[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
September 30, 2012
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________
to________________
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
[ ] No [
X
]
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or 15(d) of the Act.
Yes [
] No [
X
]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [
X
]
No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [
X
] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[
X
]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Act).
Yes [
] No [
X
]
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of such
common equity, as of the last business day of the registrant’s most recently
completed second fiscal quarter.
$2,667,697 based on a price of $0.06 per
share, being the closing price of the registrant’s common stock as quoted on the
OTC Bulletin Board on March 29, 2012.
Indicate the number of shares outstanding of each of the registrant’s
classes of common stock, as of the latest practicable date.
49,514,115
shares of common stock as at December 31, 2012.
List hereunder the following documents if incorporated by
reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which
the document is incorporated: (1) Any annual report to security holders; (2) Any
proxy or information statement; and (3) Any prospectus filed pursuant to Rule
424(b) or (c) under the Securities Act of 1933. The listed documents should be
clearly described for identification purposes (e.g., annual report to security
holders for fiscal year ended December 24, 1980).
PART I
FORWARD LOOKING STATEMENTS.
This report contains forward-looking statements. These
statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as “may”,
“should”, “expect”, “plan”, “anticipate”, “believe”, “estimate”, “predict”,
“potential” or “continue” or the negative of these terms or other comparable
terminology. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks in the section
entitled “Risk Factors”, that may cause our company’s or our industry’s actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Except as required by
applicable law, including the securities laws of the United States, we do not
intend to update any of the forward-looking statements to conform these
statements to actual results.
Our audited consolidated financial statements are stated in
United States dollars and are prepared in accordance with United States
generally accepted accounting principles. The following discussion should be
read in conjunction with our audited consolidated financial statements and the
related notes that appear elsewhere in this report.
In this report, unless otherwise specified, all references to
“common shares” refer to the shares of our common stock and the terms “we”,
“us”, “our” and “Arkanova” mean Arkanova Energy Corporation.
ITEM 1. BUSINESS.
We were incorporated in the State of Nevada on September 6,
2001 under the name Talon Ventures, Inc. and on January 15, 2003, we changed our
name to Alton Ventures, Inc. On October 20, 2006, we entered into an agreement
and plan of merger with Arkanova Acquisition Corp., our wholly-owned subsidiary,
and Arkanova Energy, Inc., a private Delaware corporation. The agreement and
plan of merger contemplated the merger of Arkanova Energy, Inc. with and into
Arkanova Acquisition Corp., with Arkanova Acquisition Corp. surviving as our
wholly-owned subsidiary. Effective November 1, 2006, we changed our name from
Alton Ventures Inc. to Arkanova Energy Corporation. The closing of the agreement
and plan of merger occurred on March 1, 2007. As of that date, we acquired all
of the property interests formerly held by Arkanova Energy, Inc.
We are a junior producing oil and gas company and are also
engaged in the acquisition, exploration and development of prospective oil and
gas properties. We hold mineral leases in Delores County, Lone Mesa State Park,
Colorado and leasehold interests located in Pondera and Glacier Counties,
Montana. Please see the information under the heading “Item 2. Properties” on
page 11 of this annual report for a detailed description of our property
interests, including disclosure of our oil and gas operations with respect to
our Montana property.
In addition to our existing property interests, we intend to
acquire additional oil and gas property interests in the future. Management
believes that future growth of our company will primarily occur through the
exploration and development of our existing properties and through the
acquisition of additional oil and gas properties following extensive due
diligence by our company. However, we may elect to proceed through collaborative
agreements and joint ventures in order to share expertise and reduce operating
costs with other experts in the oil and gas industry. We anticipate that the
analysis of new property interests will be undertaken by or under the
supervision of our management and board of directors.
2
Competition
We are a junior producing oil and gas company and are also
engaged in the acquisition of prospective oil and gas properties for exploration
and development. We compete with other junior producing companies in addition to
significantly larger producers. As we are also engaged in the exploration and
development of prospective properties, we also compete with companies for the
identification of such properties and the financing necessary to develop such
properties.
We conduct our business in an environment that is highly
competitive and unpredictable. In seeking out prospective properties, we have
encountered intense competition in all aspects of our business as we compete
directly with other development stage companies as well as established
international producing companies. Many of our competitors are national or
international companies with far greater resources, capital and access to
information than us. Accordingly, these competitors may be able to spend greater
amounts on the acquisition of prospective properties and on the exploration and
development of such properties. In addition, they may be able to afford greater
geological expertise in the exploration and exploitation of mineral and oil and
gas properties. This competition could result in our competitors having resource
properties of greater quality and attracting prospective investors to finance
the development of such properties on more favorable terms. As a result of this
competition, we may become involved in an acquisition with more risk or obtain
financing on less favorable terms.
Customers
There are no contracts obligating our company to provide a
fixed quantity of oil and gas to any party. We have a contract with CHS Inc.,
that provides for their taking all of our oil and/or condensate production from
the unit unless either party give 30 days advance written notice to terminate
the agreement. In the event our contact with CHS Inc. is terminated for any
reason, our company has determined that there are numerous other purchasers
available to enter into a similar arrangement without a material adverse effect
on our company.
Government Regulation
The exploration and development of oil and gas properties is
subject to various United States federal, state and local governmental
regulations. Our company may, from time to time, be required to obtain licenses
and permits from various governmental authorities in regards to the exploration
of our property interests.
We are a company that has only recently started to produce oil
and gas during the year ended September 30, 2009. As such, we are subject to
increased governmental regulation. Matters subject to regulation include
discharge permits for drilling operations, drilling and abandonment bonds,
reports concerning operations, the spacing of wells, and pooling of properties
and taxation. From time to time, regulatory agencies have imposed price controls
and limitations on production by restricting the rate of flow of oil and gas
wells below actual production capacity in order to conserve supplies of oil and
gas. The production, handling, storage, transportation and disposal of oil and
gas, by-products thereof, and other substances and materials produced or used in
connection with oil and gas operations are also subject to regulation under
federal, state, provincial and local laws and regulations relating primarily to
the protection of human health and the environment. Additionally, we have
recently commenced incurring expenditures related to compliance with such laws,
and may incur costs in connection with the remediation of any environmental
contamination. The requirements imposed by such laws and regulations are
frequently changed and subject to interpretation, and we are unable to predict
the ultimate cost of compliance with these requirements or their effect on our
operations.
As of December 31, 2012, we have not filed for any permits.
3
Employees
Our company is currently operated by Pierre Mulacek as our
president, chief executive officer and director, and Reginald Denny as our chief
financial officer and director. As of the date of this report, we had seven
employees including Pierre Mulacek and Reginald Denny. We intend to periodically
hire independent contractors to execute our exploration and development
activities. Our company may hire employees when circumstances warrant. At
present, however, our company does not anticipate hiring any additional
employees in the near future.
Environmental Liabilities
Our business is governed by numerous laws and regulations at
various levels of government. These laws and regulations govern the operation
and maintenance of our facilities, the discharge of materials into the
environment and other environmental protection issues. Such laws and regulations
may, among other potential consequences, require that we acquire permits before
commencing drilling and restrict the substances that can be released into the
environment with drilling and production activities. Under these laws and
regulations, we could be liable for personal injury, clean-up costs and other
environmental and property damages, as well as administrative, civil and
criminal penalties.
ITEM 1A. RISK FACTORS
Much of the information included in this annual report includes
or is based upon estimates, projections or other forward looking statements.
Such forward looking statements include any projections and estimates made by us
and our management in connection with our business operations. While these
forward-looking statements, and any assumptions upon which they are based, are
made in good faith and reflect our current judgment regarding the direction of
our business, actual results will almost always vary, sometimes materially, from
any estimates, predictions, projections, assumptions or other future performance
suggested herein.
Such estimates, projections or other forward looking statements
involve various risks and uncertainties as outlined below. We caution the reader
that important factors in some cases have affected and, in the future, could
materially affect actual results and cause actual results to differ materially
from the results expressed in any such estimates, projections or other forward
looking statements.
Risks Relating to our Business and the Oil and Gas
Industry
We have a history of losses and this trend may continue and
may negatively impact our ability to achieve our business objectives.
We have experienced net losses since inception, and expect to
continue to incur substantial losses for the foreseeable future. Our accumulated
deficit was $25,334,021 as at September 30, 2012. We may not be able to generate
significant revenues in the future and our company has incurred increased
operating expenses following the recent commencement of production. As a result,
our management expects our business to continue to experience negative cash flow
for the foreseeable future and cannot predict when, if ever, our business might
become profitable. We will need to raise additional funds, and such funds may
not be available on commercially acceptable terms, if at all. If we are unable
to raise funds on acceptable terms, we may not be able to execute our business
plan, take advantage of future opportunities, or respond to competitive
pressures or unanticipated requirements. This may seriously harm our business,
financial condition and results of operations.
4
We have a limited operating history, which may hinder our
ability to successfully meet our objectives.
We have a limited operating history upon which to base an
evaluation of our current business and future prospects. We have only recently
commenced production and we do not have an established history of operating
producing properties or locating and developing properties that have oil and gas
reserves. As a result, the revenue and income potential of our business is
unproven. In addition, because of our limited operating history, we have limited
insight into trends that may emerge and affect our business. Errors may be made
in predicting and reacting to relevant business trends and we will be subject to
the risks, uncertainties and difficulties frequently encountered by early-stage
companies in evolving markets. We may not be able to successfully address any or
all of these risks and uncertainties. Failure to adequately do so could cause
our business, results of operations and financial condition to suffer.
Our operations and proposed exploration activities will
require significant capital expenditures for which we may not have sufficient
funding and if we do obtain additional financing, our existing shareholders may
suffer substantial dilution.
We intend to make capital expenditures far in excess of our
existing capital resources to develop, acquire and explore oil and gas
properties. We intend to rely on funds from operations and external sources of
financing to meet our capital requirements to continue acquiring, exploring and
developing oil and gas properties and to otherwise implement our business plan.
We plan to obtain additional funding through the debt and equity markets, but we
can offer no assurance that we will be able to obtain additional funding when it
is required or that it will be available to us on commercially acceptable terms,
if at all. In addition, any additional equity financing may involve substantial
dilution to our then existing shareholders.
The successful implementation of our business plan is
subject to risks inherent in the oil and gas business, which if not adequately
managed could result in additional losses.
Our oil and gas operations are subject to the economic risks
typically associated with exploration and development activities, including the
necessity of making significant expenditures to locate and acquire properties
and to drill exploratory wells. In addition, the availability of drilling rigs
and the cost and timing of drilling, completing and, if warranted, operating
wells is often uncertain. In conducting exploration and development activities,
the presence of unanticipated pressure or irregularities in formations,
miscalculations or accidents may cause our exploration, development and, if
warranted, production activities to be unsuccessful. This could result in a
total loss of our investment in a particular well. If exploration efforts are
unsuccessful in establishing proved reserves and exploration activities cease,
the amounts accumulated as unproved costs will be charged against earnings as
impairments.
In addition, market conditions or the unavailability of
satisfactory oil and gas transportation arrangements may hinder our access to
oil and gas markets and delay our production. The availability of a ready market
for our prospective oil and gas production depends on a number of factors,
including the demand for and supply of oil and gas and the proximity of reserves
to pipelines and other facilities. Our ability to market such production depends
in substantial part on the availability and capacity of gathering systems,
pipelines and processing facilities, in most cases owned and operated by third
parties. Our failure to obtain such services on acceptable terms could
materially harm our business. We may be required to shut in wells for lack of a
market or a significant reduction in the price of oil or gas or because of
inadequacy or unavailability of pipelines or gathering system capacity. If that
occurs, we would be unable to realize revenue from those wells until
arrangements are made to deliver such production to market.
5
Our future performance is dependent upon our ability to
identify, acquire and develop oil and gas properties, the failure of which could
result in under use of capital and losses.
Our future performance depends upon our ability to identify,
acquire and develop additional oil and gas reserves that are economically
recoverable. Our success will depend upon our ability to acquire working and
revenue interests in properties upon which oil and gas reserves are ultimately
discovered in commercial quantities, and our ability to develop prospects that
contain proven oil and gas reserves to the point of production. Without
successful acquisition and exploration activities, we will not be able to
develop additional oil and gas reserves or generate revenues. We cannot provide
you with any assurance that we will be able to identify and acquire additional
oil and gas reserves on acceptable terms, or that oil and gas deposits will be
discovered in sufficient quantities to enable us to recover our exploration and
development costs or sustain our business.
The successful acquisition and development of oil and gas
properties requires an assessment of recoverable reserves, future oil and gas
prices and operating costs, potential environmental and other liabilities, and
other factors. Such assessments are necessarily inexact and their accuracy
inherently uncertain. In addition, no assurance can be given that our
exploration and development activities will result in the discovery of
additional reserves. Our operations may be curtailed, delayed or canceled as a
result of lack of adequate capital and other factors, such as lack of
availability of rigs and other equipment, title problems, weather, compliance
with governmental regulations or price controls, mechanical difficulties, or
unusual or unexpected formations, pressures and or work interruptions. In
addition, the costs of exploitation and development may materially exceed our
initial estimates.
We have a very small management team and the loss of any
member of our team may prevent us from implementing our business plan in a
timely manner.
We have two executive officers and a limited number of
additional consultants upon whom our success largely depends. We do not maintain
key person life insurance policies on our executive officers or consultants, the
loss of which could seriously harm our business, financial condition and results
of operations. In such an event, we may not be able to recruit personnel to
replace our executive officers or consultants in a timely manner, or at all, on
acceptable terms.
Future growth could strain our personnel and infrastructure
resources, and if we are unable to implement appropriate controls and procedures
to manage our growth, we may not be able to successfully implement our business
plan.
We expect to experience rapid growth in our operations, which
will place a significant strain on our management, administrative, operational
and financial infrastructure. Our future success will depend in part upon the
ability of our management to manage growth effectively. This may require us to
hire and train additional personnel to manage our expanding operations. In
addition, we must continue to improve our operational, financial and management
controls and our reporting systems and procedures. If we fail to successfully
manage our growth, we may be unable to execute upon our business plan.
Market conditions or operation impediments may hinder our
access to natural gas and oil markets or delay our production.
The marketability of production from our properties depends in
part upon the availability, proximity and capacity of pipelines, natural gas
gathering systems and processing facilities. This dependence is heightened where
this infrastructure is less developed. Therefore, if drilling results are
positive in certain areas of our oil and gas properties, a new gathering system
would need to be built to handle the potential volume of gas produced. We might
be required to shut in wells, at least temporarily, for lack of a market or
because of the inadequacy or unavailability of transportation facilities. If
that were to occur, we would be unable to realize revenue from those wells until
arrangements were made to deliver production to market.
Our ability to produce and market natural gas and oil is
affected and also may be harmed by:
-
the lack of pipeline transmission facilities or carrying capacity;
6
-
government regulation of natural gas and oil production;
-
government transportation, tax and energy policies;
-
changes in supply and demand; and
-
general economic conditions.
We might incur additional debt in order to fund our
exploration and development activities, which would continue to reduce our
financial flexibility and could have a material adverse effect on our business,
financial condition or results of operations.
If we incur indebtedness, the ability to meet our debt
obligations and reduce our level of indebtedness depends on future performance.
General economic conditions, oil and gas prices and financial, business and
other factors affect our operations and future performance. Many of these
factors are beyond our control. We cannot assure you that we will be able to
generate sufficient cash flow to pay the interest on our current or future debt
or that future working capital, borrowings or equity financing will be available
to pay or refinance such debt. Factors that will affect our ability to raise
cash through an offering of our capital stock or a refinancing of our debt
include financial market conditions, the value of our assets and performance at
the time we need capital. We cannot assure you that we will have sufficient
funds to make such payments. If we do not have sufficient funds and are
otherwise unable to negotiate renewals of our borrowings or arrange new
financing, we might have to sell significant assets. Any such sale could have a
material adverse effect on our business and financial results.
Our properties in Colorado and Montana and/or future
properties might not produce, and we might not be able to determine reserve
potential, identify liabilities associated with the properties or obtain
protection from sellers against them, which could cause us to incur
losses.
Although we have reviewed and evaluated our properties in
Colorado and Montana in a manner consistent with industry practices, such review
and evaluation might not necessarily reveal all existing or potential problems.
This is also true for any future acquisitions made by us. Inspections may not
always be performed on every well, and environmental problems, such as
groundwater contamination, are not necessarily observable even when an
inspection is undertaken. Even when problems are identified, a seller may be
unwilling or unable to provide effective contractual protection against all or
part of those problems, and we may assume environmental and other risks and
liabilities in connection with the acquired properties.
If we or our operators fail to maintain adequate insurance,
our business could be materially and adversely affected.
Our operations are subject to risks inherent in the oil and gas
industry, such as blowouts, cratering, explosions, uncontrollable flows of oil,
gas or well fluids, fires, pollution, earthquakes and other environmental risks.
These risks could result in substantial losses due to injury and loss of life,
severe damage to and destruction of property and equipment, pollution and other
environmental damage, and suspension of operations. We could be liable for
environmental damages caused by previous property owners. As a result,
substantial liabilities to third parties or governmental entities may be
incurred, the payment of which could have a material adverse effect on our
financial condition and results of operations.
Any prospective drilling contractor or operator which we hire
will be required to maintain insurance of various types to cover our operations
with policy limits and retention liability customary in the industry. We also
have acquired our own insurance coverage for such prospects. The occurrence of a
significant adverse event on such prospects that is not fully covered by
insurance could result in the loss of all or part of our investment in a
particular prospect which could have a material adverse effect on our financial
condition and results of operations.
7
The oil and gas industry is highly competitive, and we may
not have sufficient resources to compete effectively.
The oil and gas industry is highly competitive. We compete with
oil and natural gas companies and other individual producers and operators, many
of which have longer operating histories and substantially greater financial and
other resources than we do, as well as companies in other industries supplying
energy, fuel and other needs to consumers. Our larger competitors, by reason of
their size and relative financial strength, can more easily access capital
markets than we can and may enjoy a competitive advantage in the recruitment of
qualified personnel. They may be able to absorb the burden of any changes in
laws and regulation in the jurisdictions in which we do business and handle
longer periods of reduced prices for oil and gas more easily than we can. Our
competitors may be able to pay more for oil and gas leases and properties and
may be able to define, evaluate, bid for and purchase a greater number of leases
and properties than we can. Further, these companies may enjoy technological
advantages and may be able to implement new technologies more rapidly than we
can. Our ability to acquire additional properties in the future will depend upon
our ability to conduct efficient operations, evaluate and select suitable
properties, implement advanced technologies and consummate transactions in a
highly competitive environment.
Complying with environmental and other government
regulations could be costly and could negatively impact our production.
Our business is governed by numerous laws and regulations at
various levels of government. These laws and regulations govern the operation
and maintenance of our facilities, the discharge of materials into the
environment and other environmental protection issues. Such laws and regulations
may, among other potential consequences, require that we acquire permits before
commencing drilling and restrict the substances that can be released into the
environment with drilling and production activities.
Under these laws and regulations, we could be liable for
personal injury, clean-up costs and other environmental and property damages, as
well as administrative, civil and criminal penalties. Prior to commencement of
drilling operations, we may secure limited insurance coverage for sudden and
accidental environmental damages as well as environmental damage that occurs
over time. However, we do not believe that insurance coverage for the full
potential liability of environmental damages is available at a reasonable cost.
