000,000 as well as a 25% non-managing membership interest in the Company. Subsequent to the Metro purchase the Company engaged Energy Source Advisors to renew a number of the leases acquired in the Metro purchase and to lease additional acreage. As a result of the asset purchase from Metro and the completion of the additional lease renewals and additional acreage purchases, the Company obtained a total of 115,000 gross/85,000 net acres of leases, having unproven reserves at the time of acquisition, in the Mississippi Lime in Southeast Kansas for total cost of $12.2 million.

 

On April 23, 2013, the Company executed and consummated a securities purchase agreement (the “Securities Purchase Agreement”) by and among the Company, Petro, and the investors in Petro (the “Investors,”), namely, the holders of outstanding secured promissory notes of Petro (the “Notes”), and the members of Petro holding membership interests in Petro (the “Membership Interests”, and, together with the Notes, the “Acquired Securities”) sold by the Company (the “Share Exchange”).

 

In the Share Exchange, the Investors exchanged their Acquired Securities for 591,021,011 newly issued shares of common stock of the Company (“Common Stock”). As a result, upon completion of the Share Exchange, Petro became the Company’s wholly-owned subsidiary.

 

As a result of the Share Exchange, the Company acquired 100% of the member units of Petro and consequently, control of the business and operations of Petro. Under generally accepted accounting principles in the United States, (“U.S. GAAP”) because Petro’s former members and note holders held 80% of the issued and outstanding shares of the Company as a result of the Share Exchange, Petro is deemed the accounting acquirer while the Company remains the legal acquirer. Petro adopted the fiscal year of the Company. Prior to the Share Exchange, all historical financial statements presented are those of Petro. The equity of the Company is the historical equity of Petro, retrospectively restated to reflect the number of shares issued by the Company in the transaction.

 

 

Investment in Bandolier Energy LLC and Acquisition of Spyglass Energy Group, LLC / Pearsonia West Concession

 

On May 30, 2014, the Company entered into a Subscription Agreement, (the “Subscription Agreement”), pursuant to which the Company was issued a 50% interest in Bandolier Energy, LLC (“Bandolier”) in exchange for a capital contribution of $5,000,000. The Company has the right to appoint a majority of the board of managers of Bandolier, pursuant to the Amended and Restated Limited Liability Company Agreement of Bandolier. The Company’s Executive Chairman is a manager of, and investor in, Pearsonia West Investment Group, LLC (“PWIG”), a special purpose vehicle formed for the purpose of investing in Bandolier with the Company and Ranger Station. PWIG was issued 44% interest in Bandolier for cash consideration of $4,400,000. Ranger Station was issued 6% interest in Bandolier for cash consideration of $600,000. In connection with PWIG’s investment in Bandolier, the Company and PWIG entered into an agreement, dated May 30, 2014, granting the members of PWIG an option, exercisable at any time prior to May 30, 2017, to exchange their pro rata share of the Bandolier interests for shares of the Company’s common stock, at a price of $0.08 per share of common stock, subject to adjustment (the “Option”). The Option, if fully exercised, would result in the Company issuing 55,000,000 shares of its common stock to the members of PWIG.

 

The Company has operational control along with a 50 percent ownership interest in the newly formed Bandolier. As a result, the Company consolidates Bandolier. The remaining 50 percent non–controlling interest represents the equity investment from PWIG and Ranger Station. The Company will allocate the proportionate share of the net operating income/loss to both the Company and the non-controlling interest.

 

Subsequent the initial capitalization of Bandolier, Bandolier acquired for a purchase price of $8,712,893 less a $407,161 clawback, all of the issued and outstanding equity of Spyglass Energy Group, LLC (“Spyglass”), the owner of oil and gas leases, leaseholds, lands, and options and concessions thereto located in Osage County, Oklahoma. Spyglass controls a significant contiguous oil and gas acreage position in Northeastern Oklahoma, consisting of approximately 106,000 acres, with substantial original oil in place, stacked reservoirs, as well as exploratory and development opportunities that can be accessed through both horizontal and vertical drilling. Significant infrastructure is already in place including 32 square miles of 3D seismic, 3 phase power, a dedicated sub-station as well as multiple oil producing horizontal wells.

 

The Company recorded the purchase of Spyglass using the acquisition method of accounting as specified in ASC 805 “Business Combinations.” This method of accounting requires the acquirer to (i) record purchase consideration issued to sellers in a business combination at fair value on the date control is obtained, (ii) determine the fair value of any non-controlling interest, and (iii) allocate the purchase consideration to all tangible and intangible assets acquired and liabilities assumed based on their acquisition date fair values. Further, the Company commenced reporting the results of Spyglass on a consolidated basis with those of the Company effective upon the date of the acquisition.

 

The following tables summarizes fair values of the net liabilities assumed and the allocation of the aggregate fair value of the purchase consideration, and non-controlling interest and net liabilities to assumed identifiable and unidentifiable intangible assets. The fair value allocation is based on management’s preliminarily best estimates utilizing potential production and future cash flows:

 

Purchase consideration:
Net cash provided		$	8,305,732
Liabilities assumed			76,541
Aggregate fair value of enterprise			8,382,273
Purchase price allocation:
Oil and gas assets – proved developed – estimated			2,460,632
Oil and gas assets – proved undeveloped – estimated			5,921,641
Asset retirement obligations – estimated			(76,541	)

 

The following table summarizes, on an unaudited pro forma basis, the results of operations of the Company as though the acquisition had occurred as of May 1, 2013. The pro forma amounts presented are not necessarily indicative of either the actual operation results had the acquisition transaction occurred as of May 1, 2013.

 

			July 31, 2014				July 31, 2013
Revenues		$	1,033,092			$	1,911,205
Net loss			(1,506,454	)			(1,205,473	)
Loss per share of common share - Basic and diluted			(0.00	)			(0.00	)
Weighted average number of common shares Outstanding - Basic and diluted			818,567,746				737,311,224

 

At July 31, 2014 the non–controlling interest in Bandolier was as follows:

 

Non–controlling interest at April 30, 2014		$	-
Acquisition of non–controlling interest in Bandolier			5,000,000
Non–controlling share of net loss			(402,711	)
Non–controlling interest at July 31, 2014		$	4,597,289

  

 

Liquidity and Management Plans

 

The Company is focused on developing its core position in the Mississippi Lime, specifically its recently acquired Pearsonia West Concession in Osage County. Management’s current plans in the Mississippi Lime play are focused on Pearsonia West, but Petro River also owns additional Mississippi Lime acreage in Kansas. Over the last 12 months the Company has continued to build out its leadership and technical team with individuals with extensive in the Mississippi Lime play. Additionally, the Company has been in discussions with industry partners to capitalize and develop acreage in the Mississippi Lime. The Company continues to seek out joint venture partners and acquisition targets.

