NOTES TO
CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
REVENUE
RECOGNITION
The
Company recognizes oil and gas revenues from its interests in producing wells as
oil and gas is produced and sold from these wells and when ultimate collection
is reasonably assured.
INCOME /
(LOSS) PER SHARE
Basic
income/(loss) per share is computed based on the weighted average number of
common shares outstanding during each period. The computation of
diluted earnings per share assumes the conversion, exercise or contingent
issuance of securities only when such conversion, exercise or issuance would
have the dilutive effect on income/(loss) per share. The dilutive
effect of convertible securities is reflected in diluted earnings per share by
application of the "as if converted method." The dilutive effect of outstanding
options and warrants and their equivalents is reflected in diluted earnings per
share by application of the treasury stock method.
The table
below presents the computation of basic and diluted earnings per share for the
three-month period ended January 31, 2008:
|
|
|
January
31, 2008
|
|
|
Basic
earnings per share computation:
|
|
|
|
|
Income
from continuing operations
|
|
$
|
223,256
|
|
|
Basic
shares outstanding
|
|
|
24,529,832
|
|
|
Basic
earnings per share
|
|
$
|
0.009
|
|
|
|
|
|
|
|
|
Diluted
earnings per share computation:
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
223,256
|
|
|
Basic
shares outstanding
|
|
|
24,529,832
|
|
|
Incremental
shares from assumed conversions:
|
|
|
|
|
|
Stock
options
|
|
|
0
|
|
|
Warrants
|
|
|
0
|
|
|
Diluted
shares outstanding
|
|
|
24,529,832
|
|
|
Diluted
earnings per share
|
|
$
|
0.009
|
|
Outstanding
stock options and warrants, with an exercise price above market, are excluded
from the Company’s diluted computation as their effect would be
anti-dilutive. There were 200,000 and 938,440 outstanding stock
options and warrants with an exercise price above the average market price at
January 31, 2008. If the average market value of the Company’s common
stock increases above the respective exercise prices of the options and
warrants, they will be included in the diluted computation as common stock
equivalents.
BRINX
RESOURCES LTD.
NOTES TO
CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
EQUITY
BASED COMPENSATION
Effective
November 1 2006, the Company adopted the fair value recognition provisions of
Statement of Financial Standards (SFAS) 123(R), “Share Based Payment”, using the
modified prospective method as described therein.
The fair
value of each option granted has been estimated as of the date of the grant
using the Black-Scholes option pricing model with the following
assumptions:
|
|
Three-month
period ended January 31, 2008
|
|
Expected
volatility
|
100.36%
|
|
Risk-free
interest rate
|
4.5%
|
|
Expected
life
|
2
years
|
|
Dividend
yield
|
0.0%
|
2.
BASIS OF PRESENTATION AND LIQUIDITY
The
accompanying condensed financial statements have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates the
realization of assets and extinguishment of liabilities in the normal course of
business. As shown in the accompanying condensed balance sheet, the
Company has accumulated a deficit of $260,354 through January 31,
2008. These factors among others raise substantial doubt that the
Company will be able to continue in existence. The Company’s
financial statements do not include any adjustments related to the realization
of the carrying value of assets or the amounts and classification of liabilities
that might be necessary should the Company be unable to continue in
existence. The Company’s ability to establish itself as a going
concern is dependent upon its ability to obtain additional financing, in order
to further its oil and gas production operations. Management believes
it will require additional funding to cover its anticipated costs and that such
additional funding will be in the form of equity financing from the sale of the
Company’s common stock. However, there can be no assurances that such
financing can be secured.
3. ACCOUNTS
RECEIVABLE
Accounts receivable
consists of revenues receivable from the operators of
the oil and gas projects for the sale of
oil and gas by the operators on their behalf
and are carried at net receivable amounts less
an estimate for doubtful accounts. Management
considers all accounts receivable to be fully collectible at January 31, 2008
and October 31, 2007; accordingly, no allowance for doubtful accounts or bad
debt expense has been recorded.
BRINX
RESOURCES LTD.
NOTES TO
CONDENSED FINANCIAL STATEMENTS
(Unaudited)
4. OIL
AND GAS INTERESTS
The
Company holds the following oil and natural gas interests:
|
|
|
January
31,
|
|
|
October
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Owl
Creek Project, Oklahoma
|
|
$
|
1,966,338
|
|
|
$
|
2,030,731
|
|
|
Three
Sands Project, Oklahoma
|
|
|
906,309
|
|
|
|
920,278
|
|
|
Palmetto
Point Project, Mississippi
|
|
|
420,000
|
|
|
|
420,000
|
|
|
Frio-Wilcox
Prospect, Mississippi
|
|
|
400,000
|
|
|
|
400,000
|
|
|
PP
F-12-2 and PP F-12-3, Mississippi
|
|
|
123,360
|
|
|
|
86,862
|
|
|
Asset retirement cost
|
|
|
28,365
|
|
|
|
28,365
|
|
|
Less:
Accumulated depletion and impairment
|
|
|
(1,725,385
|
)
|
|
|
(1,643,367
|
)
|
|
|
|
$
|
2,118,987
|
|
|
$
|
2,242,869
|
|
Owl
Creek Project, Oklahoma
On August
10, 2005, the Company acquired a 70% working interest in Ranken Energy
Corporation’s Owl Creek Project for a total buy-in cost of $211,750 plus dry
hole costs. The interest is located in Oklahoma.
