Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2017
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______.
Commission file number: 000-49760
PETRO RIVER OIL CORP.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
|
|
98-0611188
|
(State or Other Jurisdiction of
|
|
(I.R.S. Employer
|
Incorporation or Organization)
|
|
Identification No.)
|
55 5th
Avenue, Suite 1702, New York, New York
10003
(Address of Principal Executive Offices, Zip
Code)
(469) 828-3900
(Registrant’s Telephone Number, Including Area
Code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes [X] No
[ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
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 to Section 7(a)(2)(B) of the Securities 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]
Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest
practicable date.
Class
|
|
Outstanding at December 19, 2017
|
Common Stock, $0.00001 par value per share
|
|
17,309,809 shares
|
TABLE OF CONTENTS
|
|
Page
|
|
|
|
|
||
|
|
|
1
|
||
|
|
|
|
2
|
|
|
|
|
|
3
|
|
|
|
|
|
4
|
|
|
|
|
|
5
|
|
|
|
|
21
|
||
|
|
|
30
|
||
|
|
|
30
|
||
|
|
|
|
||
|
|
|
31
|
||
|
|
|
32
|
||
|
|
|
32
|
||
|
|
|
32
|
||
|
|
|
32
|
||
|
|
|
33
|
||
|
|
|
33
|
||
|
|
|
|
34
|
|
|
|
|
PART I - FINANCIAL INFORMATION
Petro
River Oil Corp. and Subsidiaries
Consolidated Balance
Sheets
(Unaudited)
|
As of
|
|
|
October 31, 2017
|
April 30, 2017
|
Assets
|
|
|
Current Assets:
|
|
|
Cash
and cash equivalents
|
$462,865
|
$631,232
|
Accounts
receivable - oil and gas
|
18,385
|
8,423
|
Accounts
receivable - real estate - related party
|
1,150,641
|
2,123,175
|
Accrued
interest on notes receivable - related party
|
1,195,552
|
797,710
|
Interest
in real estate rights
|
-
|
309,860
|
Prepaid
expenses and other current assets
|
28,638
|
207,831
|
Prepaid
oil and gas asset development costs
|
1,060,336
|
613,480
|
Notes
receivable - related party, current portion
|
26,344,883
|
24,786,382
|
Total Current Assets
|
30,261,300
|
29,478,093
|
|
|
|
Oil
and gas assets, full cost method
|
|
|
Costs
subject to amortization, net
|
2,024,000
|
1,234,806
|
Costs
not being amortized, net
|
861,444
|
858,830
|
Property,
plant and equipment, net of accumulated depreciation of $184,520
and $184,140, respectively
|
1,202
|
1,582
|
Investment
in Horizon Energy Partners
|
1,592,418
|
1,213,000
|
Other
assets
|
17,133
|
17,133
|
Total Long-term Assets
|
4,496,197
|
3,325,351
|
Total Assets
|
$34,757,497
|
$32,803,444
|
|
|
|
Liabilities and Equity
|
|
|
Current Liabilities:
|
|
|
Accounts
payable and accrued expenses
|
$283,088
|
$120,233
|
Deferred
tax liability
|
3,725,643
|
3,442,724
|
Advances
from related party
|
250,000
|
-
|
Asset
retirement obligations, current portion
|
406,403
|
406,403
|
Total Current Liabilities
|
4,665,134
|
3,969,360
|
|
|
|
Long-term Liabilities:
|
|
|
Asset
retirement obligations, net of current portion
|
165,768
|
152,293
|
Note
payable, net of debt discount of $867,440 and $0,
respectively
|
1,132,560
|
-
|
Total Long-term Liabilities
|
1,298,328
|
152,293
|
|
|
|
Total Liabilities
|
5,963,462
|
4,121,653
|
|
|
|
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; 15,843,066 and
15,827,921 issued and outstanding, respectively
|
158
|
158
|
Additional
paid-in capital
|
48,341,827
|
46,681,073
|
Accumulated
deficit
|
(32,231,645)
|
(30,609,910)
|
Total Petro River Oil Corp. Equity
|
16,110,340
|
16,071,321
|
Non-controlling
interests
|
12,683,695
|
12,610,470
|
Total Equity
|
28,794,035
|
28,681,791
|
Total Liabilities and Equity
|
$34,757,497
|
$32,803,444
|
The accompanying notes are an integral part of these consolidated
financial statements.
Petro River Oil Corp. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
|
For the
Three Months Ended
October 31,
|
For the
Six Months Ended
October 31,
|
||
|
2017
|
2016
|
2017
|
2016
|
|
|
|
|
|
Revenues
|
|
|
|
|
Oil
and natural gas sales
|
$16,238
|
$-
|
$25,041
|
$-
|
Total Revenues
|
16,238
|
-
|
25,041
|
-
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
Lease
operating expenses
|
39,242
|
8,365
|
57,604
|
32,124
|
Depreciation,
depletion and accretion
|
11,745
|
2,772
|
20,865
|
7,168
|
Gain
on sale of oil and gas assets
|
-
|
-
|
-
|
(216,580)
|
Impairment
of oil and gas assets
|
241,881
|
-
|
241,881
|
-
|
General
and administrative
|
483,522
|
830,071
|
1,476,079
|
2,538,212
|
Total Operating Expenses
|
776,390
|
841,208
|
1,796,429
|
2,360,924
|
|
|
|
|
|
Operating Loss
|
(760,152)
|
(841,208)
|
(1,771,338)
|
(2,360,924)
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
Interest
income (expense) - net
|
101,562
|
157,507
|
234,307
|
298,766
|
Net
gain on real estate rights
|
-
|
392,665
|
271,490
|
693,304
|
Other Income
|
101,562
|
550,172
|
505,797
|
992,070
|
|
|
|
|
|
Net Loss Before Income Tax Provision
|
(658,590)
|
(291,036)
|
(1,265,591)
|
(1,368,854)
|
|
|
|
|
|
Income Tax Provision
|
84,715
|
233,232
|
282,919
|
421,149
|
|
|
|
|
|
Net Loss
|
(743,305)
|
(524,268)
|
(1,548,510)
|
(1,790,003)
|
|
|
|
|
|
Net (Loss) Income Attributable to Non-controlling
Interest
|
(1,346)
|
87,834
|
73,225
|
135,509
|
|
|
|
|
|
Net Loss Attributable to Petro River Oil Corp. and
Subsidiaries
|
$(741,959)
|
$(612,102)
|
$(1,621,735)
|
$(1,925,512)
|
|
|
|
|
|
Basic and Diluted Net Loss Per Common Share
|
$(0.05)
|
$(0.04)
|
$(0.10)
|
$(0.12)
|
|
|
|
|
|
Weighted Average Number of Common Shares Outstanding - Basic and
Diluted
|
15,842,558
|
15,827,921
|
15,838,826
|
15,639,373
|
The accompanying notes are an integral part of these consolidated
financial statements.
Petro River Oil Corp. and Subsidiaries
Consolidated Statements of Cash
Flows
(Unaudited)
|
For the Six Months
|
|
|
Ended
|
|
|
October 31, 2017
|
October 31, 2016
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
Net
loss
|
$(1,548,510)
|
$(1,790,003)
|
Adjustments
to reconcile net loss to net cash used in by operating
activities:
|
|
|
Stock-based
compensation
|
708,698
|
1,515,457
|
Depreciation,
depletion and accretion
|
20,867
|
7,168
|
Amortization
of debt discount
|
84,616
|
-
|
Gain
on sale of oil and gas assets
|
-
|
(216,580)
|
Impairment
of oil and gas assets
|
241,881
|
-
|
Net
gain on interest in real estate rights
|
(271,490)
|
(693,304)
|
Deferred
income tax expense
|
282,919
|
421,149
|
Changes
in operating assets and liabilities:
|
|
|
Accounts
receivable – oil and gas
|
(9,962)
|
903
|
Accounts
receivable – related party
|
(3,968)
|
-
|
Accrued
interest on notes receivable – related party
|
(397,842)
|
(298,766)
|
Prepaid
expenses and other assets
|
179,193
|
(14,013)
|
Accounts
payable and accrued expenses
|
107,397
|
(98,242)
|
Net Cash Used in Operating Activities
|
(606,201)
|
(1,166,231)
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
Proceeds
from the sale of interest in real estate rights
|
1,557,852
|
3,711,006
|
Prepaid
oil and gas assets
|
(446,856)
|
(311,202)
|
Issuance
of notes receivable – related party
|
(1,558,501)
|
(3,742,803)
|
Capitalized
expenditures on oil and gas assets
|
(985,243)
|
(294,640)
|
Cash
received from acquisition of Horizon Investments
|
-
|
3,364,817
|
Cash
paid for cost method investment
|
(379,418)
|
(525,000)
|
Net Cash (Used in) Provided by Investing
Activities
|
(1,812,166)
|
2,202,178
|
|
|
|
CASH FLOW FROM FINANCING ACTIVITIES:
|
|
|
Proceeds
from related party advances
|
250,000
|
-
|
Proceeds
from notes payable – related party
|
2,000,000
|
-
|
Cash
received from non-controlling interest contributions
|
-
|
176,000
|
Net Cash Provided by Financing Activities
|
2,250,000
|
176,000
|
|
|
|
Change
in cash and cash equivalents
|
(168,367)
|
1,211,947
|
|
|
|
Cash
and cash equivalents, beginning of period
|
631,232
|
774,751
|
Cash
and cash equivalents, end of period
|
$462,865
|
$1,986,698
|
|
|
|
SUPPLEMENTARY CASH FLOW INFORMATION:
|
|
|
Cash
paid during the period for:
|
|
|
Income
taxes
|
$4,258
|
$3,789
|
Interest
paid
|
$-
|
$-
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
Reclassification
from prepaid oil and gas development costs to oil and gas assets
not being amortized
|
$-
|
$761,444
|
Accrual
of oil and gas development costs
|
$55,458
|
$-
|
Additions
to asset retirement obligation from new drilling
activities
|
$7,500
|
$-
|
Warrants
issued with notes payable
|
$952,056
|
$-
|
The accompanying notes are an integral part of these consolidated
financial statements.
