NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2014 and 2013
NOTE 1—ORGANIZATION AND NATURE OF OPERATIONS
Circle Star Energy Corp. (a Nevada Corporation) is a Fort Worth based independent exploration and production company engaged in the acquisition, exploration and development of crude oil and natural gas properties and production of oil and natural gas in the United States.
NOTE 2—GOING CONCERN
At April 30, 2014, we had cash and cash equivalents of $395,735 and a working capital deficit of $3,648,330. For the year ended April 30, 2014, we incurred a net loss of $1,030,129 and an operating loss of $772,507. Cash used in operations was $897,643.
Given that we have not achieved profitable operations to date, our cash requirements are subject to numerous contingencies and risks beyond our control, including operational and development risks, competition from well-funded competitors, and our ability to manage growth. We can offer no assurance that the Company will generate cash flow sufficient to achieve profitable operations or that our expenses will not exceed our projections. Accordingly, there is substantial doubt as to our ability to continue as a going concern for a reasonable period of time.
There can be no assurance that financing will be available to us when needed or, if available, or that it can be obtained on commercially reasonable terms. Unprecedented disruptions in the credit and financial markets over the past two years have had a significant material adverse impact on access to capital and credit for many companies. Considering our financial condition, we may be forced to issue debt or equity at less favorable terms than would otherwise be available. These disruptions could, among other things, make it more difficult for the Company to obtain, or increase its cost of obtaining capital and financing for its operations. If we are unable to obtain additional or alternative financing on a timely basis and are unable to generate sufficient revenues and cash flows, we will be unable to meet our capital requirements and will be unable to continue as a going concern.
We anticipate generating losses in the near term, and therefore, may be unable to continue operations in the future. To secure additional capital, we will have to issue debt or equity securities or enter into a strategic arrangement with a third party. There can be no assurance that additional capital will be available to us. We currently have no agreements, arrangements, or understandings with any person to obtain funds through bank loans, lines of credit, or any other sources. The financial statements do not include any adjustments that may be necessary if the Company is unable to continue as a going concern.
NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of Circle Star and our wholly-owned subsidiaries, JHE Holdings, LLC, a Texas limited liability company (“JHE”), and Circle Star Operating Corp., a Nevada corporation (“CSOP”). All material inter-company transactions and accounts have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure and estimation of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. The most significant of the estimates and assumptions that affect reported results are the estimates of the Company’s crude oil and natural gas reserves, which are used to compute depreciation, depletion, amortization and impairment of proved crude oil and natural gas properties. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation in accordance with U.S. GAAP have been included in these consolidated financial statements.
Crude Oil and Natural Gas Properties
The Company uses the successful efforts method of accounting for crude oil and natural gas properties whereby costs incurred to acquire mineral interests in crude oil and natural gas properties, to drill and equip exploratory wells that find proved reserves, to drill and equip development wells, and expenditures for enhanced recovery operations are capitalized. Geological and geophysical costs, seismic costs incurred for exploratory projects, lease rentals and costs associated with unsuccessful exploratory wells or projects are expensed as incurred. Costs of seismic studies that are utilized in development drilling within an area of proved reserves are capitalized as development costs. To the extent a seismic project covers areas of both developmental and exploratory drilling, those seismic costs are proportionately allocated between capitalized development costs and exploration expense. Maintenance, repairs and costs of injection are expensed as incurred, except that the costs of replacements or renewals that expand capacity or improve production are capitalized.
Under the successful efforts method of accounting, the Company capitalizes exploratory drilling costs on the balance sheet pending determination of whether the well has found proved reserves in economically producible quantities. The Company capitalizes costs associated with the acquisition or construction of support equipment and facilities with the drilling and development costs to which they relate. If proved reserves are found by an exploratory well, the associated capitalized costs become part of well equipment and facilities. However, if proved reserves are not found, the capitalized costs associated with the well are expensed, net of any salvage value.
Cash and Cash Equivalents
We consider all highly liquid instruments purchased with an original maturity of three months or less to be cash and cash equivalents. We continually monitor our positions with, and the credit quality of, the financial institutions with which we invest.
Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. We have not experienced any losses related to these balances. From time to time, such amounts on deposit are in excess of federally insured limits at April 30, 2014 and April 30, 2013, respectively.
Financial Instruments
The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and long-term debt approximate fair value, as of April 30, 2014 and April 30, 2013 due to their short maturities.
Revenue Recognition
Crude oil and natural gas sales result from interests owned by the Company in crude oil and natural gas properties. We recognize revenue for our production when the quantities are delivered to or collected by the respective purchaser and title transfers to the purchaser. Prices for such production are defined in sales contracts and are readily determinable based on certain publicly available indices. All transportation costs are included in lease operating expense. For natural gas sales the sale method is utilized in determining whether a sale has occurred.
Accounts Receivable
The Company derives revenue primarily from the sale of produced natural gas and crude oil. Revenues from production on properties in which the Company shares an economic interest with other owners are recognized on the basis of the Company's interest. Revenues are reported on a gross basis for the amounts received before taking into account production taxes and transportation costs, which are reported as separate expenses. Revenue is recorded and receivables are accrued using the sales method, which occurs in the month production is delivered to the purchaser, at which time ownership of the oil is transferred to the purchaser. Payment is generally received between 30 and 90 days after the date of production. Collection of the revenue may vary depending on the status of wells or the performance of the operator. Estimates of the amount of production delivered to purchasers and the prices at which it was delivered are necessary at year end. Management’s knowledge of the Company’s properties, their historical performance, the anticipated effect of weather conditions during the month of production, NYMEX and local spot market prices, and other factors are the basis for these estimates. Variances between estimates and the actual amounts received are recorded when payment is received, or when better information is available.
Concentration of Credit Risk
The Company is subject to credit risk resulting from the concentration of its crude oil and natural gas receivables with several significant purchasers. The Company operates exclusively within the United States of America. For the year ended April 30, 2014, 100% of oil and gas revenue was from non-operated properties where the Company has no direct contact with the actual purchaser. On these properties, our portion of the product was marketed by the multiple companies who operate these wells. In the event of the bankruptcy of any one of these operators we could incur a significant decrease in annual revenue. During the year ended April 30, 2014, three operators, Woodbine Acquisition, CML Exploration and Chesapeake/EXCO accounted for 73%, 15% and 12% of our revenue sales respectively.
Production and Exploration Costs
Production costs, including compressor rental and repair, pumpers’ salaries, saltwater disposal, ad valorem taxes, insurance, repairs and maintenance, expensed workovers and other operating expenses are expensed as incurred and included in lease operating expense on our consolidated statements of operations. Exploration expenses include dry hole costs, delay rentals, and geological and geophysical costs.
Other Property
Furniture, fixtures and equipment are carried at cost. Depreciation of furniture, fixtures and equipment is provided using the straight-line method over estimated useful lives of five years. Gain or loss on retirement or sale or other disposition of assets is included in income in the period of disposition.
Depreciation expense for other property and equipment was $nil and $6,596, for the years ended April 30, 2014 and April 30, 2013, respectively.
Asset Retirement Obligations
The Company accounts for its asset retirement obligations by recording the fair value of a liability for an asset retirement obligation in the period in which a legal obligation is incurred and a corresponding increase in the carrying amount of the related long-lived asset. Subsequently, the capitalized asset retirement costs are charged to expense through the depreciation, depletion and amortization of crude oil and natural gas properties and the liability is accreted to the expected future abandonment cost ratably over the related asset’s life.
