N
otes to the Consolidated Financial
Statements
(Unaudited)
Petro River Oil Corp. (the “
Company
”) is an independent energy company focused
on the exploration and development of conventional oil and gas
assets with low discovery and development costs. The Company is
currently focused on moving forward with drilling wells on several
of its properties owned directly and indirectly through its
interest in Horizon Energy Partners, LLC
(“
Horizon
Energy
”), as well as
entering into highly prospective plays with Horizon Energy and
other industry-leading partners. Diversification over a number of
projects, each with low initial capital expenditures and strong
risk reward characteristics, reduces risk and provides
cross-functional exposure to a number of attractive risk adjusted
opportunities.
The Company’s core holdings are in Osage and Kay County,
Oklahoma. Following the acquisition of Horizon I Investments,
LLC (“
Horizon
Investments
”), the
Company also has exposure to a portfolio of several additional
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, 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.
In light of the challenging oil price environment and capital
markets, management is focusing on specific target acquisitions and
investments, limiting operating expenses, and exploring farm-in and
joint venture opportunities for the Company’s oil and gas
assets. No assurances can be given that management will be
successful.
Recent Developments
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 fair value of the assets acquired was
$108,333 as of the date of the agreement. Following the exchange,
the Company and Red Fork each retain a 2% overriding royalty
interest in the projects that they respectively conveyed. Under the
terms of the agreement, all revenues and all 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 adds 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.
Dilution of Company’s Indirect Interest in Horizon
Energy.
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 and 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.
MegaWest Exchange Transaction.
On January 31, 2018, the Company entered into an Assignment and
Assumption of Membership Interest with MegaWest Energy Kansas Corp.
(“
MegaWest
”), a wholly-owned subsidiary of the Company
(“
Assignment
Agreement
”), whereby the
Company transferred its interest in MegaWest in exchange for
MegaWest’s membership interests in Bandolier Energy, LLC
(“
Bandolier
”) (the “
Bandolier
Interests
”). 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 (“
Fortis
”).
The Redetermination was conducted pursuant to a Contribution
Agreement, dated October 30, 2015. Under the terms of the
Contribution Agreement, the Board of MegaWest was entitled to
engage a qualified appraiser to determine the value of the MegaWest
Assets and Bandolier Interests, and upon 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 equity 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 the 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 of 10%, which will be due and payable one
year after the date of the Assignment Agreement and included as a
payable as of 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’ interests 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 this time,
under the terms of the Contribution Agreement, Fortis would have
been required to fund the planned drilling
program.
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 with Pearsonia West Investments, LLC
(“
Pearsonia
”). The Company issued 1,466,667 shares of
its common stock, $0.00001 par value (“
Common
Stock
”) with a fair value
of $1.75 per share, to Pearsonia in exchange for all membership
interests in Bandolier held by Pearsonia. As result of this
transaction, the Company wrote-off the receivable from
Pearsonia’s non-controlling interest in Bandolier totaling
$785,298, resulting in a loss of
$3,351,965.
November 2017 $2.5 Million Secured Note
Financing
.
On September 20, 2017, the Company entered into a Securities
Purchase Agreement (“
Purchase Agreement
II
”) with Petro
Exploration Funding II, LLC (“
Funding
Corp
.
II
”), pursuant to which the Company issued to
Funding Corp. II a senior secured promissory note on November 6,
2017 in the principal amount of $2.5 million (the
“
November 2017 Secured
Note
”) (the
“
November 2017 Note
Financing
”) and received
total proceeds of $2.5 million. As additional consideration for the
purchase of the November 2017 Secured Note, the Company issued to
Funding Corp. II (i) a warrant to purchase 1.25 million shares of
the Company’s Common Stock (the “
November 2017
Warrant
”), and (ii) an
overriding royalty interest equal to 2% in all production from the
Company’s interest in the Company’s concessions located
in Osage County, Oklahoma currently held by Spyglass Energy Group,
LLC, an indirect subsidiary of the Company
(“
Spyglass
”) (the “
Existing
Osage County
Override
”). The Existing
Osage County Override was an existing override that was acquired by
the Company from Scot Cohen, as discussed
below.
The November 2017 Secured Note accrues interest at a rate of 10%
per annum and matures on June 30, 2020. To secure the repayment of
all amounts due under the terms of the November 2017 Secured Note,
the Company entered into a Security Agreement, pursuant to which
the Company granted to Funding Corp. II a security interest in all
assets of the Company, which security interest is subordinate to
the security interest granted to Petro Exploration Funding, LLC
(“
Funding
Corp
.
I
”) on June 13, 2017 in connection with a
financing consummated in June 2017. The first interest payment will
be due on June 1, 2018, and each six-month anniversary thereafter
until the outstanding principal balance of the November 2017
Secured Note is paid in full.
The Company’s Executive Chairman, Scott Cohen, owns or
controls 31.25% of Funding Corp. I and 41.20% of Funding Corp.