PETRO RIVER OIL CORP.
Notes to the Consolidated Financial
Statements
(Unaudited)
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 Osage County, Oklahoma and
in Kern County, California. Following the acquisition of
Horizon I Investments, LLC (“Horizon
Investments”), the
Company now has exposure to a portfolio of several domestic and
international oil and gas assets consisting of highly prospective
conventional plays diversified across project type, geographic
location and risk profile, as well as access to a broad network of
industry leaders from Horizon Investment’s 20% interest in
Horizon Energy. Horizon Energy is an oil and gas exploration
and development company owned and managed by former senior oil and
gas executives. It has a portfolio of domestic and
international assets, including two assets located in the United
Kingdom, adjacent to the giant Wytch Farm oil field, the largest
onshore oil field in Western Europe. Other projects include
the proposed redevelopment of a large oil field in Kern County,
California and the development of an additional recent discovery in
Kern County. Each of the assets in the Horizon Energy
portfolio is characterized by low initial capital expenditure
requirements and strong risk reward
characteristics.
In light of the challenging oil price environment and capital
markets, management is focusing on specific target acquisitions and
investments, limiting operating expenses, and exploring farm-in and
joint venture opportunities for the Company’s oil and gas
assets. No assurances can be given that management will be
successful.
Recent Developments
Acquisition of Membership Interest in the Osage County
Concession. On November 6,
2017, the Company entered into an Assignment and Assumption of
Membership Interest Agreement (the “Membership Interest
Assignment”) with
Pearsonia West Investments, LLC (“Pearsonia”), the owner of a 46.81% membership
interest in Bandolier Energy LLC (“Bandolier”). Pursuant to the Membership Interest
Assignment, the Company issued 1,466,667 shares of its common
stock, $0.00001 par value, with a fair value of approximately $4.4
million (“Common
Stock”), to Pearsonia in
exchange for all membership interests in Bandolier held by
Pearsonia, resulting in the Company acquiring an additional 46.81%
stake in Bandolier’s 106,500-acre concession in Osage County,
Oklahoma.
November 2017 $2.5 Million Secured Note
Financing. On September 20,
2017, the Company entered into a Securities Purchase Agreement
(“Purchase Agreement
II”) with Petro
Exploration Funding II, LLC (“Funding
Corp. II”), pursuant to which the Company issued to
Funding Corp. II a senior secured promissory note on November 6,
2017 in the principal amount of $2.5 million (the
“November 2017 Secured
Note”) (the
“November 2017 Note
Financing”) and received
total proceeds of $2.5 million. As additional consideration for the
purchase of the November 2017 Secured Note, the Company issued to
Funding Corp. II (i) a warrant to purchase 1.25 million shares of
the Company’s Common Stock (the “November 2017
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 Energy Group,
LLC, an indirect subsidiary of the Company
(“Spyglass”) (the “Existing Osage County
Override”). The Existing
Osage County Override was an existing override that was acquired by
the Company from Scot Cohen, a member of the Company’s Board
of Directors and a substantial stockholder of the Company, as
discussed below.
The November 2017 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 November 2017 Secured Note,
the Company entered into a Security Agreement, pursuant to which
the Company granted to Funding Corp. II a security interest in all
assets of the Company, which security interest is subordinate to
the security interest granted to Petro Exploration Funding, LLC
(“Funding
Corp. I”) on June 13, 2017 in connection with the
June 2017 Note Financing, as defined below. The first interest
payment will be due on June 1, 2018, and each six-month anniversary
thereafter until the outstanding principal balance of the November
2017 Secured Note is paid in full.
The November 2017 Warrant is exercisable immediately upon issuance,
for an exercise price per share equal to $2.00 per share, and shall
terminate, if not previously exercised, three years from the date
of issuance. The grant date relative fair value of the November
2017 Warrant was $1,051,171.
Purchase of Existing Osage County Override. On August 14, 2017, following a review of the
Company’s capital requirements necessary to fund its 2017
development program, the Company’s independent directors
consented to Scot Cohen’s purchase of the Existing Osage
County Override from various prior third-party royalty owners to be
issued in connection with the November 2017 Note Financing for
$250,000. Mr. Cohen agreed to sell the Existing Osage County
Override to the Company at the same price paid by him (plus market
interest on his capital) upon a determination by the Company to
finance the Osage County development plan. On November 6, 2017,
upon consummation of the November 2017 Note Financing, the Company
acquired the Existing Osage County Override from Mr. Cohen in
exchange for $250,000.
June 2017 $2.0 Million Secured Note Financing. On June 13, 2017, the Company entered into a
Securities Purchase Agreement (“Purchase Agreement
I”) with Funding Corp. I,
pursuant to which the Company issued to Funding Corp. I a senior
secured promissory note to finance the Company’s working
capital requirements, in the principal amount of $2.0 million (the
“June
2017 Secured Note”) (the
“June
2017 Note Financing”). As
additional consideration for the issuance of the June 2017 Secured
Note, the Company issued to Funding Corp. I (i) a warrant to
purchase 840,336 shares of the Company’s Common Stock (the
“June
2017 Warrant”), and (ii)
a new 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 (the “New Osage County
Override”) valued at
$250,000.
The June 2017 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 June 2017 Secured Note, the
Company entered into a Security Agreement, pursuant to which the
Company granted to Funding Corp. I 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 June 2017 Secured Note is paid
in full.
The June 2017 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. The grant date relative fair value of the June 2017
Warrant was $951,299.
Scot Cohen owns or controls 31.25% of Funding Corp. I and 41.20% of
Funding Corp. II.
2.
|
Basis of Preparation
|
The accompanying unaudited interim consolidated financial
statements are prepared in accordance with generally accepted
accounting principles in the United States
(“U.S. GAAP”) and include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.
Non–controlling interest represents the minority equity
investment in the Company’s subsidiaries, plus the minority
investors’ share of the net operating results and other
components of equity relating to the non–controlling
interest.
These unaudited consolidated financial statements include the
Company and the following subsidiaries:
Petro Spring, LLC, PO1, LLC; Petro River UK Limited; Horizon I
Investments, LLC; and MegaWest Energy USA Corp. and MegaWest Energy
USA Corp.’s wholly owned subsidiaries:
MegaWest Energy Texas Corp.
MegaWest Energy Kentucky Corp.
MegaWest Energy Missouri Corp.
Also contained in the unaudited consolidated financial statements
is the financial information of the Company’s 58.51% owned
subsidiary, MegaWest Energy Kansas Corporation
(“MegaWest”), which resulted from a transaction with
Fortis Property Group, LLC, a Delaware limited liability company
(“Fortis”) consummated on October 15, 2015 (the
“MegaWest
Transaction”). The
MegaWest Transaction includes the Company’s contribution of
its 50% interest in Bandolier.
The unaudited consolidated financial information furnished herein
reflects all adjustments, consisting solely of normal recurring
items, which in the opinion of management are necessary to fairly
state the financial position of the Company and the results of its
operations for the periods presented. This report should be read in
conjunction with the Company’s consolidated financial
statements and notes thereto included in the Company’s Form
10-K for the year ended April 30, 2017 filed with the Securities
and Exchange Commission (the “SEC”) on July 31, 2017. The Company assumes
that the users of the interim financial information herein have
read or have access to the audited financial statements for the
preceding fiscal year and that the adequacy of additional
disclosure needed for a fair presentation may be determined in that
context. Accordingly, footnote disclosure, which would
substantially duplicate the disclosure contained in the
Company’s Form 10-K for the year ended April 30, 2017, has
been omitted. The results of operations for the interim periods
presented are not necessarily indicative of results for the entire
year ending April 30, 2018.
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. At October 31, 2017, approximately
$79,976 of the Company’s cash balances were uninsured. The
Company has not experienced any loses on such
accounts.
(c)
|
Receivables:
|
Receivables that management has the intent and ability to hold for
the foreseeable future are reported in the balance sheet at
outstanding principal adjusted for any charge-offs and the
allowance for doubtful accounts. Losses from uncollectible
receivables are 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 October 31, 2017 and April
30, 2017 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. For the six months
ended October 31, 2017, the Company evaluated these properties
and recorded an impairment in the amount of
$241,881.
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 Company’s acquisition of its
interest in Bandolier. The price used to establish economic
viability is the average price during the 12-month period preceding
the end of the entity’s fiscal year and calculated as the
un-weighted arithmetic average of the first-day-of-the-month price
for each month within such 12-month period. For the six months
ended October 31, 2017, the Company recorded an impairment charge
of $241,881 on its proved oil and gas
properties.