Asset Impairment
Proved crude oil and natural gas properties are reviewed for impairment on a field-by-field basis each quarter, or when events and circumstances indicate a possible decline in the recoverability of the carrying value of such field. The estimated future undiscounted cash flows expected in connection with the field are compared to the carrying amount of the field to determine if the carrying amount is recoverable. If the carrying amount of the field exceeds its estimated undiscounted future cash flows, the carrying amount of the field is reduced to its estimated fair value. Due to the unavailability of relevant comparable market data, a discounted cash flow method is used to determine the fair value of proved properties. The discounted cash flow method utilizes the most recent third party reserve estimation report and estimates future cash flows based on management’s estimates of future crude oil and natural gas production, commodity prices based on commodity futures price strips, operating and development costs, and a risk-adjusted discount rate.
Non-producing crude oil and natural gas properties primarily consist of undeveloped leasehold costs and costs associated with the purchase of certain proved undeveloped reserves. Individually significant non-producing properties, if any, are assessed for impairment on a property-by-property basis and, if the assessment indicates an impairment, a loss is recognized by providing a valuation allowance consistent with the level at which impairment was assessed. For individually insignificant non-producing properties, impairment losses are recognized by amortizing the portion of the properties’ costs which management estimates will not be transferred to proved properties over the lives of the leases based on experience of successful drilling and the average holding period. The Company’s impairment assessments are affected by economic factors such as the results of exploration activities, commodity price outlooks, anticipated drilling programs, remaining lease terms, and potential shifts in business strategy employed by management.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization of capitalized drilling and development costs of producing crude oil and natural gas properties, including related support equipment and facilities, are computed using the unit-of-production method on a field basis based on total estimated proved developed crude oil and natural gas reserves. Amortization of producing leaseholds is based on the unit-of-production method using total estimated proved reserves. In arriving at rates under the unit-of-production method, the quantities of recoverable crude oil and natural gas reserves are established based on estimates made by the Company’s internal geologists and engineers and external independent reserve engineers. Upon sale or retirement of properties, the cost and related accumulated depreciation, depletion and amortization are eliminated from the accounts and the resulting gain or loss, if any, is recognized. Unit of production rates are revised whenever there is an indication of a need, but at least in conjunction with semi-annual reserve reports. Revisions are accounted for prospectively as changes in accounting estimates.
Estimates of Proved Oil and Gas Reserves
Estimates of our proved reserves included in this report are prepared in accordance with U.S. generally accepted accounting principles, or GAAP, and SEC guidelines. The accuracy of a reserve estimate is a function of:
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the quality and quantity of available data;
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the interpretation of that data;
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the accuracy of various mandated economic assumptions;
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the judgment of the persons preparing the estimate.
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Our proved reserve information included in this report was predominately based on evaluations prepared by independent petroleum engineers. Estimates prepared by other third parties may be higher or lower than those included herein. Because these estimates depend on many assumptions, all of which may substantially differ from future actual results, reserve estimates will be different from the quantities of oil and gas that are ultimately recovered. In addition, results of drilling, testing and production after the date of an estimate may justify material revisions to the estimate.
We based the estimated discounted future net cash flows from proved reserves on the un-weighted arithmetic average of the prior 12-month commodity prices as of the first day of each of the months constituting the period and costs on the date of the estimate. Future prices and costs may be materially higher or lower than these prices and costs which would impact the estimated value of our reserves.
The estimates of proved reserves materially impact depreciation, depletion, and amortization expense and our estimates of impairment. If the estimates of proved reserves decline, the rate at which we record depreciation and depletion expense will increase, reducing future net income. Such a decline may result from lower market prices, which may make it uneconomic to drill for and produce higher cost fields.
Share-Based Compensation
The Company follows the fair value recognition provisions of Accounting Standards Codification (“ASC”) 718,
“Compensation – Stock Compensation.”
The Company estimates the fair value of share-based payment awards made to employees and directors, including stock options and stock awards. The value of the portion of the award that is ultimately expected to vest is recognized as an expense ratably over the requisite service periods. Awards that vest only upon achievement of performance criteria are recorded only when achievement of the performance criteria is considered probable. We estimate the fair value of stock options using the Black-Scholes option pricing model. This model is highly complex and dependent on key estimates by management. The estimates with the greatest degree of subjective judgment are the estimated lives of the stock-based awards, the estimated volatility of our stock price, and the assessment of whether the achievement of performance criteria is probable. The fair value of stock awards is based on the quoted market price on the grant date.
Income Taxes
The Company accounts for income taxes pursuant to the provisions of ASC 740-10,
“Accounting for Income Taxes,”
which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
The Company follows the provisions of the ASC 740-10 related to
Accounting for Uncertain Income Tax Positions.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for uncertain tax benefits.
The Company has adopted ASC 740-10-25
Definition of Settlement,
which provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. As of April 30, 2014, the tax years ended April 30, 2013 and April 30, 2012 are still subject to audit.
(Loss) per Common Share
Basic net loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per common share is calculated in the same manner, but also considers the impact to net loss and common shares for the potential dilution from stock options, stock warrants and any other outstanding convertible securities, or common stock equivalents.
We have issued potentially dilutive instruments as summarized in the table below. We did not include any of these instruments in our calculation of diluted loss per share during the period because to include them would be anti-dilutive due to our net loss during the periods.
The following table summarizes the types of potentially dilutive securities outstanding as of April 30, 2014 and April 30, 2013:
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Year Ended April 30,
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2014
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2013
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Common stock awards issuable pursuant to service contract
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Convertible notes payable
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Advances from Working Interest Partners
In January 2013, the Company, through its wholly owned subsidiary CSOP, entered into two Participation agreements, whereby the Company became the operator of two wells in Trego County, Kansas.
In March 2013, the Company, through its wholly owned subsidiary CSOP, received a letter of intent to enter into a Participation agreement, whereby the Company agreed to proceed with gathering seismic data, and eventually become the operator of future potential wells in Trego County, Kansas. The letter of intent was superseded by the Participation agreement finalized on September 13, 2013.
In February 2014, the Company, through its wholly owned subsidiary CSOP, entered into a Participation agreement, whereby the Company became the operator of another well in Trego County, Kansas.
Advances from working interest partners recorded in CSOP as of April 30, 2014 consisted of cash calls received from the other working interest owner, net of costs incurred on the respective wells. As of April 30, 2014, net advances amounted to $59,479.
Recent Accounting Pronouncements
In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210):
Disclosures about Offsetting Assets and Liabilities.
This ASU requires the Company to disclose both net and gross information about assets and liabilities that have been offset, if any, and the related arrangements. The disclosures under this new guidance are required to be provided retrospectively for all comparative periods presented. The Company is required to implement this guidance effective for the first quarter of fiscal 2014 and does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.
Various other accounting pronouncements have been recently issued, most of which represented technical corrections to the accounting literature or were applicable to specific industries, and are not expected to have a material effect on our financial position, results of operations, or cash flows.
Derivative Instruments
The Company may enter into financing arrangements that consist of freestanding derivative instruments or hybrid instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with ASC Topic 815,
Accounting for Derivative Instruments and Hedging Activities
as well as related interpretation of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument.
We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For certain complex derivative instruments, such as free-standing warrants and embedded conversion options, we generally use the Black-Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free interest rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of our common stock. Since derivative financial instruments are initially and subsequently carried at fair values, our income (expense) going forward will reflect the volatility in these estimates and assumption changes. Under the terms of the accounting standard, increases in the trading price of the Company’s common stock and increases in fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price of the Company’s common stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative income.
NOTE 4 – FAIR VALUE MEASUREMENTS
ASC Topic 820 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data and requires disclosures for assets and liabilities measured at fair value based on their level in the hierarchy. In circumstances in which a quoted price in an active market for the identical liabilities is not available, a reporting entity is required to measure fair value using one or more of the techniques provided for in ASC 820.
The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
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Level 1 – Quoted prices in active markets for identical assets of liabilities.
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·
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Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
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·
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Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
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Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480,
“Distinguishing Liabilities from Equity”
and ASC 815,
“Derivatives and Hedging”
. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrant and option derivatives are valued using the Black-Scholes model.