 

Non-core projects related to the Company’s legacy heavy oil reservoirs are still in technical review but a determination has been made to continue testing pilot technologies and processes on the Missouri heavy oil assets. In Missouri, the Company has continued to analyze reservoir data and testing results to determine if any of these technologies or processes may lead to a viable and economic development plan for the understanding and test phases to develop an economic heavy oil production reserve base. The Company is leveraging executive vice president Luis Vierma’s experience in heavy oil which he acquired during his time as vice president of Exploration and Production at Petróleos de Venezuela, S.A, (“PDVSA”).

 

The ultimate goal of the management of the Company is to maximize shareholder value. Specific targets include: increasing production by developing its acreage, increasing profitability margins by evaluating and optimizing its production, and executing its business plan to increase property values, prove its reserves, and expand its asset base.

 

At July 31, 2014, the Company had working capital of approximately $2.8 million and has incurred losses since it commenced operations and utilized cash in its operating activities to date. In addition, Petro has a limited operating history. At July 31, 2014, the Company had cash and cash equivalents of approximately $3.4 million. Management believes that the current level of working capital is sufficient to maintain current operations in Kansas, Oklahoma and Missouri as well as the planned added operations for the next 12 months. Management intends to continue to raise capital through debt and equity instruments in order to achieve its business plans. Management can provide no assurances that the Company will be successful in capital raising efforts. In order to conserve capital, from time to time, management may defer certain development activity.

 

2.

Basis of Preparation:

 

The condensed consolidated financial statements and accompanying footnotes are prepared in accordance with U.S. GAAP and include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. Non–controlling interest represents the minority equity investment in the Company’s subsidiaries, plus the minority investors’ share of the net operating results and other components of equity relating to the non–controlling interest.

 

These condensed consolidated financial statements include the below subsidiaries:

 

Petro River Oil LLC, Petro Spring, LLC, PO1, LLC and MegaWest Energy USA Corp. and its wholly owned subsidiaries:

 

MegaWest Energy Texas Corp.

MegaWest Energy Kentucky Corp.

MegaWest Energy Missouri Corp.

MegaWest Energy Kansas Corp.

MegaWest Energy Montana Corp.

 

Also contained in the condensed consolidated financial statements is the financial information of the Company’s 50% owned subsidiary, Bandolier Energy LLC.

 

The unaudited condensed consolidated financial information furnished herein reflects all adjustments, consisting solely of normal recurring items, which in the opinion of management are necessary to fairly state the financial position of the Company and the results of its operations for the periods presented. This report should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended April 30, 2014 filed with the Securities and Exchange Commission (the “SEC”) on August 13, 2014. The Company assumes that the users of the interim financial information herein have read or have access to the audited financial statements for the preceding fiscal year and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. Accordingly, footnote disclosure, which would substantially duplicate the disclosure contained in the Company’s Form 10-K for the year ended April 30, 2014 has been omitted. The results of operations for the interim periods presented are not necessarily indicative of results for the entire year ending April 30, 2015.

 

 

3.

Significant Accounting Policies:

 

(a)

Use of Estimates:

 

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include volumes of oil and natural gas reserves, abandonment obligations, impairment of oil and natural gas properties, depreciation and accretion, income taxes, fair value of financial instruments, and contingencies.

 

Oil and gas proven reserve estimates, which are the basis for unit-of-production depletion and the full cost ceiling test, have a number of inherent uncertainties. The accuracy of any reserve estimate is a function of the quality of available data and of 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 gas that are ultimately recovered. In addition, reserve estimates are vulnerable to changes in prices of crude oil and gas. Such prices have been volatile in the past and can be expected to be volatile in the future. As of July 31, 2014, the Company had proven reserves in Oklahoma in relation to the Bandolier transaction.

 

(b)

Cash and Cash Equivalents:

 

Cash and cash equivalents include all highly liquid monetary instruments with original maturities of three months or less when purchased to be cash equivalents. These investments are carried at cost, which approximates fair value. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash deposits. The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation (“FDIC”). At times, the Company’s cash and cash equivalent balances may be uninsured or in amounts that exceed the FDIC insurance limits.

 

(c)

Oil and Gas Operations:

 

Oil and Gas Properties: The Company uses the full-cost method of accounting for its exploration and development activities. Under this method of accounting, the costs of both successful and unsuccessful exploration and development activities are capitalized as oil and gas property and equipment. Proceeds from the sale or disposition of oil and gas properties are accounted for as a reduction to capitalized costs unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves of oil and natural gas attributable to a country, in which case a gain or loss would be recognized in the condensed consolidated statements of operations. All of the Company’s oil and gas properties are located within the continental United States, its sole cost center.

 

Oil and gas properties may include costs that are excluded from costs being depleted. Oil and gas costs excluded represent investments in unproved properties and major development projects in which the Company owns a direct interest. These unproved property costs include non-producing leasehold, geological and geophysical costs associated with leasehold or drilling interests and in process exploration drilling costs. All costs excluded are reviewed at least annually to determine if impairment has occurred.

 

The Company accounts for its unproven long-lived assets in accordance with Accounting Standards Codification (“ASC”) Topic 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.” ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. As of April 30, 2014, management engaged a third party to perform an independent study of the oil and gas assets. Management concluded that the Montana assets was impaired by $75,000 and the Kansas assets were impaired by $4,638,973. The Company recorded $4,713,973 impairment to the consolidated statement of operations for the year ended April 30, 2014.

 

 

Proved Oil and Gas Reserves: In accordance with Rule 4-10 of SEC Regulation S-X, proved oil and gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. All of the Company’s oil and gas properties with proven reserves were impaired to the salvage value prior to the Bandolier transaction. The price used to establish economic producibility is the average price during the 12-month period preceding the end of the entity’s fiscal year and calculated as the un-weighted arithmetic average of the first-day-of-the-month price for each month within such 12-month period. Upon completion of the Bandolier transaction, the Company acquired $2,460,632 in proved developed oil and gas assets and $5,921,641 in proven undeveloped oil and gas assets.

 

Depletion, Depreciation and Amortization: Depletion, depreciation and amortization is provided using the unit-of-production method based upon estimates of proved oil and gas reserves with oil and gas production being converted to a common unit of measure based upon their relative energy content. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is deducted from the capitalized costs to be amortized. Once the assessment of unproved properties is complete and when major development projects are evaluated, the costs previously excluded from amortization are transferred to the full cost pool and amortization begins. The amortizable base includes estimated future development costs and, where significant, dismantlement, restoration and abandonment costs, net of estimated salvage value.

 

In arriving at rates under the unit-of-production method, the quantities of recoverable oil and natural gas reserves are established based on estimates made by the Company’s geologists and engineers which require significant judgment, as does the projection of future production volumes and levels of future costs, including future development costs. In addition, considerable judgment is necessary in determining when unproved properties become impaired and in determining the existence of proved reserves once a well has been drilled. All of these judgments may have significant impact on the calculation of depletion expenses. There have been no material changes in the methodology used by the Company in calculating depletion, depreciation and amortization of oil and gas properties under the full cost method during the three months ended July 31, 2014 and 2013.