Accordingly, we could be liable, or could be required to cease production on
properties, if environmental damage occurs.
The costs of complying with environmental laws and regulations
in the future may harm our business. Furthermore, future changes in
environmental laws and regulations could result in stricter standards and
enforcement, larger fines and liability, and increased capital expenditures and
operating costs, any of which could have a material adverse effect on our
financial condition or results of operations.
Shortages of rigs, equipment, supplies and personnel could
delay or otherwise adversely affect our cost of operations or our ability to
operate according to our business plans.
If drilling activity increases in Colorado, Montana or the
southern United States generally, a shortage of drilling and completion rigs,
field equipment and qualified personnel could develop. The demand for and wage
rates of qualified drilling rig crews generally rise in response to the
increasing number of active rigs in service and could increase sharply in the
event of a shortage. Shortages of drilling and completion rigs, field equipment
or qualified personnel could delay, restrict or curtail our exploration and
development operations, which could in turn harm our operating results.
We will be required to replace, maintain or expand our
reserves in order to prevent our reserves and production from declining, which
would adversely affect cash flows and income.
In general, production from natural gas and oil properties
declines over time as reserves are depleted, with the rate of decline depending
on reservoir characteristics. If we are not successful in our exploration and
development activities, our proved reserves will decline as reserves are
produced. Our future natural gas and oil production is highly dependent upon our
ability to economically find, develop or acquire reserves in commercial
quantities.
8
To the extent cash flow from operations is reduced, either by a
decrease in prevailing prices for natural gas and oil or an increase in
exploration and development costs, and external sources of capital become
limited or unavailable, our ability to make the necessary capital investment to
maintain or expand our asset base of natural gas and oil reserves would be
impaired. Even with sufficient available capital, our future exploration and
development activities may not result in additional proved reserves, and we
might not be able to drill productive wells at acceptable costs.
The geographic concentration of all of our other properties
in Colorado and Montana subjects us to an increased risk of loss of revenue or
curtailment of production from factors affecting those areas.
The geographic concentration of all of our leasehold interests
in Lone Mesa State Park, Colorado and Pondera and Glacier Counties, Montana
means that our properties could be affected by the same event should the region
experience:
-
severe weather;
-
delays or decreases in production, the availability of equipment,
facilities or services;
-
delays or decreases in the availability of capacity to transport, gather
or process production; or
-
changes in the regulatory environment.
The oil and gas exploration and production industry
historically is a cyclical industry and market fluctuations in the prices of oil
and gas could adversely affect our business.
Prices for oil and gas tend to fluctuate significantly in
response to factors beyond our control. These factors include:
-
weather conditions in the United States and wherever our property
interests are located;
-
economic conditions, including demand for petroleum-based products, in the
United States wherever our property interests are located;
-
actions by OPEC, the Organization of Petroleum Exporting Countries;
-
political instability in the Middle East and other major oil and gas
producing regions;
-
governmental regulations, both domestic and foreign;
-
domestic and foreign tax policy;
-
the pace adopted by foreign governments for the exploration, development,
and production of their national reserves;
-
the price of foreign imports of oil and gas;
-
the cost of exploring for, producing and delivering oil and gas;
-
the discovery rate of new oil and gas reserves;
-
the rate of decline of existing and new oil and gas reserves;
-
available pipeline and other oil and gas transportation capacity;
-
the ability of oil and gas companies to raise capital;
-
the overall supply and demand for oil and gas; and
-
the availability of alternate fuel sources.
Changes in commodity prices may significantly affect our
capital resources, liquidity and expected operating results. Price changes will
directly affect revenues and can indirectly impact expected production by
changing the amount of funds available to reinvest in exploration and
development activities. Reductions in oil and gas prices not only reduce
revenues and profits, but could also reduce the quantities of reserves that are
commercially recoverable. Significant declines in prices could result in
non-cash charges to earnings due to impairment.
Changes in commodity prices may also significantly affect our
ability to estimate the value of producing properties for acquisition and
divestiture and often cause disruption in the market for oil and gas producing
properties, as buyers and sellers have difficulty agreeing on the value of the
properties. Price volatility also makes it difficult to budget for and project
the return on acquisitions and the exploration and development of projects. We
expect that commodity prices will continue to fluctuate significantly in the
future.
9
Our ability to produce oil and gas from our properties may
be adversely affected by a number of factors outside of our control which may
result in a material adverse effect on our business, financial condition or
results of operations.
The business of exploring for and producing oil and gas
involves a substantial risk of investment loss. Drilling oil and gas wells
involves the risk that the wells may be unproductive or that, although
productive, the wells may not produce oil or gas in economic quantities. Other
hazards, such as unusual or unexpected geological formations, pressures, fires,
blowouts, loss of circulation of drilling fluids or other conditions may
substantially delay or prevent completion of any well. Adverse weather
conditions can also hinder drilling operations. A productive well may become
uneconomic if water or other deleterious substances are encountered that impair
or prevent the production of oil or gas from the well. In addition, production
from any well may be unmarketable if it is impregnated with water or other
deleterious substances. There can be no assurance that oil and gas will be
produced from the properties in which we have interests. In addition, the
marketability of oil and gas that may be acquired or discovered may be
influenced by numerous factors beyond our control. These factors include the
proximity and capacity of oil and gas, gathering systems, pipelines and
processing equipment, market fluctuations in oil and gas prices, taxes,
royalties, land tenure, allowable production and environmental protection. We
cannot predict how these factors may affect our business.
We may be unable to retain our leases and working interests
in our leases, which would result in significant financial losses to our
company.
Our properties are held under oil and gas leases. If we fail to
meet the specific requirements of each lease, such lease may terminate or
expire. We cannot assure you that any of the obligations required to maintain
each lease will be met. The termination or expiration of our leases may harm our
business. Our property interests will terminate unless we fulfill certain
obligations under the terms of our leases and other agreements related to such
properties. If we are unable to satisfy these conditions on a timely basis, we
may lose our rights in these properties. The termination of our interests in
these properties may harm our business. In addition, we will need significant
funds to meet capital requirements for the exploration activities that we intend
to conduct on our properties.
Title deficiencies could render our leases worthless which
could have adverse effects on our financial condition or results of operations.
The existence of a material title deficiency can render a lease
worthless and can result in a large expense to our business. It is our practice
in acquiring oil and gas leases or undivided interests in oil and gas leases to
forego the expense of retaining lawyers to examine the title to the oil or gas
interest to be placed under lease or already placed under lease. Instead, we
rely upon the judgment of oil and gas landmen who perform the field work in
examining records in the appropriate governmental office before attempting to
place under lease a specific oil or gas interest. This is customary practice in
the oil and gas industry. However, we do not anticipate that we, or the person
or company acting as operator of the wells located on the properties that we
currently lease or may lease in the future, will obtain counsel to examine title
to the lease until the well is about to be drilled. As a result, we may be
unaware of deficiencies in the marketability of the title to the lease. Such
deficiencies may render the lease worthless.
Our disclosure controls and procedures and internal control
over financial reporting were not effective, which may cause our financial
reporting to be unreliable and lead to misinformation being disseminated to the
public.
Our management evaluated our disclosure controls and procedures
as of September 30, 2012 and concluded that as of that date, our disclosure
controls and procedures were not effective. In addition, our management
evaluated our internal control over financial reporting as of September 30, 2012
and concluded that that there were material weaknesses in our internal control
over financial reporting as of that date and that our internal control over
financial reporting was not effective as of that date. A material weakness is a
control deficiency, or combination of control deficiencies, such that there is a
reasonable possibility that a material misstatement of the financial statements
will not be prevented or detected on a timely basis.
10
We have not yet remediated this material weakness and we
believe that our disclosure controls and procedures and internal control over
financial reporting continue to be ineffective. Until these issues are
corrected, our ability to report financial results or other information required
to be disclosed on a timely and accurate basis may be adversely affected and our
financial reporting may continue to be unreliable, which could result in
additional misinformation being disseminated to the public. Investors relying
upon this misinformation may make an uninformed investment decision.
Risks Relating To Our Common Stock
A decline in the price of our common stock could affect our
ability to raise further working capital and adversely impact our ability to
continue operations.
A prolonged decline in the price of our common stock could
result in a reduction in the liquidity of our common stock and a reduction in
our ability to raise capital. Because a significant portion of our operations
have been and will be financed through the sale of equity securities, a decline
in the price of our common stock could be especially detrimental to our
liquidity and our operations. Such reductions may force us to reallocate funds
from other planned uses and may have a significant negative effect on our
business plan and operations, including our ability to develop new properties
and continue our current operations. If our stock price declines, we can offer
no assurance that we will be able to raise additional capital or generate funds
from operations sufficient to meet our obligations. If we are unable to raise
sufficient capital in the future, we may not be able to have the resources to
continue our normal operations.
The market price for our common stock may also be affected by
our ability to meet or exceed expectations of analysts or investors. Any failure
to meet these expectations, even if minor, may have a material adverse effect on
the market price of our common stock.
If we issue additional shares in the future, it will result
in the dilution of our existing shareholders.
Our articles of incorporation, as amended, authorizes the
issuance of up to 1,000,000,000 shares of common stock with a par value of
$0.001. Our board of directors may choose to issue some or all of such shares to
acquire one or more businesses or to provide additional financing in the future.
The issuance of any such shares will result in a reduction of the book value and
market price of the outstanding shares of our common stock. If we issue any such
additional shares, such issuance will cause a reduction in the proportionate
ownership and voting power of all current shareholders. Further, such issuance
may result in a change of control of our corporation.
Trading of our stock may be restricted by the Securities
Exchange Commission’s penny stock regulations, which may limit a stockholder’s
ability to buy and sell our stock.
The Securities and Exchange Commission has adopted regulations
which generally define “penny stock” to be any equity security that has a market
price (as defined) less than $5.00 per share or an exercise price of less than
$5.00 per share, subject to certain exceptions. Our securities are covered by
the penny stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
“accredited investors”. The term “accredited investor” refers generally to
institutions with assets in excess of $5,000,000 or individuals with a net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the Securities and
Exchange Commission, which provides information about penny stocks and the
nature and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer’s account. The bid and offer quotations, and the broker-dealer and
salesperson compensation information, must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer’s confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise exempt
from these rules, the broker-dealer must make a special written determination
that the penny stock
11
is a suitable investment for the purchaser and receive the
purchaser’s written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest
in and limit the marketability of our common stock.
The Financial Industry Regulatory Authority, or FINRA, has
adopted sales practice requirements which may also limit a stockholder’s ability
to buy and sell our stock.
In addition to the “penny stock” rules described above, FINRA
has adopted rules that require that in recommending an investment to a customer,
a broker-dealer must have reasonable grounds for believing that the investment
is suitable for that customer. Prior to recommending speculative low priced
securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s financial status,
tax status, investment objectives and other information. Under interpretations
of these rules, FINRA believes that there is a high probability that speculative
low priced securities will not be suitable for at least some customers. FINRA
requirements make it more difficult for broker-dealers to recommend that their
customers buy our common stock, which may limit your ability to buy and sell our
stock and have an adverse effect on the market for our shares.
Our common stock is illiquid and the price of our common
stock may be negatively impacted by factors which are unrelated to our
operations.
Our common stock currently trades on a limited basis on OTCQB
operated by the OTC Markets Group. Trading of our stock through OTCQB is
frequently thin and highly volatile. There is no assurance that a sufficient
market will develop in our stock, in which case it could be difficult for
shareholders to sell their stock. The market price of our common stock could
fluctuate substantially due to a variety of factors, including market perception
of our ability to achieve our planned growth, quarterly operating results of our
competitors, trading volume in our common stock, changes in general conditions
in the economy and the financial markets or other developments affecting our
competitors or us. In addition, the stock market is subject to extreme price and
volume fluctuations. This volatility has had a significant effect on the market
price of securities issued by many companies for reasons unrelated to their
operating performance and could have the same effect on our common stock.
ITEM 2. PROPERTIES
Executive Offices
Our executive and head offices are located at 305 Camp Craft
Road, Suite 525, Austin, TX 78746. We lease the office on a month-to-month basis
at a cost of $4,196.04
per month. Our current premises are adequate for
our current operations and we do not anticipate that we will require any
additional premises in the foreseeable future.
We currently hold property interests in counties in the United
States, one county in the State of Colorado and two counties in the State of
Montana as summarized below.
Montana Properties
On August 21, 2008, our wholly-owned subsidiary, Arkanova
Acquisition Corporation, entered into a stock purchase agreement with Billie J.
Eustice and the Gary L. Little Trust to acquire all of the issued and
outstanding capital stock of Prism Corporation, an Oklahoma corporation, for a
purchase price of $6,000,000.
Following the closing, we acquired all of the membership
interests of Provident Energy of Montana, LLC (formerly known as Provident
Energy Associates of Montana, LLC), which holds all of the leasehold interests
comprising the Two Medicine Cut Bank Sand Unit in Pondera and Glacier Counties
(the “Unit”), Montana, and the equipment, parts, machinery, fixtures and
improvements located on, or used in connection with, the Two Medicine Cut Bank
Sand Unit. The Unit, which covers approximately 9,900 acres, is located at the
far southern end of the Cut Bank Field and is part of the Blackfeet Indian
Reservation. Since the establishment of the Unit in 1959, there have been
12
82 wells drilled on the Unit and there are currently 30 wells
producing oil from the Unit. Ownership of these leasehold interests granted us
the right to develop and produce all of the oil and gas reserves under the Unit.
The funds used to make the acquisition were provided by an
unaffiliated lender and, as part of the loan transaction, our subsidiary pledged
the shares of Prism it acquired to secure the loan. The terms of the $9,000,000
loan stated that the proceeds were to be used for the acquisition of the Two
Medicine Cut Bank Sand Unit, the oil and gas leases comprising same, the
fixtures and equipment therewith, all the capital stock of Prism Corporation and
for general working capital purposes.
On April 9, 2010, our subsidiary, Provident Energy of Montana
LLC, entered into a Purchase and Sale Agreement with Knightwall Invest, Inc.
Pursuant to the agreement, Provident Energy agreed to sell to Knightwall Invest
30% of the leasehold working interests comprising Provident Energy’s Two
Medicine Cut Bank Sand Unit in Pondera and Glacier Counties, Montana, and the
equipment, parts, machinery, fixtures and improvements located on, or used in
connection with, the Unit, for a purchase price of $7,000,000. The closing of
the purchase and sale, which was subject to the payment in full of all
instalments of the purchase price and other conditions of closing, was scheduled
to occur on August 6, 2010 but was delayed because of delayed drilling
commitments. The final closing took place on November 23, 2010 with the final
payment of $1,500,000 being received. Knightwall Invest was a lender to our
company and it had an outstanding loan to our company of $330,000 in principal
amount bearing interest at the rate of 10% per annum and due and payable by our
company on July 8, 2010, plus interest of $33,000. The total amount due
($367,077.53, which included accrued interest to the date of payment) was paid
in full from the portion of the purchase price paid by Knightwall Invest on
August 3, 2010.
The purchase price was payable in instalments, with the initial
payment of $1,500,000 paid on April 8, 2010, a second payment of $2,000,000 was
paid on July 8, 2010, a third payment of $2,000,000 ($367,077.53 of which
Knightwall Invest applied to the payment in full of its loan to our company)
being due on July 8, 2010 and paid on August 3, 2010, and the remaining final
$1,500,000 being paid on November 23, 2010.
On November 22, 2010, Provident entered into an option
agreement with Knightwall Invest pursuant to which Provident Energy granted an
option to Knightwall Invest to purchase an additional 5% working interest in the
Unit. Upon the grant of the option, Knightwall Invest provided our company with
a $100,000 non refundable deposit, the payment of which will not be applied
against the purchase price in the event the option is exercised. On March 15,
2011, Knightwall Invest exercised the option and paid $1,500,000 to Provident on
April 5, 2011. The proceeds of $1,500,000 were applied against the full cost
pool resulting in a gain on sale of oil and gas properties in the amount of
$1,438,396. Knightwall Invest currently holds a 35% working interest in the
Unit.
On October 21, 2011, our subsidiary entered into a Conversion
and Loan Modification Agreement and a Note Purchase Agreement with Aton Select
Funds Limited which were effective as of October 1, 2011, and pursuant to which
Aton agreed to, among other things, convert $6,000,000.00 of the remaining
principal balance of the Promissory Note that our subsidiary issued to Aton on
October 1, 2009 into a ten percent (10%) working interest in the oil and gas
leases comprising our company’s Two Medicine Cut Bank Sand Unit in Pondera and
Glacier Counties, Montana. Please see Item 7 – “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Liquidity and
Capital Resources – Outstanding Promissory Notes” for additional information.
Reserves
The following estimates of proved reserve and proved developed
reserve quantities and related standardized measure of discounted net cash flow
are estimates only, and do not purport to reflect realizable values or fair
market values of our company’s reserves. We emphasize that reserve estimates are
inherently imprecise and that estimates of new discoveries are more imprecise
than those of producing oil and gas properties. Accordingly, these estimates are
expected to change as future information becomes available.
Future cash flows are computed by applying prices of oil which
are based on the respective 12-month unweighted average of the first of the
month prices to period end quantities of proved oil reserves. The 12-month
unweighted average of the first of the month market prices used for the
standardized measures below was $79.31 and $78.22/barrel for liquids for
September 30, 2012 and 2011. Future operating expenses and development costs are
13
computed primarily by our company’s petroleum engineers by
estimating the expenditures to be incurred in developing and producing our
company’s proved natural gas and oil reserves at the end of the period, based on
period end costs and assuming continuation of existing economic conditions.
Future income taxes are based on period end statutory rates,
adjusted for tax basis and applicable tax credits. A discount factor of ten
percent was used to reflect the timing of future net cash flows. The
standardized measure of discounted future net cash flows is not intended to
represent the replacement cost of fair value of our company’s natural gas and
oil properties. An estimate of fair value would also take into account, among
other things, the recovery of reserves not presently classified as proved,
anticipated future changes in prices and costs, and a discount factor more
representative of the time value of money and the risks inherent in reserve
estimate of natural gas and oil producing operations.
A report of Gustavson Associates dated December 16, 2011 on our
Montana Properties was attached as an exhibit to our annual report on Form 10-K
filed on December 29, 2011 and an updated report of Gustavson Associates dated
December 18, 2012 on our Montana Properties is attached as an exhibit to this
annual report.
