Attached files
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 January 31, 2017
[ ] 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
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98-0611188
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(State or Other Jurisdiction of
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(I.R.S. Employer
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Incorporation or Organization)
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Identification No.)
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205 East 42nd Street, Fourteenth Floor, New York, NY
10017
(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 (Sec.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 [ ]
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Accelerated filer [ ]
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Non-accelerated filer [ ]
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Smaller reporting company [X]
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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
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Outstanding at March 16, 2017
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Common Stock, $0.00001 par value per share
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15,827,998 shares
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TABLE OF CONTENTS
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Page
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PART I - FINANCIAL INFORMATION
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1
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18
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25
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25
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PART II - OTHER INFORMATION
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26
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27
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27
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28
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29
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL
STATEMENTS.
Petro
River Oil Corp. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
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As of
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January 31, 2017
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April 30, 2016
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Assets
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Current Assets:
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Cash
and cash equivalents
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$1,413,443
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$774,751
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Certificate
of deposit - restricted
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-
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80,803
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Accounts
receivable – oil and gas
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9,797
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903
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Accounts
receivable - related party
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2,738,807
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4,829,693
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Accrued
interest on notes receivable - related party
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632,681
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170,653
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Interest
in real estate rights
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1,883,185
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2,820,402
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Prepaid
expenses and other current assets
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37,236
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24,967
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Prepaid
oil and gas asset development costs
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646,681
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844,131
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Notes
receiveable - related party, current portion
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21,590,803
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-
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Total Current Assets
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28,952,633
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9,546,303
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Oil
and gas assets, full cost method
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Costs
subject to amortization, net
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1,060,756
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778,226
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Costs
not being amortized, net
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858,829
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100,000
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Property,
plant and equipment, net of accumulated depreciation
of
$183,951 and $308,223, respectively
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1,772
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2,341
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Notes
receivable - related party
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-
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17,848,000
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Investment
in Horizon Energy Partners
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1,213,000
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-
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Other
assets
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17,133
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53,778
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Total Long-term Assets
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3,151,490
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18,782,345
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Total Assets
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$32,104,123
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$28,328,648
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Liabilities and Equity
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Current Liabilities:
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Accounts
payable and accrued expenses
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$128,763
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$206,780
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Deferred
tax liability
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2,944,558
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2,501,209
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Notes
payable - related party
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-
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1,600,000
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Asset
retirement obligations, current portion
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406,403
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561,958
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Total Current Liabilities
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3,479,724
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4,869,947
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Long-term liabilities:
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Asset
retirement obligations, net of current portion
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150,859
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201,104
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Total Long-term Liabilities
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150,859
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201,104
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Total Liabilities
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3,630,583
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5,071,051
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Commitments and contingencies
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Equity:
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Preferred
shares - 5,000,000 authorized; par value $0.00001; 0 shares issued
and outstanding
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-
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Preferred
B shares - 29,500 authorized; par value $0.00001; 0 shares
issued and outstanding
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-
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-
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Common
shares - 150,000,000 authorized; par value $0.00001; 15,827,998 and
4,263,748 shares issued and outstanding, respectively
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158
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43
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Additional
paid-in capital
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46,352,819
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38,849,655
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Accumulated
deficit
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(30,238,616)
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(27,643,419)
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Total Petro River Oil Corp. Equity
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16,114,361
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11,206,279
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Non-controlling
interests
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12,359,179
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12,051,318
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Total Equity
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28,473,540
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23,257,597
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Total Liabilities and Equity
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$32,104,123
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$28,328,648
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The accompanying notes are an integral part of these consolidated
financial statements.
Petro River Oil Corp. and Subsidiaries
Consolidated Statements of
Operations
(Unaudited)
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For the
Three Months
Ended
January
31,
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For
the
Nine
Months Ended
January
31,
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2017
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2016
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2017
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2016
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Revenues
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Oil
and natural gas sales
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$7,117
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$9,882
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$7,117
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$72,723
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Total Revenues
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7,117
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9,882
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7,117
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72,723
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Operating Expenses
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Lease
operating expenses
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8,586
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68,469
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40,710
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328,457
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Depreciation,
depletion and accretion
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7,621
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43,468
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14,789
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149,218
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Amortization
of intangibles
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-
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30,113
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-
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90,339
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Gain
on sale of equipment
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-
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-
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(5,519)
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Loss
(gain) on sale of oil and gas assets
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7,519,460
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(216,580)
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7,519,460
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Impairment
of oil and gas assets
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20,942
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6,870,613
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20,942
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6,870,613
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General
and administrative
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777,702
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505,629
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3,315,914
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2,483,990
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Total Operating Expenses
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814,851
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15,037,752
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3,175,775
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17,436,558
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Operating Loss
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(807,734)
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(15,027,870)
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(3,168,658)
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(17,363,835)
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Other Income (Expense)
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Interest
income (expense) - net
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163,809
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45,937
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462,575
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46,719
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Net
(loss) gain on real estate rights
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(7,208)
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2,377,761
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686,096
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10,238,499
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Other Income
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156,601
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2,423,698
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1,148,671
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10,285,218
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Net Loss Before Income Tax Provision
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(651,133)
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(12,604,172)
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(2,019,987)
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(7,078,617)
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Income Tax Provision
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22,200
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1,330,775
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443,349
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1,330,775
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Net Loss
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(673,333)
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(13,934,947)
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(2,463,336)
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(8,409,372)
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Net (Loss) Income Attributable to Non-controlling
Interest
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(3,648)
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(3,833,483)
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131,861
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(791,353)
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Net Loss Attributable to Petro River Oil Corp. and
Subsidiaries
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$(669,685)
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$(10,101,464)
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$(2,595,197)
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$(7,618,039)
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Basic and Diluted Net Loss Per Common Share
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$(0.04)
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$(2.37)
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$(0.17)
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$(1.79)
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Weighted average number of common shares outstanding - Basic and
diluted
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15,827,998
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4,259,777
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15,702,300
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4,259,687
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The accompanying notes are an integral part of these consolidated
financial statements.
Petro River Oil Corp. and Subsidiaries
Consolidated Statements of Cash
Flows
(Unaudited)
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For the Nine Months Ended
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January 31, 2017
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January 31, 2016
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net
loss
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$(2,463,336)
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$(8,409,372)
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Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
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Stock-based
compensation
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1,850,462
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1,492,868
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Depreciation,
depletion and accretion
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14,789
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149,218
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Amortization
of intangibles
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-
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90,339
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(Gain)
loss on sale of oil and gas assets
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(216,580)
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7,519,460
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Gain
on sale of equipment
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(5,519)
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Impairment
of oil and gas assets
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20,942
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6,870,613
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Net
gain on interest in real estate rights
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(686,096)
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(10,238,499)
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Deferred
tax liability
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443,349
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1,330,755
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Changes
in operating assets and liabilities:
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Accounts
receivable – oil and gas
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(8,894)
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34,644
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Accounts
receivable – related party
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5,021
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-
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Accrued
interest on notes receivable – related party
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(462,028)
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(44,095)
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Prepaid
expenses and other assets
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(12,269)
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6,807
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Accounts
payable and accrued expenses
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(78,017)
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(115,200)
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Deposit
for real estate sales
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-
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363,750
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Net Cash Used in Operating Activities
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(1,592,657)
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(954,231)
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Cash
received from acquisition of Horizon Investments
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3,364,817
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-
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Cash
paid for cost method investment
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(525,000)
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-
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Proceeds
from the sale of interest in real estate rights
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3,709,178
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16,520,250
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Capitalized
expenditures on oil and gas assets
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(304,297)
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(7,279)
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Cash
received upon disposal of oil and gas assets
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279,013
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Proceeds
from the sale of equipment
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60,000
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Payments
on deposit
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91,802
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(210)
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Prepaid
oil and gas assets
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(538,348)
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(735,798)
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Issuance
of notes receivable – related party
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(3,742,803)
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(16,348,000)
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Net Cash Provided by (Used in) Investing Activities
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2,055,349
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(232,024)
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CASH FLOW FROM FINANCING ACTIVITIES:
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Cash
received from non-controlling interest contributions
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176,000
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-
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Proceeds
from notes payable – related party
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-
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1,500,000
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Net Cash Provided by Financing Activities
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176,000
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1,500,000
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Change in cash and cash equivalents
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638,692
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313,745
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Cash and cash equivalents, beginning of period
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774,751
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1,010,543
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Cash and cash equivalents, end of period
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$1,413,443
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$1,324,288
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SUPPLEMENTARY CASH FLOW INFORMATION:
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Cash
paid during the period for:
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Income
taxes
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$3,789
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$14,482
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Interest
paid
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$-
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$-
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NON-CASH INVESTING AND FINANCING ACTIVITIES:
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Reclassification
from prepaid oil and gas development costs to oil
and gas assets not being amortized
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$761,444
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$-
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Real
estate contributed by non-controlling interest
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$-
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$15,544,382
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Accounts
receivable for deposit received on real estate sales in
escrow
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$-
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$888,375
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The accompanying notes are an integral part of these consolidated
financial statements.
PETRO RIVER OIL CORP.
Notes to the Consolidated Financial
Statements
(Unaudited)
1.
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Organization
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Petro River Oil Corp. (the “Company”) is an independent energy company focused
on the exploration and development of conventional oil and gas
assets with low discovery and development costs. The Company is
currently focused on moving forward with drilling wells on several
of its properties owned directly and indirectly through its
interest in Horizon Energy Partners, LLC
(“Horizon
Energy”), as well as
taking advantage of the relative depressed market in oil prices to
enter highly prospective plays with Horizon Energy and other
industry-leading partners. Diversification over a number of
projects, each with low initial capital expenditures and strong
risk reward characteristics, reduces risk and provides
cross-functional exposure to a number of attractive risk adjusted
opportunities.