Depletion, Depreciation and Amortization: Depletion, depreciation and amortization is
provided using the unit-of-production method based upon estimates
of proved oil and gas reserves with oil and gas production being
converted to a common unit of measure based upon their relative
energy content. Investments in unproved properties and major
development projects are not amortized until proved reserves
associated with the projects can be determined or until impairment
occurs. If the results of an assessment indicate that the
properties are impaired, the amount of the impairment is deducted
from the capitalized costs to be amortized. Once the assessment of
unproved properties is complete and when major development projects
are evaluated, the costs previously excluded from amortization are
transferred to the full cost pool and amortization begins. The
amortizable base includes estimated future development costs and,
where significant, dismantlement, restoration and abandonment
costs, net of estimated salvage value.
In arriving at rates under the unit-of-production method, the
quantities of recoverable oil and natural gas reserves are
established based on estimates made by the Company’s
geologists and engineers which require significant judgment, as
does the projection of future production volumes and levels of
future costs, including future development costs. In addition,
considerable judgment is necessary in determining when unproved
properties become impaired and in determining the existence of
proved reserves once a well has been drilled. All of these
judgments may have significant impact on the calculation of
depletion expenses. There have been no material changes in the
methodology used by the Company in calculating depletion,
depreciation and amortization of oil and gas properties under the
full cost method during the six months ended October 31, 2017 and
2016.
(f)
|
Investments:
|
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.
(g)
|
Fair Value of Financial Instruments:
|
The Company follows paragraph 825-10-50-10 of the FASB Accounting
Standards Codification for disclosures about fair value of its
financial instruments and paragraph 820-10-35-37 of the FASB
Accounting Standards Codification (“Paragraph
820-10-35-37”) to measure
the fair value of its financial instruments. Paragraph 820-10-35-37
establishes a framework for measuring fair value in U.S. GAAP, and
expands disclosures about fair value measurements. To increase
consistency and comparability in fair value measurements and
related disclosures, Paragraph 820-10-35-37 establishes a fair
value hierarchy which prioritizes the inputs to valuation
techniques used to measure fair value into three (3) broad levels.
The fair value hierarchy gives the highest priority to quoted
prices (unadjusted) in active markets for identical assets or
liabilities and the lowest priority to unobservable inputs. The
three (3) levels of fair value hierarchy defined by Paragraph
820-10-35-37 are described below:
Level
1
|
Quoted market prices available in active markets for identical
assets or liabilities as of the reporting date.
|
|
|
Level
2
|
Pricing inputs other than quoted prices in active markets included
in Level 1, which are either directly or indirectly observable as
of the reporting date.
|
|
|
Level
3
|
Pricing inputs that are generally observable inputs and not
corroborated by market data.
|
Financial assets are considered Level 3 when their fair values are
determined using pricing models, discounted cash flow methodologies
or similar techniques and at least one significant model assumption
or input is unobservable.
The fair value hierarchy gives the highest priority to quoted
prices (unadjusted) in active markets for identical assets or
liabilities and the lowest priority to unobservable inputs. If the
inputs used to measure the financial assets and liabilities fall
within more than one level described above, the categorization is
based on the lowest level input that is significant to the fair
value measurement of the instrument.
The carrying amount of the Company’s financial assets and
liabilities, such as cash, prepaid expenses, and accounts payable
and accrued liabilities approximate their fair value because of the
short maturity of those instruments.
Transactions involving related parties cannot be presumed to be
carried out on an arm’s-length basis, as the requisite
conditions of competitive, free-market dealings may not exist.
Representations about transactions with related parties, if made,
shall not imply that the related party transactions were
consummated on terms equivalent to those that prevail in
arm’s-length transactions unless such representations can be
substantiated.
(h)
|
Stock-Based Compensation:
|
Generally, all forms of stock-based compensation, including stock
option grants, warrants, and restricted stock grants are measured
at their fair value utilizing an option pricing model on the
award’s grant date, based on the estimated number of awards
that are ultimately expected to vest.
Under fair value recognition provisions, the Company recognizes
equity–based compensation net of an estimated forfeiture rate
and recognizes compensation cost only for those shares expected to
vest over the requisite service period of the award.
The fair value of option award is estimated on the date of grant
using the Black–Scholes option valuation model. The
Black–Scholes option valuation model requires the development
of assumptions that are input into the model. These assumptions are
the expected stock volatility, the risk–free interest rate,
the option’s expected life, the dividend yield on the
underlying stock and the expected forfeiture rate. Expected
volatility is calculated based on the historical volatility of the
Company’s Common Stock over the expected option life and
other appropriate factors. Risk–free interest rates are
calculated based on continuously compounded risk–free rates
for the appropriate term. The dividend yield is assumed to be zero,
as the Company has never paid or declared any cash dividends on its
Common Stock and does not intend to pay dividends on the Common
Stock in the foreseeable future. The expected forfeiture rate is
estimated based on historical experience.
Determining the appropriate fair value model and calculating the
fair value of equity–based payment awards requires the input
of the subjective assumptions described above. The assumptions used
in calculating the fair value of equity–based payment awards
represent management’s best estimates, which involve inherent
uncertainties and the application of management’s judgment.
As a result, if factors change and the Company uses different
assumptions, the equity–based compensation expense could be
materially different in the future. In addition, the Company is
required to estimate the expected forfeiture rate and recognize
expense only for those shares expected to vest. If the actual
forfeiture rate is materially different from our estimate, the
equity–based compensation expense could be significantly
different from what the Company has recorded in the current
period.
The Company determines the fair value of the stock–based
payments to non-employees as either the fair value of the
consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. If the fair
value of the equity instruments issued is used, it is measured
using the stock price and other measurement assumptions as of the
earlier of either (1) the date at which a commitment for
performance by the counterparty to earn the equity instruments is
reached, or (2) the date at which the counterparty’s
performance is complete.
The expenses resulting from stock-based compensation are recorded
as general and administrative expenses in the consolidated
statement of operations, depending on the nature of the services
provided.
(i)
|
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 October 31, 2017 and April 30, 2017, the Company had
approximately $3.7 million and $3.4 million, 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 were 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)
|
Per Share Amounts:
|
Basic net income (loss) per common share is computed by dividing
net loss attributable to stockholders by the weighted-average
number of shares of common stock 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 six months ended October 31, 2017 and
2016, potentially dilutive securities were not included in the
calculation of diluted net loss per share because to do so would be
anti-dilutive.
The Company had the following common stock equivalents at October
31, 2017 and 2016:
|
October 31, 2017
|
October 31, 2016
|
Stock
Options
|
2,529,682
|
2,507,182
|
Stock
Purchase Warrants
|
973,669
|
133,333
|
Total
|
3,503,351
|
2,640,515
|
(k)
|
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
2018.
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 versus 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
does not expect the new standard to have a material effect on its
consolidated financial statements.
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 other recently
issued accounting pronouncements to have a significant impact on
its financial position, results of operations, or cash
flows.
(k)
|
Subsequent Events:
|
The Company has evaluated all transactions through the date the
consolidated financial statements were issued for subsequent event
disclosure consideration.
4.
|
Accounts Receivable – Related Party
|
On October 15, 2015, the Company entered into a contribution
agreement (the “Contribution Agreement”) with
MegaWest and Fortis pursuant to which the Company and Fortis each
agreed to contribute certain assets to MegaWest in exchange for
shares of MegaWest common stock (“MegaWest Shares”) (the
“MegaWest
Transaction”) in order to participate in the
development of the Company’s Bandolier
prospect.
Upon
execution of the Contribution Agreement, Fortis transferred its
interest in 30 condominium units and the right to any profits and
proceeds therefrom. For the three months ended October 31, 2017 and
2016, Fortis sold zero and one condominium units, respectively, and
MegaWest recorded a net gain on interest in real estate rights of
$0 and $392,665, respectively. For the six months ended October 31,
2017 and 2016, Fortis sold one and two condominium units,
respectively, and MegaWest recorded a net gain on interest in real
estate rights of $271,490 and $693,304, respectively. As of October
31, 2017, the Company had accounts receivable - related party in
the amount of $1,150,641 related to interest in real estate rights
of condominium units sold.
The accounts 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 be available when the Company has completed its
evaluation of the Bandolier prospects. In this regard, 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”),
which is currently due to occur on December 31, 2017. The
Company is seeking an extension of the Redetermination to allow the
Company to complete the initial test well program on the Bandolier
prospect in order to value the Redetermination. The Company has
currently completed one test well of its nine well test program.
Upon a Redetermination, which has not occurred as of
December 19, 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 entitled to the value of the
receivable but will be required to provide MegaWest with a cash
contribution in an amount equal to the shortfall. In the event
the Company is unable to deliver to MegaWest the cash contribution
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
reduction in noncontrolling interest for Fortis’ interest in
MegaWest for (i) the amount of the notes receivable, (ii) interest
in real estate rights, (iii) accounts receivable - related party,
and (iv) any accrued interest for the amount due to Fortis in
exchange for their portion of MegaWest representing their indirect
interest in the Bandolier
prospect.
5.
|
Notes Receivable – Related Party
|
Since December 2015, the Company has entered into ten promissory
note agreements with Fortis with aggregate principal amounts of
$26,344,883. The notes receivable bear interest at an annual rate
of 3% and mature on December 31, 2017. As of October 31, 2017,
and April 30, 2017, the outstanding balance of the notes receivable
was $26,344,883 and $24,786,382, respectively.