Proved Oil and Gas Reserve Quantities
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
|
Oil
|
|
|
|
|
(Mbbl)
|
|
|
(Mbbl)
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of the year
|
|
130,746
|
|
|
155,713
|
|
|
Revisions of previous estimates
|
|
(11,442
|
)
|
|
(9,138
|
)
|
|
Production
|
|
(11,511
|
)
|
|
(15,829
|
)
|
|
Transfer of oil
and gas interest
|
|
(20,115
|
)
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Balance end of the
year
|
|
87,678
|
|
|
130,746
|
|
Standardized Measure of Discounted Future Net Cash
Flow
|
|
|
|
September 30, 2012
|
|
|
|
Future cash inflows
|
$
|
6,953,704
|
|
|
|
Future production and development costs
|
|
(3,098,052
|
)
|
|
|
Future income tax expenses
|
|
(1,349,478
|
)
|
|
|
Future net cash flows
|
|
2,506,174
|
|
|
|
10% annual discount for estimated timing of cash flows
|
|
(988,624
|
)
|
|
|
Standardized
measure of discounted future net cash flows
|
$
|
1,517,550
|
|
Production
During the year ended September 30, 2012, the average net sales
price per barrel of oil received by contract was $78.10/barrel. The average net
production cost was $80.77 per barrel. The high cost of production was due to
upgrading flow lines, facilities, batterys, and well bores as the property was
not maintained for several years. We are currently producing approximately 1,800
to 2,300 barrels per month and intend to eventually increase this production to
over 3,000 barrels per month.
Productive Wells and Acreage
As of December 31, 2012, there were 82 oil wells on the lease
of which 31 are now oil producing. This has increased from 12 wells that were
producing in October 2008 at the time we acquired the property interests.
14
Undeveloped Acreage
All of the 9,900 acres on the Montana unit are considered to be
developed and developmental acreage. Provident Energy, our wholly owned
subsidiary, has worked with Schlumberger to develop infield vertical and
horizontal drilling locations. We believe that the property has 80 acre spacing
with the potential for 40 acre to 20 acre spacing allowing for a minimum of 80
infield drilling locations. We believe that the property also has the potential
for 30 Bakken type horizontal wells based on 320 acre spacing.
Drilling Activity
On August 12, 2011, we announced that Provident Energy of
Montana, LLC successfully finished the completion of the six stage perf and frac
of the Tribal-Max 1-2817; the first successful horizontal well drilled in the
Cut Bank Sand formation. In addition the company also recompleted three existing
vertical wells within the Two Medicine Cut Bank Sand Unit (TMCBSU).
The Tribal-Max 1-2817 as of the date of this report was still
flowing back at a high rate and pressure. Completion of the Tribal-Max 1-2817
included a six stage frac consisting of approximately 12,410 barrels of
stimulation fluid and 474,981 pounds of sand. Three other wells within the field
were also stimulated, achieving near to or exceeded design parameters.
Present Activities
As of the date of this report, we are continuing our efforts to
bring more producing wells on line through recompletion and reactivation of
existing wells to more than 40 in 2013.
Delivery Commitments
There are no contracts obligating our company to provide a
fixed quantity of oil and gas to any party. We have a contract with CHS Inc.,
that provides for their taking all of our oil and/or condensate production from
the unit unless either party give 30 days advance written notice to terminate
the agreement.
Internal Controls Over Reserves Estimates
Estimates of proved reserves at September 30, 2012 and 2011
were prepared by Gustavson Associates, LLC, our independent consulting petroleum
engineers. The technical persons responsible for preparing the reserve estimates
are independent petroleum engineers, geologists, economists, and appraisers and
prepared the estimate of reserves in accordance with the US Securities and
Exchange Commission’s definitions and guidelines. Gustavson Associates, LLC,
holds neither direct nor indirect financial interest in the subject properties,
in Provident Energy of Montana, LLC, or in any other affiliated companies. Our
independent engineering firm reports jointly to the board of directors and to
our President and Chief Executive Officer: Pierre Mulacek. For information
regarding the experience and qualifications of the members of our board of
directors and our President, please see Item 10 – “Directors, Executive Officers
and Corporate Governance”.
Colorado Property
Effective February 15, 2008, Arkanova Acquisition Corporation,
our wholly-owned subsidiary leased a total of 1,320 gross mineral acres in
Delores County, Colorado from The Curtis Jones Family Trust, Vera Lee Redd
Family Trust and Redd Royalties Ltd. for an aggregate price of $93,500. The
initial term of the leases is for seven years, and continues thereafter so long
as oil or gas is being produced from the lease areas in paying quantities. We
anticipate we will have a 100% working interest in the property and an
approximate combined net royalty of 83.25%, with the remaining royalty interest
to the lessors. In connection with the acquisition of the lease from The Curtis
Jones Family Trust, we agreed to pay a third-party a 3.5% overriding royalty on
220 net mineral acres. The exploration targets on this prospect include a series
of fractured black shales of the Pennsylvanian age Paradox
15
Formation with drilling depths of 8,000 feet to 9,500 feet. The
target intervals were already encountered in a well located on the leasehold,
which was drilled for deeper oil targets and then was plugged in a time when gas
was uneconomic due to price. In the 100 foot thick main target interval, the gas
show while drilling was reported to be 14,000 units of C1 (28,000+ units by
chromatograph) and pressure was calculated at approximately 4,600 psi. We plan
to request permission from the State of Colorado to re-enter and complete this
bypassed gas pay when natural gas prices become economical to do so.
Undeveloped Acreage
Management is planning to farm out this prospect in 2013 if
commercially productive. We are also considering the sale of this property.
Drilling Activity
There has not been any drilling activity on the leases in the
last three years except for the MAX 1 well on our Montana lease in August 2011.
Arkansas Properties
Pursuant to the terms of an oil and gas lease acquisition and
development agreement dated July 24, 2006, we acquired leases of mineral rights
in approximately 50,000 acres of prospective oil and gas lands located in
Phillips and Monroe Counties, Arkansas.
The Arkansas well, the DB Griffin #1-33, was drilled to a total
depth of 7,732 feet on November 29, 2007. It was evaluated and the decision was
made to plug and abandon the well in May 2011.
Under the terms of the acquisition and development agreement,
we were obligated to pay approximately an additional $5,600,000 to acquire the
remainder of the acreage which we had committed to acquire, unless we elected to
pay a majority of the costs with shares of our common stock at $1.25 per share.
In addition, we were required to drill five additional wells within 24 months,
from the date upon which Arkanova Nevada would have made the last of the lease
bonus payments as required in the agreement. These wells were never drilled. We
do not anticipate paying the final lease payment. It is the opinion of
management that any and all obligations have expired with respect to these
leases due to non-performance.
Management chose not to re-negotiate the expired Arkansas
leases because of the costs of exploration and development in undeveloped
acreage, natural gas prices being uneconomical, the depth of the possible play
and any funding could be better utilized in our producing area of Montana.
ITEM 3. LEGAL PROCEEDINGS.
Except as disclosed below, we know of no material, active or
pending legal proceedings against our company, nor are we involved as a
plaintiff in any material proceeding or pending litigation. There are no
proceedings in which any of our directors, officers or affiliates, or any
registered or beneficial shareholder, is an adverse party or has a material
interest adverse to our interest.
Provident Energy of Montana, LLC and Arkanova Energy
Corporation vs. Billie Eustice
On October 20, 2010, we and our subsidiary, Provident Energy of
Montana, LLC, initiated a lawsuit against Billie Eustice in the Circuit Court of
Tulsa County, Oklahoma.
Factual Allegations
Provident Energy was bought by our company in its entirety from
a former corporation owned by Billie Eustice and the Gary Little Trust. In that
share acquisition, we acquired Provident Energy as a wholly owned subsidiary and
16
obtained the rights to existing leases and production on
approximately 10,000 acres in Montana. After the sale was completed, Provident
Energy learned of violations of the Migratory Bird Treaty Act which had occurred
on the property the month before the closing date of the sale. Although Billie
Eustice had direct knowledge of the incident, she failed to disclose the
information to us. She also signed a seller’s certificate acknowledging that no
incidents had occurred on the property prior to the sale which would have
materially altered the value of the property that had not already been disclosed
to us.
As a consequence of the violations, Provident Energy had to
plead guilty to a federal class B misdemeanor and incurred fines and penalties
in addition to being put on 18-months probation.
In addition to this claim, we and Provident Energy have also
asserted that Billie Eustice committed fraud and conversion in withdrawing
monies from the account of Provident Energy after the sale of the company and in
representing herself as an agent of Provident Energy after the sale in order to
acquire royalty interest which she was not authorized to do. Provident Energy
had a one year consulting agreement with Billie Eustace wherein she was to
provide consulting services to Provident Energy in exchange for a $1,500,000.00
consulting fee that was paid up front as part of the consideration for the
company less a $250,000.00 retention for remediation and clean up of a spill
disclosed prior to closing. Provident Energy's costs far exceeded the $250,000
retention.
We and Provident Energy seek rescission of the consulting
agreement with Billie Eustace, the divesting of any royalty interests she
fraudulently obtained for herself, and reimbursement and indemnity of all
damages incurred as a result of her fraud and conversion.
Relief Sought
We and Provident Energy are asking for all amounts expended for
clean up, remediation, fines, attorneys fees, and any loss of opportunity or
profit attributable to the undisclosed "spill" resulting the death of birds
covered by the Migratory Bird Treaty Act, rescission of the consulting
agreement, damages in the amounts of all profits derived from royalty interests
fraudulently obtained by Billie Eustace, $134,000.00 as the amount of Provident
Energy’s funds converted by Eustace to her own personal bank account, attorneys
fees, pre and post-judgment interests, and court costs.
Settlement
On December 14, 2012, we reached a preliminary settlement with
Billie Eustice, whereby it is contemplated that we will pay Ms. Eustice $150,000
over four years beginning January 28, 2013 in 48 equal monthly installments in
settlement of all outstanding matters and issues between Billie Eustice and us,
including the balance owing on the consulting agreement in the amount of
$125,000, oil barrels in the tanks at time of purchase, and a refund of $12,000
that was a tax refund prior to the purchase of Provident Energy and cashed by
Provident Energy after the purchase. There is no assurance that we will enter
into a settlement agreement as contemplated, or on terms acceptable to us.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock trades on OTCQB operated by the OTC Markets
Group under the symbol “AKVA”. Until July 22, 2012, our common stock was quoted
on the OTC Bulletin Board, but effective July 23, 2012, our common stock was not
eligible for quotation on the OTC Bulletin Board due to quoting inactivity under
Rule 15c2-11 promulgated by the Securities and Exchange Commission.
17
The following quotations obtained from the OTC Bulletin Board
and OTCQB reflect the high and low bids for our common stock based on
inter-dealer prices, without retail mark-up, mark-down or commission an may not
represent actual transactions. The high and low bid prices of our common stock
for the periods indicated below are as follows:
|
Quarter Ended
|
High
|
Low
|
|
September 30, 2012
|
$0.04
|
$0.01
|
|
June 30, 2012
|
$0.07
|
$0.035
|
|
March 31, 2012
|
$0.13
|
$0.04
|
|
December 31, 2011
|
$0.24
|
$0.10
|
|
September 30, 2011
|
$0.30
|
$0.15
|
|
June 30, 2011
|
$0.25
|
$0.00
|
|
March 31, 2011
|
$0.35
|
$0.00
|
|
December 31, 2010
|
$0.35
|
$0.17
|
On December 27, 2012, the closing price of our common stock as
reported by OTCQB was $0.02.
Our transfer agent and registrar for our common stock is
Pacific Stock Transfer Company, located at 4045 South Spencer Street, Suite 403,
Las Vegas, NV 89119, Tel: (702) 361-3033, Fax: (702) 433-1979, E-mail:
info@pacificstocktransfer.com.
Holders
On December 31, 2012, there were 109 registered shareholders of
our common stock and 49,514,115 common shares issued and outstanding.
Dividends
We have not declared or paid any cash dividends since
inception. Although there are no restrictions that limit our ability to pay
dividends on our common shares, we intend to retain future earnings, if any, for
use in the operation and expansion of our business and do not intend to pay any
cash dividends in the foreseeable future.
Securities authorized for issuance under equity compensation
plans
On April 25, 2007, our compensation committee and board of
directors adopted a stock option plan named the 2007 Stock Option Plan, the
purpose of which is to attract and retain the best available personnel and to
provide incentives to employees, officers, directors and consultants, all in an
effort to promote the success of our company. The 2007 Stock Option Plan
initially authorized our company to issue 2,500,000 shares of common stock. On
November 14, 2008, we amended the 2007 Stock Option Plan, renamed the plan the
2008 Amended Stock Option Plan and increased the number of shares available for
issuance from 2,500,000 to 5,000,000.
The following table provides a summary of the number of stock
options granted under the 2008 Amended Stock Option Plan, the weighted average
exercise price and the number of stock options remaining available for issuance
under the 2008 Amended Stock Option Plan, all as at September 30, 2012:
|
Number of securities
to be
issued upon
exercise of
outstanding options
|
Weighted-Average
exercise
price of
outstanding options
|
remaining available
for future
issuance
under equity
compensation plan
|
|
Equity compensation plans not approved by
security holders
|
4,653,333
|
$0.27
|
346,667
|
|
Equity compensation plans approved by
security holders
|
Nil
|
Nil
|
Nil
|
18
Recent sales of unregistered securities
Since the beginning of the fiscal year ended September 30,
2012, we have not sold any equity securities that were not registered under the
Securities Act of 1933 that were not previously reported in an annual report on
Form 10-K, a quarterly report on Form 10-Q or a current report on Form 8-K.
Purchases of equity securities by the issuer and affiliated
purchasers
None.
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
audited consolidated financial statements and the related notes that appear
elsewhere in this annual report. The following discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in the forward
looking statements. Factors that could cause or contribute to such differences
include those discussed below and elsewhere in this annual report.
Our audited consolidated financial statements are stated in
United States dollars and are prepared in accordance with United States
generally accepted accounting principles.
Results of Operations for the Years Ended September 30, 2012
and 2011
Years Ended September 30, 2012 and 2011
Summary
The following summary of our results of operations should be
read in conjunction with our audited consolidated financial statements for the
years ended September 30, 2012 and 2011 which are included herein:
|
|
|
September 30,
|
|
|
|
|
|
September 30,
|
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
Oil and gas sales
|
$
|
899,052
|
|
|
|
|
|
1,278,693
|
|
|
Expenses
|
|
(2,329,234
|
)
|
|
|
|
|
(2,616,600
|
)
|
|
Net Income (Loss)
|
$
|
3,844,264
|
|
|
|
|
|
(2,067,833
|
)
|
Revenues
During the year ended September 30, 2012, we generated $899,052
in oil and gas sales as compared to $1,278,693 in oil and gas sales during the
year ended September 30, 2011. The reason for the decrease in sales is because
of the 10% working interest sale to Aton Select Fund on October 1, 2011.
Expenses
Expenses decreased during the year ended September 30, 2012 to
$2,329,234 as compared to $2,616,600 during the year ended September 30, 2011.
The decrease
is largely due to the decrease in officer salaries in the
year ended September 30, 2012 and completion of the upgrades to the lease in the
year ended September 30, 2011.
19
General and Administrative Expenses
General and administrative expenses decreased to $1,325,678 for
the year ended September 30, 2012 compared to $1,973,142 for the year ended
September 30, 2011 due to the decrease in officer salaries in the year ended
September 30, 2012.
Oil and Gas Production Costs
Oil and gas production costs decreased to $929,795 for the year
ended September 30, 2012 compared to $1,744,289 for the year ended September 30,
2011 due to completion of the upgrades to the lease last year.
Accretion Expenses
Accretion expenses increased to $11,019 for the year ended
September 30, 2012 compared to $10,253 for the year ended September 30, 2011.
Depletion Expenses
Depletion expenses decreased to $267,320 for the year ended
September 30, 2012 compared to $327,312 for the year ended September 30, 2011
due to a decrease in production during the year ended September 30, 2012.
Gain on Sale of Oil & Gas Properties
Gain on sale of oil & gas properties was $nil for the year
ended September 30, 2012 compared to $1,438,396 for the year ended September 30,
2011. This was due to the sale of 5% interest of oil and gas properties in the
year ended September 30, 2011.
Gain on Transfer of Oil and Gas Properties
Gain on transfer of oil and gas properties increased to
$161,029 for the year ended September 30, 2012 compared to $nil for the year
ended September 30, 2011 due to the partial settlement of debt by transferring
oil and gas properties.
Interest Expense
Interest expense decreased for the year ended September 30,
2012 to $457,697 as compared to $739,727 for the year ended September 30, 2011
due to the partial settlement of a loan as of October 1, 2011.
Gain (Loss) on Derivative liability
Gain on derivative liability for the year ended September 30,
2012 was $88,013 as compared to a loss on derivative liability of $37,266 for
the year ended September 30, 2011. This was a result of a greater decrease in
our stock price during the year ended September 30, 2012 as compared to the year
ended September 30, 2011. Our stock price is one of the primary factors in
determining the value of the derivative liability.
Gain on Settlement of Debt
Gain on settlement of debt increased to $5,563,130 for the year
ended September 30, 2012 compared to $nil for the year ended September 30, 2011
due to the partial settlement of debt by transferring oil and gas
properties.
20
Gain on Disposal of Equipment
Gain on disposal of equipment increased to $43,549 for the year
ended September 30, 2012 compared to $nil for the year ended September 30, 2011
due to sale of equipment during the year ended September 30, 2012.
Liquidity and Capital Resources
Working Capital
|
|
|
At September 30,
|
|
|
At September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Current assets
|
$
|
249,299
|
|
$
|
434,405
|
|
|
Current liabilities
|
|
9,103,073
|
|
|
14,381,088
|
|
|
Working capital (deficiency)
|
$
|
(8,853,774
|
)
|
$
|
(13,946,683
|
)
|
We had cash and cash equivalents of $74,356 and a working
capital deficit of $8,853,774 as of September 30, 2012 compared to cash and cash
equivalents of $218,741 and working capital deficit of $13,946,683 as of
September 30, 2011. Subsequent to September 30, 2012, we sold an aggregate of
3,000,000 shares of our common stock to the President of the Company at a price of $0.10 per share for gross
proceeds of $300,000.
We anticipate that we will require approximately $8,000,000 for
operating expenses during the next twelve months as set out below.
Estimated Expenses for the Next Twelve Month Period
|
Drilling Costs
|
$
|
7,000,000
|
|
|
Employee and
Consultant Compensation
|
$
|
400,000
|
|
|
Professional Fees
|
$
|
100,000
|
|
|
General and
Administrative Expenses
|
$
|
500,000
|
|
|
Total
|
$
|
8,000,000
|
|
Our company’s principal cash requirements are for new infield
well drilling development and current well reactivations. We anticipate such
expenses will rise as we proceed to determine the feasibility of developing our
current or future property interests.
Our company’s cash and cash equivalents will not be sufficient
to meet our working capital requirements for the next twelve month period. We
estimate that we will require approximately $8,000,000 over the next twelve
month period to fund our plan of operations. Our company plans to raise the
capital required to satisfy our immediate short-term needs and additional
capital required to meet our estimated funding requirements for the next twelve
months primarily through the private placement of our equity securities. There
is no assurance that our company will be able to obtain further funds required
for our continued working capital requirements. The ability of our company to
meet our financial liabilities and commitments is primarily dependent upon the
continued financial support of our directors and shareholders, the continued
issuance of equity to new shareholders, and our ability to achieve and maintain
profitable operations.
There is substantial doubt about our ability to continue as a
going concern as the continuation of our business is dependent upon obtaining
further long-term financing, successful exploration of our property interests,
the identification of reserves sufficient enough to warrant development,
successful development of our property interests and, finally, achieving a
profitable level of operations. The issuance of additional equity securities by
us could result in a significant dilution in the equity interests of our current
stockholders. Obtaining commercial loans, assuming those loans would be
available, will increase our liabilities and future cash commitments.