II.
|
2. Going Concern and Management’s Plan
|
The
accompanying condensed 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 January 31, 2018, the Company
had an accumulated deficit of $48.9 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 condensed 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
January 31, 2018, the Company had working capital of approximately
$1.0 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 January 31, 2018, the Company had
cash and cash equivalents of approximately $0.8 million. The
Company’s primary source of operating funds since inception
has been debt and equity financings.
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 accompanying unaudited interim consolidated financial
statements are prepared in accordance with generally accepted
accounting principles in the United States
(“
U.S. GAAP
”) and include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.
Non–controlling interest represents the minority equity
investment in the Company’s subsidiaries, plus the minority
investors’ share of the net operating results and other
components of equity relating to the non–controlling
interest.
These unaudited consolidated financial statements include the
Company and the following subsidiaries:
Petro Spring, LLC; PO1, LLC; Petro River UK Limited; Horizon I
Investments, LLC; and MegaWest Energy USA Corp. and MegaWest Energy
USA Corp.’s wholly owned subsidiaries:
MegaWest Energy Texas Corp.
MegaWest Energy Kentucky Corp.
MegaWest Energy Missouri Corp.
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 unaudited consolidated financial statements
for the period ending January 31, 2017 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 unaudited
consolidated financial statements for the nine months ended January
31, 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 income statement as
of January 31, 2018.
The unaudited consolidated financial information furnished herein
reflects all adjustments, consisting solely of normal recurring
items, which in the opinion of management are necessary to fairly
state the financial position of the Company and the results of its
operations for the periods presented. This report should be read in
conjunction with the Company’s consolidated financial
statements and notes thereto included in the Company’s Form
10-K for the year ended April 30, 2017 filed with the Securities
and Exchange Commission (the “
SEC
”) on July 31, 2017. The Company assumes
that the users of the interim financial information herein have
read or have access to the audited financial statements for the
preceding fiscal year and that the adequacy of additional
disclosure needed for a fair presentation may be determined in that
context. Accordingly, footnote disclosure, which would
substantially duplicate the disclosure contained in the
Company’s Form 10-K for the year ended April 30, 2017, has
been omitted. The results of operations for the interim periods
presented are not necessarily indicative of results for the entire
year ending April 30, 2018.
|
4.
|
Significant Accounting Policies
|
The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
The Company’s financial statements are based on a number of
significant estimates, including oil and natural gas reserve
quantities which are the basis for the calculation of depreciation,
depletion and impairment of oil and natural gas properties, and
timing and costs associated with its asset retirement obligations,
as well as those related to the fair value of stock options, stock
warrants and stock issued for services. While we believe that our
estimates and assumptions used in preparation of the financial
statements are appropriate, actual results could differ from those
estimates.
|
(b)
|
Cash
and Cash Equivalents:
|
Cash and cash equivalents include all highly liquid monetary
instruments with original maturities of three months or less when
purchased. These investments are carried at cost, which
approximates fair value. Financial instruments that potentially
subject the Company to concentrations of credit risk consist
primarily of cash deposits. The Company maintains its cash in
institutions insured by the Federal Deposit Insurance Corporation
(“
FDIC
”). At times, the Company’s cash and
cash equivalent balances may be uninsured or in amounts that exceed
the FDIC insurance limits. At January 31, 2018, approximately
$549,000 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 are reported in the balance sheet at
outstanding principal adjusted for any charge-offs and the
allowance for doubtful accounts. Losses from uncollectible
receivables are accrued when both of the following conditions are
met: (a) information available before the financial statements are
issued or are available to be issued indicates that it is probable
that an asset has been impaired at the date of the financial
statements, and (b) the amount of the loss can be reasonably
estimated. These conditions may be considered in relation to
individual receivables or in relation to groups of similar types of
receivables. If the conditions are met, an accrual shall be made
even though the particular receivables that are uncollectible may
not be identifiable. The Company reviews individually each
receivable for collectability and performs on-going credit
evaluations of its customers and adjusts credit limits based upon
payment history and the customer’s current credit worthiness,
as determined by the review of their current credit information,
and determines the allowance for doubtful accounts based on
historical write-off experience, customer specific facts and
general economic conditions that may affect a client’s
ability to pay. Bad debt expense is included in general and
administrative expenses, if any.
Credit losses for receivables (uncollectible receivables), which
may be for all or part of a particular receivable, shall be
deducted from the allowance. The related receivable balance shall
be charged off in the period in which the receivables are deemed
uncollectible. Recoveries of receivables previously charged off
shall be recorded when received. The Company charges off its
account receivables against the allowance after all means of
collection have been exhausted and the potential for recovery is
considered remote.
The allowance for doubtful accounts at January 31, 2018 and April
30, 2017 was $0.
|
(d)
|
Interest
in Real Estate Rights:
|
At January 31, 2017, i
nterest in real estate
rights contributed by Fortis related to real properties that Fortis
planned to sell within one year. Since these properties were
contributed by Fortis, a related party, the rights for the period
ending January 31, 2017 are stated on the Company’s balance
sheet at Fortis’ cost basis. As a result of the Exchange
Agreement, no amounts are reflected in interests in real estate
rights as of January 31, 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. For the nine months
ended January 31, 2018, the Company evaluated these properties
and recorded an impairment in the amount of
$972,488.