 

(d)

Asset Retirement Obligations:

 

The Company recognizes a liability for the estimated fair value of site restoration and abandonment costs when the obligations are legally incurred and the fair value can be reasonably estimated. The fair value of the obligations is based on the estimated cash flow required to settle the obligations discounted using the Company’s credit adjusted risk-free interest rate. The obligation is recorded as a liability with a corresponding increase in the carrying amount of the oil and gas assets. The capitalized amount will be depleted on a unit-of-production method. The liability is increased each period, or accretes, due to the passage of time and a corresponding amount is recorded in the condensed consolidated statements of operations.

 

Revisions to the estimated fair value would result in an adjustment to the liability and the capitalized amount in oil and gas assets.

 

(e)

Oil and Gas Revenue:

 

Sales of oil and gas, net of any royalties, are recognized when oil has been delivered to a custody transfer point, persuasive evidence of a sales arrangement exists, the rights and responsibility of ownership pass to the purchaser upon delivery, collection of revenue from the sale is reasonably assured, and the sales price is fixed or determinable. The Company sells oil and gas on a monthly basis. Virtually all of its contracts’ pricing provisions are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, the quality of the oil and gas, and prevailing supply and demand conditions, so that the price of the oil and gas fluctuates to remain competitive with other available oil supplies.

 

 

(f)

Per Share Amounts:

 

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, which is the case for the three months ended July 31, 2014 and 2013 presented in these condensed consolidated financial statements, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

 

The Company had the following common stock equivalents at July 31, 2014 and 2013:

 

As at		July 31, 2014				July 31, 2013
Stock Options			87,938,281				290,000
Stock Purchase Warrants			40,625,000				-
Compensation Warrants			-				230,000
			128,563,281				520,000

 

(g)

Fair Value of Financial Instruments:

 

All financial instruments, including cash and cash equivalents, accounts receivable and accounts payable and accrued expenses are to be recognized on the condensed consolidated balance sheet initially at carrying value. The carrying value of these assets approximates their fair value due to their short-term maturities.

 

At each balance sheet date, the Company assesses financial assets for impairment with any impairment recorded in the condensed consolidated statement of operations. To assess loans and receivables for impairment, the Company evaluates the probability of collection of accounts receivable and records an allowance for doubtful accounts, which reduces loans and receivables to the amount management reasonably believes will be collected. In determining the amount of the allowance, the following factors are considered: the length of the time the receivable has been outstanding, specific knowledge of each customer’s financial condition and historical experience.

 

Market risk is the risk that changes in commodity prices will affect the Company’s oil sales, cash flows or the value of its financial instruments. The objective of commodity price risk management is to manage and control market risk exposures within acceptable limits while maximizing returns.

 

The Company is exposed to changes in oil prices which impact its revenues and to changes in natural gas process which impact its operating expenses.

 

The Company does not utilize financial derivatives or other contracts to manage commodity price risks.

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).

 

Fair value measurements are categorized using a valuation hierarchy for disclosure of the inputs used to measure fair value, which prioritize the inputs into three broad levels:

 

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

 

 

Level 2 - Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date, and include those financial instruments that are valued using models or other valuation methodologies.

 

Level 3 - Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

 

(h)

Subsequent Events:

 

The Company evaluates subsequent events through the date the condensed consolidated financial statements are issued.

 

(i)

Recent Accounting Pronouncements:

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying condensed consolidated financial statements.

 

4.

Oil and Gas Assets:

 

The following table summarizes the oil and gas assets by project:

 

Cost		Oklahoma				Kansas					Missouri				Kentucky				Montana				Other				Total
Balance May 1, 2014		$	-			$	7,922,601				$	918,991			$	-			$	-			$	100,000			$	8,941,592
Additions			8,382,273				-					-				-				-				-				8,382,273
Depreciation and amortization			(139,410	)			(29,170	)				-				-				-				-				(168,580	)
Balance July 31, 2014		$	8,242,863			$	7,893,431				$	918,991			$	-			$	-			$	100,000			$	17,155,285

 

Oklahoma

 

On May 30, 2014, the Company, entered into a Subscription Agreement, pursuant to which the Company purchased a 50% interest in Bandolier. Bandolier’s oil and gas assets are located in in Osage County, Oklahoma and comprise a significant contiguous oil and gas acreage position in Northeastern Oklahoma, approximately 106,000 acres, with substantial original oil in place, stacked reservoirs, as well as exploratory and development opportunities that can be accessed through both horizontal and vertical drilling. Significant infrastructure is already in place including 32 square miles of 3D seismic, 3 phase power, a dedicated sub-station as well as multiple oil producing horizontal wells. As a result of this transaction, the Company capitalized $2,460,632 in proved developed oil and gas assets and $5,921,641 in proven undeveloped oil and gas assets. No impairment was recorded on these assets during the three months ended July 31, 2014.

 

Kansas

 

Through proceeds received from the issuance of various promissory notes, on February 1, 2012 Petro purchased various interests in oil and gas leases, wells, records, data and related personal property located along the Mississippi Lime play in the state of Kansas from Metro, a Louisiana company and other interrelated entities, which were in financial distress. These assets were purchased by Petro from Metro through a court approved order as Metro was undergoing Chapter 11 Bankruptcy proceedings as a Debtor-In-Possession of these various oil and gas assets. Petro purchased these assets for cash considerations of $2,000,000 as well as a 25% non-managing membership interest in the Company. Subsequent to the Metro purchase the Company engaged Energy Source Advisors to renew a number of the leases acquired in the Metro purchase and to lease additional acreage. As a result of the asset purchase from Metro and the completion of the additional lease renewals and additional acreage purchases, the Company obtained a total of 115,000 gross/85,000 net acres of leases, having unproven reserves at the time of acquisition, in the Mississippi Lime play in Southeast Kansas for total cost of $12.2 million. The Company also acquired over 60 square miles of proprietary 3D seismic data over prospective Mississippi Lime acreage in the same area. During the year ended April 30, 2014, management engaged an independent third party to test the Kansas assets for impairment. Throughout the year, management was not aware of any impairment indicators, but during the annual impairment test, the third party specialist concluded that the Kansas assets were impaired by $4,638,973, principally due to comparable acreage values. No further impairment was recorded on these assets during the three months ended July 31, 2014.

 

 

Missouri

 

At July 31, 2014, the Company’s Missouri lease holdings totaled 1,272 gross acres with 98.4% working interest.

 

On separate pilot projects at Deerfield, the Company built two 500 barrel of oil per day steam drive production facilities (Marmaton River and Grassy Creek) comprised of 116 production wells, 39 steam injection wells and 14 service and observation wells. Throughout the Deerfield area, the Company has drilled 73 exploration/delineation wells with a 67% success rate.

 

As of July 31, 2014 and April 30, 2014, all Missouri assets were carried at salvage value, since the Company’s current business plans do not contemplate raising the necessary capital to develop these properties. The Company is in current discussions with third parties to use the acreage as a testing site for heavy oil solutions with contemplated profit sharing opportunities.

