Blueprint
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended April 30, 2018
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-49760
Petro River Oil Corp.
(Exact
name of registrant as specified in its charter)
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Delaware
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98-0611188
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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55
5th Avenue,
Suite 1702, New York, NY 10003
(Address
of Principal Executive Offices, Zip Code)
(469)
828-3900
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $0.00001 par
value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No
[X]
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes
[ ] No [X]
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post
such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definition of “large accelerated
filer,” “large accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
|
Large
accelerated filer [ ]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ ]
|
Smaller
reporting company [X]
Emerging
growth company [ ]
|
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No
[X]
[As of
October 31, 2017, the aggregate market value of the
registrant’s common stock held by non-affiliates was
$24,865,911, based on the closing bid price of $1.85 per share on
October 31, 2017, as reported on OTC Pink
Marketplace.]
Indicate
the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable
date.
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Class
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Outstanding
at July 25, 2018
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Common
Stock, $0.00001 par value per share
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17,569,809
shares
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38
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Item
16.
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Form
10-K Summary
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41
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F-1
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FORWARD-LOOKING STATEMENTS
This
report, including information included in future filings by us with
the Securities and Exchange Commission (the “SEC”), as well as
information contained in written material, press releases and oral
statements issued by us or on our behalf, contain, or may contain,
certain statements that are “forward-looking
statements” within the meaning of federal securities laws
that are subject to a number of risks and uncertainties, many of
which are beyond our control. This report modifies and supersedes
documents filed by us before this report. In addition, certain
information that we file with the SEC in the future will
automatically update and supersede information contained in this
report. All statements, other than statements of historical fact,
included in this report regarding our strategy, future operations,
financial position, estimated revenues and losses, projected costs,
prospects, plans and objectives of management are forward-looking
statements. When used in this report, the words
“could,” “believe,”
“anticipate,” “intend,”
“estimate,” “expect,”
“project,” “will” and similar expressions
are intended to identify forward-looking statements, although not
all forward-looking statements contain such identifying
words.
Forward-looking
statements may include statements about our business strategy,
reserves, technology, financial strategy, oil and natural gas
realized prices, timing and amount of future production of oil and
natural gas, the amount, nature and timing of capital expenditures,
drilling of wells, competition and government regulations,
marketing of oil and natural gas, property acquisitions, costs of
developing our properties and conducting other operations, general
economic conditions, uncertainty regarding our future operating
results and plans, objectives, expectations and intentions
contained in this report that are not historical.
All
forward-looking statements speak only as of the date of this
report, and, except as required by law, we do not intend to update
any of these forward-looking statements to reflect changes in
events or circumstances that arise after the date of this report.
You should not place undue reliance on these forward-looking
statements. Although we believe that our plans, intentions and
expectations reflected in or suggested by the forward-looking
statements we make in this report are reasonable, we can give no
assurance that these plans, intentions or expectations will be
achieved. We disclose important factors that could cause our actual
results to differ materially from our expectations under
“Risk Factors”
and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and elsewhere in this report. These
cautionary statements qualify all forward-looking statements
attributable to us or persons acting on our behalf.
ITEM 1. BUSINESS
Business Overview
Petro River Oil Corp. (the “Company”) is an independent energy company focused
on the exploration and development of conventional oil and gas
assets with low discovery and development costs, utilizing modern
technology. 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
entering 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, including in Osage County and Kay County, Oklahoma.
Following the acquisition of Horizon I Investments, LLC
(“Horizon
Investments”), the
Company has additional exposure to a portfolio of 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 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. 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 prospects in Oklahoma are owned directly by the
Company and indirectly through Spyglass Energy Group, LLC
(“Spyglass”), a wholly owned subsidiary of Bandolier
Energy, LLC (“Bandolier”). As a result of the Exchange Transaction
consummated on January 31, 2018, as discussed below, Bandolier is
wholly-owned by the Company. Bandolier has a 75% working interest
in the 87,754-acre concession in Osage County, Oklahoma. The
remaining 25% working interest is held by the operator, Performance
Energy, LLC.
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 continue drilling additional wells on our
existing concessions, and to acquire additional 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
Recent Oil Discoveries.
On
July 24, 2018, the Company announced the discovery of its largest
oil field to date with the Company’s successful drilling of
the Arsaga 25-2 exploration well, located on its concession in
Osage County, Oklahoma. The well was spud on July 9, 2018, and was
drilled to a depth of approximately 2,750 feet. Preliminary results
indicate 30 feet of productive Mississippian Chat formation. The
Arsaga Field spans approximately 2,000 acres, with up to 100 well
locations.
On May 22, 2018, the Company announced the discovery of a new oil
field, the N. Blackland Field, in its concession in Osage County,
Oklahoma upon successfully testing of the 2-34 exploration well
(the “2-34”). The 2-34 was drilled to a depth of
approximately 2,850 feet, and initial results indicate both
Mississippian Chat and Burges formations were discovered and have
been comingled to increase production rates. The N. Blackland Field
is approximately 200 acres, and the Company expects to drill an
additional eight to ten wells to develop the structure. This
structure was identified using 3-D seismic technology. This
development project is anticipated to result in production revenue
prior to the end of the current fiscal year.
In May 2017, Bandolier discovered two new 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, which were successfully completed
in April 2018. The Company has received additional permits, and is
currently in the process of drilling an additional two wells. Our
W. Blackland concessions are currently producing, and, with the
drilling of additional wells, we anticipate substantially
increasing revenue throughout the remainder of the current fiscal
year.
In addition to our current development plans, within our current
3-D seismic data, additional structures in Osage County have been
identified. The Company plans
to drill 13 additional wells in calendar year 2018: nine in the N.
Blackland Field, three in the Arsaga structure and one in the
Section 13 structure. The
Company anticipates drilling these wells out of cash flows from
current production of its existing wells.
Working Interest Exchange.
On February 14, 2018, the Company entered into a Purchase and
Exchange Agreement with Red Fork Resources
(“Red
Fork”), pursuant to which
(i) the Company agreed to convey to Mountain View Resources, LLC,
an affiliate of Red Fork, 100% of its 13.7% working interest in and
to an area of mutual interest (“AMI”) in the Mountain View Project in Kern
County, California, and (ii) Red Fork agreed to convey to the
Company 64.7% of its 85% working interest in and to an AMI situated
in Kay County, Oklahoma (the “Red Fork Exchange”). The fair value of the assets acquired
was $108,333 as of the date of the agreement. Following the Red
Fork Exchange, the Company and Red Fork each retained a 2%
overriding royalty interest in the projects that they respectively
conveyed. Under the terms of the Agreement, all revenues and costs,
expenses, obligations and liabilities earned or incurred prior to
January 1, 2018 (the “Effective
Date”) shall be borne by
the original owners of such working interests, and all of such
costs, expenses, obligations and liabilities that occur subsequent
to the Effective Date shall be borne by the new owners of such
working interests.
The acquisition of the additional concessions in Kay County,
Oklahoma added additional prospect locations adjacent to the
Company’s 87,754-acre concession in Osage County, Oklahoma.
The similarity of the prospects in Kay and Kern County allows for
the leverage of assets, infrastructure and technical
expertise.
MegaWest Exchange Transaction.
On January 31, 2018, the Company entered into an Assignment and
Assumption of Membership Interest with MegaWest Energy
Kansas Corp. (“MegaWest”) (the “Assignment
Agreement”), whereby the
Company transferred its interest in MegaWest in exchange for a 50%
membership interest in Bandolier Energy LLC (“Bandolier”) (the “Bandolier
Interest”) then held by
MegaWest (the “Exchange
Transaction”), as a
result of the Bandolier Acquisition, as defined below. The Exchange
Transaction followed the receipt by the Company of a notice of
Redetermination, as defined below, of MegaWest’s assets,
including MegaWest’s interest in the Bandolier Interests
(together, “MegaWest
Assets”), conducted
by Fortis Property Group, LLC, a Delaware limited liability
company (“Fortis”).
The Redetermination was conducted pursuant to the Contribution
Agreement, pursuant to which the Board of MegaWest was entitled to
engage a qualified appraiser to determine the value of the MegaWest
Assets and Bandolier Interests, and upon the completion thereof
(a “Redetermination”),
in the event the MegaWest Assets were determined to be less than
$40.0 million, then a Shortfall, as defined in the
Contribution Agreement, exists. As a result, the Company would
be required to make cash contributions to MegaWest in an amount
equal to the amount of the Shortfall
(the “Shortfall Capital
Contribution”). The
Contribution Agreement further provided that, in the event that the
Company was unable to deliver to MegaWest the Shortfall Capital
Contribution required after the Redetermination, if any, MegaWest
would have the right to exercise certain remedies, including a
right to foreclose on the Company’s entire interest in
MegaWest. In the event of foreclosure, the Bandolier Interest
would revert back to the Company.
In lieu of engaging a qualified appraiser to quantify the Shortfall
Capital Contribution, and in lieu of requiring MegaWest to exercise
its remedies under the terms of the Contribution Agreement, the
Company and MegaWest entered into the Exchange Transaction. As
a result, the Company has no further rights or interest in
MegaWest, and MegaWest has no further rights or interest in any
assets associated with the Bandolier Interests. Pursuant to
the Contribution Agreement and Assignment Agreement, the Company
continues to be responsible for a reimbursement payment to MegaWest
in the amount of $259,313, together with interest accrued thereon
at an annual rate 10%, which will be due and payable one year after
the date of the Assignment Agreement and has been included as a
payable since January 31, 2018. As a result of the
Redetermination, the Company recorded a loss on redetermination of
$11,914,204 reflecting the write-off of the related assets,
liabilities and non-controlling interests of Fortis.
At the time the parties entered into the Contribution Agreement,
management anticipated that the market price for crude oil would
return to prices reached prior to 2015, and that additional wells
would be drilled, resulting in greater revenue from the Bandolier
Interests. Subsequent to the execution of the Contribution
Agreement, only two wells had been drilled as of January 2018. That
fact, together with the relatively low price of crude oil and the
anticipated delays in drilling additional wells to demonstrate the
value of the Bandolier Interests, contributed to Fortis’
election to terminate the Contribution Agreement at the end of its
term, as amended. Had the market price of oil supported the value
of developing the Bandolier oil and gas properties at that time,
under the terms of the Contribution Agreement, Fortis would have
been required to fund the planned drilling program.
Recent Financings.
On September 20, 2017, the Company entered into a Securities
Purchase Agreement 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, 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 (the
“Existing Osage County
Override”). The Existing
Osage County Override was an existing override that was acquired by
the Company from Scot Cohen. The note accrues interest at a rate of
10% per annum and matures on June 30, 2020.
Scott Cohen, a member of the Company’s Board of
Directors and a substantial stockholder of the Company,
owns or controls 31.25% of Funding
Corp. I and 41.20% of Funding Corp. II.
On June 13, 2017, the Company entered into a Securities Purchase
Agreement with Petro Exploration Funding, LLC (“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 (the
“June Note
Financing”), in the principal amount of $2.0 million.
As additional consideration for the June Note Financing, the
Company issued to Funding Corp. I (i) a warrant to purchase 840,336
shares of the Company’s common stock, and (ii) an overriding
royalty interest equal to 2% in all production from the
Company’s interest in the Company’s concessions located
in Osage County, Oklahoma, currently held by Spyglass, pursuant to
an Assignment of Overriding Royalty Interests. The note accrues interest at a rate of 10% per
annum and matures on June 30,
2020.
Scot
Cohen owns or controls 31.25% of Funding Corp. I.
On June 18, 2018, Bandolier Energy,
LLC, a wholly owned subsidiary of the Company, entered into a
Loan Agreement with Scot Cohen, the Executive Chairman of the
Company (the “Cohen Loan
Agreement”), pursuant to
which Scot Cohen loaned the Company $300,000 at a 10% annual
interest rate due September 30, 2018. The Cohen Loan Agreement was
to provide the Company with short term financing in connection with
the Company’s drilling program in Osage County,
Oklahoma.
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”). Pursuant to the Membership Interest
Assignment, the Company issued 1,466,667 shares of its common
stock, with a fair value of $1.75 per share, to Pearsonia in
exchange for all the membership interests in Bandolier held by
Pearsonia. As result of this transaction, the Company wrote-off the
non-controlling interest in Bandolier totaling $785,298 and
recorded a loss of $3,351,965.
Our Objective
Our
primary objective is to enhance shareholder value by increasing our
net asset value, net reserves and cash flow through development,
exploitation, exploration, and acquisition of oil and gas
properties.
Our Strategy
We
intend to follow a balanced risk strategy by allocating capital
expenditures to a combination of lower risk development and high
potential exploration prospects. Key elements of our business
strategy include the following:
Develop and exploit our existing oil and natural gas
properties. Our principal growth strategy has been to
explore, develop and exploit our acquired and leased properties to
add proven reserves.
Pursue selective acquisitions. The Company has acquired
leasehold positions that it believes contain substantial resource
potential and meet its targeted returns on invested capital.
Management intends to continue to pursue strategic acquisitions
that meet the Company’s operational and financial targets. We
seek to acquire developed and undeveloped oil and gas properties
that will provide us with additional development and exploratory
prospect opportunities. We may also acquire a working interest in
one or more prospects from others and participate with the other
working interest owners in drilling and, if warranted, completing
oil or gas wells on a prospect. We may purchase producing oil or
gas properties.
Use the latest 3-D seismic technology to maximize returns.
Technical advances in imaging and modeling can lower risk and
enhance productivity. The Company intends to utilize 3-D seismic
and other technological advancements that benefit its exploratory
and developmental drilling program.
Plan of Operation
The
Company is currently engaged in oil and natural gas acquisition,
exploration, development and production, with activities
principally in Oklahoma in the United States, and Northern Ireland,
Denmark and the U.K. in Western Europe. We focus on developing our
existing properties, while continuing to pursue acquisitions of oil
and gas properties with upside potential.
The
Company intends to grow its resources and production through
exploration activities and development of identified potential
drilling locations, and through acquisitions that meet the
Company’s strategic and financial objectives. Our plan
includes:
Leveraging our management experience. The Company’s
executive team, along with Horizon Energy, the Company’s
operating partner, has extensive and proven experience in the oil
and gas industry. We believe that the experience of our executive
team will help reduce the time and cost associated with drilling
and completing exploration and development of our conventional
assets and potentially increasing recovery. Collectively, our
management team and engineering professionals identify and evaluate
acquisition opportunities, negotiate and close purchases and manage
acquired properties.
Leveraging our established business relationships. Our
executive team, along with Horizon Energy, has many relationships
with operators and service providers in our core asset regions. We
believe that leveraging our relationships will provide us with a
competitive advantage in developing our acreage and identifying
acquisition targets.
De-risking our acreage position and build a vertical drilling
program. The Company has identified a multi-year inventory
of potential drilling locations that will drive reserves and
production growth and provide attractive return opportunities. The
Company views its Osage County, Kay County and Horizon Energy
projects as de-risked because of the significant production history
in the areas and well-established industry activity surrounding the
acreage.
Partnership with Horizon Energy. Following the acquisition
of Horizon Investments, the Company has an indirect interest,
through Horizon Investment’s 20% ownership in Horizon Energy,
in a portfolio of several domestic and international oil and gas
assets consisting of highly prospective conventional plays
diversified across project type, geographic location and risk
profile, as well as access to a broad network of industry
leaders.
Competitive Strengths
Financial flexibility. Our capital structure and high degree
of operational control continue to provide us with significant
financial flexibility. Other than recent financings with related
parties as discussed above, we have no corporate debt in our
capital structure, enabling us to make capital decisions with no
restrictions imposed by debt covenants, lender oversight and/or
mandatory repayment schedules. Additionally, in concert with our
partner, Horizon Energy, we control the majority of our anticipated
future net drilling locations, including the timing and selection
of drilling locations as well as completion schedules. This allows
us to modify our capital spending program depending on financial
resources, leasehold requirements and market
conditions.
Management experience. Our key management team possesses an
average of over thirty years of experience in oil and gas
exploration and production in multiple resource plays, including
exploration and production in the Company’s core regions of
Osage, Oklahoma, Kay County, Oklahoma, and the North
Sea.
Cost-efficient operators. In the past, our management team
has shown an ability to drill wells in a cost-efficient way and to
successfully integrate acquired assets without incurring
significant increases in overhead.
History
The
Company was originally incorporated under the Company Act (British
Columbia) on February 8, 2000 under the name Brockton Capital Corp.
We then changed our name to MegaWest Energy Corp. effective
February 27, 2010, before changing it to Gravis Oil Corp. on June
20, 2011. On September 11, 2012, we re-organized under the laws of
the State of Delaware as a corporation organized under the Delaware
General Corporation Law. Prior to September 11, 2012, and at
April 30, 2012, we were organized under the laws of Alberta,
Canada.
Petro
River Oil LLC (“Petro”), an indirect subsidiary
of the Company, and wholly owned subsidiary of MegaWest, was formed
under the laws of the State of Delaware on March 3, 2011. Through
proceeds received from the issuance of various promissory notes, on
February 1, 2012, Petro purchased various interests in oil and gas
leases, wells, records, data and related personal property located
along the play in the state of Kansas (“Mississippi
Assets”). Effective December 23, 2015, Petro
divested the Mississippi Assets. In connection with the
divestiture, the assignee and purchaser of the Mississippi Assets
agreed to pay outstanding liabilities, including unpaid taxes, and
assume certain responsibilities to plug any abandoned wells. No
cash consideration was paid for the interests.
Share Exchange.
On
April 23, 2013, the Company executed and consummated a securities
purchase agreement by and among the Company, Petro, and certain
investors in Petro (the “Investors”), namely, the holders
of outstanding secured promissory notes of Petro (the
“Notes”), and
those holding membership interests in Petro (the
“Membership
Interests,” and, together with the Notes, the
“Acquired
Securities”) sold by Petro (the “Share Exchange”). In the Share
Exchange, the Investors exchanged their Acquired Securities for
591,021,011 newly issued shares of the Company’s common stock
(2,955,105 shares of common stock based on the December 2015
reverse stock split – see “Reverse Stock Split”
below). Upon completion of the Share Exchange, Petro became a
wholly owned subsidiary of the Company.
As a
result of the Share Exchange, the Company acquired 100% of the
membership units of Petro and consequently, control of
Petro’s business and operations. Under generally accepted
accounting principles in the United States (“U.S. GAAP”), because
Petro’s former members and note holders held 80% of the
issued and outstanding shares of the Company as a result of the
Share Exchange, Petro was deemed the accounting acquirer while the
Company remains the legal acquirer. Petro adopted the fiscal year
of the Company. Prior to the Share Exchange, all historical
financial statements presented are those of Petro. The equity of
the Company is the historical equity of Petro, restated to reflect
the number of shares issued by the Company in the
transaction.
Acquisition of Interest in Bandolier Energy LLC.
On May
30, 2014, the Company entered into a Subscription Agreement
pursuant to which the Company was issued a 50% interest in
Bandolier in exchange for a capital contribution of $5.0 million
(the “Bandolier
Acquisition”). In connection with the Bandolier
Acquisition, the Company had the right to appoint a majority of the
board of managers of Bandolier. The Company’s Executive
Chairman was a manager of, and owned a 20% membership interest in,
Pearsonia West Investment Group, LLC (“Pearsonia West”), a special
purpose vehicle formed for the purpose of investing in Bandolier
with the Company and Ranger Station, LLC (“Ranger Station”). Concurrent with
the Bandolier Acquisition, Pearsonia West was issued a 44% interest
in Bandolier for cash consideration of $4.4 million, and Ranger
Station was issued a 6% interest in Bandolier for cash
consideration of $600,000. In connection with Pearsonia
West’s investment in Bandolier, the Company and Pearsonia
West entered into an agreement, dated May 30, 2014, granting
the members of Pearsonia West an option, exercisable at any time
prior to May 30, 2017, to exchange their pro rata share of the
Bandolier membership interests for shares of the Company’s
common stock, at a price of $0.08 per share, subject to adjustment
(the “Option”).
The Option, if fully exercised, would result in the Company issuing
55,000,000 shares of its common stock (275,000 shares of common
stock at a price of $16 per share based on the December 2015
reverse stock split – see “Reverse Stock Split”
below), or 6% to the members of Pearsonia West.
Until
the execution of the Contribution Agreement, described below, the
Company had operational control along with a 50% ownership interest
in Bandolier. As a result, the Company consolidated Bandolier. The
remaining 50% non-controlling interest represented the equity
investment from Pearsonia West and Ranger Station. The Company
allocated the proportionate share of the net operating income/loss
to both the Company and the non-controlling interest.
Subsequent
to the initial capitalization of Bandolier, Bandolier acquired, for
$8,712,893 less a $407,161 claw back, all of the issued and
outstanding equity of Spyglass, the owner of oil and gas leases,
leaseholds, lands, and options and concessions thereto located in
Osage County, Oklahoma. Spyglass controlled a significant
contiguous oil and gas acreage position in Northeastern Oklahoma,
consisting of 87,754 acres, with substantial original oil in place,
stacked reservoirs, as well as exploratory and development
opportunities that could be accessed through both horizontal and
vertical drilling. Significant infrastructure was already in place
including 32 square miles of 3-D seismic, 3 phase power, a
dedicated sub-station as well as multiple oil producing horizontal
wells.
The
Company recorded the purchase of Spyglass by Bandolier using the
acquisition method of accounting as specified in ASC 805 “Business Combinations.” This
method of accounting requires the acquirer to (i) record purchase
consideration issued to sellers in a business combination at fair
value on the date control is obtained, (ii) determine the fair
value of any non-controlling interest, and (iii) allocate the
purchase consideration to all tangible and intangible assets
acquired and liabilities assumed based on their acquisition date
fair values. Further, the Company commenced reporting the results
of Spyglass on a consolidated basis with those of the Company
effective upon the date of the
acquisition.
Acquisition and Dilution of Horizon Investments.
On December 1, 2015, the Company entered into a conditional
purchase agreement with Horizon Investments (as amended, the
“Purchase
Agreement”), pursuant to which the
Company acquired, on May 3, 2016, (i) a 20% membership interest in
Horizon Energy; (ii) three
promissory notes issued by the Company to Horizon Investments in
the aggregate principal amount of $1.6 million (the “Horizon
Notes”);
(iii) approximately $690,000 held in escrow pending closing under
the Purchase Agreement (the “Closing
Proceeds”); and (iv) certain bank,
investment and other accounts maintained by Horizon Investments, in
an amount which, together with the principal amount of the Horizon
Note and the Closing Proceeds, totaled not less than $5.0 million
(collectively, the “Purchased
Assets”). The consideration for
the Purchased Assets was 11,564,249 shares of the Company's
common stock, $0.00001 par value
(“Common
Stock”), which shares were issued to
Horizon Investments at closing.
On
February 2, 2018, Horizon Investments received from Horizon Energy
a capital call in the amount of $600,227. Horizon Investments did
not have the required funds to fund the capital call. The capital
call was not mandatory and the consequence of Horizon
Investments’ failure to fund the capital call was a dilution
in Horizon Investments’ interest in Horizon Energy by 27.43%,
therefore reducing Horizon Investments’ interest in Horizon
Energy from 20.01% to 14.52%. Scot Cohen, a member of the
Company’s Board of Directors, a substantial stockholder, and
a member of Horizon Energy, participated with other Horizon Energy
members to make the requested capital call in light of Horizon
Investment’s inability to make the requested capital call.