The Company’s core holdings are in the Mid-Continent Region
in Oklahoma and in Kern County, California. Following
the acquisition of Horizon I Investments, LLC
(“Horizon
Investments”), the
Company now has exposure to a portfolio of several domestic and
international oil and gas assets consisting of highly prospective
conventional plays diversified across project type, geographic
location and risk profile, as well as access to a broad network of
industry leaders from Horizon Investment’s 20% interest in
Horizon Energy. Horizon Energy is an oil and gas
exploration and development company owned and managed by former
senior oil and gas executives. It has a portfolio of
domestic and international assets, including two assets located in
the United Kingdom, adjacent to the giant Wytch Farm oil field, the
largest onshore oil field in Western Europe. Other
projects include the proposed redevelopment of a large oil field in
Kern County, California and the development of an additional recent
discovery in Kern County. Each of the assets in the
Horizon Energy portfolio is characterized by low initial capital
expenditure requirements and strong risk reward
characteristics.
In light of the challenging oil price environment and capital
markets, management is focusing on specific target acquisitions and
investments, limiting operating expenses and exploring farm-in and
joint venture opportunities for the Company’s oil and gas
assets. No assurances can be given that management will be
successful.
2.
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Basis of Preparation
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The accompanying unaudited interim consolidated financial
statements 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 unaudited consolidated financial statements include the
Company and the following subsidiaries:
Petro Spring, LLC, PO1, LLC, Petro River UK Limited, Horizon I
Investments, LLC and MegaWest Energy USA Corp. and MegaWest Energy
USA Corp.’s wholly owned subsidiaries:
MegaWest Energy Texas Corp.
MegaWest Energy Kentucky Corp.
MegaWest Energy Missouri Corp.
MegaWest Energy Montana Corp.
Also contained in the unaudited consolidated financial statements
is the financial information of the Company’s 58.51% owned
subsidiary, MegaWest Energy Kansas Corporation
(“MegaWest”), which resulted from a transaction with
Fortis Property Group, LLC, a Delaware limited liability company
(“Fortis”) consummated on October 15, 2015 (the
“MegaWest
Transaction”). The
Megawest Transaction includes the Company’s contribution of
its 50% interest in Bandolier Energy LLC.
The unaudited 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, 2016 filed with the Securities
and Exchange Commission (the “SEC”) on July 29, 2016. 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, 2016 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, 2017.
3.
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Significant Accounting Policies
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(a)
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Use of Estimates:
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The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
The Company’s financial statements are based on a number of
significant estimates, including oil and natural gas reserve
quantities which are the basis for the calculation of depreciation,
depletion and impairment of oil and natural gas properties, and
timing and costs associated with its asset retirement obligations,
as well as those related to the fair value of stock options, stock
warrants and stock issued for services. While we believe that our
estimates and assumptions used in preparation of the financial
statements are appropriate, actual results could differ from those
estimates.
(b)
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Cash and Cash Equivalents:
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Cash and cash equivalents include all highly liquid monetary
instruments with original maturities of three months or less when
purchased. 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.
As of January 31, 2017 and April 30, 2016, restricted cash
consisted of a certificate of deposit in the amount of $0 and
$80,803, respectively, which had an annual interest rate of 0.5%
and maturity date of March 13, 2017.
(c)
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Receivables:
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Pursuant to FASB ASC paragraph 310-10-35-47, receivables that
management has the intent and ability to hold for the foreseeable
future shall be reported in the balance sheet at outstanding
principal adjusted for any charge-offs and the allowance for
doubtful accounts. The Company follows FASB ASC paragraphs
310-10-35-7 through 310-10-35-10 to estimate the allowance for
doubtful accounts. Pursuant to FASB ASC paragraph 310-10-35-9,
losses from uncollectible receivables shall be accrued when both of
the following conditions are met: (a) Information available before
the financial statements are issued or are available to be issued
(as discussed in Section 855-10-25) indicates that it is probable
that an asset has been impaired at the date of the financial
statements, and (b) The amount of the loss can be reasonably
estimated. These conditions may be considered in relation to
individual receivables or in relation to groups of similar types of
receivables. If the conditions are met, an accrual shall be made
even though the particular receivables that are uncollectible may
not be identifiable. The Company reviews individually each
receivable for collectability and performs on-going credit
evaluations of its customers and adjusts credit limits based upon
payment history and the customer’s current credit worthiness,
as determined by the review of their current credit information;
and determines the allowance for doubtful accounts based on
historical write-off experience, customer specific facts and
general economic conditions that may affect a client’s
ability to pay. Bad debt expense is included in general and
administrative expenses, if any.
Pursuant to FASB ASC paragraph 310-10-35-41, Credit losses for
receivables (uncollectible receivables), which may be for all or
part of a particular receivable, shall be deducted from the
allowance. The related receivable balance shall be charged off in
the period in which the receivables are deemed uncollectible.
Recoveries of receivables previously charged off shall be recorded
when received. The Company charges off its account receivables
against the allowance after all means of collection have been
exhausted and the potential for recovery is considered
remote.
The allowance for doubtful accounts at January 31, 2017 and April
30, 2016 was $0.
(d)
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Interest in Real Estate Rights:
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Interest in real estate
rights contributed by Fortis related to real properties that Fortis
plans to sell within one year. Since these properties are
contributed by Fortis, a related party, the rights are stated on
balance sheet at the cost basis of Fortis.
(e)
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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 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. For the nine months
ended January 31, 2017, the Company evaluated and recorded no
impairment on these properties.
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. For the nine
months ended January 31, 2017, the Company recorded an impairment
of $20,942 on its proved oil and gas
properties.
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 nine months ended January 31, 2017 and
2016.
(f)
|
Investments – Cost Method and Equity Method:
|
Investments held in stock of entities other than subsidiaries,
namely corporate joint ventures and other non-controlled entities
usually are accounted for by one of three methods: (i) the fair
value method (addressed in Topic 320), (ii) the equity method
(addressed in Topic 323), or (iii) the cost method (addressed in
Subtopic 325-20). Pursuant to Paragraph 323-10-05-5, the equity
method tends to be most appropriate if an investment enables the
investor to influence the operating or financial policies of the
investee. The cost basis is utilized for investments that are less
than 20% owned, and the Company does not exercise significant
influence over the operating and financial policies of the
investee. Under the cost method, investments are held at historical
cost.
(g)
|
Stock-Based Compensation:
|
Generally, all forms of stock-based compensation, including stock
option grants, warrants, and restricted stock grants are measured
at their fair value utilizing an option pricing model on the
award’s grant date, based on the estimated number of awards
that are ultimately expected to vest.
Under fair value recognition provisions, the Company recognizes
equity–based compensation net of an estimated forfeiture rate
and recognizes compensation cost only for those shares expected to
vest over the requisite service period of the award.
The fair value of option award is estimated on the date of grant
using the Black–Scholes option valuation model. The
Black–Scholes option valuation model requires the development
of assumptions that are input into the model. These assumptions are
the expected stock volatility, the risk–free interest rate,
the option’s expected life, the dividend yield on the
underlying stock and the expected forfeiture rate. Expected
volatility is calculated based on the historical volatility of the
Company’s common stock over the expected option life and
other appropriate factors. Risk–free interest rates are
calculated based on continuously compounded risk–free rates
for the appropriate term. The dividend yield is assumed to be zero
as the Company has never paid or declared any cash dividends on its
common stock and does not intend to pay dividends on the common
stock in the foreseeable future. The expected forfeiture rate is
estimated based on historical experience.
Determining the appropriate fair value model and calculating the
fair value of equity–based payment awards requires the input
of the subjective assumptions described above. The assumptions used
in calculating the fair value of equity–based payment awards
represent management’s best estimates, which involve inherent
uncertainties and the application of management’s judgment.
As a result, if factors change and the Company uses different
assumptions, the equity–based compensation expense could be
materially different in the future. In addition, the Company is
required to estimate the expected forfeiture rate and recognize
expense only for those shares expected to vest. If the actual
forfeiture rate is materially different from our estimate, the
equity–based compensation expense could be significantly
different from what the Company has recorded in the current
period.
The Company determines the fair value of the stock–based
payments to non-employees as either the fair value of the
consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. If the
fair value of the equity instruments issued is used, it is measured
using the stock price and other measurement assumptions as of the
earlier of either (1) the date at which a commitment for
performance by the counterparty to earn the equity instruments is
reached, or (2) the date at which the counterparty’s
performance is complete.
The expenses resulting from stock-based compensation are recorded
as general and administrative expenses in the consolidated
statement of operations, depending on the nature of the services
provided.
(h)
|
Income Taxes:
|
Income Tax Provision
Deferred income tax assets and liabilities are determined based
upon differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected
to reverse. Deferred tax assets are reduced by a valuation
allowance to the extent management concludes it is more likely than
not that the assets will not be realized. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
the statements of operations in the period that includes the
enactment date.
The Company may recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based
on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position should
be measured based on the largest benefit that has a greater than
fifty percent (50%) likelihood of being realized upon ultimate
settlement.
The estimated future tax effects of temporary differences between
the tax basis of assets and liabilities are reported in the
accompanying consolidated balance sheets, as well as tax credit
carry-backs and carry-forwards. The Company periodically reviews
the recoverability of deferred tax assets recorded on its
consolidated balance sheets and provides valuation allowances as
management deems necessary.