On June
1, 2006, the Company completed the sale of 20% of the Powell #2 well and future
drill sites on the Owl Creek Project. The Company retains a 50%
working interest in the Project. The agreement called for a one-time
cash payment to the Company of $300,000 and for each party to be responsible for
their portion of the cost to complete the Powell #2 well and future drill
sites. The Company retained a 70% interest in two spacing units of
approximately 160 acres and the two wells located on them. These
wells are the Johnson #1 and the producing well, the Powell #1.
On August
3, 2006, the Company completed the sale of 7.5% of the Isbill #1-36 well and
future drill sites on the Owl Creek Project. The Company retains a
42.5% working interest in the Project. The agreement called for a
one-time cash payment to the Company of $100,000 and for each party to be
responsible for their portion of the cost to complete the Isbill #1-36 well and
future exploration. The Company retained a 70% interest in two
spacing units of approximately160 acres and the two wells located on them and a
third spacing unit of approximately 80 acres where the Company retained a 50%
interest. The 70% wells are the Johnson #1 and the producing well,
the Powell #1. The 50% well and associated spacing unit is the
producing well, the Powell #2.
On March
15, 2007, the Company expended $403,675 on Isbill #2-36 well. The
Company has a working interest of 42.5% and the well commenced production on
April 4, 2007. On October 19, 2007, the Company expended $238,784 on
Powell #3-25 well earning a working interest of 42.5%. On November 9,
2007, Powell #3-25 was abandoned and $174,245 was transferred to the proven cost
pool for depletion. The unused estimated drilling costs were applied
to other operating well costs.
Three
Sands Project, Oklahoma
On
October 6, 2005, the Company acquired a 40% working interest in Vector
Exploration Inc’s Three Sands Project for a total buy-in cost of $88,000 plus
dry hole costs. For the year ended October 31, 2006, the Company
expended $530,081 in exploration costs. In June 2007, the Company
acquired a 40% working interest in William #4-10 for a total cost of $285,196
and paid a further $17,000 in costs relating to the well. During the
three month period ended January 31, 2008, the Company expensed $13,969 in lease
operating of the William #4-10 well. The total cost as at January 31,
2008 was $906,309. The interests are located in
Oklahoma.
BRINX
RESOURCES LTD.
NOTES TO
CONDENSED FINANCIAL STATEMENTS
(Unaudited)
4. OIL
AND GAS INTERESTS (continued)
Palmetto
Point Project, Mississippi
On
February 28, 2006, the Company acquired a 10% working interest before production
and 8.5% revenue interest after production in a 10 well program at Griffin &
Griffin Exploration Inc.’s Palmetto Point Project for a total buy-in cost of
$350,000. On September 26, 2006, the Company acquired an additional
two wells within this program for $70,000. On October 1, 2007, the
Company acquired a 10% working interest and participated in drilling two more
wells within the Palmetto Point Project, the (PP F-12-2 and PP F-12-3 wells), at
a cost of $69,862. On October 25, 2007, the Company paid $17,000 for a
sidetrack, a deviation of the existing PP-F-12-3 well at an angle to reach
additional targeted oil sands. On January 30, 2008, the Company incurred $36,498
for workovers to install submersible pumps and subsequently paid on February 1,
2008. The total cost as at January 31, 2008 was $123,360. The
interests are located in Mississippi.
Frio-Wilcox
Project, Mississippi
On August
2, 2006, the Company signed a memorandum agreement with Griffin & Griffin
LLC (the operator) to participate in two proposed drilling programs located in
Mississippi and Louisiana. The Company acquired a 10% working
interest in this project before production and a prorated reduced working
interest after production based on the operator’s interest
portion. The Company paid $400,000 for the interest.
On June
21, 2007, the Company assigned all future development obligations for any new
wells at its Frio-Wilcox Prospect to a third party. The Company
maintained its original interest, rights, title and benefits to all seven wells
drilled with the Company’s participation at the Frio-Wilcox Prospect property
between August 3, 2006 and June 19, 2007, specifically wells CMR-USA-39-14,
Dixon #1, Faust #1 TEC F-1, CMR/BR F-14, RB F-1 Red Bug #2, BR F-33, and Randall
#1 F-4, and any offset wells that could be drilled to any of these specified
wells.
Impairment
Under the
full cost method, the Company is subject to a ceiling test. This
ceiling test determines whether there is an impairment to the proved
properties. The impairment amount represents the excess of
capitalized costs over the present value, discounted at 10%, of the estimated
future net cash flows from the proven oil and gas reserves plus the cost, or
estimated fair market value. There was no impairment for the
three-month periods ended January 31, 2008 or 2007.