The determination not to make the requested capital call, and
therefore allow Mr. Cohen to increase his membership interest in
Horizon Energy, was discussed and approved by the independent
members of the Company’s Board of Directors.
Competition
We operate in a highly competitive environment. We compete with
major and independent oil and natural gas companies, many of whom
have financial and other resources substantially in excess of those
available to us. These competitors may be better positioned to take
advantage of industry opportunities and to withstand changes
affecting the industry, such as fluctuations in oil and natural gas
prices and production, the availability of alternative energy
sources and the application of government regulation.
Compliance with Government Regulation
The
availability of a ready market for future oil and gas production
from possible U.S. assets depends upon numerous factors beyond our
control. These factors may include, amongst others, regulation of
oil and natural gas production, regulations governing environmental
quality and pollution control, and the effects of regulation on the
amount of oil and natural gas available for sale, the availability
of adequate pipeline and other transportation and processing
facilities and the marketing of competitive fuels. These
regulations generally are intended to prevent waste of oil and
natural gas and control contamination of the
environment.
We
expect that our sales of crude oil and other hydrocarbon liquids
from our future U.S.-based production will not be regulated and
will be made at market prices. However, the price we would receive
from the sale of these products may be affected by the cost of
transporting the products to market via pipeline.
Environmental Regulations
Our U.S. assets are subject to numerous laws and regulations
governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and
regulations may require the acquisition of a permit before drilling
commences; restrict the types, quantities and concentration of
various substances that can be released into the environment in
connection with drilling and production activities; limit or
prohibit drilling activities on certain lands within wilderness,
wetlands and other protected areas; require remedial measures to
mitigate pollution from former operations, such as pit closure and
plugging abandoned wells; and impose substantial liabilities for
pollution resulting from production and drilling operations. Public
interest in the protection of the environment has increased
dramatically in recent years. The worldwide trend of more expansive
and stricter environmental legislation and regulations applied to
the oil and natural gas industry could continue, resulting in
increased costs of doing business and consequently affecting
profitability. To the extent laws are enacted or other governmental
action is taken that restricts drilling or imposes more stringent
and costly waste handling, disposal and cleanup requirements, our
business and prospects could be adversely affected.
Operating Hazards and Insurance
The oil
and natural gas business involves a variety of operating hazards
and risks such as well blowouts, craterings, pipe failures, casing
collapse, explosions, uncontrollable flows of oil, natural gas or
well fluids, fires, formations with abnormal pressures, pipeline
ruptures or spills, pollution, releases of toxic gas and other
environmental hazards and risks. These hazards and risks could
result in substantial losses to us from, among other things, injury
or loss of life, severe damage to or destruction of property,
natural resources and equipment, pollution or other environmental
damage, clean-up responsibilities, regulatory investigation and
penalties and suspension of operations.
In
accordance with customary industry practices, we expect to maintain
insurance against some, but not all, of such risks and losses.
There can be no assurance that any insurance we obtain would be
adequate to cover any losses or liabilities. We cannot predict the
continued availability of insurance or the availability of
insurance at premium levels that justify its purchase. The
occurrence of a significant event not fully insured or indemnified
against could materially and adversely affect our financial
condition and operations.
Pollution
and environmental risks generally are not fully insurable. The
occurrence of an event not fully covered by insurance could have a
material adverse effect on our future financial condition. If we
were unable to obtain adequate insurance, we could be forced to
participate in all of our activities on a non-operated basis, which
would limit our ability to control the risks associated with oil
and natural gas operations.
Research and Development
On December 12, 2013, we formed Petro Spring, LLC, a wholly owned
subsidiary (“Petro
Spring”), to
focus on technology solutions related to the oil and gas
industry. During the year ended April 30, 2015, Petro Spring
I, LLC, a Delaware limited liability company wholly owned by Petro
Spring (“Petro Spring
I”),
entered into a definitive asset purchase agreement
(“Havelide Purchase
Agreement”) to purchase substantially all of the
assets of Havelide GTL LLC (“Havelide”) and Coalthane Tech LLC
(“Coalthane”),
consisting of certain patents and other intellectual property,
trade secrets, and assets developed and owned by Havelide to
produce a gasoline-like liquid and high-purity hydrogen from
natural gas, at low temperature and at low pressure (the
“Havelide
Assets”) and consisting of certain patents and other
intellectual property, trade secrets, and assets developed and
owned by Coalthane to reduce the methane from coal mines and other
wells (the “Coalthane
Assets”). The purchase of the Coalthane and
Havelide Assets was consummated on February 27, 2015. The
acquisitions reflected the Company’s desire to diversify the
Company’s business amid the challenging oil price environment
that existed at that time.
As of April 30, 2016, the Company did not have adequate capital to
fund additional development of the intangibles and, therefore, the
Company has been unable to identify near-term
opportunities to commercialize the technology. As of April 30,
2016, the Company performed an impairment assessment on the
intangible assets and recognized an impairment charge of
$2,082,941, and it does not intend to expend any additional amounts
to develop the Havelide Assets or Coalthane Assets at this
time.
Employees
At
April 30, 2018, we employed four full-time employees and two
part-time employees. We also retained several consultants to
provide both operational, investor relations and marketing
support.
Geographical Area of the Company’s Business
The
principal market that we compete in is the North American and
Western Europe. The Company is currently contemplating expansion
into additional international energy markets.
You
should carefully consider the following risk factors, in addition
to the other information set forth in this Report, in connection
with any investment decision regarding shares of our common stock.
Each of these risk factors could adversely affect our business,
operating results and financial condition, as well as adversely
affect the value of an investment in our common stock. Some
information in this Report may contain
“forward-looking” statements that discuss future
expectations of our financial condition and results of operation.
The risk factors noted in this section and other factors could
cause our actual results to differ materially from those contained
in any forward-looking statements.
Risks Relating to Our Business
Our results of operations as well as the carrying value of our oil
and gas properties are substantially dependent upon the prices of
oil and natural gas. In the event the prices for oil and natural
gas decrease, our results of operations could be adversely
affected, and our ability to continue our planned development and
acquisition activities could be substantially
curtailed.
Currently, our costs to maintain our unproved properties include
non-producing leasehold, geological and geophysical costs
associated with leasehold or drilling interests and in process
exploration drilling costs. In the future, our results of
operations and the ceiling on the carrying value of our oil and gas
properties will be dependent on the estimated present value of
proved reserves, which depends on the prevailing prices for oil and
gas. Various factors beyond our control affect prices of oil and
natural gas, including political and economic conditions; worldwide
and domestic supplies of and demand for oil and gas; weather
conditions; the ability of the members of the Organization of
Petroleum Exporting Countries (“OPEC”)
to agree on and maintain price and production controls; political
instability or armed conflict in oil-producing regions; the price
of foreign imports; the level of consumer demand; the price and
availability of alternative fuels; and changes in existing federal
and state regulations. In the event oil and gas prices fall from
current levels, our operations and financial condition could be
materially and adversely affected, and the level of development and
exploration expenditures could be substantially
curtailed. These conditions could ultimately result in a
reduction in the carrying value of our oil and gas properties. A
decline in prices for oil and gas would also likely cause a
reduction in the amount of any reserves and, in turn, in the amount
that we might be able to borrow to fund development and acquisition
activities.
We own certain assets unrelated to our traditional oil and gas
properties. The acquired technologies are in development
stage, have not been proven, and require additional capital to
develop. We may not be able to successfully
raise sufficient capital or otherwise successfully develop
these technology assets.
In 2015 we purchased certain assets to produce
gasoline-like liquid and high-purity hydrogen from natural gas, at
low temperature and at low pressure, as well as to reduce the
methane from coal mines and other wells. The purchased assets
require additional capital or a strategic partner in order to
develop. Management currently intends to defer development of these
assets while it focuses on its drilling activities. No assurances
can be given that the Company will be able to successfully raise
sufficient capital to develop the assets, or otherwise find a
strategic or development partner to develop the same. In
addition, the purchased assets are in the development stage and are
unproven, and no assurances can be given that we will be able to
commercialize the assets.
We have a limited operating history and if we are not successful in
continuing to grow our business, then we may have to scale back or
even cease our ongoing business operations.
We have
received a limited amount of revenues from operations and have
limited assets. To date, we have acquired certain interests in oil
and gas properties, but have only recently developed and commenced
production of wells drilled on those properties. Furthermore,
although we have recently announced additional oil field
discoveries with the potential to generate commercial revenues,
there can be no assurance that they will yield significant
production. We have a limited operating history. Our success is
significantly dependent on a successful acquisition, drilling,
completion and production program. Our operations will be subject
to all the risks inherent in the establishment of a developing
enterprise and the uncertainties arising from the absence of a
significant operating history. We may be unable to locate
additional recoverable reserves or operate on a profitable basis.
Since we are principally in the exploration stage, with minimal
development and production activities, potential investors should
be aware of the difficulties normally encountered by enterprises in
the exploration stage. If our business plan is not successful, and
we are not able to operate profitably, investors may lose some or
all of their investment.
Because we are small and have a limited amount of capital, we may
have to limit our exploration and development activity which may
result in a loss of your investment.
Because
we are small and our capital available for operations is limited,
we must limit our exploration and development activity. As such we
may not be able to complete an exploration and development program
that is as thorough as we would like. In that event, existing
reserves may go undiscovered and undeveloped. Without additional
capital, we cannot generate sufficient revenues and you may lose
your investment.
We had
cash and cash equivalents at April 30, 2018 and 2017 of $47,330 and
$631,232, respectively. At April 30, 2018, we had working capital
deficit of approximately $1.5 million. We are dependent on obtaining, and are continuing
to pursue, the necessary funding from outside sources, including
obtaining additional funding from the sale of securities in order
to continue our operations. Without adequate funding, we may not be
able to meet our obligations. To further develop the
Company’s assets, management currently intends to raise
additional capital through debt and equity
instruments.
Exploratory drilling is a speculative activity that may not result
in commercially productive reserves and may require expenditures in
excess of budgeted amounts.
Drilling
activities are subject to many risks, including the risk that no
commercially productive oil or gas reservoirs will be encountered.
There can be no assurance that new wells drilled by us or in which
we have an interest will be productive or that we will recover all
or any portion of our investment. Drilling for oil and gas may
involve unprofitable efforts, not only from dry wells, but also
from wells that are productive but do not produce sufficient net
revenues to return a profit after drilling, operating and other
costs. The cost of drilling, completing and operating wells is
often uncertain. Our drilling operations may be curtailed, delayed
or canceled as a result of a variety of factors, many of which are
beyond our control, including economic conditions, mechanical
problems, pressure or irregularities in formations, title problems,
weather conditions, compliance with governmental requirements and
shortages in or delays in the delivery of equipment and services.
Such equipment shortages and delays sometimes involve drilling rigs
where inclement weather prohibits the movement of land rigs causing
a high demand for rigs by a large number of companies during a
relatively short period of time. Our future drilling activities may
not be successful. Lack of drilling success could have a material
adverse effect on our financial condition and results of
operations.
Our
operations are also subject to all of the hazards and risks
normally incident to the development, exploitation, production and
transportation of, and the exploration for, oil and gas, including
unusual or unexpected geologic formations, pressures, down hole
fires, mechanical failures, blowouts, explosions, uncontrollable
flows of oil, gas or well fluids and pollution and other
environmental risks. These hazards could result in substantial
losses to us due to injury and loss of life, severe damage to and
destruction of property and equipment, pollution and other
environmental damage and suspension of operations. Insurance for
wells in which we participate is generally obtained, although there
can be no assurances that such coverage will be sufficient to
prevent a material adverse effect to us if any of the foregoing
events occur.
We may not identify all risks associated with the acquisition of
oil and natural gas properties, or existing wells, and any
indemnifications we receive from sellers may be insufficient to
protect us from such risks, which may result in unexpected
liabilities and costs to us.
Our
business strategy focuses on acquisitions of undeveloped and
unproven oil and natural gas properties that we believe are capable
of production. We may make additional acquisitions of undeveloped
oil and gas properties from time to time, subject to available
resources. Any future acquisitions will require an assessment of
recoverable reserves, title, future oil and natural gas prices,
operating costs, potential environmental hazards, potential tax and
other liabilities and other factors.
Generally,
it is not feasible for us to review in detail every individual
property involved in a potential acquisition. In making
acquisitions, we generally focus most of our title and valuation
efforts on the properties that we believe to be more significant,
or of higher-value. Even a detailed review of properties and
records may not reveal all existing or potential problems, nor
would it permit us to become sufficiently familiar with the
properties to assess fully their deficiencies and capabilities. In
addition, we do not inspect in detail every well that we acquire.
Potential problems, such as deficiencies in the mechanical
integrity of equipment or environmental conditions that may require
significant remedial expenditures, are not necessarily observable
even when we perform a detailed inspection. Any unidentified
problems could result in material liabilities and costs that
negatively impact our financial condition and results of
operations.
Even if
we are able to identify problems with an acquisition, the seller
may be unwilling or unable to provide effective contractual
protection or indemnity against all or part of these problems. Even
if a seller agrees to provide indemnity, the indemnity may not be
fully enforceable or may be limited by floors and caps, and the
financial wherewithal of such seller may significantly limit our
ability to recover our costs and expenses. Any limitation on our
ability to recover the costs related any potential problem could
materially impact our financial condition and results of
operations.
We are and will continue to be subject to various operating and
other casualty risks that could result in liability exposure or the
loss of production and revenues.
Our oil
and gas business involves a variety of operating risks, including,
but not limited to, unexpected formations or pressures,
uncontrollable flows of oil, gas, brine or well fluids into the
environment (including groundwater contamination), blowouts, fires,
explosions, pollution and other risks, any of which could result in
personal injuries, loss of life, damage to properties and
substantial losses. Although we carry insurance at levels that we
believe are reasonable, we are not fully insured against all risks.
We do not carry business interruption insurance. Losses and
liabilities arising from uninsured or under-insured events could
have a material adverse effect on our financial condition and
operations.
The
cost of operating wells is often uncertain. Our drilling operations
may be curtailed, delayed or canceled as a result of numerous
factors, including title problems, weather conditions, compliance
with governmental requirements and shortages or delays in the
delivery of equipment. Furthermore, completion of a well does not
assure a profit on the investment or a recovery of drilling,
completion and operating costs.
We face significant competition, and many of our competitors have
resources in excess of our available resources.
The oil
and gas industry is highly competitive. We encounter competition
from other oil and gas companies in all areas of our operations,
including the acquisition of producing properties and exploratory
prospects and sale of crude oil, natural gas and natural gas
liquids. Our competitors include major integrated oil and gas
companies and numerous independent oil and gas companies,
individuals and drilling and income programs. Many of our
competitors are large, well established companies with
substantially larger operating staffs and greater capital resources
than us. Such companies may be able to pay more for productive oil
and gas properties and exploratory prospects and to define,
evaluate, bid for and purchase a greater number of properties and
prospects than our financial or human resources permit. Our ability
to acquire additional properties and to discover reserves in the
future will depend upon our ability to evaluate and select suitable
properties and to consummate transactions in this highly
competitive environment.
Strategic relationships upon which we may rely are subject to
change, which may diminish our ability to conduct our
operations.
Our
ability to successfully acquire additional properties, to discover
and develop reserves, to participate in drilling opportunities and
to identify and enter into commercial arrangements with customers
will depend on developing and maintaining close working
relationships with industry participants and on our ability to
select and evaluate suitable properties and to consummate
transactions in a highly competitive environment. These realities
are subject to change and may impair our ability to
grow.
To
develop our business, we will endeavor to use the business
relationships of our management to enter into strategic
relationships, which may take the form of joint ventures with other
private parties and contractual arrangements with other oil and gas
companies, including those that supply equipment and other
resources that we will use in our business. We may not be able to
establish these strategic relationships, or if established, we may
not be able to maintain them. In addition, the dynamics of our
relationships with strategic partners may require us to incur
expenses or undertake activities we would not otherwise be inclined
to in order to fulfill our obligations to these partners or
maintain our relationships. If our strategic relationships are not
established or maintained, our business prospects may be limited,
which could diminish our ability to conduct our
operations.
We may not have satisfactory title or rights to all of our current
or future properties.
Prior
to acquiring undeveloped properties, our contract land
professionals review title records or other title review materials
relating to substantially all of such properties. The title
investigation performed by us prior to acquiring undeveloped
properties is thorough, but less rigorous than that conducted prior
to drilling, consistent with industry standards. Prior to drilling
we obtain a title opinion on the drill site. However, a title
opinion does not necessarily ensure satisfactory title. We believe
we have satisfactory title to our producing properties in
accordance with standards generally accepted in the oil and gas
industry. Our properties are subject to customary royalty
interests, liens incident to operating agreements, liens for
current taxes and other burdens, which we believe do not materially
interfere with the use of or affect the value of such properties.
In the normal course of our business, title defects and lease
issues of varying degrees arise, and, if practicable, reasonable
efforts are made to cure such defects and issues.
We may be responsible for additional costs in connection with
abandonment of properties.
We are
responsible for payment of plugging and abandonment costs on our
oil and gas properties pro rata to our working interest. There can
be no assurance that we will be successful in avoiding additional
expenses in connection with the abandonment of any of our
properties. In addition, abandonment costs and their timing may
change due to many factors, including actual production results,
inflation rates and changes in environmental laws and
regulations.
Governmental regulations could adversely affect our
business.
Our business is subject to certain federal, state and local laws
and regulations on taxation, the exploration for, and development,
production and marketing of, oil and natural gas, and environmental
and safety matters. Many laws and regulations require drilling
permits and govern the spacing of wells, rates of production,
prevention of waste and other matters. These laws and regulations
have increased the costs of our operations. In addition, these laws
and regulations, and any others that are passed by the
jurisdictions where we have production, could limit the total
number of wells drilled or the allowable production from successful
wells, which could limit our revenues.
Laws and regulations relating to our business frequently change,
and future laws and regulations, including changes to existing laws
and regulations, could adversely affect our business.
In
particular and without limiting the foregoing, various tax
proposals currently under consideration could result in an increase
and acceleration of the payment of federal income taxes assessed
against independent oil and natural gas producers, for example by
eliminating the ability to expense intangible drilling costs,
removing the percentage depletion allowance and increasing the
amortization period for geological and geophysical expenses. Any of
these changes would increase our tax burden.
All
states in which the Company owns leases require permits for
drilling operations, drilling bonds and reports concerning
operations and impose other requirements relating to the
exploration for and production of oil and gas. Such states also
have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and gas
properties, the establishment of maximum rates of production from
wells and the regulation of spacing, plugging and abandonment of
such wells. The statutes and regulations of these states limit the
rate at which oil and gas can be produced from our properties.
However, we do not believe we will be affected materially
differently by these statutes and regulations than any other
similarly situated oil and gas company.
Environmental liabilities could adversely affect our
business.
In the
event of a release of oil, natural gas or other pollutants from our
operations into the environment, we could incur liability for any
and all consequences of such release, including personal injuries,
property damage, cleanup costs and governmental fines. We could
potentially discharge these materials into the environment in
several ways, including:
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from a well or drilling equipment at a drill
site;
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leakage
from gathering systems, pipelines, transportation facilities and
storage tanks;
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damage
to oil and natural gas wells resulting from accidents during normal
operations; and
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blowouts,
cratering and explosions.
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In
addition, because we may acquire interests in properties that have
been operated in the past by others, we may be liable for
environmental damage, including historical contamination, caused by
such former operators. Additional liabilities could also arise from
continuing violations or contamination that we have not yet
discovered relating to the acquired properties or any of our other
properties.
To the
extent we incur any environmental liabilities, it could adversely
affect our results of operations or financial
condition.
Climate change legislation, regulation and litigation could
materially adversely affect us.
There
is an increased focus by local, state and national regulatory
bodies on greenhouse gas (“GHG”) emissions and climate
change. Various regulatory bodies have announced their intent to
regulate GHG emissions, including the United States Environmental
Protection Agency, which promulgated several GHG regulations in
2010 and late 2009. As these regulations are under development or
are being challenged in the courts, we are unable to predict the
total impact of these potential regulations upon our business, and
it is possible that we could face increases in operating costs in
order to comply with GHG emission legislation.
Passage
of legislation or regulations that regulate or restrict emissions
of GHG, or GHG-related litigation instituted against us, could
result in direct costs to us and could also result in changes to
the consumption and demand for natural gas and carbon dioxide
produced from our oil and natural gas properties, any of which
could have a material adverse effect on our business, financial
position, results of operations and prospects.
Risks Relating to Our Financial Position and Capital
Requirements
We will require additional capital to execute our business
plan. If we are unable to obtain funding, our business
operations will be harmed.
We will
require additional capital to execute our business plan, further
expand our exploration and continue with our development
programs. We may be unable to obtain additional capital
required. Furthermore, inability to maintain capital may damage our
reputation and credibility with industry participants. Our
inability to raise additional funds when required would have a
negative impact on our consolidated results of operations and
financial condition.
Future
acquisitions and future exploration, development, production,
leasing activities and marketing activities, as well as our
administrative requirements (such as salaries, insurance expenses
and general overhead expenses, as well as legal compliance costs
and accounting expenses) will require a substantial amount of
additional capital and cash flow.
We may
pursue sources of additional capital through various financing
transactions or arrangements, including joint venturing of
projects, debt financing, equity financing or other means. We may
not be successful in raising the capital needed and we may not
obtain the capital we require by other means. This would adversely
affect our consolidated financial results and financial
condition.
We have a history of losses, which may continue, which may
negatively impact our ability to achieve our business
objectives.
We generated total revenues of $723,409 and $26,603 for the years
ended April 30, 2018 and 2017, respectively, generated from oil and
gas sales. We incurred a net loss of $20,439,104 and $2,583,339 for
the years ended April 30, 2018 and 2017, respectively. To date, we
have acquired interests in oil and gas properties,
but have only recently developed and
commenced production of wells drilled on those properties.
Furthermore, although we have recently announced additional oil
field discoveries with the potential to generate commercial
revenues, there can be no assurance that they will yield
significant production. Our
operations are subject to the risks and competition inherent in the
establishment of a business enterprise. There can be no assurance
that future operations will be profitable. Revenues and profits, if
any, will depend upon various factors, including whether we will be
able to continue expansion of our revenue. We may not achieve our
business objectives, and the failure to achieve such goals would
have an adverse impact on us.
As our
properties are in early stages of development, we may not be able
to establish commercial reserves on these projects, and/or such
projects may not result in sufficient reserves to fund future
operations and/or development activities. Exploration for
commercial reserves of oil is subject to a number of risk factors.
Few of the properties that are explored are ultimately developed
into producing oil and/or gas fields. Since we may not be able to
establish commercial reserves, we are therefore considered to be an
exploration stage company.
Our results of operations as well as the carrying value of our oil
and gas properties are substantially dependent upon the prices of
oil and natural gas, which historically have been volatile and are
likely to continue to be volatile.
Our
future financial condition, access to capital, cash flows and
results of operations depend upon the prices we receive for our oil
and natural gas. Historically, oil and natural gas prices have been
volatile and are subject to fluctuations in response to changes in
supply and demand, market uncertainty and a variety of additional
factors that are beyond our control. Factors that affect the prices
we receive for our oil and natural gas include:
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the
level of domestic production;
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the
availability of imported oil and natural gas;
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political
and economic conditions and events in foreign oil and natural gas
producing nations, including embargoes, continued hostilities in
the Middle East and other sustained military campaigns, and acts of
terrorism or sabotage;
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the
ability of members of OPEC to agree to and maintain oil price and
production controls;
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the
cost and availability of transportation and pipeline systems with
adequate capacity;
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the
cost and availability of other competitive fuels;
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fluctuating
and seasonal demand for oil, natural gas and refined
products;
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concerns
about global warming or other conservation initiatives and the
extent of governmental price controls and regulation of
production;
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weather;
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foreign
and domestic government relations; and
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overall
economic conditions.
