Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2017
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 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
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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55 5th
Avenue, Suite 1702, New York, NY
10003
(Address of
Principal Executive Offices, Zip Code)
(469) 828-3900
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $0.00001 par
value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No
[X]
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes
[ ] No [X]
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 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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 definition of “large accelerated
filer,” “large accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated
filer [ ]
|
Accelerated filer
[ ]
|
Non-accelerated
filer [ ]
|
Smaller reporting
company [X]
Emerging
growth company [ ]
|
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No
[X]
As of
October 31, 2016, the aggregate market value of the
registrant’s common stock held by non-affiliates was
$2,906,686, based on the closing bid price of $1.30 per share on
October 31, 2016, as reported on OTC Pink Marketplace.
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 July 27, 2017
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Common
Stock, $0.00001 par value per share
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15,852,997
shares
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TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
This
report, including information included in future filings by us with
the Securities and Exchange Commission (the “SEC”), as well as
information contained in written material, press releases and oral
statements issued by us or on our behalf, contain, or may contain,
certain statements that are “forward-looking
statements” within the meaning of federal securities laws
that are subject to a number of risks and uncertainties, many of
which are beyond our control. This report modifies and supersedes
documents filed by us before this report. In addition, certain
information that we file with the SEC in the future will
automatically update and supersede information contained in this
report. All statements, other than statements of historical fact,
included in this report regarding our strategy, future operations,
financial position, estimated revenues and losses, projected costs,
prospects, plans and objectives of management are forward-looking
statements. When used in this report, the words
“could,” “believe,”
“anticipate,” “intend,”
“estimate,” “expect,”
“project”, “will” and similar expressions
are intended to identify forward-looking statements, although not
all forward-looking statements contain such identifying
words.
Forward-looking
statements may include statements about our business strategy,
reserves, technology, financial strategy, oil and natural gas
realized prices, timing and amount of future production of oil and
natural gas, the amount, nature and timing of capital expenditures,
drilling of wells, competition and government regulations,
marketing of oil and natural gas, property acquisitions, costs of
developing our properties and conducting other operations, general
economic conditions, uncertainty regarding our future operating
results and plans, objectives, expectations and intentions
contained in this report that are not historical.
All
forward-looking statements speak only as of the date of this
report, and, except as required by law, we do not intend to update
any of these forward-looking statements to reflect changes in
events or circumstances that arise after the date of this report.
You should not place undue reliance on these forward-looking
statements. Although we believe that our plans, intentions and
expectations reflected in or suggested by the forward-looking
statements we make in this report are reasonable, we can give no
assurance that these plans, intentions or expectations will be
achieved. We disclose important factors that could cause our actual
results to differ materially from our expectations under
“Risk Factors”
and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and elsewhere in this report. These
cautionary statements qualify all forward-looking statements
attributable to us or persons acting on our behalf.
PART I
ITEM 1. BUSINESS
Business Overview
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.
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.
Our Objective
Our
primary objective is to enhance shareholder value by increasing our
net asset value, net reserves and cash flow through development,
exploitation, exploration, and acquisition of oil and gas
properties.
Our Strategy
We
intend to follow a balanced risk strategy by allocating capital
expenditures to a combination of lower risk development and high
potential exploration prospects. Key elements of our business
strategy include the following:
Develop and exploit our existing oil and natural gas
properties. Our principal growth strategy has been to
explore, develop and exploit our acquired and leased properties to
add proven reserves.
Pursue selective acquisitions. The Company has acquired
leasehold positions that it believes contain substantial resource
potential and meet its targeted returns on invested capital.
Management intends to continue to pursue strategic acquisitions
that meet the Company’s operational and financial targets. We
seek to acquire developed and undeveloped oil and gas properties
that will provide us with additional development and exploratory
prospect opportunities. We may also acquire a working interest in
one or more prospects from others and participate with the other
working interest owners in drilling and, if warranted, completing
oil or gas wells on a prospect. We may purchase producing oil or
gas properties.
Use the latest 3-D seismic technology to maximize returns.
Technical advances in imaging and modeling can lower risk and
enhance productivity. The Company intends to utilize 3-D seismic
and other technological advancements that benefit its exploratory
and developmental drilling program.
Limit our current exploration and acquisition activities to
conventional oil plays with a projected breakeven price of $30 per
barrel or less. We intend to focus our resources
on more easily recoverable conventional reserves.
During the current downturn, obtain price concessions from third
party vendors, specifically those involved in our drilling
and completion activities and day-to-day well
maintenance.
Plan of Operation
The
Company is currently engaged in oil and natural gas acquisition,
exploration, development and production, with activities in
Oklahoma and California in the United States, and Northern Ireland,
Denmark and the U.K in Western Europe. We focus on developing our
existing properties, while continuing to pursue acquisitions of oil
and gas properties with upside potential.
The
Company intends to grow its resources and production through
exploration activities and development of identified potential
drilling locations, and through acquisitions that meet the
Company’s strategic and financial objectives. Our plan
includes:
Leveraging our management experience. The Company’s
executive team, along with Horizon Energy, the Company’s
operating partner, has extensive and proven experience in the oil
and gas industry. We believe that the experience of our executive
team will help reduce the time and cost associated with drilling
and completing exploration and development of our conventional
assets and potentially increasing recovery. Collectively, our
management team and engineering professionals identify and evaluate
acquisition opportunities, negotiate and close purchases and manage
acquired properties.
Leveraging our established business relationships. Our
executive team, along with Horizon Energy, has many relationships
with operators and service providers in our core asset regions. We
believe that leveraging our relationships will be a competitive
advantage in developing our acreage and identifying acquisition
targets.
De-risking our acreage position and build a vertical drilling
program. The Company has identified a multi-year inventory
of potential drilling locations that will drive reserves and
production growth and provide attractive return opportunities. The
Company views its Osage, Kern County and Grapevine projects as
de-risked because of the significant production history in the area
and well-established industry activity surrounding the
acreage.
Partnership with Horizon Energy. Following the acquisition
of Horizon Investments, the Company has an indirect interest,
through Horizon Investment’s 20% ownership in Horizon Energy,
in 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.
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.
Competitive Strengths
Financial flexibility. Our capital structure and high degree
of operational control continues to provide us with significant
financial flexibility. We have no corporate debt in our capital
structure, enabling us to make capital decisions with no
restrictions imposed by debt covenants, lender oversight and/or
mandatory repayment schedules. Additionally, in concert with our
partner, Horizon Energy, we control the majority of our anticipated
future net drilling locations, including the timing and selection
of drilling locations as well as completion schedules. This allows
us to modify our capital spending program depending on financial
resources, leasehold requirements and market
conditions.
Management experience. Our key management team possesses an
average of over thirty years of experience in oil and gas
exploration and production in multiple resource plays, including
exploration and production in the Company’s core regions of
Osage, Oklahoma, Kern County, California, and the North
Sea.
Cost-efficient operators. In the past, our management team
has shown an ability to drill wells in a cost-efficient way and to
successfully integrate acquired assets without incurring
significant increases in overhead.
History
The
Company was originally incorporated under the Company Act (British
Columbia) on February 8, 2000 under the name Brockton Capital Corp.
We then changed our name to MegaWest Energy Corp. effective
February 27, 2010, before changing it to Gravis Oil Corp. on June
20, 2011. On September 11, 2012, we re-organized under the laws of
the State of Delaware as a corporation organized under the Delaware
General Corporation Law. Prior to September 11, 2012, and at April
30, 2012, we were organized under the laws of Alberta,
Canada.
Petro
River Oil LLC (“Petro”), an indirect subsidiary
of the Company and wholly owned subsidiary of MegaWest Energy
Kansas Corp., was incorporated under the laws of the State of
Delaware on March 3, 2011 (“MegaWest”). Through proceeds
received from the issuance of various promissory notes, on February
1, 2012, Petro purchased various interests in oil and gas leases,
wells, records, data and related personal property located along
the play in the state of Kansas (“Mississippi
Assets”). Effective December 23, 2015, Petro
divested the Mississippi Assets. In connection with the
divestiture, the assignee and purchaser of the Mississippi Assets
agreed to pay outstanding liabilities, including unpaid taxes, and
assume certain responsibilities to plug any abandoned wells. No
cash consideration was paid for the interests.
Share Exchange. On April 23, 2013, the Company executed and
consummated a securities purchase agreement by and among the
Company, Petro, and certain investors in Petro (the
“Investors”),
namely, the holders of outstanding secured promissory notes of
Petro (the “Notes”), and those holding
membership interests in Petro (the “Membership Interests”, and,
together with the Notes, the “Acquired Securities”) sold by
Petro (the “Share
Exchange”). In the Share Exchange, the Investors
exchanged their Acquired Securities for 591,021,011 newly issued
shares of the Company's common stock (2,955,105 shares of common
stock based on the December 2015 reverse stock split – see
“Reverse Stock
Split” below). Upon completion of the Share Exchange,
Petro became a wholly owned subsidiary of the Company.
As a
result of the Share Exchange, the Company acquired 100% of the
membership units of Petro and consequently, control of
Petro’s business and operations. Under generally accepted
accounting principles in the United States (“U.S. GAAP”), because
Petro’s former members and note holders held 80% of the
issued and outstanding shares of the Company as a result of the
Share Exchange, Petro was deemed the accounting acquirer while the
Company remains the legal acquirer. Petro adopted the fiscal year
of the Company. Prior to the Share Exchange, all historical
financial statements presented are those of Petro. The equity of
the Company is the historical equity of Petro, restated to reflect
the number of shares issued by the Company in the
transaction.
Acquisition of Interest in Bandolier Energy LLC. On May 30, 2014, the
Company entered into a Subscription Agreement pursuant to which the
Company was issued a 50% interest in Bandolier Energy, LLC
(“Bandolier”)
in exchange for a capital contribution of $5.0 million (the
“Bandolier
Acquisition”). In connection with the Bandolier
Acquisition, the Company had the right to appoint a majority of the
board of managers of Bandolier. The Company’s Executive
Chairman was a manager of, and owned a 20% membership interest in,
Pearsonia West Investment Group, LLC (“Pearsonia West”), a special
purpose vehicle formed for the purpose of investing in Bandolier
with the Company and Ranger Station, LLC (“Ranger Station”). Concurrent with
the Bandolier Acquisition, Pearsonia West was issued a 44% interest
in Bandolier for cash consideration of $4.4 million, and Ranger
Station was issued a 6% interest in Bandolier for cash
consideration of $600,000. In connection with Pearsonia
West’s investment in Bandolier, the Company and Pearsonia
West entered into an agreement, dated May 30, 2014, granting
the members of Pearsonia West an option, exercisable at any time
prior to May 30, 2017, to exchange their pro rata share of the
Bandolier membership interests for shares of the Company’s
common stock, at a price of $0.08 per share, subject to adjustment
(the “Option”).
The Option, if fully exercised, would result in the Company issuing
55,000,000 shares of its common stock (275,000 shares of common
stock at a price of $16 per share based on the December 2015
reverse stock split – see “Reverse Stock Split”
below), or 6% to the members of Pearsonia West.
Until
the execution of the Contribution Agreement, described below, the
Company had operational control along with a 50% ownership interest
in Bandolier. As a result, the Company consolidated Bandolier. The
remaining 50% non–controlling interest represented the equity
investment from Pearsonia West and Ranger Station. The Company
allocated the proportionate share of the net operating income/loss
to both the Company and the non-controlling interest.
Subsequent
to the initial capitalization of Bandolier, Bandolier acquired, for
$8,712,893 less a $407,161 claw back, all of the issued and
outstanding equity of Spyglass Energy Group, LLC
(“Spyglass”),
the owner of oil and gas leases, leaseholds, lands, and options and
concessions thereto located in Osage County, Oklahoma. Spyglass
controlled a significant contiguous oil and gas acreage position in
Northeastern Oklahoma, consisting of approximately 106,000 acres,
with substantial original oil in place, stacked reservoirs, as well
as exploratory and development opportunities that could be accessed
through both horizontal and vertical drilling. Significant
infrastructure was already in place including 32 square miles of
3-D seismic, 3 phase power, a dedicated sub-station as well as
multiple oil producing horizontal wells.
The
Company recorded the purchase of Spyglass by Bandolier using the
acquisition method of accounting as specified in ASC 805 “Business
Combinations.” This method of accounting requires
the acquirer to (i) record purchase consideration issued to sellers
in a business combination at fair value on the date control is
obtained, (ii) determine the fair value of any non-controlling
interest, and (iii) allocate the purchase consideration to
alltangible and intangible assets acquired and liabilities assumed
based on their acquisition date fair values. Further, the Company
commenced reporting the results of Spyglass on a consolidated basis
with those of the Company effective upon the date of the
acquisition.
MegaWest Transaction. On October 15, 2015, the
Company entered into a contribution agreement (the
“Contribution
Agreement”) with MegaWest and Fortis Property Group,
LLC, a Delaware limited liability company (“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, (i) the Company
transferred its 50% membership interest in Bandolier
(the “Bandolier
Interest”), and cancelled all of its ownership
interest in the then issued and outstanding MegaWest Shares, which
prior to the MegaWest Transaction represented 100% ownership of
MegaWest; and (ii) Fortis transferred certain indirect interests
held in 30 condominium units and the rights to any profits and
proceeds therefrom. Immediately thereafter, MegaWest
issued to the Company 58,510 MegaWest Shares, representing a 58.51%
equity interest in MegaWest, as consideration for the assignment of
the Bandolier Interest, and issued to Fortis 41,490 MegaWest
Shares, representing a 41.49% equity interest in MegaWest, as
consideration for the assets assigned to MegaWest by
Fortis. 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.
Proceeds from the amounts receivable from Fortis will not be
available until such time as the Company has completed its
evaluation of the Bandolier prospects, at which time the
Redetermination will be performed. Subject to the terms and
conditions of the Contribution Agreement, the Contribution
Agreement provided for a redetermination of the fair market value
of the Bandolier Interest at any time following the six month
anniversary after the execution thereof (the “Redetermination”), Upon
a Redetermination, which has not occurred as of July 28, 2017, but
is anticipated prior to December 31, 2017, 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. If the Company is
unable to deliver to Fortis the cash payment required after the
Redetermination, if any, the board of directors of MegaWest shall
have the right to exercise certain remedies against the Company,
including a right to foreclose on the Company’s entire equity
in MegaWest, which equity interest has been pledged to Fortis under
the terms of the Contribution Agreement. In the event of
foreclosure, the Bandolier Interest would revert back to the
Company, and the Company would record a loss for the amount of the
notes receivable, interest in real estate rights, accounts
receivable – related party, and any accrued
interest.
Acquisition of Horizon Investments. On December 1, 2015, the Company entered into a
conditional purchase agreement with Horizon Investments (as
amended, the "Purchase
Agreement"), pursuant to which
the Company acquired, on May 3, 2016, (i) a 20% membership interest
in Horizon Energy; (ii) certain promissory notes issued by Horizon
Investments to the Company in the aggregate principal amount of
$1.6 million (the "Horizon
Notes"); (iii) approximately
$690,000 held in escrow pending closing under the Purchase
Agreement (the "Closing
Proceeds"); and (iv) certain
bank, investment and other accounts maintained by Horizon
Investments, in an amount which, together with the principal amount
of the Horizon Note and the Closing Proceeds, totaled not less than
$5.0 million (collectively, the "Purchased
Assets"). The consideration for
the Purchased Assets was 11,564,249 shares of the Company's
common stock, $0.00001 par value (“Common Stock”), which shares were issued to Horizon Investments
at closing.
Recent Developments
$2.0 Million Secured Note
Financing. On June 13, 2017, the Company
entered into a Securities Purchase Agreement (“Purchase Agreement”) with Petro
Exploration Funding, LLC (“Funding Corp.”), pursuant to
which the Company issued to Funding Corp. a senior secured
promissory note to finance the Company’s working capital
requirements (the “Note
Financing”), in the principal amount of $2.0 million
(“Secured
Note”). As additional consideration for the Note
Financing, the Company issued to Funding Corp. (i) a warrant to
purchase 840,336 shares of the Company’s Common Stock
(“Warrant”),
and (ii) an overriding royalty interest equal to 2% in all
production from the Company’s interest in the Company’s
concessions located in Osage County, Oklahoma, currently held by
Spyglass, pursuant to an Assignment of Overriding Royalty Interests
(the “Assignment”).
The Secured Note accrues interest at a rate of 10% per annum, and
matures on June 30, 2020. To secure the repayment of all amounts
due under the terms of the Secured Note, the Company entered into a
Security Agreement, pursuant to which the Company granted to
Funding Corp. a security interest in all assets of the Company. The
first interest payment will be due on June 1, 2018 and each
six-month anniversary thereafter until the outstanding principal
balance of the Secured Note is paid in
full.
The
Warrant is exercisable immediately upon issuance, for an exercise
price per share equal to $2.38 per share, and shall terminate, if
not previously exercised, five years from the date of
issuance.
Scot
Cohen, a member of the Company’s Board of Directors and a
substantial stockholder of the Company, owns or controls 31.25% of
Funding Corp.
Kern County Drilling Program Results. On July 18, 2017, the
Company announced a new
oil field discovery in its Sunset Boulevard prospect in Kern
County, California upon successfully drilling the Cattani-Rennie
47X-15 exploration well (“CR 47X”). The CR 47X was drilled
to a depth of approximately 8,500 feet and confirmed at least two
commercially successful pay zones. The discovery is
currently being evaluated but initial results indicate significant
reserve potential. Following completion and production tests,
the Company will announce development plans. Several
additional prospect wells are now being planned to be drilled in
Kern County.
The
Company owns a 19.25% interest in the Kern County field based on a
13.75% direct working interest and 5.5% indirect working interest
through its 20% equity investment in Horizon Energy. Historically,
since its 1933 discovery, this field has produced over 100 million
barrels of oil and equivalents from six distinct reservoirs. The
Company’s 3-D survey constitutes the first modern seismic
data (including both 2-D and 3-D) acquired over this geologically
complex field.
Osage County Drilling Program Results. On May 8, 2017, the
Company announced a new oil field discovery in
it’s
106,500-acre concession in Osage County, Oklahoma upon successfully
drilling the Chat 2-11 exploration well. The Chat 2-11 was drilled
to a depth of 2,800 feet into the Mississippian Chat. Initial
results indicated up to 20 feet of oil productive formation.
Following flow and fracking tests, the Company plans to confirm IP
rates.
On May
30, 2017, the Company announced a second new oil field discovery in
its’ 106,500-acre concession in Osage County, Oklahoma upon
successfully drilling the Red Fork 1-3 exploration well. The Red
Fork 1-3 was drilled to a depth of 2,800 feet into the
Mississippian Chat. Initial results indicated up to 30 feet of oil
productive formation. Following flow and fracking tests, the
Company plans to confirm IP rates. These structures were identified
utilizing 3D seismic technology, indicating a potential of up to
2.5 million barrels of oil.
The
Company’s Osage County drilling program is the result of a
Joint Exploration and Development Agreement (the
“Exploration
Agreement”), dated August 19, 2016, between Spyglass,
a wholly owned subsidiary of Bandolier, Phoenix 2016, LLC
(“Phoenix”)
and Mackey Consulting & Leasing, LLC (“Mackey”). Pursuant to the
Exploration Agreement, Phoenix and Mackey operates and provides
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 its sole
discretion.