Management makes judgments as to the interpretation of the tax laws
that might be challenged upon an audit and cause changes to
previous estimates of tax liability. In addition, the Company
operates within multiple taxing jurisdictions and is subject to
audit in these jurisdictions. In management’s opinion,
adequate provisions for income taxes have been made for all years.
If actual taxable income by tax jurisdiction varies from estimates,
additional allowances or reversals of reserves may be
necessary.
Uncertain Tax Positions
The Company did not take any uncertain tax positions and had no
adjustments to its income tax liabilities or benefits for the
reporting periods ended January 31, 2017 and 2016.
(i)
|
Per Share Amounts:
|
Basic net income (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 income (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. For the three and nine months ended January 31,
2017 and 2016, potentially dilutive securities were not included in
the calculation of diluted net loss per share because to do so
would be anti-dilutive.
The Company had the following common stock equivalents at January
31, 2017 and 2016:
|
January 31, 2017
|
January 31, 2016
|
Stock
Options
|
2,495,182
|
710,019
|
Stock Purchase
Warrants
|
133,333
|
336,458
|
Total
|
2,628,515
|
1,046,477
|
(j)
|
Recent Accounting Pronouncements:
|
In May 2014, the FASB issued a comprehensive new revenue
recognition standard that will supersede nearly all existing
revenue recognition guidance under U.S. GAAP. The standard’s
core principle (issued as ASU 2014-09 by the FASB), is that a
company will recognize revenue when it transfers promised goods or
services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those
goods or services. These may include identifying performance
obligations in the contract, estimating the amount of variable
consideration to include in the transaction price and allocating
the transaction price to each separate performance obligation. The
new guidance must be adopted using either a full retrospective
approach for all periods presented in the period of adoption or a
modified retrospective approach. In August 2015, the FASB issued
ASU No. 2015-14, which defers the effective date of ASU 2014-09 by
one year, and would allow entities the option to early adopt the
new revenue standard as of the original effective date. This ASU is
effective for public reporting companies for interim and annual
periods beginning after December 15, 2017. The Company is currently
evaluating its adoption method and the impact of the standard on
its consolidated financial statements and has not yet determined
the method by which the Company will adopt the standard in
2017.
In April 2016, the FASB issued ASU No. 2016-10,
“Revenue from Contracts with
Customers: Identifying Performance Obligations and
Licensing” (topic 606).
In March 2016, the FASB issued ASU No. 2016-08, “Revenue from
Contracts with Customers: Principal versus Agent Considerations
(Reporting Revenue Gross verses Net)” (topic 606). These
amendments provide additional clarification and implementation
guidance on the previously issued ASU 2014-09, “Revenue from
Contracts with Customers”. The amendments in ASU 2016-10
provide clarifying guidance on materiality of performance
obligations; evaluating distinct performance obligations; treatment
of shipping and handling costs; and determining whether an entity's
promise to grant a license provides a customer with either a right
to use an entity's intellectual property or a right to access an
entity's intellectual property. The amendments in ASU 2016-08
clarify how an entity should identify the specified good or service
for the principal versus agent evaluation and how it should apply
the control principle to certain types of arrangements. The
adoption of ASU 2016-10 and ASU 2016-08 is to coincide with an
entity's adoption of ASU 2014-09, which we intend to adopt for
interim and annual reporting periods beginning after December 15,
2017. The Company is currently evaluating the impact of the new
standard.
In April 2016, the FASB issued ASU No. 2016-09,
“Compensation – Stock
Compensation” (topic
718). The FASB issued this update to improve the accounting for
employee share-based payments and affect all organizations that
issue share-based payment awards to their employees. Several
aspects of the accounting for share-based payment award
transactions are simplified, including: (a) income tax
consequences; (b) classification of awards as either equity or
liabilities; and (c) classification on the statement of cash flows.
The updated guidance is effective for annual periods beginning
after December 15, 2016, including interim periods within those
fiscal years. Early adoption of the update is permitted. The
Company is currently evaluating the impact of the new
standard.
In
August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash
Payments” (“ASU 2016-15”). ASU 2016-15
will make eight targeted changes to how cash receipts and cash
payments are presented and classified in the statement of cash
flows. ASU 2016-15 is effective for fiscal years beginning after
December 15, 2017. The new standard will require adoption on a
retrospective basis unless it is impracticable to apply, in which
case it would be required to apply the amendments prospectively as
of the earliest date practicable. The Company is currently in the
process of evaluating the impact of ASU 2016-15 on its consolidated
financial statements.
In November 2016, the FASB issued
ASU 2016-18, “Statement of
Cash Flows (Topic 230)”, requiring that the statement
of cash flows explain the change in the total cash, cash
equivalents, and amounts generally described as restricted cash or
restricted cash equivalents. This guidance is effective for fiscal
years, and interim reporting periods therein, beginning after
December 15, 2017 with early adoption permitted. The provisions of
this guidance are to be applied using a retrospective approach
which requires application of the guidance for all periods
presented. The Company is currently evaluating the impact of the
new standard.
The Company does not expect the adoption of any recently issued
accounting pronouncements to have a significant impact on its
financial position, results of operations, or cash
flows.
(k)
|
Subsequent Events:
|
The Company has evaluated all transactions through the date the
consolidated financial statements were issued for subsequent event
disclosure consideration.
4.
|
Business Acquisitions
|
On May 3, 2016 (the “Closing
Date”), the Company
consummated the acquisition of Horizon Investments (the
“Horizon
Acquisition”). As a result of the
acquisition, the Company acquired: (i) a 20% membership interest in
Horizon Energy; (ii) three promissory notes issued by the Company
to Horizon Investments in the principal amount of $1.6 million (the
“Horizon
Notes”); (iii) a
restricted certificate of deposit; and (iv) certain bank,
investment and other accounts maintained by Horizon
Investments. The Horizon Acquisition was completed in
accordance with the term and conditions of the Conditional Purchase
Agreement first entered into by the Company and Horizon Investments
on December 1, 2015 (the “Purchase
Agreement”). Also on the
Closing Date, the Company and Horizon Investments entered into an
amended and restated Purchase Agreement, pursuant to which the
Company agreed to provide for additional advances by Horizon
Investments to the Company.
As consideration for the Horizon Acquisition, and in accordance
with the Purchase Agreement, as amended, the Company issued
11,564,250 shares of its common stock on the Closing Date, which
amount included 1,395,916 additional shares of common stock in
consideration for the additional cash, receivables and other assets
reflected on Horizon Investment's balance sheet on the Closing
Date.
The following table summarizes the allocation of the purchase price
to the net assets acquired:
Purchase price allocation
|
|
Cash
and cash equivalents
|
$3,364,817
|
Cost
method investment – Horizon Energy Partners, LLC
|
688,000
|
Notes
receivable – related party
|
1,600,000
|
Net assets acquired
|
$5,652,817
|
|
|
Consideration for net assets acquired
|
|
Fair
value of common stock issued
|
$5,652,817
|
5.
|
Accounts Receivable – Related Party
|
On October 15, 2015, the Company entered into a contribution
agreement (the “Contribution
Agreement”) with MegaWest
and Fortis pursuant to which the Company and Fortis each agreed to
contribute certain assets to MegaWest in exchange for shares of
MegaWest common stock (“MegaWest
Shares”) (the
“MegaWest
Transaction”).
Upon execution of the Contribution Agreement, Fortis transferred
its interest in 30 condominium units and the right to any profits
and proceeds therefrom. For the three months ended January 31, 2017
and 2016, Fortis sold 0 and 6 condominium units, respectively, and
MegaWest recorded a net (loss) gain on interest in real estate
rights of $(7,208) and $2,377,761, respectively. For the nine
months ended January 31, 2017 and 2016, Fortis sold 2 and 24
condominium units, respectively, and MegaWest recorded a net gain
on interest in real estate rights of $686,096 and $10,238,499,
respectively. As of January 31, 2017, the Company had an accounts
receivable – related party in the amount of $2,738,807
related to interest in real estate rights of condominium units
sold.
The account receivable and the Company’s interest in real
estate reflected on the Company’s balance sheet are assets
held by MegaWest, and are controlled by MegaWest’s board of
directors, consisting of two members appointed by Fortis, and one
by the Company. The relative composition of the board of
directors of MegaWest shall continue as long as Fortis has an
equity interest in MegaWest.
6.
|
Notes Receivable – Related Party
|
During 2015 and 2016, the Company entered into eight promissory
note agreements with Fortis with aggregate principal amounts of
$21,590,803. The notes receivable bear interest at an annual rate
of 3% and mature on December 31, 2017. As of January 31, 2017 and
April 30, 2016, the outstanding balance of the notes receivable was
$21,590,803 and $17,848,000, respectively.
7.
|
Interest in Real Estate Rights
|
As discussed in Note 5, MegaWest received an interest in real
estate rights of 30 condominium units from Fortis pursuant to the
Megawest Transaction. For the nine months ended January 31,
2017, the Company recognized a net gain of $686,096 related to the
sale of two condominium units by Fortis.