Depletion
Under the
full cost method, depletion is computed on the units of production method based
on proved reserves, or upon reasonable estimates where proved reserves have not
yet been established due to the recent commencement of
production. Depletion expense recognized was $82,018 and $180,916 for
the three months ended January 31, 2008 and 2007, respectively.
Capitalized
Costs
|
|
|
January
31, 2008
|
|
|
October
31, 2007
|
|
|
Proved
properties
|
|
$
|
3,554,201
|
|
|
$
|
3,575,064
|
|
|
Unproved
properties
|
|
|
290,171
|
|
|
|
311,172
|
|
|
Total
Proved and Unproved properties
|
|
|
3,844,372
|
|
|
|
3,886,236
|
|
|
Accumulated
depletion expense
|
|
|
(1,303,033
|
)
|
|
|
(1,221,015
|
)
|
|
Impairment
|
|
|
(422,352
|
)
|
|
|
(422,352
|
)
|
|
Net
capitalized cost
|
|
$
|
2,118,987
|
|
|
$
|
2,242,869
|
|
BRINX
RESOURCES LTD.
NOTES TO
CONDENSED FINANCIAL STATEMENTS
(Unaudited)
4. OIL
AND GAS INTERESTS (continued)
Results
of Operations
Results
of operations for oil and gas producing activities are as follows:
|
|
|
January
31, 2008
|
|
|
January
31, 2007
|
|
|
Revenues
|
|
$
|
495,292
|
|
|
$
|
247,789
|
|
|
Production
costs
|
|
|
(67,025
|
)
|
|
|
(20,960
|
)
|
|
Depletion
and accretion
|
|
|
(83,056
|
)
|
|
|
(181,766
|
)
|
|
Results
of operations (excluding corporate overhead)
|
|
$
|
345,211
|
|
|
$
|
45,063
|
|
5. LOANS
AND INTEREST PAYABLE TO RELATED PARTIES
The
unsecured loans and accrued interest at 6%, previously outstanding at October
31, 2007 were paid in full on January 9, 2008.
|
|
|
January
31, 2008
|
|
|
October
31, 2007
|
|
|
Loan
repayable on December 31, 2007, bears interest at 6% per annum, and is
unsecured
|
|
$
|
-
|
|
|
$
|
19,070
|
|
|
Total
loans
|
|
|
-
|
|
|
|
19,070
|
|
|
Plus:
accrued interest
|
|
|
-
|
|
|
|
2,606
|
|
|
Total
loans and interest payable
|
|
|
-
|
|
|
|
21,676
|
|
|
Less:
current portion
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
-
|
|
|
$
|
21,676
|
|
Interest
expense was $209 and $583 for the three-month periods ended January 31, 2008 and
2007, respectively.
6. ASSET
RETIREMENT OBLIGATIONS
The
Company follows SFAS 143 “Accounting for asset retirement
obligations”. SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS 143 requires recognition
of the present value of obligations associated with the retirement of tangible
long-lived assets in the period in which it is incurred. As of
January 31, 2008 and October 31, 2007, we recognized the future cost to plug and
abandon the gas wells over the estimated useful lives of the wells in accordance
with SFAS 143. The liability for the fair value of an asset
retirement obligation with a corresponding increase in the carrying value of the
related long-lived asset is recorded at the time a well is completed and ready
for production. The Company amortizes the amount added to the oil and
gas properties and recognizes accretion expense in connection with the
discounted liability over the remaining life of the respective
well. The estimated liability is based on historical experience in
plugging and abandoning wells, estimated useful lives based on engineering
studies, external estimates as to the cost to plug and abandon wells in the
future and federal and state regulatory requirements. The liability
is a discounted liability using a credit-adjusted risk-free rate of
12%.
BRINX
RESOURCES LTD.
NOTES TO
CONDENSED FINANCIAL STATEMENTS
(Unaudited)
6. ASSET
RETIREMENT OBLIGATIONS (continued)
Revisions
to the liability could occur due to changes in plugging and abandonment costs,
well useful lives or if federal or state regulators enact new guidance on the
plugging and abandonment of wells.
The
Company amortizes the amount added to oil and gas properties and recognizes
accretion expense in connection with the discounted liability over the remaining
useful lives of the respective wells.
The
information below reflects the change in the asset retirement obligations during
the period ended January 31, 2008 and year ended October 31, 2007:
|
|
|
January
31,
|
|
|
October
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance,
beginning of period
|
|
$
|
34,584
|
|
|
$
|
28,847
|
|
|
Liabilities
assumed
|
|
|
-
|
|
|
|
18,038
|
|
|
Revisions
|
|
|
-
|
|
|
|
(16,326
|
)
|
|
Accretion
expense
|
|
|
1,038
|
|
|
|
4,025
|
|
|
Balance,
end of period
|
|
$
|
35,622
|
|
|
$
|
34,584
|
|
The
reclamation obligation relates to the Kodesh and William wells at the Three
Sands Property; Powell #1 and #2, Johnson #1 and Isbill #2-36 wells at the Owl
Creek Property, the Palmetto Point Project and CMR-USA39-14 well at the
Frio-Wilcox Project. The present value of the reclamation liability
may be subject to change based on management’s current estimates, changes in
remediation technology or changes to the applicable laws and
regulations. Such changes will be recorded in the accounts of the
Company as they occur.