Reverse Stock Split. At its Annual Meeting held
on September 20, 2016, the Company’s shareholders approved a
resolution to authorize the Company’s Board of Directors, in
its sole and absolute discretion, to amend the Company’s
Certificate of Incorporation to implement a reverse stock split of
our Common Stock, at a ratio of not less than 1-for-2, and not
greater than 1-for-10 (“Reverse
Split”), within one
year from the date of the Annual Meeting, with the exact ratio to
be determined by the Board of Directors. The Board of Directors has
not determined the ratio, and does not currently intend to execute
the Reverse Split until such time as the Company lists its shares
of Common Stock on the NASDAQ Stock Market.
Competition
We operate in a highly competitive environment. We compete with
major and independent oil and natural gas companies, many of whom
have financial and other resources substantially in excess of those
available to us. These competitors may be better positioned to take
advantage of industry opportunities and to withstand changes
affecting the industry, such as fluctuations in oil and natural gas
prices and production, the availability of alternative energy
sources and the application of government regulation.
Compliance with Government Regulation
The
availability of a ready market for future oil and gas production
from possible U.S. assets depends upon numerous factors beyond our
control. These factors may include, amongst others, regulation of
oil and natural gas production, regulations governing environmental
quality and pollution control, and the effects of regulation on the
amount of oil and natural gas available for sale, the availability
of adequate pipeline and other transportation and processing
facilities and the marketing of competitive fuels. These
regulations generally are intended to prevent waste of oil and
natural gas and control contamination of the
environment.
We
expect that our sales of crude oil and other hydrocarbon liquids
from our future U.S.-based production will not be regulated and
will be made at market prices. However, the price we would receive
from the sale of these products may be affected by the cost of
transporting the products to market via pipeline.
Environmental Regulations
Our U.S. assets are subject to numerous laws and regulations
governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and
regulations may require the acquisition of a permit before drilling
commences, restrict the types, quantities and concentration of
various substances that can be released into the environment in
connection with drilling and production activities, limit or
prohibit drilling activities on certain lands within wilderness,
wetlands and other protected areas, require remedial measures to
mitigate pollution from former operations, such as pit closure and
plugging abandoned wells, and impose substantial liabilities for
pollution resulting from production and drilling operations. Public
interest in the protection of the environment has increased
dramatically in recent years. The worldwide trend of more expansive
and stricter environmental legislation and regulations applied to
the oil and natural gas industry could continue, resulting in
increased costs of doing business and consequently affecting
profitability. To the extent laws are enacted or other governmental
action is taken that restricts drilling or imposes more stringent
and costly waste handling, disposal and cleanup requirements, our
business and prospects could be adversely affected.
Operating Hazards and Insurance
The oil
and natural gas business involves a variety of operating hazards
and risks such as well blowouts, craterings, pipe failures, casing
collapse, explosions, uncontrollable flows of oil, natural gas or
well fluids, fires, formations with abnormal pressures, pipeline
ruptures or spills, pollution, releases of toxic gas and other
environmental hazards and risks. These hazards and risks could
result in substantial losses to us from, among other things, injury
or loss of life, severe damage to or destruction of property,
natural resources and equipment, pollution or other environmental
damage, clean-up responsibilities, regulatory investigation and
penalties and suspension of operations.
In
accordance with customary industry practices, we expect to maintain
insurance against some, but not all, of such risks and losses.
There can be no assurance that any insurance we obtain would be
adequate to cover any losses or liabilities. We cannot predict the
continued availability of insurance or the availability of
insurance at premium levels that justify its purchase. The
occurrence of a significant event not fully insured or indemnified
against could materially and adversely affect our financial
condition and operations.
Pollution
and environmental risks generally are not fully insurable. The
occurrence of an event not fully covered by insurance could have a
material adverse effect on our future financial condition. If we
were unable to obtain adequate insurance, we could be forced to
participate in all of our activities on a non-operated basis, which
would limit our ability to control the risks associated with oil
and natural gas operations.
Research and Development
Previously, we did not have any research and development policies
in place. We formed Petro Spring, LLC, a wholly owned subsidiary,
on December 12, 2013, to begin to focus on technology solutions
related to the oil and gas industry. During the year
ended April 30, 2015, we purchased the Havelide and Coalthane
Assets. We are currently trying to determine a
monetization strategy for these assets.
Employees
At
April 30, 2017, we employed four full-time employees and no
part-time employees. We also retained several consultants to
provide both operational, investor relations and marketing
support.
Geographical Area of the Company’s Business
The
principal market that we compete in is the North American and
Western Europe. The Company is currently contemplating expansion
into additional international energy markets.
You
should carefully consider the following risk factors, in addition
to the other information set forth in this Report, in connection
with any investment decision regarding shares of our Common Stock.
Each of these risk factors could adversely affect our business,
operating results and financial condition, as well as adversely
affect the value of an investment in our Common Stock. Some
information in this Report may contain
“forward-looking” statements that discuss future
expectations of our financial condition and results of operation.
The risk factors noted in this section and other factors could
cause our actual results to differ materially from those contained
in any forward-looking statements.
Risks Relating to Our Business
Our results of operations as well as the carrying value of our oil
and gas properties are substantially dependent upon the prices of
oil and natural gas, which are currently depressed. In the
event lower prices for oil and natural gas continue for a prolonged
period of time our results of operations could be adversely
affected, and our ability to continue our planned development and
acquisition activities could be substantially
curtailed.
Currently, our costs to maintain our unproved properties include
non-producing leasehold, geological and geophysical costs
associated with leasehold or drilling interests and in process
exploration drilling costs. In the future, our results of
operations and the ceiling on the carrying value of our oil and gas
properties will be dependent on the estimated present value of
proved reserves, which depends on the prevailing prices for oil and
gas, which are currently depressed. Various factors beyond our
control affect prices of oil and natural gas, including political
and economic conditions; worldwide and domestic supplies of and
demand for oil and gas; weather conditions; the ability of the
members of the Organization of Petroleum Exporting Countries
(“OPEC”)
to agree on and maintain price and production controls; political
instability or armed conflict in oil-producing regions; the price
of foreign imports; the level of consumer demand; the price and
availability of alternative fuels; and changes in existing federal
and state regulations. In the event oil and gas prices do not rise
from current levels, our operations and financial condition could
be materially and adversely affected, and the level of development
and exploration expenditures could be substantially curtailed.
These conditions could ultimately result in a reduction in
the carrying value of our oil and gas properties. A continued
decline in prices for oil and gas would also likely cause a
reduction in the amount of any reserves and, in turn, in the amount
that we might be able to borrow to fund development and acquisition
activities.
We recently acquired certain assets unrelated to our traditional
oil and gas properties. The acquired technologies are in
development stage, have not been proven, and require additional
capital to develop. We may not be able to successfully
raise sufficient capital or otherwise successfully develop
these technology assets.
We recently purchased certain assets to produce
gasoline-like liquid and high-purity hydrogen from natural gas, at
low temperature and at low pressure, as well as to reduce the
methane from coal mines and other wells. The purchased
assets, while consistent with the Company’s business
objective of acquiring leading edge technologies, are in the
development stage, and require additional capital or a strategic
partner in order to fully develop. We are currently
developing a strategy to monetize these assets through potential
licensing, commercialization or an outright sale. While
management currently intends to seek financing or a development
partner in order to fully develop the purchased assets, no
assurances can be given that the Company will be able to
successfully raise sufficient capital to develop the assets, or
otherwise find a strategic or development partner to develop the
same. In addition, the purchased assets are in the
development stage and are unproven, and no assurances can be given
that we will be able to commercialize the assets.
We have a limited operating history and if we are not successful in
continuing to grow our business, then we may have to scale back or
even cease our ongoing business operations.
We have
received a limited amount of revenues from operations and have
limited assets. To date, we have acquired interests in oil and gas
properties, but have only recently announced oil field discoveries
with the potential to generate commerical revenues, although there
can be no assurance that we will ever operate profitably. We have a
limited operating history. Our success is significantly dependent
on a successful acquisition, drilling, completion and production
program. Our operations will be subject to all the risks inherent
in the establishment of a developing enterprise and the
uncertainties arising from the absence of a significant operating
history. We may be unable to locate recoverable reserves or operate
on a profitable basis. We are in the exploration stage and
potential investors should be aware of the difficulties normally
encountered by enterprises in the exploration stage. If our
business plan is not successful, and we are not able to operate
profitably, investors may lose some or all of their
investment.
Because we are small and have a limited amount of capital, we may
have to limit our exploration activity which may result in a loss
of your investment.
Because
we are small and our capital available for operations is limited,
we must limit our exploration activity. As such we may not be able
to complete an exploration program that is as thorough as we would
like. In that event, existing reserves may go undiscovered. Without
finding additional reserves, we cannot generate sufficient revenues
and you will lose your investment.
We had
cash and cash equivalents at April 30, 2017 and 2016 of $631,232
and $774,751, respectively. At April 30, 2017, we had working
capital of approximately $25.5 million. Management believes that
the current level of working capital is sufficient to maintain
current operations for the next 12 months. To further develop the
Company’s assets, and take advantage of the current depressed
market for oil and gas assets, management currently intends to
raise additional capital through debt and equity
instruments.
Exploratory drilling is a speculative activity that may not result
in commercially productive reserves and may require expenditures in
excess of budgeted amounts.
Drilling
activities are subject to many risks, including the risk that no
commercially productive oil or gas reservoirs will be encountered.
There can be no assurance that new wells drilled by us or in which
we have an interest will be productive or that we will recover all
or any portion of our investment. Drilling for oil and gas may
involve unprofitable efforts, not only from dry wells, but also
from wells that are productive but do not produce sufficient net
revenues to return a profit after drilling, operating and other
costs. The cost of drilling, completing and operating wells is
often uncertain. Our drilling operations may be curtailed, delayed
or canceled as a result of a variety of factors, many of which are
beyond our control, including economic conditions, mechanical
problems, pressure or irregularities in formations, title problems,
weather conditions, compliance with governmental requirements and
shortages in or delays in the delivery of equipment and services.
Such equipment shortages and delays sometimes involve drilling rigs
where inclement weather prohibits the movement of land rigs causing
a high demand for rigs by a large number of companies during a
relatively short period of time. Our future drilling activities may
not be successful. Lack of drilling success could have a material
adverse effect on our financial condition and results of
operations.
Our
operations are also subject to all of the hazards and risks
normally incident to the development, exploitation, production and
transportation of, and the exploration for, oil and gas, including
unusual or unexpected geologic formations, pressures, down hole
fires, mechanical failures, blowouts, explosions, uncontrollable
flows of oil, gas or well fluids and pollution and other
environmental risks. These hazards could result in substantial
losses to us due to injury and loss of life, severe damage to and
destruction of property and equipment, pollution and other
environmental damage and suspension of operations. Insurance for
wells in which we participate is generally obtained, although there
can be no assurances that such coverage will be sufficient to
prevent a material adverse effect to us if any of the foregoing
events occur.
We may not identify all risks associated with the acquisition of
oil and natural gas properties, or existing wells, and any
indemnifications we receive from sellers may be insufficient to
protect us from such risks, which may result in unexpected
liabilities and costs to us.
Our
business strategy focuses on acquisitions of undeveloped and
unproven oil and natural gas properties that we believe are capable
of production. We may make additional acquisitions of undeveloped
oil and gas properties from time to time, subject to available
resources. Any future acquisitions will require an assessment of
recoverable reserves, title, future oil and natural gas prices,
operating costs, potential environmental hazards, potential tax and
other liabilities and other factors.
Generally,
it is not feasible for us to review in detail every individual
property involved in a potential acquisition. In making
acquisitions, we generally focus most of our title and valuation
efforts on the properties that we believe to be more significant,
or of higher-value. Even a detailed review of properties and
records may not reveal all existing or potential problems, nor
would it permit us to become sufficiently familiar with the
properties to assess fully their deficiencies and capabilities. In
addition, we do not inspect in detail every well that we acquire.
Potential problems, such as deficiencies in the mechanical
integrity of equipment or environmental conditions that may require
significant remedial expenditures, are not necessarily observable
even when we perform a detailed inspection. Any unidentified
problems could result in material liabilities and costs that
negatively impact our financial condition and results of
operations.
Even if
we are able to identify problems with an acquisition, the seller
may be unwilling or unable to provide effective contractual
protection or indemnity against all or part of these problems. Even
if a seller agrees to provide indemnity, the indemnity may not be
fully enforceable or may be limited by floors and caps, and the
financial wherewithal of such seller may significantly limit our
ability to recover our costs and expenses. Any limitation on our
ability to recover the costs related any potential problem could
materially impact our financial condition and results of
operations.
We are and will continue to be subject to various operating and
other casualty risks that could result in liability exposure or the
loss of production and revenues.
Our oil
and gas business involves (or will involve as operations activities
increase) a variety of operating risks, including, but not limited
to, unexpected formations or pressures, uncontrollable flows of
oil, gas, brine or well fluids into the environment (including
groundwater contamination), blowouts, fires, explosions, pollution
and other risks, any of which could result in personal injuries,
loss of life, damage to properties and substantial losses. Although
we carry insurance at levels that we believe are reasonable, we are
not fully insured against all risks. We do not carry business
interruption insurance. Losses and liabilities arising from
uninsured or under-insured events could have a material adverse
effect on our financial condition and operations.
The
cost of operating wells is often uncertain. Our drilling operations
may be curtailed, delayed or canceled as a result of numerous
factors, including title problems, weather conditions, compliance
with governmental requirements and shortages or delays in the
delivery of equipment. Furthermore, completion of a well does not
assure a profit on the investment or a recovery of drilling,
completion and operating costs.
We face significant competition, and many of our competitors have
resources in excess of our available resources.
The oil
and gas industry is highly competitive. We encounter competition
from other oil and gas companies in all areas of our operations,
including the acquisition of producing properties and exploratory
prospects and sale of crude oil, natural gas and natural gas
liquids. Our competitors include major integrated oil and gas
companies and numerous independent oil and gas companies,
individuals and drilling and income programs. Many of our
competitors are large, well established companies with
substantially larger operating staffs and greater capital resources
than us. Such companies may be able to pay more for productive oil
and gas properties and exploratory prospects and to define,
evaluate, bid for and purchase a greater number of properties and
prospects than our financial or human resources permit. Our ability
to acquire additional properties and to discover reserves in the
future will depend upon our ability to evaluate and select suitable
properties and to consummate transactions in this highly
competitive environment.
Strategic relationships upon which we may rely are subject to
change, which may diminish our ability to conduct our
operations.
Our
ability to successfully acquire additional properties, to discover
and develop reserves, to participate in drilling opportunities and
to identify and enter into commercial arrangements with customers
will depend on developing and maintaining close working
relationships with industry participants and on our ability to
select and evaluate suitable properties and to consummate
transactions in a highly competitive environment. These realities
are subject to change and may impair our ability to
grow.
To
develop our business, we will endeavor to use the business
relationships of our management to enter into strategic
relationships, which may take the form of joint ventures with other
private parties and contractual arrangements with other oil and gas
companies, including those that supply equipment and other
resources that we will use in our business. We may not be able to
establish these strategic relationships, or if established, we may
not be able to maintain them. In addition, the dynamics of our
relationships with strategic partners may require us to incur
expenses or undertake activities we would not otherwise be inclined
to in order to fulfill our obligations to these partners or
maintain our relationships. If our strategic relationships are not
established or maintained, our business prospects may be limited,
which could diminish our ability to conduct our
operations.
We may not have satisfactory title or rights to all of our current
or future properties.
Prior
to acquiring undeveloped properties, our contract land
professionals review title records or other title review materials
relating to substantially all of such properties. The title
investigation performed by us prior to acquiring undeveloped
properties is thorough, but less rigorous than that conducted prior
to drilling, consistent with industry standards. Prior to drilling
we obtain a title opinion on the drill site. However, a title
opinion does not necessarily ensure satisfactory title. We believe
we have satisfactory title to our producing properties in
accordance with standards generally accepted in the oil and gas
industry. Our properties are subject to customary royalty
interests, liens incident to operating agreements, liens for
current taxes and other burdens, which we believe do not materially
interfere with the use of or affect the value of such properties.
In the normal course of our business, title defects and lease
issues of varying degrees arise, and, if practicable, reasonable
efforts are made to cure such defects and issues.
We may be responsible for additional costs in connection with
abandonment of properties.
We are
responsible for payment of plugging and abandonment costs on our
oil and gas properties pro rata to our working interest. There can
be no assurance that we will be successful in avoiding additional
expenses in connection with the abandonment of any of our
properties. In addition, abandonment costs and their timing may
change due to many factors, including actual production results,
inflation rates and changes in environmental laws and
regulations.
Governmental regulations could adversely affect our
business.
Our
business is subject to certain federal, state and local laws and
regulations on taxation, the exploration for, and development,
production and marketing of, oil and natural gas, and environmental
and safety matters. Many laws and regulations require drilling
permits and govern the spacing of wells, rates of production,
prevention of waste and other matters. These laws and regulations
have increased the costs of our operations. In addition, these laws
and regulations, and any others that are passed by the
jurisdictions where we have production, could limit the total
number of wells drilled or the allowable production from successful
wells, which could limit our revenues.
Laws and regulations relating to our business frequently change,
and future laws and regulations, including changes to existing laws
and regulations, could adversely affect our business.
In
particular and without limiting the foregoing, various tax
proposals currently under consideration could result in an increase
and acceleration of the payment of federal income taxes assessed
against independent oil and natural gas producers, for example by
eliminating the ability to expense intangible drilling costs,
removing the percentage depletion allowance and increasing the
amortization period for geological and geophysical expenses. Any of
these changes would increase our tax burden.
All
states in which the Company owns leases require permits for
drilling operations, drilling bonds and reports concerning
operations and impose other requirements relating to the
exploration for and production of oil and gas. Such states also
have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and gas
properties, the establishment of maximum rates of production from
wells and the regulation of spacing, plugging and abandonment of
such wells. The statutes and regulations of these states limit the
rate at which oil and gas can be produced from our properties.
However, we do not believe we will be affected materially
differently by these statutes and regulations than any other
similarly situated oil and gas company.
Environmental liabilities could adversely affect our
business.
In the
event of a release of oil, natural gas or other pollutants from our
operations into the environment, we could incur liability for any
and all consequences of such release, including personal injuries,
property damage, cleanup costs and governmental fines. We could
potentially discharge these materials into the environment in
several ways, including:
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from a
well or drilling equipment at a drill site;
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leakage
from gathering systems, pipelines, transportation facilities and
storage tanks;
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damage
to oil and natural gas wells resulting from accidents during normal
operations; and
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blowouts,
cratering and explosions.
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In
addition, because we may acquire interests in properties that have
been operated in the past by others, we may be liable for
environmental damage, including historical contamination, caused by
such former operators. Additional liabilities could also arise from
continuing violations or contamination that we have not yet
discovered relating to the acquired properties or any of our other
properties.
To the
extent we incur any environmental liabilities, it could adversely
affect our results of operations or financial
condition.
Climate change legislation, regulation and litigation could
materially adversely affect us.