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Any
prolonged decline in oil or gas prices could have a material
adverse effect on our operations, financial condition, and level of
development and exploration expenditures and could result in a
reduction in the carrying value of our oil and gas
properties.
Risks Related to Our Common Stock
The liquidity, market price and volume of our stock are
volatile.
Our
common stock is not traded on any exchange but is currently quoted
on the OTC Pink Marketplace (“OTC Pink”). The liquidity of our
common stock may be adversely affected, and purchasers of our
common stock may have difficulty selling our common stock,
particularly if our common stock does not continue to be quoted on
the OTC Pink or another recognized quotation services or
exchange.
The
trading price of our common stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in our
operating results, announcements of our drilling results and other
events or factors. In addition, the U.S. stock markets have from
time to time experienced extreme price and volume fluctuations that
have affected the market price for many companies and which often
have been unrelated to the operating performance of these
companies. These broad market fluctuations may adversely affect the
market price of our securities.
Our stock is categorized as a penny stock. Trading of our stock may
be restricted by the SEC’s penny stock regulations, which may
limit a stockholder’s ability to buy and sell our
stock.
Our
stock is categorized as a “penny stock.” The SEC has
adopted Rule 15g-9 which generally defines “penny
stock” to be any equity security that has a market price (as
defined) less than $5.00 per share or an exercise price of less
than $5.00 per share, subject to certain exceptions. Our securities
are covered by the penny stock rules, which impose additional sales
practice requirements on broker-dealers who sell to persons other
than established customers and accredited investors. The penny
stock rules require a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the
SEC, which provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer
also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly
account statements showing the market value of each penny stock
held in the customer’s account. The bid and offer quotations,
and the broker-dealer and salesperson compensation information,
must be given to the customer orally or in writing prior to
effecting the transaction and must be given to the customer in
writing before or with the customer’s confirmation. In
addition, the penny stock rules require that prior to a transaction
in a penny stock not otherwise exempt from these rules, the
broker-dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive
the purchaser’s written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level
of trading activity in the secondary market for the stock that is
subject to these penny stock rules. Consequently, these penny stock
rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage
investor interest in and limit the marketability of our Common
Stock.
FINRA sales practice requirements may also limit a
stockholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above,
the Financial Industry Regulatory Authority
(“FINRA”) has adopted rules that require that in
recommending an investment to a customer, a broker-dealer must have
reasonable grounds for believing that the investment is suitable
for that customer. Prior to recommending speculative low-priced
securities to their non-institutional customers, broker-dealers
must make reasonable efforts to obtain information about the
customer’s financial status, tax status, investment
objectives and other information. Under interpretations of these
rules, FINRA believes that there is a high probability that
speculative low-priced securities will not be suitable for at least
some customers. The FINRA requirements make it more difficult for
broker-dealers to recommend that their customers buy our Common
Stock, which may limit your ability to buy and sell our stock and
have an adverse effect on the market for our
shares.
We have never paid dividends on our capital stock, and we do not
anticipate paying any cash dividends in the foreseeable
future.
We have
paid no cash dividends on any of our classes of capital stock to
date and currently intend to retain our future earnings, if any, to
fund the development and growth of our business. As a result,
capital appreciation, if any, of our Common Stock will be your sole
source of gain for the foreseeable future. Any payment of cash
dividends will depend upon our financial condition, contractual
restrictions, financing agreement covenants, solvency tests imposed
by corporate law, results of operations, anticipated cash
requirements and other factors and will be at the discretion of our
Board of Directors. Furthermore, we may incur indebtedness that may
severely restrict or prohibit the payment of
dividends.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Kern County
On March 4, 2016, the Company executed an Asset Purchase and Sale
and Exploration Agreement (the “Kern Agreement”)
to acquire a 13.7% working interest in certain oil and gas leases
in 5,000 gross acres located in southern Kern County, California
(the “Project”).
Horizon Energy also purchased a 27.5% working interest in the
Project.
Under the terms of the Kern Agreement, the Company paid $108,333 to
the sellers on the closing date, and was 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 Kern
Agreement. In addition, the sellers were entitled to an overriding
royalty interest in certain existing and new leases acquired after
the Closing Date, and the Company was required to make certain
other payments, each in amounts set forth in the Kern
Agreement.
On July
18, 2017, the Company announced a new oil field discovery in
its Sunset Boulevard prospect in Kern County, California upon
successfully drilling the Cattani-Rennie 47X-15 exploration well
(“CR 47X”). The
CR 47X was drilled to a depth of approximately 8,500 feet and
confirmed at least two commercially successful pay
zones.
In
February 2018, the Company transferred its working interest in the
Kern County prospect for additional interests in Oklahoma, as more
particularly discussed below, but retained an overriding royalty
interest in the project. Horizon Energy’s interests in Kern
County were not affected by the transaction.
Kay County
On February 14, 2018, the Company entered into a Purchase and
Exchange Agreement with Red Fork, pursuant to which (i) the Company
agreed to convey to Mountain View Resources, LLC, an affiliate of
Red Fork, 100% of its 13.7% working interest in and to the project
in Kern County, California, and (ii) Red Fork agreed to convey to
the Company 64.7% of its 85% working interest in and to an AMI
situated in Kay County, Oklahoma (the “Red Fork Exchange”). The fair value of the assets acquired
was $108,333 as of the date of the Agreement. Following the Red
Fork Exchange, the Company and Red Fork each retained a 2%
overriding royalty interest in the projects that they respectively
conveyed.
The acquisition of the additional concessions in Kay County,
Oklahoma added additional prospect locations adjacent to the
Company’s 87,754-acre concession in Osage County, Oklahoma.
The similarity of the prospects in Kay and Kern County allows for
the leverage of assets, infrastructure and technical
expertise.
Osage County
On May
30, 2014, the Company entered into a Subscription Agreement,
pursuant to which the Company purchased a 50% interest in
Bandolier. Bandolier’s oil and gas assets are located in in
Osage County, Oklahoma and comprise a significant contiguous oil
and gas acreage position in Northeastern Oklahoma, approximately
87,754 acres, with substantial original oil in place, stacked
reservoirs, as well as exploratory and development opportunities
that can be accessed through both horizontal and vertical drilling.
Significant infrastructure is already in place, including 32 square
miles of 3-D seismic, 3 phase power, a dedicated sub-station as
well as multiple oil producing horizontal wells.
On May 22, 2018, the Company announced the discovery of a new oil
field, the N. Blackland Field, in its concession in Osage County,
Oklahoma upon successfully testing of the 2-34 exploration well
(the “2-34”). The 2-34 was drilled to a depth of
approximately 2,850 feet, and initial results indicate both
Mississippian Chat and Burges formations were discovered and have
been comingled to increase production rates. The N. Blackland Field
is approximately 200 acres, and the Company expects to drill an
additional eight to ten wells to develop the structure. This
structure was identified using 3-D seismic technology. This
development project is anticipated to result in production revenue
prior to the end of the current fiscal year.
In May 2017, Bandolier discovered a new 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, which were successfully completed
in April 2018. The Company has received additional permits, and is
currently in the process of drilling an additional two wells. Our
W. Blackland concessions are currently producing, and, with the
drilling of additional wells, we anticipate substantially
increasing revenue throughout the remainder of the current fiscal
year.
In addition to our current development plans, within our current
3-D seismic data, additional structures in Osage County have been
identified. The Company plans to drill 13 additional wells in
calendar year 2018: nine in the N. Blackland Field, three in the
Arsaga structure and one in the Section 13 structure. The Company
anticipates drilling these wells out of cash flows from current
production of its existing wells.
The
Osage County drilling program is the result of a Joint Exploration
and Development Agreement (the “Exploration Agreement”), dated
August 19, 2016, between Spyglass, Phoenix 2016, LLC
(“Phoenix”) and
Mackey Consulting & Leasing, LLC (“Mackey”). Pursuant to the
Exploration Agreement, Phoenix and Mackey operate and provide
certain services, including obtaining permits and providing
technical services, at cost, in connection with a Phase I
Development Program as agreed to by the parties (the
“Phase I
Program”). Phoenix and Mackey will earn a 25%
working interest on all wells drilled in the Phase I
Program. Following success and completion of the Phase I
Program, Phoenix and Mackey shall earn a 25% working interest in
the Osage County, Oklahoma Concession held by Spyglass. Under the
Exploration Agreement, Bandolier has agreed commit up to $2.1
million towards costs of the Phase I Program, which has been
completed.
In
connection with each of the $2.0 million and $2.5 million secured
note financings consummated on June 13, 2017 and November 6, 2017,
respectively, the Company issued an overriding royalty interest
equal to 2% in all production from the Company’s interest in
the Company’s concessions located in Osage County,
Oklahoma.
As a
result of the above transactions, the Company currently has
approximately $12.8 million in oil and gas assets in Osage
County.
Horizon Energy
Horizon Acquisition.
On May 3, 2016 (the
“Closing
Date”), the
Company consummated the acquisition of Horizon Investments. As
a result of the acquisition, the Company acquired: (i) a 20%
membership interest in Horizon Energy; (ii) three promissory notes
issued by the Company to Horizon Investments in the aggregate
principal amount of $1.6 million (the “Horizon
Notes”); (iii)
approximately $690,000 (the “Closing
Proceeds”);
and (iv) certain bank, investment and other accounts maintained by
Horizon Investments, in an
amount which, together with the principal amount of the Horizon
Note and the Closing Proceeds, totaled not less than $5.0
million (collectively, the
“Purchased
Assets”) (the
“Horizon
Acquisition”).
The Horizon Acquisition was completed in accordance with the terms
and conditions set forth in the Conditional Purchase Agreement
first entered into by the Company and Horizon Investments on
December 1, 2015 (the “Purchase
Agreement”).
Also on the Closing Date, the Company and Horizon Investments
entered into an amended and restated Purchase Agreement, pursuant
to which the Company agreed to provide for additional advances by
Horizon Investments to the
Company.
As consideration for the Horizon Acquisition, and in accordance
with the Purchase Agreement, as amended, the Company issued
11,564,249 shares of its Common Stock to Horizon Investments on the
Closing Date, which amount included 1,395,916 additional shares of
Common Stock in consideration for the additional cash, receivables
and other assets reflected on Horizon Investment’s balance
sheet on the Closing Date.
On
February 2, 2018, Horizon Investments received from Horizon Energy
a capital call in the amount of $600,227. Horizon Investments did
not have the required funds to fund the capital call. The capital
call was not mandatory and the consequence of Horizon
Investments’ failure to fund the capital call was a dilution
in Horizon Investments’ interest in Horizon Energy by 27.43%,
therefore reducing Horizon Investments’ interest in Horizon
Energy from 20.01% to 14.52%. Scot Cohen, a member of the
Company’s Board of Directors, a substantial stockholder, and
a member of Horizon Energy, participated with other Horizon Energy
members to make the requested capital call in light of Horizon
Investment’s inability to make the requested capital call.
The determination not to make the requested capital call, and
therefore allow Mr. Cohen to increase his membership interest in
Horizon Energy, was discussed and approved by the independent
members of the Company’s Board of Directors.
Horizon
Energy is an oil and gas exploration and development company owned
and managed by former senior oil and gas executives with access to
a broad network of industry insiders. It has a portfolio of
domestic and international assets, including two assets located in
the United Kingdom, adjacent to the giant Wytch Farm oil field, the
largest onshore oil field in Western Europe. Each of the
assets in the Horizon Energy portfolio is characterized by low
initial capital expenditure requirements and strong risk reward
characteristics.
Operational and Project Review
The
following table summarizes the costs incurred in oil and gas
property acquisition, exploration, and development activities for
the Company for the years ended April 30, 2018 and
2017:
|
Cost
|
|
|
|
|
|
Balance, May 1,
2016
|
$778,226
|
-
|
100,000
|
878,226
|
|
Additions
|
487,857
|
761,444
|
-
|
1,249,301
|
|
Depreciation,
depletion and amortization
|
(12,949)
|
-
|
-
|
(12,949)
|
|
Impairment of oil
and gas assets
|
(20,942)
|
-
|
-
|
(20,942)
|
|
Balance,
April 30, 2017
|
$1,232,192
|
$761,444
|
$100,000
|
$2,093,636
|
|
Additions
|
3,665,851
|
|
-
|
3,665,851
|
|
Depreciation,
depletion and amortization
|
(146,141)
|
-
|
-
|
(146,141)
|
|
Impairment of oil
and gas assets
|
(972,488)
|
(761,444)
|
-
|
(1,733,932)
|
|
Balance,
April 30, 2018
|
$3,779,414
|
$-
|
$100,000
|
$3,879,414
|
(1)
Other property consists primarily of four, used steam generators
and related equipment that will be assigned to future projects. As
of April 30, 2018 and 2017, management concluded that impairment
was not necessary as all other assets were carried at salvage
value.
For the
year ended April 30, 2018, the Company performed a ceiling test and
recognized an impairment charge of $972,488 on the Oklahoma
assets. In addition,
the Company recognized an impairment charge of $761,444 on the
Larne Basin assets. For the year ended April 30, 2017, the Company
performed a ceiling test and recognized impairment charges of
$20,942 on the Oklahoma assets.
Oil Wells, Properties, Operations, and Acreage
The
following table sets forth the number of oil wells in which we held
a working interest as of April 30, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Osage County,
OK
|
12
|
12
|
2
|
2
|
42
|
42
|
41
|
41
|
|
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Total
|
12
|
12
|
2
|
2
|
42
|
42
|
41
|
41
|
The
following table sets forth the lease areas we have an interest in,
by area, as of April 30, 2018 and 2017:
|
Project
Areas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Larne Basin
(2)
|
-
|
-
|
130,000
|
26,000
|
|
Kern
County
|
-
|
-
|
16,000
|
2,200
|
|
Osage County, OK
(2)
|
87,754
|
65,816
|
106,880
|
80,160
|
|
Kay County,
OK
|
-
|
-
|
-
|
-
|
|
Total
|
87,754
|
65,816
|
252,880
|
108,360
|
|
(1)
|
We have no plans for any further material
expenditure on these properties as a result of the legal
acquirer’s prior drilling results and a lack of
resources.
|
|
(2)
|
Management concluded that as of April 30, 2018, the Oklahoma assets
were impaired by $972,488 and the Larne Basin assets were impaired
by $761,444.
|
Oil and Natural Gas Reserves
Oil and
natural gas information is provided in accordance with ASC Topic
932 - “Extractive Activities
- Oil and Gas.”
The Company has approximately $9.9 million and $4.7 million in
proven and probable oil and gas reserves as of April 30, 2018 and
2017, respectively. For the year ended April 30, 2018 the reports
by Cawley, Gillespie & Associates (“CGA”) covered 100% of the Company’s oil
reserves.
Proved
oil and natural gas reserves, as defined within SEC Rule
4-10(a)(22) of Regulation S-X, are those quantities of oil and gas,
which, by analysis of geoscience and engineering data can be
estimated with reasonable certainty to be economically producible
from a given date forward from known reservoirs, and under existing
economic conditions, operating methods and government regulations
prior to the time of which contracts providing the right to operate
expire, unless evidence indicates that renewal is reasonably
certain, regardless of whether determinable or probabilistic
methods are used for the estimation. The project to extract the
hydrocarbons must have commenced or the operator must be reasonably
certain that it will commence the project within a reasonable time.
Developed oil and natural gas reserves are reserves that can be
expected to be recovered from existing wells with existing
equipment and operating methods or in which the cost of the
required equipment is relatively minor compared to the cost of a
new well; and through installed extraction equipment and
infrastructure operational at the time of the reserves estimate is
the extraction is by means not involving a well. Estimates of the
Company’s oil reserves are subject to uncertainty and will
change as additional information regarding producing fields and
technology becomes available and as future economic and operating
conditions change.
Our
undeveloped acreage includes leased acres on which wells have not
been drilled or completed to a point that would permit the
production of commercial quantities of oil and natural gas,
regardless of whether or not such acreage is held by production or
contains proved reserves. A gross acre is an acre in which we own
an interest. A net acre is deemed to exist when the sum of
fractional ownership interests in gross acres equals one. The
number of net acres is the sum of the fractional interests owned in
gross acres.
Net Production, Unit Prices and Costs
The
following table presents certain information with respect to our
oil and natural gas production and prices and costs attributable to
all oil and natural gas properties owned by us for the periods
shown.
|
|
For the Years Ended
April 30,
|
|
|
|
|
|
Production
volumes:
|
|
|
|
Oil
(Bbls)
|
12,054
|
379
|
|
Natural gas
(Mcf)
|
5,893
|
4,512
|
|
Total
(Boe)
|
13,036
|
1,131
|
|
Average realized
prices:
|
|
|
|
Oil (per
Bbl)
|
$59.16
|
$50.57
|
|
Natural gas (per
Mcf)
|
$1.75
|
$1.64
|
|
Total per
Boe
|
$55.49
|
$23.52
|
|
Average production
cost:
|
|
|
|
Total per
Boe
|
$1.41
|
$3.44
|
Drilling and Other Exploratory and Development
Activities
Osage County, OK. The Company
plans to drill 13 additional wells in 2018; nine in the N.
Blackland Field, three in the Arsaga structure and one in the
Section 13 structure. Each well will cost the Company approximately
$200,000. The Company anticipates drilling these wells out of cash
flows from current production of its existing
wells.
The Company’s Direct Working Interest Projects
Pearsonia West – Osage County, Oklahoma. The Company is pursuing its core strategy in
this well-known basin, drilling vertical wells in relatively
shallow conventional legacy reservoirs using modern 3-D seismic
surveys. The Company has acquired approximately 87,754 acres in
Osage County in an area that was the focus of a deeper horizontal
play and is reprocessing 36 square miles of 3-D seismic data to
refocus on a shallow (3,000 to 4,000 ft.) vertical program. The
Company is targeting the Mississippian-aged Chat formation and
Pennsylvanian-aged formations. Pearsonia West is a low-cost
conventional project surrounded by 800 million barrels of
historical production. The Company plans to drill up to 10 vertical
development wells this year at a cost of $200,000 per well, and up
to 3 exploration wells at a cost of $200,000 per well. The Company
has drilled eleven development wells as of July 27,
2018.
Kay County, Oklahoma - In
February 2018 the Company, through an exchange transaction and no
cash consideration, acquired a 55% interest in an exploration
project in Kay County, Oklahoma, the county adjoining and just to
the west Osage County, the Company’s current core area. The
acquisition included rights to newly reprocessed 50 square mile 3D
seismic survey. The primary exploration objectives are the
Pennsylvanian-aged Red Fork channels. Historically these have been
prolific producers in nearby fields. The Company plans to
participate in leasing and the drilling of at least one shallow
well (less than 3,500 feet) in calendar year 2018.
Horizon Energy Projects
Denmark Offshore. The
Denmark project is a prospective, underexplored oil basin on trend
with the major oil and gas fields offshore in Norway and the United
Kingdom. We are currently evaluating the four licenses awarded in
the year ended April 30, 2017 to Ardent Oil Denmark
(“Ardent”)
(Horizon Energy owns 50% of Ardent). Horizon Energy is in the
process of interpreting the high-quality 3-D seismic survey we
acquired last year. Ardent will thereafter commence marketing
efforts to farm-out the prospect to a major oil company. The other
three licenses are being high-graded and are in various stages of
evaluation.
Dorset, U.K. Onshore. The Dorset project is south of and
adjacent to the giant Wytch Farm oil field, the largest onshore oil
field in Western Europe, which has produced approximately 500
million barrels of oil and 175 billion cubic feet of natural gas
since production first began in 1979. Horizon Energy was recently
awarded two onshore blocks. Seven wells were previously drilled
within the license area, including the first UK offshore well in
1963 on Lulworth Banks. Six of these wells encountered oil or gas
shows and three flowed oil or gas on test. A new 3-D seismic survey
is planned in calendar year 2018 over new blocks to more clearly
image prospects/leads identified on older 2-D data.
ITEM 3. 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 $591,300 as of April 30, 2018). 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 $518,100 as of April 30, 2018). 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,
however, as of July 27, 2018, no new developments or action has
occurred since dismissal by the appellate
court.
(b) In September 2013, the Company was notified by the Railroad
Commission of Texas (the “Railroad
Commission”) that the
Company was not in compliance with regulations promulgated by the
Railroad 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 Railroad
Commission therefore collected $25,000 from the Company, which was
originally deposited with the Railroad Commission, to cover a
portion of the estimated costs of $88,960 to plug the wells. In
addition to the above, the Railroad 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, the Plaintiffs
filed a Notice of Appeal to the Tenth Circuit Court of Appeals.
That appeal is pending as of the filing date of these
financial statements. 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.
The
Company is from time to time involved in legal proceedings in the
ordinary course of business. It does not believe that any of these
claims and proceedings against it is likely to have, individually
or in the aggregate, a material adverse effect on its financial
condition or results of operations.
ITEM 4. MINE SAFETY
DISCLOSURES
Not
applicable.
ITEM
5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our
common shares trade in the United States on the OTC Pink
Marketplace under the symbol “PTRC.”
The
following table sets forth the quarterly average high and low bid
prices per share for our Common Stock for the two most recently
completed fiscal years in the period that ended on April 30,
2018.
|
Fiscal
Year Ended
|
|
|
|
|
|
|
April
30, 2018
|
|
|
|
First
Quarter
|
$3.05
|
$0.84
|
|
Second
Quarter
|
$2.30
|
$1.58
|
|
Third
Quarter
|
$1.92
|
$1.23
|
|
Fourth
Quarter
|
$1.73
|
$0.57
|
|
|
|
|
|
April
30, 2017
|
|
|
|
First
Quarter
|
$3.48
|
$1.15
|
|
Second
Quarter
|
$2.49
|
$1.30
|
|
Third
Quarter
|
$1.15
|
$0.45
|
|
Fourth
Quarter
|
$1.17
|
$0.74
|
Holders
As of July 25, 2018, we had 93 holders of record of our registered
Common Stock, and our Common Stock had a closing bid price of $1.61
per share.
Dividends and Related Policy
We
presently intend to retain all earnings, if any, for use in our
business operations and accordingly, the Board of Directors (the
“Board”) does
not anticipate declaring any cash dividends for the foreseeable
future. Any future determination to pay dividends will be at the
discretion of the Board and will be contingent upon our financial
condition, results of operations, current and anticipated cash
needs, restrictions contained in current or future financing
instruments, plans for expansion and such other factors as the
Board deems relevant. We have never paid any cash dividends on our
Common Stock.
Transfer Agent and Registrar
Our
transfer agent is Computershare, Inc., located at 462 South 4th
Street, 11th Floor, Louisville, KY 40202. Their telephone number is
(502) 625-0400.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers.
None.
ITEM 6. SELECTED FINANCIAL DATA
Not
applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Forward Looking Statements
The
following is management’s discussion and analysis of certain
significant factors which have affected our financial position and
operating results during the periods included in the accompanying
consolidated financial statements, as well as information relating
to the plans of our current management and should be read in
conjunction with the accompanying financial statements and their
related notes included in this Report. References in this section
to “we,” “us,” “our,” or the
“Company” are to the consolidated business of Petro
River Oil Corp. and its wholly owned and majority owned
subsidiaries.