The following table summarizes the activity for interest in real
estate rights:
|
Nine Months Ended January 31,
2017
|
Balance
at April 30, 2016
|
$2,820,402
|
Cost
of sales - two condominium units
|
937,217
|
Balance at January 31, 2017
|
$1,883,185
|
8.
|
Oil and Gas Assets
|
The following table summarizes the activity of the oil and gas
assets by project for the nine months ended January 31,
2017:
|
Oklahoma
|
Larne
Basin
|
Other (1)
|
Total
|
Balance
May 1, 2016
|
$778,226
|
$-
|
$100,000
|
$878,226
|
Additions
|
304,297
|
761,444
|
-
|
1,065,741
|
Disposals
|
-
|
-
|
-
|
-
|
Depreciation,
depletion and amortization
|
(3,440)
|
-
|
-
|
(3,440)
|
Impairment
of oil and gas assets
|
(20,942)
|
-
|
-
|
(20,942)
|
|
|
|
|
|
Balance
January 31, 2017
|
$1,058,141
|
$761,444
|
$100,000
|
$1,919,585
|
(1) Other property consists primarily of four used steam generators
and related equipment that will be assigned to future projects. As
of January 31, 2017, management concluded that impairment was not
necessary as all other assets were carried at salvage
value.
Kern County Project. On March 4, 2016, the
Company executed an Asset Purchase and Sale and Exploration
Agreement (the "Agreement")
to acquire a 13.75% working interest in certain oil and gas leases
located in southern Kern County, California (the
"Project").
Horizon Energy also purchased a 27.5% working interest in the
Project.
Under the terms of the Agreement, the Company paid $108,333 to
the sellers on the closing date, and is obligated to pay certain
other costs and expenses after the closing date related to existing
and new leases as more particularly set forth in the Agreement.
Costs incurred to date for this property have aggregated to
$646,680 as of January 31, 2017
and are recorded as prepaid oil and gas development costs on the
consolidated balance sheet. In addition, the
sellers are entitled to an overriding royalty interest in certain
existing and new leases acquired after the closing date, and the
Company is required to make certain other payments, each in amounts
set forth in the Agreement.
Acquisition of Interest in Larne
Basin. On January
19, 2016, Petro River UK Limited, ("Petro UK"), a wholly owned subsidiary of the Company,
entered into a Farmout Agreement to acquire a 9% interest in
Petroleum License PL 1/10 and P2123 (the “Larne
Licenses”) located in the
Larne Basin in Northern Ireland (the "Larne
Transaction"). The
two Larne Licenses, one onshore and one offshore, together
encompass approximately 130,000 acres covering the large majority
of the prospective Larne Basin. The other parties to the
Farmout Agreement are Southwestern Resources Ltd, a wholly owned
subsidiary of Horizon Energy, which will acquire a 16% interest,
and Brigantes Energy Limited, which will retain a 10%
interest. Third parties will own the remaining 65%
interest.
Under the terms of the Farmout Agreement, Petro UK deposited
approximately $735,000 into an escrow agreement
("Escrow
Agreement"), which amount
represented Petro UK's obligation to fund the total projected cost
to drill the first well under the terms of the Farmout Agreement.
The total deposited amount to fund the cost to drill the first well
is approximately $6,159,452, based on an exchange rate of one
British Pound for 1.44 U.S. Dollars. Petro UK was and will continue
to be responsible for its pro-rata costs of additional wells
drilled under the Farmout Agreement. Drilling of the first well was
completed in June 2016 and was unsuccessful. The initial costs
incurred by the Company were reclassified from prepaid oil and gas
development costs to oil and gas assets not being amortized on the
consolidated balance sheets.
Spyglass Drilling Program. On August 19, 2016, Spyglass Energy Group, LLC
(“Spyglass”), a wholly owned subsidiary of Bandolier
Energy, LLC (“Bandolier”), entered into a Joint Exploration and
Development Agreement (the “Exploration
Agreement”) between
Spyglass, Phoenix 2016, LLC (“Phoenix”) and Mackey Consulting & Leasing, LLC
(“Mackey”). Pursuant to the Exploration
Agreement, Phoenix and Mackey shall operate and provide certain
services, including obtaining permits and providing technical
services, at cost, in connection with a Phase I Development Program
as agreed to by the parties (the “Phase I
Program”). Phoenix and Mackey shall earn
a 25% working interest on all wells drilled in the Phase I
Program. Following success and completion of the Phase I
Program, Phoenix and Mackey shall earn a 25% working interest in
the Osage County, Oklahoma Concession held by Spyglass. Under the
Exploration Agreement, Bandolier has agreed commit up to $2.1
million towards costs of the Phase I Program, at their sole
discretion.
Divestiture of Missouri Properties. During the quarter
ended July 31, 2016, the Company assigned its leaseholds covering approximately 320
acres in Missouri to a third party in furtherance of the
Company’s corporate strategy to divest its legacy assets. In
conjunction with the assignment, the Company recorded a gain of
$216,850.
Divestiture of Oklahoma Properties. During the three months ended July 31, 2015, the
Company disposed of some of its interests in its Oklahoma oil and
gas assets and received proceeds totaling $279,013. The proceeds
were offset against the full cost pool, therefore no gain or loss
was recognized.
Impairment of Oil & Gas Properties. As of January 31, 2017,
the Company assessed its oil and gas assets for impairment and
recognized a charge of $20,942 related to the Oklahoma oil and gas
property. As of January 31, 2016, the Company assessed its oil and
gas assets for impairment and recognized a charge of $6,870,613
related to the Oklahoma and Missouri oil and gas
properties.
9.
|
Intangible Assets
|
The Company recorded amortization expense of $0 and $30,113,
respectively, for the three months ended January 31, 2017 and 2016,
respectively, and recorded
amortization expense of $0 and $90,339, respectively, for the nine
months ended January 31, 2017 and 2016, respectively,
related to certain intangible assets
which were acquired during 2015, but for which are no longer
recorded by the Company as they were fully impaired during fiscal
year 2016.
10.
|
Asset Retirement Obligations
|
The total future asset retirement obligations were 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 January
31, 2017 and April 30, 2016, based on a future undiscounted
liability of $638,330 and $956,612, 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 obligations were as
follows:
|
Nine Months Ended
January 31,
2017
|
Nine Months Ended
January 31,
2016
|
Balance,
beginning of period
|
$763,062
|
$918,430
|
Disposals
|
(216,580)
|
(207,827)
|
Accretion
|
10,780
|
48,320
|
|
557,262
|
758,923
|
Less:
Current portion for cash flows expected to be incurred within one
year
|
(406,403)
|
(541,959)
|
Long-term
portion, end of period
|
$150,859
|
$216,964
|
Expected timing of asset retirement obligations:
Year Ending April 30,
|
|
2017 (remainder of year)
|
$406,403
|
2018
|
-
|
2019
|
-
|
2020
|
-
|
2021
|
-
|
Thereafter
|
231,927
|
Subtotal
|
638,330
|
Effect
of discount
|
(81,068)
|
Total
|
$557,262
|
11.
|
Related Party Transactions
|
Employment Agreements
On October 30, 2015, Mr. Stephen Brunner joined the Company as
President. Mr. Brunner has been tasked with making oil
and gas related decisions and executing the Company’s growth
strategy. Under the terms of the contract, Mr. Brunner receives a
base salary of $10,000 per month. Mr. Brunner was also granted
53,244 stock options. He also has the right to purchase an
additional 1.75% of the Company’s common stock subject to
shareholder approval on the increase of the current stock option
plan and achieving pre-defined target objectives.
The Company computed the fair value of the grant as of the date of
grant utilizing a Black-Scholes option-pricing model using the
following assumptions: common share value based on the fair value
of the Company’s common stock as quoted on the Over the
Counter Bulletin Board, $1.78; exercise price of $2.00; expected
volatility of 171%; and a discount rate of 2.16%. The grant date
fair value of the award was $89,525. For the three months
ended January 31, 2017 and 2016, the Company expensed $6,101
and $6,101, respectively, to general and administrative
expenses. For the nine months ended January 31, 2017 and 2016, the
Company expensed $18,303 and $24,006 respectively, to general
and administrative expenses.
MegaWest Transaction
On October 15, 2015, the Company entered into the Contribution
Agreement with MegaWest and Fortis, pursuant to which the Company
and Fortis each agreed to contribute certain assets to MegaWest in
exchange for shares of MegaWest common stock. See Note 5
above.
Accounts Receivable - Related Party
As discussed in Note 5 above, on October 15, 2015, the Company
entered into the Contribution Agreement with MegaWest and Fortis
pursuant to which the Company and Fortis each agreed to assign
certain assets to MegaWest in exchange for the MegaWest
Shares.
Upon execution of the Contribution Agreement, Fortis transferred
certain indirect interests held in 30 condominium units and the
rights to any profits and proceeds therefrom, with its basis of
$15,544,382, to MegaWest. As of January 31, 2017 and April 30,
2016, the Company had an accounts receivable – related party
in the amount of $2,738,807 and $4,829,693, respectively, which was
due from Fortis for the profits belonging to MegaWest. See Note 5
above.
Notes Receivable – Related Party
As discussed in Note 6, the Company entered into eight promissory
note agreements with Fortis, with total principal amount of
$21,590,803 as of January 31, 2016. The notes receivable bear
interest at an annual interest rate of 3% and mature on December
31, 2017. For the three and nine months ended January 31, 2017, the
Company recorded $163,479 and $462,245 of interest income on the
notes receivable. As of January 31, 2017 and April 30, 2016, the
outstanding balance of the notes receivable was $21,590,803 and
$17,848,000, respectively.
Notes Payable – Related Party
On December 1, 2015, the Company issued a non-recourse promissory
note, in the principal amount of $750,000 to Horizon Investments
(“Note
A”), the proceeds of
which were to be used for working capital purposes. Interest on
Note A was due upon the earlier to occur of closing of the Horizon
Transaction, or December 31, 2016. Amounts due under the terms of
Note A accrued interest at an annual rate equal to one half of one
percent.