There
is an increased focus by local, state and national regulatory
bodies on greenhouse gas (“GHG”) emissions and climate
change. Various regulatory bodies have announced their intent to
regulate GHG emissions, including the United States Environmental
Protection Agency, which promulgated several GHG regulations in
2010 and late 2009. As these regulations are under development or
are being challenged in the courts, we are unable to predict the
total impact of these potential regulations upon our business, and
it is possible that we could face increases in operating costs in
order to comply with GHG emission legislation.
Passage
of legislation or regulations that regulate or restrict emissions
of GHG, or GHG-related litigation instituted against us, could
result in direct costs to us and could also result in changes to
the consumption and demand for natural gas and carbon dioxide
produced from our oil and natural gas properties, any of which
could have a material adverse effect on our business, financial
position, results of operations and prospects.
Risks Relating to Our Financial Position and Capital
Requirements
We will require additional capital to execute our business
plan. If we are unable to obtain funding, our business
operations will be harmed.
We will
require additional capital to execute our business plan, further
expand our exploration and continue with our development
programs. We may be unable to obtain additional capital
required. Furthermore, inability to maintain capital may damage our
reputation and credibility with industry participants. Our
inability to raise additional funds when required will have a
negative impact on our consolidated results of operations and
financial condition.
Future
acquisitions and future exploration, development, production,
leasing activities and marketing activities, as well as our
administrative requirements (such as salaries, insurance expenses
and general overhead expenses, as well as legal compliance costs
and accounting expenses) will require a substantial amount of
additional capital and cash flow.
We may
pursue sources of additional capital through various financing
transactions or arrangements, including joint venturing of
projects, debt financing, equity financing or other means. We may
not be successful in raising the capital needed and we may not
obtain the capital we require by other means. This will adversely
affect our consolidated financial results and financial
condition.
We have a history of losses, which may continue, which may
negatively impact our ability to achieve our business
objectives.
We
generated minimal total revenues of $26,603 and $87,939 for the
years ended April 30, 2017 and 2016, respectively, the result of
oil and gas sales, we incurred a net loss of $2,583,339 and
$11,989,758 for the years ended April 30, 2017 and 2016,
respectively. To date, we have acquired interests in oil and gas
properties, but have only
recently announced oil field discoveries with the potential to
generate commercial revenues, although no assurances can be given
that we will achieve or operate profitably. Our operations are
subject to the risks and competition inherent in the establishment
of a business enterprise. There can be no assurance that future
operations will be profitable. Revenues and profits, if any, will
depend upon various factors, including whether we will be able to
continue expansion of our revenue. We may not achieve our business
objectives and the failure to achieve such goals would have an
adverse impact on us.
As our
Larne Basin, Kern County and Oklahoma properties are in early
stages of development, we may not be able to establish commercial
reserves on these projects, and/or such projects may not result in
sufficient reserves to fund future operations and/or development
activities. Exploration for commercial reserves of oil is subject
to a number of risk factors. Few of the properties that are
explored are ultimately developed into producing oil and/or gas
fields. Since we may not be able to establish commercial reserves,
we are therefore considered to be an exploration stage
company.
Our results of operations as well as the carrying value of our oil
and gas properties are substantially dependent upon the prices of
oil and natural gas, which historically have been volatile and are
likely to continue to be volatile.
Our
future financial condition, access to capital, cash flows and
results of operations depend upon the prices we receive for our oil
and natural gas. Historically, oil and natural gas prices have been
volatile and are subject to fluctuations in response to changes in
supply and demand, market uncertainty and a variety of additional
factors that are beyond our control. Factors that affect the prices
we receive for our oil and natural gas include:
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the
level of domestic production;
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the
availability of imported oil and natural gas;
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political
and economic conditions and events in foreign oil and natural gas
producing nations, including embargoes, continued hostilities in
the Middle East and other sustained military campaigns, and acts of
terrorism or sabotage;
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the
ability of members of OPEC to agree to and maintain oil price and
production controls;
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the
cost and availability of transportation and pipeline systems with
adequate capacity;
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the
cost and availability of other competitive fuels;
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fluctuating
and seasonal demand for oil, natural gas and refined
products;
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concerns
about global warming or other conservation initiatives and the
extent of governmental price controls and regulation of
production;
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weather;
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foreign
and domestic government relations; and
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overall
economic conditions, particularly the recent worldwide economic
slowdown, which has put downward pressure on oil and natural gas
prices and demand.
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Any
prolonged decline in oil or gas prices could have a material
adverse effect on our operations, financial condition, and level of
development and exploration expenditures and could result in a
reduction in the carrying value of our oil and gas
properties.
In the event of a Redetermination of the value of the Bandolier
Interest contributed to MegaWest, the Company may be required to
fund any shortfall in such valuation, which the Company may not be
able to fund. Failure to fund the shortfall will result in a
material and adverse effect on our financial condition and results
from operations.
Consummation
of the MegaWest Transaction resulted in a substantial increase in
our assets and total revenue during the year ended April 30,
2016. However, substantially all of these amounts are held by
MegaWest and controlled by the board of directors of MegaWest,
which consists 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 could result in the
foreclosure on 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. In
the event the evaluation of the drilling prospects results in a
Redetermination, the Company not be able to recover its notes
receivable, interest in real estate rights, accounts receivable
– related party, and any accrued interest. Our ability to
recover such assets, or any requirement to fund a shortfall, will
have a material and adverse effect on our operations and financial
condition.
In the event of a Redetermination results in a foreclosure of any
portion of our equity interest in MegaWest, our control of MegaWest
may terminate. As a result, our financial condition may be
materially and adversely affected.
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.
Risks Related to Our Common Stock
The liquidity, market price and volume of our stock are
volatile.
Our
Common Stock is not traded on any exchange, but is currently quoted
on the OTC Pink Marketplace (“OTC Pink”). The liquidity of our
Common Stock may be adversely affected, and purchasers of our
Common Stock may have difficulty selling our Common Stock,
particularly if our Common Stock does not continue to be quoted on
the OTC Pink on another recognized quotation services or
exchange.
The
trading price of our Common Stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in our
operating results, announcements of our drilling results and other
events or factors. In addition, the U.S. stock markets have from
time to time experienced extreme price and volume fluctuations that
have affected the market price for many companies and which often
have been unrelated to the operating performance of these
companies. These broad market fluctuations may adversely affect the
market price of our securities.
Our stock is categorized as a penny stock. Trading of our stock may
be restricted by the SEC’s penny stock regulations, which may
limit a stockholder’s ability to buy and sell our
stock.
Our
stock is categorized as a “penny stock.” The SEC has
adopted Rule 15g-9 which generally defines “penny
stock” to be any equity security that has a market price (as
defined) less than $5.00 per share or an exercise price of less
than $5.00 per share, subject to certain exceptions. Our securities
are covered by the penny stock rules, which impose additional sales
practice requirements on broker-dealers who sell to persons other
than established customers and accredited investors. The penny
stock rules require a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the
SEC, which provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer
also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly
account statements showing the market value of each penny stock
held in the customer’s account. The bid and offer quotations,
and the broker-dealer and salesperson compensation information,
must be given to the customer orally or in writing prior to
effecting the transaction and must be given to the customer in
writing before or with the customer’s confirmation. In
addition, the penny stock rules require that prior to a transaction
in a penny stock not otherwise exempt from these rules, the
broker-dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive
the purchaser’s written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level
of trading activity in the secondary market for the stock that is
subject to these penny stock rules. Consequently, these penny stock
rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage
investor interest in and limit the marketability of our Common
Stock.
FINRA sales practice requirements may also limit a
stockholder’s ability to buy and sell our stock.
In addition to the “penny
stock” rules described above, the Financial Industry
Regulatory Authority (“FINRA”) has adopted rules that require that in
recommending an investment to a customer, a broker-dealer must have
reasonable grounds for believing that the investment is suitable
for that customer. Prior to recommending speculative low-priced
securities to their non-institutional customers, broker-dealers
must make reasonable efforts to obtain information about the
customer’s financial status, tax status, investment
objectives and other information. Under interpretations of these
rules, FINRA believes that there is a high probability that
speculative low-priced securities will not be suitable for at least
some customers. The FINRA requirements make it more difficult for
broker-dealers to recommend that their customers buy our Common
Stock, which may limit your ability to buy and sell our stock and
have an adverse effect on the market for our
shares.
We have never paid dividends on our capital stock, and we do not
anticipate paying any cash dividends in the foreseeable
future.
We have
paid no cash dividends on any of our classes of capital stock to
date and currently intend to retain our future earnings, if any, to
fund the development and growth of our business. As a result,
capital appreciation, if any, of our Common Stock will be your sole
source of gain for the foreseeable future. Any payment of cash
dividends will depend upon our financial condition, contractual
restrictions, financing agreement covenants, solvency tests imposed
by corporate law, results of operations, anticipated cash
requirements and other factors and will be at the discretion of our
board of directors. Furthermore, we may incur indebtedness that may
severely restrict or prohibit the payment of
dividends.
None.
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 acquired a 16% interest, and
Brigantes Energy Limited, which retained a 10%
interest. Third parties 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
was approximately $6,159,452, based on an exchange rate of one
British Pound for 1.44 U.S. Dollars. Petro UK was and continues 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. The primary
objectives of the well were to (i) confirm the existence and
maturity of the carboniferous source rock and (ii) test potential
hydrocarbon-bearing objective zones. Unexpectedly, the overlying
Permian section thickened considerably and at 2,000 meters, and
several participants owning 55% of the working interest in the well
(including Horizon Energy) expressed interest in deepening the well
an additional 600 meters. However, participants
representing the other 45% of the interest were unwilling to fund
their share of the additional costs, and without unanimity
determined that continued drilling was impractical. The well has
been plugged and the drilling rig has been demobilized from the
location. The drilling detected background gas shows in
the drilling fluid, and samples were sent to Applied Petroleum
Technology, (“APT”) an internationally
recognized independent geochemical laboratory in Oslo, Norway. APT
determined that the gas originated from a carboniferous source,
providing evidence of nearby source rock and an active petroleum
system. The samples were strikingly similar to a gas sample from a
producing gas field in in Lancashire, England, just across the
North Channel.
Historically,
large basinal discoveries are found and developed only after
thorough analysis of technical data derived from both seismic
acquisition and drilling of wells. Management believes that Larne
Basin continues to be a very attractive exploration opportunity
based on technical merit, modest exploration costs, low political
risk and excellent fiscal terms. The Company is continuing the
exploration program by relocating to offshore targets and
reprocessing seismic data.
Management
believes that the Larne Basin continues to be very attractive
exploration opportunity based on technical merit, modest
exploration costs, low political risk and excellent fiscal terms.
The Company intends to conduct further exploration and appraisal by
reprocessing existing seismic data, and if merited, additional new
seismic “shoots,” re-locating drill targets to more
favorable locations offshore, and evaluating farmout
opportunities.
Kern County
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
in 5,000 gross acres 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. 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.
On July
18, 2017, the Company announced a new
oil field discovery in its Sunset Boulevard prospect in Kern
County, California upon successfully drilling the Cattani-Rennie
47X-15 exploration well (“CR 47X”). The CR 47X was drilled
to a depth of approximately 8,500 feet and confirmed at least two
commercially successful pay zones. The discovery is
currently being evaluated but initial results indicate significant
reserve potential. Following completion and production tests,
the Company will announce development plans. Several
additional prospect wells are now being planned to be drilled in
Kern County.
Oklahoma
On May
30, 2014, the Company, entered into a Subscription Agreement,
pursuant to which the Company purchased a 50% interest in
Bandolier. Bandolier’s oil and gas assets are located in in
Osage County, Oklahoma and comprise a significant contiguous oil
and gas acreage position in Northeastern Oklahoma, approximately
106,000 acres, with substantial original oil in place, stacked
reservoirs, as well as exploratory and development opportunities
that can be accessed through both horizontal and vertical drilling.
Significant infrastructure is already in place including 32 square
miles of 3-D seismic, 3 phase power, a dedicated sub-station as
well as multiple oil producing horizontal wells. As a result of
this transaction, the Company capitalized $2,460,632 in proved
developed oil and gas assets and $5,921,641 in proven undeveloped
oil and gas assets. During the year ended April 30, 2016, Bandolier
purchased additional oil and gas assets totaling
$102,864. Management performed a ceiling test as of
April 30, 2016, and recognized an impairment of $5,951,622 on the
Oklahoma property.
On May
8, 2017, the Company announced a new oil field discovery in its
106,500-acre concession in Osage County, Oklahoma upon successfully
drilling the Chat 2-11 exploration well. The Chat 2-11 was drilled
to a depth of 2,800 feet into the Mississippian Chat. Initial
results indicated up to 20 feet of oil productive formation.
Following flow and fracking tests, the Company plans to confirm IP
rates.
On May
30, 2017, the Company announced a second new oil field discovery in
its 106,500-acre concession in Osage County, Oklahoma upon
successfully drilling the Red Fork 1-3 exploration well. The Red
Fork 1-3 was drilled to a depth of 2,800 feet into the
Mississippian Chat. Initial results indicated up to 30 feet of oil
productive formation. Following flow and fracking tests, the
Company plans to confirm IP rates. These structures were identified
utilizing 3D seismic technology, indicating a potential of up to
2.5 million barrels of oil.
The
Company has plans to drill an additional six wells on its Osage
County, Oklahoma concessions during 2017.
The
Osage County drilling program is the result of a Joint Exploration
and Development Agreement (the “Exploration Agreement”), dated
August 19, 2016, between Spyglass Energy Group, LLC
(“Spyglass”),
a wholly owned subsidiary of Bandolier Energy, LLC
(“Bandolier”),
Phoenix 2016, LLC (“Phoenix”) and Mackey Consulting
& Leasing, LLC (“Mackey”). Pursuant to the
Exploration Agreement, Phoenix and Mackey operates and provides
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.
In
connection with the $2.0 million secured note financing consummated
on June 13, 2017, the Company issued an overriding royalty interest
equal to 2% in all production from the Company’s interest in
the Company’s concessions located in Osage County,
Oklahoma.
Horizon Energy
Horizon Acquisition. On May 3, 2016 (the
“Closing
Date”), the
Company consummated the acquisition of Horizon
Investments. 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)
approximately $690,000 (the “Closing
Proceeds”);
and (iv) certain bank, investment and other accounts maintained by
Horizon Investments, in an amount which, together with the amount
issued under the Horizon Notes and the Closing Proceeds, total
approximately $5.0 million (collectively, the
“Purchased
Assets”) (the
“Horizon
Acquisition”).
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
11,564,249 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.
Horizon
Energy is an oil and gas exploration and development company owned
and managed by former senior oil and gas executives with access to
a broad network of industry insiders. 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.
Operational and Project Review
The
following table summarizes the costs incurred in oil and gas
property acquisition, exploration, and development activities for
the Company for the years ended April 30, 2017 and
2016:
Cost
|
Oklahoma
|
Kansas
|
Missouri
|
Other (1)
|
Total
|
Balance, May 1,
2015
|
$6,935,000
|
$7,803,020
|
$918,991
|
$100,000
|
15,757,011
|
Additions
|
102,864
|
-
|
-
|
-
|
102,864
|
Disposals
|
(279,013)
|
(7,727,287)
|
-
|
-
|
(8,006,301)
|
Depreciation,
depletion and amortization
|
(29,003)
|
(75,733)
|
-
|
-
|
(104,736)
|
Impairment of oil
and gas assets
|
(5,951,622)
|
-
|
(918,991)
|
-
|
(6,870,613)
|
Balance, April 30,
2016
|
778,226
|
-
|
-
|
100,000
|
878,226
|
Additions
|
490,471
|
-
|
-
|
-
|
490,471
|
Disposals
|
-
|
-
|
-
|
-
|
-
|
Depreciation,
depletion and amortization
|
(12,949)
|
-
|
-
|
-
|
(12,949)
|
Impairment of oil
and gas assets
|
(20,942)
|
-
|
-
|
-
|
(20,942)
|
Balance, April 30,
2017
|
$1,234,806
|
$-
|
$-
|
$100,000
|
$1,334,806
|
(1) Other property consists primarily of four used steam generators
and related equipment that will be assigned to future projects. As
of April 30, 2017 and 2016, management concluded that impairment
was not necessary as all other assets were carried at salvage
value.
The above table excludes Larne Basin and Kern County assets of
$761,444 which were not in operations as of April 30,
2017.
For the year ended April 30, 2017, the Company performed a ceiling
test and recognized an impairment charge of $20,942 on the Oklahoma
assets. For the year
ended April 30, 2016, the Company performed a ceiling test and
recognized impairment charges of $5,951,622 and $918,991 on the
Oklahoma and Missouri assets, respectively.
Oil Wells, Properties, Operations, and Acreage
The
following table sets forth the number of oil wells in which we held
a working interest as of April 30, 2017 and 2016:
|
Producing
|
Non-Producing
|
||||||
|
April
30, 2017
|
April
30, 2016
|
April
30, 2017
|
April
30, 2016
|
||||
|
Gross
|
Net
|
Gross
|
Net
|
Gross
|
Net
|
Gross
|
Net
|
Kansas
|
|
|
-
|
-
|
|
|
-
|
-
|
Oklahoma
|
2
|
2
|
1
|
1
|
41
|
41
|
6
|
6
|
Missouri
(1)
|
|
|
-
|
-
|
|
|
-
|
-
|
Kentucky
(1)
|
|
|
-
|
-
|
|
|
-
|
-
|
Montana
(1)
|
|
|
-
|
-
|
|
|
-
|
-
|
Texas (1)
|
|
|
-
|
-
|
|
|
-
|
-
|
Total
|
2
|
2
|
1
|
1
|
41
|
41
|
6
|
6
|
(1)
|
We
acquired the predecessor assets of Petro River Oil Corporation on
April 23, 2016. These assets are no longer in
operation.
|
The
following table sets forth the lease areas we have an interest in,
by area, as of April 30, 2017 and 2016:
Project
Areas
|
April
30, 2017
|
April
30, 2016
|
||
|
Gross
|
Net
|
Gross
|
Net
|
Kansas
|
-
|
-
|
-
|
-
|
Larne
Basin
|
130,000
|
26,000
|
130,000
|
11,700
|
Kern
County
|
16,000
|
2,200
|
5,000
|
688
|
Oklahoma
(2)
|
106,880
|
80,160
|
106,880
|
106,880
|
Missouri
(1) (2)
|
-
|
-
|
-
|
-
|
Kentucky
(1)
|
-
|
-
|
-
|
-
|
Texas (1)
|
-
|
-
|
-
|
-
|
Montana
(1)
|
-
|
-
|
-
|
-
|
Total
|
252,880
|
108,360
|
241,880
|
119,268
|
(1)
We
have
no plans for any further material expenditure on these properties
as a result of the legal acquirer’s prior drilling results
and a lack of resources.
(2)
Management concluded that as of April 30, 2016, the Missouri assets
were impaired by $918,991 and the Oklahoma assets were impaired by
$5,951,622.
Oil and Natural Gas Reserves
Oil and
natural gas information is provided in accordance with ASC Topic
932 - “Extractive Activities - Oil and
Gas”.
The
Company has approximately $2.0 million and $2.1 million in proven
oil and gas reserves as of April 30, 2017 and 2016, respectively.
For the year ended April 30, 2017 the reports by Pinnacle Energy
Services, LLC (“Pinnacle”) covered 100% of the
Company’s oil reserves.