 

Kentucky

 

As a result of the share exchange, the Company acquired Kentucky lease holdings which include a 37.5% working interest in 27,150 unproved gross acres (10,181 net acres). At July 31, 2014 and April 30, 2014 the Kentucky lease holdings acquired as a result of the share exchange have expired.

 

Montana

 

As of July 31, 2014 and April 30, 2014, the Montana leasehold in the Devils Basin prospect have expired.

 

During the year ended April 30, 2014, management fully impaired the asset to zero due to the expiration of the leases.

 

Other

 

Other property consists primarily of four used steam generators and related equipment that will be assigned to future projects. As of July 31, 2014, management concluded that impairment was not necessary as all other assets were carried at salvage value.

 

5.

Asset Retirement Obligations:

 

The total future asset retirement obligation was estimated based on the Company’s ownership interest in all wells and facilities, the estimated legal obligations required to retire, dismantle, abandon and reclaim the wells and facilities and the estimated timing of such payments. The Company estimated the present value of its asset retirement obligations at both July 31, 2014 and April 30, 2014, based on a future undiscounted liability of $1,183,292 and $1,087,292, respectively. These costs are expected to be incurred within one to 24 years. A credit-adjusted risk-free discount rate of 10% and an inflation rate of 2% were used to calculate the present value.

 

 

Changes to the asset retirement obligation were as follows:

 

		July 31, 2014				April 30, 2014
Balance, beginning of period		$	818,010			$	763,036
Additions			76,541				-
Disposition			-				-
Revisions			-				-
Accretion			12,642				54,974
			907,193				818,010
Less: Current portion for cash flows expected to be incurred within one year			(484,939	)			(481,658	)
Long-term portion, end of period		$	422,254			$	336,352

 

Expected timing of asset retirement obligations:

 

Year Ending April 30,
2015				460,778
2016				81,181
2017				212,000
2018				96,000
2019				-
Thereafter				333,334
				1,183,293
Effect of discount				(276,100	)
Total			$	907,193

 

As of July 31, 2014 and April 30, 2014, the Company has $0 of reclamation deposits with authorities to secure certain abandonment liabilities.

 

6.

Related Party Transactions:

 

During the three months ended July 31, 2014 and 2013, the Company expensed an aggregate $189,244 and $1,539,500, respectively, to general and administrative expenses for stock based compensation pursuant to employment agreements with certain employees.

 

7.

Stockholders’ Equity:

 

As of July 31, 2014 and April 30, 2014, the Company had 5,000,000 shares of blank check preferred stock authorized with a par value of $0.00001 per share. None of the blank check preferred shares were issued or outstanding.

 

As of July 31, 2014 and April 30, 2014, the Company had 29,500 shares of preferred B shares authorized with a par value of $0.00001 per share. No preferred B shares were issued or outstanding.

 

8.

Stock Options:

 

As of July 31, 2014, the Company has one equity incentive plan. The number of shares reserved for issuance in aggregate under the plan is limited to 120 million shares. The exercise price, term and vesting schedule of stock options granted are set by the Board of Directors at the time of grant. Stock options granted under the plan may be exercised on a cashless basis, if such exercise is approved by the Board. In a cashless exercise, the employee receives a lesser amount of shares in lieu of paying the exercise price based on the quoted market price of the shares on the trading day immediately preceding the exercise date.

 

As of April 30, 2014, the Company had a total of 88,038,281 options outstanding and 24,204,947 exercisable with a weighted average exercise price of $0.06. As of July 31, 2014, the Company had a total of 87,938,281 options outstanding and 24,104,947 exercisable with a weighted average exercise price of $0.06.

 

 

The following table summarizes information about the options outstanding and exercisable at July 31, 2014:

 

		Options				Weighted Average Exercise Prices
Outstanding – April 30, 2014			88,038,281			$	0.06
Exercisable – April 30, 2014			24,204,947			$	0.06
Granted			-			$	-
Exercised			-			$	-
Forfeited/Cancelled			(100,000	)		$	-
Outstanding July 31, 2014			87,938,281			$	0.06
Exercisable – July 31, 2014			24,104,947			$	0.06
Outstanding - Aggregate Intrinsic Value						$	1,137,151
Exercisable - Aggregate Intrinsic Value						$	307,317

 

The following table summarizes information about the options outstanding and exercisable at July 31, 2014:

 

			Options Outstanding												Options Exercisable
	Exercise Price		Options				Weighted Avg. Life Remaining				Weighted Avg. Exercise Price				Options				Weighted Avg. Exercise Price
$	0.22			465,116				0.01 years			$	0.22				465,116			$	0.22
$	0.06			87,473,165				9.19 years			$	0.06				23,639,831			$	0.06
				87,938,281												24,104,947
Aggregate Intrinsic Value											$	1,137,151							$	307,317

 

For the three months ended July 31, 2014 and 2013, the Company recorded stock-based compensation of $189,244 and $1,539,500, respectively, which is included in general and administrative expenses.

 

Intrinsic value is the Company’s current per share fair value as quoted on the Over the Counter Bulletin Board on the balance sheet date ($0.064) less the current exercise price.

 

Other than the issuances disclosed in Note 6 and below, during the three months ended July 31, 2014, the Company had no other stock based compensation expense.

 

As of July 31, 2014, the Company has $2,437,477 in unrecognized stock based compensation expense which will be amortized over a weighted average exercise period of 3.31 years.

 

Advisor Grants:

 

On November 20, 2013, the Board of Directors authorized the grant of fair value options to two consultants. The option grants have an exercise price equal to the closing price of shares of the Company’s common stock as of the date of the grant. One consultant was granted 2,333,333 fair value options and the second consultant was granted 1,833,333 fair value options. All options granted vested immediately upon grant and mature in ten years.

 

Warrants:

 

		Number of Warrants				Weighted Average Exercise Price				Weighted Average Life Remaining
Outstanding and exercisable – April 30, 2014			40,625,000				0.14				1.62
Forfeited			-				-				-
Granted			-				-				-
Outstanding and exercisable – July 31, 2014			40,625,000				0.14				1.37

 

The aggregate intrinsic value of the warrants was $0. Intrinsic value is the Company’s current per share fair value as quoted on the Over the Counter Bulletin Board on the balance sheet date ($0.064) less the current exercise price.

 

 

9.

Contingency and Contractual Obligations:

 

As a result of the Share Exchange, the Company inherited the following contingencies:

 

(a) In January 2010, the Company experienced a flood in its Calgary office premises as a result of a broken water pipe. There was significant damage to the premises rendering them unusable until remediation was completed by the landlord. Pursuant to the lease contract, the Company asserted that rent should be abated during the remediation process and accordingly, the Company ceased making rent payments in December 2009. During the remediation process, the Company engaged an independent environmental testing company to test for air quality and for the existence of other potentially hazardous conditions. The testing revealed the existence of potentially hazardous mold and the consultant provided specific written instructions for the effective remediation of the premises. During the remediation process, the landlord did not follow the consultant’s instructions to correct the potentially hazardous mold situation, and subsequently in June 2010, gave notice and declared the premises to be ready for occupancy. The Company re-engaged the consultant to re-test the premises and the testing results again revealed the presence of potentially hazardous mold. The Company determined that the premises were not fit for re-occupancy, considered the landlord to be in default of the lease, and considered the lease to be terminated.