The Company uses Level 3 inputs for its valuation methodology for the derivative liabilities and embedded conversion option liabilities as their fair values were determined by using the Black-Scholes option pricing model based on various assumptions. The Company’s derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives.
The following tables set forth the liabilities as April 30, 2014 and 2013, which were recorded on the balance sheet at fair value on a recurring basis by level within the fair value hierarchy. As required, these are classified based on the lowest level of input that is significant to the fair value measurement:
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Fair Value Measurements at Reporting Date Using
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Description
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April 30, 2014
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Quoted Prices in Active Markets for Identical Assets (Level 1)
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Significant Other Observable Inputs (Level 2)
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Significant
Unobservable
Inputs
(Level 3)
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Convertible promissory notes with embedded beneficial conversion feature
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Description
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April 30, 2013
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Convertible promissory notes with embedded beneficial conversion feature
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The following table sets forth a summary of changes in fair value of our derivative liabilities for the years ended April 30, 2014 and April 30, 2013:
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April 30, 2014
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April 30, 2013
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Beginning balance
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$
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63,671
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$
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-
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Embedded conversion option liability recorded in connection with the issuance of convertible promissory notes
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83,185
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86,672
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Changes in derivative liabilities recorded in connection with the conversion of convertible promissory notes
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(197,924
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)
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-
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Changes in fair value of embedded beneficial conversion feature of convertible promissory notes included in earnings
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51,068
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(23,001
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)
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NOTE 5—ACQUISITIONS
Wevco Acquisition
On March 6, 2012, the Company entered into a leasehold Purchase Agreement with Wevco Production, Inc. (“Wevco”), whereby Wevco would sell to the Company all of Wevco’s rights, title, and working interest in and to certain oil and gas leases, containing up to 64,575 net acres, situated in Gove and Trego Counties, Kansas (“the Wevco Purchase Agreement”). Under the Wevco Purchase Agreement, the Company was to pay $5,000,000 on or before closing and issue 1,000,000 common shares to the seller. At the time of the signing of the Purchase Agreement, the Company paid $100,000.The Company paid an additional $200,000 in March 2012.These amounts were non-refundable and were considered an advance against the Purchase Price. The Company issued the 1,000,000 common shares in March 2012.
On April 24, 2012, the Company entered into an amendment to the Wevco Purchase Agreement extending the closing date from April 30, 2012 until May 31, 2012 (the “Wevco First Amendment”). The Company paid a non-refundable $100,000 extension fee which was considered an advance against the Purchase Price.
On June 13, 2012, the Company entered into a Second Amendment to Purchase Agreement extending the closing date from May 31, 2012 until September 28, 2012 (“the Second Amendment”). Pursuant to the Second Amendment, the Company paid a non-refundable $100,000 extension fee, and issued 600,000 common shares. The shares were issued on June 19, 2012 at a price of $0.89 per share. As of July 31, 2012 the Company had capitalized $3,611,638 in costs as deposits subject to forfeiture related to consideration granted the seller.
The Company did not fully execute the terms of the purchase agreement by September 28, 2012. The Seller assigned 1,120 of the 64,575 net acres stipulated in the initial purchase agreement to the Company in October 2012. The value of the acreage transferred to the Company relative to the initial 64,575 net acres as per the terms of the initial Purchase Agreement amounted to $62,641. These costs had been transferred to unproved properties on the Company’s consolidated balance sheet as of April 30, 2013 and the remaining $3,548,997 of deposits subject to forfeiture were charged to impairment expense.
On December 18, 2012, the Company and Wevco executed a Settlement and Release Agreement (“Release”). In connection with the execution of the Release the Company issued 225,000 common shares to Wevco at $0.38 per share. The common shares were issued as follows; 115,965 in consideration for the satisfaction of $44,066 in accrued liabilities due Wevco and $109,035 in consideration for approximately 1,400 acres Wevco assigned to the Company. As of April 30, 2014, we had classified $107,574 related to the shares as unproved properties.
BlueRidge Acquisition
On April 17, 2012, the Company agreed to purchase certain interests in oil and gas leases in Rawlins, Sheridan and Graham Counties, Kansas for $5,308,375 and 560,000 common shares, with a closing date of July 1, 2012. Pursuant to the Purchase Agreement, the Company initially agreed to purchase interests in 17,168 acres in Rawlins County, 12,518 acres in Sheridan County and 12,781 acres in Graham County. The Company paid $50,000 in irrevocable earnest money to be applied to the purchase price at closing.
The Purchase Agreement was amended on July 2, 2012 by which the terms were modified by reducing the acreage of the leases in Graham County by 1,760 acres, and by granting the Company an option to purchase the properties in Rawlins and Graham Counties. The amendment further modified the terms of the Purchase Agreement, whereby the $50,000 of earnest money previously paid was applied to the purchase price and the Company issued 2,611,000 common shares to the certain sellers, for the interests in Sheridan County. The shares were issued on July 19, 2012 at a price of $0.70 per share, the fair market value on the date of issuance.
As the Company did not exercise its right to exercise its purchase option, the $50,000 in cash paid and the value of the shares $1,868,632, were reclassified from non-refundable lease deposits to unproved property costs during the quarter ended October 31, 2012. During the fiscal year ended April 30, 2013 $946,895 of the costs were impaired related to a transfer of 50% of the subject acreage related to the settlement of litigation related to this matter in addition $238,880 of the costs related to the acreage were impaired related to lease expirations. During the fiscal year ended April 30, 2014 the remaining value of the lease acreage was impaired due to the short duration remaining on the leaseholds.
NOTE 6—INVESTEES ACCOUNTED FOR UNDER THE EQUITY METHOD
Equity Method Investment
The Company has a 10% investment in JHE Energy Interests (“JHEI”) which is accounted for under the equity method of accounting. JHEI is engaged in the exploration, development, and production of crude oil and natural gas assets in the state of Texas. The Company’s investment in JHEI was $167,215 and $167,215 as of April 30, 2014 and April 30, 2013, respectively. The Company has elected to use the equity method, as we may have the ability to exercise significant influence on the investee. During the year ended April 30, 2014, we received earnings distributions of $27,250 related to the investment in JHEI.
The table below summarizes activity related to our investment in JHEI for the period ended April 30, 2014
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Investment in JHEI as of April 30, 2013
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$
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167,215
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Earnings for the year ended April 30, 2014
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27,250
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Distributions for the year ended April 30, 2014
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(27,250
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)
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Investment as of April 30, 2014
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$
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167,215
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NOTE 7—CRUDE OIL AND NATURAL GAS PROPERTIES
Capitalized Costs
Our crude oil and natural gas properties as of April 30, 2014 and April 30, 2013, comprised the following:
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2014
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2013
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Proved crude oil and natural gas producing properties
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Unproved crude oil and natural gas properties
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Accumulated depreciation, depletion and amortization
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Net oil and gas properties
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|
|
Capitalized amounts attributable to proved crude oil and natural gas properties are depleted by the unit-of-production method over proved reserves using the unit conversion ratio of six Mcf of gas to one barrel of oil equivalent (“BOE”), and one barrel of NGLs to one BOE. The ratios of six Mcf of natural gas to one BOE and one barrel of NGLs to one BOE do not assume price equivalency and, given price differentials, the price for a BOE for natural gas may differ significantly from the price for a barrel of oil. Capitalized costs of proved mineral interests are depleted over total estimated proved reserves, and capitalized costs of wells and related equipment and facilities are depleted over estimated proved developed reserves. Depreciation, depletion and amortization expense for oil and gas producing property and related equipment amounted to $547,704 and $396,319 for the years ended April 30, 2014 and April 30, 2013, respectively.