Proved Oil and Gas Reserves
:
Proved oil and gas reserves are the estimated quantities of crude
oil, natural gas and natural gas liquids which geological and
engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing
economic and operating conditions. All of the Company’s oil
and gas properties with proven reserves were impaired to the
salvage value prior to the Company’s acquisition of its
interest in Bandolier. The price used to establish economic
viability is the average price during the 12-month period preceding
the end of the entity’s fiscal year and calculated as the
un-weighted arithmetic average of the first-day-of-the-month price
for each month within such 12-month
period.
Depletion, Depreciation and Amortization:
Depletion, depreciation and amortization is
provided using the unit-of-production method based upon estimates
of proved oil and gas reserves with oil and gas production being
converted to a common unit of measure based upon their relative
energy content. Investments in unproved properties and major
development projects are not amortized until proved reserves
associated with the projects can be determined or until impairment
occurs. If the results of an assessment indicate that the
properties are impaired, the amount of the impairment is deducted
from the capitalized costs to be amortized. Once the assessment of
unproved properties is complete and when major development projects
are evaluated, the costs previously excluded from amortization are
transferred to the full cost pool and amortization begins. The
amortizable base includes estimated future development costs and,
where significant, dismantlement, restoration and abandonment
costs, net of estimated salvage value.
In arriving at rates under the unit-of-production method, the
quantities of recoverable oil and natural gas reserves are
established based on estimates made by the Company’s
geologists and engineers which require significant judgment, as
does the projection of future production volumes and levels of
future costs, including future development costs. In addition,
considerable judgment is necessary in determining when unproved
properties become impaired and in determining the existence of
proved reserves once a well has been drilled. All of these
judgments may have significant impact on the calculation of
depletion expenses. There have been no material changes in the
methodology used by the Company in calculating depletion,
depreciation and amortization of oil and gas properties under the
full cost method during the nine months ended January 31, 2018 and
2017.
Investments held in stock of entities other than subsidiaries,
namely corporate joint ventures and other non-controlled entities,
usually are accounted for by one of three methods: (i) the fair
value method, (ii) the equity method, or (iii) the cost method. The
equity method tends to be most appropriate if an investment enables
the investor to influence the operating or financial policies of
the investee. The cost basis is utilized for investments that are
less than 20% owned, and the Company does not exercise significant
influence over the operating and financial policies of the
investee. Under the cost method, investments are held at historical
cost.
|
(g)
|
Fair
Value of Financial Instruments:
|
The Company follows paragraph 825-10-50-10 of the FASB Accounting
Standards Codification for disclosures about fair value of its
financial instruments and paragraph 820-10-35-37 of the FASB
Accounting Standards Codification (“
Paragraph
820-10-35-37
”) to measure
the fair value of its financial instruments. Paragraph 820-10-35-37
establishes a framework for measuring fair value in U.S. GAAP and
expands disclosures about fair value measurements. To increase
consistency and comparability in fair value measurements and
related disclosures, Paragraph 820-10-35-37 establishes a fair
value hierarchy which prioritizes the inputs to valuation
techniques used to measure fair value into three (3) broad levels.
The fair value hierarchy gives the highest priority to quoted
prices (unadjusted) in active markets for identical assets or
liabilities and the lowest priority to unobservable inputs. The
three (3) levels of fair value hierarchy defined by Paragraph
820-10-35-37 are described below:
|
Level
1
|
Quoted
market prices available in active markets for identical assets or
liabilities as of the reporting date.
|
|
|
|
|
Level
2
|
Pricing
inputs other than quoted prices in active markets included in Level
1, which are either directly or indirectly observable as of the
reporting date.
|
|
|
|
|
Level
3
|
Pricing
inputs that are generally observable inputs and not corroborated by
market data.
|
Financial assets are considered Level 3 when their fair values are
determined using pricing models, discounted cash flow methodologies
or similar techniques and at least one significant model assumption
or input is unobservable.
The fair value hierarchy gives the highest priority to quoted
prices (unadjusted) in active markets for identical assets or
liabilities and the lowest priority to unobservable inputs. If the
inputs used to measure the financial assets and liabilities fall
within more than one level described above, the categorization is
based on the lowest level input that is significant to the fair
value measurement of the instrument.
The carrying amount of the Company’s financial assets and
liabilities, such as cash, prepaid expenses, and accounts payable
and accrued liabilities approximate their fair value because of the
short maturity of those instruments.
Transactions involving related parties cannot be presumed to be
carried out on an arm’s-length basis, as the requisite
conditions of competitive, free-market dealings may not exist.
Representations about transactions with related parties, if made,
shall not imply that the related party transactions were
consummated on terms equivalent to those that prevail in
arm’s-length transactions unless such representations can be
substantiated.
|
(h)
|
Stock-Based
Compensation:
|
Generally, all forms of stock-based compensation, including stock
option grants, warrants, and restricted stock grants are measured
at their fair value utilizing an option pricing model on the
award’s grant date, based on the estimated number of awards
that are ultimately expected to vest.
