ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Overview
First Titan Corp. is a development stage company and was incorporated in Florida on September 16, 2010. The Company intended to design and manufacture both panel and engineered/tooled custom vacuum formed instrument panels and wiring harnesses, required for the monitoring of any final product that utilizes a gas or diesel engine source. The Company was considered to be in the development stage in accordance with ASC 915 until October 1, 2012 when it began receiving revenue.
We intend to invest in oil and gas properties, greenfield projects and in the development of cutting edge exploration and production technologies.
In September 2011, First Titan Corporation created First Titan Energy, LLC with the goal of capitalizing on the booming oil and gas industry. It is our intention to maximize shareholder value through mergers and acquisitions, greenfield projects and investments in the development of cutting edge exploration and production technologies.
First Titan Energy’s oil and gas development activities include the following:
Alabama
– On May 2, 2012, we acquired a one percent working interest in one well in Little Cedar Creek Field in Alabama. This well was drilled during the fiscal year ended September 30, 2012 and we began receiving revenue during the fiscal year ended September 30, 2013. This well is located in the Little Cedar Field, Alabama’s largest producing oil field.
Louisiana
– On January 3, 2012, we entered into a participation agreement in an oil and gas drilling project in Calcasieu Parish, Louisiana (the “Participation Agreement”). The South Lake Charles Prospect is located seven miles south of the city of Lake Charles, Louisiana. It is a middle Oligocene age geo-pressured prospect located in the middle and lower hackberry sands. Under the terms of the Participation Agreement, we will participate in the drilling of one well and may participate in the drilling of future wells if it chooses. We will pay 25% of the drilling cost of the first well and will receive 13.59% of the net revenue from the well. We anticipate that our share of the total drilling and completion cost of the initial well, projected to be drilled to approximately 15,500 feet, will be $3.4 million. On August 12, 2013, the Participation Agreement was amended to reduce our working interest to 1.8%. As a result, our share of the drilling cost is expected to be approximately $181,000. The Company has paid $143,264 of its share of the costs of the well to date. We will receive 1.4% of the revenue from this well. The well is currently being drilled and is expected to be completed in the first half of fiscal 2014.
During October 2012, we acquired a working interest in the Lake Boeuf Field in Southeast Louisiana. The field covers 300 acres in Lafourche Parish. The prospect was a 12,025 directional well to be drilled utilizing a land rig. The project has been indefinitely suspended. All amounts invested in this project have been transferred to the South Lake Charles Prospect.
Texas
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Minns Project
– On July 7, 2013, the Company acquired a 30% working interest in the Minns project located in Waller County, Texas. The project included three producing wells and a salt water disposal well within the Brookshire Field. The project is targeted for additional development vis-à-vis reworks, deepening of wells, and potentially drilling new wells on the property.
Big Canyon Prospect
– On January 19, 2012, we entered into an agreement to drill two wells on 640 acres of land located in Terrell County, Texas. Our option to drill expired January 27, 2013 and no wells have been drilled.
We have incurred losses since inception, have been issued a going concern opinion from our auditors and rely upon the sale of our securities and debt financing to fund operations. We will need additional financing in order to continue operations.
Results of Operations
The following discussion should be read in conjunction with the condensed financial statements contained elsewhere in this document and in conjunction with the Company’s Form 10-K for the year ended September 30, 2013. Results for interim periods may not be indicative of results for the full year.
We incurred a net loss of $380,521 for the three months ended December 31, 2013, and had a working capital deficit of $145,026 as of December 31, 2013. We do not anticipate having positive net income or positive cash flows from operations in the immediate future. Net cash used by operations for the three months ended December 31, 2013 was $117,240. These conditions create an uncertainty as to our ability to continue as a going concern.
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We continue to rely on advances to fund operating shortfalls and do not foresee a change in this situation in the immediate future. There can be no assurance that we will continue to have such advances available. We will not be able to continue operations without them. We are pursuing alternate sources of financing, but there is no assurance that additional capital will be available to the Company when needed or on acceptable terms.
We have generated limited revenues from our operations. We cannot guarantee we will be successful in our business operations. Our business is subject to risks inherent in the establishment of a new business enterprise, including the financial risks associated with the limited capital resources currently available to us for the implementation of our business strategies. To become profitable and competitive, we must develop the business and marketing plan and execute the plan. Our management will attempt to secure financing through various means including borrowing and investment from institutions and private individuals.
Since inception, the majority of our time has been spent refining our business plan.