6.
|
Interest in Real Estate Rights
|
As discussed in Note 4, MegaWest received an interest in real
estate rights of 30 condominium units from Fortis pursuant to the
MegaWest Transaction. For the six months ended October 31, 2017,
the Company recognized a net gain of $271,490 related to the sale
of one condominium unit by Fortis.
The following table summarizes the activity for interest in real
estate rights:
|
Six Months Ended
October 31, 2017
|
Balance at April 30, 2017
|
$309,860
|
Cost
of sales – 1 condominium unit
|
(309,860)
|
Balance at October 31, 2017
|
$-
|
7.
|
Oil and Gas Assets
|
The following table summarizes the activity of the oil and gas
assets by project for the six months ended October 31,
2017:
|
Oklahoma
|
Larne
Basin
|
Other (1)
|
Total
|
Balance
May 1, 2017
|
$1,232,192
|
$761,444
|
$100,000
|
$2,093,636
|
Additions
|
1,048,201
|
-
|
-
|
1,048,201
|
Disposals
|
-
|
-
|
-
|
-
|
Depreciation,
depletion and amortization
|
(14,512)
|
-
|
-
|
(14,512)
|
Impairment
of oil and gas assets
|
(241,881)
|
-
|
-
|
(241,881)
|
Balance
October 31, 2017
|
$2,024,000
|
$761,444
|
$100,000
|
$2,885,444
|
(1)
Other property consists primarily of four used steam generators and
related equipment that will be assigned to future projects. As of
October 31, 2017, and April 30, 2017, management concluded that
impairment was not necessary as all other assets were carried at
salvage value.
Kern County Project. On March 4, 2016, the
Company executed an Asset Purchase and Sale and Exploration
Agreement 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. Costs incurred to date
for this property have aggregated to $1,060,336 as
of October 31, 2017 and are recorded
as prepaid oil and gas development costs on the consolidated
balance sheet. In addition, the
sellers are entitled to an overriding royalty interest in certain
existing and new leases acquired after the closing date, and the
Company is required to make certain other payments, each in amounts
set forth in the agreement.
Acquisition of Interest in Larne
Basin. On January
19, 2016, Petro River UK Limited, (“Petro UK”), a wholly owned subsidiary of the
Company, entered into a Farmout Agreement to acquire a 9% interest
in Petroleum License PL 1/10 and P2123 (the
“Larne
Licenses”) located in the
Larne Basin in Northern Ireland (the “Larne
Transaction”). The
two Larne Licenses, one onshore and one offshore, together
encompass approximately 130,000 acres covering the large majority
of the prospective Larne Basin. The other parties to the
Farmout Agreement are Southwestern Resources Ltd, a wholly owned
subsidiary of Horizon Energy, which will acquire a 16% interest,
and Brigantes Energy Limited, which will retain a 10%
interest. Third parties will own the remaining 65%
interest.
Under the terms of the Farmout Agreement, Petro UK deposited
approximately $735,000 into an escrow agreement
(“Escrow
Agreement”), which amount
represented Petro UK's obligation to fund the total projected cost
to drill the first well under the terms of the Farmout
Agreement. The
total deposited amount to fund the cost to drill the first well is
approximately $6,159,452, based on an exchange rate of one British
Pound for 1.44 U.S. Dollars. Petro UK was and will continue to be
responsible for its pro-rata costs of additional wells drilled
under the Farmout Agreement. Drilling of the first well was
completed in June 2016 and was unsuccessful. The initial costs
incurred by the Company were reclassified from prepaid oil and gas
development costs to oil and gas assets not being amortized on the
consolidated balance sheets.
Oklahoma Properties. During the
six months ended October 31, 2017, the Company recorded additions
related to development costs incurred of approximately $1,041,000
and $6,800 for proven and unproven oil and gas assets,
respectively.
Divestiture of Kansas Properties. On 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 October 31, 2017,
the Company assessed its oil and gas assets for impairment and
recognized a charge of $241,881 related to its oil and gas
property. 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 assets.
8.
|
Asset Retirement Obligations
|
The total future asset retirement obligations were estimated based
on the Company’s ownership interest in all wells and
facilities, the estimated legal obligations required to retire,
dismantle, abandon and reclaim the wells and facilities and the
estimated timing of such payments. The Company estimated the
present value of its asset retirement obligations at both October
31, 2017 and April 30, 2017 based on a future undiscounted
liability of $650,441 and $639,755, respectively. These costs are
expected to be incurred within 1 to 24 years. A credit-adjusted
risk-free discount rate of 10% and an inflation rate of 2% were
used to calculate the present value.
Changes to the asset retirement obligations were as
follows:
|
October 31,
2017
|
April 30,
2017
|
Balance,
beginning of period
|
$558,696
|
$763,062
|
Additions
|
7,500
|
-
|
Disposals
|
-
|
(216,580)
|
Accretion
|
5,975
|
12,214
|
|
572,171
|
558,696
|
Less:
Current portion for cash flows expected to be incurred within one
year
|
(406,403)
|
(406,403)
|
Long-term
portion, end of period
|
$165,768
|
$152,293
|
During the six months ended October 31, 2017 and 2016, the Company
recorded accretion expense of $5,975 and $6,789,
respectively.
Expected timing of asset retirement obligations:
Year
Ending April 30,
|
|
2018
(remainder of year)
|
$406,403
|
2019
|
-
|
2020
|
-
|
2021
|
-
|
2022
|
-
|
Thereafter
|
244,038
|
Subtotal
|
650,441
|
Effect
of discount
|
(78,270)
|
Total
|
$572,171
|
9.
|
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 311,489 shares of the Company’s common stock for
$1.38 per share 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 stock options as of the date
of grant utilizing a Black-Scholes option-pricing model using the
following assumptions: common share value based on the fair value
of the Company’s Common Stock as quoted on the
Over-the-Counter Bulletin Board, $1.78; exercise price of $2.00;
expected volatility of 171%; and a discount rate of 2.16%. The
grant date fair value of the award was $89,525. For the three months
ended October 31, 2017 and 2016, the Company expensed $5,968
and $6,101, respectively, to general and administrative
expenses. For the six months
ended October 31, 2017 and 2016, the Company expensed $11,937
and $12,202 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 4
above.
Accounts Receivable - Related Party
As discussed in Note 4 above, on October 15, 2015, the Company
entered into the Contribution Agreement with MegaWest and Fortis
pursuant to which the Company and Fortis each agreed to assign
certain assets to MegaWest in exchange for the MegaWest
Shares.
Upon execution of the Contribution Agreement, Fortis transferred
certain indirect interests held in 30 condominium units and the
rights to any profits and proceeds therefrom, with its basis of
$15,544,382, to MegaWest. As of October 31, 2017, and April
30, 2017, the Company had an accounts receivable – related
party in the amount of $1,150,641 and $2,123,175, respectively,
which was due from Fortis for the profits belonging to MegaWest.
See Note 4 above.
Notes Receivable – Related Party
As discussed in Note 5, the Company entered into ten promissory
note agreements with Fortis, with total principal amount of
$26,344,883 as of October 31, 2017. The notes receivable bear
interest at an annual interest rate of 3% and mature on December
31, 2017. For the three and six months ended October 31, 2017, the
Company recorded $199,211 and $393,810 of interest income on the
notes receivable, respectively. As of October 31, 2017, and April
30, 2017, the outstanding balance of the notes receivable was
$26,344,883 and $24,786,382, respectively.
Advances from Related Party
In September 2017, Scot Cohen, a member of the Company’s
Board of Directors and a substantial stockholder of the Company,
advanced the Company $250,000 in order to satisfy working capital
needs, including the purchase of the Existing Osage County Override
as discussed below. These advances are due on demand and are
non-interest bearing. As of October 31, 2017, the amount due to the
related parties was $250,000 and is presented as “Advances
from related party” on the consolidated balance sheets. The
advances were repaid in November 2017.
On August 14, 2017, following a review of the Company’s
capital requirements necessary to fund its 2017 development
program, the Company’s independent directors consented to
Scot Cohen’s purchase of the Existing Osage County Override
from various prior holders to be issued in connection with the
November 2017 Note Financing, for $250,000. Mr. Cohen agreed to
sell the Existing Osage County Override to the Company at the same
price paid by him (plus market interest on his capital) upon a
determination by the Company to finance the Osage County
development plan. On November 6, 2017, upon consummation of the
November 2017 Note Financing, the Company acquired the Existing
Osage County Override from Mr. Cohen.
June 2017 $2.0 Million Secured Note Financing
Scot Cohen owns or controls 31.25% of Funding Corp. I, the holder
of the June 2017 Note issued by the Company in connection with the
June 2017 Note Financing in the principal amount of $2.0 million.
The June 2017 Note accrues interest at a rate of 10% per annum, and
matures on June 30, 2020. (See Note 1). The June 2017 Note is
presented as “Note payable – related party, net of debt
discount” on the consolidated balance sheets.
Pursuant to the financing agreement, the Company issued the June
2017 Warrant to Funding Corp. I to purchase 840,336 shares of the
Company’s Common Stock. Upon issuance of the June 2017 Note,
the Company valued the June 2017 Warrant at the grant date share
price of $2.38 and recorded $952,056 to debt discount on the
consolidated balance sheet. The debt discount is amortized over the
earlier of (i) the term of the debt or (ii) conversion of the debt,
using the effective interest method. The amortization of debt
discount is included as a component of interest expense in the
consolidated statements of operations. There was unamortized debt
discount of $867,440 as of October 31, 2017. During the six
months ended October 31, 2017 and 2016, the Company recorded
amortization of debt discount totaling $84,616 and $0,
respectively. See Note 10 for the assumptions and inputs utilized
to value the June 2017 Warrant.