This
Report contains forward-looking statements. Generally, the words
“believes,” “anticipates,”
“may,” “will,” “should,”
“expects,” “intends,”
“estimates,” “continues,” and similar
expressions or the negative thereof or comparable terminology are
intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, including the
matters set forth in this Report or other reports or documents we
file with the SEC from time to time, which could cause actual
results or outcomes to differ materially from those projected.
Undue reliance should not be placed on these forward-looking
statements which speak only as of the date hereof. We undertake no
obligation to update these forward-looking statements.
Business Overview
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, utilizing modern
technology. 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
entering 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, including in Osage County and Kay County, Oklahoma.
Following the acquisition of Horizon I Investments, LLC
(“Horizon
Investments”), the
Company has additional exposure to a portfolio of 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 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. 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 prospects in Oklahoma are owned directly by the
Company and indirectly through Spyglass Energy Group, LLC
(“Spyglass”), a wholly owned subsidiary of Bandolier
Energy, LLC (“Bandolier”). As a result of the Exchange Transaction
consummated on January 31, 2018, as discussed below, Bandolier is
wholly-owned by the Company. Bandolier has a 75% working interest
in the 106,500-acre concession in Osage County, Oklahoma. The
remaining 25% working interest is held by the operator, Performance
Energy, LLC.
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 continue drilling additional wells on our
existing concessions, and to acquire additional 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
Recent Oil Discoveries.
On July 24, 2018, the Company announced the discovery of its
largest oil field to date with the Company’s successful
drilling of the Arsaga 25-2 exploration well, located on its
concession in Osage County, Oklahoma. The well was spud on July 9,
2018, and was drilled to a depth of approximately 2,750 feet.
Preliminary results indicate 30 feet of productive Mississippian
Chat formation. The Arsaga Field spans approximately 2,000 acres,
with up to 100 well locations.
On May 22, 2018, the Company announced the discovery of a new oil
field, the N. Blackland Field, in its concession in Osage County,
Oklahoma upon successfully testing of the 2-34 exploration well
(the “2-34”). The 2-34 was drilled to a depth of
approximately 2,850 feet, and initial results indicate both
Mississippian Chat and Burges formations were discovered and have
been comingled to increase production rates. The N. Blackland Field
is approximately 200 acres, and the Company expects to drill an
additional eight to ten wells to develop the structure. This
structure was identified using 3-D seismic technology. This
development project is anticipated to result in production revenue
prior to the end of the current fiscal year.
In May 2017, Bandolier discovered a new 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, which were successfully completed
in April 2018. The Company has received additional permits, and is
currently in the process of drilling an additional two wells. Our
W. Blackland concessions are currently producing, and, with the
drilling of additional wells, we anticipate substantially
increasing revenue throughout the remainder of the current fiscal
year.
In addition to our current development plans, within our current
3-D seismic data, additional structures in Osage County have been
identified. The Company plans to drill 13 additional wells in
calendar year 2018: nine in the N. Blackland Field, three in the
Arsaga structure and one in the Section 13 structure. The Company
anticipates drilling these wells out of cash flows from the current
production of its existing well operations.
Working Interest Exchange.
On February 14, 2018, the Company entered into a Purchase and
Exchange Agreement with Red Fork Resources
(“Red
Fork”), pursuant to which
(i) the Company agreed to convey to Mountain View Resources, LLC,
an affiliate of Red Fork, 100% of its 13.7% working interest in and
to an area of mutual interest (“AMI”) in the Mountain View Project in Kern
County, California, and (ii) Red Fork agreed to convey to the
Company 64.7% of its 85% working interest in and to an AMI situated
in Kay County, Oklahoma (the “Red Fork Exchange”). The fair value of the assets acquired
was $108,333 as of the date of the agreement. Following the Red
Fork Exchange, the Company and Red Fork each retained a 2%
overriding royalty interest in the projects that they respectively
conveyed. Under the terms of the Agreement, all revenues and costs,
expenses, obligations and liabilities earned or incurred prior to
January 1, 2018 (the “Effective
Date”) shall be borne by
the original owners of such working interests, and all of such
costs, expenses, obligations and liabilities that occur subsequent
to the Effective Date shall be borne by the new owners of such
working interests.
The acquisition of the additional concessions in Kay County,
Oklahoma added additional prospect locations adjacent to the
Company’s 87,754-acre concession in Osage County, Oklahoma.
The similarity of the prospects in Kay and Kern County allows for
the leverage of assets, infrastructure and technical
expertise.
MegaWest Exchange Transaction.
On January 31, 2018, the Company entered into an Assignment and
Assumption of Membership Interest with MegaWest Energy
Kansas Corp. (“MegaWest”) (the “Assignment
Agreement”), whereby the
Company transferred its interest in MegaWest in exchange for a 50%
membership interest in Bandolier Energy LLC (“Bandolier”) (the “Bandolier
Interest”) then held by
MegaWest (the “Exchange
Transaction”), as a
result of the Bandolier Acquisition, as defined below. The Exchange
Transaction followed the receipt by the Company of a notice of
Redetermination, as defined below, of MegaWest’s assets,
including MegaWest’s interest in the Bandolier Interests
(together, “MegaWest
Assets”), conducted
by Fortis Property Group, LLC, a Delaware limited liability
company (“Fortis”).
The Redetermination was conducted pursuant to the Contribution
Agreement, pursuant to which the Board of MegaWest was entitled to
engage a qualified appraiser to determine the value of the MegaWest
Assets and Bandolier Interests, and upon the completion thereof
(a “Redetermination”),
in the event the MegaWest Assets were determined to be less than
$40.0 million, then a Shortfall, as defined in the
Contribution Agreement, exists. As a result, the Company would
be required to make cash contributions to MegaWest in an amount
equal to the amount of the Shortfall
(the “Shortfall Capital
Contribution”). The
Contribution Agreement further provided that, in the event that the
Company was unable to deliver to MegaWest the Shortfall Capital
Contribution required after the Redetermination, if any, MegaWest
would have the right to exercise certain remedies, including a
right to foreclose on the Company’s entire interest in
MegaWest. In the event of foreclosure, the Bandolier Interest
would revert back to the Company.
In lieu of engaging a qualified appraiser to quantify the Shortfall
Capital Contribution, and in lieu of requiring MegaWest to exercise
its remedies under the terms of the Contribution Agreement, the
Company and MegaWest entered into the Exchange Transaction. As
a result, the Company has no further rights or interest in
MegaWest, and MegaWest has no further rights or interest in any
assets associated with the Bandolier Interests. Pursuant to
the Contribution Agreement and Assignment Agreement, the Company
continues to be responsible for a reimbursement payment to MegaWest
in the amount of $259,313, together with interest accrued thereon
at an annual rate 10%, which will be due and payable one year after
the date of the Assignment Agreement and has been included as a
payable since January 31, 2018. As a result of the
Redetermination, the Company recorded a loss on redetermination of
$11,914,204 reflecting the write-off of the related assets,
liabilities and non-controlling interests of Fortis.
At the time the parties entered into the Contribution Agreement,
management anticipated that the market price for crude oil would
return to prices reached prior to 2015, and that additional wells
would be drilled, resulting in greater revenue from the Bandolier
Interests. Subsequent to the execution of the Contribution
Agreement, only two wells had been drilled as of January 2018. That
fact, together with the relatively low price of crude oil and the
anticipated delays in drilling additional wells to demonstrate the
value of the Bandolier Interests, contributed to Fortis’
election to terminate the Contribution Agreement at the end of its
term, as amended. Had the market price of oil supported the value
of developing the Bandolier oil and gas properties at that time,
under the terms of the Contribution Agreement, Fortis would have
been required to fund the planned drilling program.
Recent Financings.
On September 20, 2017, the Company entered into a Securities
Purchase Agreement 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, 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 (the
“Existing Osage County
Override”). The Existing
Osage County Override was an existing override that was acquired by
the Company from Scot Cohen. The note accrues interest at a rate of
10% per annum and matures on June 30,
2020.
Scott Cohen, a member of the Company’s Board of
Directors and a substantial stockholder of the Company,
owns or controls 31.25% of Funding
Corp. I and 41.20% of Funding Corp. II.
On June 13, 2017, the Company entered into a Securities Purchase
Agreement with Petro Exploration Funding, LLC (“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 (the
“June Note
Financing”), in the principal amount of $2.0 million.
As additional consideration for the June Note Financing, the
Company issued to Funding Corp. I (i) a warrant to purchase 840,336
shares of the Company’s common stock, and (ii) an overriding
royalty interest equal to 2% in all production from the
Company’s interest in the Company’s concessions located
in Osage County, Oklahoma, currently held by Spyglass, pursuant to
an Assignment of Overriding Royalty Interests. The note accrues interest at a rate of 10% per
annum and matures on June 30,
2020.
Scot
Cohen owns or controls 31.25% of Funding Corp. I.
On June 18, 2018, Bandolier Energy, LLC, a wholly owned
subsidiary of the Company entered into a Loan Agreement with Scot
Cohen, the Executive Chairman of the Company (the
“Cohen Loan
Agreement”), pursuant to which Scot Cohen loaned the
Company $300,000 at a 10% annual interest rate due September 30,
2018. The Cohen Loan Agreement was to provide the Company with
short term financing in connection with the Company's drilling
program in Osage County,
Oklahoma.
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”). Pursuant to the Membership Interest
Assignment, the Company issued 1,466,667 shares of its common
stock, with a fair value of $1.75 per share, to Pearsonia in
exchange for all the membership interests in Bandolier held by
Pearsonia. As result of this transaction, the Company wrote-off the
non-controlling interest in Bandolier totaling $785,298 and
recorded a loss of $3,351,965.
Financial Condition and Results of Operations
For the Years Ended April 30, 2018 and 2017:
Oil and Natural Gas Sales
During
the year ended April 30, 2018, the Company recognized $723,409 in
oil and gas sales compared to $26,603 for the year ended April 30,
2017. The overall increase in sales of $696,806 is primarily due to
the commencement of
production in Osage
County, Oklahoma. The Company anticipates increasing revenue in
subsequent quarters as a result of the Company’s discoveries
in Osage County, Oklahoma and drilling program for calendar year
2018. Management anticipates
deriving substantial revenue from existing oil and gas assets and
following the completion of its calendar year 2018 drilling
program.
Lease Operating Expenses
During
the year ended April 30, 2018, lease operating expense was $127,814
as compared to lease operating expenses of $48,578 for the year
ended April 30, 2017. The overall
increase in lease operating expense of $79,236 was primarily
attributable to increased activity in the Company’s drilling
activity in Osage County, Oklahoma.
Gain on Sale of Oil and Gas Assets
During the year ended April 30, 2017, the
Company assigned its leaseholds covering approximately
320 acres in Missouri to third party in furtherance of the
Company’s corporate strategy to divest its legacy assets. In
conjunction with the assignment, the Company recorded a gain of
$216,580.
Impairment of Oil and Gas Assets
The
Company assesses all items classified as unproved property on an
annual basis for possible impairment. The Company assesses
properties on an individual basis or as a group if properties are
individually insignificant. The assessment includes consideration
of the following factors, among others: land relinquishment; intent
to drill; remaining lease term; geological and geophysical
evaluations; drilling results and activity; the assignment of
proved reserves; and the economic viability of development if
proved reserves are assigned. Significant changes in these factors
could reduce our estimates of future net proceeds, and accordingly
could result in an impairment of our oil and gas assets. During the
year ended April 30, 2018, the Company reviewed the oil and gas
assets for impairment and recognized an impairment charge of
$1,733,932 on the Oklahoma and Larne Basin properties. During the
year ended April 30, 2017, the Company reviewed the oil and gas
assets for impairment and recognized an impairment charge of
$20,942 on the Oklahoma properties.
General and Administrative Expense
General and administrative expense for the year ended April 30,
2018 was $3,644,751, as compared to $4,107,795 for the year ended
April 30, 2017. The
decrease was primarily attributable to decreases in salaries and
benefits, and office and administrative expenses.
These
changes are outlined below:
|
|
|
|
|
|
|
|
|
Salaries and
benefits
|
$1,109,190
|
$2,446,391
|
|
Professional
fees
|
1,980,152
|
1,092,644
|
Office and
administrative
|
555,409
|
568,760
|
|
Total
|
$3,644,751
|
$4,107,795
|
Salaries
and benefits include non-cash stock-based compensation of $906,591
for year ended April 30, 2018, compared to $2,178,716 for the year
ended April 30, 2017. The decrease in stock-based compensation of
$1,272,125 from the prior year was due to fewer awards made during the current period. Other
than stock-based compensation, general and administrative expenses
decreased due to
management’s commitment to substantially reduce expenses in
light of the challenging oil price environment. These decreases
were offset by an increase in professional fees due to the
completion of wells and related production during the
year.
Interest Income (Expense)
During
the year ended April 30, 2018, the Company recognized interest
expense of $65,569, compared to interest income of $628,956 for the
year ended April 30, 2017. The income recorded in the 2018 and 2017
years was attributable to $597,053 of
interest income accrued on the related party notes receivable,
which was offset by $363,977 and $294,613, the accretion of the
debt discount and interest expense related to the June 2017 $2.0
million and November 2017 $2.5 million Secured Note Financings, as
more thoroughly discussed below.
Loss on Assumption of Pearsonia Interests
On
November 6, 2017, the Company entered into the Membership Interest
Assignment with Pearsonia, the owner of a 46.81% membership
interest in Bandolier. Pursuant to the Membership Interest
Assignment, the Company issued 1,466,667 shares of its 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. Upon completing this transaction, the Company
recorded a loss on the assumption of Pearsonia’s interest of
$3,351,965.
Loss on Redetermination
On January 31, 2018, the Company entered into the Assignment
Agreement with MegaWest, whereby the Company transferred its
MegaWest Shares in exchange for MegaWest’s membership
interests in Bandolier (the “Exchange Transaction”). The
Exchange Transaction followed the receipt by the Company of a
notice of Redetermination of MegaWest’s assets conducted by
Fortis. Upon execution of the agreement, the Company wrote-off the
MegaWest assets and recorded a loss of
$11,914,204.
Liquidity and Capital Resources
At April 30, 2018, the Company
had working capital deficit of $1,523,990, of which $47,330, and
$308,099 was attributable to ending cash balances and oil and gas
accounts receivable, respectively. These amounts are offset by
current liabilities of $908,343, $298,581, $259,313 and $413,794,
which were attributable to accounts payable and accrued expense,
the redetermination liability, accrued interest on notes payable
and asset retirement obligations,
respectively.
As a
result of the utilization of cash in its operating activities, and
the development of its assets, the Company has incurred losses
since it commenced operations. In addition, the
Company has a limited operating history. At April 30,
2018, the Company had cash and cash equivalents of approximately
$47,330. 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.
On June 13, 2017, the Company consummated the June 2017 Note
Financing, pursuant to which the Company entered into a Purchase
Agreement with Funding Corp. I which resulted in the issuance to
Funding Corp. I of a Secured Note to finance the Company’s
short-term working capital requirements, in the principal amount of
$2.0 million. On November 6, 2017, the Company consummated the
November 2017 Note Financing, pursuant to which the Company entered
into a Purchase Agreement with Funding Corp. II, resulting in the
issuance to Funding Corp. II, of a Secured Promissory Note to
finance the Company’s short-term working capital
requirements, in the principal amount of $2.5
million.
Subsequent to the year end, on June 18, 2018, the Company entered
into the Cohen Loan Agreement with Scot Cohen, pursuant to which
Mr. Cohen loaned the Company $300,000 at a 10% annual interest rate
due September 30, 2018.
The
current level of working capital may be insufficient to maintain
current operations as well as the planned added operations for the
next 12 months. Management therefore intends to raise capital
through debt and equity instruments in order to execute its
business and operating plans. Management can provide no assurances
that the Company will be successful in its capital raising efforts.
In order to conserve capital, from time to time, management may
defer certain development activity.
Operating Activities
During the year ended April
30, 2018, operating activities used cash of $346,354, compared to
$2,219,980 used in operating activities during the year ended April
30, 2017. The Company incurred a net loss during the year
ended April 30, 2018 of $20,439,104 compared to a loss of
$2,583,339 for the year ended April 30, 2017. For the year ended April 30,
2018, the net loss
was offset by non-cash items such as stock-based compensation,
depreciation, depletion and accretion of asset retirement
obligation, impairment of oil and gas assets, the net change of
assets and liabilities on redetermination, the loss on assumption
of Pearsonia interests and the deferred tax liability. Cash used by
operations was also influenced by changes in accounts receivable,
accrued interest on notes receivable, prepaid expenses and accounts
payable and accrued expenses. For the year ended April 30, 2017,
the net loss was offset by non-cash items such as stock-based
compensation, depreciation, depletion and amortization, accretion
of asset retirement obligation, impairment of oil and gas assets,
and the deferred tax liability. Cash used in operations was
also influenced by changes in accounts receivable, prepaid expenses
and accounts payable and accrued
expenses.
Investing Activities
Investing activities during the year ended April 30, 2018 resulted
in cash used of $4,487,548, compared to cash provided of $1,900,461
during the year ended April 30, 2017. During the year ended
April 30, 2018, the Company invested an additional $379,418 in
Horizon Energy, compared to $525,000 in the comparable period in
2017. The proceeds
of sale of interest in real estate rights prior to the MegaWest
Transaction were $1,553,884 for the year ended April 30, 2018,
compared to $6,900,228 during the year ended April 30, 2017. As a
part of the former arrangement with Fortis, the majority of the
proceeds were then loaned to Fortis in the form of notes receivable
agreements with Fortis for $6,938,382 during the year ended April
30, 2017. Due to the MegaWest Transaction, the Company no longer
had any interest in real estate rights as of April 30, 2018, and
the Company recorded a loss on
redetermination of $11,914,204, reflecting the write-off of the
related assets, liabilities and non-controlling interests of Fortis
during the period.
During the year ended April 30, 2018, the Company incurred
$3,536,935 of expenditures related to the development of its oil
and gas assets, compared to $487,857 of expenditures for the year
ended April 30, 2017. Additionally, during the year ended
April 30, 2018, the Company executed notes receivable agreements
with related parties resulting in an outlay of $1,558,501, compared
to $6,938,382 during the year ended April 30,
2017.
Financing Activities
Financing activities during the year ended April 30, 2018 resulted
in cash provided of $4,250,000, compared to $176,000
during the year ended April
30, 2017. The cash provided during the year ended April 30, 2018
was related to the issuance
of $4.5 million in notes
payable, which were offset by cash paid for debt inducement of
$250,000. The cash
provided during the year ended April 30, 2017 was related to a
contribution received from the Company’s non-controlling
interest partners in Bandolier from a mandatory capital
request.
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
|
|
|
|
Common
shares
|
17,309,733
|
15,827,921
|
|
Stock
options
|
2,555,385
|
2,599,682
|
|
Stock purchase
warrants
|
2,223,669
|
133,333
|
|
|
22,088,787
|
18,560,936
|
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, 2018 and 2017. The consolidated financial
statements are prepared in conformity with generally accepted
accounting principles in the United States (“U.S. GAAP”).
Our
discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements.
These consolidated financial statements are prepared in accordance
with 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 as of 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. Because the use of
estimates is an integral component of the financial reporting
process, actual results could differ from those estimates. Some of
our accounting policies require higher degrees of judgment than
others in their application.
The
following critical accounting policies rely upon assumptions and
estimates and were used in the preparation of our consolidated
financial statements:
Oil and Gas Operations
The
Company follows the full cost method of accounting for oil and gas
operations, whereby all costs related to exploration and
development of oil and gas reserves are capitalized. Under this
method, the Company capitalizes all acquisition, exploration and
development costs incurred for the purpose of finding oil and
natural gas reserves, including salaries, benefits and other
internal costs directly attributable to these activities. Costs
associated with production and general corporate activities,
however, are expensed in the period incurred. Costs are capitalized
on a country-by-country basis. To date, there has only been one
cost center, the United States.
The
present value of estimated future net cash flows is computed by
applying the average first-day-of-the-month prices during the
previous twelve-month period of oil and natural gas to estimated
future production of proved oil and natural gas reserves as of
year-end less estimated future expenditures to be incurred in
developing and producing the proved reserves and assuming
continuation of existing economic conditions. Prior to December 31,
2009, prices and costs used to calculate future net cash flows were
those as of the end of the appropriate quarterly
period.
Following
the discovery of reserves and the commencement of production, the
Company will compute depletion of oil and natural gas properties
using the unit-of-production method based upon production and
estimates of proved reserve quantities. Costs associated with
unproved properties are excluded from the depletion calculation
until it is determined whether or not proved reserves can be
assigned to such properties. Unproved properties are assessed for
impairment annually. Significant properties are assessed
individually.
The
Company assesses all items classified as unproved property on an
annual basis for possible impairment. The Company assesses
properties on an individual basis or as a group if properties are
individually insignificant. The assessment includes consideration
of the following factors, among others: land relinquishment; intent
to drill; remaining lease term; geological and geophysical
evaluations; drilling results and activity; the assignment of
proved reserves; and the economic viability of development if
proved reserves are assigned. During any period in which these
factors indicate impairment, the related exploration costs incurred
are transferred to the full cost pool and are then subject to
depletion and the ceiling limitations on development oil and
natural gas expenditures.
Proceeds
from the sale of oil and gas assets are applied against capitalized
costs, with no gain or loss recognized, unless a sale would alter
the rate of depletion and depreciation by 25 percent or
more.
Significant
changes in these factors could reduce our estimates of future net
proceeds, and accordingly could result in an impairment of our oil
and gas assets. Management will perform annual assessments of the
carrying amounts of its oil and gas assets as additional data from
ongoing exploration activities becomes available.
Interest in Real Estate Rights
Fortis
contributed profit realized from future sale of these properties to
MegaWest, pursuant to the terms and conditions of the Contribution
Agreement, as a part of the MegaWest Transaction. As a result of the
Exchange, no amounts are reflected in interest in real estate
rights as of April 30, 2018. The rights are stated on the
consolidated balance sheet as of April 30, 2017 at the cost basis
of Fortis.
Income Taxes
The
Company uses the asset and liability method in accounting for
income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial
reporting and income tax carrying amounts of assets and liabilities
and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The Company
reviews deferred tax assets for a valuation allowance based upon
whether it is more likely than not that the deferred tax asset will
be fully realized. A valuation allowance, if necessary, is provided
against deferred tax assets, based upon management’s
assessment as to their realization.
Uncertain Tax Positions
The
Company evaluates uncertain tax positions pursuant to ASC Topic
740-10-25 “Accounting for
Uncertainty in Income Taxes,” which allows companies
to recognize a tax benefit from an uncertain tax position only if
it is more likely than not that the tax position will be sustained
on examination by the taxing authorities based on the technical
merits of the position. Those tax positions failing to qualify for
initial recognition are recognized in the first interim period in
which they meet the more likely than not standard, or are resolved
through negotiation or litigation with the taxing authority, or
upon expiration of the statute of limitations. De-recognition of a
tax position that was previously recognized occurs when an entity
subsequently determines that a tax position no longer meets the
more likely than not threshold of being sustained.