Under fair value recognition provisions, the Company recognizes
equity–based compensation net of an estimated forfeiture rate
and recognizes compensation cost only for those shares expected to
vest over the requisite service period of the award.
The fair value of option award is estimated on the date of grant
using the Black–Scholes option valuation model. The
Black–Scholes option valuation model requires the development
of assumptions that are input into the model. These assumptions are
the expected stock volatility, the risk–free interest rate,
the option’s expected life, the dividend yield on the
underlying stock and the expected forfeiture rate. Expected
volatility is calculated based on the historical volatility of the
Company’s Common Stock over the expected option life and
other appropriate factors. Risk–free interest rates are
calculated based on continuously compounded risk–free rates
for the appropriate term. The dividend yield is assumed to be zero,
as the Company has never paid or declared any cash dividends on its
Common Stock and does not intend to pay dividends on the Common
Stock in the foreseeable future. The expected forfeiture rate is
estimated based on historical experience.
Determining the appropriate fair value model and calculating the
fair value of equity–based payment awards requires the input
of the subjective assumptions described above. The assumptions used
in calculating the fair value of equity–based payment awards
represent management’s best estimates, which involve inherent
uncertainties and the application of management’s judgment.
As a result, if factors change and the Company uses different
assumptions, the equity–based compensation expense could be
materially different in the future. In addition, the Company is
required to estimate the expected forfeiture rate and recognize
expense only for those shares expected to vest. If the actual
forfeiture rate is materially different from our estimate, the
equity–based compensation expense could be significantly
different from what the Company has recorded in the current
period.
The Company determines the fair value of the stock–based
payments to non-employees as either the fair value of the
consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. If the fair
value of the equity instruments issued is used, it is measured
using the stock price and other measurement assumptions as of the
earlier of either (1) the date at which a commitment for
performance by the counterparty to earn the equity instruments is
reached, or (2) the date at which the counterparty’s
performance is complete.
The expenses resulting from stock-based compensation are recorded
as general and administrative expenses in the consolidated
statement of operations, depending on the nature of the services
provided.
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 our effective
tax rate from approximately 36.64% to 24.16% for the nine months
ended January 31, 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, 2018, but the
Company does not expect the Tax Act to have a material impact on
the Company’s consolidated financial statements.
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 January 31, 2018 and April 30, 2017, the Company had
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 were no interest or penalties recorded as the
position is expected but the tax returns are not yet
due.
The Company is subject to ongoing tax exposures, examinations and
assessments in various jurisdictions. Accordingly, the Company may
incur additional tax expense based upon the outcomes of such
matters. In addition, when applicable, the Company will adjust tax
expense to reflect the Company’s ongoing assessments of such
matters, which require judgment and can materially increase or
decrease its effective rate as well as impact operating
results.
The number of years with open tax audits varies depending on the
tax jurisdiction. The Company’s major taxing jurisdictions
include the United States (including applicable
states).
Basic net income (loss) per common share is computed by dividing
net loss attributable to stockholders by the weighted-average
number of shares of common stock outstanding during the period.
Diluted net income (loss) per common share is determined using the
weighted-average number of common shares outstanding during the
period, adjusted for the dilutive effect of common stock
equivalents. For the nine months ended January 31, 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 January
31, 2018 and 2017:
|
|
|
|
|
Stock
Options
|
2,555,385
|
2,495,182
|
|
Stock
Purchase Warrants
|
2,223,669
|
133,333
|
|
Total
|
4,779,054
|
2,628,515
|
|
(k)
|
Recent
Accounting Pronouncements:
|
In May 2014, the FASB issued a comprehensive new revenue
recognition standard that will supersede nearly all existing
revenue recognition guidance under U.S. GAAP. The standard’s
core principle (issued as ASU 2014-09 by the FASB), is that a
company will recognize revenue when it transfers promised goods or
services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those
goods or services. These may include identifying performance
obligations in the contract, estimating the amount of variable
consideration to include in the transaction price and allocating
the transaction price to each separate performance obligation. The
new guidance must be adopted using either a full retrospective
approach for all periods presented in the period of adoption or a
modified retrospective approach. In August 2015, the FASB issued
ASU No. 2015-14, which defers the effective date of ASU 2014-09 by
one year, and would allow entities the option to early adopt the
new revenue standard as of the original effective date. This ASU is
effective for public reporting companies for interim and annual
periods beginning after December 15, 2017. The Company is currently
evaluating its adoption method and the impact of the standard on
its consolidated financial statements and has not yet determined
the method by which the Company will adopt the standard in
2018.
In April 2016, the FASB issued ASU No. 2016-10,
“
Revenue from Contracts with
Customers: Identifying Performance Obligations and
Licensing
” (Topic 606).
In March 2016, the FASB issued ASU No. 2016-08,
“
Revenue from Contracts with
Customers: Principal versus Agent Considerations (Reporting Revenue
Gross versus Net)
” (Topic
606). These amendments provide additional clarification and
implementation guidance on the previously issued ASU
2014-09,
“Revenue from Contracts
with Customers.”