Due to the uncertainty of our ability to meet our current
operating and capital expenses, in their report on our audited consolidated
financial statements for the year ended September 30, 2012, our independent
auditors included an explanatory paragraph regarding substantial doubt about our
ability to continue as a going concern. Our statements contain additional note
disclosures describing the circumstances that lead to this disclosure by our
independent auditors.
21
Outstanding Promissory Notes
On October 1, 2009, our subsidiary entered into a loan
consolidation agreement to consolidate its outstanding promissory notes. We
requested an additional loan in the amount of $1,168,729 to be consolidated into
one new promissory note in the principal amount of $12,000,000. Pursuant to the
terms and conditions of the agreement, the new loan provided for the
consolidation and cancellation of the former notes and the additional loan
amount. Interest of $818,771 on the former notes was consolidated to the new
principal amount of $12,000,000. The promissory note bears interest at 6% per
annum, was due on September 30, 2011, and is secured by a pledge of all of our
subsidiary’s interest in its wholly-owned subsidiary, Provident Energy. Interest
on the promissory note is payable 10 days after maturity in shares of our
company’s common stock. The number of shares payable as interest will be
determined by dividing $1,440,000 by the average stock price over the 15
business day period immediately preceding the date on which the promissory note
matures.
As inducement to the note holder to provide the additional loan
of $1,168,729, our subsidiary agreed to cause our company to issue 821,918
shares of common stock to the note holder. In addition, we agreed to issue
$240,000 worth of shares of common stock to the note holder on the first
anniversary of the execution of the Note Purchase Agreement. The new note is
secured by a pledge of all the membership interest of Provident Energy and a
guarantee of indebtedness by our company.
Our subsidiary also agreed to cause our company to issue an
additional 900,000 shares of common stock to the lender following the execution
of the loan consolidation agreement, in accordance with our company’s heretofore
unfulfilled obligation under Section 3 of the Note Purchase Agreement relating
to the $9,000,000 note. We issued the 900,000 shares on May 27, 2010.
On October 22, 2010, we issued 2,634,150 shares of common stock
with a fair value of $720,000 to Aton Select Funds Limited as an interest
payment on the promissory note and on October 26, 2010, we issued an additional
878,049 common shares with a fair value of $240,000.
On October 21, 2011, our subsidiary entered into a Conversion
and Loan Modification Agreement and a Note Purchase Agreement with Aton Select
Funds Limited which were effective as of October 1, 2011, and pursuant to which
Aton agreed to (i) convert $6,000,000.00 of the remaining principal balance of
the Promissory Note that our subsidiary issued to Aton on October 1, 2009 (the
“2009 Note”) into a ten percent (10%) working interest in the oil and gas leases
comprising our company’s Two Medicine Cut Bank Sand Unit in Pondera and Glacier
Counties, Montana, (ii) loan our subsidiary an additional $1,000,000.00 (the
“Additional Loan Amount”), (iii) consolidate the remaining post-conversion
outstanding principal balance under the 2009 Note and the Additional Loan Amount
into one new promissory note in the principal amount of $7,000,000.00 (the “2011
Note”).
The 2011 Note bears interest at the rate of 6% per annum, was
due and payable on September 30, 2012, and, as was the case with the 2009 Note,
is secured by a pledge of all of our subsidiary’s interest in its wholly owned
subsidiary, Provident. Interest on the 2011 Note is payable 10 days after
maturity in shares of our common stock. The number of shares of our common stock
payable as interest on the 2011 Note will be determined by dividing $420,000 by
the average stock price for our common stock over the 15 business day period
immediately preceding the date on which the 2011 Note matures. Our subsidiary’s
obligations under the 2011 Note are guaranteed by our company pursuant to a
Guaranty Agreement dated as of October 1, 2011.
On October 11, 2011, we issued 3,204,748 shares of common stock
with a fair value of $769,140 to Aton Select Funds Limited to settle interest
payment of $720,000 on the 2011 Note resulting in a loss of settlement of debt
of $49,140. On February 1, 2012, we adjusted the exercise price of the warrant
to purchase 250,000 shares of common stock of our company which warrant was
issued to John Thomas Bridge & Opportunity Fund on March 19, 2008 from $0.27
per share to $0.22 per share, which is the deemed price per share of the
issuance to Aton Select Funds Limited.
On August 6, 2012, our wholly owned subsidiary entered into a
Loan Modification Agreement and an Amended and Restated Note Purchase Agreement
with Aton Select Funds Limited which were effective as of July 1, 2012, whereby
Aton agreed to increase the amount outstanding under the 2011 Note by
$1,000,000.00 (the “ 2012
22
Additional Loan Amount”) and consolidate the remaining balance
under the 2011 Note and the 2012 Additional Loan Amount into one new amended and
restated promissory note in the principal amount of $8,315,000.00 (the “2012
Note”).
The 2012 Note bears interest at the rate of 6% per annum, is
due and payable on June 30, 2013, is secured by a pledge of all of our
subsidiary’s interest in its wholly owned subsidiary, Provident. Interest on the
2012 Note is payable 10 days after maturity in shares of our common stock. The
number of shares of our common stock payable as interest on the 2012 Note will
be determined by dividing $498,900 by the average stock price for our common
stock over the 15 business day period immediately preceding the date on which
the 2012 Note matures. Our subsidiary’s obligations under the 2012 Note are
guaranteed by our company pursuant to a Guaranty Agreement dated as of July 1,
2012. We received the 2012 Additional Loan Amount evidenced by the foregoing
amended and restated loan documents on October 3, 2012.
Lease Acquisition Costs
We have recorded and paid for 31,258 oil and gas lease acreage
of the approximately 50,000 acres in the Phillips, Monroe and Desha counties in
Arkansas; however, we do not anticipate incurring any additional lease
acquisition costs during the next twelve months. It remains uncertain that we
will acquire the remainder of this acreage in future periods. The decision to
purchase the Arkansas acreage was made by prior management.
Drilling, Remediation and Seismic Costs
We estimate that our exploration and development costs on our
property interests will be approximately $10,000,000 during the next twelve
months, which will include drilling and, if warranted, completion costs for one
horizontal well that has already been drilled to the Bakken. We will need to
obtain additional equity funding, and possibly additional debt funding as well,
in order to be able to obtain the needed funds. Alternatively, we may be
required to farmout a working interest in some of our acreage to a third party.
There is no guarantee that we will be able to raise sufficient additional
capital or alternatively that we will be able to negotiate a farmout arrangement
on terms acceptable to us.
Estimated Timeline of Exploration Activity on
Property
|
Date
|
Objective
|
|
October 2013
|
Drill a vertical or horizontal Cut Bank or Alberta Bakken
well. (Testing required) MAX 1 well update :
|
|
|
We continue our efforts to the testing of the Tribal MAX
1 horizontal well.
|
|
|
Adjustments are on going to target the best performance
of the well.
|
|
|
This was the first successful horizontal well drilled in
the Cut Bank Sand formation and there was not any existing data available
and the data retrieved during this first well will be extremely valuable
in the next Cut Bank or Bakken well to be drilled.
|
|
August – September
|
2013 - Recomplete 5 Cut Bank wells.
|
Employee and Consultant Compensation
Given the early stage of our development and exploration
properties, we intend to continue to outsource our professional and personnel
requirements by retaining consultants on an as needed basis. We estimate that
our consultant and related professional compensation expenses for the next
twelve month period will be approximately $400,000. On July 17, 2012, we entered
into an executive employment agreement with Pierre Mulacek, our chief
23
executive officer, president and a director of our company. We
agreed to pay an annual salary of $240,000 to Mr. Mulacek in consideration for
him carrying out his duties as an executive of our company. On July 17, 2012, we
also entered into an executive employment agreement with Reginald Denny, our
chief financial officer and a director of our company. We agreed to pay an
annual salary of $190,000 to Mr. Denny in consideration for him carrying out his
duties as an executive of our company. The foregoing agreements were entered
into as a result of the expiration of previous executive employment agreements
with Mr. Denny and Mr. Mulacek.
Professional Fees
We expect to incur on-going legal, accounting and audit
expenses to comply with our reporting responsibilities as a public company under
the United States Securities Exchange Act of 1934, as amended, in addition to
general legal fees for oil and gas and general corporate matters. We estimate
our legal and accounting expenses for the next twelve months to be approximately
$100,000.
General and Administrative Expenses
We anticipate spending $500,000 on general and administrative
costs in the next twelve month period. These costs primarily consist of expenses
such as lease payments, office supplies, insurance, travel, office expenses,
etc.
Cash Used In Operating Activities
Net cash used in operating activities was $1,646,724 during the
year ended September 30, 2012 as compared to $2,346,680 during the year ended
September 30, 2011. The reason for the decrease is the completion of the field
maintenance upgrades to the Montana oil lease and the salary reductions.
Cash from Investing Activities
Net cash used in investing activities was $63,171 during
the year ended September 30, 2012 as compared to net cash provided by investing
activities of $933,515. The reason for the decrease is the completion of capital
improvements in the prior period.
Cash from Financing Activities
Net cash provided by financing activities for the year ended
September 30, 2012 was $1,565,510 compared to $24,728 of net cash used in
financing activities in the year ended September 30, 2011. The reason for the
increase is funding received from related party and issuance of promissory
notes.
Capital Expenditures
As of September 30, 2012, our company did not have any material
commitments for capital expenditures.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
stockholders.
Critical Accounting Policies
Our discussion and analysis of our financial condition and
results of operations are based upon our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the
24
reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities.
We believe that the estimates, assumptions and judgments
involved in the accounting policies described below have the greatest potential
impact on our financial statements, so we consider these to be our critical
accounting policies. Because of the uncertainty inherent in these matters,
actual results could differ from the estimates we use in applying the critical
accounting policies. Certain of these critical accounting policies affect
working capital account balances, including the policies for revenue
recognition, allowance for doubtful accounts, inventory reserves and income
taxes. These policies require that we make estimates in the preparation of our
financial statements as of a given date.
Within the context of these critical accounting policies, we
are not currently aware of any reasonably likely events or circumstances that
would result in materially different amounts being reported.
Going Concern
Due to the uncertainty of our ability to meet our current
operating and capital expenses, in their report on the annual financial
statements for the year ended September 30, 2012, our independent auditors
included an explanatory paragraph regarding concerns about our ability to
continue as a going concern. Our financial statements contain additional note
disclosures describing the circumstances that lead to this disclosure by our
independent auditors.
There is substantial doubt about our ability to continue as a
going concern as the continuation of our business is dependent upon obtaining
further financing. The issuance of additional equity securities by us could
result in a significant dilution in the equity interests of our current
stockholders. Commercial loans, assuming those loans would be available, will
increase our liabilities and future cash commitments.
There are no assurances that we will be able to obtain further
funds required for our continued operations or for our entry into the petroleum
exploration and development industry. We are pursuing various financing
alternatives to meet our immediate and long-term financial requirements. There
can be no assurance that additional financing will be available to us when
needed or, if available, that it can be obtained on commercially reasonable
terms. If we are not able to obtain the additional financing on a timely basis,
we will not be able to meet our other obligations as they become due.
Oil and Gas Properties
We utilize the full-cost method of accounting for petroleum and
natural gas properties. Under this method, we capitalizes all costs associated
with acquisition, exploration and development of oil and natural gas reserves,
including leasehold acquisition costs, geological and geophysical expenditures,
lease rentals on undeveloped properties and costs of drilling of productive and
non-productive wells into the full cost pool on a country by country basis. As
of September 30, 2012, we had properties with proven reserves. When we obtain
proven oil and gas reserves, capitalized costs, including estimated future costs
to develop the reserves proved and estimated abandonment costs, net of salvage,
will be depleted on the units-of-production method using estimates of proved
reserves. The costs of unproved properties are not amortized until it is
determined whether or not proved reserves can be assigned to the properties. We
assess the property at least annually to ascertain whether impairment has
occurred. In assessing impairment we consider factors such as historical
experience and other data such as primary lease terms of the property, average
holding periods of unproved property, and geographic and geologic data. During
the years ended September 30, 2012 and 2011, no impairment was recorded.
Asset Retirement Obligations
We account for asset retirement obligations in accordance with
ASC 410-20, Asset Retirement Obligations.
ASC 410-20 requires us to record the fair value of an asset
retirement obligation as a liability in the period in which we incur an
obligation associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development and/or normal use of the
assets. Asset retirement obligations consists of estimated final well closure
and associated ground reclamation costs to be incurred by us in the future once
the economical life of our oil and gas wells are reached. The estimated fair
value of the asset retirement obligation is based on the current
25
cost escalated at an inflation rate and discounted at a credit
adjusted risk-free rate. This liability is capitalized as part of the cost of
the related asset and amortized over its useful life. The liability accretes
until we settle the obligation.
Recent Accounting Pronouncements
Our company has implemented all new accounting pronouncements
that are in effect and that may impact its financial statements and does not
believe that there are any other new accounting pronouncements that have been
issued that might have a material impact on its financial position or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Arkanova Energy Corporation
Austin, Texas
We have audited the accompanying consolidated balance sheets of
Arkanova Energy Corporation and its subsidiaries (collectively, the “Company”)
as of September 30, 2012 and 2011, and the related consolidated statements of
operations, stockholders’ deficit, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform an audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of the Arkanova
Energy Corporation and its subsidiaries as of September 30, 2012 and 2011 and
the results of their operations and their cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United States
of America.
The accompanying financial statements have been prepared
assuming that Arkanova Energy Corporation will continue as a going concern. As
discussed in Note 2 to the financial statements, the Company has incurred
cumulative losses since inception and has negative working capital, which raises
substantial doubt about its ability to continue as a going concern. Management’s
plans regarding those matters also are described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ MaloneBailey, LLP
www.malonebailey.com
Houston,
Texas
December 31, 2012
Arkanova Energy Corporation
Consolidated Balance Sheets
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
74,356
|
|
$
|
218,741
|
|
|
Oil and gas receivables
|
|
146,908
|
|
|
165,345
|
|
|
Prepaid expenses and other
|
|
28,035
|
|
|
50,319
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
249,299
|
|
|
434,405
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated
depreciation of $201,651 and $165,561
|
|
167,585
|
|
|
336,834
|
|
|
Oil and gas properties, full cost method
|
|
|
|
|
|
|
|
Evaluated, net of accumulated
depletion of $16,381,452 and $16,114,132
|
|
1,931,723
|
|
|
2,267,009
|
|
|
Other Assets
|
|
97,000
|
|
|
97,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
2,445,607
|
|
$
|
3,135,248
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
518,966
|
|
$
|
1,229,502
|
|
|
Accrued liabilities
|
|
124,271
|
|
|
726,164
|
|
|
Due to related party
|
|
826,379
|
|
|
–
|
|
|
Notes payable
|
|
7,630,538
|
|
|
12,334,490
|
|
|
Derivative liability
|
|
2,919
|
|
|
90,932
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
9,103,073
|
|
|
14,381,088
|
|
|
|
|
|
|
|
|
|
|
Loans payable
|
|
2,707
|
|
|
18,245
|
|
|
Asset retirement obligations
|
|
123,827
|
|
|
133,319
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
9,229,607
|
|
|
14,532,652
|
|
|
|
|
|
|
|
|
|
|
Contingencies and commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock, $0.001 par value,
1,000,000,000 shares authorized,
46,514,115 (September 30, 2011 –
43,309,367) shares issued and outstanding
|
|
46,514
|
|
|
43,309
|
|
|
Additional paid-in capital
|
|
18,503,507
|
|
|
17,737,572
|
|
|
Accumulated deficit
|
|
(25,334,021
|
)
|
|
(29,178,285
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ deficit
|
|
(6,784,000
|
)
|
|
(11,397,404
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficit
|
$
|
2,445,607
|
|
$
|
3,135,248
|
|
See accompanying notes to consolidated financial statements
Arkanova Energy Corporation
Consolidated Statements of Operations
|
|
|
Year
|
|
|
Year
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas sales
|
$
|
899,052
|
|
$
|
1,278,693
|
|
|
Operator income
|
|
81,000
|
|
|
47,067
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
980,052
|
|
|
1,325,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
1,325,678
|
|
|
1,973,142
|
|
|
Oil and gas production costs
|
|
929,795
|
|
|
1,744,289
|
|
|
Accretion expenses
|
|
11,019
|
|
|
10,253
|
|
|
Depletion
|
|
267,320
|
|
|
327,312
|
|
|
Gain on sale of oil & gas
properties
|
|
–
|
|
|
(1,438,396
|
)
|
|
Gain on transfer of oil & gas properties
|
|
(161,029
|
)
|
|
–
|
|
|
Gain on disposal of equipment
|
|
(43,549
|
)
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(1,349,182
|
)
|
|
(1,290,840
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(457,697
|
)
|
|
(739,727
|
)
|
|
Gain (loss) on derivative liability
|
|
88,013
|
|
|
(37,266
|
)
|
|
Gain on settlement of debt
|
|
5,563,130
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
3,844,264
|
|
$
|
(2,067,833
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share – basic and
diluted
|
$
|
0.08
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
outstanding
|
|
46,418,000
|
|
|
43,055,000
|
|
|
Diluted weighted average common shares outstanding
|
|
46,418,000
|
|
|
43,055,000
|
|
See accompanying notes to consolidated financial statements
Arkanova Energy Corporation
Consolidated Statements of Cash Flows
|
|
|
Year
|
|
|
Year
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
3,844,264
|
|
$
|
(2,067,833
|
)
|
|
|
|
|
|
|
|
|
|
Adjustment to reconcile net
income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
|
|
11,019
|
|
|
10,253
|
|
|
Depreciation
|
|
96,722
|
|
|
102,045
|
|
|
Depletion
|
|
267,320
|
|
|
327,312
|
|
|
(Gain) loss on derivative
liability
|
|
(88,013
|
)
|
|
37,266
|
|
|
Gain on transfer
of oil and gas properties
|
|
(161,029
|
)
|
|
–
|
|
|
Gain on sale of oil and gas
properties
|
|
–
|
|
|
(1,438,396
|
)
|
|
Gain on
settlement of debt
|
|
(5,563,130
|
)
|
|
–
|
|
|
Gain on disposal of equipment
|
|
(43,549
|
)
|
|
–
|
|
|
Stock-based
compensation
|
|
–
|
|
|
401,325
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets
and liabilities:
|
|
|
|
|
|
|
|
Prepaid expenses and other
receivables
|
|
22,287
|
|
|
298,507
|
|
|
Oil and gas
receivables
|
|
18,435
|
|
|
(58,781
|
)
|
|
Accounts payable and accrued
liabilities
|
|
(710,536
|
)
|
|
(664,266
|
)
|
|
Accrued interest
|
|
433,107
|
|
|
706,682
|
|
|
Due to related parties
|
|
226,379
|
|
|
(794
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Operating Activities
|
|
(1,646,724
|
)
|
|
(2,346,680
|
)
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
(20,474
|
)
|
|
(69,293
|
)
|
|
Proceeds from sale of
oil and gas property
|
|
–
|
|
|
3,100,000
|
|
|
Proceeds from sale of equipment
|
|
136,550
|
|
|
–
|
|
|
Oil and gas property
expenditures
|
|
(179,247
|
)
|
|
(2,097,192
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Used in (Provided by) Investing
Activities
|
|
(63,171
|
)
|
|
933,515
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on
debt
|
|
(34,490
|
)
|
|
(43,478
|
)
|
|
Loan from related party
|
|
800,000
|
|
|
–
|
|
|
Repayment of related
party loan
|
|
(200,000
|
)
|
|
–
|
|
|
Proceeds from issuance of promissory
notes
|
|
1,000,000
|
|
|
–
|
|
|
Proceeds from exercise
of stock options
|
|
–
|
|
|
18,750
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in) Financing
Activities
|
|
1,565,510
|
|
|
(24,728
|
)
|
|
|
|
|
|
|
|
|
|
Net Change in Cash
|
|
(144,385
|
)
|
|
(1,437,893
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents – beginning of
period
|
|
218,741
|
|
|
1,656,634
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents – end of period
|
$
|
74,356
|
|
$
|
218,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow and Other
Disclosures (Note 13)
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
Arkanova Energy Corporation
Consolidated Statement of
Stockholders’ Deficit
Period from September 30, 2010 through September 30, 2012
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par
|
|
|
Paid-in
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – September 30, 2010
|
|
39,722,168
|
|
$
|
39,722
|
|
$
|
16,361,084
|
|
$
|
(27,110,452
|
)
|
$
|
(10,709,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
–
|
|
|
–
|
|
|
401,325
|
|
|
–
|
|
|
401,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued upon the exercise of stock options
|
|
75,000
|
|
|
75
|
|
|
18,675
|
|
|
–
|
|
|
18,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued to settle interest payable on
Note Purchase Agreement
|
|
2,634,150
|
|
|
2,634
|
|
|
717,366
|
|
|
–
|
|
|
720,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in connection with Note Purchase
Agreement
|
|
878,049
|
|
|
878
|
|
|
239,122
|
|
|
–
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(2,067,833
|
)
|
|
(2,067,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – September 30, 2011
|
|
43,309,367
|
|
|
43,309
|
|
|
17,737,572
|
|
|
(29,178,285
|
)
|
|
(11,397,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued to settle interest payable on
Note Purchase Agreement
|
|
3,204,748
|
|
|
3,205
|
|
|
765,935
|
|
|
–
|
|
|
769,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year
|
|
–
|
|
|
–
|
|
|
–
|
|
|
3,844,264
|
|
|
3,844,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – September 30, 2012
|
|
46,514,115
|
|
$
|
46,514
|
|
$
|
18,503,507
|
|
$
|
(25,334,021
|
)
|
$
|
(6,784,000
|
)
|
See accompanying notes to consolidated financial statements
Arkanova Energy Corporation
Notes to Consolidated Financial Statements
NOTE 1: BASIS OF PRESENTATION
Arkanova Energy Corporation (formerly Alton Ventures, Inc.)
(“Arkanova” or the “Company”) was incorporated in the state of Nevada on
September 6, 2001 to engage in the acquisition, exploration and development of
mineral properties.
NOTE 2: GOING CONCERN
Arkanova is primarily engaged in the acquisition, exploration
and development of oil and gas resource properties. Arkanova has incurred losses
of $25,334,021 since inception and has a negative working capital of $8,853,774
at September 30, 2012. Management plans to raise additional capital through
equity and/or debt financings. These factors raise substantial doubt regarding
Arkanova’s ability to continue as a going concern.
NOTE 3: SUMMARY OF SIGNFICANT ACCOUNTING POLICIES
|
a)
|
Basis of Accounting
|
|
|
|
|
|
The Company’s consolidated financial statements are
prepared in accordance with accounting principles generally accepted in
the United States. These consolidated statements include the accounts of
the Company and its wholly-owned subsidiaries, Arkanova Development LLC,
Arkanova Acquisition Corp. and Provident Energy Associates of Montana,
LLC. All significant intercompany transactions and balances have been
eliminated. The Company has a September 30 year-end.
|
|
|
|
|
b)
|
Use of Estimates
|
|
|
|
|
|
The preparation of consolidated financial statements in
accordance with United States generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses in
the reporting period. The Company regularly evaluates estimates and
assumptions related to useful life and recoverability of long-lived
assets, stock-based compensation expense, deferred income tax asset
valuations and loss contingencies. The Company bases its estimates and
assumptions on current facts, historical experience and various other
factors that it believes to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying
values of assets and liabilities and the accrual of costs and expenses
that are not readily apparent from other sources. The actual results
experienced by the Company may differ materially and adversely from the
Company’s estimates. To the extent there are material differences between
the estimates and the actual results, future results of operations will be
affected.
|
|
|
|
|
c)
|
Cash and Cash Equivalents
|
|
|
|
|
|
For purposes of the statement of cash flows, Arkanova
considers all highly liquid instruments with maturity of three months or
less at the time of issuance to be cash equivalents.
|
|
|
|
|
d)
|
Basic and Diluted Net Income (Loss) Per Share
|
|
|
|
|
|
Arkanova computes net income (loss) per share in
accordance with ASC 260,
Earnings per Share
which requires
presentation of both basic and diluted earnings per share (EPS) on the
face of the income statement. Basic EPS is computed by dividing net income
(loss) available to common shareholders (numerator) by the weighted
average number of shares outstanding (denominator) during the period.
Diluted EPS gives effect to all dilutive potential common shares
outstanding during the period including convertible debt, stock options,
and warrants, using the treasury stock method, and convertible securities,
using the if-converted method. In computing diluted EPS, the average stock
price for the period is used in determining the number of shares assumed
to be purchased from the exercise of stock options or warrants. Diluted
EPS excludes all dilutive potential shares if their effect is
anti-dilutive.
|
|
e)
|
Financial Instruments
|
|
|
|
|
|
The Company’s financial instruments consist of cash and
cash equivalents, oil and gas receivables, other receivables, accounts
payable and accrued liabilities, due to related party, loans payable,
derivative liability and notes payable. Pursuant to ASC 820,
Fair Value
Measurements and Disclosures
and ASC 825,
Financial
Instruments
, fair value of assets and liabilities measured on a
recurring basis include derivative liability determined based on “Level 3”
inputs, which are significant and unobservable and have the lowest
priority. The Company believes that the recorded values of all of the
other financial instruments approximate their current fair values because
of their nature and respective maturity dates or durations.
|
|
|
|
|
f)
|
Property and Equipment
|
|
|
|
|
|
Property and equipment consists of computer hardware,
office furniture and equipment, vehicle, exploration equipment, computer
software and leasehold improvements and is recorded at cost, less
accumulated depreciation. Property and equipment is amortized on a
straight-line basis over its estimated life:
|
|
Computer hardware
|
3 years
|
|
Office furniture and equipment
|
5 years
|
|
Vehicle
|
5 years
|
|
Exploration equipment
|
5 years
|
|
Computer software
|
1 year
|
|
Leasehold improvements
|
5 years
|
|
g)
|
Revenue Recognition
|
|
|
|
|
|
The Company recognizes oil and gas revenue when
production is sold at a fixed or determinable price, persuasive evidence
of an arrangement exists, delivery has occurred and title has transferred,
and collectibility is reasonably assured.
|
|
|
|
|
h)
|
Accounts Receivable
|
|
|
|
|
|
Accounts receivable are generally reported net of an
allowance for uncollectible accounts. The allowance for uncollectible
accounts is determined based on past collection experience and an analysis
of outstanding balances. As of September 30, 2012, Arkanova has not
recorded an allowance as all receivables are deemed collectable at this
time.
|
|
|
|
|
i)
|
Oil and Gas Properties
|
|
|
|
|
|
Arkanova utilizes the full-cost method of accounting for
petroleum and natural gas properties. Under this method, Arkanova
capitalizes all costs associated with acquisition, exploration and
development of oil and natural gas reserves, including leasehold
acquisition costs, geological and geophysical expenditures, lease rentals
on undeveloped properties and costs of drilling of productive and
non-productive wells into the full cost pool on a country by country
basis. As of September 30, 2012, Arkanova had properties with proven
reserves. When Arkanova obtains proven oil and gas reserves, capitalized
costs, including estimated future costs to develop the reserves proved and
estimated abandonment costs, net of salvage, will be depleted on the
units-of-production method using estimates of proved reserves. The costs
of unproved properties are not amortized until it is determined whether or
not proved reserves can be assigned to the properties. Arkanova assesses
the property at least annually to ascertain whether impairment has
occurred. In assessing impairment Arkanova considers factors such as
historical experience and other data such as primary lease terms of the
property, average holding periods of unproved property, and geographic and
geologic data. During the years ended September 30, 2012 and 2011, no
impairment was recorded.
|
|
|
|
|
j)
|
Asset Retirement Obligations
|
|
|
|
|
|
Arkanova accounts for asset retirement obligations in
accordance with ASC 410-20,
Asset Retirement Obligations
. ASC
410-20 requires the Company to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs an
obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development and/or normal
use of the assets. Asset retirement obligations consists of estimated
final well closure and associated ground reclamation costs to be incurred
by the Company in the future once the economical life of its oil and gas
wells are reached. The estimated fair value of the asset retirement
obligation is based on the current cost escalated at an inflation rate and
discounted at a credit adjusted risk-free rate. This liability is
capitalized as part of the cost of the related asset and amortized over
its useful life. The liability accretes until the Company settles the
obligation.
|
|
k)
|
Long-lived Assets
|
|
|
|
|
|
In accordance with ASC 360,
Property, Plant and
Equipment
, the carrying value of intangible assets and other
long-lived assets is reviewed on a regular basis for the existence of
facts or circumstances that may suggest impairment. Arkanova recognizes
impairment when the sum of the expected undiscounted future cash flows is
less than the carrying amount of the asset. Impairment losses, if any, are
measured as the excess of the carrying amount of the asset over its
estimated fair value.
|
|
|
|
|
l)
|
Concentration of Risk
|
|
|
|
|
|
Arkanova maintains its cash accounts in a commercial bank
located in Texas, United States. Arkanova's cash accounts are uninsured
and insured business checking accounts and deposits maintained in U.S.
dollars. As at September 30, 2012, Arkanova has not engaged in any
transactions that would be considered derivative instruments on hedging
activities.
|
|
|
|
|
m)
|
Comprehensive Loss
|
|
|
|
|
|
ASC 220,
Comprehensive Income
establishes
standards for the reporting and display of comprehensive loss and its
components in the financial statements. As at September 30, 2012 and 2011,
Arkanova has no items that represent comprehensive loss and, therefore,
has not included a schedule of comprehensive loss in the financial
statements.
|
|
|
|
|
n)
|
Income Taxes
|
|
|
|
|
|
Potential benefits of income tax losses are not
recognized in the accounts until realization is more likely than not.
Arkanova has adopted ASC 740,
Income Taxes
as of its inception.
Pursuant to ASC 740, Arkanova is required to compute tax asset benefits
for net operating losses carried forward. The potential benefits of net
operating losses have not been recognized in these financial statements
because Arkanova cannot be assured it is more likely than not it will
utilize the net operating losses carried forward in future
years.
|
|
|
|
|
o)
|
Fair value
|
|
|
|
|
|
Accounting standards regarding fair value of financial
instruments define fair value, establish a three-level hierarchy which
prioritizes and defines the types of inputs used to measure fair value,
and establish disclosure requirements for assets and liabilities presented
at fair value on the consolidated balance sheets. Fair value is the amount
that would be received from the sale of an asset or paid for the transfer
of a liability in an orderly transaction between market participants. A
liability is quantified at the price it would take to transfer the
liability to a new obligor, not at the amount that would be paid to settle
the liability with the creditor.
|
|
|
|
|
|
The three-level hierarchy is as follows:
• Level 1
inputs consist of unadjusted quoted prices for identical instruments in
active markets.
• Level 2 inputs consist of quoted prices for similar
instruments.
• Level 3 valuations are derived from inputs which are
significant and unobservable and have the lowest priority.
|
Financial assets and liabilities are
classified in their entirety based on the lowest level of input that is
significant to the fair value measurement. The Company has determined that
certain warrants outstanding as of the date of these financial statements
qualify as derivative financial instruments under the provisions of ASC Topic
No. 815-40,
Derivatives and Hedging – Contracts in an Entity’s Own Stock.
(See Note 9 – Derivative Instruments) The fair value of these warrants was
determined using a lattice model with any change in fair value during the period
recorded in earnings as Gain (loss) on derivative liability. Significant inputs
used to calculate the fair value of the warrants include expected volatility,
risk-free interest rate and management’s assumptions regarding the likelihood of
a future repricing of these warrants pursuant to the down-round provision.
The derivative warrant liability is the
only financial asset or liability that is accounted for at fair value, using a
Level 3 valuation technique, on a recurring basis as of September 30, 2012.The
carrying amounts reported in the balance sheet for cash, oil and gas
receivables, other receivables, accounts payable and accrued liabilities, due to
related party, loans payable, and notes payable approximate their fair market
value based on the short-term maturity of these instruments.
|
p)
|
Stock-based Compensation
|
|
|
|
|
|
The Company records stock-based compensation in
accordance with ASC 718,
Compensation – Stock Based Compensation
and ASC 505,
Equity Based Payments to Non-Employees
, using the
fair value method. All transactions in which goods or services are the
consideration received for the issuance of equity instruments are
accounted for based on the fair value of the consideration received or the
fair value of the equity instrument issued, whichever is more reliably
measurable. Equity instruments issued to employees and the cost of the
services received as consideration are measured and recognized based on
the fair value of the equity instruments issued.
|
|
|
|
|
q)
|
Recent Accounting Pronouncements
|
|
|
|
|
|
The Company has implemented all new accounting
pronouncements that are in effect and that may impact its financial
statements and does not believe that there are any other new accounting
pronouncements that have been issued that might have a material impact on
its financial position or results of operations.
|
NOTE 4: OIL AND GAS INTERESTS
Arkanova is currently participating in oil and gas exploration
activities in Arkansas, Colorado and Montana. All of Arkanova’s oil and gas
properties are located in the United States.
Proven and Developed Properties, Arkansas and Colorado and
Montana
As at September 30, 2012 and 2011, the present value of the estimated future net revenue exceeds the carrying value of the evaluated oil and gas properties, therefore, no impairment is required. The carrying value of Arkanova’s evaluated oil and gas properties at September 30, 2012 and 2011 was $1,931,723 and $2,267,009, respectively.
|
(a)
|
On November 23, 2010, the Company received $1,500,000
in proceeds related to the last instalment of the Purchase and Sale Agreement
dated April 9, 2010 with Knightwall. The proceeds were applied against
the Full Cost Pool. On November 22, 2010, Provident entered into an option
agreement with Knightwall pursuant to which Provident granted an option
to Knightwall to purchase an additional 5% working interest in the leasehold
interests comprising Provident’s Two Medicine Cut Bank Sand Unit
in Pondera and Glacier Counties, Montana. The option is exercisable by
Knightwall until expiry on March 31, 2011. Upon the grant of the option,
Knightwall provided a $100,000 (paid) non refundable deposit, the payment
of which will not be applied against the purchase price in the event the
option is exercised. On March 15, 2011, Knightwall exercised the option
and paid $1,500,000 to Provident on April 5, 2011. The proceeds of $1,500,000
were applied against the full cost pool resulting in a gain on sale of
oil and gas properties in the amount of $1,438,396.
|
|
|
|
|
(b)
|
On October 21, 2011, Arkanova’s wholly owned subsidiary,
Arkanova Acquisition Corporation (“Acquisition”), entered into a
Conversion and Loan Modification Agreement and a Note Purchase Agreement
with Aton Select Funds Limited (“Aton”) pursuant to which Aton agreed to
convert $6,000,000 of the remaining principal balance of the note
described in Note 7(b) (the “2009 Note”) into a ten percent (10%) working
interest in the oil and gas leases comprising the Company’s Two Medicine
Cut Bank Sand Unit in Pondera and Glacier Counties, Montana. The Company
recognized a gain of $161,029 on the transfer of the 10%
interest.
|
NOTE 5: EARNINGS (LOSS) PER SHARE
A reconciliation of the components of basic and diluted net
income per common share is presented in the tables below:
|
|
|
For the Year Ended September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per
|
|
|
Income
|
|
|
Shares
|
|
|
Per
|
|
|
|
|
(Loss)
|
|
|
Outstanding
|
|
|
Share
|
|
|
(Loss)
|
|
|
Outstanding
|
|
|
Share
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to common stock
|
$
|
3,844,264
|
|
|
46,418,000
|
|
$
|
0.08
|
|
$
|
(2,067,833
|
)
|
|
43,055,000
|
|
$
|
(0.05
|
)
|
|
Effective of Dilutive
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and other
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to common stock, including assumed
conversions
|
$
|
3,844,264
|
|
|
46,418,000
|
|
$
|
0.08
|
|
$
|
(2,067,833
|
)
|
|
43,055,000
|
|
$
|
(0.05
|
)
|
NOTE 6: RELATED PARTY TRANSACTIONS
|
(a)
|
On October 8, 2010, the Company granted an aggregate of
1,500,000 stock options exercisable at $0.25 per share to officers and
directors of the Company. The options expire on October 8, 2015.
|
|
|
|
|
|
(b)
|
On July 17, 2012, the Company entered into an executive
employment agreement with the President of the Company, pursuant to which
the Company agreed to pay an annual salary of $240,000 in consideration
for carrying out the duties as an executive of the Company. In the event
the Company undergoes a change of control event, the agreement will
automatically terminate and the Company is required to pay the President
an amount equal to the total of:
|
|
|
|
|
|
|
1)
|
$360,000 (calculated as 18 months salary payable under
the agreement); and
|
|
|
|
|
|
|
2)
|
The cost for a period of 18 months to obtain family
and/or spousal health insurance that is similar in coverage to that
provided to the President as of the date of the change in
control.
|
|
|
|
|
|
(c)
|
On July 17, 2012, the Company entered into an executive
employment agreement with the Chief Financial Officer of the Company (the
“CFO”), pursuant to which the Company agreed to pay an annual salary of
$190,000 in consideration for carrying out the duties as an executive of
the Company. In the event the Company undergoes a change of control event,
the agreement will automatically terminate and the Company is required to
pay the CFO an amount equal to the total of:
|
|
|
|
|
|
|
1)
|
$285,000 (calculated as 18 months salary payable under
the agreement); and
|
|
|
|
|
|
|
2)
|
The cost for a period of 18 months to obtain family
and/or spousal health insurance that is similar in coverage to that
provided to the CFO as of the date of the change in control.
|
|
|
|
|
|
(d)
|
During the year ended September 30, 2012, the Company
received a $400,000 loan and two $200,000 loans from the President of the
Company, which are non-interest bearing. The $400,000 loan is to be repaid
by September 30, 2012. The two $200,000 loans have no terms of repayment.
On July 5, 2012, the Company repaid one of the $200,000 loans. On October
4, 2012, the Company repaid the $400,000 loan and the remaining $200,000
loan. Refer to Note 15(a).
|
|
|
|
|
|
(e)
|
At September 30, 2012, the Company owed management fees
of $180,000 (2011 - $0) to the President of the Company and $46,333 (2011
- $0) to the CFO of the Company.
|
|
|
|
|
|
(f)
|
(f) During the year ended September 30, 2012, the Company sold two vehicles to the President of the Company for $65,000 and realized a gain of $14,159 on disposal of equipment.
|
NOTE 7: NOTES PAYABLE
|
(a)
|
On April 17, 2008, Arkanova received $300,000 and issued
a promissory note. Under the terms of the promissory note, the amount was
unsecured, accrued interest at 10% per annum, and was due on April 16,
2009. This note’s maturity date has been extended through several
extensions from April 16, 2009 through July 17, 2012. On July 17, 2012,
Arkanova did not repay the $300,000 note.
|
|
|
|
|
|
Arkanova evaluated the application of ASC 470-50,
Modifications and Extinguishments
and ASC 470-60,
Troubled Debt
Restructurings by Debtors
and concluded that the revised terms
constituted a debt modification, rather than a debt extinguishment or
troubled debt restructuring.
|
|
|
|
|
|
On October 10, 2012, the Company repaid the $300,000
note. The accrued interest on the $300,000 note was forgiven by the note
holder. Refer to Note 15(b).
|
|
|
|
|
(b)
|
On October 1, 2009, the Company’s subsidiary borrowed
$1,168,729 and consolidated its outstanding promissory note balances into
one promissory note in the principal amount for $12,000,000 (the “2009
Note”). The loan also adds accrued interest of $818,771 to this principal
amount. The 2009 Note bears interest at 6% per annum, is due on September
30, 2011, and is secured by our guarantee and also a pledge of our wholly
owned subsidiary, Provident. Interest is payable 10 days after maturity in
common shares. The number of shares payable will be determined by dividing
$1,440,000 by the average stock price over the 15 business day period
immediately preceding the date on which the 2009 Note matures. On October
22, 2010, Arkanova issued 2,634,150 shares of common stock with a fair
value of $720,000 to Aton Select Funds Limited as an interest payment on
the 2009 Note of $12,000,000. On October 25, 2011, Arkanova issued
3,204,748 shares of common stock with a fair value of $769,140 to Aton
Select Funds Limited to settle interest payment of $720,000 on the 2009
Note, resulting in a loss of settlement of debt of $49,140. (Refer to Note
8).
|
|
|
|
|
|
On October 21, 2011, the Company’s subsidiary entered
into a Conversion and Loan Modification Agreement and a Note Purchase
Agreement with the note holder which were effective as of October 1, 2011,
and pursuant to which the note holder agreed to (i) convert $6,000,000 of
the remaining principal balance of the 2009 Note into a ten percent (10%)
working interest in the oil and gas leases comprising the Company’s Two
Medicine Cut Bank Sand Unit in Pondera and Glacier Counties, Montana, (ii)
loan our subsidiary an additional $1,000,000 (the “Additional Loan
Amount”), (iii) consolidate the remaining post-conversion outstanding
principal balance
|
under the 2009 Note and the Additional
Loan Amount into one new promissory note in the principal amount of $7,000,000
(the “2011 Note”).
The 2011 Note bears interest at the
rate of 6% per annum, is due and payable on September 30, 2012, and, as was the
case with the 2009 Note, is secured by a pledge of all of Acquisition’s interest
in its wholly owned subsidiary, Provident. Interest on the 2011 Note is payable
10 days after maturity in shares of common stock. The number of shares of common
stock payable as interest on the 2011 Note will be determined by dividing
$420,000 by the average stock price over the 15 business day period immediately
preceding the date on which the 2011 Note matures.
Arkanova evaluated the application of
ASC 470-50 and ASC 470-60 and concluded that the revised terms constituted a
troubled debt restructuring rather than a debt modification or debt
extinguishment. The 10% working interest in Arkanova’s oil and gas properties
was revalued at fair market value and a gain on transfer of assets of $161,029
was recognized by Arkanova. Arkanova also recorded a gain on settlement of debt
of $5,612,270 equal to the difference between the carrying value of the debt and
the fair value of the assets transferred. Pursuant to ASC 470-60, if the
remaining debt is continued with a modification of terms, it is necessary to
compare the total future cash flows of the restructured debt with the carrying
value of the original debt. If the total future cash flows of the restructured
debt exceed the total carrying amount at the time of restructuring, no
adjustment is made to the carrying value of the debt. Arkanova did not change
the carrying amount of the debt as the total future cash payments are greater
than the carrying value of the note.
On July 1, 2012, the Company’s
subsidiary entered into a Loan Modification Agreement to borrow an additional
$1,000,000 and consolidate its 2011 Note into one promissory note in the
principal amount for $8,315,000 (the “2012 Note”), including accrued interest of
$315,000. The 2012 Note bears interest at 6% per annum, is due on June 30, 2013,
and, as was the case with the 2011 Note, is secured by our guarantee and also a
pledge of all of Acquisition’s interest in its wholly owned subsidiary,
Provident. Interest on the 2012 Note shall be paid within 10 business days
following the maturity date in shares of common stock of the Company. The number
of shares of common stock shall be determined by dividing $498,900 by the
average stock price of the Company over the 15 business day period immediately
preceding the maturity date. On October 3, 2012, the Company received the
additional $1,000,000 from the note holder.
NOTE 8: COMMON STOCK
Common stock
|
a)
|
On October 25, 2011, Arkanova issued 3,204,748 shares of common
stock with a fair value of $769,140 to Aton Select Funds Limited as an interest
payment on the promissory note of $12,000,000. Refer to Note 7(b).
|
|
|
|
|
b)
|
On October 22, 2010, Arkanova issued 75,000 common shares
upon the exercise of 75,000 stock options by one of the employees at an
exercise price of $0.25 per common share for gross proceeds of $18,750.
|
|
|
|
|
c)
|
On October 26, 2010, Arkanova issued 2,634,150 shares of
common stock with a fair value of $720,000 to Aton Select Funds Limited as
an interest payment on the promissory note of $12,000,000. Refer to Note
7(b).
|
|
|
|
|
d)
|
On October 26, 2010, Arkanova issued 878,049 shares of
common stock with a fair value of $240,000 to Aton Select Funds Limited as
further consideration for a loan obtained from Aton Select Funds Limited.
Refer to Note 7(b).
|
Stock Options
On April 25, 2007, Arkanova adopted a stock option plan named
the 2007 Stock Option Plan (the “Plan”), the purpose of which is to attract and
retain the best available personnel and to provide incentives to employees,
officers, directors and consultants, all in an effort to promote the success of
Arkanova. Prior to the grant of options under the 2007 Stock Option Plan, there
were 5,000,000 shares of Arkanova’s common stock available for issuance under
the plan.
On July 17, 2010, Arkanova amended and restated the 2008
Amended Stock Option Plan to revise the termination provision for vested
Non-Qualified Stock Options. The termination date of vested Non-Qualified Stock
Options was extended from a period of three months to a period of one year.
During the year ended September 30, 2012, Arkanova did not issue
any stock options. During the year ended September 30, 2011, Arkanova granted
1,725,000 stock options, exercisable at $0.25 per share and expire on October
8, 2015. The weighted average grant date fair value of stock options granted
during the year ended September 30, 2011 was $0.23. During the year ended September
30, 2012, no stock option was exercised. During the year ended September 30,
2012 and 2011 Arkanova recorded stock-based compensation of $0 and $401,325,
respectively, as general and administrative expense.
A summary of Arkanova’s stock option activity is as
follows:
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2010
|
|
3,303,333
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
Granted
|
|
1,725,000
|
|
|
0.25
|
|
|
|
|
|
|
|
|
Exercised
|
|
(75,000
|
)
|
|
0.25
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2011
|
|
4,953,333
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
Granted
|
|
–
|
|
|
–
|
|
|
|
|
|
|
|
|
Exercised
|
|
–
|
|
|
–
|
|
|
|
|
|
|
|
|
Expired
|
|
(300,000
|
)
|
|
1.35
|
|
|
|
|
|
|
|
|
Outstanding,
September 30, 2012
|
|
4,653,333
|
|
$
|
0.27
|
|
|
2.00
|
|
$
|
–
|
|
|
Exercisable, September 30, 2012
|
|
4,653,333
|
|
$
|
0.27
|
|
|
2.00
|
|
$
|
–
|
|
The fair value of each option grant was estimated on the date
of the grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
|
|
|
Year
|
|
|
Year
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
–
|
|
|
0.00%
|
|
|
Expected volatility
|
|
–
|
|
|
214%
|
|
|
Expected life (in years)
|
|
–
|
|
|
2.50
|
|
|
Risk-free interest rate
|
|
–
|
|
|
0.45%
|
|
At September 30, 2012, there was $0 of unrecognized
compensation costs related to non-vested share-based compensation arrangements
granted under the Plan. There was $0 intrinsic value associated with the
outstanding options at September 30, 2012.
Warrants
A summary of the changes in the Company’s common share purchase
warrants is presented below:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2011 and 2010
|
|
1,168,235
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
–
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2012
|
|
1,168,235
|
|
$
|
0.48
|
|
|
0.46
|
|
$
|
–
|
|
As at September 30, 2012, the following common share purchase
warrants were outstanding:
|
|
|
Remaining Contractual Life
|
|
Number of Warrants
|
Exercise Price
|
(years)
|
|
294,425
|
$ 1.00
|
0.08
|
|
100,000
|
$ 1.00
|
1.25
|
|
773,810
|
$ 0.21
|
0.50
|
|
|
|
|
|
1,168,235
|
|
|
NOTE 9: DERIVATIVE INSTRUMENTS
In June 2008, the FASB ratified ASC 815-15,
Derivatives and
Hedging – Embedded Derivatives
(“ASC 815-15”). ASC 815-15, specifies that a
contract that would otherwise meet the definition of a derivative, but is both
(a) indexed to its own stock and (b) classified in stockholders’ equity in the
statement of financial position would not be considered a derivative financial
instrument. ASC 815-15 provides a new two-step model to be applied in
determining whether a financial instrument or an embedded feature is indexed to
an issuer’s own stock, including evaluating the instrument’s contingent exercise
and settlement provisions, and thus able to qualify for the ASC 815-15 scope
exception. It also clarifies the impact of foreign currency denominated strike
prices and market-based employee stock option valuation instruments on the
evaluation. ASC 815-15 is effective for the first annual reporting period
beginning after December 15, 2008 and early adoption is prohibited.
On March 19, 2008 (the “Closing Date”), pursuant to the John
Thomas Bridge & Opportunity Fund Warrant Agreement (the “Warrant
Agreement”), Arkanova issued common stock purchase warrants to purchase up to
250,000 additional shares of common stock (the “Warrants”). The initial exercise
price of the Warrants is $0.65 per share, subject to adjustment therein, with a
term of exercise equal to 5 years.
The Warrants are subject to adjustment pursuant to certain
events, including a full ratchet reset feature. Additionally, the number of
shares of common stock to be received upon the exercise of the Warrants (the
“Warrant Shares”) and the exercise price of the Warrants are subject to
adjustment for reverse and forward stock splits, stock dividends, stock
combinations and other similar transactions of the common stock that occur after
the Closing Date.
The warrants issued during the year ended September 30, 2008
are not afforded equity treatment because these warrants have a down-round
ratchet provision on the exercise price. As a result, the warrants are not
considered indexed to the Company’s own stock, and as such, the fair value of
the derivative liability is reflected on the balance sheet and all future
changes in the fair value of these warrants are recognized currently in earnings
in the consolidated statement of operations under the caption “Gain (loss) on
derivative liability” until such time as the warrants are exercised or expire.
The total fair values of the warrants at the end of the year ended September 30,
2012, were determined using a lattice model and the changes in fair value were
recognized in the consolidated statements of operations.
The warrants were valued as of September 30, 2012 using a
multi-nominal lattice model with the following assumptions:
|
|
-
|
The 5 year warrants issued to the investor on March 19,
2008 included 250,000 warrants adjusted to 601,852 with an exercise price
of $0.65 reset to $0.27 in 2009 and reset from 601,852 to 738,636 shares
following the October 11, 2011 reset to an exercise price of $0.22; and
adjusted from 738,636 to 773,810 shares following Q3 2012 reset to an
exercise price of $0.21.
|
|
|
|
|
|
|
-
|
The stock price would fluctuate with Company projected
volatility.
|
|
|
|
|
|
|
-
|
The stock price would fluctuate with an annual
volatility. The projected volatility curve was based on historical
volatilities of the Company for the valuation periods. The projected
volatility curve for the valuation dates was:
|
|
|
|
1 year
|
2 year
|
3 year
|
4 year
|
5 year
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
155%
|
241%
|
328%
|
361%
|
417%
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
206%
|
257%
|
316%
|
386%
|
417%
|
|
|
-
|
The Holder would not exercise the warrant as they become
exercisable (effective registration is projected 4 months from issuance)
at target price of 2 times the projected reset price or higher but would
hold the warrants to maturity.
|
|
|
|
|
|
|
-
|
The Holder would exercise the warrant at maturity if the
stock price was above the project reset prices.
|
|
|
|
|
|
|
-
|
A 10% probability of a reset event and a projected
financing each year in December and June at prices approximating 100% of
market.
|
|
|
|
|
|
|
-
|
No warrants have been exercised or expired.
|
The impact of ASC 815-15 for the year ending September 30, 2012
resulted in a decrease in the derivative liability of $88,013 with a
corresponding gain of $88,013 on derivative instruments. The fair value of the
derivative liability was $2,919 and $90,932 at September 30, 2012 and 2011,
respectively.
NOTE 10: FAIR VALUE MEASUREMENTS
ASC 825 defines fair value as the price that would be received
from selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. In determining fair value
for assets and liabilities required or permitted to be recorded at fair value,
The Company considers the principal or most advantageous market in which it
would transact and it considers assumptions that market participants would use
when pricing the asset or liability.
Fair Value Hierarchy
ASC 825 establishes a fair value hierarchy that requires an
entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. A financial instrument's
categorization within the fair value hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. ASC 825 establishes
three levels of inputs that may be used to measure fair value.
Level 1
Level 1 applies to assets and
liabilities for which there are quoted prices in active markets for identical
assets or liabilities. Valuations are based on quoted prices that are readily
and regularly available in an active market and do not entail a significant
degree of judgment.
Level 2
Level 2 applies to assets and
liabilities for which there are other than Level 1 observable inputs such as
quoted prices for similar assets or liabilities in active markets, quoted prices
for identical assets or liabilities in markets with insufficient volume or
infrequent transactions (less active markets), or model-derived valuations in
which significant inputs are observable or can be derived principally from, or
corroborated by, observable market data.
Level 2 instruments require more
management judgment and subjectivity as compared to Level 1 instruments. For
instance:
Determining which instruments are most
similar to the instrument being priced requires management to identify a sample
of similar securities based on the coupon rates, maturity, issuer, credit rating
and instrument type, and subjectively select an individual security or multiple
securities that are deemed most similar to the security being priced; and
Determining whether a market is
considered active requires management judgment.
Level 3
Level 3 applies to assets and
liabilities for which there are unobservable inputs to the valuation methodology
that are significant to the measurement of the fair value of the assets or
liabilities. The determination of fair value for Level 3 instruments requires
the most management judgment and subjectivity.
Pursuant to ASC 825, the fair values of assets and liabilities
measured on a recurring basis include derivative liability determined based on
“Level 3” inputs, which are significant and unobservable and have the lowest
priority. The Company believes that the recorded values of all of the other
financial instruments approximate their current fair values because of their
nature and respective relatively short maturity dates or durations.
Assets and liabilities measured at fair value on a recurring
basis were presented on the Company's consolidated balance sheet as of September
30, 2012 as follows:
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
Balance
|
|
|
Balance
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
as of
|
|
|
as of
|
|
|
|
|
Instruments
|
|
|
Inputs
|
|
|
Inputs
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2012
|
|
|
2011
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
$
|
–
|
|
$
|
–
|
|
$
|
2,919
|
|
$
|
2,919
|
|
$
|
90,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
$
|
–
|
|
$
|
–
|
|
$
|
2,919
|
|
$
|
2,919
|
|
$
|
90,932
|
|
NOTE 11: COMMITMENTS
See Note 7.
|
(a)
|
The Company, as an owner or lessee and operator of oil
and gas properties, is subject to various federal, state and local laws
and regulations relating to discharge of materials into, and protection
of, the environment. These laws and regulations may, among other things,
impose liability on the lessee under an oil and gas lease for the cost of
pollution clean-up resulting from operations and subject the lessee to
liability for pollution damages. In some instances, the Company may be
directed to suspend or cease operations in the affected area. The Company
maintains insurance coverage, which it believes is customary in the
industry, although the Company is not fully insured against all
environmental risks. The Company is not aware of any environmental claims
existing as of September 30, 2012, which have not been provided for,
covered by insurance or otherwise have a material impact on its financial
position or results of operations. There can be no assurance, however,
that current regulatory requirements will not change, or past
noncompliance with environmental laws will not be discovered on the
Company’s properties.
|
|
|
|
|
(b)
|
On June 10, 2011, the Company commenced a lease agreement
for a period of 62 months. The monthly base rate begins at $2,750 and
increases every 12 months at the average rate of $2,979 per month over the
term of the lease.
|
|
|
|
|
c)
|
On December 14, 2012, we reached a preliminary settlement
with Billie Eustice, whereby it is contemplated that we will pay Ms. Eustice
$150,000 over four years beginning January 28, 2013 in 48 equal monthly
installments in settlement of all outstanding matters and issues between
Billie Eustice and us, including the balance owing on the consulting
agreement in the amount of $125,000, oil barrels in the tanks at time of
purchase, and a refund of $12,000 that was a tax refund prior to the
purchase of Provident Energy and cashed by Provident Energy after the
purchase.
|
NOTE 12: ASSET RETIREMENT OBLIGATION
Changes in Arkanova’s asset retirement obligations were as
follows:
|
|
|
|
Year ended
|
|
|
Year ended
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligations, beginning of
period
|
$
|
133,319
|
|
$
|
186,902
|
|
|
|
Revision due to property sales
|
|
(20,511
|
)
|
|
(63,836
|
)
|
|
|
Accretion expense
|
|
11,019
|
|
|
10,253
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligations, end of period
|
$
|
123,827
|
|
$
|
133,319
|
|
During the year ended September 30, 2012, the Company reduced
the asset retirement obligations by $20,511 due to the sale of 10% of the leasehold
interests comprising Provident’s Two Medicine Cut Bank Sand Unit in Pondera
and Glacier Counties, Montana. Refer to Note 4(b).
During the year ended September 30, 2011, the Company reduced
the asset retirement obligations by $63,836 due to the sale of 35% of the leasehold
interests comprising Provident’s Two Medicine Cut Bank Sand Unit in Pondera
and Glacier Counties, Montana.
NOTE 13: SUPPLEMENTAL CASH FLOW AND OTHER
DISCLOSURES
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Supplemental Disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
$
|
24,657
|
|
$
|
30,000
|
|
|
|
Income taxes paid
|
$
|
–
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash Financing and Investing Activities
|
|
|
|
|
|
|
|
|
Shares issued to extinguish
liability
|
$
|
720,000
|
|
$
|
960,000
|
|
|
|
Asset retirement obligation revision due to
property sales
|
$
|
20,511
|
|
$
|
63,836
|
|
NOTE 14: INCOME TAXES
Potential benefits of income tax losses are not recognized in
the accounts until realization is more likely than not. The Company has incurred
non-capital losses as scheduled below:
|
Year of
|
|
|
|
|
Year of
|
|
|
Loss
|
|
Amount
|
|
|
Expiration
|
|
|
|
|
|
|
|
|
|
|
2006
|
$
|
16,548
|
|
|
2026
|
|
|
2007
|
|
493,777
|
|
|
2027
|
|
|
2008
|
|
1,199,618
|
|
|
2028
|
|
|
2009
|
|
3,853,251
|
|
|
2029
|
|
|
2010
|
|
3,008,921
|
|
|
2030
|
|
|
2011
|
|
2,628,028
|
|
|
2031
|
|
|
2012
|
|
1,636,396
|
|
|
2032
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,836,539
|
|
|
|
|
Pursuant to ASC 740, the Company is required to compute tax
asset benefits for non-capital losses carried forward. Potential benefit of
non-capital losses have not been recognized in these financial statements
because the Company cannot be assured it is more likely than not it will utilize
the losses carried forward in future years.
Significant components of the Company’s deferred tax assets and
liabilities, after applying enacted corporate income tax rates, are as follows:
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Deferred income tax assets
|
|
|
|
|
|
|
|
|
Net losses carried
forward
|
$
|
4,492,789
|
|
$
|
3,920,050
|
|
|
|
|
|
4,492,789
|
|
|
3,920,050
|
|
|
|
Valuation
allowance
|
|
(4,492,789
|
)
|
|
(3,920,050
|
)
|
|
|
Net deferred income tax asset
|
$
|
–
|
|
$
|
–
|
|
The valuation allowance reflects the Company’s estimate that
the tax assets, more likely than not, will not be realized and consequently have
not been recorded in these financial statements
NOTE 15: SUBSEQUENT EVENTS
|
(a)
|
On October 4, 2012, the Company repaid a $400,000 loan and a $200,000 loan to the President of the Company. Refer to Note 6(l).
|
|
|
|
|
(b)
|
On October 10, 2012, the Company repaid the $300,000 promissory note due to Global Project Finance AG as describe in Note 7(a). Global Project Finance AG also agreed to forgive the accrued interest on the $300,000
promissory note.
|
|
|
|
|
(c)
|
Subsequent to September 30, 2012, the Company issued 3,000,000 shares of common stock to the President of the Company at $0.10 per share for cash proceeds of $300,000.
|
NOTE 16: SUPPLEMENTAL OIL AND GAS INFORMATION
Capitalized Costs Related to Oil and Gas Producing
Activities
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Evaluated oil and gas properties
|
$
|
18,313,175
|
|
$
|
18,381,141
|
|
|
Less accumulated
depletion and impairment
|
|
(16,381,452
|
)
|
|
(16,114,132
|
)
|
|
|
|
|
|
|
|
|
|
Net capitalized
costs for evaluated oil and gas properties
|
$
|
1,931,723
|
|
$
|
2,267,009
|
|
Costs incurred in Oil and Gas Property Acquisition,
Exploration and Development Activities
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Evaluated Property Acquisition Costs
|
$
|
–
|
|
$
|
–
|
|
|
Evaluated
Exploration Costs
|
|
179,247
|
|
|
2,033,354
|
|
|
|
|
|
|
|
|
|
|
|
$
|
179,247
|
|
$
|
2,033,354
|
|
Results of Operations from Oil and Gas Producing
Activities
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
980,052
|
|
$
|
1,325,760
|
|
|
Production costs
|
|
(929,795
|
)
|
|
(1,744,289
|
)
|
|
Depletion, depreciation and amortization
|
|
(267,320
|
)
|
|
(327,312
|
)
|
|
Loss from oil and
gas operations
|
$
|
(217,063
|
)
|
$
|
(745,841
|
)
|
Reserve Information
The following estimates of proved reserve and proved developed
reserve quantities and related standardized measure of discounted net cash flow
are estimates only, and do not purport to reflect realizable values or fair
market values of the Company’s reserves. The Company emphasizes that reserve
estimates are inherently imprecise and that estimates of new discoveries are
more imprecise than those of producing oil and gas properties. Accordingly,
these estimates are expected to change as future information becomes available.
All of the Company’s reserves are located in the United States.
Future cash flows are computed by applying prices of oil which
are based on the respective 12-month unweighted average of the first of the
month prices to period end quantities of proved oil reserves. The 12-month
unweighted average of the first of the month market prices used for the
standardized measures below was $79.31/barrel and $78.22/barrel for liquids for
September 30, 2012 and 2011. Future operating expenses and development costs are
computed primarily by the Company’s petroleum engineers by estimating the
expenditures to be incurred in developing and producing the Company’s proved
natural gas and oil reserves at the end of the period, based on period end costs
and assuming continuation of existing economic conditions.
Future income taxes are based on period end statutory rates,
adjusted for tax basis and applicable tax credits. A discount factor of ten
percent was used to reflect the timing of future net cash flows. The
standardized measure of discounted future net cash flows is not intended to
represent the replacement cost of fair value of the Company’s natural gas and
oil properties. An estimate of fair value would also take into account, among
other things, the recovery of reserves not presently classified as proved,
anticipated future changes in prices and costs, and a discount factor more
representative of the time value of money and the risks inherent in reserve
estimate of natural gas and oil producing operations.
Proved Oil and Gas Reserve Quantities
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
|
Oil
|
|
|
|
|
|
(Mbbl)
|
|
|
(Mbbl)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of the year
|
|
130,746
|
|
|
155,713
|
|
|
|
Revisions of previous estimates
|
|
(11,442
|
)
|
|
(9,138
|
)
|
|
|
Production
|
|
(11,511
|
)
|
|
(15,829
|
)
|
|
|
Transfer of oil
and gas interest
|
|
(20,115
|
)
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of the
year
|
|
87,678
|
|
|
130,746
|
|
Standardized Measure of Discounted Future Net Cash Flow
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Future cash inflows
|
$
|
6,953,704
|
|
$
|
9,474,984
|
|
|
|
Future production and development costs
|
|
(3,098,052
|
)
|
|
(4,635,163
|
)
|
|
|
Future income tax expenses
|
|
(1,349,478
|
)
|
|
(1,693,937
|
)
|
|
|
Future net cash flows
|
|
2,506,174
|
|
|
3,145,884
|
|
|
|
10% annual discount for estimated timing of cash flows
|
|
(988,624
|
)
|
|
(1,265,820
|
)
|
|
|
Standardized
measure of discounted future net cash flows
|
$
|
1,517,550
|
|
$
|
1,880,064
|
|
Sources of Changes in Discounted Future Net Cash Flows
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Standardized measure of discounted future
net cash flows at the
|
|
|
|
|
|
|
|
|
beginning of the year
|
$
|
1,880,064
|
|
$
|
1,444,671
|
|
|
|
Accretion of discount
|
|
72,270
|
|
|
53,948
|
|
|
|
Development costs incurred
|
|
179.247
|
|
|
2,033,354
|
|
|
|
Changes in estimated development costs
|
|
187,475
|
|
|
(2,165,001
|
)
|
|
|
Revision of previous quantity estimates
|
|
(1,126,584
|
)
|
|
(218,038
|
)
|
|
|
Net change in prices and production costs
|
|
963,121
|
|
|
336,661
|
|
|
|
Net change in income taxes
|
|
195,199
|
|
|
(234,442
|
)
|
|
|
Sales of oil and gas produced, net of
production costs
|
|
50,257
|
|
|
465,596
|
|
|
|
Sales of oil and gas interest
|
|
–
|
|
|
163,315
|
|
|
|
Transfer of oil and gas interest
|
|
(883,499
|
)
|
|
–
|
|
|
|
Standardized
measure of discounted future net cash flows at the end of the year
|
$
|
1,517,550
|
|
$
|
1,880,064
|
|
28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
As required by paragraph (b) of Rules 13a-15 under the Exchange
Act, our principal executive officer and principal financial officer evaluated
our company’s disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) of the Exchange Act) as of the end of the period covered by this
annual report on Form 10-K. Based on this evaluation, these officers concluded
that as of the end of the period covered by this annual report on Form 10-K, our
company’s disclosure controls and procedures were not effective. The
ineffectiveness of our company’s disclosure controls and procedures was due to
the existence of material weaknesses identified below.
The disclosure controls and procedures are controls and
procedures that are designed to ensure that the information required to be
disclosed by our company in reports it files or submits under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission and
include controls and procedures designed to ensure that such information is
accumulated and communicated to our company’s management, including our
company’s principal executive officer and principal financial officer, to allow
timely decisions regarding required disclosure. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues, if any, within our company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake.
Management’s Report on Internal Control Over Financial
Reporting
Management is responsible for establishing and maintaining
adequate internal control over our financial reporting. In order to evaluate the
effectiveness of internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment,
including testing, using the criteria in Internal Control - Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). Our system of internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements.
Based on our evaluation under the framework in Internal
Control-Integrated Framework, our chief executive officer and our chief
financial officer concluded that our internal control over financial reporting
were not effective as of September 30, 2012. The ineffectiveness of our internal
control over financial reporting was due to the existence of significant
deficiencies constituting material weaknesses. A material weakness is a control
deficiency, or combination of control deficiencies, such that there is a
reasonable possibility that a material misstatement of the financial statements
will not be prevented or detected on a timely basis.
Management has identified the following material weaknesses:
-
We do not have accounting staff with sufficient U.S. GAAP expertise;
29
-
There was insufficient segregation of duties in our finance and accounting
function due to limited personnel. During the year ended September 30, 2012,
we had limited staff that performed nearly all aspects of our financial
reporting process, including, but not limited to, access to the underlying
accounting records and systems, the ability to post and record journal entries
and responsibility for the preparation of the financial statements. This
creates certain incompatible duties and a lack of review over the financial
reporting process that would likely result in a failure to detect errors in
spreadsheets, calculations, or assumptions used to compile the financial
statements and related disclosures as filed with the Securities and Exchange
Commission. These control deficiencies could result in a material misstatement
to our financial statements that would not be prevented or detected; and
-
There have been a significant number of audit adjustments discovered by our
independent registered public accounting firm for the year ended September 30,
2012.
We intend to take appropriate and reasonable steps to make the
necessary improvements to remediate these material weaknesses. In particular, we
intend to hire more staff with U.S. GAAP expertise if we can obtain additional
financing or our revenues increase.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. In addition,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions
and that the degree of compliance with the policies or procedures may
deteriorate.
Changes in Internal Control Over Financial Reporting.
There were no changes in our company’s internal control over
financial reporting during the quarter ended September 30, 2012 that have
materially affected, or are reasonably likely to materially affect, our
company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
30
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
Directors and Executive Officers
As at the date of this report, our directors and executive
officers, their ages, positions held, and duration of such, are as follows:
Name
|
Position Held with the
Company
|
Age
|
Date First Elected or
Appointed
|
|
Pierre Mulacek
|
Chief Executive Officer,
President and Director
|
51
|
April 23, 2007
|
Reginald Denny
|
Chief Financial Officer
Director
|
66
|
October 18, 2007
April 20,
2010
|
|
Erich Hofer
(1)
|
Director
|
51
|
March 19, 2007
|
(1)
Member of our audit committee and compensation
committee.
Business Experience
The following is a brief account of the education and business
experience of our directors and executive officers during at least the past five
years, indicating their respective principal occupations during the period, and
the name and principal business of the organization by which they were employed.
Pierre Mulacek – Chief Executive Officer, President and
Director
Mr. Mulacek has over twenty years’ experience in all facets of
the oil and gas industry. Mr. Mulacek attended Texas Tech University from 1979
to 1983 with a focus on Petroleum Land Management until he joined Petroleum
Independent and Exploration Corporation as Vice President. Mr. Mulacek was also
a founding shareholder of Interoil Corp., an integrated oil and gas company
listed on the New York Stock Exchange.
We believe Mr. Mulacek is qualified to serve on our board of
directors because of his knowledge of our company’s history and current
operations, which he gained from working for our company since April 2007, in
addition to his education and business experiences as described above.
Reginald Denny – CPA Texas, Chief Financial Officer and
Director
Mr. Denny has extensive experience in the controller and senior
management functions of companies in the oil and gas, manufacturing and services
industries. Mr. Denny has managed the accounting, finance, audit, tax, human
resources, banking relations, insurance, legal, planning, treasury, credit,
forecasting and budgeting functions; reporting to federal and state regulatory
agencies. From January 2006 to 2007, Mr. Denny was an independent consultant
performing the duties of a controller with several companies. From 1993 to 2005,
Mr. Denny was the chief financial officer and controller of a manufacturing
company, an international company in the manufacture, service, assembly and
sales of trenching machines for the oil and gas industry.
Mr. Denny received his BBA in Accounting, minor in Finance from
the University of Houston and is a registered Certified Public Accountant in
Texas.
We believe Mr. Denny is qualified to serve on our board of
directors because of his knowledge of our company’s history and current
operations, which he gained from working for our company since October 2007, in
addition to his education and business experiences as described above.
31
Erich Hofer – Director
Mr. Hofer is a director of our company. Mr. Hofer leads
business development for our company and has been instrumental in securing our
company’s largest project acquisition to date. Mr. Hofer brings over fifteen
years of international financial and management expertise to our company. He
served from January 2005 to September 2007 as Group CFO for Argo-Hytos Ltd., a
mobile hydraulic application manufacturer, headquartered in Baar, Switzerland.
Prior to this, Mr. Hofer served from September 2001 to March 2004 as chief of
staff and deputy of the group CEO at Schneeberger Ltd, a linear technology
manufacturer, located in Roggwil, Switzerland. Prior to this time, Mr. Hofer
served in various executive management leadership roles in several industrial
and financial service companies in Switzerland. Mr. Hofer holds an MBA from the
University of Chicago (2004) and a B.S. in Economics and Management from the
University for Applied Science for Business and Administration in Zurich (1993).
Mr. Hofer is also a Certified Management Accountant in Switzerland.
We believe Mr. Hofer is qualified to serve on our board of
directors because of his knowledge of our company’s history and current
operations, which he gained from working for our company since March 2007, in
addition to his education and business experiences as described above.
Term of Office
Our directors hold office until the next annual meeting of
shareholders and until their successors have been elected and qualified, or
until they resign or are removed. Our officers are elected by our board of
directors. Our officers hold office until the next annual meeting of our board
of directors and until their successions have been elected and qualified, or
until they resign or are removed.
Family Relationships
There are no family relationships among our directors or
officers.
Involvement in Certain Legal Proceedings
Our directors and executive officers have not been involved in
any of the following events during the past ten years:
|
|
1.
|
any bankruptcy petition filed by or against any business
of which such person was a general partner or executive officer either at
the time of the bankruptcy or within two years prior to that
time;
|
|
|
|
|
|
|
2.
|
any conviction in a criminal proceeding or being subject
to a pending criminal proceeding (excluding traffic violations and other
minor offenses);
|
|
|
|
|
|
|
3.
|
being subject to any order, judgment, or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring, suspending or
otherwise limiting his involvement in any type of business, securities or
banking activities;
|
|
|
|
|
|
|
4.
|
being found by a court of competent jurisdiction (in a
civil action), the Securities and Exchange Commission or the Commodity
Futures Trading Commission to have violated a federal or state securities
or commodities law, and the judgment has not been reversed, suspended, or
vacated;
|
|
|
|
|
|
|
5.
|
being the subject of, or a party to, any federal or state
judicial or administrative order, judgment, decree, or finding, not
subsequently reversed, suspended or vacated, relating to an alleged
violation of: (i) any federal or state securities or commodities law or
regulation; or (ii) any law or regulation respecting financial
institutions or insurance companies including, but not limited to, a
temporary or permanent injunction, order of disgorgement or restitution,
civil money penalty or temporary or permanent cease- and-desist order, or
removal or prohibition order; or (iii) any law or regulation prohibiting
mail or wire fraud or fraud in connection with any business entity;
or
|
32
|
|
6.
|
being the subject of, or a party to, any sanction or
order, not subsequently reversed, suspended or vacated, of any
self-regulatory organization (as defined in Section 3(a)(26) of the
Securities Exchange Act of 1934), any registered entity (as defined in
Section 1(a)(29) of the Commodity Exchange Act), or any equivalent
exchange, association, entity or organization that has disciplinary
authority over its members or persons associated with a
member.
|
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Exchange Act requires our executive
officers and directors and persons who own more than 10% of a registered class
of our equity securities to file with the SEC initial statements of beneficial
ownership, reports of changes in ownership and annual reports concerning their
ownership of our common stock and other equity securities, on Forms 3, 4 and 5
respectively. Executive officers, directors and greater than 10% shareholders
are required by the SEC regulations to furnish us with copies of all Section
16(a) reports that they file.
Based solely on our review of the copies of such forms received
by us, or written representations from certain reporting persons, we believe
that all filing requirements applicable to our officers, directors and greater
than 10% beneficial owners were complied with.
Code of Ethics
Effective December 18, 2007, our company’s board of directors
adopted a Code of Business Conduct and Ethics that applies to, among other
persons, our company’s president (being our principal executive officer) and our
company’s chief financial officer (being our principal financial and accounting
officer), as well as persons performing similar functions. As adopted, our Code
of Business Conduct and Ethics sets forth written standards that are designed to
deter wrongdoing and to promote:
|
|
(1)
|
honest and ethical conduct, including the ethical
handling of actual or apparent conflicts of interest between personal and
professional relationships;
|
|
|
|
|
|
|
(2)
|
full, fair, accurate, timely, and understandable
disclosure in reports and documents that we file with, or submit to, the
Securities and Exchange Commission and in other public communications made
by us;
|
|
|
|
|
|
|
(3)
|
compliance with applicable governmental laws, rules and
regulations;
|
|
|
|
|
|
|
(4)
|
the prompt internal reporting of violations of the Code
of Business Conduct and Ethics to an appropriate person or persons
identified in the Code of Business Conduct and Ethics; and
|
|
|
|
|
|
|
(5)
|
accountability for adherence to the Code of Business
Conduct and Ethics.
|
Our Code of Business Conduct and Ethics requires, among other
things, that all of our company’s personnel shall be accorded full access to our
president and secretary with respect to any matter which may arise relating to
the Code of Business Conduct and Ethics. Further, all of our company’s personnel
are to be accorded full access to our company’s board of directors if any such
matter involves an alleged breach of the Code of Business Conduct and Ethics by
our president or secretary.
In addition, our Code of Business Conduct and Ethics emphasizes
that all employees, and particularly managers and/or supervisors, have a
responsibility for maintaining financial integrity within our company,
consistent with generally accepted accounting principles, and federal,
provincial and state securities laws. Any employee who becomes aware of any
incidents involving financial or accounting manipulation or other
irregularities, whether by witnessing the incident or being told of it, must
report it to his or her immediate supervisor or to our company’s president or
secretary. If the incident involves an alleged breach of the Code of Business
Conduct and Ethics by the president or secretary, the incident must be reported
to any member of our board of directors. Any failure to report such
inappropriate or irregular conduct of others is to be treated as a severe
disciplinary matter. It is against our company policy to retaliate against any
individual who reports in good faith the violation or potential violation of our
company’s Code of Business Conduct and Ethics by another.
33
We will provide a copy of the Code of Business Conduct and
Ethics to any person without charge, upon request. Requests can be sent to:
Arkanova Energy Corp., 305 Camp Craft Road, Suite 525, Austin, Texas 78746.
Corporate Governance
Director Independence
We currently act with three directors, consisting of Pierre
Mulacek, Erich Hofer and Reginald Denny. We have determined that Erich Hofer is
an independent director as defined by NASDAQ Listing Rule 5605(a)(2). We
currently act with a standing audit committee and a compensation committee. We
do not have a standing nominating committee but our entire board of directors
acts as our nominating committee.
Audit Committee
Our audit committee consists of Erich Hofer. Mr. Hofer is a
non-employee director of our company and is independent as defined by NASDAQ
Listing Rule 5605(a)(2). The audit committee is directed to review the scope,
cost and results of the independent audit of our books and records, the results
of the annual audit with management and the adequacy of our accounting,
financial and operating controls; to recommend annually to the board of
directors the selection of the independent registered accountants; to consider
proposals made by the independent registered accountants for consulting work;
and to report to the board of directors, when so requested, on any accounting or
financial matters.
Audit Committee Financial Expert
Our board of directors has determined that it does not have a
member that qualifies as an “audit committee financial expert” as defined in
Item 407(d)(5)(ii) of Regulation S-K. We believe that our board of directors is
capable of analyzing and evaluating our financial statements and understanding
internal controls and procedures for financial reporting. In addition, we
believe that retaining an independent director who would qualify as an “audit
committee financial expert” would be overly costly and burdensome and is not
warranted in our circumstances given the early stages of our development.
Compensation Committee
Our compensation committee consists of Erich Hofer. Mr. Hofer
is a non-employee director of our company and is independent as defined by
NASDAQ Listing Rule 5605(a)(2). The compensation committee oversees our
compensation and employee benefit plans, stock option plan and practices and
produces a report on executive compensation. The compensation committee acts in
accordance with our Compensation Committee Charter.
Nomination Process
As of the date of this report, we did not effect any material
changes to the procedures by which our shareholders may recommend nominees to
our board of directors. Our board of directors does not have a policy with
regards to the consideration of any director candidates recommended by our
shareholders. Our board of directors has determined that it is in the best
position to evaluate our company’s requirements as well as the qualifications of
each candidate when the board considers a nominee for a position on our board of
directors. If shareholders wish to recommend candidates directly to our board,
they may do so by sending communications to the president of our company at the
address on the cover of this annual report.
34
Board Leadership Structure
The positions of our principal executive officer and the
chairman of our board of directors are served by one individual, Pierre Mulacek.
We have determined that the leadership structure of our board of directors is
appropriate, especially given the early stage of our development and the size of
our company. Our board of directors provides oversight of our risk exposure by
receiving periodic reports from senior management regarding matters relating to
financial, operational, legal and strategic risks and mitigation strategies for
such risks.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation
The following table sets forth all compensation received during
the two years ended September 30, 2012 by our chief executive officer, chief
financial officer and each of the other most highly compensated executive
officers whose total compensation exceeded $100,000 in such fiscal years. These
officers are referred to as the named executive officers in this annual
report.
Summary Compensation Table
Name
and
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensa-
tion
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensa-
tion
($)
|
Total
($)
|
Pierre Mulacek
Chief Executive
Officer,
President and
Director
|
2012
2011
|
60,000
240,000
|
Nil
25,000
|
Nil
Nil
|
Nil
146,364
|
Nil
Nil
|
180,000
Nil
|
Nil
Nil
|
240,000
411,364
|
Reginald Denny
Chief Financial
Officer and
Director
|
2012
2011
|
127,787
190,000
|
Nil
10,000
|
Nil
Nil
|
Nil
123,846
|
Nil
Nil
|
46,333
Nil
|
Nil
Nil
|
174,120
323,846
|
Compensation Discussion and Analysis
There are no arrangements or plans in which we provide pension,
retirement or similar benefits for directors or executive officers. Our
directors and executive officers may receive stock options at the discretion of
our board of directors in the future. We do not have any material bonus or
profit sharing plans pursuant to which cash or non-cash compensation is or may
be paid to our directors or executive officers, except that stock options may be
granted at the discretion of our board of directors from time to time. Except as
disclosed in this section, we have no plans or arrangements in respect of
remuneration received or that may be received by our executive officers to
compensate such officers in the event of termination of employment (as a result
of resignation, retirement, change of control) or a change of responsibilities
following a change of control.
Effective July 17, 2010, we entered into an executive
employment agreement with Pierre Mulacek, our chief executive officer, president
and a director of our company, pursuant to which he has agreed to serve as our
chief executive officer for a term of one year. We have agreed to pay Mr.
Mulacek an annual salary of $240,000 and he was eligible to receive an annual
bonus as determined by the board of directors based upon the performance of our
company. We also agreed to grant Mr. Mulacek stock options to acquire shares of
our company on such terms as are approved by the board of directors.
35
On July17, 2012, we entered into an executive employment
agreement with Mr. Mulacek. We agreed to pay an annual salary of $240,000 to Mr.
Mulacek in consideration for his carrying out his duties as an executive of our
company.
Pursuant to the terms of the agreement, and in the event our
company undergoes a Change of Control Event (as defined in the agreement and
described below), the agreement will automatically terminate and our company is
required to pay to Mr. Mulacek an amount equal to the total of:
|
|
1.
|
$360,000 (calculated as 18 month salary payable under the
agreement); and
|
|
|
|
|
|
|
2.
|
the cost for a period of 18 months to obtain family
and/or spousal health insurance that is similar in coverage to that
provided to Mr. Mulacek as of the date of the change of
control.
|
Effective July 17, 2010, we entered into an executive
employment agreement with Reginald Denny, our chief financial officer and a
director of our company, and appointed Mr. Denny as our chief financial officer.
Under the terms of the executive employment agreement, Mr. Denny received an
annual salary of $170,000 and he was eligible to receive an annual bonus as
determined by the board of directors based upon the performance of our company.
We also agreed to grant Mr. Denny stock options to acquire shares of our company
on such terms as are approved by the board of directors.
On July17, 2012, we entered into an executive employment
agreement with Mr. Denny. We agreed to pay an annual salary of $190,000 to Mr.
Denny in consideration for his carrying out his duties as an executive of our
company.
Pursuant to the terms of the agreement, and in the event our
company undergoes a Change of Control Event (as defined in the agreement and
described below), the agreement will automatically terminate and our company is
required to pay to Mr. Denny an amount equal to the total of:
|
|
1.
|
$285,000 (calculated as 18 month salary payable under the
agreement); and
|
|
|
|
|
|
|
2.
|
the cost for a period of 18 months to obtain family
and/or spousal health insurance that is similar in coverage to that
provided to Mr. Denny as of the date of the change of
control.
|
Under both executive employment agreements, a Change of Control
Event means the occurrence of any one of the following events:
|
|
1.
|
the acquisition, other than from our company, of
beneficial ownership of 50% or more of either the then outstanding shares
of common stock of our company or the combined voting power of the then
outstanding voting securities of our company entitled to vote generally in
the election of directors;
|
|
|
|
|
|
|
2.
|
the approval by the stockholders of our company of a
reorganization, merger or consolidation of our company in which the
individuals and entities who were the respective beneficial owners of the
common stock and voting securities immediately prior to such
reorganization, merger or consolidation do not, following such
reorganization, merger or consolidation, beneficially own, directly or
indirectly, more than 50% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the
case may be, of the corporation resulting from such reorganization, merger
or consolidation; or
|
|
|
|
|
|
|
3.
|
a liquidation or dissolution of our company or the sale
or disposition of all or substantially all of the assets of our company,
which, for greater certainty, is deemed to occur in the event our company
sells or disposes of all or substantially all of the assets of a
subsidiary of our company.
|
Outstanding Equity Awards at Fiscal Year-End
We established a 2008 Amended Stock Option Plan, as amended, to
provide for the issuance of stock options to acquire an aggregate of up to
5,000,000 shares of our common stock.
36
The particulars of unexercised options, stock that has not
vested and equity incentive plan awards for our named executive officers are set
out in the following table:
|
|
Options Awards
|
Stock Awards
|
Name
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
m/d/y
|
Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
(#)
|
Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested
($)
|
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value
of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested ($)
|
Pierre
Mulacek
Chief
Executive
Officer,
President
and
Director
|
600,000
(1)
600,000
(1)
650,000
(1)
|
Nil
Nil
Nil
|
Nil
Nil
Nil
|
$0.39
(1)
$0.20
(1)
$0.25
(1)
|
06/19/2013
10/14/2014
10/08/2015
|
Nil
Nil
Nil
|
N/A
N/A
N/A
|
N/A
N/A
N/A
|
N/A
N/A
N/A
|
Reginald
Denny
Chief
Financial
Officer
and
Director
|
50,000
(2)
300,000
(2)
100,000
350,000
550,000
|
Nil
(2)
Nil
Nil
Nil
Nil
|
Nil
(2)
Nil
Nil
Nil
Nil
|
$0.10
(2)
$0.39
(2)
$0.12
(2)
$0.20
(2)
$0.25
(2)
|
10/18/2012
06/19/2013
11/19/2013
10/14/2014
10/08/2015
|
Nil
Nil
Nil
Nil
Nil
|
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
|
|
(1)
|
Mr. Mulacek was appointed our president, secretary and
treasurer on April 23, 2007. Mr. Mulacek was granted 600,000 options at an
exercise price of $0.39 on June 19, 2008 and 600,000 options at an
exercise price of $0.20 on October 14, 2009. On October 8, 2010, we
entered into a Stock Option Agreement with Mr. Mulacek and issued him an
additional 650,000 options in consideration for services provided as chief
executive officer, president and director. Each option is exercisable into
one common share at the exercise price of $0.25 until October 8, 2015. All
of the options vest immediately.
|
|
|
|
|
(2)
|
Mr. Denny was appointed our chief financial officer on
October 18, 2007. Mr. Denny was granted 200,000 options at an exercise
price of $1.70 on October 18, 2007 (of which 150,000 have been exercised),
300,000 options at an exercise price of $0.39 on June 19, 2008 which
options vested immediately, 100,000 options at an exercise price of $0.12
on November 14, 2008 and 350,000 options at an exercise price of $0.20 on
October 14, 2009. On November 14, 2008, our company repriced the 200,000
options held by Mr. Denny from $1.70 per share to $0.10 per share.
Pursuant to the terms of an amended stock option agreement dated November
14, 2008, we agreed to amend the vesting provisions such that all of the
remaining options not already vested under the original agreement vested
on November 14, 2008, the date of the amended agreement. On October 8,
2010, we entered into a Stock Option Agreement with Mr. Denny and issued
him an additional 550,000 options in consideration for services provided
as chief financial officer. Each option is exercisable into one common
share at the exercise price of $0.25 until October 8, 2015. All of the
options vest immediately.
|
Long-Term Incentive Plan
Other than our 2008 Amended Stock Option Plan, our company does
not have a long-term incentive plan in favor of any director, officer,
consultant or employee of our company.
37
Pension and Retirement Plans
Currently, we do not offer any annuity, pension or retirement
benefits to be paid to any of our officers, directors or employees, in the event
of retirement.
Director Compensation
The particulars of compensation paid to our directors who are
not named executive officers for our year ended September 30, 2012, is set out
in the following director compensation table:
Name
|
Fees
Earned or
Paid in
Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensati
on
($)
|
Nonqualified
Deferred
Compensation
Earnings
|
All
Other
Compen
sation
($)
|
Total
($)
|
|
Erich Hofer
(2)
|
15,000
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
15,000
|
We have no formal plan for compensating our directors for their
service in their capacity as directors, although such directors are expected in
the future to receive stock options to purchase common shares as awarded by our
board of directors or (as to future stock options) a compensation committee.
Directors are entitled to reimbursement for reasonable travel and other
out-of-pocket expenses incurred in connection with attendance at meetings of our
board of directors. Our board of directors may award special remuneration to any
director undertaking any special services on our behalf other than services
ordinarily required of a director. No director received and/or accrued any
compensation for their services as a director, including committee participation
and/or special assignments.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth, as at the date of this report,
certain information with respect to the beneficial ownership of our common stock
by each stockholder known by us to be the beneficial owner of more than 5% of
our common stock and by our directors and executive officers. Each person has
sole voting and investment power with respect to the shares of common stock,
except as otherwise indicated. Beneficial ownership consists of a direct
interest in the shares of common stock, except as otherwise indicated. Except as
otherwise noted, the number of shares beneficially owned includes common stock
which the named person has the right to acquire, through conversion or option
exercise, or otherwise, within 60 days after the date of this report. Beneficial
ownership calculations for 5% stockholders are based solely on publicly filed
Schedule 13Ds or 13Gs, which 5% stockholders are required to file with the
Securities and Exchange Commission.
Security ownership of certain beneficial owners
Title of class
|
Name and address of
beneficial
owner
|
Amount and nature of
beneficial
ownership
1
|
Percent of
class
|
Common
Stock
|
Centrum Bank AG
Kirchstrasse 3
Postfach
1168
Vaduz, FL-9490 Liechteinstein
|
5,234,117 Direct
|
10.57%
|
Common
Stock
|
Aton Select Funds Limited
Aeulestrasse 5
9490 Vaduz
Vaduz, Switzerland
|
3,204,748 Direct
|
6.47%
|
38
Security ownership of management.
Title of class
|
Name and address of beneficial
owner
|
Amount and nature of
beneficial
ownership
1
|
Percent of
class
|
Common
Stock
|
Pierre Mulacek
PO Box 2601
Conroe TX
77305
|
6,437,500 Direct
2
|
12.53%
|
Common
Stock
|
Erich Hofer
Grossackerstrasse 64
CH-8041
Zurich, Switzerland
|
1,200,000 Direct
3
|
2.38%
|
Common
Stock
|
Reginald Denny
16709 French Harbour Court
Austin, Texas 78734
|
1,465,000 Direct
4
|
2.88%
|
|
|
Directors and Executive Officers as a
Group
|
9,102,500
|
16.99%
|
1
Based on 49,514,115 shares of common stock issued
and outstanding as of December 31, 2012.
2
Consists of 4,587,500 common shares and stock
options to acquire an aggregate of 1,850,000 shares of common stock exercisable
within 60 days of the date of this report. Of such options, 600,000 are
exercisable at $0.39 until June 19, 2013; 600,000 are exercisable at $0.20 until
October 14, 2014; and 650,000 are exercisable at $0.25 until October 8, 2015.
3
Consists of 300,000 shares of common stock, and
stock options to acquire an aggregate of 900,000 shares of common stock
exercisable within 60 days of the date of this report. Of such options, 300,000
are exercisable at $0.39 until June 19, 2013; 300,000 are exercisable at $0.20
until October 14, 2014 and 300,000 are exercisable at $0.25 until October 8,
2015.
4
Consists of 165,000 shares of common stock, and
stock options to acquire an aggregate of 1,300,000 shares of common stock
exercisable within 60 days of the date of this report. Of such options, 300,000
are exercisable at $0.39 until June 19, 2013; 100,000 are exercisable at $0.12
until November 19, 2013, 350,000 are exercisable at $0.20 until October 14, 2014
and 550,000 are exercisable at $0.25 until October 8, 2015.
Changes in Control
We are unaware of any contract or other arrangement the
operation of which may at a subsequent date result in a change of control of our
company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Transactions with related persons.
Other than as set forth herein, and to our knowledge, no
director, executive officer, principal shareholder holding at least 5% of our
common shares, or any family member thereof, had any material interest, direct
or indirect, in any transaction, or proposed transaction, during the years ended
September 30, 2012 and 2011 or in any currently proposed transaction, in which
the amount involved in the transaction exceeded or exceeds the lesser of
$120,000 or one percent of the average of our total assets at the year end for
the last two completed fiscal years.
On October 8, 2010, we issued an aggregate of 1,500,000 stock
options exercisable at $0.25 per share to officers and directors of our company
(650,000 stock options to Pierre Mulacek; 550,000 stock options to Reginald
Denny; and 300,000 stock options to Erich Hofer). The options expire on October
8, 2015.
39
During the year ended September 30, 2012, we received a
$400,000 loan and two $200,000 loans from Pierre Mulacek, our president and
chief executive officer, which are non-interest bearing. The $400,000 loan was
to be repaid by September 30, 2012. The two $200,000 loans had no terms of
repayment. Proceeds were used for ongoing expenses of our company. On July 5,
2012, we repaid one of the $200,000 loans. On October 4, 2012, we repaid the
$400,000 loan and the remaining $200,000 loan.
On December 14, 2012, we sold Pierre Mulacek 2,000,000 shares
of our common stock at a price of $0.10 per shares for gross proceeds of
$200,000. On December 26, 2012, we sold Mr. Mulacek 1,000,000 shares of our
common stock at a price of $0.10 per shares for gross proceeds of $100,000.
Compensation for Executive Officers and Directors
For information regarding compensation for our executive
officers and directors, see Item 11 – “Executive Compensation”.
Director Independence
We currently act with three directors, consisting of Pierre
Mulacek, Erich Hofer and Reginald Denny. We have determined that only Erich
Hofer is an independent director as defined by NASDAQ Listing Rule 5605(a)(2).
The other two directors are not independent as defined by NASDAQ Listing Rule
5605(a)(2) because they are our executive officers.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit fees
The aggregate fees billed for the two most recently completed
years ended September 30, 2012 and 2011 for professional services rendered by
MaloneBailey, LLP, of Houston, Texas for the audit of our annual consolidated
financial statements, reviews of our quarterly consolidated financial statements
and services normally provided by the independent accountant in connection with
statutory and regulatory filings or engagements for these fiscal periods were as
follows:
|
|
Year Ended
|
Year Ended
|
|
|
September 30, 2012
|
September 30, 2011
|
|
Audit Fees and Audit Related
Fees
|
49,552
|
$52,594
|
|
Tax Fees
|
3,675
|
$10,000
|
|
All Other Fees
|
nil
|
Nil
|
|
Total
|
53,227
|
$62,594
|
In the above table, “audit fees” are fees billed by our
company’s external auditor for services provided in auditing our company’s
annual financial statements for the subject year. “Audit-related fees” are fees
not included in audit fees that are billed by the auditor for assurance and
related services that are reasonably related to the performance of the audit
review of our company’s financial statements. “Tax fees” are fees billed by the
auditor for professional services rendered for tax compliance, tax advice and
tax planning. “All other fees” are fees billed by the auditor for products and
services not included in the foregoing categories.
Policy on Pre-Approval by Audit Committee of Services
Performed by Independent Auditors
The board of directors pre-approves all services provided by
our independent auditors. All of the above services and fees were reviewed and
approved by the board of directors before the respective services were rendered.
The board of directors has considered the nature and amount of
fees billed by MaloneBailey, LLP and believes that the provision of services for
activities unrelated to the audit is compatible with maintaining the
independence of MaloneBailey, LLP.
40