At
April 30, 2018 and 2017, the Company had approximately $0 and
$3,442,724, respectively, of liabilities for uncertain tax
positions. Interpretation of taxation rules relating to net
operating loss utilization in real estate transactions give rise to
uncertain positions. In connection with the uncertain tax position,
there was no interest or penalties recorded as the position is
expected but the tax returns are not yet due.
The
Company is subject to ongoing tax exposures, examinations and
assessments in various jurisdictions. Accordingly, the Company may
incur additional tax expense based upon the outcomes of such
matters. In addition, when applicable, the Company will adjust tax
expense to reflect the Company’s ongoing assessments of such
matters, which require judgment and can materially increase or
decrease its effective rate as well as impact operating
results.
The
number of years with open tax audits varies depending on the tax
jurisdiction. The Company’s major taxing jurisdictions
include the United States (including applicable
states).
Off-Balance Sheet Arrangements
None.
Recent Accounting Pronouncements
In May 2014, the FASB issued a comprehensive new revenue
recognition standard that will supersede nearly all existing
revenue recognition guidance under U.S. GAAP. The standard’s
core principle (issued as ASU 2014-09 by the FASB), is that a
company will recognize revenue when it transfers promised goods or
services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those
goods or services. These may include identifying performance
obligations in the contract, estimating the amount of variable
consideration to include in the transaction price and allocating
the transaction price to each separate performance obligation. The
new guidance must be adopted using either a full retrospective
approach for all periods presented in the period of adoption or a
modified retrospective approach. In August 2015, the FASB issued
ASU No. 2015-14, which defers the effective date of ASU 2014-09 by
one year, and would allow entities the option to early adopt the
new revenue standard as of the original effective date. This ASU is
effective for public reporting companies for interim and annual
periods beginning after December 15, 2017. The Company is currently
evaluating its adoption method and the impact of the standard on
its consolidated financial statements and has not yet determined
the method by which the Company will adopt the standard in
2018.
In February
2016, the FASB issued
ASU 2016-02, Leases,
which aims to make leasing activities more transparent and
comparable and requires substantially all leases be recognized by
lessees on their balance sheet as a right-of-use asset and
corresponding lease liability, including leases currently accounted
for as operating leases. This ASU is effective for all interim and
annual reporting periods beginning after December 15,
2019, with early adoption
permitted. We expect to adopt ASU 2016-02 beginning January 1,
2019 and are in the
process of assessing the impact that this new guidance is expected
to have on our financial statements and related
disclosures.
In
April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers:
Identifying Performance Obligations and Licensing”
(topic 606). In March 2016, the FASB issued ASU No. 2016-08,
“Revenue from Contracts with
Customers: Principal versus Agent Considerations (Reporting Revenue
Gross verses Net)” (topic 606). These amendments
provide additional clarification and implementation guidance on the
previously issued ASU 2014-09, “Revenue from Contracts with
Customers”. The amendments in ASU 2016-10 provide
clarifying guidance on materiality of performance obligations;
evaluating distinct performance obligations; treatment of shipping
and handling costs; and determining whether an entity's promise to
grant a license provides a customer with either a right to use an
entity's intellectual property or a right to access an entity's
intellectual property. The amendments in ASU 2016-08 clarify how an
entity should identify the specified good or service for the
principal versus agent evaluation and how it should apply the
control principle to certain types of arrangements. The adoption of
ASU 2016-10 and ASU 2016-08 is to coincide with an entity's
adoption of ASU 2014-09, which the Company intends 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. Adoption of ASU 2016-09
did not have a material impact on the consolidated financial
statements.
In May
2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with
Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients,”
which narrowly amended the revenue recognition guidance regarding
collectability, noncash consideration, presentation of sales tax
and transition and is effective during the same period as ASU
2014-09. The Company is currently evaluating the standard and does
not expect the adoption will have a material effect on its
consolidated financial statements and disclosures.
In
August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash
Payments” (“ASU 2016-15”). ASU 2016-15
will make eight targeted changes to how cash receipts and cash
payments are presented and classified in the statement of cash
flows. ASU 2016-15 is effective for fiscal years beginning after
December 15, 2017. The new standard will require adoption on a
retrospective basis unless it is impracticable to apply, in which
case it would be required to apply the amendments prospectively as
of the earliest date practicable. The Company is currently in the
process of evaluating the impact of ASU 2016-15 on its consolidated
financial statements.
In September 2016, the FASB issued
ASU 2016-13, Financial
Instruments-Credit Losses.
ASU 2016-13 was issued to provide more decision-useful
information about the expected credit losses on financial
instruments and changes the loss impairment methodology.
ASU 2016-13 is effective for reporting periods beginning
after December 15,
2019 using a modified
retrospective adoption method. A prospective transition approach is
required for debt securities for which an other-than-temporary
impairment had been recognized before the effective date. The
Company is currently assessing the impact this accounting standard
will have on its financial statements and related
disclosures.
In May 2017, the
FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic
718): Scope of Modification Accounting,” which
provides guidance about which changes to the terms or conditions of
a share-based payment award require an entity to apply modification
accounting in Topic 718. This standard is required to be adopted in
the first quarter of 2018. The Company is currently evaluating the
impact this guidance will have on its consolidated financial
statements and related disclosures.
In
September 2017, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) No. 2017-13, Revenue Recognition (Topic 605), and Revenue
from Contracts with Customers (Topic 606). The new
standards, among other things, provide additional implementation
guidance with respect to Accounting Standards Codification (ASC)
Topic 606. ASU 2017-13 is effective for annual reporting periods
beginning after December 15, 2017, including interim reporting
periods within that reporting period. The Company is currently
evaluating the impact of the new standard but does not expect it to
have a material impact on its implementation strategies or its
consolidated financial statements upon adoption.
The
Company does not expect the adoption of any recently issued
accounting pronouncements to have a significant impact on its
financial position, results of operations, or cash
flows.
Management
does not believe that any other recently issued, but not yet
effective accounting pronouncements, if adopted, would have a
material effect on the accompanying consolidated financial
statements.
ITEM 7A. QUANTITATIVE AND
QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Reference
is made to the financial statement pages beginning on page F-1
comprising a portion of this annual report on Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
TO DISCUSS
We
maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our reports
filed pursuant to the Securities Exchange Act of 1934, as amended
(the “Exchange
Act”), is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to
our Chief Executive Officer and Chief Financial Officer to allow
timely decisions regarding required disclosure. Our management,
including our Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of our disclosure
controls and procedures, as defined under Exchange Act Rule
13a-15(e), as of April 30, 2018. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures were not effective as
of April 30, 2018 due to a material weakness in our internal
control over financial reporting, as discussed below.
Management’s Annual Report on Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting as required under
applicable United States securities regulatory requirements.
Internal control over financial reporting is defined in Rule
13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a
process designed by, or under the supervision of, the
company’s chief executive and chief financial officers and
effected by the company’s board of directors, management and
other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and
procedures that:
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pertain
to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets
of the company;
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provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company;
and
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provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use of disposition of the company’s
assets that could have a material effect on the financial
statements.
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Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect all misstatements. A system of
internal controls can provide only reasonable, not absolute,
assurance that the objectives of the control system are met, no
matter how well the system is conceived or operated. Projections of
any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Our
management assessed the effectiveness of our internal control over
financial reporting as of April 30, 2018. In making this
assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COO”) in the
2013 Internal Control Integrated Framework. Based on that
evaluation under this framework, our management concluded that as
of April 30, 2018, our internal control over financial reporting
was not effective because of the following material weaknesses in
our internal control over financial reporting:
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Due to
our small number of employees and resources, we have limited
segregation of duties, and as a result there is insufficient
independent review of duties performed.
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As a
result of the limited number of accounting personnel, we rely on
outside consultants for the preparation of our financial reports,
including financial statements and management discussion and
analysis, which could lead to overlooking items requiring
disclosure.
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This
annual report does not include an attestation report by our
independent registered public accounting firm regarding internal
control over financial reporting. As we are neither a large
accelerated filer nor an accelerated filer, our management’s
report was not subject to attestation by our registered public
accounting firm pursuant to rules of the Securities and Exchange
Commission that permit us to provide only management’s report
in this annual report.
Changes to Internal Controls and Procedures for Financial
Reporting
There
were no significant changes in the Company’s internal control
over financial reporting that were identified in connection with
such evaluation that occurred during the period covered by this
Annual Report on Form 10-K that has materially affected, or is
reasonably likely to materially affect, the Company’s
internal control over financial reporting. To begin remediating the
material weakness identified in internal control over financial
reporting of the Company, the Company engaged Brio Financial Group
and appointed its Managing Member, David Briones, to act as the
Company’s Chief Financial Officer on August 15, 2013.
During the year ended April 30, 2018,
Management intended to hire additional accounting staff, and
operational and administrative executives. However, due to the lack
of resources those hires were delayed until such time additional
financing is received. Management intends to prepare
and implement sufficient written policies and checklists to remedy
the material weaknesses identified above.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
information required by this item will be set forth in our
definitive proxy statement for our 2018 annual meeting of
stockholders to be filed within 120 days after our fiscal year end
and is incorporated in this report by reference.
ITEM 11.
EXECUTIVE
COMPENSATION
The
information required by this item will be set forth in our
definitive proxy statement for our 2018 annual meeting of
stockholders to be filed within 120 days after our fiscal year end
and is incorporated in this report by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDERS
MATTERS
The information
required by this item will be set forth in our definitive proxy
statement for our 2018 annual meeting of stockholders to be filed
within 120 days after our fiscal year end and is incorporated in
this report by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The
information required by this item will be set forth in our
definitive proxy statement for our 2018 annual meeting of
stockholders to be filed within 120 days after our fiscal year end
and is incorporated in this report by reference.
ITEM 14. ACCOUNTING FEES AND SERVICES
The
information required by this item will be set forth in our
definitive proxy statement for our 2018 annual meeting of
stockholders to be filed within 120 days after our fiscal year end
and is incorporated in this report by reference.
ITEM 15. 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:
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Exhibit
Number
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Exhibit Description
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Certificate
of Incorporation of the Company.
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Bylaws
of the Company.
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Certificate
of Amendment to the Certificate of Incorporation of Petro River Oil
Corporation, effective December 1, 2015 (Reverse
Split).
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Certificate
of Amendment to the Certificate of Incorporation of Petro River Oil
Corporation, effective December 1, 2015 (Authorized
Increase).
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Certificate
of Amendment to the Certificate of Incorporation of Petro River Oil
Corporation, dated June 15, 2016.
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Securities
Purchase Agreement of Petro River Oil LLC, dated as of April 23,
2013, by and among Petro River Oil Corp., Petro River Oil,
LLC, the holders of outstanding secured promissory notes of Petro
River Oil, LLC, the members of Petro River Oil, LLC and Mega
Partners 1 LLC.
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Amended
and Restated 2012 Equity Compensation Plan.
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Assignment
and Assumption Agreement, dated as of May 30, 2014, by and between
Bandolier Energy, LLC and PO1, LLC.
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Agreement,
dated as of May 30, 2014, by and between Petro River Oil Corp. and
Pearsonia West Investment Group, LLC.
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Employment
Agreement, by and between Petro River Oil Corp. and Scot Cohen,
dated April 23, 2013
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Amendment
No. 1 to the Employment Agreement, by and between Petro River Oil
Corp. and Scot Cohen, dated November 20, 2013.
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Form of
Securities Purchase Agreement, dated April 23, 2013
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Securities
Purchase Agreement, by and between Petro River Oil Corp. and Petrol
Lakes Holding Limited, dated December 12, 2013.
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Form of
Bandolier Energy LLC Subscription Agreement, dated May 30,
2014.
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Securities
Purchase Agreement, by and between Spyglass Energy Group, LLC,
Nadel and Gussman, LLC, Charles W. Wickstrom, Shane E. Matson and
Bandolier Energy, LLC, dated January 1, 2014.
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Assignment
and Assumption Agreement, by and between Bandolier Energy, LLC and
PO1, LLC, dated May 30, 2014.
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Agreement,
by and between Petro River Oil Corp. and Pearsonia West Investment
Group, LLC, dated May 30, 2014.
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Asset
Purchase Agreement by and among Petro River Oil Corp, Petro Spring
I, LLC, Havelide GTL LLC and certain shareholders, dated February
18, 2015.
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Employment
Agreement by and between the Company and Stephen Boyd, dated
February 18, 2015
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Form of
Warrant.
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Asset
Purchase Agreement by and among Petro River Oil Corp, Petro Spring
II, LLC, Coalthane Tech LLC and certain shareholders, dated
February 27, 2015.
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Contribution
Agreement, by and between Petro River Oil Corp., MegaWest Energy
Kansas Corporation and Fortis Property Group, dated October 30,
2015, effective October 15, 2015.
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Employment
Agreement, by and between Petro River Oil Corp. and Stephen
Brunner, dated October 30, 2015.
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Conditional
Purchase Agreement, by and between Petro River Oil Corp. and
Horizon I Investments, LLC, dated December 1, 2015.
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Form of
Escrow Agreement.
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Non-Recourse
Note, by and between Petro River Oil Corp. and Horizon I
Investments, LLC, dated December 1, 2015.
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Farm-Out
Agreement, dated January 19, 2016.
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Escrow
Agreement, dated January 18, 2016.
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Non-Recourse
Promissory Note, in the principal amount of $750,000, dated January
13, 2016.
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Assignment
of Oil and Gas Lease, by and between MegaWest Energy Missouri Corp.
and Paluca Petroleum, Inc., dated July 11, 2016.
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Asset
Purchase and Sale and Exploration Agreement, dated March 4,
2016.
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Securities
Purchase Agreement, dated June 13, 2017.
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Form of
Warrant, dated June 13, 2017.
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Security
Agreement, dated June 13, 2017.
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Assignment
of Overriding Royalty Interests, dated June 13, 2017.
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Promissory
Note, dated June 13, 2017.
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Security
Purchase Agreement, dated September 20, 2017.
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Form of
Warrant, dated November 6, 2017.
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Form of
Security Agreement, dated November 6, 2017.
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Form of
Assignment of Overriding Royalty Interests November 6,
2017.
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Form of
Secured Promissory Note, dated November 6, 2017.
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Assignment
and Assumption of Membership Interest, dated November 6,
2017.
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Modification
of Promissory Notes, dated December 29, 2017.
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Assignment
and Assumption of Membership Interest, dated January 31,
2018.
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Purchase
and Exchange Agreement, dated February 14, 2018.
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Code of
Business Conduct and Ethics.
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Subsidiaries.
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Certification
of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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Certification
of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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Report
of Pinnacle Energy Services, LLC with respect to oil and reserves,
dated June 8, 2017.
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Report
of Cawley, Gillespie & Associates with respect to oil
and reserves in Oklahoma – Spyglass/Pearsonia, dated May 1,
2018.
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Report of Cawley, Gillespie &
Associates with respect to oil
and reserves in Osage County, Oklahoma, dated May 1,
2018.
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101.INS*
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XBRL
Instance Document
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101.SCH*
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XBRL
Taxonomy Extension Schema Document
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101.CAL*
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XBRL
Taxonomy Extension Calculation Linkbase Document
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101.DEF*
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XBRL
Taxonomy Extension Definition Linkbase Document
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101.LAB*
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XBRL
Taxonomy Extension Labels Linkbase Document
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101.PRE*
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XBRL
Taxonomy Extension Presentation Linkbase Document
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*
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Attached
hereto
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(1)
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Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on September 13, 2012.
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(2)
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Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on April 29, 2013.
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(3)
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Incorporated
by reference to our Transition Report on Form 10-K filed with the
Securities and Exchange Commission on August 28, 2013.
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(4)
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Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on November 22, 2013.
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(5)
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Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on December 16, 2013.
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(6)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on June 5, 2014.
|
|
(7)
|
Incorporated
by reference to our Annual Report on Form 10-K filed with the
Securities and Exchange Commission on August 13, 2014.
|
|
(8)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on February 23, 2015.
|
|
(9)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on March 5, 2015.
|
|
(10)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on January 20, 2016.
|
|
(11)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on July 13, 2016.
|
|
(12)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on December 7, 2015.
|
|
(13)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on June 20, 2016.
|
|
(14)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on March 10, 2016.
|
|
(15)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on November 5, 2015.
|
|
(16)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on June 16, 2017.
|
|
(17)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on June 16, 2017.
|
|
(18)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on June 16, 2017.
|
|
(19)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on June 16, 2017.
|
|
(20)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on June 16, 2017.
|
|
(21)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on November 6, 2017.
|
|
(22)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on November 6, 2017.
|
|
(23)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on November 6, 2017.
|
|
(24)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on November 6, 2017.
|
|
(25)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on November 6, 2017.
|
|
(26)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on November 6, 2017.
|
|
(27)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on January 5, 2018.
|
|
(28)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on February 5, 2018.
|
|
(29)
|
Incorporated
by reference to our Form 8-K filed with the Securities and Exchange
Commission on February 16, 2018.
|
|
(30)
|
Incorporated
by reference to our Form 10-Q filed with the Securities and
Exchange Commission on March 26, 2018.
|
FINANCIAL INFORMATION
|
|
|
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|
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F-2
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F-3
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F-4
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F-5
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F-6
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F-7
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
stockholders and the board of directors of
Petro
River Oil Corp.
New
York, New York
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Petro River
Oil Corp. (the "Company") as of April 30, 2018 and 2017, the
related consolidated statements of operations, changes in
stockholders’ equity, and cash flows for each of the years
then ended, and the related notes (collectively referred to as the
"financial statements"). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Company as of April 30, 2018 and 2017, and the results of its
operations and its cash flows for each of the years then ended, in
conformity with accounting principles generally accepted in the
United States of America.
Basis for Opinion
These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express
no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
Other matters
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company has suffered recurring
losses from operations and has a net capital deficiency that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments
that might result from the outcome of this
uncertainty.
/s/ GBH
CPAs, PC
We have
served as the Company's auditor since 2015.
GBH
CPAs, PC
www.gbhcpas.com
Houston,
Texas
July
30, 2018
Petro River Oil Corp. and Subsidiaries
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
Assets
|
|
|
|
Current
Assets:
|
|
|
|
Cash and cash
equivalents
|
$47,330
|
$631,232
|
|
Accounts receivable
- oil and gas
|
308,099
|
8,423
|
|
Accounts receivable
- real estate - related party
|
-
|
2,123,175
|
|
Accrued interest on
notes receivable - related party
|
-
|
797,710
|
|
Interest in real
estate rights
|
-
|
309,860
|
|
Prepaid expense and
other current assets
|
612
|
207,831
|
|
Prepaid oil and gas
asset development costs
|
-
|
613,480
|
|
Notes receivable -
related party, current portion
|
-
|
24,786,382
|
|
Total
Current Assets
|
356,041
|
29,478,093
|
|
|
|
|
|
Oil and gas assets,
full cost method
|
|
|
|
Costs subject to
amortization, net
|
3,779,414
|
1,234,806
|
|
Costs not being
amortized, net
|
100,000
|
858,830
|
|
Property, plant and
equipment, net
|
822
|
1,582
|
|
Investment in
Horizon Energy Partners
|
1,592,418
|
1,213,000
|
|
Other
assets
|
17,133
|
17,133
|
|
Total
Long-term Assets
|
5,489,787
|
3,325,351
|
|
Total
Assets
|
$5,845,828
|
$32,803,444
|
|
|
|
|
|
Liabilities
and Equity
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts payable
and accrued expense
|
$908,343
|
$120,233
|
|
Accrued interest on
notes payable – related party
|
298,581
|
-
|
|
Deferred tax
liability
|
-
|
3,442,724
|
|
Redetermination
liability
|
259,313
|
-
|
|
Asset retirement
obligations, current portion
|
413,794
|
406,403
|
|
Total
Current Liabilities
|
1,880,031
|
3,969,360
|
|
|
|
|
|
Long-term
Liabilities:
|
|
|
|
Asset retirement
obligations, net of current portion
|
246,345
|
152,293
|
|
Note payable -
related parties, net of debt discount of $2,139,250 and $0,
respectively
|
2,360,750
|
-
|
|
Total
Long-term Liabilities
|
2,607,095
|
152,293
|
|
|
|
|
|
Total
Liabilities
|
4,487,126
|
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 -
150,000,000 authorized; par value $0.00001; 17,309,733 and
15,827,921 issued and outstanding, respectively
|
173
|
158
|
|
Additional paid-in
capital
|
52,407,543
|
46,681,073
|
|
Accumulated
deficit
|
(51,049,014)
|
(30,609,910)
|
|
Total
Petro River Oil Corp. Equity
|
1,358,702
|
16,071,321
|
|
Non-controlling
interests
|
-
|
12,610,470
|
|
Total
Equity
|
1,358,702
|
28,681,791
|
|
Total
Liabilities and Equity
|
$5,845,828
|
$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
|
|
|
|
Operations
|
|
|
|
Revenues
|
|
|
|
Oil
and natural gas sales
|
$723,409
|
$26,603
|
|
Total Revenues
|
723,409
|
26,603
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
Lease
operating expenses
|
127,814
|
48,578
|
|
Depreciation,
depletion and accretion
|
157,386
|
25,922
|
|
Gain
on sale of oil and gas assets
|
-
|
(216,580)
|
|
Impairment
of oil and gas assets
|
1,733,932
|
20,942
|
|
General
and administrative
|
3,644,751
|
4,107,795
|
|
Total Operating Expenses
|
5,663,883
|
3,986,657
|
|
|
|
|
|
Operating Loss
|
(4,940,474)
|
(3,960,054)
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
Interest
income (expense), net
|
(65,569)
|
628,956
|
|
Loss
on assumption of Pearsonia interests
|
(3,351,965)
|
-
|
|
Loss
on redetermination
|
(11,914,204)
|
-
|
|
Net
gain on real estate rights
|
267,734
|
1,689,274
|
|
Other Income (Expense)
|
(15,064,004)
|
2,318,230
|
|
|
|
|
|
Loss Before Income Tax Provision
|
(20,004,478)
|
(1,641,824)
|
|
|
|
|
|
Income Tax Provision
|
333,203
|
941,515
|
|
|
|
|
|
Net Loss
|
(20,337,681)
|
(2,583,339)
|
|
|
|
|
|
Net Income Attributable to Non-controlling Interests
|
101,423
|
383,152
|
|
|
|
|
|
Net Loss Attributable to Petro River Oil Corp.
shareholders
|
$(20,439,104)
|
$(2,966,491)
|
|
|
|
|
|
Loss Per Common Share - Basic and Diluted
|
$(1.24)
|
(0.19)
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic and
diluted
|
16,546,093
|
15,732,949
|
The
accompanying notes are an integral part of these consolidated
financial statements.