 

The landlord disputed the Company’s position and gave notice that it considers the Company to be in default of the lease for failure to re-occupy the premises.

 

The landlord has previously claimed that the Company owed monthly rent for the premises from January 2010 to June 30, 2010 in the amount of $247,348 and as a result of the alleged default, pursuant to the terms of the lease, the Company owed three months accelerated rent in the amount of $114,837. The landlord previously also asserted that the Company would be liable for an amount up to the full lease obligation of $1,596,329 which otherwise would have been due as follows:

 

Year Ended April 30
2011			$	473,055
2012				473,055
2013				473,055
2014				177,164
Total			$	1,596,329

 

On January 30, 2014, the landlord filed a Statement of Claim with the Court of Queen’s Bench of Alberta against the Company in the approximate amount of $759,000. On March 26, 2014, the Company filed a Statement of Defence in which it challenged the allegations made by the landlord. The Company claims that the two year limitation period as defined under the “Limitations Act”, as established in Alberta, Canada, has been exceeded and therefore the Statement of Claim filed by the landlord should be barred in its entirety.

 

(b) In September 2013, the Company was notified by the Railroad Commission of Texas (the “Commission”) that the Company was not in compliance with regulations promulgated by the Commission. The Company was therefore deemed to have lost its corporate privileges within the State of Texas and as a result, all wells within the state would have to be plugged. The Commission therefore collected $25,000 from the Company, which was originally deposited with the Commission, to cover a portion of the estimated costs of $88,960 to plug the wells. In addition to the above, the Commission also reserved its right to separately seek any remedies against the Company resulting from its noncompliance.

 

(c) On July 3, 2014, the Company entered into a memorandum of understanding with Sichuan Renzhi Oilfield Technology Services Co. Ltd., a corporation incorporated under the laws of the People’s Republic of China and traded on the Shenzhen Stock Exchange (“Renzhi”), which is memorialized in a Framework Agreement for Acquisition and Cooperation (the “MOU”). The MOU sets forth a framework for (i) the sale by the Company, and the purchase by Renzhi, of PO1, LLC (“PO1”), a wholly-owned subsidiary of the Company, which owns 51% of the issued and outstanding membership interests of Spyglass, the owner of oil and gas leases, leaseholds, lands, and options and concessions thereto, located in Osage County, Oklahoma; and (ii) the joint development by the Company and Renzhi of oil and gas technology and properties (collectively, the “Transactions”), with an aggregate investment by Renzhi to the Company in the amount of $87,500,000.

 

The Company and Renzhi intend to enter into one or more definitive agreements to effectuate the terms of the MOU. The execution of definitive documentation with respect to the Transactions remains subject to additional negotiations between the parties, further due diligence, Renzhi obtaining financing in order to comply with its obligations, and applicable Chinese regulatory approvals. There can be no assurance that definitive documentation for the Transactions will be entered into by the parties or that the Transactions will close.

 

(d) The Company is from time to time involved in legal proceedings in the ordinary course of business. It does not believe that any of these claims and proceedings against it is likely to have, individually or in the aggregate, a material adverse effect on its financial condition or results of operations.

 

  

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Except as otherwise indicated by the context, references in this Quarterly Report to “we”, “us”, “our” or the “Company” are to the consolidated businesses of Petro River Oil Corp. and its wholly-owned direct and indirect subsidiaries and majority-owned subsidiaries, except that references to “our common stock” or “our capital stock” or similar terms refer to the common stock, par value $0.00001 per share, of Petro River Oil Corp., a Delaware corporation (the “Company” or the “Registrant”).

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide information that is supplemental to, and should be read together with, the Company’s condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report. Information in this Item 2 is intended to assist the reader in obtaining an understanding of the condensed consolidated financial statements, the changes in certain key items in those financial statements from quarter to quarter, the primary factors that accounted for those changes, and any known trends or uncertainties that the Company is aware of that may have a material effect on the Company’s future performance, as well as how certain accounting principles affect the condensed consolidated financial statements. This includes discussion of (i) Liquidity, (ii) Capital Resources, (iii) Results of Operations, and (iv) Off-Balance Sheet Arrangements, and any other information that would be necessary to an understanding of the company’s financial condition, changes in financial condition and results of operations.

 

Forward Looking Statements

 

The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying condensed consolidated financial statements, as well as information relating to the plans of our current management and should be read in conjunction with the accompanying financial statements and their related notes included in this Report. References in this section to “we,” “us,” “our,” or the “Company” are to the consolidated business of Petro River Oil Corp. and its wholly owned and majority owned subsidiaries.

 

This Report contains forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expects,” “intends,” “estimates,” “continues,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Report or other reports or documents we file with the Securities and Exchange Commission (“SEC”) from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

 

The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our condensed consolidated financial statements and their related notes included in this Quarterly Report and our Annual Report on Form 10-K filed with the SEC on August 13, 2014 for the year ended April 30, 2014.

 

Business Overview

 

Petro River Oil Corp. is an independent exploration and production company with a focus on drilling, recompletions, and applying modern technologies to both conventional and unconventional oil and gas assets. Specific targets include: increasing production by developing our acreage, increasing profitability margins by evaluating and optimizing our production, and executing our business plan to increase property values, reserves, and expanding our asset base.

 

We benefit from having an experienced management team with proven acquisition, operating and financing capabilities. Mr. Scot Cohen, our Executive Chairman, has over 20 years of financial management experience including five years as managing partner of Iroquois Capital Opportunity Fund, a private equity fund focused on oil and gas. He has raised equity and debt for a number of small and microcap public companies.

 

 

Mr. Cohen is joined by Luis Vierma, Daniel Smith and Ruben Alba who make up the Company’s technical leadership. Mr. Vierma has 35 years of experience in oil and gas including Vice President of Exploration and Production at Petróleos de Venezuela, S.A, (“PDVSA”) the fourth largest oil company in the world. Mr. Vierma has a BS in Chemistry and MS in Geology and leads the Company’s Geological and Geophysical team. Mr. Smith is a registered petroleum engineer with over 15 years’ experience. Mr. Smith spent his career at XTO Energy where he served as an operations engineer responsible for managing fields producing in excess of 100 million cubic feet of natural gas per day. Mr. Alba has been active in the oil and gas industry since 1997. Previously he was with Halliburton Energy Services and Superior Well Services overseeing regional technical staff and operations. Mr. Alba manages the Company’s heavy oil projects in Missouri and Kentucky.