The
amendments in ASU 2016-10 provide clarifying guidance on
materiality of performance obligations; evaluating distinct
performance obligations; treatment of shipping and handling costs;
and determining whether an entity’s promise to grant a
license provides a customer with either a right to use an
entity’s intellectual property or a right to access an
entity’s intellectual property. The amendments in ASU 2016-08
clarify how an entity should identify the specified good or service
for the principal versus agent evaluation and how it should apply
the control principle to certain types of arrangements. The
adoption of ASU 2016-10 and ASU 2016-08 is to coincide with an
entity’s adoption of ASU 2014-09, which we intend to adopt
for interim and annual reporting periods beginning after December
15, 2017. The Company does not expect the new standard to have a
material effect on its consolidated financial
statements.
In April 2016, the FASB issued ASU No. 2016-09,
“
Compensation – Stock
Compensation
” (Topic
718). The FASB issued this update to improve the accounting for
employee share-based payments and affect all organizations that
issue share-based payment awards to their employees. Several
aspects of the accounting for share-based payment award
transactions are simplified, including: (a) income tax
consequences; (b) classification of awards as either equity or
liabilities; and (c) classification on the statement of cash flows.
The updated guidance is effective for annual periods beginning
after December 15, 2016, including interim periods within those
fiscal years. Early adoption of the update is permitted. Adoption
of ASU 2016-09 did not have a material impact on the consolidated
financial statements.
In August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash
Payments”
(“
ASU 2016-15
”). ASU 2016-15 will make eight targeted
changes to how cash receipts and cash payments are presented and
classified in the statement of cash flows. ASU 2016-15 is effective
for fiscal years beginning after December 15, 2017. The new
standard will require adoption on a retrospective basis unless it
is impracticable to apply, in which case it would be required to
apply the amendments prospectively as of the earliest date
practicable. The Company is currently in the process of evaluating
the impact of ASU 2016-15 on its consolidated financial
statements.
The Company does not expect the adoption of any other recently
issued accounting pronouncements to have a significant impact on
its financial position, results of operations, or cash
flows.
The Company has evaluated all transactions through the date the
consolidated financial statements were issued for subsequent event
disclosure consideration.
5.
Accounts Receivable – Related Party
On
October 15, 2015, the Company entered into the Contribution
Agreement with MegaWest and Fortis pursuant to which the Company
and Fortis each agreed to contribute certain assets to MegaWest in
exchange for shares of MegaWest common stock (“
MegaWest Shares
”) (the
“
MegaWest
Transaction
”) in order to participate in the
development of the Company’s Bandolier
prospect.
Upon
execution of the Contribution Agreement, Fortis transferred its
interest in 30 condominium units and the right to any profits and
proceeds therefrom. For the three months ended January 31, 2018 and
2017, MegaWest recorded a net loss on interest in real estate
rights of $3,756 and $7,208, respectively. For the nine months
ended January 31, 2018 and 2017, Fortis sold
one
and two condominium units,
respectively, and MegaWest recorded a net gain on interest in real
estate rights of $
267,734
and
$686,096, respectively.
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 MegaWest 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.
6.
Notes Receivable – Related Party
Since December 2015, the Company has entered into ten promissory
note agreements with Fortis with aggregate principal amounts of
$26,344,883. The notes receivable bear interest at an annual rate
of 3% and mature on January 31, 2018. As of January 31, 2018
and April 30, 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.
7.
Interest in Real Estate Rights
As discussed in Note 5, MegaWest received an interest in real
estate rights to 30 condominium units from Fortis pursuant to the
MegaWest Transaction. For the nine months ended January 31, 2018,
the Company recognized a net gain of $686,096 related to the sale
of one condominium unit by Fortis.
The following table summarizes the activity for interest in real
estate rights:
|
|
Nine Months Ended January
31,
2018
|
|
Balance at April 30, 2017
|
$
309,860
|
|
Cost
of sales – 1 condominium unit
|
(309,860
)
|
|
Balance at January 31, 2018
|
$
-
|
As
described in Note 1, as a result of the exchange agreement, no
amounts are recorded at January 31, 2018 for interests in real
estate rights.
The following table summarizes the activity of the oil and gas
assets by project for the nine months ended January 31,
2018:
|
|
|
|
|
|
|
Balance
May 1, 2017
|
$
1,232,192
|
$
761,444
|
$
100,000
|
$
2,093,636
|
|
Additions
|
2,265,882
|
-
|
-
|
2,265,882
|
|
Dispositions
|
(16,500
)
|
-
|
-
|
(16,500
)
|
|
Depreciation,
depletion and amortization
|
(110,303
)
|
-
|
-
|
(110,303
)
|
|
Impairment
of oil and gas assets
|
(972,488
)
|
-
|
-
|
(972,488
)
|
|
Balance
January 31, 2018
|
$
2,398,783
|
761,444
|
100,000
|
3,260,227
|
(1)
Other property consists primarily of four used steam generators and
related equipment that will be assigned to future projects. As of
January 31, 2018, and April 30, 2017, management concluded that
impairment was not necessary as all other assets were carried at
salvage value.