Petro River Oil Corp. and
Subsidiaries
Consolidated Statement of Changes in Stockholders’
Equity
For the Years Ended April 30, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at May 1, 2016
|
4,263,672
|
$43
|
$38,849,655
|
$(27,643,419)
|
$12,051,318
|
$23,257,597
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
-
|
-
|
2,178,716
|
-
|
-
|
2,178,716
|
|
|
|
|
|
|
|
|
|
Acquisition of
Horizon Investments
|
11,564,249
|
115
|
5,652,702
|
-
|
-
|
5,652,817
|
|
|
|
|
|
|
|
|
|
Non-controlling
interest contribution
|
-
|
-
|
-
|
-
|
176,000
|
176,000
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
-
|
-
|
-
|
(2,966,491)
|
383,152
|
(2,583,339)
|
|
|
|
|
|
|
|
|
|
Balance
at April 30, 2017
|
15,827,921
|
158
|
46,681,073
|
(30,609,910)
|
12,610,470
|
28,681,791
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
-
|
-
|
906,591
|
-
|
-
|
906,591
|
|
|
|
|
|
|
|
|
|
Cashless exercise
of options
|
15,145
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Warrants issued
with secured promissory note
|
-
|
|
2,003,227
|
-
|
-
|
2,003,227
|
|
|
|
|
|
|
|
|
|
Contribution of
overriding royalty interest
|
-
|
-
|
250,000
|
-
|
-
|
250,000
|
|
|
|
|
|
|
|
|
|
Acquisition of
Pearsonia interest
|
1,466,667
|
15
|
2,566,652
|
-
|
785,298
|
3,351,965
|
|
|
|
|
|
|
|
|
|
Acquisition of
Bandolier interest upon redetermination
|
-
|
-
|
-
|
-
|
(13,497,191)
|
(13,497,191)
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
-
|
-
|
-
|
(20,439,104)
|
101,423
|
(20,337,681)
|
|
|
|
|
|
|
|
|
|
Balance
at April 30, 2018
|
17,309,733
|
$173
|
$52,407,543
|
$(51,049,014)
|
$-
|
$1,358,702
|
The
accompanying notes are an integral part of these consolidated
financial statements.
Petro River Oil Corp. and
Subsidiaries
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
Net
loss
|
$(20,337,681)
|
$(2,583,339)
|
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
|
Stock-based
compensation
|
906,591
|
2,178,716
|
|
Depreciation,
depletion and accretion
|
157,386
|
25,922
|
|
Amortization of
debt discount
|
363,977
|
-
|
|
Impairment of oil
and gas assets
|
1,733,932
|
20,942
|
|
Loss on
redetermination
|
11,914,204
|
-
|
|
Loss on assumption
of Pearsonia interests
|
3,351,965
|
-
|
|
Gain on sale of oil
and gas assets
|
-
|
(216,580)
|
|
Net gain on interest in real estate
rights
|
(267,734)
|
(1,689,274)
|
|
Deferred income tax
expense
|
333,203
|
941,515
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Accounts receivable
- oil and gas
|
(299,676)
|
(7,520)
|
|
Accounts receivable
- real estate - related party
|
-
|
6,106
|
|
Accounts receivable
- other
|
17,449
|
-
|
|
Accrued interest on
notes receivable - related party
|
(593,021)
|
(627,057)
|
|
Prepaid expenses
and other current assets
|
1,267,555
|
(182,864)
|
|
Accounts payable
and accrued expenses
|
1,105,496
|
(86,547)
|
|
Net
Cash Used in Operating Activities
|
(346,354)
|
(2,219,980)
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
Proceeds from the
sale of interest in real estate rights
|
1,553,884
|
6,900,228
|
|
Prepaid oil and gas
development costs
|
(446,856)
|
(505,147)
|
|
Issuance of notes
receivable - related party
|
(1,558,501)
|
(6,938,382)
|
|
Capitalized
expenditures on oil and gas assets
|
(3,536,935)
|
(487,857)
|
|
Cash received from
the acquisition of Horizon Investment
|
-
|
3,364,817
|
|
Cash provided upon
redetermination
|
(119,722)
|
-
|
|
Cash paid for cost
method investment
|
-
|
91,802
|
|
Payments on
investment in Horizon Energy Partners
|
(379,418)
|
(525,000)
|
|
Net
Cash (Used in) Provided by Investing Activities
|
(4,487,548)
|
1,900,461
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
Proceeds from notes
payable - related party
|
4,500,000
|
-
|
|
Cash paid for debt
inducement
|
(250,000)
|
-
|
|
Cash received from
non-controlling interest contribution
|
-
|
176,000
|
|
Net
Cash Provided by Financing Activities
|
4,250,000
|
176,000
|
|
|
|
|
|
Change
in cash and cash equivalents
|
(583,902)
|
(143,519)
|
|
|
|
|
|
Cash
and cash equivalents, beginning of year
|
631,232
|
774,751
|
|
Cash
and cash equivalents, end of year
|
$47,330
|
$631,232
|
|
|
|
|
|
SUPPLEMENTARY
CASH FLOW INFORMATION:
|
|
|
|
Cash paid during
the year for:
|
|
|
|
Income
taxes
|
$86,876
|
$34,052
|
|
Interest
|
$-
|
$-
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
Reclassification
from prepaid oil and gas development costs to oil and gas assets
not being amortized
|
$-
|
$761,444
|
|
Receivable for sale
of oil and gas equipment
|
$17,449
|
$-
|
|
Warrants issued
with note payable
|
$2,003,227
|
$-
|
|
Overriding interest
contributed as debt inducement
|
$250,000
|
$-
|
|
Accrued oil and gas
development costs
|
$54,458
|
$-
|
|
Change in estimate
of asset retirement obligation
|
$61,633
|
$-
|
|
Additions to asset
retirement obligation from new drilling
|
$29,325
|
$-
|
The
accompanying notes are an integral part of these consolidated
financial statements.
PETRO RIVER OIL CORP. AND
SUBSIDIARIES
Notes to the Consolidated Financial Statements
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, utilizing modern
technology. 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
entering 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, including in Osage County and Kay County, Oklahoma.
Following the acquisition of Horizon I Investments, LLC
(“Horizon
Investments”), the
Company has additional exposure to a portfolio of 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 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. 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 prospects in Oklahoma are owned directly by the
Company and indirectly through Spyglass Energy Group, LLC
(“Spyglass”), a wholly owned subsidiary of Bandolier
Energy, LLC (“Bandolier”). As a result of the Exchange Transaction
consummated on January 31, 2018, as discussed below, Bandolier is
wholly-owned by the Company. Bandolier has a 75% working interest
in the 87,754-acre concession in Osage County, Oklahoma. The
remaining 25% working interest is held by the operator, Performance
Energy, LLC.
The execution of the Company’s 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, the Company plans to continue drilling additional
wells on its existing concessions, and to acquire additional
high-quality oil and gas properties, primarily proved producing,
and proved undeveloped reserves. The Company also intends 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
Working Interest Exchange.
On February 14, 2018, the Company
entered into a Purchase and Exchange Agreement with Red Fork
Resources (“Red Fork”), pursuant to which (i) the Company agreed
to convey to Mountain View Resources, LLC, an affiliate of Red
Fork, 100% of its 13.7% working interest in and to an area of
mutual interest (“AMI”) in the Mountain View Project in Kern
County, California, and (ii) Red Fork agreed to convey to the
Company 64.7% of its 85% working interest in and to an AMI situated
in Kay County, Oklahoma (the “Red Fork Exchange”). The fair value of the assets acquired
was $108,333 as of the effective date of the agreement. Following
the Red Fork Exchange, the Company and Red Fork each retained a 2%
overriding royalty interest in the projects that they respectively
conveyed. Under the terms of the Agreement, all revenues and costs,
expenses, obligations and liabilities earned or incurred prior to
January 1, 2018 (the “Effective
Date”) shall be borne by
the original owners of such working interests, and all of such
costs, expenses, obligations and liabilities that occur subsequent
to the effective date shall be borne by the new owners of such
working interests.
The acquisition of the additional concessions in Kay County,
Oklahoma added additional prospect locations adjacent to the
Company’s 106,000-acre concession in Osage County, Oklahoma.
The similarity of the prospects in Kay and Kern County allows for
the leverage of assets, infrastructure and technical
expertise.
MegaWest Exchange Transaction.
On January 31, 2018, the Company entered into an Assignment and
Assumption of Membership Interest with MegaWest Energy
Kansas Corp. (“MegaWest”) (the “Assignment
Agreement”), whereby the
Company transferred its interest in MegaWest in exchange for a 50%
membership interest in Bandolier Energy LLC (“Bandolier”) (the “Bandolier
Interest”) then held by
MegaWest (the “Exchange
Transaction”), as a
result of the Bandolier Acquisition, as defined below. The Exchange
Transaction followed the receipt by the Company of a notice of
Redetermination, as defined below, of MegaWest’s assets,
including MegaWest’s interest in the Bandolier Interests
(together, “MegaWest
Assets”), conducted
by Fortis Property Group, LLC, a Delaware limited liability
company (“Fortis”).
The Redetermination was conducted pursuant to the Contribution
Agreement, pursuant to which the Board of MegaWest was entitled to
engage a qualified appraiser to determine the value of the MegaWest
Assets and Bandolier Interests, and upon the completion thereof
(a “Redetermination”),
in the event the MegaWest Assets were determined to be less than
$40.0 million, then a Shortfall, as defined in the
Contribution Agreement, exists. As a result, the Company would
be required to make cash contributions to MegaWest in an amount
equal to the amount of the Shortfall
(the “Shortfall Capital
Contribution”). The
Contribution Agreement further provided that, in the event that the
Company was unable to deliver to MegaWest the Shortfall Capital
Contribution required after the Redetermination, if any, MegaWest
would have the right to exercise certain remedies, including a
right to foreclose on the Company’s entire interest in
MegaWest. In the event of foreclosure, the Bandolier Interest
would revert back to the Company.
In lieu of engaging a qualified appraiser to quantify the Shortfall
Capital Contribution, and in lieu of requiring MegaWest to exercise
its remedies under the terms of the Contribution Agreement, the
Company and MegaWest entered into the Exchange Transaction. As
a result, the Company has no further rights or interest in
MegaWest, and MegaWest has no further rights or interest in any
assets associated with the Bandolier Interests. Pursuant to
the Contribution Agreement and Assignment Agreement, the Company
continues to be responsible for a reimbursement payment to MegaWest
in the amount of $259,313, together with interest accrued thereon
at an annual rate 10%, which will be due and payable one year after
the date of the Assignment Agreement and has been included as a
payable since January 31, 2018.
As a result of the Redetermination, the Company recorded a loss on
redetermination of $11,914,204 reflecting the write-off of the
related assets, liabilities and non-controlling interests of
Fortis’ interest in MegaWest as shown below:
|
Assets
|
|
|
Cash
and cash equivalents
|
$119,722
|
|
Accounts
receivable - real estate - related party
|
1,146,885
|
|
Accrued
interest on notes receivable - related party
|
1,390,731
|
|
Interest
in Bandolier
|
259,313
|
|
Notes
receivable - related party, current portion
|
26,344,883
|
|
Total Assets
|
$29,261,534
|
|
|
|
|
Liabilities
|
|
|
Accounts
payable and accrued expenses
|
$74,212
|
|
Deferred
tax liability
|
3,775,927
|
|
Total Liabilities
|
3,850,139
|
|
|
|
|
Non-controlling
interest
|
13,497,191
|
|
|
|
|
Loss
on redetermination
|
$11,914,204
|
At the time the parties entered into the Contribution Agreement,
management anticipated that the market price for crude oil would
return to prices reached prior to 2015, and that additional wells
would be drilled, resulting in greater revenue from the Bandolier
Interests. Subsequent to the execution of the Contribution
Agreement, only two wells had been drilled as of January 2018. That
fact, together with the relatively low price of crude oil and the
anticipated delays in drilling additional wells to demonstrate the
value of the Bandolier Interests, contributed to Fortis’
election to terminate the Contribution Agreement at the end of its
term, as amended. Had the market price of oil supported the value
of developing the Bandolier oil and gas properties at that time,
under the terms of the Contribution Agreement, Fortis would have
been required to fund the planned drilling program.
Recent Financings.
On September 20, 2017, the Company entered into a Securities
Purchase Agreement 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, 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 (the
“Existing Osage County
Override”). The Existing
Osage County Override was an existing override that was acquired by
the Company from Scot Cohen. The note accrues interest at a rate of
10% per annum and matures on June 30,
2020.
Scott Cohen, a member of the Company’s Board of
Directors and a substantial stockholder of the Company,
owns or controls 31.25% of Funding
Corp. I and 41.20% of Funding Corp. II.
On June 13, 2017, the Company entered into a Securities Purchase
Agreement with Petro Exploration Funding, LLC (“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 (the “June Note
Financing”), in the principal amount of $2.0 million.
As additional consideration for the June Note Financing, the
Company issued to Funding Corp. I (i) a warrant to purchase 840,336
shares of the Company’s common stock, and (ii) an overriding
royalty interest equal to 2% in all production from the
Company’s interest in the Company’s concessions located
in Osage County, Oklahoma, currently held by Spyglass, pursuant to
an Assignment of Overriding Royalty Interests. The note accrues interest at a rate of 10% per
annum and matures on June 30,
2020.
Scot
Cohen owns or controls 31.25% of Funding Corp. I.
On June 18, 2018, Bandolier Energy, LLC, a wholly owned
subsidiary of the Company entered into a Loan Agreement with Scot
Cohen, the Executive Chairman of the Company (the "Cohen Loan
Agreement"), pursuant to which Scot Cohen loaned the Company
$300,000 at a 10% annual interest rate due September 30,
2018. The Cohen Loan Agreement was to provide the Company
with short term financing in connection with the Company's drilling
program in Osage County, Oklahoma.
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”). Pursuant to the Membership Interest
Assignment, the Company issued 1,466,667 shares of its common
stock, with a fair value of $1.75 per share, to Pearsonia in
exchange for all the membership interests in Bandolier held by
Pearsonia. As result of this transaction, the Company wrote-off the
non-controlling interest in Bandolier totaling $785,298 and
recorded a loss of $3,351,965.
|
2.
|
Going Concern and Management’s Plan
|
The
accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. As of April 30, 2018, the Company had an accumulated
deficit of $51.0 million. The Company has incurred significant
losses since inception. These matters raise substantial doubt about
the Company’s ability to continue as a going concern. The
consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset amounts
or the classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
At
April 30, 2018, the Company had a working deficit of approximately
$1.5 million. 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 prior to
acquisition of Bandolier. At April 30, 2018, the Company had cash
and cash equivalents of $47,330. The Company’s primary source
of operating funds since inception has been debt and equity
financings, primarily from related parties.
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. In addition, 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.
The
consolidated financial statements and accompanying footnotes are
prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) and the rules and
regulations of the Securities and Exchange Commission
(“SEC”) and
include the accounts of the Company and its wholly owned and
majority owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
Non–controlling interest represents the minority equity
investment in the Company’s subsidiaries, plus the minority
investors’ share of the net operating results and other
components of equity relating to the non–controlling
interest.
These
consolidated financial statements include the Company and the
following subsidiaries:
Petro
Spring, LLC; PO1, LLC; Petro River UK Limited; Horizon I
Investments, LLC; and MegaWest Energy USA Corp. and MegaWest Energy
USA Corp.’s wholly owned subsidiaries:
MegaWest
Energy Texas Corp.
MegaWest
Energy Kentucky Corp.
MegaWest
Energy Missouri Corp.
As a result of the Acquisition of Membership Interest in the Osage
County Concession (as discussed above), Bandolier is now a
wholly-owned subsidiary of the Company, and the Company
consolidates 100% of the financial information of Bandolier.
Bandolier operates the Company’s Oklahoma oil and gas
properties.
Also contained in the consolidated financial statements for the
year ended April 30, 2018 is the financial information of MegaWest,
which, prior to January 31, 2018, was 58.51% owned by the Company.
As a result of the Exchange Transaction, the consolidated financial
statements for the year ended April 30, 2018, include the results
of operations of MegaWest; however, the assets and liabilities have
been written off and included in loss on redetermination of
$11,914,204 on the statement of operations for the year ended April
30, 2018.
|
4.
|
Significant Accounting Policies
|
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
management’s 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 April 30, 2018, $0 of the Company’s cash balances were
uninsured. The Company has not experienced any loses on such
accounts.
Receivables
that management has the intent and ability to hold for the
foreseeable future shall be reported in the balance sheet at
outstanding principal adjusted for any charge-offs and the
allowance for doubtful accounts. Losses from uncollectible
receivables shall be accrued when both of the following conditions
are met: (a) Information available before the financial statements
are issued or are available to be issued indicates that it is
probable that an asset has been impaired at the date of the
financial statements, and (b) The amount of the loss can be
reasonably estimated. These conditions may be considered in
relation to individual receivables or in relation to groups of
similar types of receivables. If the conditions are met, an accrual
shall be made even though the particular receivables that are
uncollectible may not be identifiable. The Company reviews
individually each receivable for collectability and performs
on-going credit evaluations of its customers and adjusts credit
limits based upon payment history and the customer’s current
credit worthiness, as determined by the review of their current
credit information; and determines the allowance for doubtful
accounts based on historical write-off experience, customer
specific facts and general economic conditions that may affect a
client’s ability to pay. Bad debt expense is included in
general and administrative expenses, if any.
Credit
losses for receivables (uncollectible receivables), which may be
for all or part of a particular receivable, shall be deducted from
the allowance. The related receivable balance shall be charged off
in the period in which the receivables are deemed uncollectible.
Recoveries of receivables previously charged off shall be recorded
when received. The Company charges off its account receivables
against the allowance after all means of collection have been
exhausted and the potential for recovery is considered
remote.
The
allowance for doubtful accounts at April 30, 2018 and 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
for the year ended April 30, 2017 are stated on balance sheet at
the cost basis of Fortis. As a result of the
Working Interest Exchange, no amounts are reflected in interests in
real estate rights as of April 30, 2018.
|
(e)
|
|
Oil and
Gas Operations:
|
Oil and Gas Properties: The Company uses the full-cost
method of accounting for its exploration and development
activities. Under this method of accounting, the costs of both
successful and unsuccessful exploration and development activities
are capitalized as oil and gas property and equipment. Proceeds
from the sale or disposition of oil and gas properties are
accounted for as a reduction to capitalized costs unless the gain
or loss would significantly alter the relationship between
capitalized costs and proved reserves of oil and natural gas
attributable to a country, in which case a gain or loss would be
recognized in the consolidated statements of operations. All of the
Company’s oil and gas properties are located within the
continental United States, its sole cost center.
Oil and
gas properties may include costs that are excluded from costs being
depleted. Oil and gas costs excluded represent investments in
unproved properties and major development projects in which the
Company owns a direct interest. These unproved property costs
include non-producing leasehold, geological and geophysical costs
associated with leasehold or drilling interests and in process
exploration drilling costs. All costs excluded are reviewed at
least annually to determine if impairment has
occurred.
Long-lived
assets are reviewed for impairment whenever events or changes in
circumstances indicate that the historical cost carrying value of
an asset may no longer be appropriate. As of April 30, 2018 and 2017,
management engaged a third party to perform an independent study of
the oil and gas assets. The Company recorded total impairment of
$1,733,932 and $20,942 to the consolidated statements of operations
for the years ended April 30, 2018 and 2017,
respectively.
Proved Oil and Gas Reserves: Proved oil and gas reserves are
the estimated quantities of crude oil, natural gas and natural gas
liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. All of
the Company’s oil and gas properties with proven reserves
were impaired to the salvage value prior to the Bandolier
transaction. The price used to establish economic producibility is
the average price during the 12-month period preceding the end of
the entity’s fiscal year and calculated as the un-weighted
arithmetic average of the first-day-of-the-month price for each
month within such 12-month period.
Depletion, Depreciation and Amortization: Depletion,
depreciation and amortization is provided using the
unit-of-production method based upon estimates of proved oil and
gas reserves with oil and gas production being converted to a
common unit of measure based upon their relative energy content.
Investments in unproved properties and major development projects
are not amortized until proved reserves associated with the
projects can be determined or until impairment occurs. If the
results of an assessment indicate that the properties are impaired,
the amount of the impairment is deducted from the capitalized costs
to be amortized. Once the assessment of unproved properties is
complete and when major development projects are evaluated, the
costs previously excluded from amortization are transferred to the
full cost pool and amortization begins. The amortizable base
includes estimated future development costs and, where significant,
dismantlement, restoration and abandonment costs, net of estimated
salvage value.
In
arriving at rates under the unit-of-production method, the
quantities of recoverable oil and natural gas reserves are
established based on estimates made by the Company’s
geologists and engineers which require significant judgment, as
does the projection of future production volumes and levels of
future costs, including future development costs. In addition,
considerable judgment is necessary in determining when unproved
properties become impaired and in determining the existence of
proved reserves once a well has been drilled. All of these
judgments may have significant impact on the calculation of
depletion expenses. There have been no material changes in the
methodology used by the Company in calculating depletion,
depreciation and amortization of oil and gas properties under the
full cost method during the years ended April 30, 2018 and
2017.
|
(f)
|
|
Impairment
of Long-Lived Assets:
|
The
Company assesses the recoverability of its long-lived assets when
there are indications that the assets might be impaired. When
evaluating assets for potential impairment, the Company compares
the carrying value of the asset to its estimated undiscounted
future cash flows. If an asset’s carrying value exceeds
such estimated cash flows (undiscounted and with interest charges),
the Company records an impairment charge for the
difference.
|
(g)
|
|
Asset
Retirement Obligations:
|
The
Company recognizes a liability for the estimated fair value of site
restoration and abandonment costs when the obligations are legally
incurred and the fair value can be reasonably estimated. The fair
value of the obligations is based on the estimated cash flow
required to settle the obligations discounted using the
Company’s credit adjusted risk-free interest rate. The
obligation is recorded as a liability with a corresponding increase
in the carrying amount of the oil and gas assets. The capitalized
amount will be depleted on a unit-of-production method. The
liability is increased each period, or accretes, due to the passage
of time and a corresponding amount is recorded in the consolidated
statements of operations.
Revisions
to the estimated fair value would result in an adjustment to the
liability and the capitalized amount in oil and gas
assets.
Income Tax Provision
On
December 22, 2017, the Tax Cuts and Jobs Act
(“Tax Act”) was
signed into law. ASC 740, Accounting for Income Taxes requires
companies to recognize the effects of changes in tax laws and rates
on deferred tax assets and liabilities and the retroactive effects
of changes in tax laws in the period in which the new legislation
is enacted. The Company’s gross deferred tax assets were
revalued based on the reduction in the federal statutory tax rate
from 35% to 21%, which will result in a reduction in the
Company’s statutory tax rate from 36.64% to 30.62% for the
year ended April 30, 2018. A corresponding offset has been made to
the valuation allowance, and any potential other taxes arising due
to the Tax Act will result in reductions to the Company’s net
operating loss carryforward and valuation allowance. The Company
will continue to analyze the Tax Act to assess its full effects on
the Company’s financial results, including disclosures, for
the Company’s fiscal year ending April 30, 2019, but the
Company does not expect the Tax Act to have a material impact on
the Company’s consolidated financial statements.
Deferred
income tax assets and liabilities are determined based upon
differences between the financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to
reverse. Deferred tax assets are reduced by a valuation allowance
to the extent management concludes it is more likely than not that
the assets will not be realized. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
the statements of operations in the period that includes the
enactment date.
The
Company may recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based
on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position should
be measured based on the largest benefit that has a greater than
fifty percent (50%) likelihood of being realized upon ultimate
settlement.
The
estimated future tax effects of temporary differences between the
tax basis of assets and liabilities are reported in the
accompanying consolidated balance sheets, as well as tax credit
carry-backs and carry-forwards. The Company periodically reviews
the recoverability of deferred tax assets recorded on its
consolidated balance sheets and provides valuation allowances as
management deems necessary.
Management
makes judgments as to the interpretation of the tax laws that might
be challenged upon an audit and cause changes to previous estimates
of tax liability. In addition, the Company operates within multiple
taxing jurisdictions and is subject to audit in these
jurisdictions. In management’s opinion, adequate provisions
for income taxes have been made for all years. If actual taxable
income by tax jurisdiction varies from estimates, additional
allowances or reversals of reserves may be necessary.