Capitalized costs related to-proved crude oil and natural gas properties, including wells on a field by field basis and related equipment and facilities, are evaluated for impairment based on an analysis of undiscounted future net cash flows. If undiscounted cash flows are insufficient to recover the net capitalized costs related to-proved properties, then we recognize an impairment charge in income from operations equal to the difference between the net capitalized costs related to-proved properties and their estimated fair values based on the present value of the related future net cash flows.
For the year ended April 30, 2014, we recorded impairment expense of $756,167 related to:
|
(1)
|
Expiring leased acreage in Sheridan County, Kansas, in the amount of $708,015 previously classified as unproved property associated costs have been impaired; and
|
|
(2)
|
$48,152 related to, on a field by field basis, certain capitalized proved crude oil and natural gas property costs exceeding the fair value of the asset.
|
For the year ended April 30, 2013, significant impairment charges relate to:
|
(1)
|
$3,548,997 recorded in connection with a leasehold Purchase Agreement with Wevco executed in September 2012, whereby Wevco agreed to sell to the Company all of Wevco’s rights, title, and working interest in and to certain oil and gas leases, containing up to 64,575 net acres, situated in Gove and Trego Counties, Kansas (“the Wevco Purchase Agreement”); as further described below.
|
|
(2)
|
Lease expirations in the amount of $238,880, whereby associated costs have been impaired.
|
|
(3)
|
Approximately $970,000 in costs associated with acreage transferred in connection with the settlement and release agreement executed in connection with the litigation or of our “Cottonwood” matter. (Note 14)
|
On the sale of an entire interest in an unproved property for cash or cash equivalent, gain or loss on the sale is recognized, taking into consideration the amount of any recorded impairment if the property had been assessed individually. If a partial interest in an unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained.
2014 Transactions
On January 24, 2014, the Company completed the assignment of certain royalty and over-riding royalty interests related to 14 wells located in Madison, Grimes, Dimmit and Fayette counties in Texas to unrelated third parties. Net capitalized costs associated with the interests conveyed amounted to $665,165. Net cash consideration received in connection with the conveyance amounted to $1,897,444. In connection with the conveyance we have recorded a gain of $1,232,279. For the fiscal 2014 year, we had generated revenue of approximately $905,000 related to these interests through the date of the conveyance.
Transfer of Net Profits Interest
During the fiscal year ended April 30, 2014, the Company made distributions of $1,580 to High Plains Oil, LLC (“High Plains”) and $99,774 to an unrelated third party, related to their 10% retained net revenue interest in our wholly-owned subsidiary, JHE Holdings, LLC (“JHE”). Prior to May 9, 2013, this net revenue interest had been owned by High Plains, an entity controlled by S. Jeffrey Johnson, our Chief Executive Officer. On May 9, 2013, High Plains transferred its ownership of the net revenue interest to an unrelated third party. In February 2014, the net revenue interest as held by the unrelated third party increased from 10% to 15%. The increase in the net profits interest was granted in lieu of paying that party $189,000 or approximately 10% of the net proceeds received from the January 24, 2014 conveyance of certain over-riding royalty interests and net revenue interests as described above.
NOTE 8—ASSET RETIREMENT OBLIGATION
For the purpose of determining the fair value of the asset retirement obligation incurred during the year ended April 30, 2014, the Company assumed an inflation rate of 4.07%, an estimated average asset life of 16.5 years, and a credit adjusted risk free interest rate of 7.85%.
The following reconciles the value of the asset retirement obligation for the periods presented:
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligation, beginning of year
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Liabilities settled
|
|
|
-
|
|
|
|
-
|
|
|
Liabilities incurred
|
|
|
6,213
|
|
|
|
|
|
|
Revisions in estimated liabilities
|
|
|
-
|
|
|
|
-
|
|
|
Accretion
|
|
|
630
|
|
|
|
-
|
|
|
Asset retirement obligation, end of year
|
|
$
|
6,843
|
|
|
$
|
-
|
|
NOTE 9—NOTES PAYABLE
A summary of our notes payable is as follows:
|
|
|
April 30, 2014
|
|
|
April 30, 2013
|
|
|
(a)
Convertible notes payable 12% - December 31, 2014
|
|
$
|
2,310,000
|
|
|
$
|
2,750,000
|
|
|
Debt Discount
|
|
|
(70,635
|
)
|
|
|
-
|
|
|
(b)
Convertible notes payable 10% - August 15, 2014
|
|
|
-
|
|
|
|
67,713
|
|
|
Debt Discount
|
|
|
-
|
|
|
|
(64,913
|
)
|
|
(c)
Convertible notes payable 6% - September 14, 2014
|
|
|
1,500,000
|
|
|
|
-
|
|
|
Debt Discount
|
|
|
(43,728
|
)
|
|
|
-
|
|
|
Total Current Portion
|
|
$
|
3,695,637
|
|
|
$
|
2,752,800
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Convertible notes payable 6% - September 14, 2014
|
|
$
|
-
|
|
|
$
|
1,500,000
|
|
|
Debt Discount
|
|
|
-
|
|
|
|
(169,288
|
)
|
|
Total Long-term Portion
|
|
$
|
-
|
|
|
$
|
1,330,712
|
|
|
Total Notes Payable
|
|
$
|
3,695,637
|
|
|
$
|
4,083,512
|
|
|
(a)
|
On February 8, 2012, the Company issued two 10% convertible notes in the aggregate principal amount of $2,750,000. The notes accrue interest at the rate of 10% per annum on the unpaid principal balance and could be repaid by the Company at any time. The notes were originally due and payable on February 8, 2013 or at the election of the applicable holder on the earlier of: (i) the closing of a financing transaction by the Company for aggregate proceeds in excess of $5,000,000; (ii) the sale or partial sale of JHE Holdings LLC (“JHE”); (iii) the sale of all or substantially all of the assets of JHE; or (iv) an Event of Default. The 10% Notes were convertible at the option of the holders into common shares at the Maturity Date or upon the occurrence of one or more of the triggering events set forth above, at a conversion price of $1.50 per share. The notes were discounted by $1,008,333 to reflect the beneficial conversion feature that existed on the date of issuance. On October 9, 2012 the terms of the note were modified whereby interest payments were delayed through February 2013. In exchange for these modifications the Company issued the noteholders 250,000 common shares (Note 10). In connection with the issuance of these common shares we recognized a discount to the notes in the amount of $57,500. The discount related to these shares is being amortized over the remaining term of the notes.
|
|
|
The 10% convertible notes became due on February 8, 2013 in the principal amount of $2,750,000. In January 2014 the Company paid a total of $1,000,000 cash, each of the two noteholders receiving $500,000. Of the total amount paid $515,000 was allocated to principal on the notes ($257,500 for each note) and $485,000 was allocated to interest ($242,500 for each note). On February 28, 2014, the Company entered into new note agreements with the two noteholders. The amended and restated note agreements, each in the amount of $1,155,000, accrue interest at 12% per annum and mature on December 31, 2014. The new notes are convertible into shares of the Company’s common stock at $0.75. The new notes are collateralized by a security interest in the oil and gas properties held by JHE. The Company has maintained the right to continue selling interests in assets held by JHE provided that 70% of the proceeds from any sale by JHE be applied to the outstanding principal and accrued interest related to the amended and restated notes. In connection with the new note agreements which extend the term of the notes through December 2014 and increased the interest rate on the notes to 12%, we agreed to issue 5,000,000 shares of our common stock to the noteholders and in connection therewith we recorded a debt discount of $50,000. The Company at the election of the Chief Executive Officer has retained the right to vote these shares and we have retained the right to re-purchase any or all of these shares at a price of $0.15 per share for six months from the date of grant. In addition we issued to each of the noteholders 2,500,000 warrants to purchase our common shares at $0.05 per share beginning on February 15, 2015. The Company has retained the right to call the warrants any time within the first six months from the date of issuance at $0.10 provided that we repay a minimum of $500,000 in principal on each note. In connection with the issuance of the warrants we recorded a discount of $38,294. The discount related to the issuance of these warrants is being amortized over the remaining term of the notes. In evaluating whether this transaction should be accounted for as a debt modification or extinguishment the Company performed the two step evaluation prescribed in ASC 470-50 and concluded that the transaction should be accounted for as a modification as: (1) the present value of cash flows including non-cash consideration paid did not change by greater than 10% of the carrying amount of the original debt instrument immediately prior to the modification or exchange; and (2) the fair value of the embedded conversion option did not change by greater than 10% of the carrying amount of the original debt instrument immediately prior to the modification or exchange.