Kern County Project.
On March 4, 2016, the
Company executed an Asset Purchase and Sale and Exploration
Agreement to acquire a 13.75% working interest in certain oil and
gas leases located in southern Kern County, California. Horizon
Energy also purchased a 27.5% working interest in the
project.
Under the terms of the agreement, the Company paid $108,333 to the
sellers on the closing date, and is obligated to pay certain other
costs and expenses after the closing date related to existing and
new leases as more particularly set forth in the
agreement.
Costs incurred to date
for this property have aggregated to $1,060,336 as
of January 31, 2018 and are recorded
as prepaid oil and gas development costs on the consolidated
balance sheet.
In addition, the
sellers are entitled to an overriding royalty interest in certain
existing and new leases acquired after the closing date, and the
Company is required to make certain other payments, each in amounts
set forth in the agreement.
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
nine months ended January 31, 2018, the Company recorded additions
related to development costs incurred of approximately $2,255,589
and $10,293 for proven and unproven oil and gas assets,
respectively. During the nine months ended January 31, 2018, the
Company disposed of oil and gas assets of
$16,500.
The Company’s prospects in Oklahoma are owned directly by the
Company and indirectly by Spyglass Energy Group, LLC, a wholly
owned subsidiary of Bandolier. 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 January 31, 2018,
the Company assessed its oil and gas assets for impairment and
recognized a charge of $972,488 related to its 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.
|
9.
|
Asset Retirement Obligations
|
The total future asset retirement obligations were estimated based
on the Company’s ownership interest in all wells and
facilities, the estimated legal obligations required to retire,
dismantle, abandon and reclaim the wells and facilities and the
estimated timing of such payments. The Company estimated the
present value of its asset retirement obligations at both January
31, 2018 and April 30, 2017 based on a future undiscounted
liability of $713,969 and $639,755, respectively. These costs are
expected to be incurred within 1 to 24 years. A credit-adjusted
risk-free discount rate of 10% and an inflation rate of 2% were
used to calculate the present value.
Changes to the asset retirement obligations were as
follows:
|
|
Nine Months
Ended
January 31,
2018
|
Year Ended
April 30,
2017
|
|
Balance,
beginning of period
|
558,696
|
$
763,062
|
|
Additions
|
16,875
|
-
|
|
Changes
in estimates
|
55,098
|
-
|
|
Disposals
|
-
|
(216,580
)
|
|
Accretion
|
6,535
|
12,214
|
|
|
637,204
|
558,696
|
|
Less:
Current portion for cash flows expected to be incurred within one
year
|
(406,403
)
|
(406,403
)
|
|
Long-term
portion, end of period
|
230,801
|
$
152,293
|
During the nine months ended January 31, 2018 and 2017, the Company
recorded accretion expense of $9,212 and $10,780,
respectively.
Expected timing of asset retirement obligations:
|
Year
Ending April 30,
|
|
|
2018
(remainder of year)
|
$
406,403
|
|
2019
|
-
|
|
2020
|
-
|
|
2021
|
-
|
|
2022
|
-
|
|
Thereafter
|
307,566
|
|
Subtotal
|
661,549
|
|
Effect
of discount
|
(76,765
)
|
|
Total
|
$
637,204
|
|
10.
|
Related Party Transactions
|
Accounts Receivable - Related Party
As discussed in Notes 1 and 5 above, on October 15, 2015, the
Company entered into the Contribution Agreement with MegaWest and
Fortis pursuant to which the Company and Fortis each agreed to
assign certain assets to MegaWest in exchange for the MegaWest
Shares.
Upon
execution of the Contribution Agreement, Fortis transferred certain
indirect interests held in 30 condominium units and the rights to
any profits and proceeds therefrom, with its basis of $15,544,382,
to MegaWest. As of 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 agreement, all amounts for
accounts receivable – related party were written off at
January 31, 2018.
Notes Receivable – Related Party
As
discussed in Note 6, the Company entered into ten promissory note
agreements with Fortis. The notes receivable accrued interest at an
annual interest rate of 3% and mature on January 31, 2018. For the
three and nine months ended January 31, 2018, the Company recorded
$199,211 and $593,021 of interest income on the notes receivable,
respectively. As of April 30, 2017, the outstanding balance of the
notes receivable was $24,786,382, which was written off as a result
of the exchange transaction (see Note 1). As a result of the
exchange agreement, no amounts were recorded as interest income on
the notes receivable at January 31, 2018.
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 a
warrant 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 11 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 $1,057,307 as of
January 31, 2018. During the nine months ended January 31,
2018 and 2017, the Company recorded amortization of debt discount
totaling $144,749 and $0, respectively.
As of January 31, 2018, the outstanding balance, net of debt
discount, and accrued interest on the June 2017 Secured Note due to
related party was $942,693 and $125,000,
respectively.