7. COMMON
STOCK
PRIVATE
PLACEMENTS
On
December 28, 2005, the Company completed a 291,392 unit private placement at
$1.75 per unit for gross proceeds of $509,936. Each unit consists of
one share of common stock and one common stock purchase warrant exercisable at
$2.25 per share which expired on December 27, 2007.
On
February 28, 2006, the Company completed a 100,000 unit private placement at
$1.50 per unit for gross proceeds of $150,000. Each unit consists of
one share of common stock and one common stock purchase warrant exercisable at
$2.00 per share which expired on February 27, 2008.
On March
15, 2006, the Company completed a 269,230 unit private placement at $1.30 per
unit for gross proceeds of $349,999. Each unit consists of one share
of common stock and one common stock purchase warrant exercisable at $1.80 per
share which expired on March 14, 2008.
On May 3,
2006, the Company completed an 184,600 unit private placement at $1.30 per unit
for gross proceeds of $239,980. Each unit consists of one share
of common stock and
one common stock purchase warrant
exercisable at $1.80 per share which expire on May 2, 2008.
On
July 31, 2006, the Company completed a 384,610 unit private
placement at $1.30 per unit for gross proceeds of
$499,993. Each unit consists of one share of common stock and one
common stock purchase warrant exercisable at $1.80 per share which expire on
July 30, 2008.
BRINX
RESOURCES LTD.
NOTES TO
CONDENSED FINANCIAL STATEMENTS
(Unaudited)
7.
COMMON STOCK (continued)
STOCK OPTIONS
Although
the Company does not have a
formal stock option plan, all
options granted in
the past have been approved by the
Board of Directors.
On
November 2, 2007, the Company granted a non-qualified stock option with respect
to 200,000 shares to the President. The exercise price is $0.24 per
share. The Option shall expire and be canceled two years from the
Grant Date and is one hundred percent (100%) vested as of the Grant
Date. The Company recorded a total of $26,077 for stock compensation
expenses.
A summary
of the changes in stock options for the three-month period ended January 31,
2008 is presented below:
|
|
|
Options
Outstanding
|
|
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Balance,
October 31, 2007
|
|
|
-
|
|
|
$
|
-
|
|
|
Granted
|
|
|
200,000
|
|
|
|
0.24
|
|
|
Balance,
January 31, 2008
|
|
|
200,000
|
|
|
$
|
0.24
|
|
The
Company has the following options outstanding and exercisable.
|
January
31, 2008
|
Options
outstanding and exercisable
|
|
|
|
Weighted
|
Weighted
|
|
|
|
average
|
Average
|
|
Range
of
|
Number
|
remaining
|
Exercise
|
|
exercise
prices
|
of
shares
|
contractual
life
|
Price
|
|
$0.24
|
200,000
|
1.75
years
|
$0.24
|
|
|
|
|
|
SHARE
PURCHASE WARRANTS
Details
of the share purchase warrants for the three-month period ended January 31, 2008
are summarized as follow:
|
|
|
Number
of Warrants
|
|
|
Balance,
October 31, 2007
|
|
|
1,229,832
|
|
|
Warrants
expired during the period
|
|
|
(291,392
|
)
|
|
Balance,
January 31, 2008
|
|
|
938,440
|
|
BRINX
RESOURCES LTD.
NOTES TO
CONDENSED FINANCIAL STATEMENTS
(Unaudited)
7. COMMON
STOCK (continued)
SHARE
PURCHASE WARRANTS (continued)
At January 31, 2008, the Company had
the following share purchase warrants outstanding:
|
Amount
|
|
Exercise
Price
|
|
Expiry
Date
|
|
100,000
|
|
2.00
|
|
February
7, 2008
|
|
269,230
|
|
1.80
|
|
March
14, 2008
|
|
184,600
|
|
1.80
|
|
May
2, 2008
|
|
384,610
|
|
1.80
|
|
July
30, 2008
|
|
938,440
|
|
1.82
|
|
|
8. RELATED
PARTY TRANSACTIONS
During
the three-month periods ended January 31, 2008 and 2007, respectively, the
Company entered into the following transactions with related
parties:
a) On
January 9, 2008, the Company repaid the remaining $17,899 of the loans and the
accrued interest of $2,815 to related party totaling $20,714. The
difference of $1,171 is due to exchange variations in the Canadian currency, the
outstanding loan was decreased by $1,171.
b) Accrued
interest expense on loans payable to related parties totaled $2,815 and $6,043
for the three-month periods ended January 31, 2008 and January 31, 2007,
respectively.
c) The
Company paid $13,275 (2007 - $15,000) in management fees and reimbursement of
office space to the President of the Company.
d) The
Company paid $7,628 (2007 - $6,500) to Downtown Consulting, a related entity,
for administration services.
e)
On
November 2, 2007, the Company granted a non-qualified stock option with respect
to 200,000 shares to the President. (see note 7 – Stock
Options)
Item 2.