Uncertain Tax Positions
The
Company evaluates uncertain tax positions to recognize a tax
benefit from an uncertain tax position only if it is more likely
than not that the tax position will be sustained on examination by
the taxing authorities based on the technical merits of the
position. Those tax positions failing to qualify for initial
recognition are recognized in the first interim period in which
they meet the more likely than not standard, or are resolved
through negotiation or litigation with the taxing authority, or
upon expiration of the statute of limitations. De-recognition of a
tax position that was previously recognized occurs when an entity
subsequently determines that a tax position no longer meets the
more likely than not threshold of being sustained.
At
April 30, 2018 and 2017, the Company has approximately $0 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 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).
Sales
of oil and gas, net of any royalties, are recognized when oil has
been delivered to a custody transfer point, persuasive evidence of
a sales arrangement exists, the rights and responsibility of
ownership pass to the purchaser upon delivery, collection of
revenue from the sale is reasonably assured, and the sales price is
fixed or determinable. The Company sells oil and gas on a monthly
basis. Virtually all of its contracts’ pricing provisions are
tied to a market index, with certain adjustments based on, among
other factors, whether a well delivers to a gathering or
transmission line, the quality of the oil and gas, and prevailing
supply and demand conditions, so that the price of the oil and gas
fluctuates to remain competitive with other available oil
supplies.
|
(j)
|
|
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 options' 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 the Company’s
estimate, the equity–based compensation expense could be
significantly different from what the Company has recorded in the
current period.
The
Company determines the fair value of the stock–based payment
granted to non-employees as either the fair value of the
consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. If the fair
value of the equity instruments issued is used, it is measured
using the stock price and other measurement assumptions as of the
earlier of either (1) the date at which a commitment for
performance by the counterparty to earn the equity instruments is
reached, or (2) the date at which the counterparty’s
performance is complete.
The
expenses resulting from stock-based compensation are recorded as
general and administrative expenses in the consolidated statement
of operations, depending on the nature of the services
provided.
Basic
net income (loss) per common share is computed by dividing net loss
attributable to common stockholders by the weighted-average number
of common shares outstanding during the period. Diluted net income
(loss) per common share is determined using the weighted-average
number of common shares outstanding during the period, adjusted for
the dilutive effect of common stock equivalents. For the years
ended April 30, 2018 and 2017, potentially dilutive securities were
not included in the calculation of diluted net loss per share
because to do so would be anti-dilutive.
The
Company had the following common stock equivalents at April 30,
2018 and 2017:
|
As
of
|
|
|
|
Stock
options
|
2,555,385
|
2,599,682
|
|
Stock purchase
warrants
|
2,223,669
|
133,333
|
|
Total
|
4,779,054
|
2,733,015
|
|
(l)
|
|
Fair
Value of Financial Instruments:
|
All
financial instruments, including cash and cash equivalents,
accounts receivable and accounts payable and accrued expenses are
recognized on the consolidated balance sheet initially at carrying
value. The carrying value of these assets approximates their fair
value due to their short-term maturities.
At each
balance sheet date, the Company assesses financial assets for
impairment with any impairment recorded in the consolidated
statement of operations. To assess loans and receivables for
impairment, the Company evaluates the probability of collection of
accounts receivable and records an allowance for doubtful accounts,
which reduces loans and receivables to the amount management
reasonably believes will be collected. In determining the amount of
the allowance, the following factors are considered: the length of
the time the receivable has been outstanding, specific knowledge of
each customer’s financial condition and historical
experience.
Market
risk is the risk that changes in commodity prices will affect the
Company’s oil sales, cash flows or the value of its financial
instruments. The objective of commodity price risk management is to
manage and control market risk exposures within acceptable limits
while maximizing returns.
The
Company is exposed to changes in oil prices which impact its
revenues and to changes in natural gas process which impact its
operating expenses.
The
Company does not utilize financial derivatives or other contracts
to manage commodity price risks.
Fair
value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date (exit price).
Fair
value measurements are categorized using a valuation hierarchy for
disclosure of the inputs used to measure fair value, which
prioritize the inputs into three broad levels:
Level 1
- Quoted prices are available in active markets for identical
assets or liabilities as of the reporting date. Active markets are
those in which transactions for the asset or liability occur in
sufficient frequency and volume to provide pricing information on
an ongoing basis.
Level 2
- Pricing inputs are other than quoted prices in active markets
included in level 1, which are either directly or indirectly
observable as of the reported date, and include those financial
instruments that are valued using models or other valuation
methodologies.
Level 3
- Pricing inputs include significant inputs that are generally less
observable from objective sources. These inputs may be used with
internally developed methodologies that result in
management’s best estimate of fair value.
|
(m)
|
|
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 Accounting Standards Update
(“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 February
2016, the FASB issued
ASU 2016-02, Leases,
which aims to make leasing activities more transparent and
comparable and requires substantially all leases be recognized by
lessees on their balance sheet as a right-of-use asset and
corresponding lease liability, including leases currently accounted
for as operating leases. This ASU is effective for all interim and
annual reporting periods beginning after December 15,
2019, with early adoption
permitted. We expect to adopt ASU 2016-02 beginning January 1,
2019 and are in the
process of assessing the impact that this new guidance is expected
to have on our financial statements and related
disclosures.
In
April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers:
Identifying Performance Obligations and Licensing”
(topic 606). In March 2016, the FASB issued ASU No. 2016-08,
“Revenue from Contracts with
Customers: Principal versus Agent Considerations (Reporting Revenue
Gross verses Net)” (topic 606). These amendments
provide additional clarification and implementation guidance on the
previously issued ASU 2014-09, “Revenue from Contracts with
Customers”. The amendments in ASU 2016-10 provide
clarifying guidance on materiality of performance obligations;
evaluating distinct performance obligations; treatment of shipping
and handling costs; and determining whether an entity's promise to
grant a license provides a customer with either a right to use an
entity's intellectual property or a right to access an entity's
intellectual property. The amendments in ASU 2016-08 clarify how an
entity should identify the specified good or service for the
principal versus agent evaluation and how it should apply the
control principle to certain types of arrangements. The adoption of
ASU 2016-10 and ASU 2016-08 is to coincide with an entity's
adoption of ASU 2014-09, which the Company intends 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. Adoption of ASU 2016-09
did not have a material impact on the consolidated financial
statements.
In May
2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers
(Topic 606): Narrow-Scope Improvements and Practical
Expedients”, which narrowly amended the revenue
recognition guidance regarding collectability, noncash
consideration, presentation of sales tax and transition and is
effective during the same period as ASU 2014-09. The Company is
currently evaluating the standard and does not expect the adoption
will have a material effect on its consolidated financial
statements and disclosures.
In
August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash
Payments” (“ASU 2016-15”). ASU 2016-15
will make eight targeted changes to how cash receipts and cash
payments are presented and classified in the statement of cash
flows. ASU 2016-15 is effective for fiscal years beginning after
December 15, 2017. The new standard will require adoption on a
retrospective basis unless it is impracticable to apply, in which
case it would be required to apply the amendments prospectively as
of the earliest date practicable. The Company is currently in the
process of evaluating the impact of ASU 2016-15 on its consolidated
financial statements.
In September
2016, the FASB issued
ASU 2016-13, Financial Instruments
- Credit Losses.
ASU 2016-13 was issued to provide more decision-useful
information about the expected credit losses on financial
instruments and changes the loss impairment methodology.
ASU 2016-13 is effective for reporting periods beginning
after December 15,
2019 using a modified
retrospective adoption method. A prospective transition approach is
required for debt securities for which a other-than-temporary
impairment had been recognized before the effective date. The
Company is currently assessing the impact this accounting standard
will have on its financial statements and related
disclosures.
In May
2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718):
Scope of Modification Accounting,” which provides
guidance about which changes to the terms or conditions of a
share-based payment award require an entity to apply modification
accounting in Topic 718. This standard is required to be adopted in
the first quarter of 2018. The Company is currently evaluating the
impact this guidance will have on its consolidated financial
statements and related disclosures.
In
September 2017, the Financial Accounting Standards Board (FASB)
issued ASU No. 2017-13, Revenue
Recognition (Topic 605), and Revenue from Contracts with Customers
(Topic 606). The new standards, among other things, provide
additional implementation guidance with respect to Accounting
Standards Codification (ASC) Topic 606. ASU 2017-13 is effective
for annual reporting periods beginning after December 15, 2017,
including interim reporting periods within that reporting period.
The Company is currently evaluating the impact of the new standard
but does not expect it to have a material impact on its
implementation strategies or its consolidated financial statements
upon adoption.
The
Company does not expect the adoption of any recently issued
accounting pronouncements to have a significant impact on its
financial position, results of operations, or cash
flows.
The
Company has evaluated all transactions through the date the
consolidated financial statements were issued for subsequent event
disclosure consideration.
Acquisition of Interest in Bandolier Energy LLC. On
May 30, 2014, the Company entered into a Subscription Agreement
pursuant to which the Company was issued a 50% interest in
Bandolier Energy, LLC (“Bandolier”) in exchange for a
capital contribution of $5.0 million (the “Bandolier Acquisition”). In
connection with the Bandolier Acquisition, the Company had the
right to appoint a majority of the board of managers of Bandolier.
The Company’s Executive Chairman was a manager of, and owned
a 20% membership interest in, Pearsonia West Investment Group, LLC
(“Pearsonia
West”), a special purpose vehicle formed for the
purpose of investing in Bandolier with the Company and Ranger
Station, LLC (“Ranger
Station”). Concurrent with the Bandolier Acquisition,
Pearsonia West was issued a 44% interest in Bandolier for cash
consideration of $4.4 million, and Ranger Station was issued a 6%
interest in Bandolier for cash consideration of $600,000. In
connection with Pearsonia West’s investment in Bandolier, the
Company and Pearsonia West entered into an agreement, dated May 30,
2014, granting the members of Pearsonia West an option, exercisable
at any time prior to May 30, 2017, to exchange their pro rata share
of the Bandolier membership interests for shares of the
Company’s common stock, at a price of $16.00 per share,
subject to adjustment (the “Option”). The Option, if fully
exercised, would result in the Company issuing 275,000 shares of
its common stock, or 6% to the members of Pearsonia
West.
Until
the consummation of the Exchange Transaction, described in Note 1,
the Company had operational control along with a 50% ownership
interest in Bandolier. As a result, the Company consolidated
Bandolier. The remaining 50% non-controlling interest represented
the equity investment from Pearsonia West and Ranger Station. Upon
consummation of the Exchange Transaction, the Company now owns 100%
of Bandolier.
On May
30, 2014, Bandolier acquired, for $8,712,893 less a $407,161 claw
back, all of the issued and outstanding equity of Spyglass Energy
Group, LLC (“Spyglass”), the owner of oil and
gas leases, leaseholds, lands, and options and concessions thereto
located in Osage County, Oklahoma. Spyglass controlled a
significant contiguous oil and gas acreage position in Northeastern
Oklahoma, consisting of 87,754 acres, with substantial original oil
in place, stacked reservoirs, as well as exploratory and
development opportunities that could be accessed through both
horizontal and vertical drilling. Significant infrastructure was
already in place including 32 square miles of 3-D seismic data, 3
phase power, a dedicated sub-station as well as multiple oil
producing horizontal wells. No additional contingencies were
assumed.
Horizon Investments
On May
3, 2016, the Company consummated the acquisition of Horizon
Investments (the “Horizon
Acquisition”), which was majority owned by the
Company’s Chief Executive Officer. Accordingly, the
transaction was recorded at historical cost. As a result of the
acquisition, the Company acquired: (i) a 20% membership interest in
Horizon Energy, which in turn holds working interests in oil and
gas properties; (ii) three promissory notes issued by the Company
to Horizon Investments in the aggregate principal amount of $1.6
million (the “Horizon
Notes”); (iii) a restricted certificate of deposit;
and (iv) certain bank, investment and other accounts maintained by
Horizon Investments. The Horizon Acquisition was completed in
accordance with the term and conditions of the Conditional Purchase
Agreement first entered into by the Company and Horizon Investments
on December 1, 2015. Also on the closing date, the Company and
Horizon Investments entered into an amended and restated purchase
agreement, pursuant to which the Company agreed to provide for
additional advances by Horizon Investments to the
Company.
As consideration for the Horizon Acquisition, and in accordance
with the purchase agreement, as amended, the Company issued
11,564,249 shares of its common stock on the closing date, which
amount included 1,395,916 additional shares of common stock in
consideration for the additional cash, receivables and other assets
reflected on Horizon Investment’s balance sheet on the
closing date.
The
following table summarizes the allocation of the purchase price to
the net assets acquired:
|
Purchase
price allocation
|
|
|
Cash and cash
equivalents
|
$3,364,817
|
|
Cost method
investment – Horizon Energy Partners, LLC
|
688,000
|
|
Notes receivable
– Petro River (1)
|
1,600,000
|
|
Net
assets acquired
|
$5,652,817
|
|
|
|
|
Consideration
for net assets acquired
|
|
|
Fair value of
common stock issued
|
$5,652,817
|
(1)
Prior to the
acquisition, the Company issued notes payable to Horizon
Investments. Following the acquisition, the notes were eliminated
upon consolidation.
On
February 2, 2018, Horizon Investments received a capital call from
Horizon Energy in the amount of $600,227. Horizon Investments did
not have the required funds to fund the capital call. The capital
call was not mandatory and the consequence of Horizon
Investments’ failure to fund the capital call was a dilution
in Horizon Investments’ interest in Horizon Energy by 27.43%,
therefore reducing Horizon Investments’ interest in Horizon
Energy from 20.01% to 14.52%. Scot Cohen, a member of the
Company’s Board of Directors, a substantial stockholder, and
a member of Horizon Energy, participated with other Horizon Energy
members to make the requested capital call in light of Horizon
Investment’s inability to make the requested capital call.
The determination not to make the requested capital call, and
therefore allow Mr. Cohen to increase his membership interest in
Horizon Energy, was discussed and approved by the independent
members of the Company’s Board of Directors.
|
6.
|
Accounts Receivable – Related Party
|
On
October 15, 2015, the Company entered into a contribution agreement
with MegaWest and Fortis, pursuant to which the Company and Fortis
each agreed to contribute certain assets to MegaWest in exchange
for shares of MegaWest common stock (“MegaWest Shares”) (the
“MegaWest
Transaction”).
Upon
execution of the Contribution Agreement, (i) the Company
transferred its 50% membership interest in Bandolier
(the “Bandolier
Interest”) and cancelled all of its ownership interest
in the then issued and outstanding MegaWest Shares, which prior to
the MegaWest Transaction represented 100% ownership of MegaWest;
and (ii) Fortis transferred the rights to any profits and proceeds
from the sale of 30 condominium units owned by
Fortis. Immediately thereafter, MegaWest issued to the
Company 58,510 MegaWest Shares, representing a 58.51% equity
interest in MegaWest, as consideration for the assignment of the
Bandolier Interest, and issued to Fortis 41,490 MegaWest Shares,
representing a 41.49% equity interest in MegaWest, as consideration
for the assets assigned to MegaWest by
Fortis.
The accounts receivable and the Company’s interest in real
estate reflected on the Company’s balance sheet for the year
ended April 30, 2017 were assets held by MegaWest, and were
controlled by MegaWest’s board of directors, which consisted
of two members appointed by Fortis and one by the
Company.
Proceeds from the amounts receivable from Fortis were to be
available when the Company 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 expired on December 31, 2017. On December 29, 2017, the
Company obtained 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. Under the terms of
the Contribution Agreement, upon a Redetermination, in the event
there was 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 would have been entitled to the value of the
receivable but would be required to provide MegaWest with a cash
contribution in an amount equal to the shortfall. In the event
the Company was unable to deliver to MegaWest the cash contribution
required after the Redetermination, if any, the board of directors
of MegaWest would have had 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
was pledged to Fortis under the terms of the Contribution
Agreement. In the event of foreclosure, the Bandolier Interest
would have reverted back to the Company, and the Company would have
recorded 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.
As described in Note 1, the Company entered into the Assignment
Agreement with MegaWest, pursuant to which the Company transferred
its MegaWest shares in exchange for MegaWest’s membership
interests in Bandolier. In lieu of engaging a qualified appraiser
to quantify the Shortfall Capital Contribution, and in lieu of
requiring MegaWest to exercise its remedies under the terms of the
Contribution Agreement, the Company and MegaWest entered into the
exchange transaction. Following the execution of the Assignment
Agreement, the Company has no further rights or interest in the
MegaWest Shares or assets, and MegaWest has no further rights or
interest in any assets associated with the Bandolier Interests.
Pursuant to the Contribution Agreement and Assignment Agreement,
the Company agreed to reimburse MegaWest in the amount of $259,313,
together with interest accrued thereon at an annual rate of 10%,
which will be due and payable one year after the date of the
Assignment Agreement.
|
7.
|
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 matured on January 31, 2018. As of April 30, 2018
and 2017, the outstanding balance of the notes receivable was $0
and $24,786,382, respectively. See
Note 1 for further discussion regarding the Exchange
Transaction.
|
8.
|
Interest in Real Estate Rights
|
As
discussed in Note 6, MegaWest received an interest in real estate
rights of 30 condominium units from Fortis pursuant to the MegaWest
Transaction. During the years ended April 30, 2018 and 2017, the
Company recognized a net gain of $267,734 and $1,689,274 related to
the sale of four condominium units by Fortis.
As described in Note 1, as a result of the Exchange Transaction, no
amounts are recorded at April 30, 2018 for interests in real estate
rights.
The
following table summarizes the activity for interest in real estate
rights:
Balance
at April 30, 2016
|
$2,820,402
|
|
Additions –
interest in real estate rights of 30 condominium units contributed
by Fortis
|
|
Less: Cost of sales
– four condominium units
|
(2,510,542)
|
|
Balance
at April 30, 2017
|
309,860
|
Less: Cost of sales
– one condominium unit
|
(309,860)
|
Balance
at April 30, 2018
|
$-
|
The
following table summarizes the oil and gas assets by
project:
|
Cost
|
|
|
|
|
|
Balance, May 1,
2016
|
$778,226
|
-
|
100,000
|
878,226
|
|
Additions
|
487,857
|
761,444
|
-
|
1,249,301
|
|
Depreciation,
depletion and amortization
|
(12,949)
|
-
|
-
|
(12,949)
|
|
Impairment of oil
and gas assets
|
(20,942)
|
-
|
-
|
(20,942)
|
|
Balance, April 30,
2017
|
1,232,192
|
761,444
|
100,000
|
2,093,636
|
|
Additions
|
3,665,851
|
-
|
-
|
3,665,851
|
|
Depreciation,
depletion and amortization
|
(146,141)
|
-
|
-
|
(146,141)
|
|
Impairment of oil
and gas assets
|
(972,488)
|
(761,444)
|
-
|
(1,733,932)
|
|
Balance, April 30,
2018
|
$3,779,414
|
$-
|
$100,000
|
$3,879,414
|
(1)
Other property consists primarily of
four, used steam generators and related equipment that will be
assigned to future projects. As of April 30, 2018 and 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.
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.
As described in Note 1, on February 14, 2018, the Company exchanged
its interest in the Kern County, California properties for a
working interest in and to an AMI
situated in Kay County, Oklahoma.
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 acquired a 16% interest, and
Brigantes Energy Limited, which retained a 10% interest. Third
parties own the remaining 65% interest.
Under the terms of the Farmout Agreement, Petro UK deposited
approximately $735,000 into an escrow agreement
(“Escrow
Agreement”), which amount
represented Petro UK’s obligation to fund the total projected
cost to drill the first well under the terms of the Farmout
Agreement. The
total deposited amount to fund the cost to drill the first well is
approximately $6,159,452, based on an exchange rate of 1.0 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 year
ended April 30, 2018, the Company recorded additions related to
development costs incurred of approximately $3,665,851 and $0 for
proven and unproven oil and gas assets,
respectively.
The Company’s prospects in Oklahoma are owned directly by the
Company and indirectly by Spyglass. As a result of the Exchange
Transaction consummated on January 31, 2018, as discussed above,
Bandolier is wholly-owned by the Company. Bandolier has a 75%
working interest in the 106,500-acre concession in Osage County,
Oklahoma. The remaining 25% working interest is held by the
operator, Performance Energy, LLC.
Impairment of Oil & Gas Properties. As of April 30, 2018,
the Company assessed its oil and gas assets for impairment and
recognized a charge of $1,733,932 related to its Oklahoma and Larne
Basin oil and gas properties. As of April 30, 2017, the Company
assessed its oil and gas assets for impairment and recognized a
charge of $20,942 related to the Oklahoma oil and gas
assets.
|
10.
|
Asset Retirement Obligations
|
The
total future asset retirement obligation was estimated based on the
Company’s ownership interest in all wells and facilities, the
estimated legal obligations required to retire, dismantle, abandon
and reclaim the wells and facilities and the estimated timing of
such payments. The Company estimated the present value of its asset
retirement obligations at both April 30, 2018 and 2017, based on a
future undiscounted liability of $728,091 and $639,755,
respectively. These costs are expected to be incurred within one to
24 years. A credit-adjusted risk-free discount rate of 10% and an
inflation rate of 2% were used to calculate the present
value.
Changes
to the asset retirement obligation were as follows:
|
|
|
|
|
Balance, beginning
of period
|
$558,696
|
$763,062
|
|
Additions
|
29,325
|
-
|
|
Changes in
estimates
|
61,633
|
-
|
|
Disposals
|
-
|
(216,580)
|
|
Accretion
|
10,485
|
12,214
|
|
Total asset
retirement obligations
|
660,139
|
558,696
|
|
Less: current
portion of asset retirement obligations
|
(413,794)
|
(406,403)
|
|
Long-term portion
of asset retirement obligations
|
$246,345
|
$152,293
|
Expected
timing of asset retirement obligations:
|
Year Ending April
30,
|
|
|
2019
|
$413,794
|
|
2020
|
-
|
|
2021
|
-
|
|
2022
|
-
|
|
2023
|
-
|
|
Thereafter
|
321,688
|
|
Subtotal
|
735,482
|
|
Effect of
discount
|
(75,343)
|
|
Total
|
$660,139
|
As of
April 30, 2018 and 2017, the Company had $0 of reclamation deposits
with authorities to secure certain abandonment
liabilities.
|
11.
|
Related Party Transactions
|
Accounts Receivable - Related Party
As discussed in Notes 1 and 6 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 April 30, 2017, the Company
had an accounts receivable – related party in the amount of
$2,123,175, which was due from Fortis for the profits belonging to
MegaWest. See Note 5 above. As a result of the Exchange
Transaction, all amounts for accounts receivable – related
party were written off as of April 30, 2018.
Notes Receivable – Related Party
As discussed in Note 7, the Company entered into ten promissory
note agreements with Fortis. The notes receivable accrued interest
at an annual interest rate of 3% and matured on January 31,
2018. As of April 30, 2018 and 2017, the outstanding balance
of the notes receivable was $0 and $24,786,382, respectively.
See Note 1 for further discussion
regarding the Exchange Transaction.
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. 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
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 senior secured promissory note in the principal amount of
$2.0 million (the “June 2017 Secured
Note”) issued by the
Company on June 13, 2017. The June 2017 Secured Note accrues
interest at a rate of 10% per annum and matures on June 30, 2020.
The June 2017 Secured Note is presented as “Note payable
– related party, net of debt discount” on the
consolidated balance sheets.