 

The Company is focused on developing its Mississippi Lime acreage. Over the last 12 months the Company has continued to build out its leadership and technical team. Additionally, the Company has been in discussions with industry partners to capitalize and develop acreage in the Mississippi Lime. The Company continues to seek out joint venture partners and acquisition targets.

 

Projects related to the heavy oil reservoirs are in technical review. The Company has an extensive amount of technical and reservoir information on the Missouri, Oklahoma and Kentucky positions. The data is being utilized in the understanding and test phases to develop an economic heavy oil production reserve base.

 

The Company continues to explore various opportunities to raise capital to support the growth of the Company. These opportunities include, without limitation, potential joint ventures with various on and off-shore entities and potential private issuances of equity, debt or a combination thereof. There can be no assurance that the Company will enter into any of these transactions. Mr. Cohen and Mr. Vierma have extensive experience in capital markets and oil and gas joint ventures. During his time as VP of Exploration and Production at PDVSA, Mr. Vierma negotiated billions of dollars of joint ventures with foreign oil and gas companies.

 

On December 12, 2013, the Company signed a Securities Purchase Agreement (the “Agreement”) with Petrol Lakes Holding Limited (“Petrol Lakes”). Pursuant to the terms of the Agreement, Petrol Lakes agreed to purchase: (i) 81,250,000 shares of the Company’s common stock, at a per share price of $0.08, for an aggregate purchase price of $6,500,000; and (ii) a warrant to purchase shares of the Company’s common stock. Under the terms of the warrant, Petrol Lakes may purchase up to 40,625,000 shares of the Company’s common stock at a per share price of $0.1356, for an aggregate purchase price of $6,500,000. The warrant, which is exercisable in whole or in part, will expire on December 12, 2015. The Company paid issuances costs of $650,000.

 

Under the Agreement, Petrol Lakes also has the right to appoint one director to the Company’s Board of Directors, which director shall remain on the Board at least through the first annual meeting of the Company after the one year anniversary of the Agreement. As of the date hereof, Petrol Lakes has not exercised this right.

 

On May 30, 2014, the Company entered into a Subscription Agreement, (the “Subscription Agreement”), pursuant to which the Company was issued a 50% interest in Bandolier Energy, LLC (“Bandolier”) in exchange for a capital contribution of $5,000,000. The Company has the right to appoint a majority of the board of managers of Bandolier, pursuant to the Amended and Restated Limited Liability Company Agreement of Bandolier. Thereafter, Bandolier, pursuant to that certain Securities Purchase Agreement, effective January 1, 2014, acquired from Nadel and Gussman, LLC, Charles W. Wickstrom, and Shane E. Matson, for a purchase price of $8,712,893 less a $407,161 clawback, all of the issued and outstanding equity of Spyglass Energy Group, LLC (“Spyglass”), the owner of oil and gas leases, leaseholds, lands, and options and concessions thereto located in Osage County, Oklahoma. Spyglass comprises the largest contiguous oil and gas acreage position in Northeastern Oklahoma, approximately 106,000 acres, with substantial original oil in place, stacked reservoirs, as well as exploratory and development opportunities that can be accessed through both horizontal and vertical drilling. Significant infrastructure is already in place including 32 square miles of 3D seismic, 3 phase power, a dedicated sub-station as well as multiple oil producing horizontal wells.

 

As a result of the investment in Bandolier and the Acquisition of Spyglass, the Company has both proven developed and proven undeveloped oil and gas assets.

 

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements. These condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenues and expenses, to disclose contingent assets and liabilities on the date of the condensed consolidated financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. The most significant estimates and assumptions include the valuation of accounts receivable, and the useful lives and impairment of property and equipment, goodwill and intangible assets, the valuation of deferred tax assets and inventories and the provision for income taxes. We continue to evaluate these estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed in this Form 10-Q reflect the more significant judgments and estimates used in preparation of our condensed consolidated financial statements. We believe there have been no material changes to our critical accounting policies and estimates.

 

The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our consolidated financial statements:

 

Oil and Gas Operations

 

The Company follows the full cost method of accounting for oil and gas operations whereby all costs related to exploration and development of oil and gas reserves are capitalized. Under this method, the Company capitalizes all acquisition, exploration and development costs incurred for the purpose of finding oil and natural gas reserves, including salaries, benefits and other internal costs directly attributable to these activities. Costs associated with production and general corporate activities, however, are expensed in the period incurred. Costs are capitalized on a country-by-country basis. To date, there has only been one cost center, the United States.

 

The present value of estimated future net cash flows is computed by applying the average first-day-of-the-month prices during the previous twelve-month period of oil and natural gas to estimated future production of proved oil and natural gas reserves as of year-end less estimated future expenditures to be incurred in developing and producing the proved reserves and assuming continuation of existing economic conditions. Prior to December 31, 2009, prices and costs used to calculate future net cash flows were those as of the end of the appropriate quarterly period.

 

Following the discovery of reserves and the commencement of production, the Company will compute depletion of oil and natural gas properties using the unit-of-production method based upon production and estimates of proved reserve quantities. Costs associated with unproved properties are excluded from the depletion calculation until it is determined whether or not proved reserves can be assigned to such properties. Unproved properties are assessed for impairment annually. Significant properties are assessed individually.

 

The Company assesses all items classified as unproved property on an annual basis for possible impairment. The Company assesses properties on an individual basis or as a group if properties are individually insignificant. The assessment includes consideration of the following factors, among others: land relinquishment; intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate impairment, the related exploration costs incurred are transferred to the full cost pool and are then subject to depletion and the ceiling limitations on development oil and natural gas expenditures.

 

Proceeds from the sale of oil and gas assets are applied against capitalized costs, with no gain or loss recognized, unless a sale would alter the rate of depletion and depreciation by 25 percent or more.

 

Significant changes in these factors could reduce our estimates of future net proceeds and accordingly could result in an impairment of our oil and gas assets. Management will perform annual assessments of the carrying amounts of its oil and gas assets as additional data from ongoing exploration activities becomes available.

 

 

As of April 30, 2014, management engaged a third party to perform an independent study of the oil and gas assets. Management concluded that the Montana assets was impaired by $75,000 and the Kansas assets were impaired by $4,638,973. The Company recorded $4,713,973 impairment to the condensed consolidated statements of operations during the year ended April 30, 2014. For the three months ended July 31, 2014, the Company did not record impairment on its oil and gas assets.

 

NEW ACCOUNTING STANDARDS

 

Recently Adopted Accounting Standards

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying condensed consolidated financial statements.

 

Results of Operations

 

As a result of the April 23, 2013 acquisition and share exchange transaction, Petro River Oil, LLC was deemed the accounting acquirer. All historical financial information is that of Petro River Oil, LLC.