Proved
oil and natural gas reserves, as defined within SEC Rule
4-10(a)(22) of Regulation S-X, are those quantities of oil and gas,
which, by analysis of geoscience and engineering data can be
estimated with reasonable certainty to be economically producible
from a given date forward from known reservoirs, and under existing
economic conditions, operating methods and government regulations
prior to the time of which contracts providing the right to operate
expire, unless evidence indicates that renewal is reasonably
certain, regardless of whether determinable or probabilistic
methods are used for the estimation. The project to extract the
hydrocarbons must have commenced or the operator must be reasonably
certain that it will commence the project within a reasonable time.
Developed oil and natural gas reserves are reserves that can be
expected to be recovered from existing wells with existing
equipment and operating methods or in which the cost of the
required equipment is relatively minor compared to the cost of a
new well; and through installed extraction equipment and
infrastructure operational at the time of the reserves estimate is
the extraction is by means not involving a well. Estimates of the
Company’s oil reserves are subject to uncertainty and will
change as additional information regarding producing fields and
technology becomes available and as future economic and operating
conditions change.
Our
undeveloped acreage includes leased acres on which wells have not
been drilled or completed to a point that would permit the
production of commercial quantities of oil and natural gas,
regardless of whether or not such acreage is held by production or
contains proved reserves. A gross acre is an acre in which we own
an interest. A net acre is deemed to exist when the sum of
fractional ownership interests in gross acres equals one. The
number of net acres is the sum of the fractional interests owned in
gross acres.
Net Production, Unit Prices and Costs
The
following table presents certain information with respect to our
oil and natural gas production and prices and costs attributable to
all oil and natural gas properties owned by us for the periods
shown.
|
For the Years Ended April
30,
|
|
|
2017
|
2016
|
Production
volumes:
|
|
|
Oil
(Bbls)
|
379
|
1,475
|
Natural gas
(Mcf)
|
4,512
|
-
|
Total
(Boe)
|
1,131
|
1,475
|
Average realized
prices:
|
|
|
Oil (per
Bbl)
|
$50.57
|
$52.92
|
Natural gas (per
Mcf)
|
$1.64
|
$-
|
Total per
Boe
|
$23.52
|
$52.92
|
Average production
cost:
|
3,888
|
|
Total per
Boe
|
$3.44
|
$252.91
|
Drilling and Other Exploratory and Development
Activities
The Company’s Direct Working Interest Projects
Northern Ireland – Larne Basin. We completed drilling
the Woodburn Forest #1 well in June 2016. The primary
objectives of the well were to (i) confirm the existence and
maturity of the carboniferous source rock and (ii) test potential
hydrocarbon-bearing objective zones. Unexpectedly, the overlying
Permian section thickened considerably at 2,000 meters, and several
participants owning 55% of the working interest in the well
(including Horizon Energy) expressed interest in deepening the well
an additional 600 meters. However, participants
representing the other 45% of the interest were unwilling to fund
their share of the additional costs, and without unanimity
determined that continued drilling was impractical. The well has
been plugged and the drilling rig has been demobilized from the
location.
The
drilling detected background gas shows in the drilling fluid, and
samples were sent to Applied Petroleum Technology,
(“APT”) an
internationally recognized independent geochemical laboratory in
Oslo, Norway. APT determined that the gas originated from a
carboniferous source, providing evidence of nearby source rock and
an active petroleum system. The samples were strikingly similar to
a gas sample from a producing gas field in in Lancashire, England,
just across the North Channel.
Historically,
large basinal discoveries are found and developed only after
thorough analysis of technical data derived from both seismic
acquisition and drilling of wells. Management believes that Larne
Basin continues to be a very attractive exploration opportunity
based on technical merit, modest exploration costs, low political
risk and excellent fiscal terms. The Company is continuing the
exploration program by relocating to offshore targets and
reprocessing seismic data.
Pearsonia West – Osage County, Oklahoma. The Company
is pursuing its core strategy in this well-known basin, drilling
vertical wells in relatively shallow conventional legacy reservoirs
using modern 3-D seismic surveys. The Company has acquired
approximately 106,000 acres in Osage County in an area that was the
focus of a deeper horizontal play and is reprocessing 36 square
miles of 3-D seismic data to refocus on a shallow (3,000 to 4,000
ft.) vertical program. The Company is targeting the
Mississippian-aged Chert formation and Pennsylvanian-aged
formations. Management projects estimated ultimate recovery at
50,000 barrels of oil per well. Pearsonia West is a low-cost
conventional project surrounded by 800 million barrels of
historical production. The Company plans to drill six vertical
wells this year at a cost of $250,000 per well. The Company has
drilled three wells as of July 5, 2017.
Kern County, California. The Kern County project, the
re-development of a 100-million-barrel oil field, is currently
progressing, beginning with the spudding of the Company’s
Sunset Boulevard prospect in Kern County, California. On July 18,
2017, the Company announced a new
oil field discovery in its Sunset Boulevard prospect upon
successfully drilling the Cattani-Rennie 47X-15 exploration well
(“CR 47X”).
The CR 47X was drilled to a depth of approximately 8,500 feet and
confirmed at least two commercially successful pay zones.
The discovery is currently being evaluated but initial
results indicate significant reserve potential. Following
completion and production tests, the Company will announce
development plans. Several additional prospect wells are now
being planned to be drilled in Kern County.
Horizon Energy
Projects
Denmark Offshore. The Denmark project is a prospective,
underexplored oil basin on trend with the major oil and gas fields
offshore in Norway and the United Kingdom. We are currently
evaluating the four licenses awarded earlier this year to Ardent
Oil Denmark (“Ardent”) (Horizon Energy owns 50% of
Ardent). We are in final stages of interpreting the high-quality
3-D seismic survey we acquired last year. Ardent will
thereafter commence marketing efforts to farm-out the prospect to a
major oil company. The potential reserve target is in the
range of 200,000,000 barrels of oil. The other three licenses are
being high-graded and are in various stages of evaluation.
The goal is to advance them technically to a point at which we can
solicit a larger company to either acquire new 3-D data and/or
drill an exploration well on each.
Dorset, U.K. Onshore. The Dorset project is south of and
adjacent to the giant Wytch Farm oil field, the largest onshore oil
field in Western Europe, which has produced approximately 500
million barrels of oil and 175 billion cubic feet of natural gas
since production first began in 1979. Horizon Energy was recently
awarded two onshore blocks. Seven wells were previously drilled
within the license area, including the first UK offshore well in
1963 on Lulworth Banks. Six of these wells encountered oil or gas
shows and three flowed oil or gas on test. A new 3-D seismic survey
is planned in 2017 over new blocks to more clearly image
prospects/leads identified on older 2-D data.
(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 $605,000 as of July 24, 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 $530,000 as of July 24, 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. As of
July 5, 2017, no new development has occurred since the appeals
court ruling.
(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 specifically named
operators, including 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.
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 4. MINE SAFETY DISCLOSURES
Not
applicable.
ITEM
5.
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our
common shares have traded in the United States on the OTC Pink
Marketplace under the symbol “PTRC”.
The
following table sets forth the quarterly average high and low bid
prices per share for our Common Stock for the two most recently
completed fiscal years in the period that ended on April 30,
2017.
Fiscal
Year Ended
|
Common Stock
|
|
|
High
|
Low
|
April
30, 2017
|
|
|
First
Quarter
|
$3.48
|
$1.15
|
Second
Quarter
|
$2.49
|
$1.30
|
Third
Quarter
|
$1.15
|
$0.45
|
Fourth
Quarter
|
$1.17
|
$0.74
|
|
|
|
April
30, 2016
|
|
|
First
Quarter
|
$8.00*
|
$2.00*
|
Second
Quarter
|
$3.26*
|
$1.80*
|
Third
Quarter
|
$3.50*
|
$1.50*
|
Fourth
Quarter
|
$3.45*
|
$2.00*
|
*
Bid price reflects the
1-for-200 reverse split of our Common Stock, which reverse split
took effect on December 7, 2015.
Holders
As of July 26, 2017, we had 153 holders of record of our registered
Common Stock, and our Common Stock had a closing bid price of $2.20
per share.
Dividends and Related Policy
We
presently intend to retain all earnings, if any, for use in our
business operations and accordingly, the Board of Directors (the
“Board”) does
not anticipate declaring any cash dividends for the foreseeable
future. Any future determination to pay dividends will be at the
discretion of the Board and will be contingent upon our financial
condition, results of operations, current and anticipated cash
needs, restrictions contained in current or future financing
instruments, plans for expansion and such other factors as the
Board deems relevant. We have not paid any cash dividends on our
Common Stock.
Transfer Agent and Registrar
Our
transfer agent is Computershare, Inc., located at 462 South
4th Street, 11th Floor, Louisville, KY 40202. Their
telephone number is (502) 625-0400.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers.
None.
ITEM 6. SELECTED FINANCIAL
DATA
Not
applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
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 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.
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.
Our Objective
Our
primary objective is to enhance shareholder value by increasing our
net asset value, net reserves and cash flow through development,
exploitation, exploration, and acquisition of oil and gas
properties.
Our Strategy
We
intend to follow a balanced risk strategy by allocating capital
expenditures to a combination of lower risk development and high
potential exploration prospects. Key elements of our business
strategy include the following:
Develop and exploit our existing oil and natural gas
properties. Our principal growth strategy has been to
explore, develop and exploit our acquired and leased properties to
add proven reserves.
Pursue selective acquisitions. The Company has acquired
leasehold positions that it believes contain substantial resource
potential and meet its targeted returns on invested capital.
Management intends to continue to pursue strategic acquisitions
that meet the Company’s operational and financial targets. We
seek to acquire developed and undeveloped oil and gas properties
that will provide us with additional development and exploratory
prospect opportunities. We may also acquire a working interest in
one or more prospects from others and participate with the other
working interest owners in drilling and, if warranted, completing
oil or gas wells on a prospect. We may purchase producing oil or
gas properties.
Use the latest 3-D seismic technology to maximize returns.
Technical advances in imaging and modeling can lower risk and
enhance productivity. The Company intends to utilize 3-D seismic
and other technological advancements that benefit its exploratory
and developmental drilling program.
Limit our current exploration and acquisition activities to
conventional oil plays with a projected breakeven price of $30 per
barrel or less. We intend to focus our resources
on more easily recoverable conventional reserves.
During the current downturn, obtain price concessions from third
party vendors, specifically those involved in our drilling
and completion activities and day-to-day well
maintenance.
Plan of Operation
The
Company is currently engaged in oil and natural gas acquisition,
exploration, development and production, with activities in
Oklahoma and California in the United States, and Northern Ireland,
Denmark and the U.K in Western Europe. We focus on developing our
existing properties, while continuing to pursue acquisitions of oil
and gas properties with upside potential.
The
Company intends to grow its resources and production through
exploration activities and development of identified potential
drilling locations, and through acquisitions that meet the
Company’s strategic and financial objectives. Our plan
includes:
Leveraging our management experience. The Company’s
executive team, along with Horizon Energy, the Company’s
operating partner, has extensive and proven experience in the oil
and gas industry. We believe that the experience of our executive
team will help reduce the time and cost associated with drilling
and completing our conventional assets and potentially increasing
recovery. Collectively, our management team and engineering
professionals identify and evaluate acquisition opportunities,
negotiate and close purchases and manage acquired
properties.
Leveraging our established business relationships. Our
executive team, along with Horizon Energy, has many relationships
with operators and service providers in our core asset regions. We
believe that leveraging our relationships will be a competitive
advantage in developing our acreage and identifying acquisition
targets.
De-risking our acreage position and build a vertical drilling
program. The Company has identified a multi-year inventory
of potential drilling locations that will drive reserves and
production growth and provide attractive return opportunities. The
Company views its Osage, Kern County and Grapevine projects as
de-risked because of the significant production history in the area
and well-established industry activity surrounding the
acreage.
Partnership with Horizon Energy. Following the acquisition
of Horizon Investments, LLC (“Horizon Investments”), the
Company has an indirect interest, through Horizon
Investment’s 20% ownership in Horizon Energy, in 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.
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.
Competitive Strengths
Financial flexibility. Our capital structure and high degree
of operational control continues to provide us with significant
financial flexibility. We have no corporate debt in our capital
structure, enabling us to make capital decisions with no
restrictions imposed by debt covenants, lender oversight and/or
mandatory repayment schedules. Additionally, in concert with our
partner, Horizon Energy, we control the majority of our anticipated
future net drilling locations, including the timing and selection
of drilling locations as well as completion schedules. This allows
us to modify our capital spending program depending on financial
resources, leasehold requirements and market
conditions.
Management experience. Our key management team possesses an
average of over thirty years of experience in oil and gas
exploration and production in multiple resource plays, including
exploration and production in the Company’s core regions of
Osage, Oklahoma, Kern County, California, and the North
Sea.
Cost-efficient operators. In the past, our management team
has shown an ability to drill wells in a cost efficient way and to
successfully integrate acquired assets without incurring
significant increases in overhead.
History
The
Company was originally incorporated under the Company Act (British
Columbia) on February 8, 2000 under the name Brockton Capital Corp.
We then changed our name to MegaWest Energy Corp. effective
February 27, 2010, before changing it to Gravis Oil Corp. on June
20, 2011. On September 11, 2012, we re-organized under the laws of
the State of Delaware as a corporation organized under the Delaware
General Corporation Law. Prior to September 11, 2012, and at April
30, 2012, we were organized under the laws of Alberta,
Canada.
Petro
River Oil LLC (“Petro”), an indirect subsidiary
of the Company and wholly owned subsidiary of MegaWest Energy
Kansas Corp., was incorporated under the laws of the State of
Delaware on March 3, 2011 (“MegaWest”). Through proceeds
received from the issuance of various promissory notes, on February
1, 2012, Petro purchased various interests in oil and gas leases,
wells, records, data and related personal property located along
the play in the state of Kansas (“Mississippi
Assets”). Effective December 23, 2015, Petro
divested the Mississippi Assets. In connection with the
divestiture, the assignee and purchaser of the Mississippi Assets
agreed to pay outstanding liabilities, including unpaid taxes, and
assume certain responsibilities to plug any abandoned wells. No
cash consideration was paid for the interests.
Share Exchange. On April 23, 2013,
the Company executed and consummated a securities purchase
agreement by and among the Company, Petro, and certain investors in
Petro (the “Investors”), namely, the holders
of outstanding secured promissory notes of Petro (the
“Notes”), and
those holding membership interests in Petro (the
“Membership
Interests”, and, together with the Notes, the
“Acquired
Securities”) sold by Petro (the “Share Exchange”). In the Share
Exchange, the Investors exchanged their Acquired Securities for
591,021,011 newly issued shares of the Company's common stock,
$0.00001 par value (“Common
Stock”) (2,955,105 shares of Common Stock based on the
December 2015 reverse stock split – see “Reverse Stock Split”
below). Upon completion of the Share Exchange, Petro became a
wholly owned subsidiary of the Company.
As a
result of the Share Exchange, the Company acquired 100% of the
membership units of Petro and consequently, control of
Petro’s business and operations. Under generally accepted
accounting principles in the United States (“U.S. GAAP”), because
Petro’s former members and note holders held 80% of the
issued and outstanding shares of the Company as a result of the
Share Exchange, Petro was deemed the accounting acquirer while the
Company remains the legal acquirer. Petro adopted the fiscal year
of the Company. Prior to the Share Exchange, all historical
financial statements presented are those of Petro. The equity of
the Company is the historical equity of Petro, restated to reflect
the number of shares issued by the Company in the
transaction.
Acquisition of Interest in Bandolier Energy LLC. On May 30, 2014, the
Company entered into a Subscription Agreement pursuant to which the
Company was issued a 50% interest in Bandolier Energy, LLC
(“Bandolier”)
in exchange for a capital contribution of $5.0 million (the
“Bandolier
Acquisition”). In connection with the Bandolier
Acquisition, the Company had the right to appoint a majority of the
board of managers of Bandolier. The Company’s Executive
Chairman was a manager of, and owned a 20% membership interest in,
Pearsonia West Investment Group, LLC (“Pearsonia West”), a special
purpose vehicle formed for the purpose of investing in Bandolier
with the Company and Ranger Station, LLC (“Ranger Station”). Concurrent with
the Bandolier Acquisition, Pearsonia West was issued a 44% interest
in Bandolier for cash consideration of $4.4 million, and Ranger
Station was issued a 6% interest in Bandolier for cash
consideration of $600,000. In connection with Pearsonia
West’s investment in Bandolier, the Company and Pearsonia
West entered into an agreement, dated May 30, 2014, granting the
members of Pearsonia West an option, exercisable at any time prior
to May 30, 2017, to exchange their pro rata share of the Bandolier
membership interests for shares of the Company’s Common
Stock, at a price of $0.08 per share, subject to adjustment (the
“Option”). The
Option, if fully exercised, would result in the Company issuing
55,000,000 shares of its Common Stock (275,000 shares of Common
Stock at a price of $16 per share based on the December 2015
reverse stock split – see “Reverse Stock Split”
below), or 6% to the members of Pearsonia West.
Until
the execution of the Contribution Agreement, described below, the
Company had operational control along with a 50% ownership interest
in Bandolier. As a result, the Company consolidated Bandolier. The
remaining 50% non–controlling interest represented the equity
investment from Pearsonia West and Ranger Station. The Company
allocated the proportionate share of the net operating income/loss
to both the Company and the non-controlling interest.
Subsequent
to the initial capitalization of Bandolier, Bandolier acquired, for
$8,712,893 less a $407,161 claw back, all of the issued and
outstanding equity of Spyglass Energy Group, LLC
(“Spyglass”),
the owner of oil and gas leases, leaseholds, lands, and options and
concessions thereto located in Osage County, Oklahoma. Spyglass
controlled a significant contiguous oil and gas acreage position in
Northeastern Oklahoma, consisting of approximately 106,000 acres,
with substantial original oil in place, stacked reservoirs, as well
as exploratory and development opportunities that could be accessed
through both horizontal and vertical drilling. Significant
infrastructure was already in place including 32 square miles of
3-D seismic, 3 phase power, a dedicated sub-station as well as
multiple oil producing horizontal wells.
The
Company recorded the purchase of Spyglass by Bandolier using the
acquisition method of accounting as specified in ASC 805 “Business
Combinations.” This method of accounting requires
the acquirer to (i) record purchase consideration issued to sellers
in a business combination at fair value on the date control is
obtained, (ii) determine the fair value of any non-controlling
interest, and (iii) allocate the purchase consideration to all
tangible and intangible assets acquired and liabilities assumed
based on their acquisition date fair values. Further, the Company
commenced reporting the results of Spyglass on a consolidated basis
with those of the Company effective upon the date of the
acquisition.
MegaWest Transaction. On October 15, 2015, the
Company entered into a contribution agreement (the
“Contribution
Agreement”) with MegaWest and Fortis Property Group,
LLC, a Delaware limited liability company (“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, (i) the Company
transferred its 50% membership interest in Bandolier
(the “Bandolier
Interest”), and cancelled all of its ownership
interest in the then issued and outstanding MegaWest Shares, which
prior to the MegaWest Transaction represented 100% ownership of
MegaWest; and (ii) Fortis transferred certain indirect interests
held in 30 condominium units and the rights to any profits and
proceeds therefrom. Immediately thereafter, MegaWest
issued to the Company 58,510 MegaWest Shares, representing a 58.51%
equity interest in MegaWest, as consideration for the assignment of
the Bandolier Interest, and issued to Fortis 41,490 MegaWest
Shares, representing a 41.49% equity interest in MegaWest, as
consideration for the assets assigned to MegaWest by
Fortis. 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.