As of October 31, 2017, the outstanding balance, net of debt
discount, and accrued interest on the June 2017 Note due to related
party was $1,132,560 and $74,887, respectively.
As additional consideration for the purchase of the June 2017 Note,
the Company issued to Funding Corp. I the New Osage County
Override, which provided Funding Corp. I with a new 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, valued at
$250,000.
10.
|
Equity
|
As of October 31, 2017 and April 30, 2017, the Company had
5,000,000 shares of preferred stock, par value $0.00001 per share,
authorized. As of October 31, 2017, and April 30, 2017, the Company
had 29,500 shares of Series B Preferred Stock, par value $0.00001
per share (“Series B
Preferred”), authorized.
No Series B Preferred shares are currently issued or outstanding,
and no other series of preferred stock have been
designated.
As of October 31, 2017 and April 30, 2017, the Company had
150,000,000 shares of Common Stock, par value $0.00001 per share,
authorized. During the six months ended October 31, 2017, the
Company issued 15,145 shares of Common Stock related to a cashless
exercise of 35,000 options. There were 15,843,066 and 15,827,921
shares of Common Stock issued and outstanding as of October 31,
2017 and April 30, 2017, respectively.
Options
The following table summarizes information about the changes of
options for the period from April 30, 2017 to October 31, 2017 and
options outstanding and exercisable at October 31,
2017:
|
Options
|
Weighted
Average
Exercise
Prices
|
|
|
|
Outstanding April 30, 2017
|
2,599,682
|
$2.13
|
Granted
|
-
|
-
|
Exercised
|
(35,000)
|
1.38
|
Forfeited/Cancelled
|
(35,000)
|
1.38
|
Outstanding – October 31, 2017
|
2,529,682
|
$2.15
|
Exercisable – October 31, 2017
|
2,356,985
|
$2.18
|
|
|
|
Outstanding – Aggregate Intrinsic Value
|
|
$844,100
|
Exercisable – Aggregate Intrinsic Value
|
|
$797,664
|
The following table summarizes information about the options
outstanding and exercisable at October 31, 2017:
|
Options
Outstanding
|
Options
Exercisable
|
|
Exercise Price
|
Options
|
Weighted Avg.
Life Remaining
|
Options
|
1.38
|
1,795,958
|
9.45 years
|
1,697,158
|
1.98
|
5,000
|
9.51 years
|
5,000
|
2.00
|
457,402
|
8.50 years
|
392,784
|
2.87
|
65,334
|
8.50 years
|
64,611
|
3.00
|
51,001
|
9.16 years
|
42,445
|
3.39
|
12,000
|
9.14 years
|
12,000
|
6.00
|
10,000
|
8.25 years
|
10,000
|
12.00
|
132,987
|
6.98 years
|
132,987
|
|
2,529,682
|
|
2,356,985
|
During the three months ended October 31, 2017 and 2016, the
Company expensed $179,366 and $365,000, respectively, related to
the vesting of outstanding options to general and administrative
expense for stock-based compensation pursuant to employment and
consulting agreements. During the six months
ended October 31, 2017 and 2016, the Company expensed $708,698 and
$1,515,000, respectively, related to the vesting of outstanding
options to general and administrative expense for stock-based
compensation pursuant to employment and consulting
agreements.
As of October 31, 2017, the Company has approximately $638,115 in
unrecognized stock-based compensation expense related to unvested
options, which will be amortized over a weighted average exercise
period of approximately 3 years.
Warrants
The fair value of the 840,336 June 2017 Warrants granted in
conjunction with the June 2017 Note Financing (as discussed in Note
9) were estimated on the date of grant using the Black-Scholes
option-pricing model.
The assumptions used for the warrants granted during the six months
ended October 31, 2017 are as follows:
|
October 31,
2017
|
Exercise
price $
|
2.38
|
Expected
dividends
|
0%
|
Expected
volatility
|
169.63%
|
Risk
free interest rate
|
1.49%
|
Expected
life of warrant
|
3
years
|
The following is a summary of the Company’s warrant
activity:
|
Number of
Warrants
|
Weighted
Average
Exercise Price
|
Weighted
Average Life
Remaining (Years)
|
Outstanding and exercisable – April 30, 2017
|
133,333
|
$50.00
|
2.83
|
Forfeited
|
-
|
-
|
-
|
Granted
|
840,336
|
2.05
|
2.27
|
Outstanding and exercisable – October 31, 2017
|
973,669
|
$8.90
|
2.58
|
The aggregate intrinsic value of the outstanding warrants was
$0.
11.
|
Non-Controlling Interest
|
For the six months ended October 31, 2017, the changes in the
Company’s non–controlling interest were as
follows:
|
Bandolier
|
Fortis
|
Total
|
Non–controlling interest at April 30, 2017
|
$(699,873)
|
$13,310,343
|
$12,610,470
|
Contribution
of cash by non-controlling interest holders
|
-
|
-
|
-
|
Non–controlling
interest share of income (losses)
|
(85,425)
|
158,650
|
73,225
|
Non–controlling interest at October 31, 2017
|
$(785,298)
|
$13,468,993
|
$12,683,695
|
12.
|
Contingency and Contractual Obligations
|
Ongoing 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 $592,000 as of October 31, 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 $518,000 as of October 31, 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 through 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, which the net present value of has been included in asset
retirement obligations as of October 31, 2017. 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 4), the parties
agreed to the Redetermination of the fair market value of the
Bandolier Interest at any time following the six-month anniversary
after the execution thereof, which is currently due to occur on
December 31, 2017. The Company is seeking an extension of the
Redetermination to allow the Company to complete the initial test
well program on the Bandolier prospect in order to value the
Redetermination. The Company has currently completed one test well
of its nine well test program. Upon a Redetermination, which
has not occurred as of December 19, 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 entitled to the value of the receivable but will be
required to provide MegaWest with a cash contribution in an amount
equal to the shortfall. If the Company is unable to deliver to
MegaWest the cash contribution 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 reduction in noncontrolling interest for
Fortis’ interest in MegaWest for (i) the amount of the notes
receivable, (ii) interest in real estate rights, (iii) accounts
receivable – related party, and (iv) any accrued interest for
the amount due to Fortis in exchange for their portion of MegaWest
representing their indirect interest in the Bandolier
prospect.
13.
|
Subsequent Events
|
See discussion of the Acquisition of Membership Interest in the
Osage County Concession and the November 2017 Note Financing under
Recent Developments in Note 1.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Except as otherwise indicated by the context, references in this
Quarterly Report to “we,” “us,”
“our,” or the “Company” are to the
consolidated businesses of Petro River Oil Corp. and its
wholly-owned direct and indirect subsidiaries and majority-owned
subsidiaries, except that references to “our common
stock” or “our capital stock” or similar terms
refer to the common stock, par value $0.00001 per share, of Petro
River Oil Corp., a Delaware corporation (the
“Company”).
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (“MD&A”) is designed to provide information that
is supplemental to, and should be read together with, the
Company’s consolidated financial statements and the
accompanying notes contained in this Quarterly Report. Information
in this Item 2 is intended to assist the reader in obtaining an
understanding of the consolidated financial statements, the changes
in certain key items in those financial statements from quarter to
quarter, the primary factors that accounted for those changes, and
any known trends or uncertainties that the Company is aware of that
may have a material effect on the Company’s future
performance, as well as how certain accounting principles affect
the consolidated financial statements. This includes discussion of
(i) Liquidity, (ii) Capital Resources, (iii) Results of Operations,
and (iv) Off-Balance Sheet Arrangements, and any other information
that would be necessary to an understanding of the Company’s
financial condition, changes in financial condition and results of
operations.
Forward Looking Statements
The following is management’s discussion and analysis of
certain significant factors which have affected our financial
position and operating results during the periods included in the
accompanying consolidated financial statements, as well as
information relating to the plans of our current management and
should be read in conjunction with the accompanying financial
statements and their related notes included in this Report.
References in this section to “we,” “us,”
“our,” or the “Company” are to the
consolidated business of Petro River Oil Corp. and its wholly owned
and majority owned subsidiaries.
This Report contains forward-looking statements. Generally, the
words “believes,” “anticipates,”
“may,” “will,” “should,”
“expects,” “intends,”
“estimates,” “continues,” and similar
expressions or the negative thereof or comparable terminology are
intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, including the
matters set forth in this Report or other reports or documents we
file with the Securities and Exchange Commission
(“SEC”) from time to time, which could cause
actual results or outcomes to differ materially from those
projected. Undue reliance should not be placed on these
forward-looking statements, which speak only as of the date hereof.
We undertake no obligation to update these forward-looking
statements.
The following discussion of our financial condition and results of
operations is based upon and should be read in conjunction with our
consolidated financial statements and their related notes included
in this Quarterly Report and our Annual Report on Form 10-K filed
with the SEC on July 31, 2017 for the year ended April 30,
2017.
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 Company’s prospect in Oklahoma is owned by Spyglass
Energy Group, LLC, a wholly owned subsidiary of Bandolier Energy,
LLC (“Bandolier”). Bandolier is owned 48.81% by the Company
and 51.19% by its subsidiary, MegaWest. Bandolier has a 75% working
interest in the 106,500-acre concession in Osage County, Oklahoma.