 

Results of Operations for the Three Months Ended July 31, 2014 compared to Three Months Ended July 31, 2013

 

		Three Months				Three Months
		Ended				Ended
		July 31, 2014				July 31, 2013
Operations
Revenues
Oil and natural gas sales		$	666,276			$	104,840
Total Revenues			666,276				104,840
Operating Expenses
Operating			340,668				64,079
General and administrative			1,861,532				2,219,028
Depreciation, depletion and accretion			182,152				26,354
Total Expenses			2,384,352				2,309,461
Operating loss			(1,718,076	)			(2,204,621	)
Other income (expense)			33				(5	)
Net Loss before non-controlling interest			(1,718,043	)			(2,204,626	)
Net loss attributable to non-controlling interest			(402,711	)			-
Net loss attributable to Petro River Oil Corp. and Subsidiaries		$	(1,315,332	)		$	2,204,626
Net Loss per Common Share Basic and Diluted		$	(0.00	)		$	(0.00	)

 

 

Oil Sales

 

During the three months ended July 31, 2014, the Company recognized $666,276 in oil and gas sales, compared to sales of $104,840 for the three months ended July 31, 2013. The overall increase in sales of $561,436 is primarily due to the acquisition of Bandolier during the three months ended July 31, 2014 which incurred $575,544 of sales during the period, which was offset by a minimal decrease in sales for the remaining subsidiaries. .

 

Other Income (Expense)

 

During the three months ended July 31, 2014, other income (expense) of $33 consisted mainly of interest on cash balances.

 

Operating Expenses

 

During the three months ended July 31, 2014, operating expenses were $340,668, as compared to operating expenses of $64,079 for the three months ended July 31, 2013. The overall increase in operating expenses of $276,589 is primarily attributable to the operating expenses of Bandolier of $295,256 during the three months ended July 31, 2014 which were offset by a minimal decrease in the operating expenses of the remaining subsidiaries.

 

General and Administrative Expenses

 

General and administrative expenses for the three months ended July 31, 2014 were $1,861,532, as compared to $2,219,028 for the three months ended July 31, 2013. The decreases are primarily attributable to the significant decrease in stock based compensation. The decreases were offset by the addition of the Bandolier expenses of $950,551 and the increases in professional fees and office and administrative expenses. These changes are outlined below:

 

		For the Three Months Ended				For the Three Months Ended
		July 31, 2014				July 31, 2013
Salaries and benefits		$	261,165			$	1,577,872
Professional fees			1,297,486				534,837
Office and administrative			292,698				104,312
Information technology			10,183				2,007
		$	1,861,532			$	2,219,028

 

The increases in general and administrative expenses are primarily attributable to the Company ramping up operations and the completion of the Bandolier acquisition. This consists primarily of increases in professional fees and office and administrative expenses. The increases were offset by the reduction in salary and benefits in comparison to the prior year. Salary and benefits include non-cash stock-based compensation of $189,244 for the three months ended July 31, 2014 compared to $1,539,500 for the three months ended July 31, 2013. This decrease was due to the significant expense recorded during the three months ended July 31, 2013 for options that were issued to Scot Cohen in April 2013 as discussed in the Company’s Annual Report on the Form 10-K for the year ended April 30, 2014.

 

Liquidity and Capital Resources

 

At July 31, 2014, the Company had working capital of approximately $2.8 million and has incurred losses since it commenced operations and utilized cash in its operating activities to date. In addition, Petro has a limited operating history prior to acquisition of Bandolier during the three months ended July 31, 2014. At July 31, 2014, the Company had cash and cash equivalents of approximately $3.4 million. Management believes that the current level of working capital is sufficient to maintain operations for at least the next 12 months. Management intends to continue to raise capital through debt and equity instruments in order to achieve its business plans.

 

 

Our current capital and our other existing resources are sufficient to provide working capital for the balance of fiscal year 2015. We will require additional capital to continue to operate our business and to further expand our exploration and development programs. We may be unable to obtain additional capital required. Furthermore, inability to maintain capital may damage our reputation and credibility with industry participants. Our inability to raise additional funds when required may have a negative impact on our consolidated results of operations and financial condition.

 

The Company is focused on developing its Mississippi Lime acreage. Over the last 12 months the Company has continued to build out its leadership and technical team. Additionally, the Company has been in discussions with industry partners to capitalize and develop acreage in the Mississippi Lime. The Company continues to seek out joint venture partners and acquisition targets.

 

Projects related to our legacy heavy oil reservoirs are still in technical review, but a determination has been made to continue to testing pilot technologies and processes on the Missouri heavy oil assets as the Company has an extensive amount of technical and reservoir information on the Missouri positions. The Company is also continuing to analyze reservoir data and testing results in Missouri and this data is being utilized in the understanding and test phases to develop an economic heavy oil production reserve base.

 

As discussed in the Business Overview section, above, on May 30, 2014, the Company obtained a 50% interest in Bandolier for a capital contribution of $5,000,000. Bandolier subsequently acquired all of the issued and outstanding equity of Spyglass for $8,712,893 less a $407,161 clawback.

 

Operating Activities

 

The Company used $1,636,292 in operating activities during the three months ended July 31, 2014, as compared to $368,746 used in operating activities during the three months ended July 31, 2013. The Company incurred a net loss during the three months ended July 31, 2014 of $1,718,043 as compared to a net loss of $2,204,626 for three months ended July 31, 2013.

 

Investing Activities

 

During the three months ended July 31, 2014, the Company incurred $8,305,732 of expenditures on oil and gas assets as part of the Bandolier acquisition compared to $295,965 during the three months ended July 31, 2013. In addition, the Company purchased $3,796 of office equipment.

 

Financing Activities

 

During the three months ended July 31, 2014 and 2013, the Company had $5,000,000 in cash provided by financing activities. The $5,000,000 was contributed from the non-controlling interest holder of Bandolier.

 

Capitalization

 

The number of outstanding shares and the number of shares that could be issued if all convertible instruments are converted to shares is as follows:

 

As of		July 31, 2014				July 31, 2013
Common shares			818,567,746				737,117,746
Stock Options			87,938,281				290,000
Stock Purchase Warrants			40,625,000				-
Compensation Warrants			-				230,000
			947,131,027				737,637,746

 

 

Off-Balance Sheet Arrangements

 

None.

 

Recent Accounting Pronouncements

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

 

ITEM 3. QUANTITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable

 

ITEM 4. CONTROLS AND PROCEDURES

 

A. Material Weaknesses

 

As discussed in Item 9A of our Annual Report on Form 10-K for the fiscal year ended April 30, 2014, we identified material weaknesses in the design and operation of our internal controls. The material weaknesses are related to: the Company having a small number of employees, and therefore, limited internal review; and the Company relying on external accounting personnel to prepare financial statements.

 

To remediate the material weakness identified in internal control over financial reporting of the Company, the Company engaged Brio Financial Group and appointed its Managing Member, David Briones, to act as the Company’s Chief Financial Officer on August 15, 2013, and intends to hire additional accounting staff, and operations and administrative executives.

 

We will continue to monitor and assess our remediation initiatives to ensure that the aforementioned material weaknesses are remediated.