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 an overriding royalty interest from Funding
Corp. I (as discussed below), which was recorded as additional debt
discount on the consolidated balance sheet. See Note 11 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
”) then
transferred to Funding Corp. I as inducement for the June 2017
Secured Note. The Existing Osage County Override was then acquired
by the Company from Scot Cohen. 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 $1,221,920 as of
January 31, 2018. During the nine months ended January 31,
2018 and 2017, the Company recorded amortization of debt discount
totaling $79,251 and $0, respectively.
As of January 31, 2018, the outstanding balance, net of debt
discount, and accrued interest on the November 2017 Secured Note
due to related party was $1,278,080 and $62,500,
respectively.
As of January 31, 2018 and April 30, 2017, the Company had
5,000,000 shares of preferred stock, par value $0.00001 per share,
authorized. As of January 31, 2018, and April 30, 2017, the Company
had 29,500 shares of Series B Preferred Stock, par value $0.00001
per share (“
Series B
Preferred
”), authorized.
No Series B Preferred shares are currently issued or outstanding,
and no other series of preferred stock have been
designated.
As of January 31, 2018 and April 30, 2017, the Company had
150,000,000 shares of Common Stock authorized. During the nine
months ended January 31, 2018, the Company issued 15,145 shares of
Common Stock related to a cashless exercise of 35,000
options.
As discussed above 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.
There were 17,309,809 and 15,827,921 shares of common stock issued
and outstanding as of January 31, 2018 and April 30, 2017,
respectively.
Options
The following table summarizes information about the changes of
options for the period from April 30, 2017 to January 31, 2018 and
options outstanding and exercisable at January 31,
2018:
|
|
|
Weighted
Average
Exercise
Prices
|
|
|
|
|
|
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 – January 31, 2018
|
2,555,385
|
$
2.14
|
|
Exercisable – January 31, 2018
|
2,319,349
|
$
2.20
|
|
|
|
|
|
Outstanding – Aggregate Intrinsic Value
|
|
$
673,501
|
|
Exercisable – Aggregate Intrinsic Value
|
|
$
597,519
|
The following table summarizes information about the options
outstanding and exercisable at January 31, 2018:
|
|
|
|
|
|
|
Weighted Avg. Life
Remaining (Years)
|
|
|
1.38
|
1,795,958
|
9.45
|
1,614,916
|
|
1.40
|
25,703
|
9.89
|
18,167
|
|
1.98
|
5,000
|
9.51
|
5,000
|
|
2.00
|
457,402
|
8.50
|
419,223
|
|
2.87
|
65,334
|
8.50
|
64,611
|
|
3.00
|
51,001
|
9.16
|
42,445
|
|
3.39
|
12,000
|
9.14
|
12,000
|
|
6.00
|
10,000
|
8.25
|
10,000
|
|
12.00
|
132,987
|
6.98
|
132,987
|
|
|
2,555,385
|
|
2,319,349
|
During the
three months ended January 31, 2018 and 2017, the Company expensed
$102,425 and $335,462, respectively, related to the vesting of
outstanding options to general and administrative expense for
stock-based compensation pursuant to employment and consulting
agreements.
During the nine months
ended January 31, 2018 and 2017, the Company expensed $811,123 and
$1,850,462, respectively, related to the vesting of outstanding
options to general and administrative expense for stock-based
compensation pursuant to employment and consulting
agreements.
As of January 31, 2018, the Company has approximately $703,100 in
unrecognized stock-based compensation expense related to unvested
options, which will be amortized over a weighted average exercise
period of approximately 3 years.
Warrants
The fair 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 nine
months ended January 31, 2018 are as follows:
|
|
|
|
Exercise
price $
|
1.75
- 2.38
|
|
Expected
dividends
|
0
%
|
|
Expected
volatility
|
160.70
- 169.63
%
|
|
Risk
free interest rate
|
1.49
– 1.73
%
|
|
Expected
life of warrant
|
3 years
|
The following is a summary of the Company’s warrant
activity:
|
|
|
Weighted
Average
Exercise Price
|
Weighted
Average Life
Remaining (Years)
|
|
Outstanding and exercisable – April 30, 2017
|
133,333
|
$
50.00
|
2.83
|
|
Forfeited
|
-
|
-
|
-
|
|
Granted
|
2,090,336
|
2.15
|
2.57
|
|
Outstanding and exercisable – January 31, 2018
|
2,223,669
|
5.02
|
2.57
|
The aggregate intrinsic value of the outstanding warrants was
$0.
|
12.
|
Non-Controlling Interest
|
For the nine months ended January 31, 2018, the changes in the
Company’s non–controlling interest were as
follows:
|
|
|
|
|
|
Non–controlling interest at April 30, 2017
|
$
(699,873
)
|
$
13,310,343
|
$
12,610,470
|
|
Acquisition
of non-controlling interest
|
785,298
|
(13,497,191
)
|
(12,711,893
)
|
|
Non–controlling
interest share of income (losses)
|
(85,425
)
|
186,848
|
101,423
|
|
Non–controlling interest at January 31, 2018
|
$
-
|
-
|
-
|
As
discussed above in “Recent Developments” in Note 1, 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.
|
13.
|
Contingency and Contractual Obligations
|
Ongoing
Litigation.