Management’s Discussion and Analysis or Plan
of Operation
Overview
We are an
independent oil and gas company engaged in exploration, development and
production of oil and natural gas. As production of these products continues,
they will be sold to purchasers in the immediate area where the products are
extracted.
Our
original business plan was to proceed with the exploration of the Antelope Pass
Project to determine whether there were commercially exploitable reserves of
gold located on the property comprising the mineral claims. In 2005,
we suspended our activities on the Antelope Pass Project indefinitely in order
to focus on our oil and gas properties and we did not conduct any operations or
exploration activities on the Antelope Pass Project during the three-month
period ended January 31, 2008 or during the fiscal years ended October 31, 2007
or 2006. At the time of this report, we do not know when or if we
will proceed with the Antelope Pass Project.
Our plan
of operations is to continue to produce commercial quantities of oil and gas and
to drill new exploratory and development wells and re-entries to test the oil
and gas productive capabilities of our oil and gas properties.
The
report of our independent auditors on our financial statements for the year
ended October 31, 2007, includes an explanatory paragraph relating to the
uncertainty of our ability to continue as a going concern. Our
accumulated deficit was $483,610 and $260,354 at October 31, 2007 and January
31, 2008, respectively. We need to generate additional revenues and successfully
maintain and expand our current level of operations. These factors
raise substantial doubt about our ability to continue as a going
concern. We expect that we will require additional funding to cover
these anticipated costs and that such additional funding will be in the form of
equity financing from the sale of our common stock. However, we
cannot provide investors with any assurance that we will be able to raise
sufficient funding from the sale of our common stock to cover our oil and gas
operations or our other working capital requirements. We do not
presently have any arrangements in place for any future equity
financing. We believe that debt financing will not be an alternative
for our cash needs.
Oil
and Gas Properties
“Bbl” is
defined herein to mean one stock tank barrel, or 42 U.S. gallons liquid volume,
used in reference to oil or other liquid hydrocarbons.
“Mcf” is
defined herein to mean one thousand cubic feet of natural gas at standard
atmospheric conditions.
“Working
interest” is defined herein to mean an interest in an oil and gas lease that
gives the owner of the interest the right to drill for and produce oil and gas
on the leased acreage and requires the owner to pay a share of the costs of
drilling and production operations. The share of production to which
a working interest owner is entitled will always be smaller than the share of
costs that the working interest owner is required to bear, with the balance of
the production accruing to the mineral owners of royalties.
Owl Creek
Project
Acquisitions
and Sales of Oil and Gas Interests.
On August 10, 2005, we
acquired a 70% working interest in Ranken Energy Corporation’s Owl Creek Project
for a total buy-in cost of $211,750 plus dry hole costs (the “Owl Creek
Project”). The Owl Creek Project is located in
Oklahoma. Our working interest in the Owl Creek Project includes
leasehold interests, two re-entry test wells, geologic expenses, brokerage
costs, 3-D seismic usage, geophysical interpretations, and
overhead. We also participate in drilling operations and related
costs.
On June
1, 2006, we completed the sale of 20% of the Powell #2 well and future drill
sites on the Owl Creek Project. We received a one-time cash payment
of $300,000 and each party is responsible for its portion of the cost to
complete the Powell #2 well and future drill sites.
Delta has funded its
portion of the completion cost of the Powell #2 as well as costs related to
future wells on the project. As a result of the sale to Delta, we now
hold a 50% interest in the Powell #2 well.
Also in
June 2006, we acquired a 50% interest in an additional 85 leased acres located
at the eastern end of the Owl Creek Prospect, increasing the project’s scope to
over 1,200 acres. We paid $17,000 for the additional
acreage.
On August
3, 2006, we completed the sale of 7.5% of the Isbill #1 well and future drill
sites on the Owl Creek Project. We received a one-time cash payment
of $100,000. We retained a 42.5% working interest in the Owl Creek
Project. Each party is responsible for its portion of the costs to
drill and complete the Isbill #1 well and future drill sites. We have
also retained a 70% interest in two spacing unit and the wells containing the
Johnson #1 and Powell #1 and a 50% interest in one spacing unit and the well
containing the Powell #2.
On March
15, 2007, we expended $403,675 on Isbill #2-36 well. We hold a
working interest of 42.5% in the Isbill #2-36 well.
On
October 19, 2007, we expended $238,784 on Powell #3-25 well. On
November 9, 2007, Powell #3-25 was abandoned and $174,245 was transferred to the
proven cost pool for depletion. The unused estimated drilling costs
were applied to other operating well costs.
Operations.
We
completed the Powell #1 well on the Owl Creek Prospect in early February
2006. As of the date of this filing, the Powell #1 well has produced
1,280 Bbl of oil and 8,227 MCF of natural gas. The well is currently shut in and
may be converted to a saltwater disposal well in the near future.
We
completed drilling the Powell #2 well in June 2006. In April 2007,
the Powell #2 well was placed on a submersible pump. As of January
31, 2008, the Powell #2 well has produced 69,842 Bbl of oil and 21,418 MCF of
natural gas. As of the date of this filing, the Powell #2 was
averaging 60 Bbls of oil and 20 MCF of natural gas per day.