As of April 30, 2014, the remaining unamortized portion of the debt discount related to the amended notes amounted to $70,635.
|
|
(b)
|
On August 15, 2012, the Company entered into a convertible note agreement which allowed the Company to borrow up to $555,000. The note was to mature on August 15, 2014. The terms of the note contained a 10% or $55,000 original issuance discount, to be pro-rated based on actual cash drawn in connection with the instrument. The note was convertible into common shares at the lesser of $0.55 or at a share value of 75% of the lowest closing share price for the 25 days preceding a conversion.
During the fiscal year ended April 30, 2014, 2014, we received net cash proceeds of $50,000 related to borrowings under the terms of the initial note agreement. As of January 31, 2014, we had an outstanding balance of $32,925 under the terms of the note and recorded a discount in the amount of $28,803 to be amortized over the term of the note. The note bore no interest for the first 90 days and at 10% thereafter. The terms of the note indicated that if any principal were not repaid within 90 days of the initial funding, the 10% interest charge on all outstanding principal was to accrue immediately. Therefore we accrued $5,000 as a component of the principal balance as of January 31, 2014. In addition we recorded $5,000 in original issuance discount and $1,050 in fees as components of the principal balance.
In connection with this conversion feature, we recorded a derivative liability totaling $83,185 for the $50,000 draw related to the Level III fair value measurement of the conversion feature on the day one issuance of the debt. The value of the associated conversion liability is re-valued at the end of each fiscal period with changes recorded as charges to our profit and loss. As of April 30, 2014 the entire principal balance of the note had been converted and therefore we recorded a liability of $nil related to the embedded conversion feature and recorded gains of $51,068 during the fiscal year ended April 30, 2014, related to the change in its fair value. We used the Black-Scholes model in establishing the date of issuance fair value and end of reporting period fair value of the conversion liability. Key assumptions included in the fair value measurement of this liability included: volatility ranging from 199.51% on the date of issuance, to 310% as of the end of the reporting period; risk free interest rates ranging from 0.13% on the date of issuance, to 0.12% at the end of the reporting period; and an assumed dividend rate of 0%.
In May, June and July 2013, the Company received conversion notices from the holders of the $555,000 convertible note. The conversion notices indicated the conversion of $82,838 in principal, accrued interest and original issuance discount into 2,296,749 common shares at conversion prices of $0.053, $0.053, $0.023 and $0.023 per share respectively (Note 10).
In December 2013 and January 2014, the Company received conversion notices from the holders of the $555,000 convertible note. The conversion notices indicated the conversion of $28,125 in principal, accrued interest and original issuance discount into 2,700,000 shares of common stock at conversion prices of $0.01875 and $0.075 per share respectively (Note 10).
|
|
|
In February, March and April 2014, an additional $32,295 in principal, accrued interest and original issuance discount was converted into 5,526,582 shares of our common stock at prices ranging from $0.0059 to $0.006 per share (Note 10). The balance on the note as of April 30, 2014 was $0 as all principal accrued interest and original issuance discount had been converted as of the end of our fiscal year
|
|
(c)
|
On September 14, 2011, the Company issued 6% convertible notes in the total amount of $1,500,000. The Notes are due and payable on September 14, 2014 and bear interest at the rate of 6% per annum. The Notes are convertible at the option of the holder into common shares at a conversion price of $1.50 per share. The Notes are redeemable prior to maturity at the option of the Company and can be repaid in whole or in part at any time without a premium or penalty. Upon issuance, the notes were discounted by $370,000 to reflect the beneficial conversion price that existed on that date. This discount is being accreted over the term of the note payable utilizing the effective interest method. As of April 30, 2014 the remaining unamortized discount related to the notes was $43,728. Interest is payable with the principal on September 14, 2014. Accrued interest as of April 30, 2014 and 2013 was $
251,890
and $
147,250
, respectively.
|
Future annual contractual maturities of debt as of April 30, 2014 are as follows:
|
Years Ending April 30,
|
|
Amounts
|
|
|
2015
|
|
$
|
3,810,000
|
|
|
|
|
|
|
|
|
Total future annual contractual maturities of debt
|
|
$
|
3,810,000
|
|
NOTE 10—SHAREHOLDERS’ EQUITY
Common Stock
The Company has authorized 100,000,000 shares of common stock with a par value of $0.001, of which 72,424,711 and 44,173,404 shares were issued and outstanding as of April 30, 2014 and 2013, respectively.
Activity for the fiscal year ended April 30, 2014 is as follows:
|
|
On May 7, 2013, we issued 500,000 shares of common stock at $0.0525 per share, the contractual conversion price, in connection with the conversion of $26,250 in principal related to our August 14, 2014, 10% convertible notes payable. (Note 9)
|
|
|
On May 23, 2013, we issued 496,429 shares of common stock at $0.0525 per share, the contractual conversion price, in connection with the conversion of $26,062 in principal, original issuance discount and accrued interest on our August 14, 2014, 10% convertible notes payable. (Note 9)
|
|
|
On June 19, 2013, we issued 650,000 shares of common stock at $0.0235 per share, the contractual conversion price, in connection with the conversion of $15,259 in principal related to our August 14, 2014, 10% convertible notes. (Note 9)
|
|
|
On July 3, 2013, we issued 650,320 shares of common stock at $0.0235 per share, the contractual conversion price, in connection with the conversion of $15,266 in principal, original issuance discount and accrued interest related to our August 14, 2014, 10% convertible notes payable. (Note 9)
|
|
|
On June 27, 2013, we issued 757,249 shares of common stock to Jeffrey Johnson (“Johnson”) our Chief Executive Officer and President, at $0.08 per share. 504,833 of these shares were issued in connection with the completion of requisite vesting requirements, 252,416 shares were issued as share based compensation related to an allowance for the income tax effect of this vesting and a previous vesting of 504,833 shares. In connection with the issuance of these additional shares we have recorded share based compensation expense in the amount of $10,196.
|
|
|
On June 27, 2013, we issued 33,333 shares of common stock to an employee of the Company. The issuance of these shares represents the completion of the requisite vesting period, with all expense being recognized during the vesting period. The shares were initially issued at $2.60 per share.
|
|
|
On June 27, 2013, we issued 1,591,675 shares of common stock at $0.05 per share, the market value of the shares on the date of grant, to Johnson, in connection with the forgiveness of $63,667 in accrued salaries owed Mr. Johnson. In connection with this issuance of shares we have recorded additional share based compensation expense of $15,917, related to an allowance for the income tax effect of the issuance.
|
|
|
On June 27, 2013, we issued 1,568,750 shares of common stock at $0.05 per share, the market value of the shares on the date of grant, to an employee of the Company in connection with the forgiveness of $62,750 in accrued salaries. In connection with this issuance of shares we have recorded share based compensation expense of $15,688, related to an allowance for the income tax effect of the issuance.
|
|
|
On July 12, 2013, we issued 103,973 shares of common stock to a former director of the Company. The issuance of these shares represents the completion of the requisite vesting period, with all expense being recognized during the vesting period. The shares were initially granted at $0.60 per share.