(a) In January 2010, the Company experienced a flood in its Calgary
office premises as a result of a broken water pipe. There was
significant damage to the premises rendering them unusable until
the landlord had completed remediation. Pursuant to the lease
contract, the Company asserted that rent should be abated during
the remediation process and accordingly, the Company did not pay
any rent after December 2009. During the remediation process, the
Company engaged an independent environmental testing company to
test for air quality and for the existence of other
potentially hazardous conditions. The
testing revealed the existence of potentially hazardous mold and
the consultant provided specific written instructions for the
effective remediation of the premises. During the remediation
process, the landlord did not follow the consultant’s
instructions and correct the potentially hazardous mold situation
and subsequently in June 2010 gave notice and declared the premises
to be ready for occupancy. The Company re-engaged the consultant to
re-test the premises and the testing results again revealed the
presence of potentially hazardous mold. The Company determined that
the premises were not fit for re-occupancy and considered the
landlord to be in default of the lease. The Landlord subsequently
terminated the lease.
On January 30, 2014, the landlord filed a Statement of Claim
against the Company for rental arrears in the amount aggregating
CAD $759,000 (approximately USD $615,100 as of January 31, 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 $538,900 as of January 31, 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 through two levels of the Alberta courts and
the appeals were dismissed at both levels. The net effect is that
the landlord’s claim for loss of prospective rent is to
proceed.
(b) In September 2013, the Company was notified by the Railroad
Commission of Texas (the “
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, which
the net present value of has been included in asset retirement
obligations as of January 31, 2018. 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, Plaintiffs filed a
Notice of Appeal to the Tenth Circuit Court of Appeals. That appeal
is pending as of the effective date of this response. There is no
specific timeline by which the Court of Appeals must render a
ruling. Spyglass intends to continue to vigorously defend its
interest in this matter.
(d) MegaWest Energy Missouri Corp. (“
MegaWest
Missouri
”), a wholly
owned subsidiary of the Company, is involved in two cases related
to oil leases in West Central, Missouri. The first case
(
James Long
and Jodeane Long v. MegaWest Energy Missouri and Petro River Oil
Corp.
, case number
13B4-CV00019)
is a case for unlawful
detainer, pursuant to which the plaintiffs contend that MegaWest
Missouri oil and gas lease has expired and MegaWest Missouri is
unlawfully possessing the plaintiffs’ real property by
asserting that the leases remain in effect. The case was
originally filed in Vernon County, Missouri on September 20,
2013. MegaWest Missouri filed an Answer and Counterclaims on
November 26, 2013 and the plaintiffs filed a motion to dismiss the
counterclaims. MegaWest Missouri filed a motion for Change of Judge
and Change of Venue and the case was transferred to Barton County.
The court granted the motion to dismiss the counterclaims on
February 3, 2014.
As to
the other allegations in the complaint, the matter is still
pending.
MegaWest Missouri filed a second case on October 14, 2014
(
MegaWest
Energy Missouri Corp. v. James Long, Jodeane Long, and Arrow Mines
LLC
, case number 14VE-CV00599).
This case is pending in Vernon County, Missouri. Although the
two cases are separate, they are interrelated. In the Vernon County
case, MegaWest Missouri has made claims for: (1) replevin for
personal property; (2) conversion of personal property; (3) breach
of the covenant of quiet enjoyment regarding the lease; (4)
constructive eviction of the lease; (5) breach of fiduciary
obligation against James Long; (6) declaratory judgment that the
oil and gas lease did not terminate; and (7) injunctive relief to
enjoin the action pending in Barton County, Missouri. The
plaintiffs filed a motion to dismiss on November 4, 2014, and Arrow
Mines, LLC filed a motion to dismiss on November 13, 2014. Both
motions remain pending, and MegaWest Missouri will file an
opposition to the motions in the near
future.
The Company is from time to time involved in legal proceedings in
the ordinary course of business. It does not believe that any of
these claims and proceedings against it is likely to have,
individually or in the aggregate, a material adverse effect on its
financial condition or results of operations.
As discussed in Note 1, the following events occurred subsequent to
January 31, 2018:
On February 14, 2018, the Company entered into the Agreement with
Red Fork pursuant to which the Company and Red Fork agreed to
participate in the Exchange, resulting in the conveyance by the
Company to Mountain View Resources, LLC, an affiliate of Red Fork,
of 100% of the Company 13.7% working interest in and to an AMI in
the Mountain View Project in Kern County, California, and Red Fork
conveyed to the Company 64.7% of its 85% working interest in and to
an AMI situated in Kay County, Oklahoma.
On
February 2, 2018, Horizon Investments received from Horizon Energy
a capital call in the amount of $600,227, which was not made due to
lack of required capital. As a result, Horizon Investments’
interest in Horizon Energy was decreased by 27.43%, therefore
reducing Horizon Investments’ interest in Horizon Energy from
20.01% to 14.52%.