Subject
to the terms and conditions of the Contribution Agreement, the
Contribution Agreement provided for a redetermination of the fair
market value of the Bandolier Interest at any time following the
six month anniversary after the execution thereof (the
“Redetermination”), Upon
a Redetermination, which has not occurred as of July 28, 2017, 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. If the
Company is unable to deliver to Fortis the cash payment required
after the Redetermination, if any, the board of directors of
MegaWest shall have the right to exercise certain remedies against
the Company, including a right to foreclose on the Company’s
entire equity in MegaWest, which equity interest has been pledged
to Fortis under the terms of the Contribution Agreement. In
the event of foreclosure, the Bandolier Interest would revert back
to the Company.
Acquisition of
Horizon Investments. On
December 1, 2015, the Company entered into a conditional purchase
agreement with Horizon Investments (as amended, the
"Purchase
Agreement"), pursuant to which
the Company acquired, on May 3, 2016, (i) a 20% membership interest
in Horizon Energy; (ii) certain promissory notes issued by Horizon
Investments to the Company in the aggregate principal amount of
$1.6 million (the "Horizon
Notes"); (iii) approximately
$690,000 held in escrow pending closing under the Purchase
Agreement (the "Closing
Proceeds"); and (iv) certain
bank, investment and other accounts maintained by Horizon
Investments, in an amount which, together with the principal amount
of the Horizon Note and the Closing Proceeds, totaled not less than
$5.0 million (collectively, the "Purchased
Assets"). The consideration for
the Purchased Assets was 11,564,249 shares of the Company's Common
Stock, which shares were issued to Horizon Investments at
closing.
Recent Developments
$2.0 Million Secured Note Financing. On June 13, 2017, the
Company entered into a Securities Purchase Agreement
(“Purchase
Agreement”) with Petro Exploration Funding, LLC
(“Funding
Corp.”), pursuant to which the Company issued to
Funding Corp. a senior secured promissory note to finance the
Company’s working capital requirements (the
“Note
Financing”), in the principal amount of $2.0 million
(“Secured
Note”). As additional consideration for the Note
Financing, the Company issued to Funding Corp. (i) a warrant to
purchase 840,336 shares of the Company’s common stock,
$0.00001 par value (“Common
Stock”) (“Warrant”), and (ii) an overriding
royalty interest equal to 2% in all production from the
Company’s interest in the Company’s concessions located
in Osage County, Oklahoma, currently held by Spyglass pursuant to
an Assignment of Overriding Royalty Interests (the
“Assignment”).
The
Secured Note accrues interest at a rate of 10% per annum, and
matures on June 30, 2020. To secure the repayment of all amounts
due under the terms of the Secured Note, the Company entered into a
Security Agreement, pursuant to which the Company granted to
Funding Corp. a security interest in all assets of the Company. The
first interest payment will be due on June 1, 2018 and each
six-month anniversary thereafter until the outstanding principal
balance of the Secured Note is paid in full.
The
Warrant is exercisable immediately upon issuance, for an exercise
price per share equal to $2.38 per share, and shall terminate, if
not previously exercised, five years from the date of
issuance.
Scot
Cohen, a member of the Company’s Board of Directors and a
substantial stockholder of the Company, owns or controls 31.25% of
Funding Corp.
Kern County Drilling Program Results. On July 18, 2017, the
Company announced a new
oil field discovery in its Sunset Boulevard prospect in Kern
County, California upon successfully drilling the Cattani-Rennie
47X-15 exploration well (“CR 47X”). The CR 47X was drilled
to a depth of approximately 8,500 feet and confirmed at least two
commercially successful pay zones. The discovery is
currently being evaluated but initial results indicate significant
reserve potential. Following completion and production tests,
the Company will announce development plans. Several
additional prospect wells are now being planned to be drilled in
Kern County.
The
Company owns a 19.25% interest in the Kern County field based on a
13.75% direct working interest and 5.5% indirect working interest
through its 20% equity investment in Horizon Energy. Historically,
since its 1933 discovery, this field has produced over 100 million
barrels of oil and equivalents from six distinct reservoirs. The
Company’s 3-D survey constitutes the first modern seismic
data (including both 2-D and 3-D) acquired over this geologically
complex field.
Osage County Drilling Program Results. On May 8, 2017, the
Company announced a new oil field discovery in its 106,500-acre
concession in Osage County, Oklahoma upon successfully drilling the
Chat 2-11 exploration well. The Chat 2-11 was drilled to a depth of
2,800 feet into the Mississippian Chat. Initial results indicated
up to 20 feet of oil productive formation. Following flow and
fracking tests, the Company plans to confirm IP rates.
On May
30, 2017, the Company announced a second new oil field discovery in
its 106,500-acre concession in Osage County, Oklahoma upon
successfully drilling the Red Fork 1-3 exploration well. The Red
Fork 1-3 was drilled to a depth of 2,800 feet into the
Mississippian Chat. Initial results indicated up to 30 feet of oil
productive formation. Following flow and fracking tests, the
Company plans to confirm IP rates. These structures were identified
utilizing 3D seismic technology, indicating a potential of up to
2.5 million barrels of oil.
The
Company’s Osage County drilling program is the result of a
Joint Exploration and Development Agreement (the
“Exploration
Agreement”), dated August 19, 2016, between Spyglass,
a wholly owned subsidiary of Bandolier, Phoenix 2016, LLC
(“Phoenix”)
and Mackey Consulting & Leasing, LLC (“Mackey”). Pursuant to the
Exploration Agreement, Phoenix and Mackey operates and provides
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 its sole
discretion.
Reverse Stock Split. At its Annual Meeting held
on September 20, 2016, the Company’s shareholders approved a
resolution to authorize the Company’s Board of Directors, in
its sole and absolute discretion, to amend the Company’s
Certificate of Incorporation to implement a reverse stock split of
our Common Stock, at a ratio of not less than 1-for-2, and not
greater than 1-for-10 (“Reverse
Split”), within one
year from the date of the Annual Meeting, with the exact ratio to
be determined by the Board of Directors. The Board of Directors has
not determined the ratio, and does not currently intend to execute
the Reverse Split until such time as the Company lists its shares
of Common Stock on the NASDAQ Stock Market.
Financial Condition and Results of Operations
For the Years Ended April 30, 2017 and 2016:
Oil and Natural Gas Sales
During
the year ended April 30, 2017, the Company recognized $26,603 in
oil and gas sales compared to $87,939 for the year ended April 30,
2016. The overall decrease in sales of $61,336 is primarily due to
the decrease in operations and shut-in wells in light of the
challenging oil price environment. The Company has drilled four
exploratory wells and is re-completing certain existing wells, each
located in Osage County, Oklahoma and Kern County,
California. Given current oil and gas prices, management
does not currently anticipate deriving material 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 the Company confirms IP rates following completion and
production of its recently drilled exploratory wells, resulting 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 Expenses
During
the year ended April 30, 2017, lease operating expenses were
$48,578, as compared to lease operating expenses of $373,028 for
the year ended April 30, 2016. The overall decrease in lease
operating expense of $324,450 is primarily attributable to
management’s commitment to substantially reduce operating
expense in light of the current challenging oil price
environment.
(Gain) Loss on Sale of Oil and Gas Assets
During the year ended April 30, 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. During the year ended April 30, 2016, the Company recorded a loss
of $7,519,460 in connection with the divestiture of Kansas oil and
gas properties.
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
year ended April 30, 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 year ended April 30,
2016, 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.
Impairment of Intangible Assets
The
Company assesses all items classified as intangible assets on an
annual basis for possible impairment. During the years ended April
30, 2017 and 2016, the Company reviewed the intangible assets for
impairment and recognized an impairment charge of $0 and
$2,082,941, respectively.
General and Administrative Expense
General
and administrative expense for the year ended April 30, 2017 was
$4,107,795, as compared to $3,103,358 for the year ended April 30,
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 Year
Ended
|
For the Year
Ended |
|
April
30, 2017
|
April
30, 2016
|
Salaries and
benefits
|
$2,446,391
|
$1,969,001
|
Professional
fees
|
1,092,644
|
857,248
|
Office and
administrative
|
568,760
|
276,059
|
Information
technology
|
-
|
1,050
|
|
|
|
Total
|
$4,107,795
|
$3,103,358
|
Salaries
and benefits include non-cash stock-based compensation of
$2,178,716 for year ended April 30, 2017 compared to $1,593,349 for
the year ended April 30, 2016. The increase in stock-based
compensation of $585,367 from the prior year was due to an increase
in the number of option awards expensed during the current year.
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 year ended April 30,
2017.
Interest Income (Expense)
During
the year ended April 30, 2017, the Company recognized interest
income of $628,956 compared to interest income of $174,458 for the
year ended April 30, 2016. The income received in the 2017 and 2016
years is primarily attributable to $627,275 and $170,653,
respectively, of interest income accrued on the related party notes
receivable.
Net Gain on Interests in Real Estate Rights
During
the year ended April 30, 2017, the Company recognized $1,689,274
net gain on its interest in real estate rights compared to
$10,474,713 for the year ended April 30, 2016. The net gain on
interest in real estate rights was due to the sale of four and
25 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
April 30, 2017, the Company had working capital of
approximately $25.5 million, of which approximately $24.8 million,
$2.1 million and $0.3 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 rights, respectively. The notes receivable, account
receivable and the Company’s interest in real estate rights
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. The Company expects to receive these
funds upon the maturity date and intends to and use the proceeds to
fund the development of the Company’s interest in the
Bandolier prospects.
Proceeds
from the amounts receivable from Fortis will not be available until
such time as the Company has completed its evaluation of the
Bandolier prospects, at which time the Redetermination will be
performed. 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
April 30, 2017, the Company had cash and cash equivalents of
approximately $0.6 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.
Subsequent to April 30, 2017, on June 13, 2017, the Company
consummated the Note Financing, pursuant to which the Company
entered into the Purchase Agreement with Funding Corp. resulting in
the issuance to Funding Corp. of the Secured Note to finance the
Company’s short-term working capital requirements, in the
principal amount of $2.0 million. 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 Horizon
Acquisition. In addition to the Horizon Acquisition, the
MegaWest Transaction, and current drilling programs in Osage
County, Oklahoma and Kern County, California, the Company is also
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 year ended April 30, 2017, operating activities resulted
in cash used of $2,219,980, as compared to $1,767,151 used in
operating activities during the year ended April 30, 2016.
The Company incurred a net loss during the year ended April 30,
2017 of $2,583,339 as compared to a loss of $11,989,758 for the
year ended April 30, 2016. For year ended April 30, 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 year ended April 30, 2016, the net loss was
offset by non-cash items such as stock-based compensation,
depreciation, depletion and amortization, accretion of asset
retirement obligation, impairment of oil and gas assets, impairment
of intangible assets, loss on sale of equipment and the deferred
tax liability. 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 year ended April 30, 2017 resulted
in cash provided of $1,900,461, as compared to cash used of $68,641
during the year ended April 30, 2016. During the year ended April
30, 2017, the Company received proceeds of $6,900,228 from its
interest in real estate rights, as compared to $18,369,000 during
the year ended April 30, 2016. As a part of the arrangement with
Fortis, the majority of the proceeds were then loaned to Fortis in
the form of notes receivable agreements with Fortis for $6,938,382
during the year ended April 30, 2017, compared to $17,848,000
during the year ended April 30, 2016.
During the year ended April 30, 2017, the Company incurred $487,857
of expenditures on oil and gas assets compared to $102,864 of
expenditures on oil and gas assets as part of the Bandolier
acquisition. During the year ended April 30, 2017, the Company
received cash of $0 and $0 from the disposal of oil and gas assets
and equipment, respectively, as compared to receiving cash of
$279,013 and $60,000 during the year ended April 30, 2016,
respectively.
Financing Activities
Financing activities during the year ended April 30, 2017 resulted
in cash provided of $176,000, as compared to
$1.6 million during the year ended April
30, 2016. The cash provided during the year ended April 30, 2017
was 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
|
April 30, 2017
|
April 30, 2016
|
Common
shares
|
15,827,921
|
4,263,711
|
Stock
Options
|
2,599,682
|
743,050
|
Stock Purchase
Warrants
|
133,333
|
133,333
|
|
18,560,936
|
5,140,094
|
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, 2017 and 2016. The consolidated financial
statements are prepared in conformity with U.S. GAAP.
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.
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
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 April 30, 2017 and
2016 at the cost basis of 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, 2017 and 2016, the Company has approximately $3,442,724
and $2,501,209, 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).
Off-Balance Sheet Arrangements
None.
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.
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.
Management
does not believe that any other recently issued, but not yet
effective accounting pronouncements, if adopted, would have a
material effect on the accompanying consolidated financial
statements.
Not
applicable
Reference
is made to the financial statement pages beginning on page F-1
comprising a portion of this annual report on Form
10-K.
None.
We
maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our reports
filed pursuant to the Securities Exchange Act of 1934, as amended
(the “Exchange
Act”), is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to
our Chief Executive Officer and Chief Financial Officer to allow
timely decisions regarding required disclosure. Our management,
including our Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of our disclosure
controls and procedures, as defined under Exchange Act Rule
13a-15(e), as of April 30, 2017. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures were not effective as
of April 30, 2017 due to a material weakness in our internal
control over financial reporting, as discussed below.
Management’s Annual Report on Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting as required under
applicable United States securities regulatory requirements.
Internal control over financial reporting is defined in Rule
13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a
process designed by, or under the supervision of, the
company’s chief executive and chief financial officers and
effected by the company’s board of directors, management and
other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and
procedures that:
|
●
|
pertain
to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets
of the company;
|
|
|
|
|
●
|
provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company;
and
|
|
|
|
|
●
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use of disposition of the company’s
assets that could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect all misstatements. A system of
internal controls can provide only reasonable, not absolute,
assurance that the objectives of the control system are met, no
matter how well the system is conceived or operated. Projections of
any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Our
management assessed the effectiveness of our internal control over
financial reporting as of April 30, 2017. In making this
assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”)
in 2013 in Internal Control Integrated Framework. Based on
that evaluation under this framework, our management concluded that
as of April 30, 2017, our internal control over financial reporting
was not effective because of the following material weaknesses in
our internal control over financial reporting:
|
●
|
Due to
our small number of employees and resources, we have limited
segregation of duties, as a result of which there is insufficient
independent review of duties performed.
|
|
|
|
|
●
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As a
result of the limited number of accounting personnel, we rely on
outside consultants for the preparation of our financial reports,
including financial statements and management discussion and
analysis, which could lead to overlooking items requiring
disclosure.
|
This
annual report does not include an attestation report by our
independent registered public accounting firm regarding internal
control over financial reporting. As we are neither a large
accelerated filer nor an accelerated filer, our management’s
report was not subject to attestation by our registered public
accounting firm pursuant to rules of the Securities and Exchange
Commission that permit us to provide only management’s report
in this annual report.
Changes to Internal Controls and Procedures for Financial
Reporting
There
were no significant changes in the Company’s internal control
over financial reporting that were identified in connection with
such evaluation that occurred during the period covered by this
Annual Report on Form 10-K that has materially affected, or is
reasonably likely to materially affect, the Company’s
internal control over financial reporting. To begin remediating the
material weakness identified in internal control over financial
reporting of the Company, the Company engaged Brio Financial Group
and appointed its Managing Member, David Briones, to act as the
Company’s Chief Financial Officer on August 15, 2013. During
the year ended April 30, 2017, Management intended to hire
additional accounting staff, and operational and administrative
executives. However, with the lack of resources these hires were
delayed until which time financing is
received. Management intends to prepare and implement
sufficient written policies and checklists to remedy the material
weaknesses identified above.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
information required by this item will be set forth in our
definitive proxy statement for our 2017 annual meeting of
stockholders to be filed within 120 days after our fiscal year end
and is incorporated in this report by reference.
ITEM 11.
EXECUTIVE COMPENSATION
The
information required by this item will be set forth in our
definitive proxy statement for our 2017 annual meeting of
stockholders to be filed within 120 days after our fiscal year end
and is incorporated in this report by reference.
The information
required by this item will be set forth in our definitive proxy
statement for our 2017 annual meeting of stockholders to be filed
within 120 days after our fiscal year end and is incorporated in
this report by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The
information required by this item will be set forth in our
definitive proxy statement for our 2017 annual meeting of
stockholders to be filed within 120 days after our fiscal year end
and is incorporated in this report by reference.
The
information required by this item will be set forth in our
definitive proxy statement for our 2017 annual meeting of
stockholders to be filed within 120 days after our fiscal year end
and is incorporated in this report by reference.