The 25% working interest is held by the operator, Performance
Energy, LLC.
In 2017, Bandolier discovered two oil fields with the successful
drilling of the W. Blackland 1-3 and S. Blackland 2-11 exploration
wells. On December 15, 2017, the Company received permits from the
Bureau of Indian Affairs to drill eight additional wells in the W.
Blackland Field. Based on the 30-day flow test from the W.
Blackland 1-3 exploration well, we are projecting estimated
ultimate recoveries (“EUR”) from each new development well of
approximately 105,000 barrels of oil equivalent
(“BOE”). Drilling and completion costs are
estimated to be approximately $200,000 per
well.
In addition to our current development plans, our current 3D
seismic has identified additional structures in Osage County. It
will cost the Company approximately $300,000 to test three new
structures totaling 2,362 acres of potential productive
Mississippian chat reservoirs. If the exploration wells are
successful, the Company has a potential to discover up to 5.85
million BOE based on 20 acre well spacing and 50,0000 EUR per
well.
The Company’s results from its development and exploration
plans will have a materially significant impact on the valuation of
our interest in MegaWest and the Redetermination under the
Contribution Agreement with Fortis.
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.
Recent Developments
Acquisition of Membership Interest in the Osage County
Concession. On November 6,
2017, the Company entered into an Assignment and Assumption of
Membership Interest Agreement (the “Membership Interest
Assignment”) with
Pearsonia West Investments, LLC (“Pearsonia”), the owner of a 46.81% membership
interest in Bandolier Energy LLC (“Bandolier”). Pursuant to the Membership Interest
Assignment, the Company issued 1,466,667 shares of its common
stock, $0.00001 par value, with a fair value of approximately $4.4
million (“Common
Stock”), to Pearsonia in
exchange for all membership interests in Bandolier held by
Pearsonia, resulting in the Company acquiring an additional 46.81%
stake in Bandolier’s 106,500-acre concession in Osage County,
Oklahoma.
November 2017 $2.5 Million Secured Note
Financing. On September 20,
2017, the Company entered into a Securities Purchase Agreement
(“Purchase Agreement
II”) with Petro
Exploration Funding II, LLC (“Funding
Corp. II”), pursuant to which the Company issued to
Funding Corp. II a senior secured promissory note on November 6,
2017 in the principal amount of $2.5 million (the
“November 2017 Secured
Note”) (the
“November 2017 Note
Financing”). As
additional consideration for the purchase of the November 2017
Secured Note, the Company issued to Funding Corp. II (i) a warrant
to purchase 1.25 million shares of the Company’s Common Stock
(the “November 2017
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 Energy Group,
LLC, an indirect subsidiary of the Company
(“Spyglass”) (the “Existing Osage County
Override”). The Existing
Osage County Override was an existing override that was acquired by
the Company from Scot Cohen, a member of the Company’s Board
of Directors and a substantial stockholder of the Company, as
discussed below.
The November 2017 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 November 2017 Secured Note,
the Company entered into a Security Agreement, pursuant to which
the Company granted to Funding Corp. II a security interest in all
assets of the Company, which security interest is subordinate to
the security interest granted to Petro Exploration Funding, LLC
(“Funding
Corp. I”) on June 13, 2017 in connection with the
June 2017 Note Financing, as defined below. The first interest
payment will be due on June 1, 2018, and each six-month anniversary
thereafter until the outstanding principal balance of the November
2017 Secured Note is paid in full.
The November 2017 Warrant is exercisable immediately upon issuance,
for an exercise price per share equal to $2.00 per share, and shall
terminate, if not previously exercised, three years from the date
of issuance. The grant date fair value of the November 2017 Warrant
was $1,051,171.
Purchase of Existing Osage County Override. On August 14, 2017, following a review of the
Company’s capital requirements necessary to fund its 2017
development program, the Company’s independent directors
consented to Scot Cohen’s purchase of the Existing Osage
County Override from various prior holders to be issued in
connection with the November 2017 Note Financing for $250,000. Mr.
Cohen agreed to sell the Existing Osage County Override to the
Company at the same price paid by him (plus market interest on his
capital) upon a determination by the Company to finance the Osage
County development plan. On November 6, 2017, upon consummation of
the November 2017 Note Financing, the Company acquired the Existing
Osage County Override from Mr. Cohen.
June 2017 $2.0 Million Secured Note Financing. On June 13, 2017, the Company entered into a
Securities Purchase Agreement (“Purchase Agreement
I”) with Funding Corp. I,
pursuant to which the Company issued to Funding Corp. I a senior
secured promissory note to finance the Company’s working
capital requirements, in the principal amount of $2.0 million (the
“June
2017 Secured Note”) (the
“June
2017 Note Financing”). As
additional consideration for the issuance of the June 2017 Secured
Note, the Company issued to Funding Corp. I (i) a warrant to
purchase 840,336 shares of the Company’s Common Stock (the
“June
2017 Warrant”), and (ii)
a new 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 (the “New Osage County
Override”).
The June 2017 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 June 2017 Secured Note, the
Company entered into a Security Agreement, pursuant to which the
Company granted to Funding Corp. I 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 June 2017 Secured Note is paid
in full.
The June 2017 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. The grant date fair value of the June 2017 Warrant was
$951,299.
Scot Cohen owns or controls 31.25% of Funding Corp. I and 41.20% of
Funding Corp. II.
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 on Form 10-K filed with the SEC
on July 31, 2017 for the year ended April 30, 2017.
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 U.S. GAAP, which requires us to make estimates and assumptions
that affect the reported amounts of our assets and liabilities and
revenues and expenses, to disclose contingent assets and
liabilities on the date of the consolidated financial statements,
and to disclose the reported amounts of revenues and expenses
incurred during the financial reporting period. The most
significant estimates and assumptions include the valuation of
accounts receivable, and the useful lives and impairment of
property and equipment, goodwill and intangible assets, the
valuation of deferred tax assets and inventories and the provision
for income taxes. We continue to evaluate these estimates and
assumptions that we believe to be reasonable under the
circumstances. We rely on these evaluations as the basis for making
judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Since the use of
estimates is an integral component of the financial reporting
process, actual results could differ from those estimates. Some of
our accounting policies require higher degrees of judgment than
others in their application. We believe critical accounting
policies as disclosed in this Form 10-Q reflect the more
significant judgments and estimates used in preparation of our
consolidated financial statements. We believe there have been no
material changes to our critical accounting policies and
estimates.
The following critical accounting policies rely upon assumptions
and estimates and were used in the preparation of our consolidated
financial statements:
Oil and Gas Operations
The Company follows the full cost method of accounting for oil and
gas operations, whereby all costs related to exploration and
development of oil and gas reserves are capitalized. Under this
method, the Company capitalizes all acquisition, exploration and
development costs incurred for the purpose of finding oil and
natural gas reserves, including salaries, benefits and other
internal costs directly attributable to these activities. Costs
associated with production and general corporate activities,
however, are expensed in the period incurred. Costs are capitalized
on a country-by-country basis. To date, there has only been one
cost center, the United States.
The present value of estimated future net cash flows is computed by
applying the average first-day-of-the-month prices during the
previous twelve-month period of oil and natural gas to estimated
future production of proved oil and natural gas reserves as of
year-end less estimated future expenditures to be incurred in
developing and producing the proved reserves and assuming
continuation of existing economic conditions. Prior to December 31,
2009, prices and costs used to calculate future net cash flows were
those as of the end of the appropriate quarterly
period.
Following the discovery of reserves and the commencement of
production, the Company will compute depletion of oil and natural
gas properties using the unit-of-production method based upon
production and estimates of proved reserve quantities. Costs
associated with unproved properties are excluded from the depletion
calculation until it is determined whether or not proved reserves
can be assigned to such properties. Unproved properties are
assessed for impairment annually. Significant properties are
assessed individually.
The Company assesses all items classified as unproved property on
an annual basis for possible impairment. The Company assesses
properties on an individual basis or as a group if properties are
individually insignificant. The assessment includes consideration
of the following factors, among others: land relinquishment; intent
to drill; remaining lease term; geological and geophysical
evaluations; drilling results and activity; the assignment of
proved reserves; and the economic viability of development if
proved reserves are assigned. During any period in which these
factors indicate impairment, the related exploration costs incurred
are transferred to the full cost pool and are then subject to
depletion and the ceiling limitations on development oil and
natural gas expenditures.
Proceeds from the sale of oil and gas assets are applied against
capitalized costs, with no gain or loss recognized, unless a sale
would alter the rate of depletion and depreciation by 25 percent or
more.
Significant changes in these factors could reduce our estimates of
future net proceeds and accordingly could result in an impairment
of our oil and gas assets. Management will perform annual
assessments of the carrying amounts of its oil and gas assets as
additional data from ongoing exploration activities becomes
available.
Interest in Real Estate Rights
Interest in real estate rights, previously identified as
“Real estate - held for sale” in our unaudited
consolidated balance sheets, are related to real estate currently
held by Fortis, who intends to sell these properties within the
next 12 months. Fortis contributed profit realized from future sale
of these properties to MegaWest, pursuant to the terms and
conditions of the Contribution Agreement, as a part of the MegaWest
Transaction. As we do not know the price at which the real estate
will be sold, the rights are stated on the consolidated balance
sheet as of October 31, 2017 and April 30, 2017 at the cost basis
realized by Fortis.