On December 7, 2015, the Company entered into the Horizon
Transaction, pursuant to which the Company executed a purchase
agreement to acquire Horizon Investments in an all-stock deal. See
Note 4. Mr. Scot Cohen, the Company’s Executive Chairman, is
the sole Manager of Horizon Investments. In addition, Mr. Cohen
owns a 9.2% membership interest in Horizon Investments. Horizon
Investments owns a 20% interest in Horizon Energy
Partners. Mr. Cohen owns a 2.8% membership interest in
Horizon Energy Partners.
On January 13, 2016, the Company issued a second non-recourse
promissory note in the principal amount of $750,000
("Note
B") to Horizon Investments. All
of the proceeds from Note B were used to fund Petro UK's
obligations under the terms of the Farmout Agreement, and were
deposited into the Escrow Agreement. The principal and all accrued
and unpaid interest on Note B was due upon the earlier to occur of
closing of the transactions contemplated under the terms of the
Purchase Agreement. Amounts due under the terms of Note B accrued
interest at an annual rate equal to one half of one
percent.
On April 7, 2016, the Company issued a third non-recourse
promissory note in the principal amount of $100,000
("Note
C") to Horizon Investments. All
of the proceeds from Note C were used to fund working capital
requirements. The principal and all accrued and unpaid interest on
Note C was due upon the earlier to occur of closing of the
transactions contemplated under the terms of the Purchase
Agreement. Amounts due under the terms of Note C accrued interest
at an annual rate equal to one half of one
percent.
Upon consummation of the Horizon Transaction on May 3, 2016, each
of Note A, Note B and Note C were paid off in full.
12.
|
Equity
|
As of January 31, 2017 and April 30, 2016, the Company had
5,000,000 shares of preferred stock, par value $0.00001 per share,
were authorized. As of January 31, 2017 and April 30, 2016, the
Company had 29,500 shares of Series B Preferred Stock, par value
$0.00001 per share (“Series B
Preferred”), were
authorized. No Series B Preferred shares are currently issued or
outstanding, and no other series of preferred stock have been
designated.
As of January 31, 2017 and April 30, 2016, the Company had
150,000,000 shares of common stock, par value $0.00001 per share,
were authorized. During the nine months ended January 31, 2017, the
Company issued 11,564,250 shares of common stock related to the
Horizon Acquisition as discussed in Note 4 above. There were
15,827,998 and 4,263,748 shares of common stock issued and
outstanding as of January 31, 2017 and April 30, 2016,
respectively.
13.
|
Stock Options
|
The following table summarizes information about the options
changes of options for the period from April 30, 2016 to January
31, 2017 and options outstanding and exercisable at January 31,
2017:
|
Options
|
Weighted
Average
Exercise
Prices
|
|
|
|
Outstanding April 30, 2016
|
743,050
|
$4.00
|
Exercisable – April 30, 2016
|
421,460
|
$3.41
|
Granted
|
1,766,458
|
1.38
|
Exercised
|
-
|
-
|
Forfeited/Cancelled
|
(14,326)
|
-
|
Outstanding – January 31, 2017
|
2,495,182
|
$2.51
|
Exercisable – January 31, 2017
|
1,652,626
|
$2.10
|
|
|
|
Outstanding – Aggregate Intrinsic Value
|
$-
|
$-
|
Exercisable – Aggregate Intrinsic Value
|
$-
|
$-
|
During the nine months ended January 31, 2017, the Company issued
1,766,458 options to employees and consultants. The fair
value of the grant was computed as of the date of grant utilizing a
Black-Scholes option-pricing model using the following assumptions:
common share value based on the fair value of the Company’s
common stock as quoted on the Over the Counter Bulletin Board,
range of $1.30 to $1.90; exercise price range of $1.38 to
$3.39; expected volatility range of 170% to 187%; and a discount
rate range of 1.43% to 1.84%.
The following table summarizes information about the options
outstanding and exercisable at January 31, 2017:
|
|
Options
Outstanding
|
Options
Exercisable
|
|
|
Exercise
Price
|
Options
|
Weighted Avg.
Life Remaining
|
Options
|
|
$1.38
|
1,761,458
|
9.45
years
|
1,069,860
|
|
$1.98
|
5,000
|
9.51
years
|
2,500
|
|
$2.00
|
457,402
|
8.50
years
|
383,972
|
|
$2.87
|
65,334
|
8.50
years
|
61,611
|
|
$3.00
|
51,001
|
9.16
years
|
42,445
|
|
$3.39
|
12,000
|
9.14
years
|
8,000
|
|
$6.00
|
10,000
|
8.25
years
|
10,000
|
|
$12.00
|
132,987
|
6.98
years
|
74,238
|
|
|
2,495,182
|
|
1,652,626
|
Aggregate
Intrinsic Value
|
$-
|
|
$-
|
|
During the three months ended January 31, 2017 and 2016, the
Company expensed $335,462 and $311,993, respectively, to general
and administrative expense for stock-based compensation pursuant to
employment and consulting agreements. During the nine months ended
January 31, 2017 and 2015, the Company expensed $1,850,462 and
$1,485,993, respectively, to general and administrative expense for
stock-based compensation pursuant to employment and consulting
agreements.
As of January 31, 2017, the Company has approximately $882,600 in
unrecognized stock-based compensation expense, which will be
amortized over a weighted average exercise period of approximately
3.25 years.
Warrants:
|
Number
of
Warrants
|
Weighted
Average
Exercise Price
|
Weighted
Average Life
Remaining
|
Outstanding and exercisable – April 30, 2016
|
133,333
|
$50.00
|
3.08
|
Forfeited
|
-
|
-
|
-
|
Granted
|
-
|
-
|
-
|
Outstanding and exercisable – January 31, 2017
|
133,333
|
50.00
|
3.08
|
There were no changes to the Company’s warrants during the
nine months ended January 31, 2017. The aggregate intrinsic value
of the outstanding warrants was $0.
14.
|
Non-Controlling Interest
|
For the nine months ended January 31, 2017, the changes in the
Company’s non–controlling interest were as
follows:
|
Bandolier
|
Fortis
|
Total
|
Non–controlling
interest at April 30, 2016
|
$(731,060)
|
$12,782,378
|
$12,051,318
|
Contribution
of cash by non-controlling interest holders
|
176,000
|
-
|
176,000
|
Non–controlling
interest share of income (losses)
|
(116,752)
|
248,613
|
131,861
|
Non–controlling interest at January 31, 2017
|
$(671,812)
|
$13,030,991
|
$12,359,179
|
During the nine months ended January 31, 2017, Bandolier received
cash contributions totaling $659,163 resulting from a mandatory
capital call to its members. On August 8, 2016, Bandolier’s
Board of Managers approved a capital call of $1,250,000 due per
extension to April 30, 2017 to fund certain re-completions and test
wells to be drilled in Osage County. MegaWest Kansas' portion of
the capital call is $625,000, of which it has funded $483,163 and
$141,837 is due on or prior to April 30, 2017. Pearsonia West's
portion of the capital call is $550,000, of which it has funded
$176,000 and $374,000 is due on or prior to April 30, 2017. Ranger
Station has elected not to fund its capital call amount of $75,000.
As a result, Ranger Station has forfeited its 6% interest in
Bandolier and such interest has been allocated pro rata between
MegaWest Kansas and Pearsonia West as of January 31,
2017.
15.
|
Contingency and Contractual Obligations
|
(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
the landlord had completed remediation. Pursuant to the lease
contract, the Company asserted that rent should be abated during
the remediation process and accordingly, the Company did not pay
any rent after 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 determined that the premises were not fit for
re-occupancy and considered the landlord to be in default of the
lease. The Landlord subsequently terminated the lease.
On January 30, 2014 the landlord filed a Statement of Claim against
the Company for rental arrears in the amount aggregating CAD
$759,000 (approximately USD $566,000 as of March 8, 2017). The
Company filed a defense and on October 20, 2014, it filed a summary
judgment application stating that the landlord’s claim is
barred as it was commenced outside the 2-year statute of limitation
period under the Alberta Limitations Act. The landlord subsequently
filed a cross-application to amend its Statement of Claim to add a
claim for loss of prospective rent in an amount of CAD $665,000
(approximately USD $496,000 as of March 8, 2017). The applications
were heard on June 25, 2015 and the court
allowed both the Company’s summary judgment application and
the landlord’s amendment application. Both of these
orders were appealed though two levels of the Alberta courts and
the appeals were dismissed at both levels. The net effect is that
the landlord's claim for loss of prospective rent is to
proceed.
(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 August 11, 2014, Martha Donelson and John Friend amended
their complaint in an existing lawsuit by filing a class action
complaint styled: Martha Donelson and John
Friend, et al. v. United States of America, Department of the
Interior, Bureau of Indian Affairs and Devon Energy Production, LP,
et al., Case No.
14-CV-316-JHP-TLW, United States District Court for the Northern
District of Oklahoma (the “Proceeding”). The plaintiffs added as
defendants twenty-seven (27) specifically named operators,
including Spyglass, as well as
all Osage County lessees and operators who have obtained a
concession agreement, lease or drilling permit approved by the
Bureau of Indian Affairs (“BIA”) in Osage County allegedly in
violation of National Environmental Policy Act
(“NEPA”). Plaintiffs seek a
declaratory judgment that the BIA improperly approved oil and gas
leases, concession agreements and drilling permits prior to August
12, 2014, without satisfying the BIA’s obligations under
federal regulations or NEPA, and seek a determination that such oil
and gas leases, concession agreements and drilling permits are
void ab initio. Plaintiffs are seeking damages
against the defendants for alleged nuisance, trespass, negligence
and unjust enrichment. The potential consequences of
such complaint could jeopardize the corresponding
leases.