In late
August 2006, we commenced drilling an offset well to the Powell #2 well, the
Isbill #1 well. The well reached a total depth of 5,775 feet in mid-September
2006. After examination of the well logs it was determined that the
sands that are producing in the Powell #2 were too thin in the Isbill #1 to
produce economic quantities of oil and gas. The Isbill #1 well has been plugged
and abandoned.
We
commenced drilling of the Isbill #2 well, a direct offset well to the Powell #2,
in February 2007. The Isbill #2 well reached a total depth of 5,700 feet in
mid-March 2007. The Isbill #2 well was successfully completed and was
placed into production in April 2007. As of January 31, 2008, the Isbill #2 well
has produced 14,093 Bbls of oil and 2,489 MCF of natural gas through October 31,
2007 and is currently averaging 42 Bbls of oil and 12 MCF of natural gas per
day.
In
October 2007, drilling commenced on the Powell #3 well, a direct offset well to
the Powell #2 well. Powell #3 well reached a total depth of
5,720 feet in November 2007. After examination of the well logs, it
was determined that the sands that are producing in the Powell #2 and Isbill #2
wells were too thin in the Powell #3 well to produce economic quantities of oil
and gas. As of the date of this filing, the Powell #3 well has been
plugged, reclaimed and abandoned.
Three Sands
Project
Acquisitions and
Sales of Oil and Gas Interests.
On October 6, 2005, we
acquired a 40% working interest in Vector Exploration Inc.’s Three Sands Project
for a total buy-in cost of $88,000 plus dry hole costs (the “Three Sands
Project”). The Three Sands Project is located in
Oklahoma. For the year ended October 31, 2006, we expended $530,081
in exploration costs. In June 2007, we acquired a 40% working
interest in the William #4-10 well for a total cost of $285,196 and paid a
further $17,000 in costs relating to the well. As of January 31,
2008, the total cost for our Three Sands Project is $906,309. Our
working interest in the Three Sands Project includes leasehold interests, one
re-entry production well, and two drilling wells. We also participate
in drilling operations and related costs, in proportion to our working
interest.
Operations.
Drilling
of the Kodesh #1 disposal well was completed on October 3, 2005, and drilling of
the Kodesh #2 well was completed on October 23, 2005. Completion and equipping
of these wells took place during mid-December 2005 through early January
2006. The Kodesh #2 well is now producing oil and gas on a daily
basis and as of January 31, 2008, it has produced 2,950 Bbls of oil and 4,086
MCF of natural gas.
During
January 2007, we re-entered the Dye Estate #1 well. Production of
natural gas from the Dye Estate #1 well commenced in mid-August
2007. The Dye Estate #1 well has produced 987 MCF of natural gas and
is currently averaging natural gas production at a rate of 6 MCF per day. Water
from the Dye Estate #1 well is being disposed in the Kodesh #1 disposal
well.
We
commenced drilling the William #4-10 well in early June 2007, reaching a total
depth of 4,810 feet in mid-June 2007. Electric and radiation logs
indicated that the William #4-10 well contained four potential commercial pay
zones, the Wilcox Sand, Mississippi Lime, Layton Sand and the Tonkawa
Sand. Completion of the lowest zone, the Wilcox Sand, occurred in
mid-August 2007. Production from the William #4-10 well started in
mid-October 2007. Initial production rates from the William #4-10 well averaged
3.5 Bbls of oil and 10 MCF of natural gas per day. During January
2008, we moved up the hole and perforated and fracture treated the Mississippi
Lime Formation, increasing daily production to seven Bbls of oil and 25 MCF of
natural gas. As of January 31, 2008, the Williams #4-10 has produced
322 Bbls of oil and 1,466 MCF of natural gas.
Drilling
commenced on the KC 80 #1-11 well at the Three Sands Project in mid February
2008 and reached total depth of 4,720 feet by late February. The KC
80 #1-11 has been surveyed with radiation and electrical logs. The
primary target for the well is the upper Mississippian Limestone and Chat
Formation. The KC-80 well’s logs indicate significant thickness of Chat and
upper Mississippi Limestone with good porosity, permeability, and hydrocarbon
shows. Completion of the well should start by late March 2008.
Palmetto Point
Project
Acquisitions
and Sales of Oil and Gas Interests.
On February 28,
2006, we acquired a 10% working interest before completion and an 8.5% revenue
interest after completion, in a 10-well program at the Palmetto Point Project
operated by Griffin & Griffin Exploration LLC (“Griffin & Griffin”) for
a total buy-in cost of $350,000 (the “Palmetto Point Project”). The Palmetto
Point Project is located in Mississippi. On September 26, 2006, we acquired two
additional wells (the PP F-6B and PP F52-A wells) within the Palmetto Point
Project for $70,000.