(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
|
3.1
(1)
|
|
Certificate
of Incorporation of the Company
|
3.2
(1)
|
|
Bylaws
of the Company
|
3.3
(13)
|
|
Certificate
of Amendment to the Certificate of Incorporation of Petro River Oil
Corporation, effective December 1, 2015 (Reverse
Split).
|
3.4
(13)
|
|
Certificate
of Amendment to the Certificate of Incorporation of Petro River Oil
Corporation, effective December 1, 2015 (Authorized
Increase).
|
3.5
(14)
|
|
Certificate
of Amendment to the Certificate of Incorporation of Petro River Oil
Corporation, dated June 15, 2016.
|
10.1
(2)
|
|
Securities
Purchase Agreement of Petro River Oil LLC, dated as of April 23,
2013, by and among Petro River Oil Corp., Petro River Oil,
LLC, the holders of outstanding secured promissory notes of Petro
River Oil, LLC, the members of Petro River Oil, LLC and Mega
Partners 1 LLC
|
10.2
(8)
|
|
Amended
and Restated 2012 Equity Compensation Plan
|
10.3
(7)
|
|
Assignment
and Assumption Agreement, dated as of May 30, 2014, by and between
Bandolier Energy, LLC and PO1, LLC
|
10.4
(7)
|
|
Agreement,
dated as of May 30, 2014, by and between Petro River Oil Corp. and
Pearsonia West Investment Group, LLC
|
10.5
(2)
|
|
Employment
Agreement, by and between Petro River Oil Corp. and Scot Cohen,
dated April 23, 2013
|
10.6
(4)
|
|
Amendment
No. 1 to the Employment Agreement, by and between Petro River Oil
Corp. and Scot Cohen, dated November 20, 2013
|
10.7
(5)
|
|
Employment
Agreement, by and between Petro River Oil Corp. and Ruben Alba,
dated November 22, 2013
|
10.8
(5)
|
|
Employment
Agreement, by and between Petro River Oil Corp. and Gary Wilkey,
dated November 22, 2013
|
10.9
(5)
|
|
Employment
Agreement, by and between Petro River Oil Corp. and Luis Vierma,
dated November 22, 2013
|
10.10
(5)
|
|
Employment
Agreement, by and between Petro River Oil Corp. and Daniel Smith,
dated November 22, 2013
|
10.11
(2)
|
|
Form of
Securities Purchase Agreement, dated April 23, 2013
|
10.12
(6)
|
|
Securities
Purchase Agreement, by an between Petro River Oil Corp. and Petrol
Lakes Holding Limited, dated December 12, 2013
|
10.13
(7)
|
|
Form of
Bandolier Energy LLC Subscription Agreement, dated May 30,
2014
|
10.14
(7)
|
|
Securities
Purchase Agreement, by and between Spyglass Energy Group, LLC,
Nadel and Gussman, LLC, Charles W. Wickstrom, Shane E. Matson and
Bandolier Energy, LLC, dated January 1, 2014
|
10.15
(7)
|
|
Assignment
and Assumption Agreement, by an between Bandolier Energy, LLC and
PO1, LLC, dated May 30, 2014
|
10.16
(7)
|
|
Agreement,
by and between Petro River Oil Corp. and Pearsonia West Investment
Group, LLC, dated May 30, 2014
|
10.17
(9)
|
|
Asset
Purchase Agreement by and among Petro River Oil Corp, Petro Spring
I, LLC, Havelide GTL LLC and certain shareholders, dated February
18, 2015.
|
10.18
(9)
|
|
Employment
Agreement by and between the Company and Stephen Boyd, dated
February 18, 2015
|
10.19
(9)
|
|
Form of
Warrant
|
10.20
(10)
|
|
Asset
Purchase Agreement by and among Petro River Oil Corp, Petro Spring
II, LLC, Coalthane Tech LLC and certain shareholders, dated
February 27, 2015.
|
10.21
(16)
|
|
Contribution
Agreement, by and between Petro River Oil Corp., Megawest Energy
Kansas Corporation and Fortis Property Group, dated October 30,
2015, effective October 15, 2015.
|
10.22
(16)
|
|
Employment
Agreement, by and between Petro River Oil Corp. and Stephen
Brunner, dated October 30, 2015.
|
10.23
(13)
|
|
Conditional
Purchase Agreement, by and between Petro River Oil Corp. and
Horizon I Investments, LLC, dated December 1, 2015.
|
10.24
(13)
|
|
Form of
Escrow Agreement
|
10.25
(13)
|
|
Non-Recourse
Note, by and between Petro River Oil Corp. and Horizon I
Investments, LLC, dated December 1, 2015.
|
10.26
(11)
|
|
Farm-Out
Agreement, dated January 19, 2016.
|
10.27
(11)
|
|
Escrow
Agreement, dated January 18, 2016.
|
10.28
(11)
|
|
Non-Recourse
Promissory Note, in the principal amount of $750,000, dated January
13, 2016.
|
10.29
(12)
|
|
Assignment
of Oil and Gas Lease, by and between MegaWest Energy Missouri Corp.
and Paluca Petroleum, Inc., dated July 11, 2016.
|
10.30
(15)
|
|
Asset
Purchase and Sale and Exploration Agreement, dated March 4,
2016.
|
10.31
(17)
|
|
Securities
Purchase Agreement, dated June 13, 2017.
|
10.32
(18)
|
|
Form of
Warrant, dated June 13, 2017.
|
10.33
(19)
|
|
Security
Agreement, dated June 13, 2017.
|
10.34
(20)
|
|
Assignment
of Overriding Royalty Interests, dated June 13, 2017.
|
10.35
(21)
|
|
Promissory
Note, dated June 13, 2017.
|
14.1
(3)
|
|
Code of
Business Conduct and Ethics
|
21.1
(2)
|
|
Subsidiaries
|
31.1*
|
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
31.2*
|
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
32.1*
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
101.INS*
|
|
XBRL
Instance Document
|
101.SCH*
|
|
XBRL
Taxonomy Extension Schema Document
|
101.CAL*
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
101.DEF*
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
101.LAB*
|
|
XBRL
Taxonomy Extension Labels Linkbase Document
|
101.PRE*
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
*
|
Attached
hereto
|
(1)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on September 13, 2012.
|
(2)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on April 29, 2013.
|
(3)
|
Incorporated
by reference to our Transition Report on Form 10-K filed with the
Securities and Exchange Commission on August 28, 2013.
|
(4)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on November 22, 2013.
|
(5)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on November 27, 2013.
|
(6)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on December 16, 2013.
|
(7)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on June 5, 2014.
|
(8)
|
Incorporated
by reference to our Annual Report on Form 10-K filed with the
Securities and Exchange Commission on August 13, 2014.
|
(9)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on February 23, 2015.
|
(10)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on March 5, 2015.
|
(11)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on January 20, 2016.
|
(12)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on July 13, 2016.
|
(13)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on December 7, 2015.
|
(14)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on June 20, 2016.
|
(15)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on March 10, 2016.
|
(16)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on November 5, 2015.
|
(17)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on June 16, 2017.
|
(18)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on June 16, 2017.
|
(19)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on June 16, 2017.
|
(20)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on June 16, 2017.
|
(21)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on June 16, 2017.
|
FINANCIAL INFORMATION
|
|
|
Page
|
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
|
|
F-6
|
|
|
|
|
|
|
|
|
|
F-7
|
|
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the
Board of Directors
Petro
River Oil Corp.
New
York, New York
We have
audited the accompanying consolidated balance sheets of Petro River
Oil Corp. as of April 30, 2017 and 2016 and the related
consolidated statements of operations, changes in
stockholders’ equity, and cash flows for the years then
ended. These consolidated financial statements are the
responsibility of Petro River Oil Corp.’s management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Petro River Oil Corp. as of April 30, 2017 and 2016 and the results
of its operations and its cash flows for the year then ended, in
conformity with U.S. generally accepted accounting
principles.
/s/ GBH CPAs,
PC
GBH CPAs, PC
www.gbhcpas.com
Houston, Texas
July 31, 2017
Petro River Oil Corp. and Subsidiaries
Consolidated Balance Sheets
|
As
of
|
|
|
April
30, 2017
|
April 30, 2016
|
Assets
|
|
|
Current
Assets:
|
|
|
Cash and
cash equivalents
|
$631,232
|
$774,751
|
Certificate
of deposit - restricted
|
-
|
80,803
|
Accounts
receivable - oil and gas
|
8,423
|
903
|
Accounts
receivable - real estate - related party
|
2,123,175
|
4,829,693
|
Accrued
interest on notes receivable - related party
|
797,710
|
170,653
|
Interest in
real estate rights
|
309,860
|
2,820,402
|
Prepaid
expenses and other current assets
|
207,831
|
24,967
|
Prepaid oil
and gas asset development costs
|
613,480
|
844,131
|
Notes
receivable - related party, current portion
|
24,786,382
|
-
|
Total
Current Assets
|
29,478,093
|
9,546,303
|
|
|
|
Oil and gas assets,
full cost method
|
|
|
Costs
subject to amortization, net
|
1,234,806
|
778,226
|
Costs not
being amortized, net
|
858,830
|
100,000
|
Property, plant and
equipment, net of accumulated depreciation
|
|
|
of
$184,140 and $308,223, respectively
|
1,582
|
2,341
|
Investment in
Horizon Energy Partners
|
1,213,000
|
-
|
Notes receivable -
related party
|
-
|
17,848,000
|
Other
assets
|
17,133
|
53,778
|
Total
Long-term Assets
|
3,325,351
|
18,782,345
|
Total
Assets
|
$32,803,444
|
$28,328,648
|
|
|
|
Liabilities
and Equity
|
|
|
Current
Liabilities:
|
|
|
Accounts
payable and accrued expenses
|
$120,233
|
$206,780
|
Deferred tax
liability
|
3,442,724
|
2,501,209
|
Notes
payable - related party
|
-
|
1,600,000
|
Asset
retirement obligations, current portion
|
406,403
|
561,958
|
Total
Current Liabilities
|
3,969,360
|
4,869,947
|
|
|
|
Long-term
Liabilities:
|
|
|
Asset
retirement obligations, net of current portion
|
152,293
|
201,104
|
Total
Long-term Liabilities
|
152,293
|
201,104
|
|
|
|
Total
Liabilities
|
4,121,653
|
5,071,051
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
Equity:
|
|
|
Preferred
shares - 5,000,000 authorized; par value $0.00001; 0 shares issued
and outstanding
|
-
|
-
|
Preferred B
shares - 29,500 authorized; par value $0.00001; 0 shares
issued and outstanding
|
-
|
-
|
Common
shares - 100,000,000 authorized; par value $0.00001; 15,827,921 and
4,263,672 issued and outstanding, respectively
|
158
|
43
|
Additional
paid-in capital
|
46,681,073
|
38,849,655
|
Accumulated
deficit
|
(30,609,910)
|
(27,643,419)
|
Total
Petro River Oil Corp. Equity
|
16,071,321
|
11,206,279
|
Non-controlling
interests
|
12,610,470
|
12,051,318
|
Total
Equity
|
28,681,791
|
23,257,597
|
Total
Liabilities and Equity
|
$32,803,444
|
$28,328,648
|
The
accompanying notes are an integral part of these consolidated
financial statements.
Petro River Oil Corp. and Subsidiaries
Consolidated Statements of
Operations
|
For the Year Ended
|
|
Operations
|
April
30, 2017
|
April 30, 2016
|
Revenues
|
|
|
Oil and natural gas
sales
|
$26,603
|
$87,939
|
Total
Revenues
|
26,603
|
87,939
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
Lease operating
expenses
|
48,578
|
373,028
|
Depreciation,
depletion and accretion
|
25,922
|
161,326
|
Amortization of
intangible assets
|
-
|
120,452
|
Gain on sale of
equipment
|
-
|
(5,519)
|
(Gain) loss on sale
of oil and gas assets
|
(216,580)
|
7,519,460
|
Impairment of oil
and gas assets
|
20,942
|
6,870,613
|
Impairment of
intangible assets
|
-
|
2,082,941
|
General and
administrative
|
4,107,795
|
3,103,358
|
Total
Operating Expenses
|
3,986,657
|
20,225,659
|
|
|
|
Operating
Loss
|
(3,960,054)
|
(20,137,720)
|
|
|
|
Other
Income (Expense)
|
|
|
Interest income
(expense) – net
|
628,956
|
174,458
|
Net gain on real
estate rights
|
1,689,274
|
10,474,713
|
Other
Income
|
2,318,230
|
10,649,171
|
|
|
|
Net
Loss Before Income Tax Provision
|
(1,641,824)
|
(9,488,549)
|
|
|
|
Income
Tax Provision
|
941,515
|
2,501,209
|
|
|
|
|
|
|
Net
Loss
|
(2,583,339)
|
(11,989,758)
|
|
|
|
Net
Income (Loss) Attributable to Non-controlling
Interests
|
383,152
|
(996,825)
|
|
|
|
Net
Loss Attributable to Petro River Oil Corp.
shareholders
|
$(2,966,491)
|
$(10,992,933)
|
|
|
|
Basic
and Diluted Net Loss Per Common Share
|
$(0.19)
|
$(2.58)
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
Basic
and diluted
|
15,732,949
|
4,260,670
|
The
accompanying notes are an integral part of these consolidated
financial statements.
Petro River Oil Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
For
the Years Ended April 30, 2017 and 2016
|
Common
|
Common
|
Additional
Paid-in
|
Accumulated
|
Non-controlling
|
Total
Stockholders’
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Interests
|
Equity
|
|
|
|
|
|
|
|
Balance at
May 1, 2015
|
4,259,506
|
43
|
31,115,291
|
$(16,650,486)
|
3,644,776
|
18,109,624
|
|
|
|
|
|
|
|
Stock-based
compensation
|
4,166
|
-
|
1,593,349
|
-
|
-
|
1,593,349
|
|
|
|
|
|
|
|
Contribution of interest in joint
venture
|
-
|
-
|
6,141,015
|
-
|
9,403,367
|
15,544,382
|
|
|
|
|
|
|
|
Net loss
|
-
|
-
|
-
|
(10,992,933)
|
(996,825)
|
(11,989,758)
|
|
|
|
|
|
|
|
Balance at
April 30, 2016
|
4,263,672
|
$43
|
$38,849,655
|
$(27,643,419)
|
$12,051,318
|
$23,257,597
|
|
|
|
|
|
|
|
Stock-based
compensation
|
-
|
-
|
2,178,716
|
-
|
-
|
2,178,716
|
|
|
|
|
|
|
|
Acquisition of Horizon
Investments
|
11,564,249
|
115
|
5,652,702
|
-
|
-
|
5,652,817
|
|
|
|
|
|
|
|
Non-controlling interest
contribution
|
-
|
-
|
-
|
-
|
176,000
|
176,000
|
|
|
|
|
|
|
|
Net income
(loss)
|
-
|
-
|
-
|
(2,966,491)
|
383,152
|
(2,583,339)
|
|
|
|
|
|
|
|
Balance at
April 30, 2017
|
15,827,921
|
$158
|
$46,681,073
|
$(30,609,910)
|
$12,610,470
|
$28,681,791
|
The
accompanying notes are an integral part of these consolidated
financial statements.
Petro River Oil Corp. and Subsidiaries
Consolidated Statements of Cash
Flows
|
For
the Year Ended
|
|
|
April
30, 2017
|
April 30, 2016
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
Net
loss
|
$(2,583,339)
|
$(11,989,758)
|
Adjustments to
reconcile net loss to net cash used in operating
activities
|
|
|
Depreciation,
depletion and accretion
|
25,922
|
161,326
|
Amortization of
intangibles
|
-
|
120,452
|
Stock-based
compensation
|
2,178,716
|
1,593,349
|
Impairment of oil
and gas assets
|
20,942
|
6,870,613
|
Impairment of
intangible assets
|
-
|
2,082,941
|
(Gain) loss on sale
of oil and gas assets
|
(216,580)
|
7,519,460
|
Gain on sale of
equipment
|
-
|
(5,519)
|
Net gain on
interest in real estate rights
|
(1,689,274)
|
(10,474,713)
|
Deferred income tax
expense
|
941,515
|
2,501,209
|
Changes in
operating assets and liabilities:
|
|
|
Accounts receivable
- oil and gas
|
(7,520)
|
41,785
|
Accounts receivable
- real estate - related party
|
6,106
|
-
|
Accrued interest on
notes receivable - related party
|
(627,057)
|
(170,653)
|
Prepaid expenses
and other assets
|
(182,864)
|
27,804
|
Accounts payable
and accrued expenses
|
(86,547)
|
(45,447)
|
Net
Cash Used in Operating Activities
|
(2,219,980)
|
(1,767,151)
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
Cash received from
the acquisition of Horizon Investments
|
3,364,817
|
-
|
Proceeds from the
sale of interest in real estate rights
|
6,900,228
|
18,369,000
|
Issuance of notes
receivable - related party
|
(6,938,382)
|
(17,848,000)
|
Change in
reclamation deposit
|
-
|
44,197
|
Prepaid oil and gas
development assets
|
(505,147)
|
(844,131)
|
Capitalized
expenditures on oil and gas assets
|
(487,857)
|
(102,864)
|
Cash received upon
disposal of oil and gas assets
|
-
|
279,013
|
Proceeds from sale
of equipment
|
-
|
60,000
|
Cash paid for cost
method investment
|
(525,000)
|
-
|
Deposit (paid)
received
|
91,802
|
(25,856)
|
Net
Cash Provided by (Used in) Investing Activities
|
1,900,461
|
(68,641)
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
Proceeds from notes
payable - related party
|
-
|
1,600,000
|
Cash received from
non-controlling interest contribution
|
176,000
|
-
|
Net
Cash Provided by Financing Activities
|
176,000
|
1,600,000
|
|
|
|
Change
in cash and cash equivalents
|
(143,519)
|
(235,792)
|
|
|
|
Cash
and cash equivalents, beginning of year
|
774,751
|
1,010,543
|
Cash
and cash equivalents, end of year
|
$631,232
|
$774,751
|
|
|
|
SUPPLEMENTARY
CASH FLOW INFORMATION:
|
|
|
Cash paid during
the year for:
|
|
|
Income
taxes
|
$34,052
|
$14,482
|
Interest
|
$-
|
$-
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
Interest in real
estate rights contributed by non-controlling interest
|
$-
|
$15,544,382
|
Reclassification
from prepaid oil and gas development costs to oil and gas assets
not being amortized
|
$761,444
|
$-
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
Interest in real
estate rights contributed by non-controlling interest
|
$-
|
$15,544,382
|
Reclassification
from prepaid oil and gas development costs to oil and gas assets
not being amortized
|
$761,444
|
$-
|
The
accompanying notes are an integral part of these consolidated
financial statements.
PETRO RIVER OIL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial
Statements
1.
|
Organization
|
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.
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.
Recent Developments
$2.0 Million Secured Note Financing. On June 13, 2017, the
Company entered into a Securities Purchase Agreement
(“Purchase
Agreement”) with Petro Exploration Funding, LLC
(“Funding
Corp.”), pursuant to which the Company issued to
Funding Corp. a senior secured promissory note to finance the
Company’s working capital requirements, in the principal
amount of $2.0 million (“Secured Note”). As additional
consideration for the note financing, the Company issued to Funding
Corp. (i) a warrant to purchase 840,336 shares of the
Company’s common stock, $0.00001 par value, and (ii) an
overriding royalty interest equal to 2% in all production from the
Company’s interest in the Company’s concessions located
in Osage County, Oklahoma, currently held by Spyglass pursuant to
an Assignment of Overriding Royalty Interests.
The
Secured Note accrues interest at a rate of 10% per annum, and
matures on June 30, 2020. To secure the repayment of all amounts
due under the terms of the Secured Note, the Company entered into a
Security Agreement, pursuant to which the Company granted to
Funding Corp. a security interest in all assets of the Company. The
first interest payment will be due on June 1, 2018 and each
six-month anniversary thereafter until the outstanding principal
balance of the Secured Note is paid in full.
The
warrant is exercisable immediately upon issuance, for an exercise
price per share equal to $2.38 per share, and shall terminate, if
not previously exercised, five years from the date of
issuance.
Scot
Cohen, a member of the Company’s Board of Directors and a
substantial stockholder of the Company, owns or controls 31.25% of
Funding Corp.
Kern County Drilling Program Results. On July 18, 2017, the
Company announced a new oil field discovery in its Sunset
Boulevard prospect in Kern County, California upon successfully
drilling the Cattani-Rennie 47X-15 exploration well
(“CR 47X”).
The discovery is currently being evaluated but initial
results indicate significant reserve potential. Following
completion and production tests, the Company will announce
development plans. Several additional prospect wells are now
being planned to be drilled in Kern County.
The
Company owns a 19.25% interest in the Kern County field based on a
13.75% direct working interest and 5.5% indirect working interest
through its 20% equity investment in Horizon Energy.
Osage County Drilling Program Results. On May 8, 2017, the
Company announced a new oil field discovery in its 106,500-acre
concession in Osage County, Oklahoma upon successfully drilling the
Chat 2-11 exploration well.
On May
30, 2017, the Company announced a second new oil field discovery in
its 106,500-acre concession in Osage County, Oklahoma upon
successfully drilling the Red Fork 1-3 exploration
well.
The
Company’s Osage County drilling program is the result of a
Joint Exploration and Development Agreement (the
“Exploration
Agreement”), dated August 19, 2016, between Spyglass,
a wholly owned subsidiary of Bandolier, Phoenix 2016, LLC
(“Phoenix”) and
Mackey Consulting & Leasing, LLC (“Mackey”). Pursuant to the
Exploration Agreement, Phoenix and Mackey operates and provides
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 its sole
discretion.