Income Taxes
The Company uses the asset and liability method in accounting for
income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial
reporting and income tax carrying amounts of assets and liabilities
and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The Company
reviews deferred tax assets for a valuation allowance based upon
whether it is more likely than not that the deferred tax asset will
be fully realized. A valuation allowance, if necessary, is provided
against deferred tax assets, based upon management’s
assessment as to their realization.
Uncertain Tax Positions
The Company evaluates uncertain tax positions pursuant to ASC Topic
740-10-25 “Accounting for Uncertainty in
Income Taxes,” which
allows companies to recognize a tax benefit from an uncertain tax
position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities based on
the technical merits of the position. Those tax positions failing
to qualify for initial recognition are recognized in the first
interim period in which they meet the more likely than not
standard, or are resolved through negotiation or litigation with
the taxing authority, or upon expiration of the statute of
limitations. De-recognition of a tax position that was previously
recognized occurs when an entity subsequently determines that a tax
position no longer meets the more likely than not threshold of
being sustained.
At October 31, 2017 and April 30, 2017, the Company had
approximately $3,726,000 and $3,443,000, respectively, of
liabilities for uncertain tax positions. Interpretation of taxation
rules relating to net operating loss utilization in real estate
transactions give rise to uncertain positions. In connection with
the uncertain tax position, there was no interest or penalties
recorded as the position is expected but the tax returns are not
yet due.
The Company is subject to ongoing tax exposures, examinations and
assessments in various jurisdictions. Accordingly, the Company may
incur additional tax expense based upon the outcomes of such
matters. In addition, when applicable, the Company will adjust tax
expense to reflect the Company’s ongoing assessments of such
matters, which require judgment and can materially increase or
decrease its effective rate as well as impact operating
results.
The number of years with open tax audits varies depending on the
tax jurisdiction. The Company’s major taxing jurisdictions
include the United States (including applicable
states).
NEW ACCOUNTING STANDARDS
Recently Issued Accounting Standards
In May 2014, the FASB issued a comprehensive new revenue
recognition standard that will supersede nearly all existing
revenue recognition guidance under U.S. GAAP. The standard’s
core principle (issued as ASU 2014-09 by the FASB), is that a
company will recognize revenue when it transfers promised goods or
services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those
goods or services. These may include identifying performance
obligations in the contract, estimating the amount of variable
consideration to include in the transaction price and allocating
the transaction price to each separate performance obligation. The
new guidance must be adopted using either a full retrospective
approach for all periods presented in the period of adoption or a
modified retrospective approach. In August 2015, the FASB issued
ASU No. 2015-14, which defers the effective date of ASU 2014-09 by
one year, and would allow entities the option to early adopt the
new revenue standard as of the original effective date. This ASU is
effective for public reporting companies for interim and annual
periods beginning after December 15, 2017. The Company is currently
evaluating its adoption method and the impact of the standard on
its consolidated financial statements and has not yet determined
the method by which the Company will adopt the standard in
2018.
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 versus 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
does not expect the new standard to have a material effect on its
consolidated financial statements.
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 other recently
issued accounting pronouncements to have a significant impact on
its financial position, results of operations, or cash
flows.
Results of Operations
Results of Operations for the Three Months Ended October 31, 2017
Compared to Three Months Ended October 31, 2016
Oil Sales
During the three months ended October 31, 2017, the Company
recognized $16,238 in oil and gas sales, compared to $0 for the
three months ended October 31, 2016. The overall increase in
sales of $16,238 is primarily due to the Company commencing
production in Osage County,
Oklahoma. The Company anticipates increasing revenue in subsequent
quarters based on additional discoveries in Kern County, as well as
from the Company’s prospects in Osage County, Oklahoma
following the successful drilling of the Company’s W.
Blackland #1-3 Well and S. Blackland #2-11 Well. Given current oil
and gas prices, however, and the Company’s limited
development budget, management does not anticipate deriving
substantial revenue from existing oil and gas assets in the
short-term; provided, however, in the event oil and gas prices rise
from current levels, or in the event current drilling activity and
re-completions results in additional proven reserves that can be
extracted profitably at current oil and gas prices, management
anticipates the addition of material oil and gas sales, although no
assurances can be given.
Lease Operating Expense
During the three months ended October 31, 2017, lease operating
expense was $39,242, as compared to $8,365 for the three months
ended October 31, 2016. The overall increase in lease operating
expense of $30,877 was primarily attributable to increased activity
in the Company’s drilling activity in Osage County,
Oklahoma.
Impairment of Oil and Gas Assets
The Company assesses all items classified as unproved property on
an annual basis for possible impairment. The Company assesses
properties on an individual basis or as a group if properties are
individually insignificant. The assessment includes consideration
of the following factors, among others: land relinquishment; intent
to drill; remaining lease term; geological and geophysical
evaluations; drilling results and activity; the assignment of
proved reserves; and the economic viability of development if
proved reserves are assigned. Significant changes in these factors
could reduce our estimates of future net proceeds and accordingly
could result in an impairment of our oil and gas assets. During the
three months ended October 31, 2017, the Company reviewed the oil
and gas assets for impairment and recognized an impairment charge
of $241,881.
General and Administrative Expense
General and administrative expense for the three months ended
October 31, 2017 was $483,522, as compared to
$830,071 for
the three months ended October 31, 2016. The decrease was primarily
attributable to decreases in salaries, professional fees and
benefits, and office and administrative expenses. These changes are
outlined below:
|
For the Three Months Ended
|
For the Three Months Ended
|
|
October 31, 2017
|
October 31, 2016
|
Salaries
and benefits
|
$232,216
|
$438,530
|
Professional
fees
|
152,164
|
239,608
|
Office
and administrative
|
99,142
|
151,933
|
Total
|
$483,522
|
$830,071
|
Salaries and benefits include non-cash stock-based compensation of
$179,366 for three months ended October 31, 2017 compared to
$365,260 for the three months ended October 31, 2016. The decrease
in stock-based compensation of $185,894 from the three months ended
October 31, 2017 was due to fewer awards made during the current
period. General and administrative expenses decreased
due to
management’s commitment to substantially reduce expenses in
light of the current challenging oil price
environment.
Interest Income (Expense)
During the three months ended October 31, 2017, the Company
recognized $101,562 of net interest income compared to interest
income of $157,507 for the three months ended October 31, 2016.
During the three months ended October 31, 2017, the Company
recorded interest income $199,211 accrued on the related party
notes receivable. The interest income was offset by $47,238 and
$50,411 which were the accretion of the debt discount and interest
expense, respectively, related to the June 2017 $2.0 million
financing.
Net Gain on Interests in Real Estate Rights
During the three months ended October 31, 2017, the Company
recognized $0 net gain on its interest in real estate rights
compared to $392,665 net gain for the three months ended October
31, 2016. The net gain on interest in real estate rights for the
three months ended October 31, 2017 and 2016 was due to the sale of
zero and one condominium units, respectively, by Fortis, and the
resulting profits which were assigned to MegaWest pursuant to the
Contribution Agreement, less the book value recorded by
MegaWest.
Results of Operations for the Six Months Ended October 31, 2017
Compared to Six Months Ended October 31, 2016
Oil Sales
During the six months ended October 31, 2017, the Company
recognized $25,401 in oil and gas sales compared to $0 for the six
months ended October 31, 2016, consisting of $17,485 in oil sales
and $7,556 in gas sales. The overall increase in
sales of $25,401 is primarily due to the Company commencing
production in Osage County,
Oklahoma. The Company anticipates increasing revenue in subsequent
quarters based on additional discoveries in Kern County, as well as
from the Company’s prospects in Osage County, Oklahoma
following the successful drilling of the Company’s W.
Blackland #1-3 Well and S. Blackland #2-11 Well. Given current oil
and gas prices, however, and the Company’s limited
development budget, management does not anticipate deriving
substantial revenue from existing oil and gas assets in the
short-term; provided, however, in the event oil and gas prices rise
from current levels, or in the event current drilling activity and
re-completions results in additional proven reserves that can be
extracted profitably at current oil and gas prices, management
anticipates the addition of material oil and gas sales, although no
assurances can be given.
Lease Operating Expense
During the six months ended October 31, 2017, lease operating
expense was $57,604, as compared to lease operating expense of
$32,124 for the six months ended October 31, 2016. The overall
increase in lease operating expense of $25,480 was primarily
attributable to increased activity in the Company’s drilling
activity in Osage County, Oklahoma.
General and Administrative Expense
General and administrative expense for the six months ended October
31, 2017 was $1,476,079, as compared to $2,538,212 for the six
months ended October 31, 2016. The decrease was primarily
attributable to decreases in salaries and
benefits, professional fees and office and administrative expenses.
These changes are outlined below:
|
For the Six Months Ended
|
For the Six Months Ended
|
|
October 31, 2017
|
October 31, 2016
|
Salaries
and benefits
|
$810,639
|
$1,653,727
|
Professional
fees
|
419,132
|
531,646
|
Office
and administrative
|
246,308
|
352,839
|
Total
|
$1,476,079
|
$2,538,212
|
Salaries and benefits include non-cash stock-based compensation of
$708,698 for six months ended October 31, 2017 compared to
$1,515,457 for the six months ended October 31, 2016. The decrease
in stock-based compensation of $806,759 from the prior comparable
period was due to fewer awards made during the current period.