On October 7, 2014, Spyglass, along with other defendants, filed a
Motion to Dismiss the August 11, 2014 Amended Complaint on various
procedural and legal grounds. Following the significant briefing,
the Court, on March 31, 2016, granted the Motion to Dismiss as to
all defendants and entered a judgment in favor of the defendants
against the plaintiffs. On April 14, 2016, Spyglass with the other
defendants, filed a Motion seeking its attorneys’ fees and
costs. The motion remains pending. On April 28, 2016, the
plaintiffs filed three motions: a Motion to Amend or Alter the
Judgment; a Motion to Amend the Complaint; and a Motion to Vacate
Order. On November 23, 2016 the Court denied all three of
Plaintiffs’ motions. On December 6, 2016, Plaintiffs
filed a Notice of Appeal to the Tenth Circuit Court of
Appeals. That appeal is pending as of the effective date of
this response. There is no specific timeline by which the Court of
Appeals must render a ruling. Spyglass intends to continue to
vigorously defend its interest in this
matter.
(d) MegaWest Energy Missouri Corp. (“MegaWest
Missouri”), a wholly
owned subsidiary of the Company, is involved in two cases related
to oil leases in West Central, Missouri. The first case
(James Long
and Jodeane Long v. MegaWest Energy Missouri and Petro River Oil
Corp., case number
13B4-CV00019) is a case for unlawful
detainer, pursuant to which the plaintiffs contend that MegaWest
Missouri oil and gas lease has expired and MegaWest Missouri is
unlawfully possessing the plaintiffs’ real property by
asserting that the leases remain in effect. The case was
originally filed in Vernon County, Missouri on September 20,
2013. MegaWest Missouri filed an Answer and Counterclaims on
November 26, 2013 and the plaintiffs filed a motion to dismiss the
counterclaims. MegaWest Missouri filed a motion for Change of Judge
and Change of Venue and the case was transferred to Barton
County. The court granted the motion to dismiss the
counterclaims on February 3, 2014. As to the other allegations in the
complaint, the matter is still pending.
MegaWest Missouri filed a second case on October 14, 2014
(MegaWest
Energy Missouri Corp. v. James Long, Jodeane Long, and Arrow Mines
LLC, case number
14VE-CV00599). This case is pending in Vernon County,
Missouri. Although the two cases are separate, they are
interrelated. In the Vernon County case, MegaWest Missouri
has made claims for: (1) replevin for personal property; (2)
conversion of personal property; (3) breach of the covenant of
quiet enjoyment regarding the lease; (4) constructive eviction of
the lease; (5) breach of fiduciary obligation against James Long;
(6) declaratory judgment that the oil and gas lease did not
terminate; and (7) injunctive relief to enjoin the action pending
in Barton County, Missouri. The plaintiffs filed a motion to
dismiss on November 4, 2014, and Arrow Mines, LLC filed a motion to
dismiss on November 13, 2014. Both motions remain pending,
and MegaWest Missouri will file an opposition to the motions in the
near future.
(e) 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”).
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 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 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 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 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
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 July 29, 2016 for the year ended April 30,
2016.
Business Overview
The Company is an independent energy company focused on the
exploration and development of conventional oil and gas assets with
low discovery and development costs. The Company is currently
focused on moving forward with drilling wells on several of its
properties owned directly and indirectly through its interest in
Horizon Energy Partners, LLC (“Horizon
Energy”), as well as
taking advantage of the relative depressed market in oil prices to
enter highly prospective plays with Horizon Energy and other
industry-leading partners. Diversification over a number of
projects, each with low initial capital expenditures and strong
risk reward characteristics, reduces risk and provides
cross-functional exposure to a number of attractive risk adjusted
opportunities.
The Company’s core holdings are in the Mid-Continent Region
in Oklahoma and in Kern County, California. Following
the acquisition of Horizon I Investments, LLC
(“Horizon
Investments”), the
Company now has exposure to a portfolio of several domestic and
international oil and gas assets consisting of highly prospective
conventional plays diversified across project type, geographic
location and risk profile, as well as access to a broad network of
industry leaders from Horizon Investment’s 20% interest in
Horizon Energy. Horizon Energy is an oil and gas
exploration and development company owned and managed by former
senior oil and gas executives. It has a portfolio of
domestic and international assets, including two assets located in
the United Kingdom, adjacent to the giant Wytch Farm oil field, the
largest onshore oil field in Western Europe. Other
projects include the proposed redevelopment of a large oil field in
Kern County, California and the development of an additional recent
discovery in Kern County. Each of the assets in the
Horizon Energy portfolio is characterized by low initial capital
expenditure requirements and strong risk reward
characteristics.
The execution of our business plan is dependent on obtaining
necessary working capital. While no assurances can be
given, in the event management is able to obtain additional working
capital, we plan to acquire high-quality oil and gas properties,
primarily proved producing and proved undeveloped reserves. We also
intend to explore low-risk development drilling and work-over
opportunities. Management is also exploring farm
in and joint venture opportunities for our oil and gas
assets.
Critical Accounting Policies and Estimates
The Company’s significant accounting policies are described
in Note 3 to the annual consolidated financial statements for the
year ended April 30, 2016 and 2015 on Form 10-K filed with the SEC
on July 29, 2016 for the year ended April 30, 2016.
Our discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial statements.
These 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
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
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.
Interest in Real Estate Rights
Interest in real estate rights, previously identified as
“Real estate - held for sale” in our unaudited
consolidated balance sheets are related to real estate currently
held by Fortis, who intends to sell these properties within the
next 12 months. Fortis contributed profit realized from future sale
of these properties to MegaWest, pursuant to the terms and
conditions of the Contribution Agreement, as a part of the MegaWest
Transaction. As we do not know the price at which the real estate
will be sold, the rights are stated on the consolidated balance
sheet as of January 31, 2017 and April 30, 2016 at the cost basis
realized by Fortis.
Income Taxes
The Company uses the asset and liability method in accounting for
income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial
reporting and income tax carrying amounts of assets and liabilities
and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The Company
reviews deferred tax assets for a valuation allowance based upon
whether it is more likely than not that the deferred tax asset will
be fully realized. A valuation allowance, if necessary, is provided
against deferred tax assets, based upon management’s
assessment as to their realization.
Uncertain Tax Positions
The Company evaluates uncertain tax positions pursuant to ASC Topic
740-10-25 “Accounting for Uncertainty in
Income Taxes,” which
allows companies to recognize a tax benefit from an uncertain tax
position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities based on
the technical merits of the position. Those tax positions failing
to qualify for initial recognition are recognized in the first
interim period in which they meet the more likely than not
standard, or are resolved through negotiation or litigation with
the taxing authority, or upon expiration of the statute of
limitations. De-recognition of a tax position that was previously
recognized occurs when an entity subsequently determines that a tax
position no longer meets the more likely than not threshold of
being sustained.
At April 30, 2016 and 2015, the Company has approximately
$2,501,000 and $0, respectively, of liabilities for uncertain tax
positions. Interpretation of taxation rules relating to net
operating loss utilization in real estate transactions give rise to
uncertain positions. In connection with the uncertain tax position,
there was no interest or penalties recorded as the position is
expected but the tax returns are not yet due.
The Company is subject to ongoing tax exposures, examinations and
assessments in various jurisdictions. Accordingly, the Company may
incur additional tax expense based upon the outcomes of such
matters. In addition, when applicable, the Company will adjust tax
expense to reflect the Company’s ongoing assessments of such
matters, which require judgment and can materially increase or
decrease its effective rate as well as impact operating
results.
The number of years with open tax audits varies depending on the
tax jurisdiction. The Company’s major taxing jurisdictions
include the United States (including applicable
states).
NEW ACCOUNTING STANDARDS
Recently Adopted Accounting Standards
In May 2014, the FASB issued a comprehensive new revenue
recognition standard that will supersede nearly all existing
revenue recognition guidance under U.S. GAAP. The standard’s
core principle (issued as ASU 2014-09 by the FASB), is that a
company will recognize revenue when it transfers promised goods or
services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those
goods or services. These may include identifying performance
obligations in the contract, estimating the amount of variable
consideration to include in the transaction price and allocating
the transaction price to each separate performance obligation. The
new guidance must be adopted using either a full retrospective
approach for all periods presented in the period of adoption or a
modified retrospective approach. In August 2015, the FASB issued
ASU No. 2015-14, which defers the effective date of ASU 2014-09 by
one year, and would allow entities the option to early adopt the
new revenue standard as of the original effective date. This ASU is
effective for public reporting companies for interim and annual
periods beginning after December 15, 2017. The Company is currently
evaluating its adoption method and the impact of the standard on
its consolidated financial statements.
Results of Operations
Results of Operations for the Three Months Ended January 31, 2017
Compared to Three Months Ended January 31, 2016
Oil Sales
During
the three months ended January 31, 2017, the Company recognized
$7,117 in oil and gas sales, compared to sales of $9,882 for the
three months ended January 31, 2016. The overall decrease in
sales of $2,765 is primarily due to the Company continuing to
decrease operations and shut-in wells in light of the current
challenging oil price environment. The Company is currently drilling four wells and
re-completing certain existing wells, located in Osage County,
Oklahoma and Kern County, California. Given current oil
and gas prices, management does not anticipate deriving revenue
from existing oil and gas assets in the short-term; provided,
however, in the event oil and gas prices rise from current levels,
or in the event current drilling activity and re-completions
results in proven reserves that can be extracted profitably at
current oil and gas prices, management anticipates the resumption
of oil and gas sales, although no assurances can be
given.