In connection with the issuance of the June 2017 Secured Note, the
Company issued to Funding Corp. I warrants to purchase 840,336
shares of the Company’s common stock (the
“June
2017 Warrant”). Upon
issuance of the June 2017 Secured Note, the Company valued the June
2017 Warrant using the Black-Scholes Option Pricing model and
accounted for it using the relative fair value of $952,056 as debt
discount on the consolidated balance sheet. See Note 12 for the
assumptions and inputs utilized to value the June 2017
Warrant.
As additional consideration for the purchase of the June 2017
Secured Note, the Company issued to Funding Corp. I 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, originally held by Spyglass, valued at
$250,000, which was recorded as contributed capital and 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 $994,188 as of
April 30, 2018. During the year ended April 30, 2018, the Company
recorded amortization of debt discount related to this note
totaling $207,867.
As of April 30, 2018, the outstanding balance, net of debt
discount, and accrued interest on the June 2017 Secured Note due to
related party was $1,005,812.
November 2017 $2.5 Million Secured Note Financing
Scot Cohen owns or controls 41.20% of Funding Corp. II, the holder
of the November 2017 Secured Note issued by the Company in
connection with the November 2017 Note Financing in the principal
amount of $2.5 million. The November 2017 Secured Note accrues
interest at a rate of 10% per annum and matures on June 30, 2020.
(See Note 1). The November 2017 Secured 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 November 2017
Warrant to Funding Corp. II to purchase 1.25 million shares of the
Company’s Common Stock. Upon issuance of the November 2017
Note, the Company valued the November 2017 Warrant using the
Black-Scholes Option Pricing model and accounted for it using the
relative fair value of $1,051,171 as debt discount on the
consolidated balance sheet. In relation to the financing, Scot
Cohen paid $250,000 for a 2% overriding royalty interest from
Funding Corp. I (as discussed below), which was recorded as
additional debt discount on the consolidated balance sheet. See
Note 12 for the assumptions and inputs utilized to value the
November 2017 Warrant.
As additional consideration for the purchase of the November 2017
Secured Note, the Company issued to Funding Corp. 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, originally held by Spyglass (the
“Existing Osage County
Override”)
Override
was then acquired by the Company from Scot Cohen for $250,000. As
noted above, the override was accounted for as a debt discount and
amortized over the term of the debt.
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 $1,145,062 as of
April 30, 2018. During the years ended April 30, 2018, the Company
recorded amortization of debt discount related to this note
totaling $156,110.
As of April 30, 2018, the outstanding balance, net of debt
discount, and accrued interest on the November 2017 Secured Note
due to related party was $1,354,938.
As of
April 30, 2018 and 2017, the Company had 5,000,000 shares of blank
check preferred stock authorized with a par value of $0.00001 per
share. None of the blank check preferred shares were issued or
outstanding.
As of
April 30, 2018 and 2017, the Company had 29,500 shares of preferred
B preferred stock authorized with a par value of $0.00001 per share
(“Series B
Preferred”). No Series B Preferred shares are issued
or outstanding.
As of
April 30, 2018, the Company had 150,000,000 shares of common stock
authorized with a par value of $0.00001 per share. There were
17,309,733 and 15,827,921 shares of common stock issued and
outstanding as of April 30, 2018 and 2017,
respectively.
As
discussed in Note 5, during the year ended April 30, 2017, the
Company issued 11,564,249 shares of common stock for the Horizon
Acquisition.
As discussed in Note 1, pursuant to the Membership Interest
Assignment with Pearsonia, the Company issued 1,466,667 shares of
Common Stock to Pearsonia in exchange for all membership interests
in Bandolier held by Pearsonia.
During
the year ended April 30, 2018, the
Company issued 15,145 shares of common stock related to a cashless
exercise of 35,000 options.
Stock Options
As of
April 30, 2018, the Company has one equity incentive plan. The
number of shares reserved for issuance in aggregate under the plan
is limited to 120 million shares. The exercise price, term and
vesting schedule of stock options granted are set by the Board of
Directors at the time of grant. Stock options granted under the
plan may be exercised on a cashless basis, if such exercise is
approved by the Board. In a cashless exercise, the employee
receives a lesser amount of shares in lieu of paying the exercise
price based on the quoted market price of the shares on the trading
day immediately preceding the exercise date.
During the year ended April 30, 2018, the Company computed the fair
value of the option utilizing a Black-Scholes option-pricing model
using the following assumptions:
|
|
|
|
|
Risk-free interest
rate
|
|
|
|
Expected life of
grants
|
|
|
|
Expected volatility
of underlying stock
|
|
|
|
Dividends
|
0%
|
0%
|
The
expected stock price volatility for the Company’s stock
options was estimated using the historical volatilities of the
Company’s common stock. Risk free interest rates were
obtained from U.S. Treasury rates for the applicable
periods.
The
following table summarizes information about the options
outstanding and exercisable for the years ended April 30, 2018
and 2017:
|
|
|
Weighted
Average
Exercise
Prices
|
|
|
|
|
|
Outstanding
– April 30, 2016
|
743,050
|
4.00
|
|
Granted
|
1,870,958
|
1.38
|
|
Exercised
|
-
|
-
|
|
Forfeited/Cancelled
|
(14,326)
|
-
|
|
Outstanding
– April 30, 2017
|
2,599,682
|
$2.13
|
|
Granted
|
25,703
|
1.40
|
|
Exercised
|
(35,000)
|
1.38
|
|
Forfeited/Cancelled
|
(35,000)
|
1.38
|
|
Outstanding
– April 30, 2018
|
2,555,385
|
$2.14
|
|
Exercisable
– April 30, 2018
|
2,419,068
|
$2.17
|
The
following table summarizes information about the options
outstanding and exercisable at April 30, 2018:
|
|
|
|
|
|
|
Weighted Avg. Life
Remaining
(years)
|
|
Weighted Average Exercise Price
|
|
$1.38
|
1,795,958
|
8.34
|
$1,296,161
|
$1.38
|
|
$1.40
|
25,703
|
9.64
|
$24,447
|
$1.40
|
|
$1.98
|
5,000
|
8.27
|
$3,750
|
$1.98
|
|
$2.00
|
457,402
|
7.17
|
$392,781
|
$2.00
|
|
$2.87
|
65,334
|
6.81
|
$64,611
|
$2.87
|
|
$3.00
|
51,001
|
7.66
|
$42,445
|
$3.00
|
|
$3.39
|
12,000
|
7.89
|
$12,000
|
$3.39
|
|
$6.00
|
10,000
|
6.74
|
$10,000
|
$6.00
|
|
$12.00
|
132,987
|
5.52
|
$122,987
|
$12.00
|
|
|
2,555,385
|
|
2,419,068
|
|
|
|
|
Aggregate Intrinsic Value
|
$-
|
|
During
the years ended April 30, 2018 and 2017, the Company expensed an
aggregate $906,591 and $2,178,716 to general and administrative
expenses for stock-based compensation pursuant to employment and
consulting agreements.
As of
April 30, 2018, the Company has $608,637 in unrecognized
stock-based compensation expense which will be amortized over a
weighted average exercise period of 7.91 years.
Warrants:
The fair values of the 840,336 June 2017 Warrants granted in
conjunction with the June 2017 Note Financing and the 1.25 million
November 2017 Warrants granted in connection with the November 2017
Note Financing (as discussed in Note 10) were estimated on the date
of grant using the Black-Scholes option-pricing model.
The assumptions used for the warrants granted during the year ended
April 30, 2018 are as follows:
|
|
|
April 30,
2018
|
|
|
Exercise price
|
|
|
$ 1.75 to 2.38
|
|
|
Expected dividends
|
|
|
0%
|
|
|
Expected volatility
|
|
|
160.70%
to 169.63%
|
|
|
Risk free interest rate
|
|
|
1.49%
to 1.73%
|
|
|
Expected life of warrant
|
|
|
3
years
|
|
|
|
|
Weighted Average Exercise Price
|
Weighted Average Life Remaining
|
|
Outstanding
and exercisable – April 30, 2016
|
133,333
|
50.00
|
3.83
|
|
Forfeited
|
-
|
-
|
-
|
|
Granted/Expired
|
-
|
-
|
-
|
|
Outstanding
and exercisable – April 30, 2017
|
133,333
|
50.00
|
2.83
|
|
Forfeited
|
-
|
-
|
-
|
|
Granted/Expired
|
2,090,336
|
2.15
|
2.57
|
|
Outstanding
and exercisable – April 30, 2018
|
2,223,669
|
$5.02
|
2.57
|
The
aggregate intrinsic value of the outstanding warrants was
$0.
|
13.
|
Non-Controlling Interests
|
For the
years ended April 30, 2018 and 2017, the changes in the
Company’s non–controlling interest was as
follows:
|
|
|
|
|
|
Non–controlling
interests at May 1, 2016
|
$(731,060)
|
$12,782,378
|
$12,051,318
|
|
Contribution of
real estate by non-controlling interest holders
|
176,000
|
-
|
176,000
|
|
Non–controlling
interest share of income (losses)
|
(144,813)
|
527,965
|
383,152
|
|
Non–controlling
interests at April 30, 2017
|
(699,873)
|
13,310,343
|
12,610,470
|
|
Contribution of
real estate by non-controlling interest holders
|
785,298
|
(13,497,191)
|
(12,711,893)
|
|
Non–controlling
interest share of income (losses)
|
(85,425)
|
186,848
|
101,423
|
|
Non–controlling
interests at April 30, 2018
|
$-
|
$-
|
$-
|
As discussed above, as a result of the MegaWest Transaction and the
Membership Interest Assignment, the non-controlling interests in
Bandolier and Fortis’ interest in MegaWest were written down
to $0.
As of April 30, 2018, the Company had approximately $27.6 million
of net operating loss carryovers (“NOLs”) which expire beginning in 2028. The U.S.
net operating loss carryovers are subject to limitation under
Internal Revenue Code Section 382 should there be a greater than
50% ownership change as determined under the regulations.
Management has determined that a change in ownership occurred as a
result of the Share Exchange on April 23, 2013. Therefore, the net
operating loss carryovers are subject to an annual limitation of
approximately $156,000. The Company impaired the NOLs at the time
of the change of ownership. Further the Company was limited in the
recognition of a pre-acquisition loss deduction due to a net built
in loss in 2015 at the time of the ownership
change.
The
income tax expense (benefit) consists of the
following:
|
|
For
the Year Ended
April
30,
2018
|
For
the Year Ended
April
30,
2017
|
|
Foreign
|
|
|
|
Current
|
$-
|
$-
|
|
Deferred
|
-
|
-
|
|
U.S.
Federal
|
|
|
|
Current
|
|
|
|
Deferred
|
(4,217,889)
|
(446,593)
|
|
|
|
|
|
U.S. State &
Local
|
|
|
|
Current
|
-
|
-
|
|
Deferred
|
(478,113)
|
(27,677)
|
|
|
|
|
Change in valuation
allowance
|
5,029,205
|
1,415,785
|
|
Income tax
provision (benefit)
|
$333,203
|
$941,515
|
In
assessing the realization of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this
assessment. Based on this assessment management has established a
full valuation allowance against all of the deferred tax assets for
every period, since it is more likely than not that all of the
deferred tax assets will not be realized.
The
Company’s deferred tax assets (liabilities) consisted of the
effects of temporary differences attributable to the
following:
|
|
|
|
|
U.S. net operating
loss carryovers
|
$8,449,933
|
$3,881,860
|
|
Depreciation
|
2,156,408
|
2,422,886
|
|
Bandolier
LLC flow-through
|
4,851,566
|
4,320,684
|
|
Accretion of asset
retirement obligation
|
139,545
|
201,729
|
|
|
2,239,907
|
2,314,197
|
|
Total deferred tax
assets
|
17,837,358
|
13,141,356
|
|
|
(17,837,358)
|
(13,141,356)
|
|
Deferred tax asset,
net of valuation allowance
|
$-
|
$-
|
|
|
|
|
|
|
$-
|
$3,442,724
|
|
Total deferred tax
liability
|
$-
|
$3,442,724
|
The
expected tax expense (benefit) based on the statutory rate is
reconciled with actual tax expense benefit as follows:
|
|
For
the Year Ended
April
30, 2018
|
For
the Year Ended
April
30, 2017
|
|
U.S. federal
statutory rate
|
(27.50)%
|
(34.00)%
|
|
State income tax,
net of federal benefit
|
(3.12)%
|
(2.11)%
|
|
Change in
rate
|
(1.20)%
|
11.29%
|
|
Other permanent
differences
|
8.94%
|
6.46%
|
Change in valuation
allowance
|
24.50%
|
54.80%
|
|
Income tax
provision (benefit)
|
1.62%
|
36.44%
|
|
15.
|
Contingency and Contractual Obligations
|
Pending
Litigation.
(a) In January 2010, the Company experienced a flood in its Calgary
office premises as a result of a broken water pipe. There was
significant damage to the premises, rendering them unusable until
the landlord had completed remediation. Pursuant to the lease
contract, the Company asserted that rent should be abated during
the remediation process and accordingly, the Company did not pay
any rent after December 2009. During the remediation process, the
Company engaged an independent environmental testing company to
test for air quality and for the existence of other potentially
hazardous conditions. The testing revealed the existence of
potentially hazardous mold and the consultant provided specific
written instructions for the effective remediation of the premises.
During the remediation process, the landlord did not follow the
consultant’s instructions and correct the potentially
hazardous mold situation, and subsequently in June 2010 gave notice
and declared the premises to be ready for occupancy. The Company
re-engaged the consultant to re-test the premises and the testing
results again revealed the presence of potentially hazardous mold.
The Company determined that the premises were not fit for
re-occupancy and considered the landlord to be in default of the
lease. The Landlord subsequently terminated the lease.
On January 30, 2014, the landlord filed a Statement of Claim
against the Company for rental arrears in the amount aggregating
CAD $759,000 (approximately USD $591,300 as of April 30, 2018). 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 $518,100 as of April 30, 2018). 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. No
further activity has occurred through the filing date of these
financial statements.
(b) In September 2013, the Company was notified by the Railroad
Commission of Texas (the “Railroad
Commission”) that the
Company was not in compliance with regulations promulgated by the
Railroad 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 Railroad
Commission therefore collected $25,000 from the Company, which was
originally deposited with the Railroad Commission, to cover a
portion of the estimated costs of $88,960 to plug the wells. In
addition to the above, the Railroad 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, the Plaintiffs
filed a Notice of Appeal to the Tenth Circuit Court of Appeals.
That appeal is pending as of as of the filing date of these
financial statements. 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.
In May
2018, the Company granted a total of 260,000 shares of restricted
common stock to Scot Cohen and Steven Brunner in exchange for a
reduction in cash compensation with a fair value of approximately
$294,000 based on the market price of the Company’s common
stock on the grant date. The shares vest monthly in equal
installments over a 12-month period.
On June 18, 2018, Bandolier Energy,
LLC, a wholly owned subsidiary of the Company, entered into a
Loan Agreement with Scot Cohen, the Executive Chairman of the
Company (the “Cohen Loan
Agreement”), pursuant to
which Scot Cohen loaned the Company $300,000 at a 10% annual
interest rate due on September 30, 2018. The Cohen Loan Agreement
was to provide the Company with short term financing in connection
with the Company’s drilling program in Osage County,
Oklahoma.
|
17.
|
Supplemental Information on Oil and Gas Operations
(Unaudited)
|
The
Company retains qualified independent reserves evaluators to
evaluate the Company’s proved oil reserves. For the year
ended April 30, 2018, the reports by Cawley, Gillespie &
Associate, Inc. (“CGA”) covered 75% of the
Company’s proved oil reserves. For the year ended April 30,
2017, the report by Pinnacle Energy Services, LLC.
(“Pinnacle”)
covered 100% of the Company’s proved oil
reserves.
Proved
oil and natural gas reserves, as defined within the SEC Rule
4-10(a)(22) of Regulation S-X, are those quantities of oil and gas,
which, by analysis of geoscience and engineering data can be
estimated with reasonable certainty to be economically producible
from a given date forward from known reservoirs, and under existing
economic conditions, operating methods and government regulations
prior to the time of which contracts providing the right to operate
expire, unless evidence indicates that renewal is reasonably
certain, regardless of whether determinable or probabilistic
methods are used for the estimation. The project to extract the
hydrocarbons must have commenced or the operator must be reasonably
certain that it will commence the project within a reasonable time.
Developed oil and natural gas reserves are reserves that can be
expected to be recovered from existing wells with existing
equipment and operating methods or in which the cost of the
required equipment is relatively minor compared to the cost of a
new well; and through installed extraction equipment and
infrastructure operational at the time of the reserves estimate is
the extraction is by means not involving a well. Estimates of the
Company’s oil reserves are subject to uncertainty and will
change as additional information regarding producing fields and
technology becomes available and as future economic and operating
conditions change.
The
following tables summarize the Company’s proved developed and
undeveloped reserves within the United States, net of royalties, as
of April 30, 2018 and 2017:
|
Oil
(MBbls)
|
|
|
|
|
|
|
|
Proved
reserves as at May 1
|
167
|
206
|
|
Extensions,
acquisitions and discoveries
|
-
|
-
|
|
Dispositions
|
-
|
-
|
|
Production
|
(12)
|
(1)
|
|
Revisions
of prior estimates
|
341
|
(38)
|
|
Total
Proved reserves as at April 30
|
496
|
167
|
|
Oil
(MBbls)
|
|
|
|
|
|
|
|
Proved
developed producing
|
214
|
1
|
|
Non-producing
|
30
|
166
|
|
Proved
undeveloped
|
252
|
-
|
|
Total
Proved reserves as at April 30
|
496
|
167
|
|
Gas
(MCFs)
|
|
|
|
|
|
|
|
Proved reserves as
at May 1
|
279
|
331
|
|
Extensions,
acquisitions and discoveries
|
-
|
|
|
Dispositions
|
-
|
-
|
|
Production
|
(6)
|
(5)
|
|
Revisions of prior
estimates
|
238
|
(47)
|
|
Total Proved
reserves as at April 30
|
511
|
279
|
|
Gas
(MCFs)
|
|
|
|
|
|
|
|
Proved developed
producing
|
137
|
17
|
|
Non-producing
|
25
|
262
|
|
Proved
undeveloped
|
349
|
-
|
|
Total Proved
reserves as at April 30
|
511
|
279
|
|
Capitalized Costs
Related to Oil and Gas Assets
|
|
|
|
|
|
|
|
Proved
properties
|
$12,729,430
|
$8,244,046
|
|
Unproved
properties
|
100,000
|
858,830
|
|
|
12,829,430
|
9,102,876
|
|
Less: accumulated
impairment
|
(8,950,016)
|
(7,009,240)
|
|
|
$3,879,414
|
$2,093,636
|
|
Costs Incurred in
Oil and Gas Activities:
|
|
|
|
|
|
|
|
Development
|
$3,665,851
|
$487,857
|
|
Exploration
|
-
|
761,444
|
|
|
$3,665,851
|
$1,249,301
|
The
following standardized measure of discounted future net cash flows
from proved oil reserves has been computed using the average
first-day-of-the-month price during the previous 12-month period,
costs as at the balance sheet date and year-end statutory income
tax rates. A discount factor of 10% has been applied in determining
the standardized measure of discounted future net cash flows. The
Company does not believe that the standardized measure of
discounted future net cash flows will be representative of actual
future net cash flows and should not be considered to represent the
fair value of the oil properties. Actual net cash flows will differ
from the presented estimated future net cash flows due to several
factors including:
|
|
●
|
Future
production will include production not only from proved properties,
but may also include production from probable and possible
reserves;
|
|
|
●
|
Future
production of oil and natural gas from proved properties may differ
from reserves estimated;
|
|
|
●
|
Future
production rates may vary from those estimated;
|
|
|
●
|
Future
rather than average first-day-of-the-month prices during the
previous 12-month period and costs as at the balance sheet date
will apply;
|
|
|
●
|
Economic
factors such as changes to interest rates, income tax rates,
regulatory and fiscal environments and operating conditions cannot
be determined with certainty;
|
|
|
●
|
Future
estimated income taxes do not take into account the effects of
future exploration expenditures; and
|
|
|
●
|
Future
development and asset retirement obligations may differ from those
estimated.
|
Future
net revenues, development, production and restoration costs have
been based upon the estimates referred to above. The following
tables summarize the Company’s future net cash flows relating
to proved oil reserves based on the standardized measure as
prescribed in FASB ASC Topic 932 - “Extractive Activities - Oil and
Gas”:
|
Future cash flows
relating to proved reserves:
|
|
|
|
Future cash
inflows
|
$30,259,000
|
$8,421,000
|
|
Future operating
costs
|
(1,759,000)
|
(4,419,000)
|
|
Future development
costs
|
(8,239,000)
|
(615,000)
|
|
Future income
taxes
|
(2,147,000)
|
(597,000)
|
|
Future net cash
flows
|
18,114,000
|
2,790,000
|
|
10% discount
factor
|
(8,133,000)
|
(766,000)
|
|
Standardized
measure
|
$9,981,000
|
$2,024,000
|
Summary of Changes in Standardized Measure of Discounted Future Net
Cash Flows
The
following table summarizes the principal sources of changes in
standardized measure of discounted future estimated net cash flows
at 10% per annum for the years ended April 30, 2018 and
2017:
|
|
|
|
|
Standardized
measure, beginning of year
|
$2,024,000
|
$2,139,000
|
|
Sales
of oil produced, net of production costs
|
3,070,000
|
1,271,000
|
|
Net
changes in sales and transfer prices and in production costs and
production costs related to future production
|
(3,091,000)
|
(2,719,000)
|
|
Previously
estimated development costs incurred during the period
|
-
|
-
|
|
Changes
in future development costs
|
1,144,000
|
(205,000)
|
|
Revisions
of previous quantity estimates due to prices and
performance
|
5,216,000
|
(99,000)
|
|
Accretion
of discount
|
100,000
|
20,000
|
|
Discoveries,
net future production and development costs associated with these
extensions and discoveries
|
-
|
-
|
|
Purchases
and sales of minerals in place
|
-
|
-
|
|
Timing
and other
|
1,518,000
|
1,617,000
|
|
Standardized
measure, end of year
|
$9,981,000
|
$2,024,000
|
In
accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly
authorized.
|
|
PETRO RIVER OIL CORP.
|
|
|
|
|
|
|
By:
|
/s/ Scot Cohen
|
|
|
|
Name:
|
Scot
Cohen
|
|
|
Title:
|
Executive
Chairman
|
|
|
|
|
|
|
By:
|
/s/ David Briones
|
|
|
|
Name:
|
David
Briones
|
|
|
Title
|
Chief
Financial Officer
|
|
Date:
July 30, 2018
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ Scot Cohen
|
|
Executive
Chairman and Director
|
|
July
30, 2018
|
|
Scot
Cohen
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/ David Briones
|
|
Chief
Financial Officer
|
|
July
30, 2018
|
|
David
Briones
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
|
|
|
|
/s/ Glenn C. Pollack
|
|
Director
|
|
July
30, 2018
|
|
Glenn
C. Pollack
|
|
|
|
|
|
|
|
|
|
|
|
/s/ John Wallace
|
|
Director
|
|
July
30, 2018
|
|
John
Wallace
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Fred Zeidman
|
|
Director
|
|
July
30, 2018
|
|
Fred
Zeidman
|
|
|
|
|
|
|