Reverse Stock Split. At its Annual Meeting held on September
20, 2016, the Company’s shareholders approved a resolution to
authorize the Company’s Board of Directors, in its sole and
absolute discretion, to amend the Company’s Certificate of
Incorporation to implement a reverse stock split of our common
stock, at a ratio of not less than 1-for-2, and not greater than
1-for-10, within one year from the date of the Annual Meeting,
with the exact ratio to be determined by the Board of Directors.
The Board of Directors has not determined the ratio, and does not
currently intend to execute the reverse split until such time as
the Company lists its shares of common stock on the NASDAQ Stock
Market.
2.
|
Basis of Preparation
|
The
consolidated financial statements and accompanying footnotes are
prepared in accordance with accounting principles generally
accepted in the United States of America (“US GAAP”) and the rules and
regulations of the Securities and Exchange Commission
(“SEC”) and
include the accounts of the Company and its wholly owned and
majority 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
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 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.
3.
|
Significant Accounting Policies
|
(a)
|
|
Use of
Estimates:
|
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)
|
|
Cash
and Cash Equivalents:
|
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
April 30, 2017 and 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)
|
|
Receivables:
|
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. 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 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.
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 April 30, 2017 and 2016 was
$0.
(d)
|
|
Interest
in Real Estate Rights:
|
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)
|
|
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.
Long-lived
assets are reviewed for impairment whenever events or changes in
circumstances indicate that the historical cost carrying value of
an asset may no longer be appropriate. As of April 30, 2017 and
2016, management engaged a third party to perform an independent
study of the oil and gas assets. Management concluded that as of
April 30, 2016, the Missouri assets were impaired by $918,991 and
the Oklahoma assets were impaired by $5,951,622. The Company
recorded total impairment of $20,942 and $6,870,613 to the
consolidated statements of operations for the years ended April 30,
2017 and 2016, respectively.
Proved Oil and Gas Reserves: 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.
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 years ended April 30, 2017 and
2016.
(f)
|
|
Intangible
Assets:
|
Intangible
assets consist of patent rights. Applicable long–lived assets
are amortized or depreciated over the shorter of their estimated
useful lives, the estimated period that the assets will generate
revenue, or the statutory or contractual term in the case of
patents. Estimates of useful lives and periods of expected revenue
generation are reviewed periodically for appropriateness and are
based upon management’s judgment. Patent rights were
amortized on the straight-line method over their estimated useful
lives of 15 years.
(g)
|
|
Impairment
of Long-Lived Assets:
|
The
Company assesses the recoverability of its long-lived assets when
there are indications that the assets might be impaired. When
evaluating assets for potential impairment, the Company compares
the carrying value of the asset to its estimated undiscounted
future cash flows. If an asset’s carrying value exceeds
such estimated cash flows (undiscounted and with interest charges),
the Company records an impairment charge for the
difference.
(h)
|
|
Asset
Retirement Obligations:
|
The
Company recognizes a liability for the estimated fair value of site
restoration and abandonment costs when the obligations are legally
incurred and the fair value can be reasonably estimated. The fair
value of the obligations is based on the estimated cash flow
required to settle the obligations discounted using the
Company’s credit adjusted risk-free interest rate. The
obligation is recorded as a liability with a corresponding increase
in the carrying amount of the oil and gas assets. The capitalized
amount will be depleted on a unit-of-production method. The
liability is increased each period, or accretes, due to the passage
of time and a corresponding amount is recorded in the consolidated
statements of operations.
Revisions
to the estimated fair value would result in an adjustment to the
liability and the capitalized amount in oil and gas
assets.
(i)
|
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, (ii) the equity method, or (iii) the cost method. 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.
(j)
|
|
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 evaluates uncertain tax positions 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, 2017 and 2016, the Company has approximately $3,442,724
and $2,501,209, 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).
(j)
|
|
Oil and
Gas Revenue:
|
Sales
of oil and gas, net of any royalties, are recognized when oil has
been delivered to a custody transfer point, persuasive evidence of
a sales arrangement exists, the rights and responsibility of
ownership pass to the purchaser upon delivery, collection of
revenue from the sale is reasonably assured, and the sales price is
fixed or determinable. The Company sells oil and gas on a monthly
basis. Virtually all of its contracts’ pricing provisions are
tied to a market index, with certain adjustments based on, among
other factors, whether a well delivers to a gathering or
transmission line, the quality of the oil and gas, and prevailing
supply and demand conditions, so that the price of the oil and gas
fluctuates to remain competitive with other available oil
supplies.
(k)
|
|
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 payment
granted 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.
(l)
|
|
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 year
ended April 30, 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 April 30,
2017 and 2016:
As
of
|
April 30, 2017
|
April 30, 2016
|
Stock
Options
|
2,599,682
|
743,050
|
Stock Purchase
Warrants
|
133,333
|
133,333
|
|
2,733,015
|
876,383
|
(m)
|
|
Fair
Value of Financial Instruments:
|
All
financial instruments, including cash and cash equivalents,
accounts receivable and accounts payable and accrued expenses are
recognized on the consolidated balance sheet initially at carrying
value. The carrying value of these assets approximates their fair
value due to their short-term maturities.
At each
balance sheet date, the Company assesses financial assets for
impairment with any impairment recorded in the consolidated
statement of operations. To assess loans and receivables for
impairment, the Company evaluates the probability of collection of
accounts receivable and records an allowance for doubtful accounts,
which reduces loans and receivables to the amount management
reasonably believes will be collected. In determining the amount of
the allowance, the following factors are considered: the length of
the time the receivable has been outstanding, specific knowledge of
each customer’s financial condition and historical
experience.
Market
risk is the risk that changes in commodity prices will affect the
Company’s oil sales, cash flows or the value of its financial
instruments. The objective of commodity price risk management is to
manage and control market risk exposures within acceptable limits
while maximizing returns.
The
Company is exposed to changes in oil prices which impact its
revenues and to changes in natural gas process which impact its
operating expenses.
The
Company does not utilize financial derivatives or other contracts
to manage commodity price risks.
Fair
value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date (exit price).
Fair
value measurements are categorized using a valuation hierarchy for
disclosure of the inputs used to measure fair value, which
prioritize the inputs into three broad levels:
Level 1
- Quoted prices are available in active markets for identical
assets or liabilities as of the reporting date. Active markets are
those in which transactions for the asset or liability occur in
sufficient frequency and volume to provide pricing information on
an ongoing basis.
Level 2
- Pricing inputs are other than quoted prices in active markets
included in level 1, which are either directly or indirectly
observable as of the reported date, and include those financial
instruments that are valued using models or other valuation
methodologies.
Level 3
- Pricing inputs include significant inputs that are generally less
observable from objective sources. These inputs may be used with
internally developed methodologies that result in
management’s best estimate of fair value.
(n)
|
|
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.
(o)
|
|
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
|
Acquisition of Interest in Bandolier Energy LLC. On
May 30, 2014, the Company entered into a Subscription Agreement
pursuant to which the Company was issued a 50% interest in
Bandolier Energy, LLC (“Bandolier”) in exchange for a
capital contribution of $5.0 million (the “Bandolier Acquisition”). In
connection with the Bandolier Acquisition, the Company has the
right to appoint a majority of the board of managers of Bandolier.
The Company’s Executive Chairman is a manager of, and
investor in, Pearsonia West Investment Group, LLC
(“PWIG”), a
special purpose vehicle formed for the purpose of investing in
Bandolier with the Company and Ranger Station, LLC
(“Ranger
Station”). Concurrently with the Bandolier
Acquisition, PWIG was issued a 44% interest in Bandolier for cash
consideration of $4.4 million, and Ranger Station was issued a 6%
interest in Bandolier for cash consideration of $600,000. In
connection with PWIG’s investment in Bandolier, the Company
and PWIG entered into an agreement, dated May 30, 2014, granting
the members of PWIG an option, exercisable at any time prior to May
30, 2017, to exchange their pro rata share of the Bandolier
membership interests for shares of the Company’s common
stock, at a price of $16 per share, subject to adjustment (the
“Option”). The
Option, if fully exercised, would result in the Company issuing
275,000 shares of its common stock, or 6% to the members of
PWIG.
The
Company has operational control along with a 50% ownership interest
in Bandolier. As a result, the Company consolidates Bandolier. The
remaining 50% non–controlling interest represents the equity
investment from PWIG and Ranger Station. Upon consummation of the
MegaWest transaction, the Company owned approximately 29.3% of
Bandolier.
On May
30, 2014, Bandolier acquired, for $8,712,893 less a $407,161 claw
back, all of the issued and outstanding equity of Spyglass Energy
Group, LLC (“Spyglass”), the owner of oil and
gas leases, leaseholds, lands, and options and concessions thereto
located in Osage County, Oklahoma. Spyglass controls a significant
contiguous oil and gas acreage position in Northeastern Oklahoma,
consisting of approximately 106,000 acres, with substantial
original oil in place, stacked reservoirs, as well as exploratory
and development opportunities that can be accessed through both
horizontal and vertical drilling. Significant infrastructure is
already in place including 32 square miles of 3-D seismic, 3 phase
power, a dedicated sub-station as well as multiple oil producing
horizontal wells. No additional contingencies were
assumed.
The
Company recorded the purchase of Spyglass using the acquisition
method of accounting as specified in ASC 805 “Business
Combinations.” This method of accounting requires
the acquirer to (i) record purchase consideration issued to sellers
in a business combination at fair value on the date control is
obtained, (ii) determine the fair value of any non-controlling
interest, and (iii) allocate the purchase consideration to all
tangible and intangible assets acquired and liabilities assumed
based on their acquisition date fair values. Further, the Company
commenced reporting the results of Spyglass on a consolidated basis
with those of the Company effective upon the date of the
acquisition.
The
Company consolidated Bandolier as of May 30, 2014, and the results
of operations of the Company include that of Bandolier from June 1,
2014.
Horizon Investments
On May
3, 2016, the Company consummated the acquisition of Horizon
Investments (the “Horizon
Acquisition”), which was majority owned by the
Company’s Chief Executive Officer. Accordingly, the
transaction was recorded at historical cost. As a result of the
acquisition, the Company acquired: (i) a 20% membership interest in
Horizon Energy, which in turn holds working interests in oil and
gas properties; (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. 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
11,564,249 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
– Petro River (1)
|
1,600,000
|
Net
assets acquired
|
$5,652,817
|
|
|
Consideration
for net assets acquired
|
|
Fair value of
common stock issued
|
$5,652,817
|
(1)
Prior to the
acquisition, the Company issued notes payable to Horizon
Investments. Following the acquisition, the notes were eliminated
upon consolidation.
5.
|
Accounts Receivable – Related Party
|
On
October 15, 2015, the Company entered into a contribution agreement
(the “Contribution
Agreement”) with MegaWest and Fortis Property Group,
LLC, a Delaware limited liability company (“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, (i) the Company
transferred its 50% membership interest in Bandolier
(the “Bandolier
Interest”), and cancelled all of its ownership
interest in the then issued and outstanding MegaWest Shares, which
prior to the MegaWest Transaction represented 100% ownership of
MegaWest; and (ii) Fortis transferred the rights to any profits and
proceeds from the sale of 30 condominium units owned by
Fortis. Immediately thereafter, MegaWest issued to the
Company 58,510 MegaWest Shares, representing a 58.51% equity
interest in MegaWest, as consideration for the assignment of the
Bandolier Interest, and issued to Fortis 41,490 MegaWest Shares,
representing a 41.49% equity interest in MegaWest, as consideration
for the assets assigned to MegaWest by
Fortis.
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. See further discussion in Notes 11 and
16.
During
the years ended April 30, 2017 and 2016, Fortis sold four and 25
condominium units, respectively, and MegaWest recorded a net gain
on interest in real estate rights of $1,689,274 and $10,474,713,
respectively. As of April 30, 2017 and 2016, the Company had an
accounts receivable – related party in the amount of
$2,124,260 and $4,829,693, respectively, related to interest in
real estate rights of condominium units sold.
6.
|
Notes Receivable – Related Party
|
Since December 2015, the Company has entered into nine promissory
note agreements with Fortis with aggregate principal amounts of
$24,786,382. The notes receivable bear interest at an annual rate
of 3% and mature on December 31, 2017. As of April 31, 2017
and 2016, the outstanding balance of the notes receivable was
$24,786,382 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. During the years ended April 30, 2017 and 2016,
the Company recognized a net gain of $1,689,274 and $10,474,713,
respectively, related to the sale of four and 25 condominium units
by Fortis.
The
following table summarizes the activity for interest in real estate
rights:
Balance at April 30, 2015
|
$-
|
Additions –
interest in real estate rights of 30 condominium units contributed
by Fortis
|
15,544,382
|
Less: Cost of
sales – 25 condominium units
|
(12,723,980)
|
Balance at April
30, 2016
|
2,820,402
|
Less: Cost of
sales – 4 condominium units
|
(2,510,542)
|
Balance at April 30, 2017
|
$309,860
|
8.
|
Oil and Gas Assets
|
The
following table summarizes the oil and gas assets by
project:
Cost
|
Oklahoma
|
Kansas
|
Missouri
|
Larne
Basin
|
Other
(1)
|
Total
|
Balance, May 1,
2015
|
$6,935,000
|
$7,803,020
|
$918,991
|
$-
|
$100,000
|
$15,757,011
|
Additions
|
102,864
|
-
|
-
|
-
|
-
|
102,864
|
Disposals
|
(279,013)
|
(7,727,287)
|
-
|
-
|
-
|
(8,006,301)
|
Depreciation,
depletion and amortization
|
(29,003)
|
(75,733)
|
-
|
-
|
-
|
(104,736)
|
Impairment of oil
and gas assets
|
(5,951,622)
|
-
|
(918,991)
|
-
|
-
|
(6,870,613)
|
Balance, April 30,
2016
|
778,226
|
-
|
-
|
-
|
100,000
|
878,226
|
Additions
|
487,857
|
-
|
-
|
761,444
|
-
|
1,249,301
|
Disposals
|
-
|
-
|
-
|
-
|
-
|
-
|
Depreciation,
depletion and amortization
|
(12,949)
|
-
|
-
|
-
|
-
|
(12,949)
|
Impairment of oil
and gas assets
|
(20,942)
|
-
|
-
|
-
|
-
|
(20,942)
|
Balance, April 30,
2017
|
$1,232,192
|
$-
|
$-
|
$761,444
|
$100,000
|
$2,093,636
|
(1) Other property consists primarily of four used steam generators
and related equipment that will be assigned to future projects. As
of April 30, 2017 and 2016, 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 to acquire a
13.75% working interest in certain oil and gas leases located in
southern Kern County, California. 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.
As of April 30, 2016, exploratory activity had not commenced and
the $108,333 was 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.
As of April 30, 2016, development of the first well had not
commenced and the escrow payment was recorded as prepaid oil and
gas development costs on the consolidated balance
sheet. 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.
Oklahoma Properties. During the year ended April 30,
2016, the Company paid approximately $403,000 and $85,000 for
proven and unproven oil and gas assets, respectively. During the
year ended April 30, 2016, 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.
Divestiture of Kansas Properties. Effective December 23, 2015, Petro
River Oil, LLC ("Petro
LLC"), a wholly
owned subsidiary of Megawest, divested various interests in oil and
gas leases, wells, records, data and related personal property
located along the Mississippi Lime play in the state of Kansas,
which assets were acquired by Petro LLC in 2012. In connection with
the divestiture, the assignee and purchaser of the interests agreed
to pay outstanding liabilities, including unpaid taxes, and assume
certain responsibilities to plug any abandoned wells. No cash
consideration was paid for the interests. The Company
recorded a loss of $7,519,460 in connection with the divestiture of
these oil and gas properties, representing the $7,727,287 oil and
gas assets book value, partially offset by the asset retirement
obligation liability. MegaWest is a 58.51% owned subsidiary of the
Company following consummation of the MegaWest Transaction, defined
above.
Impairment of Oil & Gas Properties. As of April 30, 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 April 30, 2016, the Company assessed its oil and
gas assets for impairment and recognized a charge of $5,951,622
related to the Oklahoma and Missouri oil and gas
properties.
9.
|
Intangible Assets
|
|
Acquisition of Havelide and Coalthane Assets. On
February 18, 2015, Petro Spring I, LLC ("Petro Spring I"), a Delaware limited
liability company wholly owned by Petro Spring, entered into a
definitive asset purchase agreement ("Havelide Purchase Agreement") to
purchase substantially all of the assets of Havelide GTL LLC
("Havelide") and Coalthane
Tech LLC ("Coalthane"),
consisting of certain patents and other intellectual property,
trade secrets, and assets developed and owned by Havelide to
produce a gasoline-like liquid and high-purity hydrogen from
natural gas, at low temperature and at low pressure (the
"Havelide Assets") and
consisting of certain patents and other intellectual property,
trade secrets, and assets developed and owned by Coalthane to
reduce the methane from coal mines and other wells (the
"Coalthane
Assets"). The purchase of the Coalthane and
Havelide Assets was consummated on February 27,
2015. The acquisitions reflect the increased focus on
technology solutions in an effort to diversify the Company’s
business amid a challenging oil price
environment.
As of April 30, 2016, the Company did not have adequate capital to
fund additional development of the intangibles and therefore the
Company has been unable to identify near-term
opportunities to commercialize the technology. As of April 30,
2016, the Company performed an impairment assessment on the
intangible assets and recognized an impairment charge of
$2,082,941.
The
Company recorded amortization expense of $0 and $120,452 for the
years ended April 30, 2017 and 2016, respectively.
10.
|
Asset Retirement Obligations
|
The
total future asset retirement obligation was estimated based on the
Company’s ownership interest in all wells and facilities, the
estimated legal obligations required to retire, dismantle, abandon
and reclaim the wells and facilities and the estimated timing of
such payments. The Company estimated the present value of its asset
retirement obligations at both April 30, 2017 and 2016, based on a
future undiscounted liability of $639,755 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 obligation were as follows:
|
April 30, 2017
|
April 30, 2016
|
Balance, beginning
of period
|
$763,062
|
$918,430
|
Additions
|
-
|
-
|
Disposals
|
(216,580)
|
(207,827)
|
Accretion
|
12,214
|
52,459
|
Total asset
retirement obligations
|
558,696
|
763,062
|
Less: current
portion of asset retirement obligations
|
(406,403)
|
(561,958)
|
Long-term portion
of asset retirement obligations
|
$152,293
|
$201,104
|
Expected
timing of asset retirement obligations:
Year Ending April
30,
|
|
2018
|
$406,403
|
2019
|
-
|
2020
|
-
|
2021
|
-
|
2022
|
-
|
Thereafter
|
233,352
|
Subtotal
|
639,755
|
Effect of
discount
|
81,059
|
Total
|
$558,696
|
As of
April 30, 2017 and 2016, the Company had $0 of reclamation deposits
with authorities to secure certain abandonment
liabilities.
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 year ended April
30, 2017 and 2016, the Company expensed $24,404 and $29,974
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.
Interest in Real Estate Rights, Accounts and Notes Receivable
– Real Estate – Related Party
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 April 30, 2017 and 2016, the Company had an
accounts receivable – related party in the amount of
$2,123,175 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 nine promissory note
agreements with Fortis, with total principal amounts of
$24,786,382. The notes receivable bear interest at an annual
interest rate of 3% and mature on December 31, 2017. For the
year ended April 30, 2017 and 2016, the Company recorded $797,710
and $170,653 of interest income on the notes receivable,
respectively. As of April 30, 2017 and 2016, the outstanding
balance of the notes receivable was $24,786,382 and $17,848,000,
respectively.