On
October 1, 2007, we acquired a 10% working interest in the PP F-12-2 and PP
F-12-3 wells within the Palmetto Point Project at a cost of
$69,862. On October 25, 2007, we paid $17,000 for a sidetrack, a
deviation of the existing PP-F-12-3 well at an angle to reach additional
targeted oil sands. On January 30, 2008, we incurred an additional
$36,498 for our share of workover costs, including costs to install tubing and
submersible pumps to maintain production rates. We subsequently paid
these costs on February 1, 2008.
Operations.
As
of January 31, 2008, Griffin & Griffin, operator of the Palmetto Point
Project, drilled all ten of the wells in the Palmetto Point
Project. Eight of the wells were successful and two were dry holes
which were not completed. Seven of the eight successful wells have
been completed and are currently producing. One of the eight wells,
the PP F-12, was completed as a flowing oil well in early October,
2007. The PP F-12 well flowed oil at rates of over 100 Bbls of oil
per day and in December 2007 was offset by two additional wells, the PP F-12-2
and PP F-12-3. The PP F-12-2 was a dry hole and the PP F-3 was
completed as a flowing oil well. Additionally, we commenced production at the PP
F-6B and PP F52-A wells in October 2007. In December 2007, the PP
F52-A well started producing oil along with the natural gas, flowing
naturally. However, as of January 31, 2008, the well has ceased
flowing and will be placed on a pump during the second calendar quarter of
2008.
As of
January 31, 2008, the completed oil and gas wells at the Palmetto Point Project
have had total production of 185,066 MCF of natural gas and 15,267 Bbls of oil,
and are current average daily production rate of 450 MCF per day of natural gas
and 85 Bbls of oil per day. It should be noted that daily production
was lower than normal at the end of January 2008 because both the PP F-12 and
12-3 were having submersible pumps installed to increase production and maintain
pressure to the stock tanks.
Mississippi Frio-Wilcox
Joint Venture
Acquisitions
and Sales of Oil and Gas Interests.
On August 2, 2006, we
executed a memorandum agreement with Griffin & Griffin, (as operator of the
project), Delta Oil and Gas, Inc., Turner Valley Oil and Gas Company, Lexaria
Corp., a Nevada corporation (“Lexaria”), and the Stallion Group to participate
in two proposed drilling programs located in Southwest Mississippi and Northeast
Louisiana, comprised of up to 50 natural gas and/or oil wells, at a price of
$400,000
(the “Mississippi Frio-Wilcox Joint Venture”). In exchange for our
interest, we paid $100,000 as of October 31, 2006 and an additional $200,000 on
November 16, 2006. As a result of weather related delays, the
requirement for our final payment of $100,000 was deferred and paid in February
2007. We hold a 10% working interest in the Mississippi Frio-Wilcox
Joint Venture project before production and a prorated reduced working interest
after production based on the operator’s interest portion.
On June
21, 2007, we assigned our future development interests and obligations for any
new wells on our Mississippi Frio-Wilcox Joint Venture property to Lexaria for
the sum of $1. We believe the assigned interests to be of nominal
value. We have maintained our original interest, rights, title
and benefits to all seven wells drilled with our participation at the
Mississippi Frio-Wilcox Joint Venture property between August 3, 2006 and June
19, 2007, specifically wells CMR-USA-39-14, Dixon #1, Faust #1 TEC F-1, CMR/BR
F-14, RB F-1 Red Bug #2, BR F-33, and Randall #1 F-4, and any offset wells that
could be drilled to any of these specified wells.
Operations.
Nine
wells were drilled on the Mississippi Frio-Wilcox Joint Venture, of which, five
wells were initially deemed successful and four wells were dry holes and were
not completed. One of the five wells initially deemed to be
successful was the BR F-24. However, subsequent testing of the BR
F-24 indicated that it was not commercially viable and the well was plugged and
abandoned in 2007. The four remaining successful wells were the Faust
#1, USA 39-14, USA 1-37 and the BR F-33. The USA 39-14 and BR f-30
have been completed and are now also producing natural gas. As of
January 31, 2008, these three wells have produced over 85,160 MCF of natural gas
and are currently averaging a combined daily flow of 284 MCF per day of natural
gas. No further exploration wells are currently planned for this
project.
Mineral
Interests
Antelope
Pass
In 2005,
we suspended our activities on the Antelope Pass Project indefinitely in order
to focus on our oil and gas properties and we did not conduct any operations or
exploration activities on the Antelope Pass Project during the three month
period ended January 31, 2008 or during the fiscal years ended October 31, 2007
or 2006. At the time of this report, we do not know when or if
we will proceed with the
Antelope Pass Project.
Results
of Operations
Three
months ended January 31, 2008 compared to the three months ended January 31,
2007.
We
realized revenues of $495,292 during the three months ended January 31, 2008,
compared with $247,789 during the three months ended January 31, 2007, an
increase of $247,503, all due to our increased oil and gas production. However,
we can provide no assurance that we will continue to produce commercially
exploitable levels of oil and gas resources on our properties, or if additional
resources are discovered, that we will enter into commercial production of such
oil and gas properties.