Lease Operating Expense
During the three months ended January 31, 2017, lease operating
expense was $8,586, as compared to lease operating expense of
$68,469 for the three months ended January 31, 2016. The overall
decrease in lease operating expense of $59,883 was primarily
attributable to management’s commitment to substantially
reduce operating expense in light of the current challenging oil
price environment.
Impairment of Oil and Gas Assets
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. 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. During the
three months ended January 31, 2017, the Company reviewed the oil
and gas assets for impairment and recognized an impairment charge
of $20,942 on the Oklahoma properties. During the three months
ended January 31, 2017, the Company reviewed the oil and gas assets
for impairment and recognized an impairment charge of $6,870,613 on
the Oklahoma and Missouri properties.
General and Administrative Expense
General and administrative expense for the three months ended
January 31, 2017 was $777,702, as compared to $505,629 for
the three months ended January 31, 2016. The increase was primarily
attributable to increases in salaries, professional fees and
benefits and office and administrative expenses. These changes are
outlined below:
|
For
the Three Months Ended
|
For
the Three Months Ended
|
|
January
31, 2017
|
January
31, 2016
|
Salaries
and benefits
|
$397,593
|
$212,435
|
Professional
fees
|
265,543
|
255,043
|
Office
and administrative
|
114,566
|
38,151
|
|
|
|
Total
|
$777,702
|
$505,629
|
Salaries and benefits include non-cash stock-based compensation of
$335,462 for three months ended January 31, 2017 compared to
$89,860 for the three months ended January 31, 2016. The increase
in stock-based compensation of $245,145 from the prior comparable
period was due to an increase in the number of option awards
expensed during the current three-month period. General and
administrative expenses increased due to (i) significant increases
in professional fees incurred during the implementation of the
Company’s business plan; (ii) as well as increased marketing
and investor relations expenses. We also experienced higher legal
expenses relating to transactional and other corporate activities
during the three months ended January 31, 2017.
Interest Income (Expense)
During the three months ended January 31, 2017, the Company
recognized $163,809 in interest income compared to interest income
of $45,937 for the three months ended January 31, 2016. The income
received in the current period was attributable to $163,262 of
interest income accrued on the related party notes
receivable.
Net (Loss) Gain on Interests in Real Estate Rights
During the three months ended January 31, 2017, the Company
recognized $(7,208) net loss on its interest in real estate rights
compared to $2,377,761 net gain for the three months ended January
31, 2016. The net gain on interest in real estate rights for the
three months ended January 31, 2017 and 2016 was due to the sale of
0 and six condominium units, respectively, by Fortis, and the
resulting profits which were assigned to MegaWest pursuant to the
Contribution Agreement, less the book value recorded by
MegaWest.
Results of Operations for the Nine Months Ended January 31, 2017
Compared to Nine Months Ended January 31, 2016
Oil Sales
During the nine months ended January 31, 2017, the Company
recognized $7,117 in oil and gas sales compared to $72,723 for the
nine months ended January 31, 2016. The overall decrease in sales
of $65,606 was primarily due to the decrease in operations and
shut-in wells in light of the challenging oil price environment
during the reporting period. The Company is currently
drilling four wells and re-completing certain existing wells,
located in Osage County, Oklahoma and Kern County,
California. Given current oil and gas prices, management
does not anticipate deriving revenue from existing oil and gas
assets in the short-term; provided,
however, in the event oil and
gas prices rise from current levels, or in the event current
drilling activity and re-completions results in proven reserves
that can be extracted profitably at current oil and gas prices,
management anticipates the resumption of oil and gas sales,
although no assurances can be given.
Lease Operating Expense
During the nine months ended January 31, 2017, lease operating
expense was $40,710, as compared to lease operating expense of
$328,457 for the nine months ended January 31, 2016. The overall
decrease in lease operating expense of $287,747 was primarily
attributable to management’s commitment to substantially
reduce operating expense in light of the current challenging oil
price environment.
General and Administrative Expense
General and administrative expense for the nine months ended
January 31, 2017 was $3,315,914, as compared to $2,483,990
for the nine months ended January 31,
2016. The increase was primarily attributable to increases in
salaries and benefits, professional fees and office and
administrative expenses. These changes are outlined
below:
|
For
the Nine Months Ended
|
For
the Nine Months Ended
|
|
January
31, 2017
|
January
31, 2016
|
Salaries
and benefits
|
$2,051,320
|
$1,823,514
|
Professional
fees
|
797,189
|
483,950
|
Office
and administrative
|
467,405
|
175,476
|
Information
technology
|
-
|
1,050
|
|
|
|
Total
|
$3,315,914
|
$2,483,990
|
Salaries and benefits include non-cash stock-based compensation of
$1,850,462 for nine months ended January 31, 2017 compared to
$1,492,868 for the nine months
ended January 31, 2016. The increase in stock-based compensation of
$357,594 from the prior comparable period was due to an increase in
the number of option awards expensed during the current three-month
period. General and administrative expenses also increased due to
(i) significant increases in professional fees incurred during the
implementation of the Company’s business plan; (ii) the
hiring of Stephen Brunner in October 2015; as well as (iii)
increased marketing and investor relations expenses. We also
experienced higher legal expenses relating to transactional and
other corporate activities during the nine months ended January 31,
2017.
Gain on Sale of Oil and Gas Asset
During the nine months ended January 31, 2017, the
Company assigned its
leaseholds covering approximately 320 acres in Missouri to third
party in furtherance of the Company’s corporate strategy to
divest its legacy assets. In conjunction with the assignment, the
Company recorded a gain of $216,850.
Interest Income
During the nine months ended January 31, 2017, the Company
recognized $462,575 in interest income compared to of $46,719 for
the nine months ended January 31, 2016. The income received in the
2016 period was attributable to $462,028 of interest income accrued
on the related party notes receivable.
Net Gain on Interests in Real Estate Rights
During the nine months ended January 31, 2017, the Company
recognized $686,096 net gain on its interest in real estate rights
compared to $10,238,499 for the nine months ended January 31, 2016.
The net gain on interest in real estate rights during the nine
months ended January 31, 2017 and 2016 was due to the sale of two
and 24 condominium units, respectively, by Fortis and the
resulting profits which were assigned to MegaWest pursuant to the
Contribution Agreement, less the book value recorded by
MegaWest.
Liquidity and Capital Resources
At January 31, 2017, the Company had working capital of
approximately $32.4 million, of which approximately $21.6 million,
$2.7 million and $1.9 million is attributable to several notes
receivable from a related party, an account receivable from a
related party, and the Company’s interest in certain real
estate, respectively. The notes receivable, account receivable and
the Company’s interest in real estate are assets held by
MegaWest, the Company’s 58.51% owned subsidiary, and are
controlled by MegaWest’s board of directors, consisting of
two members appointed by Fortis, and one by the Company. The
relative composition of the board of directors of MegaWest shall
continue as long as Fortis has an equity interest in
MegaWest.
In the event there is a shortfall from the valuation ascribed to
the Bandolier Interest at the time of the Redetermination, as
compared to the value ascribed to the Bandolier Interest in the
Contribution Agreement, the Company will be required to provide
Fortis with a cash payment in an amount equal to the shortfall, and
any unfunded shortfall will likely result in the foreclosure on all
or a portion of the Company’s entire equity interest in
MegaWest, which equity interest has been pledged to Fortis.
No assurances can be given that the value of the Bandolier Interest
will equal the valuation set forth in the Contribution Agreement,
or if the value identified after the Redetermination is below the
initial valuation, that we will be able to fund such shortfall. Any
requirement to fund a shortfall will have a material and adverse
effect on our operations and financial condition.
In the event of a foreclosure of our equity interest in MegaWest
resulting in such equity interest decreasing to less than a
controlling interest in MegaWest, the assets conveyed to MegaWest
under the terms of the Contribution Agreement may no longer be
consolidated with the Company’s assets on the Company’s
financial statements, and the Bandolier Interest may revert back to
the Company. As a result, our financial condition and
results from operations may be adversely affected, and such affect
will be material.
As a result of the utilization of cash in its operating activities,
and the development of its assets, the Company has incurred losses
since it commenced operations. In addition, the
Company has a limited operating history. At
January 31, 2017, the Company had cash and cash equivalents of
approximately $1.4 million. The Company’s primary source
of operating funds since inception has been equity financings, as
well as through the consummation of the Horizon Acquisition. While
management believes that the current level of working capital is
sufficient to maintain current operations as well as the planned
added operations for the next 12 months, management intends to
raise capital through debt and equity instruments in order to
execute its business and operating plans. Management can provide no
assurances that the Company will be successful in its capital
raising efforts. In order to conserve capital, from time to time,
management may defer certain development activity.
To address the current challenging oil and gas environment, and in
order to increase the value of the Company’s oil and gas
assets, management has also curtailed certain oil and gas
operations, and focused on the Company’s technology and
related initiatives, as well as the Horizon Acquisition. In
addition to the Horizon Acquisition and the MegaWest Transaction,
the Company is exploring farm in and joint venture opportunities
for its oil and gas assets as well other opportunities to increase
shareholder value. No assurances can be given that management will
be successful.