|
|
|
On August 30, 2013, we issued 504,834 shares of common stock at $0.04 per share, the market value of the shares on the date of grant, to Johnson. The shares were issued in connection with the completion of the requisite vesting period, with all expense being recognized during the vesting period. An additional 126,208 shares of common stock were issued at $0.04 per share on that same date related to an allowance for the income tax effect of the issuance of the vested shares. In connection with the issuance of the additional shares for the income tax effect we have recorded additional share based compensation expense of $5,048.
|
|
|
On December 20, 2013, we issued 700,000 shares of common stock at $0.01875 per share, the contractual conversion price, in connection with the conversion of $13,125 in principal, original issuance discount and accrued interest related to our August 14, 2014, 10% convertible notes payable. (Note 9)
|
|
|
On January 23, 2014, we issued 2,000,000 shares of common stock at $0.0075 per share, the contractual conversion price, in connection with the conversion of $15,000 in principal, original issuance discount and accrued interest related to our August 14, 2014, 10% convertible notes payable. (Note 9)
|
|
|
On February 12, 2014, we issued 2,400,000 shares of common stock at $0.006 per share the contractual conversion price, in connection with the conversion of $14,400 in principal, original issuance discount and accrued interest related to our August 14, 2014, 10% convertible notes payable. (Note 9)
|
|
|
On March 3, 2014, we issued 1,600,000 shares of common stock at $0.0059 per share the contractual conversion price, in connection with the conversion of $9,480 in principal, original issuance discount and accrued interest related to our August 14, 2014, 10% convertible notes payable. (Note 9)
|
|
|
On March 4, 2014, we issued a total of 5,000,000 common shares, 2,500,000 to each of the holders of our February 8, 2013, 10% convertible notes at $0.0145 per share in connection with the amendment and restatement of the underlying note agreements. (Note 9)
|
|
|
On March 6, 2014, the Board of Directors of the Company resolved to issue 7,758,621 common shares at $0.0145 per share, which was the closing price of our shares on that date, in connection with the issuance bonuses to our Chief Executive Officer, and an employee of the Company (4,310,345 shares and 344,828 shares, respectively). In addition, we issued 3,103,448 shares to an employee of the Company in connection with the satisfaction of accrued salaries payable.
|
|
|
On March 14, 2014, we issued 1,526,582 shares of common stock at $0.0059 per share the contractual conversion price, in connection with the conversion of $4,920 in principal, original issuance discount and accrued interest related to our August 14, 2014, 10% convertible notes payable. (Note 9)
|
|
|
On April 12, 2014, we issued a total of 283,333 common shares to employees of the Company. The issuance of these shares represents the completion of the requisite vesting period for these awards, with all expense having been being recognized ratably during the vesting period. The shares were initially granted at $2.60 per share.
|
Activity for the fiscal year ended April 30, 2013 is as follows:
|
|
On March 8, 2013, the Company issued 300,000 common shares to two directors of the Company. The issuance of these shares represents the completion of the requisite vesting period, with all the expense being recognized during the vesting period. The shares were initially granted at $2.20 per share.
|
|
|
On April 1, 2013, the Company issued 504,833 common shares to the Chief Executive Officer in connection with the terms of his employment agreement. The issuance of these shares represents the completion of the requisite vesting period. The shares were initially granted at $1.89 per share.
|
|
|
On April 12, 2013, the company issued 250,000 common shares to one employee of the Company as the shares issued vested. The issuance of these shares represents the completion of the requisite vesting period, with all expense being recognized during the vesting period. The shares were initially granted at $0.60 per share.
|
|
|
On March 18, 2013, we issued 264,000 common shares at $0.16 per share in connection with the settlement of accounts payable. In connection with this issuance we have recorded a gain on settlement in the amount of $23,760.
|
|
|
On February 26, March 7 and April 2, 2013, we issued 50,000, 200,000 and 300,000 common shares at $0.21 per share, $0.16 per share and $0.09 per share. These shares were issued in connection with the conversion of $69,788 of our August 15, 2014 10% convertible notes. (Note 9)
|
|
|
On December 18, 2012, the Company issued 325,000 common shares valued at $0.38 per share in connection with the settlement of approximately $100,000 in accrued liabilities and accounts payable. In connection therewith we have recognized a loss on the settlement in the amount of $23,500.
|
|
|
On December 18, 2012, the Company issued 115,965 common shares valued at $0.38 per share in connection with the settlement of $44,066 in accrued liabilities related to the execution of a Settlement and Release agreement. (Note 5)
|
|
|
On December 18, 2012, the Company issued 109,035 common shares valued at $0.38 per share in connection with the acquisition of approximately 1,400 acres in Trego County Kansas in connection with the execution of a Settlement and Release agreement. (Note 5)
|
|
|
On October 9, 2012, the Company issued 250,000 common shares at $0.23 per share in connection with the modification of $2,750,000 of our convertible notes payable (Note 9). The issuance of the shares extended the repayment date of the accrued interest associated with the notes.
|
|
|
On August 22, 2012, the Company issued 1,100,000 common shares at $0.53 per share in connection with the conversion of a $500,000 convertible note payable and associated accrued interest (Note 9). The conversion feature embedded in the notes initially indicated that the note was convertible into 333,333 Common Shares. We have recorded a loss of $406,334 in connection with the additional shares of our common stock.
|
|
|
On July 19, 2012 we issued 2,611,000 common shares at $0.70 per share in connection with the execution of an amendment to a lease purchase agreement.
|
|
|
On June 19, 2012 we issued 600,000 common shares at $0.89 per share in connection with the execution of a second amendment to a purchase agreement.
|
|
|
On May 15, 2012, the Company closed a private placement of units to an Accredited Investor. Under the terms of the private placement, the Company issued 500,000 units at a price of $1.50 per unit, for aggregate cash proceeds of $750,000. Each unit consisted of one Common Share and one half Common Share purchase warrant, each full warrant exercisable to purchase one Common Share at $2.75 for a period of three years. The proceeds were partially used to pay the final payment of the Edsel Promissory Note, the June Extension Price and general corporate purposes.
|
Unvested Common Share Grants
As of April 30, 2014 there were 283,333 shares of unvested common stock issued to employees of the Company outstanding. Shares
vest on April 12, 2014 (250,000) issued at $0.60 and May 1, 2014 (33,000) issued at $2.60 respectively. Unvested share based compensation as of April 30, 2014 amounted to $80,562.
Warrants
Warrant activities for the years ended April 30, 2014 and 2013 are summarized as follows:
|
|
|
Year Ended April 30, 2014
|
|
|
Year Ended April 30, 2013
|
|
|
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Term
|
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Term
|
|
|
Balance at beginning of year
|
|
|
250,000
|
|
|
$
|
2.75
|
|
|
|
1.79
|
|
|
|
250,000
|
|
|
$
|
2.75
|
|
|
|
2.79
|
|
|
Issued
|
|
|
5,000,000
|
|
|
|
0.05
|
|
|
|
2.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Balance at end of year
|
|
|
5,250,000
|
|
|
$
|
0.18
|
|
|
|
1.80
|
|
|
|
250,000
|
|
|
$
|
2.75
|
|
|
|
1.79
|
|
|
Warrants exercisable at end of year
|
|
|
250,000
|
|
|
$
|
2.75
|
|
|
|
1.04
|
|
|
|
250,000
|
|
|
$
|
2.75
|
|
|
|
1.79
|
|
During the fiscal year ended April 30, 2014, the Company issued to each of the December 31, 2014, 10% noteholders, 2,500,000 warrants to purchase our common shares at $0.05 per share, beginning on February 15, 2015. The Company has retained the right to call the warrants any time within the first six months from the date of issuance at $0.10 provided that we re-pay a minimum of $500,000 in principal on each note.