We
incurred direct costs of $271,827 during the three months ended January 31,
2008, compared with $263,053 during the three months ended January 31, 2007, an
increase of $8,774. Our depletion and accretion costs were $83,056
during the three months ended January 31, 2008, compared with $181,766 during
the three months ended January 31, 2007, a decrease of
$98,710.
The
decrease in our depletion and accretion costs was offset by increases in our
production costs and general and administrative costs. Our production
costs during the three months ended January 31, 2008 were $67,025, compared with
$20,960 during the three months ended January 31, 2007, an increase of $46,065,
all directly attributable to our increased oil and gas
activities. Our general and administrative costs increased to
$121,746 for the three months ended January 31, 2008, from $60,327 for the three
months ended January 31, 2007. The increase in our general and
administrative costs was largely attributable to an increase in costs associated
with professional legal and accounting services necessary as a reporting issuer
under the Securities Exchange Act of 1934.
For the
three months ended January 31, 2008, our net income was $223,256, compared with
a net loss of $15,847 for the three months ended January 31, 2007 (an increase
in net income of $239,103). The increase of our net
income
was largely attributable to the increase in our revenues and the decrease of our
direct costs as a percentage of revenues.
Our
accumulated deficit through January 31, 2008 was $260,354.
Liquidity
and Capital Resources
As of
January 31, 2008, we had cash of $270,181 and working capital of $481,855,
compared to cash of $42,257 and working capital of $107,602 as of October 31,
2007. Our accounts receivable increased to $312,486 at January 31,
2008, compared with $281,500 at October 31, 2007.
During
the three months ended January 31, 2008, net cash provided by operating
activities was $255,534, compared with $135,173 during the three months ended
January 31, 2007, an increase of $120,361.
Net cash
used by investing activities during the three months ended January 31, 2008 was
$6,896, compared with $216,915 during the three months ended January 31,
2007.
We used
cash of $20,714 for financing activities during the three months ended January
31, 2008, compared with $10,000 during the three months ended January 31,
2007.
We had no
proceeds from the sale of our common stock during the three months ended January
31, 2008 or 2007, respectively.
Off-Balance
Sheet Arrangements
We did
not have any off-balance sheet arrangements as of January 31, 2008.
Critical
Accounting Policies
Oil and Gas
Interests
We utilize the full cost method of
accounting for oil and gas activities. Under this method, subject to
a limitation based on estimated value, all costs associated with property
acquisition, exploration and development, including costs of unsuccessful
exploration, are capitalized within a cost center. No gain or loss is
recognized upon the sale or abandonment of undeveloped or producing oil and gas
interests unless the sale represents a significant portion of oil and gas
interests and the gain significantly alters the relationship between capitalized
costs and proved oil and gas reserves of the cost
center. Depreciation, depletion and amortization of oil and gas
interests is computed on the units of production method based on proved
reserves, or upon reasonable estimates where proved reserves have not yet been
established due to the recent commencement of production. Amortizable
costs include estimates of future development costs of proved undeveloped
reserves.
Capitalized costs of oil and gas
interests may not exceed an amount equal to the present value, discounted at
10%, of the estimated future net cash flows from proved oil and gas reserves
plus the cost, or estimated fair market value, if lower, of unproved
interests. Should capitalized costs exceed this ceiling, an
impairment is recognized. The present value of estimated future net
cash flows is computed by applying year end prices of oil and gas to estimated
future production of proved oil and gas reserves as of year end, less estimated
future expenditures to be incurred in developing and producing the proved
reserves and assuming continuation of existing economic conditions.
Asset Retirement
Obligations
We follow SFAS 143 “Accounting for
Asset Retirement Obligations” (“SFAS 143”). SFAS 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS 143 requires recognition of the present value of
obligations associated with the retirement of tangible long-lived assets in the
period in which it is incurred. The liability is capitalized as part
of the related long-lived asset’s carrying amount. Over time,
accretion of the liability is recognized as an operating expense and the
capitalized cost is depreciated over the expected useful life of the related
asset. Our asset retirement obligations are
related
to the plugging, dismantlement, removal, site reclamation and similar activities
of our oil and gas exploration activities.
Forward
Looking Statements
Certain
statements in this Quarterly Report on Form 10-QSB, as well as statements made
by us in periodic press releases and oral statements made by our officials to
analysts and shareholders in the course of presentations about the company,
constitute “forward-looking statements”. Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
that may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by the forward looking statements. Such factors include,
among other things, (1) general economic and business conditions; (2) interest
rate changes; (3) the relative stability of the debt and equity markets; (4)
government regulations particularly those related to the natural resources
industries; (5) required accounting changes; (6) disputes or claims regarding
our property interests; and (7) other factors over which we have little or no
control.
Going
Concern
The
report of our independent auditors on the financial statements for the year
ended October 31, 2007, included an explanatory paragraph relating to the
uncertainty of our ability to continue as a going
concern. Additionally, our accumulated deficit through January 31,
2008 was $260,354. These factors, among others, raise substantial
doubt about our ability to continue as a going concern. There can be
no assurance that we will be able to obtain additional funding to engage in
further exploration of our mineral properties nor is there assurance that our
operations will be profitable.