The
realization and availability of proceeds from the Company’s
interests in real estate and amounts receivable from Fortis under
the Contribution Agreement are dependent upon the value attributed
to the Bandolier prospects in the Redetermination following
completion of the evaluation of the Bandolier prospects, which is
expected before December 31, 2017. In the event the valuation
of the Bandolier prospects results in a shortfall under the
Contribution Agreement, Fortis has the right to revert its
interests in MegaWest to the Company and the Company would record a
loss for the amount of the notes receivable ($24,786,382), interest
in real estate rights ($309,860), accounts receivable ($2,123,175)
and any accrued interest. The Company has not recorded a
reserve for the potential loss attributable to the
Redetermination.
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.
|
Stockholders’ Equity
|
As of
April 30, 2017 and 2016, the Company had 5,000,000 shares of blank
check preferred stock authorized with a par value of $0.00001 per
share. None of the blank check preferred shares were issued or
outstanding.
As of
April 30, 2017 and 2016, the Company had 29,500 shares of preferred
B preferred stock authorized with a par value of $0.00001 per share
(“Series B
Preferred”). No Series B Preferred shares are issued
or outstanding.
As of
April 30, 2017, the Company had 150,000,000 shares of common stock
authorized with a par value of $0.00001 per share. There were
15,827,921 and 4,263,672 shares of common stock issued and
outstanding as of April 30, 2017 and 2016,
respectively.
As
discussed in Note 4, the Company issued 11,564,249 shares of common
stock for the Horizon Acquisition.
On
January 19, 2016, the Company granted 25,000 shares of the
Company’s restricted common stock for certain consulting
services, vesting over six months. During the year ended April 30,
2016, the Company issued 4,166 shares of this restricted stock and
recognized stock-based compensation of $6,875. In February 2016,
the Company cancelled the related consulting agreement and the
remaining 20,834 shares of the Company’s restricted common
stock were not issued.
13.
|
Stock Options
|
As of
April 30, 2017, the Company has one equity incentive plan. The
number of shares reserved for issuance in aggregate under the plan
is limited to 120 million shares. The exercise price, term and
vesting schedule of stock options granted are set by the Board of
Directors at the time of grant. Stock options granted under the
plan may be exercised on a cashless basis, if such exercise is
approved by the Board. In a cashless exercise, the employee
receives a lesser amount of shares in lieu of paying the exercise
price based on the quoted market price of the shares on the trading
day immediately preceding the exercise date.
On
October 23, 2015, the Company restructured its option plan by
cancelling 395,629 options and issuing 453,039 options to new and
existing option holders pursuant to the Amended and Restated 2012
Equity Compensation Plan. In December 2015, the Company issued an
additional 111,667 options to consultants.
For options issued during the year ended April 30, 2017, 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, range of $0.93 to $1.76; exercise price
range of $1.38 to $1.98; expected volatility range of 169% to
175%; and a discount rate range of 1.51% to
2.53%.
The
following table summarizes information about the options
outstanding and exercisable for the years ended April 30, 2017 and
2016:
|
Options
|
Weighted Average
Exercise Prices
|
|
|
|
Outstanding
– April 30, 2015
|
540,941
|
$12.00
|
Exercisable
– April 30, 2015
|
158,241
|
12.00
|
Granted
|
672,706
|
2.26
|
Exercised
|
-
|
-
|
Forfeited/Cancelled
|
(470,597)
|
10.25
|
Outstanding
– April 30, 2016
|
743,050
|
4.00
|
Exercisable
– April 30, 2016
|
421,460
|
3.41
|
Granted
|
1,870,958
|
1.38
|
Exercised
|
-
|
-
|
Forfeited/Cancelled
|
(14,326)
|
-
|
Outstanding
– April 30, 2017
|
2,599,682
|
$2.13
|
Exercisable
– April 30, 2017
|
1,954,735
|
$2.35
|
|
|
|
Outstanding
– Aggregate Intrinsic Value
|
|
$-
|
Exercisable
– Aggregate Intrinsic Value
|
|
$-
|
The
following table summarizes information about the options
outstanding and exercisable at April 30, 2017:
|
Options Outstanding
|
Options Exercisable
|
||
Exercise Price
|
Options
|
Weighted Avg.
Life
Remaining
|
Options
|
Weighted Average Exercise Price
|
$1.38
|
1,865,958
|
9.54
years
|
$1,296,161
|
$1.38
|
$1.98
|
5,000
|
9.27
years
|
$3,750
|
$1.98
|
$2.00
|
457,402
|
8.25
years
|
$392,781
|
$2.00
|
$2.87
|
65,334
|
8.25
years
|
$64,611
|
$2.87
|
$3.00
|
51,001
|
9.91
years
|
$42,445
|
$3.00
|
$3.39
|
12,000
|
8.89
years
|
$12,000
|
$3.39
|
$6.00
|
10,000
|
8.00
years
|
$10,000
|
$6.00
|
$12.00
|
132,987
|
6.73
years
|
$122,987
|
$12.00
|
|
2,599,682
|
|
1,954,735
|
|
|
|
|
|
$-
|
Aggregate
Intrinsic Value
During
the years ended April 30, 2017 and 2016, the Company expensed an
aggregate $2,178,716 and $1,593,349 to general and administrative
expenses for stock-based compensation pursuant to employment and
consulting agreements.
As of
April 30, 2017, the Company has $1,358,143 in unrecognized
stock-based compensation expense which will be amortized over a
weighted average exercise period of 2.5 years.
Warrants:
|
Number
of
Warrants
|
Weighted
Average
Exercise Price
|
Weighted
Average Life
Remaining
|
Outstanding
and exercisable – April 30, 2015
|
336,458
|
$36.19
|
2.29
|
Forfeited
|
-
|
-
|
-
|
Granted
|
(203,125)
|
-
|
-
|
Outstanding
and exercisable – April 30, 2016
|
133,333
|
50.00
|
3.83
|
Forfeited
|
-
|
-
|
-
|
Granted/Expired
|
-
|
-
|
-
|
Outstanding
and exercisable – April 30, 2017
|
133,333
|
$50.00
|
2.83
|
There
were no changes of the Company’s warrants during the year
ended April 30, 2017. The aggregate intrinsic value of the
outstanding warrants was $0.
14.
|
Non-Controlling Interests
|
For the
years ended April 30, 2017 and 2016, the changes in the
Company’s non–controlling interest was as
follows:
|
Bandolier
|
MegaWest
|
Total
|
Non–controlling
interests at May 1, 2015
|
$3,644,776
|
$-
|
$3,644,776
|
Contribution by
non-controlling interest holders
|
-
|
9,403,367
|
9,403,367
|
Non–controlling
interest share of losses
|
(4,375,836)
|
3,379,011
|
(996,825)
|
Non–controlling
interests at April 30, 2016
|
(731,060)
|
12,782,378
|
12,051,318
|
Contribution of
real estate by non-controlling interest holders
|
176,000
|
-
|
176,000
|
Non–controlling
interest share of income (losses)
|
(144,813)
|
527,965
|
383,152
|
Non–controlling
interests at April 30, 2017
|
$(699,873)
|
$13,310,343
|
$12,610,470
|
15.
|
Income Taxes
|
As of April 30, 2017, the Company had
approximately $3.9 million of net operating loss carryovers
(“NOLs”) which expire beginning in 2027. The U.S.
net operating loss carryovers are subject to limitation under
Internal Revenue Code Section 382 should there be a greater than
50% ownership change as determined under the regulations.
Management has determined that a change in ownership occurred as a
result of the Share Exchange on April 23, 2013. Therefore, the net
operating loss carryovers are subject to an annual limitation of
approximately $156,000. The Company impaired the NOLs at the time
of the change of ownership. Further the Company was limited in the
recognition of a pre-acquisition loss deduction due to a net built
in loss in 2015 at the time of the ownership
change.
The
income tax expense (benefit) consists of the
following:
|
For
the Year Ended
April
30,
2017
|
For
the Year Ended
April
30,
2016
|
Foreign
|
|
|
Current
|
$-
|
$-
|
Deferred
|
-
|
-
|
U.S.
Federal
|
|
|
Current
|
|
-
|
Deferred
|
(446,593)
|
(4,503,473)
|
|
|
|
U.S. State &
Local
|
|
|
Current
|
-
|
-
|
Deferred
|
(27,677)
|
(504,613)
|
|
|
|
Change in valuation
allowance
|
1,415,785
|
7,509,295
|
Income tax
provision (benefit)
|
$941,515
|
$2,501,209
|
In
assessing the realization of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this
assessment. Based on this assessment management has established a
full valuation allowance against all of the deferred tax assets for
every period, since it is more likely than not that all of the
deferred tax assets will not be realized.
The
Company’s deferred tax assets (liabilities) consisted of the
effects of temporary differences attributable to the
following:
|
April
30, 2017
|
April
30, 2016
|
U.S. net operating
loss carryovers
|
$3,881,860
|
$3,933,952
|
Depreciation
|
2,422,886
|
2,531,949
|
Bandolier
LLC flow-through
|
4,320,684
|
4,313,122
|
Accretion of asset
retirement obligation
|
201,729
|
288,511
|
Stock-based
compensation
|
2,314,197
|
1,599,551
|
Total deferred tax
assets
|
13,141,356
|
12,667,085
|
Valuation
allowance
|
(13,141,356)
|
(12,667,085)
|
Deferred tax asset,
net of valuation allowance
|
$-
|
$-
|
|
April
30, 2017
|
April
30, 2016
|
Tax liability
– MegaWest
|
$3,442,724
|
$2,501,209
|
Total deferred tax
liability
|
$3,442,724
|
$2,501,209
|
The
expected tax expense (benefit) based on the statutory rate is
reconciled with actual tax expense benefit as follows:
|
For the Year Ended
April 30, 2017
|
For the Year Ended
April 30, 2016
|
U.S. federal
statutory rate
|
(34.00)%
|
(34.00)%
|
State income tax,
net of federal benefit
|
(2.11)%
|
(3.81)%
|
Change in
rate
|
11.29%
|
(0.98)%
|
Other permanent
differences
|
6.46%
|
(2.98)%
|
Change in valuation
allowance
|
54.80%
|
62.63%
|
Income tax
provision (benefit)
|
36.44%
|
20.86%
|
16.
|
Contingency and Contractual Obligations
|
Pending
Litigation.
(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 $605,000 as of July 24, 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 $530,000 as of July 24, 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.
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.
Redetermination of Bandolier Interest.
In connection with the Contribution Agreement, entered into by and
between the Company, MegaWest and Fortis (see Note 5), the parties
agreed to a redetermination of the fair market value of the
Bandolier Interest at any time following the six month anniversary
after the execution thereof (the “Redetermination”). Upon
a Redetermination, which has not occurred as of July 28, 2017, but
is anticipated prior to December 31, 2017, 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. If the Company is
unable to deliver to Fortis the cash payment required after the
Redetermination, if any, the board of directors of MegaWest shall
have the right to exercise certain remedies against the Company,
including a right to foreclose on the Company’s entire equity
in MegaWest, which equity interest has been pledged to Fortis under
the terms of the Contribution Agreement. In the event of
foreclosure, the Bandolier Interest would revert back to the
Company, and the Company would record a loss for the amount of the
notes receivable, interest in real estate rights, accounts
receivable – related party, and any accrued
interest.
17.
|
Subsequent Events
|
The Company has evaluated subsequent events through the date the
financial statements were available to be issued. Based on this
evaluation, the Company has identified no reportable subsequent
events other than those disclosed elsewhere in these
financials.
18.
|
Supplemental Information on Oil and Gas Operations
(Unaudited)
|
The
Company retains qualified independent reserves evaluators to
evaluate the Company’s proved oil reserves. For the year
ended April 30, 2017 and 2016, the report by Pinnacle Energy
Services, LLC. (“Pinnacle”) covered 100% of the
Company’s proved oil reserves.
Proved
oil and natural gas reserves, as defined within the SEC Rule
4-10(a)(22) of Regulation S-X, are those quantities of oil and gas,
which, by analysis of geoscience and engineering data can be
estimated with reasonable certainty to be economically producible
from a given date forward from known reservoirs, and under existing
economic conditions, operating methods and government regulations
prior to the time of which contracts providing the right to operate
expire, unless evidence indicates that renewal is reasonably
certain, regardless of whether determinable or probabilistic
methods are used for the estimation. The project to extract the
hydrocarbons must have commenced or the operator must be reasonably
certain that it will commence the project within a reasonable time.
Developed oil and natural gas reserves are reserves that can be
expected to be recovered from existing wells with existing
equipment and operating methods or in which the cost of the
required equipment is relatively minor compared to the cost of a
new well; and through installed extraction equipment and
infrastructure operational at the time of the reserves estimate is
the extraction is by means not involving a well. Estimates of the
Company’s oil reserves are subject to uncertainty and will
change as additional information regarding producing fields and
technology becomes available and as future economic and operating
conditions change.
The
following tables summarize the Company’s proved developed and
undeveloped reserves within the United States, net of royalties, as
of April 30, 2017 and 2016:
Oil (MBbls)
|
|
2017
|
|
|
2016
|
|
||
|
|
|
|
|
|
|
||
Proved reserves as at May 1
|
|
|
206
|
|
|
|
508
|
|
Extensions, acquisitions and discoveries
|
|
|
-
|
|
|
|
-
|
|
Dispositions
|
|
|
-
|
|
|
|
(301
|
)
|
Production
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Revisions of prior estimates
|
|
|
(38
|
)
|
|
|
-
|
|
Total Proved reserves as at April 30
|
|
|
167
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
Oil (MBbls)
|
|
2017
|
|
|
2016
|
|
||
|
|
|
|
|
|
|
|
|
Proved developed producing
|
|
|
1
|
|
|
|
-
|
|
Non-producing
|
|
|
166
|
|
|
|
206
|
|
Proved undeveloped
|
|
|
-
|
|
|
|
-
|
|
Total Proved reserves as at April 30
|
|
|
167
|
|
|
|
206
|
|
Gas
(MCFs)
|
2017
|
2016
|
|
|
|
Proved reserves as
at May 1
|
331
|
868
|
Extensions,
acquisitions and discoveries
|
|
|
Dispositions
|
-
|
(537)
|
Production
|
(5)
|
-
|
Revisions of prior
estimates
|
(47)
|
-
|
Total Proved
reserves as at April 30
|
279
|
331
|
|
|
|
Gas
(MCFs)
|
2017
|
2016
|
|
|
|
Proved developed
producing
|
17
|
-
|
Non-producing
|
262
|
331
|
Proved
undeveloped
|
-
|
-
|
Total Proved
reserves as at April 30
|
279
|
331
|
Capitalized Costs
Related to Oil and Gas Assets
|
2017
|
2016
|
|
|
|
Proved
properties
|
$8,244,046
|
$7,753,575
|
Unproved
properties
|
858,830
|
100,000
|
|
9,102,876
|
7,853,575
|
Less: accumulated
impairment
|
(7,009,240)
|
(6,975,349)
|
|
$2,093,636
|
$878,226
|
|
|
|
|
|
|
Costs Incurred in
Oil and Gas Activities:
|
2017
|
2016
|
|
|
|
Development
|
$487,857
|
$102,864
|
Exploration
|
761,444
|
-
|
|
$1,249,301
|
$102,864
|
The
following standardized measure of discounted future net cash flows
from proved oil reserves has been computed using the average
first-day-of-the-month price during the previous 12-month period,
costs as at the balance sheet date and year-end statutory income
tax rates. A discount factor of 10% has been applied in determining
the standardized measure of discounted future net cash flows. The
Company does not believe that the standardized measure of
discounted future net cash flows will be representative of actual
future net cash flows and should not be considered to represent the
fair value of the oil properties. Actual net cash flows will differ
from the presented estimated future net cash flows due to several
factors including:
|
●
|
Future
production will include production not only from proved properties,
but may also include production from probable and possible
reserves;
|
|
●
|
Future
production of oil and natural gas from proved properties may differ
from reserves estimated;
|
|
●
|
Future
production rates may vary from those estimated;
|
|
●
|
Future
rather than average first-day-of-the-month prices during the
previous 12-month period and costs as at the balance sheet date
will apply;
|
|
●
|
Economic
factors such as changes to interest rates, income tax rates,
regulatory and fiscal environments and operating conditions cannot
be determined with certainty;
|
|
●
|
Future
estimated income taxes do not take into account the effects of
future exploration expenditures; and
|
|
●
|
Future
development and asset retirement obligations may differ from those
estimated.
|
Future
net revenues, development, production and restoration costs have
been based upon the estimates referred to above. The following
tables summarize the Company’s future net cash flows relating
to proved oil reserves based on the standardized measure as
prescribed in FASB ASC Topic 932 - “Extractive Activities - Oil and
Gas”:
Future cash flows
relating to proved reserves:
|
2017
|
2016
|
Future cash
inflows
|
$8,421,000
|
$9,588,000
|
Future operating
costs
|
(4,419,000)
|
(5,170,000)
|
Future development
costs
|
(615,000)
|
(820,000)
|
Future income
taxes
|
(597,000)
|
(680,000)
|
Future net cash
flows
|
2,790,000
|
2,918,000
|
10% discount
factor
|
(766,000)
|
(779,000)
|
Standardized
measure
|
$2,024,000
|
$2,139,000
|
Summary of Changes in Standardized Measure of Discounted Future Net
Cash Flows
The
following table summarizes the principal sources of changes in
standardized measure of discounted future estimated net cash flows
at 10% per annum for the years ended April 30, 2017 and
2016:
|
2017
|
2016
|
Standardized
measure, beginning of year
|
$2,139,000
|
$6,935,000
|
Sales
of oil produced, net of production costs
|
1,271,000
|
388,000
|
Net
changes in sales and transfer prices and in production costs and
production costs related to future production
|
(2,719,000)
|
(4,245,000)
|
Previously
estimated development costs incurred during the period
|
-
|
-
|
Changes
in future development costs
|
(205,000)
|
5,365,000
|
Revisions
of previous quantity estimates due to prices and
performance
|
(99,000)
|
(5,180,000)
|
Accretion
of discount
|
20,000
|
214,000
|
Discoveries,
net future production and development costs associated with these
extensions and discoveries
|
-
|
-
|
Purchases
and sales of minerals in place
|
-
|
-
|
Timing
and other
|
1,617,000
|
(1,338,000)
|
Standardized
measure, end of year
|
$2,024,000
|
$2,139,000
|
In
accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, 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:
July 31, 2017
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates
indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Scot Cohen
|
|
Executive
Chairman and Director
|
|
July
31, 2017
|
Scot
Cohen
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/ David Briones
|
|
Chief
Financial Officer
|
|
July
31, 2017
|
David
Briones
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
|
|
/s/ Glenn C. Pollack
|
|
Director
|
|
July
31, 2017
|
Glenn
C. Pollack
|
|
|
|
|
|
|
|
|
|
/s/ John Wallace
|
|
Director
|
|
July
31, 2017
|
John
Wallace
|
|
|
|
|
|
|
|
|
|
/s/ Fred Zeidman
|
|
Director
|
|
July
31, 2017
|
Fred
Zeidman
|
|
|
|
|
|