The table below summarizes warrants to purchase our common shares as of April 30, 2014 and April 30, 2013:
Fiscal 2014 Transactions
The assumptions used in the fair value method calculation for the fiscal year ended April 30, 2014 are disclosed in the following table. No fair value calculations were performed during the fiscal year ended April 30, 2013 as there were no grants:
|
|
|
Fiscal Year Ended April 30, 2014
|
|
Weighted average grant date fair value per warrant granted during the period
|
|
|
|
|
Weighted average stock price volatility
|
|
|
|
|
Weighted average risk free rate of return
|
|
|
|
|
Weighted average expected term
|
|
|
|
Estimated forfeiture rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield is zero considering that we do not anticipate paying dividends. Volatility is based on the historical volatility of the Company over a period similar to the expected life of the warrants. Expected life is based on the contractual term of the warrants. The risk-free interest rate represents the published interest rate for 2-year US Treasury Bonds on the grant date.
Fiscal 2013 Transactions
On May 15, 2012 we issued 250,000 warrants to purchase our common shares at $2.75 in connection with a private placement of units to an Accredited Investor.
NOTE 11— COMMON STOCK OPTIONS
A summary of the Company’s common-stock options as of April 30, 2014 is presented below:
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
Balance at April 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2013
|
|
|
|
|
|
|
|
|
Exercisable at April 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2014
|
|
|
|
|
|
|
|
|
Exercisable at April 30, 2014
|
|
|
|
|
|
|
|
|
Activity for the fiscal years ended April 30, 2014 and April 30, 2013 was as follows:
|
·
|
On July 11, 2011, Jonathan Pina our former Chief Financial Officer was granted stock options under the Plan, consisting of options to purchase up to an aggregate of 350,000 shares of the Company’s common stock with 116,666 stock options vesting on July 11, 2012, 116,667 stock options vesting July 11, 2013, and 116,667 stock options vesting July 11, 2014. The options were to expire, July 11, 2022, July 11, 2023, and July 11, 2024, respectively.
|
|
·
|
On April 23, 2013, Mr. Pina resigned his position as Chief Financial Officer. Accordingly, as per the terms of the Plan effective ninety days from Mr. Pina’s resignation, his 350,000 stock options were forfeited on July 23, 2013. As of July 23, 2013 no options to purchase the Company’s common shares remained issued or outstanding. Total unrecognized compensation cost related to the non-vested common stock options was $0 and $82,953 as of the fiscal years ended April 30, 2014 and 2013, respectively.
|
NOTE 12—INCOME TAXES
Income tax expense (benefit) consists of the following as of April 30,
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
|
|
|
|
|
|
Net income tax provision (benefit)
|
|
|
|
|
|
|
|
|
The effective income tax rate for the years ended April 30, 2014 and April 30, 2013 differs from the U.S. Federal statutory income tax rate due to the following:
|
|
|
2014
|
|
|
2013
|
|
|
Federal statutory income tax rate
|
|
|
(34.00
|
%)
|
|
|
(34.00
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
Permanent differences
|
|
|
1.00
|
%
|
|
|
3.60
|
%
|
|
Change in valuation allowance
|
|
|
33.00
|
%
|
|
|
30.40
|
%
|
|
Net income tax provision (benefit)
|
|
|
-
|
%
|
|
|
-
|
%
|
The components of the deferred tax assets and liabilities as of April 30, 2014 and April 30, 2013 are as follows:
|
|
|
2014
|
|
|
2013
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
|
Oil & Gas Properties
|
|
|
447,166
|
|
|
|
244,719
|
|
|
Stock Compensation
|
|
|
2,364,951
|
|
|
|
2,172,292
|
|
|
Net Operating Losses
|
|
|
4,356,553
|
|
|
|
4,072,213
|
|
|
Valuation Allowance
|
|
|
(7,168,670
|
)
|
|
|
(6,489,224
|
)
|
|
Net Deferred Tax Assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has approximately a $12,813,000 net operating loss carryforward as of April 30, 2014. The net operating losses may offset against taxable income through the year ended April 30, 2034. A portion of the net operating loss carryovers begin expiring in 2032 and may be subject to U.S. Internal Revenue Code Section 382 limitations in the event of certain changes in ownership.
The Company has provided a valuation allowance for the deferred tax asset at April 30, 2014, as the likelihood of the realization of such assets cannot be determined. The valuation allowance increased by $679,446 and $3,879,155 for the years ended April 30, 2014 and 2013, respectively.
NOTE 13—RELATED PARTY TRANSACTIONS
On June 16, 2011, the Company acquired all of the membership interests in JHE, effective as of June 1, 2011 from High Plains, an entity controlled by S. Jeffrey Johnson (“Johnson”), who was appointed as a director of the Company on June 16, 2011 and Chairman of the Board on July 6, 2011. The consideration for JHE included, among other things, a 10% net profits interest in JHE to be retained by High Plains. On May 9, 2013, High Plains transferred its ownership of the net profits interest in JHE to an unrelated third party. During the fiscal year ended April 30, 2014, the Company made distributions of $1,580 to High Plains related to this net profits interest.
NOTE 14—COMMITMENTS AND CONTINGENCIES
Operational Contingencies
The exploration, development and production of oil and gas assets are subject to various, federal and state laws and regulations designed to protect the environment. Compliance with these regulations is part of our day-to-day operating procedures. Infrequently, accidental discharge of such materials as oil, natural gas or drilling fluids can occur and such accidents can require material expenditures to correct. We maintain levels of insurance we believe to be customary in the industry to limit its financial exposure. We are unaware of any material capital expenditures required for environmental control during this fiscal year.
Leases
Under the terms of a non-cancellable lease agreement, we lease approximately 1,325 square feet of office space in Fort Worth, Texas, at a cost of $1,300 per month. The primary lease term expired on January 31, 2014. We currently lease our office space on a month to month basis and may terminate the lease with two months written notice.
Litigation
Cottonwood
On or about June 18, 2012, the Company’s registered agent was served with a complaint (Civil Action No. 12-CV-327-CVE-PJC) filed in the United States District Court for the Northern District of Oklahoma by Cottonwood Natural Resources, Ltd. (“Cottonwood”). Cottonwood alleges breach of contract and fraud in connection with a Purchase and Sale Agreement dated April 19, 2012 between the Company and Cottonwood (the “Cottonwood Purchase Agreement”) related to the purchase of certain oil and gas interests in approximately 14,640 acres in Finney County, Kansas (the “Finney Property”). Cottonwood filed the complaint after the Company terminated the Cottonwood Purchase Agreement after the Company determined that Cottonwood had options to title to less than 12,908.46 net acres, and Cottonwood failed to disclose all material facts related to the Finney Property. Cottonwood was seeking damages of at least $4,324,180. On May 31, 2013 a mutual release and settlement agreement was executed by all parties. In connection therewith the Company assigned 4,160 acres in Sheridan County, Kansas to Cottonwood on June 5, 2013. As of April 30, 2013 we recorded impairment expense of $946,895 related to the cost basis of the acreage transferred to Cottonwood.
Greene Litigation
On March 6, 2012, the Company entered into an agreement (the “Greene Agreement”) to purchase certain interests in 6,518 acres of land in Kansas for a total purchase price of $9,125,200. Pursuant to the Greene Agreement, Circle Star delivered a non-refundable $50,000 deposit to the sellers. The deposit was to be applied to the purchase price upon closing.
On June 19, 2012, the Company filed a petition with the District Court of Clark County, Kansas, Sixteenth Judicial District (Case No. 2012-CV-12) against Greene Brothers Land Company, LLC, Greene Ranch Enterprises, Inc., David M. Greene, Jr., Marcia Greene, Thomas E. Greene, Janice C. Greene, Joseph B. Greene and Billie Greene (collectively the “Defendants”), requesting the return of the deposit, pursuant to the termination of the Greene Agreement. Circle Star terminated the Greene Agreement as a result of defects in title which the Defendants did not cure within the time period set forth in the Greene Agreement. On November 13, 2012 the Company entered into a settlement agreement whereby the pending Greene litigation was settled. The settlement agreement stipulated that Circle Star was to receive $32,500 of the initial deposit from the sellers net of legal fees. The execution of the settlement agreement constitutes a termination of the litigation. The remaining balance of the deposit $17,500 has been charged to impairment expense as of April 30, 2013. On December 11, 2012 the Company received $22,922 in cash net of legal fees of $9,578 related to the settlement of this matter.