 

B. Evaluation of Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in the Company’s filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The Company’s management, with the participation of its principal executive and principal financial officers, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation and solely due to the unremediated material weaknesses described above, the Company’s principal executive and financial officers have concluded that such disclosure controls and procedures were not effective for the purpose for which they were designed as of the end of such period. As a result of this conclusion, the financial statements for the period covered by this report were prepared with particular attention to the unremediated material weaknesses previously disclosed. Accordingly, management believes that the condensed consolidated financial statements included in this report fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows as of and for the periods presented, in accordance with US GAAP, notwithstanding the unremediated weaknesses.

 

C. Changes in Internal Control over Financial Reporting

 

There was no change in the Company’s internal control over financial reporting that was identified in connection with such evaluation that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

In January 2010, the Company experienced a flood in its Calgary office premises as a result of a broken water pipe. There was significant damage to the premises rendering them unusable until remediation had been completed by the landlord. Pursuant to the lease contract, the Company has asserted that rent should be abated during the remediation process and accordingly, the Company has not paid rent since December 2009. During the remediation process, the Company engaged an independent environmental testing company to test for air quality and for the existence of other potentially hazardous conditions. The testing revealed the existence of potentially hazardous mold and the consultant provided specific written instructions for the effective remediation of the premises. During the remediation process, the landlord did not follow the consultant’s instructions and correct the potentially hazardous mold situation and subsequently in June 2010 gave notice and declared the premises to be ready for occupancy. The Company re-engaged the consultant to re-test the premises and the testing results again revealed the presence of potentially hazardous mold. The Company has determined that the premises are not fit for re-occupancy and considers the landlord to be in default of the lease and the lease terminated.

 

The landlord disputes the Company’s position and has given notice that it considers the Company to be in default of the lease for failure to re-occupy the premises.

 

In addition, the landlord has previously claimed that the Company owes monthly rent for the premises from January 2010 to June 30, 2010 in the amount of $247,348 and has claimed that, as a result of the alleged default, pursuant to the terms of the lease, the Company owes three months accelerated rent in the amount of $114,837. The landlord has previously also asserted that the Company would be liable for an amount up to the full lease obligation of $1,596,329 which otherwise would have been due as follows:

 

Year Ended April 30
2011		$	473,055
2012			473,055
2013			473,055
2014			177,164
Total		$	1,596,329

 

On January 30, 2014, the landlord filed a Statement of Claim against the Company in the amount aggregating approximately $759,000. The Company is currently assessing the current revised claim and has until March 31, 2014 to respond. At which time it plans to aggressively challenge such claims.

 

There have been no material developments in any legal proceedings since the disclosures contained in the Registrant’s Form 10-K for the year ended April 30, 2014.

 

ITEM 1A. RISK FACTORS.

 

Not applicable.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

(a) There is no information required to be disclosed on Form 8-K during the period covered by this Form 10-Q that was not so reported.

 

(b) There were no material changes to the procedures by which security holders may recommend nominees to the registrant’s board of directors during the quarter ended July 31, 2014.

 

 

ITEM 6. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a) Financial Statements.

 

Our financial statements as set forth in the Index to Financial Statements attached hereto commencing on page F-1 are hereby incorporated by reference.

 

(b) Exhibits.

 

The following exhibits, which are numbered in accordance with Item 601 of Regulation S-K, are filed herewith or, as noted, incorporated by reference herein:

 

Exhibit Number		Exhibit Description
2.1(1)		Subscription Agreement, dated as of May 30, 2014, by and among Bandolier Energy LLC and the purchasers set forth therein
2.2(1)		Securities Purchase Agreement, effective as of January 1, 2014, by and among Nadel and Gussman, LLC, Charles W. Wickstrom, Shane E. Matson and Bandolier Energy, LLC
3.1 (2)		Certificate of Incorporation of the Company
3.2 (2)		Bylaws of the Company
10.1(3)		Securities Purchase Agreement of Petro River Oil LLC, dated as of April 23, 2013, by and among Petro River Oil Corp., Petro River Oil, LLC, the holders of outstanding secured promissory notes of Petro River Oil, LLC, the members of Petro River Oil, LLC and Mega Partners 1 LLC
10.2(4)		Amended and Restated 2012 Equity Compensation Plan
10.3(5)		Assignment and Assumption Agreement, dated as of May 30, 2014, by and between Bandolier Energy, LLC and PO1, LLC
10.4(5)		Agreement, dated as of May 30, 2014, by and between Petro River Oil Corp. and Pearsonia West Investment Group, LLC
31.1*		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

 

*	Attached hereto.
(1)	Attached hereto. The disclosure schedules delivered in connection with the Securities Purchase Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K and the Company agrees to furnish supplementally a copy of any disclosure schedules omitted from the Securities Purchase Agreement to the Securities and Exchange Commission upon request.
(2)	Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on September 13, 2012.
(3)	Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on April 29, 2013.
(4)	Incorporated by reference to our Form 10-K filed with the Securities and Exchange Commission on August 13, 2014.
(5)	Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on June 5, 2014.

 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	PETRO RIVER OIL CORP.
	By:	/s/ Scot Cohen
	Name:	Scot Cohen
	Title:	Executive Chairman
	By:	/s/ David Briones
	Name:	David Briones
	Title	Chief Financial Officer
Date: September 22, 2014

 

 

Index to Exhibits

 

Exhibit Number		Exhibit Description
2.1*		Subscription Agreement, dated as of May 30, 2014, by and among Bandolier Energy LLC and the purchasers set forth therein
2.2(1)		Securities Purchase Agreement, effective as of January 1, 2014, by and among Nadel and Gussman, LLC, Charles W. Wickstrom, Shane E. Matson and Bandolier Energy, LLC
3.1 (2)		Certificate of Incorporation of the Company
3.2 (2)		Bylaws of the Company
10.1(3)		Securities Purchase Agreement of Petro River Oil LLC, dated as of April 23, 2013, by and among Petro River Oil Corp., Petro River Oil, LLC, the holders of outstanding secured promissory notes of Petro River Oil, LLC, the members of Petro River Oil, LLC and Mega Partners 1 LLC
10.2(4)		Amended and Restated 2012 Equity Compensation Plan
10.3(5)		Assignment and Assumption Agreement, dated as of May 30, 2014, by and between Bandolier Energy, LLC and PO1, LLC
10.4(5)		Agreement, dated as of May 30, 2014, by and between Petro River Oil Corp. and Pearsonia West Investment Group, LLC
31.1*		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

 

*		Attached hereto.
(1)		Attached hereto. The disclosure schedules delivered in connection with the Securities Purchase Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K and the Company agrees to furnish supplementally a copy of any disclosure schedules omitted from the Securities Purchase Agreement to the Securities and Exchange Commission upon request.
(2)		Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on September 13, 2012.
(3)		Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on April 29, 2013.
(4)		Incorporated by reference to our Form 10-K filed with the Securities and Exchange Commission on August 13, 2014.
(5)		Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on June 5, 2014.