Results of Operations for the three months ended December 31, 2013 compared to the three months ended December 31, 2012
Oil and gas sales
We earned net revenue of $32,210 during the three months ended December 31, 2013 compared to revenue of $23,957 for the comparable period of 2012. Revenue increased because there were two producing wells during the three months ended December 31, 2013 compared to only one well during the same period of 2012.
Lease operating expense
We incurred lease operating expense of $3,817 and $312 during the three months ended December 31, 2013 and 2012, respectively. Lease operating expense has increased as a resulting of adding the second well which has higher operating expense.
Depletion, depreciation and amortization
We incurred depletion expense of $22,900 and $5,004 during the three months ended December 31, 2013 and 2012. The depletion rate has increased from 2012 to 2013 due to the decrease in the reserves estimated in the reserve report as of September 30, 2013.
Impairment of investment in joint venture
During the three months ended December 31, 2013, we recognized impairment of an investment in a joint venture of $25,000 as a result of impairing the investment in the joint venture with Biofuels Power Corp.
General and Administrative Expenses
General and administrative expenses increased in the three months ended December 31, 2013 as compared to the three months ended December 31, 2012 from $77,781 to $165,068. The increase in general and administrative expense was primarily due to an increase in consulting fees and office expense.
Loss from Operations
The increase in our loss from operations for the three months ended December 31, 2013 as compared to the comparable period of 2012 from $59,144 to $184,923 is due to the increase in general and administrative expenses described above.
Interest expense
We incurred interest expense of $195,598 during the three months ended December 31, 2013 and $36,863 during the comparable period of 2012. Interest expense increased as a result of the increase in convertible notes payable.
Net Loss
We recognized a net loss of $380,521 for the three months ended December 31, 2013 as compared to a net loss of $96,007 for the three months ended December 31, 2012. The change in net loss is primarily attributable to the decrease in general and administrative expense described above.
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Liquidity and Capital Resources
We anticipate needing approximately of $500,000 to fund our operations and to effectively execute our business plan over the next eighteen months. Currently available cash is not sufficient to allow us to commence full execution of our business plan. Our business expansion will require significant capital resources that may be funded through the issuance of common stock or of notes payable or other debt arrangements that may affect our debt structure. Despite our current financial status we believe that we may be able to issue notes payable or debt instruments in order to start executing our business plan. However, there can be no assurance that we will be able to raise money in this fashion and have not entered into any agreements that would obligate a third party to provide us with capital.
During the three months ended December 31, 2013, we incurred a net loss of $380,521. We raised the cash amounts to be used in these activities from advances. As of December 31, 2013, we have negative working capital of $145,026.
As of December 31, 2013, we had $29,659 of cash on hand. This amount of cash will be adequate to fund our operations for less than three months.
As of the date of this filing, the current funds available to the Company will not be sufficient to continue maintaining a reporting status. Management believes if the Company cannot maintain its reporting status with the SEC it will have to cease all efforts directed towards the Company. As such, any investment previously made would be lost in its entirety.
To date, the Company has been able to fund operations through the sale of stock and by obtaining cash advances. The Company will have to seek additional financing in the future. However, the Company may not be able to obtain additional capital or generate sufficient revenues to fund our operations. If we are unsuccessful at raising sufficient funds to fund our operations, the Company may be forced to seek a buyer for our business or another entity with which we could create a joint venture. If all of these alternatives fail, we expect that the Company will be required to seek protection from creditors under applicable bankruptcy laws.
Our independent auditor has expressed substantial doubt about our ability to continue as a going concern and believes that our ability is dependent on our ability to implement our business plan, raise capital and generate revenues. See Note 2 of our financial statements.
Recent federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or The NASDAQ Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges are those that address board of directors’ independence, audit committee oversight, and the adoption of a code of ethics. Our Board of Directors is comprised of one individual who is also our executive officer. Our executive officer makes decisions on all significant corporate matters such as the approval of terms of the compensation of our executive officer and the oversight of the accounting functions.
The Company has not yet adopted any of these corporate governance measures, and since our securities are not yet listed on a national securities exchange, the Company is not required to do so. The Company has not adopted corporate governance measures such as an audit or other independent committees of our board of directors as we presently do not have any independent directors. If we expand our board membership in future periods to include additional independent directors, the Company may seek to establish an audit and other committees of our board of directors. It is possible that if our Board of Directors included independent directors and if we were to adopt some or all of these corporate governance measures, stockholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to our senior officers and recommendations for director nominees may be made by a majority of directors who have an interest in the outcome of the matters being decided. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions.