During nine months ended June 30, 2014, the holders of our convertible notes elected to convert principal and interest into shares of common stock as detailed below:
During nine months ended June 30, 2014, the Company recognized imputed interest of $10,659 as an increase to shareholders’ equity.
On July 15, 2014 the Company paid SoHo Resource the remaining $50,000 in accordance with the Participation Agreement.
On July 28, 2014, the holders of the Convertible Promissory Note dated June 30, 2013 elected to convert $40,000 of principal and accrued interest into 1,000,000 shares of our common stock at a rate of $0.04 per share. On the conversion date, the unamortized discount related to the principal amount converted was immediately amortized to interest expense. No gain or loss was recognized on the conversions as they occurred within the terms of the agreement.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
First Titan Corp 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 –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
Nine months ended June 30, 2014 compared to the nine months ended June 30, 2013
Oil and Gas Sales
We earned net revenue of $82,133 during the period, compared to $40,622 during the comparable period in last year. The increase in revenue is due to the acquisition of the Minns Project late in fiscal 2013 and increased production from our Alabama project.
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Lease operating expense
We incurred lease operating expense of $13,489 and $819 during the nine months ended June 30, 2014 and 2013, respectively. The increase in lease operating expense is due to the acquisition of the Minns Project late in fiscal year 2013. Lease operating expense for the Minns Project was $12,837 for the nine months ended June 30, 2014.
Depletion, depreciation & amortization
We incurred depletion expense of $62,007 during the period, and $7,206 for the corresponding period last year. The increase in depletion is a result of higher production combined with a higher rate of depletion per BOE during the nine months end June 30, 2014.
General and Administrative Expenses
We recognized general and administrative expenses in the amount of $417,223 and $348,847 for the nine months ended June 30, 2014 and 2013, respectively. The increase is due to the higher professional fees during the current year.
Loss from Operations
Our loss from operation for the nine months ended June 30, 2014 and 2013 increased from $316,275 to $411,482, primarily due to the increases in depletion and professional fees discussed above.
Interest Expense
Interest expense increased from $193,245 for the nine months ended June 30, 2013 to $618,225 for the nine months ended June 30, 2014. Interest expense for the nine months ended June 30, 2014 included amortization of discount on convertible notes payable in the amount of $542,251, compared to $149,412 for the comparable period of 2013. The remaining increase is the result of the Company entering into interest-bearing convertible notes payable.
Net Loss
We incurred a net loss of $1,029,707 for the nine months ended June 30, 2014 as compared to $509,520 for the comparable period of 2013. The increase in the net loss was primarily the result of the increases in depletion, impairment, professional fees and interest expense discussed above.
Three months ended June 30, 2014 compared to the three months ended June 30, 2013
Oil and Gas Sales
We earned net revenue of $28,064 during the period, compared to $2,915 during the comparable period in last year. The increase of revenue is due to the acquisition of the Minns Project in late fiscal 2013 and increased production from our Alabama Project.
Lease operating expense
We incurred lease operating expense of $2,165 and $186 during the three months ended June 30, 2014 and 2013, respectively. The increase is due to the acquisition of the Minns Project late in fiscal 2013.
Depletion, depreciation & amortization
We incurred depletion expense of $31,377 during the period, and $0 for the equivalent period last year. The increase in depletion, depreciation and amortization is the result of higher production combined with a higher rate of depletion per BOE.
General and Administrative Expenses
We recognized general and administrative expenses in the amount of $140,910 and $124,558 for the three months ended June 30, 2014 and ended 2013, respectively. The year over year change is not meaningful.
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Loss from Operations
Our loss from operation for the nine months ended June 30, 2014 and 2013 increased from $121,837 to $146,758, due to the increase in oil sales, offset by the increase in depletion expense.
Interest Expense
Interest expense increased from $55,783 for the three months ended June 30, 2013 to $355,866 for the three months ended June 30, 2014. Interest expense for the three months ended June 30, 2014 included amortization of discount on convertible notes payable in the amount $225,340, compared to $40,046 for the comparable period of 2013. The remaining increase is the result of the higher principal balances on convertible notes payable and imputed interest on advances the Company received.
Net Loss
We incurred a net loss of $502,624 for the three months ended June 30, 2014 as compared to $177,620 for the comparable period of 2013. The increase in the net loss was primarily the result of the increased operating loss and interest expense discussed above.
Going Concern
Liquidity and Capital Resources
We anticipate needing approximately of $750,000 to fund our operations and to execute our business plan effectively 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 June 30, 2014, we incurred a net loss of $502,624. We raised the cash amount to be used in these activities from advances. As of June 30, 2014, we had cash on hand of $17,761 and negative working capital of $201,490. Our cash on hand will be adequate to fund our operations for less than one month.
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.
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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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES
Management’s Report on Internal Control over Financial Reporting
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2014. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2014, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
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| 1.
| As of June 30, 2014, we did not maintain effective controls over the control environment. Specifically we have not developed and effectively communicated to our employees our accounting policies and procedures. This has resulted in inconsistent practices. Further, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.
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| 2.
| As of June 30, 2014, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness.
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Our management, including our principal executive officer and principal financial officer, who is the same person, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Change in Internal Controls Over Financial Reporting
There was no change in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings.
ITEM 1A. RISK FACTORS
Not applicable to a smaller reporting company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no sales of unregistered equity securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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3.1
| Article of Incorporation (incorporated by reference to our Form S-1 filed with the Securities and Exchange Commission on November 3, 2010)
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3.2
| Bylaws (incorporated by reference to our Form S-1 filed with the Securities and Exchange Commission on November 3, 2010)
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10.1
| Working Interest Purchase and Sale Agreement (incorporated by reference to Form 10-Q for the quarter ended December 31, 2011, filed on February 14, 2012).
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21 (3)
| Subsidiaries of the Registrant
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31.1 (1)
| Rule 13(a)-14(a)/15(d)-14(a) Certification of principal executive officer and principal financial and account officer.
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32.1 (1)
| Section 1350 Certification of principal executive officer and principal financial accounting officer.
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101 (1) ,(2)
| XBRL data files of Financial Statement and Notes contained in this Quarterly Report on Form 10-Q.
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(1)
| Filed or furnished herewith
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(2)
| In accordance with Regulation S-T, the Interactive Data Files in Exhibit 101 to the Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed.”
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(3)
| Previously filed or furnished
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| First Titan Corp.
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Date: September 4, 2014
| BY: /s/ G. Jonathan Piña
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| G. Jonathan Piña
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| Chief Executive Officer, President, Secretary, Treasurer, Principal Executive Officer, Principal Finance and Accounting Officer and Sole Director
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