Convertible Notes
On October 28, 2013, the holders of our 10% convertible notes due February 8, 2013 in the principal amount of $2,750,000 filed a legal action against the Company in the District Court for Clark County, Nevada, in an attempt to collect the outstanding balance related to these notes. On February 28, 2014, the Company entered into a settlement agreement and new note agreements with the holders. The amended and restated note agreements, each in the amount of $1,155,000, accrue interest at 12% per annum and mature on December 31, 2014. The Company also issued 5,000,000 shares of its common stock and warrants to purchase an aggregate of 5,000,000 shares to the holders. (Note 8)
Jonathan G. Pina
On January 27, 2014 Jonathan Pina, our former Chief Financial Officer, filed a legal action against the Company in the District Court of Harris County Texas, in an attempt to collect vacation pay and for alleged failure to pay severance and benefits for resignation with good reason. The Company intends to defend this legal action vigorously.
NOTE 15—SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED)
The aggregate amount of capitalized costs related to oil and gas property and the aggregate amount of related accumulated depletion and impairment as of April 30, 2014 and 2013 are as follows:
|
|
|
Year Ended April 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depletion and impairment
|
|
|
|
|
|
|
|
|
Total oil and gas properties, net
|
|
|
|
|
|
|
|
|
The following shows, by category and year incurred, the oil and gas property costs applicable to unproved property that were excluded from the successful efforts depletion computation as of April 30, 2014:
|
Costs Incurred During Year Ended
|
|
Exploration Costs
|
|
|
Development Costs
|
|
|
Acquisition Costs
|
|
|
Impairment
|
|
|
Total Unproved Property
|
|
|
April 30, 2014
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(708,015
|
)
|
|
$
|
107,574
|
|
|
April 30, 2013
|
|
|
80,579
|
|
|
|
-
|
|
|
|
2,400,095
|
|
|
|
(4,758,812
|
)
|
|
|
815,589
|
|
|
Prior Years
|
|
|
92,247
|
|
|
|
-
|
|
|
|
3,464,870
|
|
|
|
(463,390
|
)
|
|
|
3,093,727
|
|
|
Total
|
|
$
|
172,826
|
|
|
$
|
-
|
|
|
$
|
5,864,965
|
|
|
$
|
(5,930,217
|
)
|
|
|
|
|
The following table sets forth the costs incurred in oil and gas property acquisition, exploration, and development activities.
|
|
|
Year Ended April 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Acquisition of Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited Oil and Gas Reserves Information
As of April 30, 2014 and 2013, 100% of the estimated oil and gas reserves presented herein were derived from reports prepared by independent petroleum engineering firm LaRoche Petroleum Consultants, Ltd. Proved developed reserves are reserves expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are reserves expected to be recovered through wells yet to be completed. There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and timing of development expenditures. The following reserve data only represent estimates and should not be construed as being exact. The report was prepared as of April 30, 2014 and is dated July 9, 2014.
Analysis of Changes in Proved Reserves.
Estimated quantities of proved developed and undeveloped reserves (all of which are located within the United States), as well as the changes in proved developed and undeveloped reserves during the periods indicated, are presented in the following tables:
|
|
|
April 30, 2014
|
|
|
April 30, 2013
|
|
|
|
|
Oil
|
|
|
Gas*
|
|
|
Oil
|
|
|
Gas*
|
|
|
|
|
(Bbls)
|
|
|
(Mcf)
|
|
|
(Bbls)
|
|
|
(Mcf)
|
|
|
Proved Reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revisions of previous estimates (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extensions and discoveries (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of reserves in place
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved developed reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved undeveloped reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PUD added during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revisions to previous quantity estimates
|
|
|
|
)
|
|
|
|
)
|
|
|
|
)
|
|
|
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Included in Gas (Mcf) above are natural gas liquids (NGL) reserves and are expressed in barrels, multiplied by six the (the conversion of barrels to Mcf).
|
|
|
1
|
Revisions of previous estimates – Estimates reflect an overall steady trend of increases in oil and gas prices, offset by normal decline curves in wells.
|
|
|
2
|
Extensions and Discoveries – During the fiscal year ended April 30, 2014 consisted of the addition of two new wells that contributed significant volumes in addition to three new wells that were added to the proved undeveloped category.
|
|
|
3
|
Production – Volumes of oil and gas that were produced were removed from reserves during the year.
|
|
|
4
|
Proved undeveloped reserves - Positive revisions of 26,924 BOE, or 337%, were made to the April 30, 2014 estimated proved undeveloped reserves balance.
The primary cause for these revisions was the addition of wells in our April 30, 2014 reserve report that had not been included in our April 30, 2013 reserve report. In addition to underperformance of wells within our areas of operation, actual well results underperformed relative to the proved undeveloped forecasts in our April 30, 2013 reserve report. The proved undeveloped forecasts in these areas have been adjusted to reflect these well performances in our April 30, 2014 reserve report.
|
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Reserves
The standardized measure of discounted future net cash flows relating to proved crude oil and natural gas reserves and the changes in standardized measure of discounted future net cash flows relating to proved crude oil and natural gas reserves were prepared in accordance with the provisions of ASC 932. Future cash inflows at April 30, 2014 were computed by applying the un-weighted, arithmetic average on the closing price on the first day of each month for the 12-month period prior to April 30, 2014 to estimated future production. Future production and development costs are computed by estimating the expenditures to be incurred in developing and producing the proved oil and natural gas reserves at year-end, based on year-end costs and assuming continuation of existing economic conditions.
Future income tax expenses are calculated by applying appropriate year-end tax rates to future pretax net cash flows relating to crude proved oil and natural gas reserves, less the tax basis of properties involved.
Future income tax expenses give effect to permanent differences, tax credits and loss carry-forwards relating to the proved oil and natural gas reserves. Future net cash flows are discounted at a rate of 10% annually to derive the standardized measure of discounted future net cash flows. This calculation procedure does not necessarily result in an estimate of the fair market value of our crude oil and natural gas properties. We estimate future income taxes to be zero considering the fact that our tax basis in oil and gas properties and our net operating loss carryforwards for income tax reporting purposes exceed our estimated future net cash inflows.
The standardized measure of discounted future net cash flows relating to crude proved crude oil and natural gas reserves are as follows:
|
|
|
As of April 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% annual discount for estimated timing of cash flows
|
|
|
|
|
|
|
|
|
Standardized measure of discounted future net cash flows related to proved reserves
|
|
|
|
|
|
|
|
|
Changes in Standardized Measure of Discounted Future Net Cash Flows
The changes in the standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves are as follows:
|
|
|
Years Ended April 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
Standardized measure, beginning of period
|
|
|
|
|
|
|
|
|
Sales and transfers, net of production costs
|
|
|
|
|
|
|
|
|
Net changes in future development costs
|
|
|
|
|
|
|
|
|
Net change in sales and transfer prices, net of production costs
|
|
|
|
|
|
|
|
|
Extensions and discoveries and improved recovery,
net of future production and development costs
|
|
|
|
|
|
|
|
|
Revisions of quantity estimates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of reserves in place
|
|
|
|
)
|
|
|
|
|
Purchase of reserves in-place
|
|
|
|
|
|
|
|
|
Changes in production rates (timing) and other
|
|
|
|
|
|
|
|
|
Standardized measure, end of period
|
|
|
|
|
|
|
|
|
The commodity prices inclusive of adjustments for quality and location used in determining future net revenues related to the standardized measure calculation are as follows.