General and administrative expenses decreased due to
management’s commitment to substantially reduce expenses in
light of the current challenging oil price
environment.
Interest Income (Expense)
During the six months ended October 31, 2017, the Company
recognized $234,307 of net interest income compared to interest
income of $298,766 for the six months ended October 31, 2016. The
income recorded in the 2017 period was attributable to $393,810 of
interest income accrued on the related party notes receivable,
which was offset by $84,616 and $74,887, the accretion of the debt
discount and interest expense related to the June 2017 $2.0
million.
Net Gain on Interests in Real Estate Rights
During the six months ended October 31, 2017, the Company
recognized $271,490 net gain on its interest in real estate rights
compared to $693,304 for the six months ended October 31, 2016. The
net gain on interest in real estate rights during the six months
ended October 31, 2017 and 2016 was due to the sale of one and
two 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 October 31, 2017, the Company had working capital of
approximately $25.6 million, of which approximately $26.3 million,
$1.2 million, and $1.1 million is attributable to several notes
receivable from a related party, an account receivable from a
related party, and prepaid oil and gas assets,
respectively.
Proceeds from the notes receivable
from Fortis will not be available until the Company has completed
the Redetermination of the fair market value of the Bandolier
Interest, which has not occurred as of December 19,
2017, and is currently due to occur on
December 31, 2017. The Company is seeking an extension of the
Redetermination to allow the Company to complete its initial test
well program on the Bandolier prospect in order to value the
Redetermination. The Company has currently completed one test well
of its nine well test program. 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 entitled to the value of the receivable but will be required to
provide MegaWest with a cash contribution 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 would 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
October 31, 2017, the Company had cash and cash equivalents of
approximately $463,000. The Company’s primary source of
operating funds since inception has been equity and note
financings, as well as through the consummation of the Horizon
Acquisition. While management believes that the current level of
working capital is sufficient to maintain current operations as
well as the planned added operations for the next 12 months,
management intends to raise additional capital through debt and
equity instruments in order to execute its business, operating and
development 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.
Operating Activities
During the six months ended October 31, 2017, operating activities
used cash of $606,201 compared to $1,166,231 used in operating activities
during the six months ended October 31, 2016. The Company incurred a net loss during the six
months ended October 31, 2017 of $1,548,510 as compared to a net
loss of $1,790,003 for the six months ended October 31,
2016. For six months ended
October 31, 2017, the net loss was offset by non-cash items such as
stock-based compensation, depreciation, depletion and accretion of
asset retirement obligation 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 six months ended
October 31, 2016, the loss was offset by non-cash items such as
stock-based compensation, depreciation, depletion and accretion of
asset retirement obligation 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 six months ended October 31, 2017
resulted in cash used of $1,812,166, as compared to cash provided
of $2,202,178 during the six months ended October 31, 2016. During
the six months ended October 31, 2017, the Company invested an
additional $379,418 in Horizon Energy Partners compared to $525,000
in the comparable period in 2016. During the six months ended
October 31, 2017, the Company received proceeds of $1,557,852 from
profits in its real estate rights compared to $3,711,006 for the
six months ended October 31, 2016. During the six months ended
October 31, 2017, the Company incurred $985,243 of expenditures on
oil and gas assets compared to $294,640 for the six months ended
October 31, 2016. During the six months ended October 31, 2017, the
Company executed notes receivable agreements with related parties
resulting in the outlay of $1,558,501 compared to $3,742,803 during
the period ended October 31, 2016. During the six months ended
October 31, 2016, the Company received cash of $3,364,817 upon the
execution of the Horizon transaction.
Financing Activities
Financing activities during the six months ended October 31, 2017
resulted in cash provided of $2,250,00, as compared to
$176,000 during the six months
ended October 31, 2016. The increase was due to the issuance of
a $2.0 million note payable and
$250,000 of advances from a related party during the current
period.
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
|
October 31,
2017
|
October 31,
2016
|
Common
shares
|
15,843,066
|
15,827,921
|
Stock
options
|
2,529,682
|
2,507,182
|
Stock
purchase warrants
|
973,669
|
133,333
|
|
19,346,417
|
18,468,436
|
Off-Balance Sheet Arrangements
None.
ITEM 3. QUANTITATIVE
AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 4. CONTROLS AND
PROCEDURES
A. Material Weaknesses
As discussed in Item 9A of our Annual Report on Form 10-K for the
fiscal year ended April 30, 2017, we identified material weaknesses
in the design and operation of our internal controls. The material
weaknesses are due to the limited number of employees, which
impacts our ability to conduct a thorough internal review, and the
Company’s reliance on external accounting personnel to
prepare financial statements.
To remediate the material weakness, the Company is developing a
plan to design and implement the operation of our internal
controls. Upon the Company obtaining additional capital, the
Company intends to hire additional accounting staff, and operations
and administrative executives in the future to address its material
weaknesses.
We will continue to monitor and assess our remediation initiatives
to ensure that the aforementioned material weaknesses are
remediated.
B. Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures and
internal controls designed to ensure that information required to
be disclosed in the Company’s filings under the Securities
Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms. The
Company’s management, with the participation of its principal
executive and principal financial officers, has evaluated the
effectiveness of the Company’s disclosure controls and
procedures as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based upon that evaluation and solely due to
the unremediated material weaknesses described above, the
Company’s principal executive and financial officers have
concluded that such disclosure controls and procedures were not
effective for the purpose for which they were designed as of the
end of such period. As a result of this conclusion, the financial
statements for the period covered by this report were prepared with
particular attention to the unremediated material weaknesses
previously disclosed. Accordingly, management believes that the
consolidated financial statements included in this report fairly
present, in all material respects, the Company’s financial
condition, results of operations and cash flows as of and for the
periods presented, in accordance with U.S. GAAP, notwithstanding
the unremediated weaknesses.
C. Changes in Internal Control over Financial
Reporting
There was no change in the Company’s internal control over
financial reporting that was identified in connection with such
evaluation that occurred during the period covered by this
Quarterly Report on Form 10-Q that has materially affected, or is
reasonably likely to materially affect, the Company’s
internal control over financial reporting.
PART II - OTHER
INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
(a) In January 2010, the Company experienced a flood in its Calgary
office premises as a result of a broken water pipe. There was
significant damage to the premises rendering them unusable until
the landlord had completed remediation. Pursuant to the lease
contract, the Company asserted that rent should be abated during
the remediation process and accordingly, the Company did not pay
any rent after December 2009. During the remediation process, the
Company engaged an independent environmental testing company to
test for air quality and for the existence of other potentially
hazardous conditions. The testing revealed the existence of
potentially hazardous mold and the consultant provided specific
written instructions for the effective remediation of the premises.
During the remediation process, the landlord did not follow the
consultant’s instructions and correct the potentially
hazardous mold situation and subsequently in June 2010 gave notice
and declared the premises to be ready for occupancy. The Company
re-engaged the consultant to re-test the premises and the testing
results again revealed the presence of potentially hazardous mold.
The Company determined that the premises were not fit for
re-occupancy and considered the landlord to be in default of the
lease. The Landlord subsequently terminated the lease.
On January 30, 2014, the landlord filed a Statement of Claim
against the Company for rental arrears in the amount aggregating
CAD $759,000 (approximately USD $592,000 as of October 31, 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 $518,000 as of October 31, 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.
ITEM 1A. RISK FACTORS
Our results of operations and financial condition are subject to
numerous risks and uncertainties described in our Annual Report on
Form 10-K for our fiscal year ended April 30, 2017, filed on July
31, 2017. You should carefully consider these risk factors in
conjunction with the other information contained in this Quarterly
Report. Should any of these risks materialize, our business,
financial condition and future prospects could be negatively
impacted. As of October 31, 2017, there have been no material
changes to the disclosures made in the above-referenced Form
10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER
INFORMATION.
(a) There is no information required to be disclosed on Form 8-K
during the period covered by this Form 10-Q that was not so
reported.
(b) There were no material changes to the procedures by which
security holders may recommend nominees to the registrant’s
Board of Directors during the quarter ended October 31,
2017.
ITEM 6. EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
(a) Financial Statements.
Our financial statements as set forth in the Index to Financial
Statements attached hereto commencing on page F-1 are hereby
incorporated by reference.
(b) Exhibits.
The following exhibits, which are numbered in accordance with Item
601 of Regulation S-K, are filed herewith or, as noted,
incorporated by reference herein:
Exhibit
Number
|
|
Exhibit Description
|
31.1*
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
31.2*
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
32.1*
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
32.2*
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
101.INS*
|
|
XBRL Instance Document
|
101.SCH*
|
|
XBRL Taxonomy Extension Schema Document
|
101.CAL*
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
101.DEF*
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
101.LAB*
|
|
XBRL Taxonomy Extension Labels Linkbase Document
|
101.PRE*
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
*
|
Filed herewith.
|
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
PETRO RIVER OIL CORP.
|
|
|
|
|
|
By:
|
/s/ Scot Cohen
|
|
Name:
|
Scot Cohen
|
|
Title:
|
Executive Chairman
|
|
|
|
|
By:
|
/s/ David Briones
|
|
Name:
|
David Briones
|
|
Title
|
Chief Financial Officer
|
Date: December 19, 2017
|
|
|
|
|
|
-34-