Operating Activities
During the nine months ended January 31, 2017, operating activities
used cash of $1,592,657, as compared to $954,231 used in
operating
activities during the nine months ended January 31, 2016.
The Company incurred a net loss during
the nine months ended January 31, 2017 of $2,463,336 as compared to
a net loss of $8,409,372 for
the nine months ended October 31, 2016. For nine months ended
January 31, 2017, the net loss was offset by non-cash items such as
stock-based compensation, depreciation, depletion and accretion of
asset retirement obligation, impairment of oil and gas assets, and
the deferred tax liability. Cash provided by operations was also
influenced by changes in accounts receivable, accrued interest on
notes receivable, prepaid expenses and accounts payable and accrued
expenses. For the nine months ended January 31, 2016, the loss was
offset by non-cash items such as stock-based compensation,
depreciation, depletion and amortization, impairment of oil and gas
assets, gain on sale of oil and gas assets and accretion of asset
retirement obligation. Cash used in operations was also influenced
by changes in accounts receivable, prepaid expenses and accounts
payable and accrued expenses.
Investing Activities
Investing activities during the nine months ended January 31, 2017
resulted in cash provided of $2,055,349, as compared to cash used
of $232,024 during the nine months
ended January 31, 2016. During the nine months ended January 31,
2017, the Company received cash of $3,364,817 upon the execution of
the Horizon transaction. During the nine months ended January 31,
2017, the Company invested an additional $525,000 in Horizon Energy
Partners. During the nine months ended January 31, 2017, the
Company received proceeds of $3,709,178 from profits in its real
estate rights. During the nine months ended January 31, 2017, the
Company incurred $304,297 of expenditures on oil and gas assets
compared to cash provided of $279,013 from the disposal of oil and
gas assets and equipment for the nine months ended January 31,
2016. During the nine months ended January 31, 2017, the Company
executed notes receivable agreements with related parties resulting
in the outlay of $3,742,803.
Financing Activities
Financing
activities during the nine months ended January 31, 2017 resulted
in cash provided of $176,000, as compared to
$1.5 million during the nine months
ended January 31, 2016 related to a contribution received from the
Company’s non-controlling interest partners in Bandolier from
a mandatory capital request. On
August 8, 2016, Bandolier’s Board of Managers approved a
capital call of $1.25 million due per extension to April 30, 2017
to fund certain re-completions and test wells to be drilled in
Osage county. MegaWest Kansas’ portion of the capital call is
$625,000, of which it has funded $483,163 and $141,838 is due on or
prior to April 30, 2017. Pearsonia West’s portion of the
capital call is $550,000, of which it has funded $176,000 and
$374,000 is due on or prior to April 30, 2017. Ranger Station has
elected not to fund its capital call amount of $75,000. As a
result, Ranger Station has forfeited its 6% interest in Bandolier
and such interest has been allocated pro rata between MegaWest
Kansas and Pearsonia West as of April 30, 2017.
Capitalization
The number of outstanding shares and the number of shares that
could be issued if all common stock equivalents are converted to
shares is as follows:
As
of
|
January 31,
2017
|
January 31,
2016
|
Common
shares
|
15,827,998
|
4,263,671
|
Stock
options
|
2,495,182
|
710,019
|
Stock
purchase warrants
|
133,333
|
336,458
|
|
18,456,513
|
5,310,148
|
Off-Balance Sheet Arrangements
None.
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, 2016, we identified material weaknesses
in the design and operation of our internal controls. The material
weaknesses are due to the limited number of employees, which
impacts our ability to conduct a thorough internal review, and the
Company’s reliance on external accounting personnel to
prepare financial statements.
To remediate the material weakness, the Company is developing a
plan to design and implement the operation of our internal
controls. Upon the Company obtaining additional capital,
the Company intends to hire additional accounting staff, and
operations and administrative executives in the future to address
its material weaknesses.
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 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.
(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
the landlord had completed remediation. Pursuant to the lease
contract, the Company asserted that rent should be abated during
the remediation process and accordingly, the Company did not pay
any rent after 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 determined that the premises were not fit for
re-occupancy and considered the landlord to be in default of the
lease. The Landlord subsequently terminated the lease.
On January 30, 2014 the landlord filed a Statement of Claim against
the Company for rental arrears in the amount aggregating CAD
$759,000 (approximately USD $566,000 as of March 8, 2017The Company
filed a defense and on October 20, 2014, it filed a summary
judgment application stating that the landlord’s claim is
barred as it was commenced outside the 2-year statute of limitation
period under the Alberta Limitations Act. The landlord subsequently
filed a cross-application to amend its Statement of Claim to add a
claim for loss of prospective rent in an amount of CAD $665,000
(approximately USD $496,000 as of March 8, 2017). The applications
were heard on June 25, 2015 and the court
allowed both the Company’s summary judgment application and
the landlord’s amendment application. Both of these
orders were appealed though two levels of the Alberta courts and
the appeals were dismissed at both levels. The net effect is that
the landlord's claim for loss of prospective rent is to
proceed.
(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 August 11, 2014, Martha Donelson and John Friend amended
their complaint in an existing lawsuit by filing a class action
complaint styled: Martha Donelson and John
Friend, et al. v. United States of America, Department of the
Interior, Bureau of Indian Affairs and Devon Energy Production, LP,
et al., Case No.
14-CV-316-JHP-TLW, United States District Court for the Northern
District of Oklahoma (the “Proceeding”). The plaintiffs added as
defendants twenty-seven (27) specifically named operators,
including the Spyglass Energy, LLC (“Spyglass”),
a wholly owned Subsidiary of Bandolier Energy, LLC, as well as all
Osage County lessees and operators who have obtained a concession
agreement, lease or drilling permit approved by the Bureau of
Indian Affairs (“BIA”) in Osage County allegedly in
violation of National Environmental Policy Act
(“NEPA”). Plaintiffs seek a
declaratory judgment that the BIA improperly approved oil and gas
leases, concession agreements and drilling permits prior to August
12, 2014, without satisfying the BIA’s obligations under
federal regulations or NEPA, and seek a determination that such oil
and gas leases, concession agreements and drilling permits are
void ab initio. Plaintiffs are seeking damages
against the defendants for alleged nuisance, trespass, negligence
and unjust enrichment. The potential consequences of
such complaint could jeopardize the corresponding
leases.
On October 7, 2014, Spyglass, along with other defendants, filed a
Motion to Dismiss the August 11, 2014 Amended Complaint on various
procedural and legal grounds. Following the significant briefing,
the Court, on March 31, 2016, granted the Motion to Dismiss as to
all defendants and entered a judgment in favor of the defendants
against the plaintiffs. On April 14, 2016, Spyglass with the other
defendants, filed a Motion seeking its attorneys’ fees and
costs. Said motion remains pending. On April 28, 2016, the
plaintiffs filed three motions: a Motion to Amend or Alter the
Judgment; a Motion to Amend the Complaint; and a Motion to Vacate
Order. On November 23, 2016 the
Court denied all three of Plaintiffs’ motions. On
December 6, 2016, Plaintiffs filed a Notice of Appeal to the Tenth
Circuit Court of Appeals. That appeal is pending as of the
effective date of this response. There is no specific timeline by
which the Court of Appeals must render a ruling. Spyglass intends
to continue to vigorously defend its interest in this
matter.
(d) MegaWest Energy Missouri Corp. (“MegaWest
Missouri”), a wholly
owned subsidiary of the Company, was previously involved in two
cases related to oil leases in West Central, Missouri. The first
case (James Long and Jodeane Long v. MegaWest Energy Missouri and
Petro River Oil Corp., case number 13B4- CV00019) was a case for
unlawful detainer, pursuant to which the plaintiffs contended that
a MegaWest Missouri oil and gas lease had expired and MegaWest
Missouri was unlawfully possessing the plaintiffs’ real
property by asserting that the leases remained in effect. MegaWest
Missouri filed a second case on October 14, 2014 (MegaWest Energy
Missouri Corp. v. James Long, Jodeane Long, and Arrow Mines LLC,
case number 14VE-CV00599). This case was pending in Vernon County,
Missouri. Although the two cases were separate, they were
interrelated. In the Vernon County case, MegaWest Missouri made
claims for: (1) replevin for personal property; (2) conversion of
personal property; (3) breach of the covenant of quiet enjoyment
regarding the lease; (4) constructive eviction of the lease; (5)
breach of fiduciary obligation against James Long; (6) declaratory
judgment that the oil and gas lease did not terminate; and (7)
injunctive relief to enjoin the action pending in Barton County,
Missouri. On September 21, 2015, the parties entered into a
Settlement and Release Agreement for both cases. The parties agreed
to release their claims and dismiss their lawsuits with prejudice.
MegaWest Missouri released its claims to certain leases and the
plaintiff purchased certain personal property from MegaWest
Missouri. The matters have been completely resolved, and the cases
dismissed.
(e) 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 1A. RISK FACTORS
Our results of operations and financial condition are subject to
numerous risks and uncertainties described in our Annual Report on
Form 10-K for our fiscal year ended April 30, 2016, filed on July
29, 2016. You should carefully consider these risk factors in
conjunction with the other information contained in this Quarterly
Report. Should any of these risks materialize, our business,
financial condition and future prospects could be negatively
impacted. As of January 31, 2017, there have been no material
changes to the disclosures made in the above-referenced Form
10-K.
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 January 31,
2017.
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
|
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 Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
32.2*
|
|
Certification of 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
|
*
Filed herewith.
-28-
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:
March 17, 2017
|
|
|
|
|
-29-