ITEM 1. FINANCIAL STATEMENTS
Our unaudited consolidated financial statements are stated in
United States dollars and are prepared in accordance with United States
generally accepted accounting principles.
It is the opinion of management that the unaudited consolidated
interim financial statements for the period ended March 31, 2013 include all
adjustments necessary in order to ensure that the unaudited consolidated interim
financial statements are not misleading.
2
Arkanova Energy Corporation
|
Consolidated Balance Sheets
|
(unaudited)
|
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
235,710
|
|
$
|
74,356
|
|
Oil and gas receivables
|
|
208,379
|
|
|
146,908
|
|
Prepaid expenses and other
|
|
21,997
|
|
|
28,035
|
|
Total current assets
|
|
466,086
|
|
|
249,299
|
|
Property and equipment, net of accumulated depreciation of
$215,717 and $201,651
|
|
168,095
|
|
|
167,585
|
|
Oil and gas properties, full cost method
|
|
|
|
|
|
|
Evaluated, net of accumulated depletion of
$16,499,763 and $16,381,452
|
|
1,832,796
|
|
|
1,931,723
|
|
Other Assets
|
|
97,000
|
|
|
97,000
|
|
Total assets
|
$
|
2,563,977
|
|
$
|
2,445,607
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
|
|
|
|
|
|
Accounts payable
|
$
|
244,202
|
|
$
|
518,966
|
|
Accrued liabilities
|
|
79,334
|
|
|
124,271
|
|
Due to related party
|
|
230,029
|
|
|
826,379
|
|
Notes payable
|
|
9,116,650
|
|
|
7,630,538
|
|
Derivative liability
|
|
|
|
|
2,919
|
|
Other liabilities
|
|
37,500
|
|
|
|
|
Total current liabilities
|
|
9,707,715
|
|
|
9,103,073
|
|
Loans payable
|
|
|
|
|
2,707
|
|
Asset retirement obligations
|
|
129,701
|
|
|
123,827
|
|
Other liabilities
|
|
103,125
|
|
|
|
|
Total liabilities
|
|
9,940,541
|
|
|
9,229,607
|
|
|
|
|
|
|
|
|
Contingencies and commitments
|
|
|
|
|
|
|
Stockholders Deficit
|
|
|
|
|
|
|
Common Stock, $0.001 par value,
1,000,000,000 shares authorized,
49,514,115 (September 30, 2012
46,514,115) shares issued and outstanding
|
|
49,514
|
|
|
46,514
|
|
Additional paid-in capital
|
|
18,800,507
|
|
|
18,503,507
|
|
Accumulated deficit
|
|
(26,226,585
|
)
|
|
(25,334,021
|
)
|
Total stockholders deficit
|
|
(7,376,564
|
)
|
|
(6,784,000
|
)
|
Total liabilities and stockholders deficit
|
$
|
2,563,977
|
|
$
|
2,445,607
|
|
See accompanying notes to unaudited consolidated financial
statements
3
Arkanova Energy Corporation
|
Consolidated Statements of Operations
|
(unaudited)
|
|
|
Three Months
|
|
|
Three Months
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas sales
|
$
|
189,589
|
|
$
|
239,595
|
|
$
|
380,181
|
|
$
|
492,945
|
|
Operator income
|
|
20,250
|
|
|
20,250
|
|
|
40,500
|
|
|
40,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
209,839
|
|
|
259,845
|
|
|
420,681
|
|
|
533,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
expenses
|
|
307,236
|
|
|
323,919
|
|
|
633,328
|
|
|
637,057
|
|
Oil and gas production costs
|
|
130,903
|
|
|
264,297
|
|
|
280,699
|
|
|
526,143
|
|
Accretion
|
|
2,939
|
|
|
4,713
|
|
|
5,874
|
|
|
5,381
|
|
Depletion
|
|
58,702
|
|
|
64,923
|
|
|
118,310
|
|
|
133,541
|
|
Gain on transfer of oil and
gas properties
|
|
|
|
|
|
|
|
|
|
|
(161,029
|
)
|
Loss on disposal of equipment
|
|
1,917
|
|
|
|
|
|
1,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(291,858
|
)
|
|
(398,007
|
)
|
|
(619,447
|
)
|
|
(607,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(119,283
|
)
|
|
(112,451
|
)
|
|
(261,337
|
)
|
|
(226,076
|
)
|
Gain on derivative liability
|
|
2,764
|
|
|
4,322
|
|
|
2,919
|
|
|
68,444
|
|
Loss on settlement of debt
|
|
|
|
|
|
|
|
(29,165
|
)
|
|
|
|
Gain on forgiveness of debt
|
|
|
|
|
|
|
|
14,466
|
|
|
5,563,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(408,377
|
)
|
$
|
(506,136
|
)
|
$
|
(892,564
|
)
|
$
|
4,797,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share basic and
diluted
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
outstanding
|
|
49,514,000
|
|
|
46,514,000
|
|
|
48,212,000
|
|
|
46,321,000
|
|
Diluted weighted average common shares outstanding
|
|
49,514,000
|
|
|
46,514,000
|
|
|
48,212,000
|
|
|
46,345,000
|
|
See accompanying notes to unaudited consolidated financial
statements
4
Arkanova Energy Corporation
|
Consolidated Statements of Cash Flows
|
(unaudited)
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(892,564
|
)
|
$
|
4,797,850
|
|
|
|
|
|
|
|
|
Adjustment to reconcile net (loss) income to
net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
|
|
5,874
|
|
|
5,381
|
|
Depreciation
|
|
32,934
|
|
|
50,994
|
|
Depletion
|
|
118,310
|
|
|
133,541
|
|
Gain on
derivative liability
|
|
(2,919
|
)
|
|
(68,444
|
)
|
Gain on transfer of oil and gas
properties
|
|
|
|
|
(161,029
|
)
|
Loss (gain) on
settlement of debt
|
|
29,165
|
|
|
(5,563,130
|
)
|
Gain on forgiveness of debt
|
|
(14,466
|
)
|
|
|
|
Loss on disposal
of equipment
|
|
1,917
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets
and liabilities:
|
|
|
|
|
|
|
Prepaid expenses and other
receivables
|
|
7,601
|
|
|
(157,454
|
)
|
Oil and gas
receivables
|
|
(61,471
|
)
|
|
762
|
|
Accounts payable and accrued
liabilities
|
|
(153,928
|
)
|
|
(678,903
|
)
|
Accrued interest
|
|
260,554
|
|
|
209,902
|
|
Due to related parties
|
|
3,650
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Operating Activities
|
|
(665,343
|
)
|
|
(1,430,530
|
)
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
(37,112
|
)
|
|
(7,750
|
)
|
Proceeds from disposal
of equipment
|
|
187
|
|
|
|
|
Oil and gas property expenditures
|
|
(19,383
|
)
|
|
(70,408
|
)
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
(56,308
|
)
|
|
(78,158
|
)
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on debt
|
|
(316,995
|
)
|
|
(22,132
|
)
|
Repayment of related
party loan
|
|
(600,000
|
)
|
|
400,000
|
|
Proceeds from issuance of promissory
notes
|
|
1,500,000
|
|
|
1,000,000
|
|
Proceeds from issuance
of common stock
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
883,005
|
|
|
1,377,868
|
|
|
|
|
|
|
|
|
Net Change in Cash
|
|
161,354
|
|
|
(130,820
|
)
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning of
period
|
|
74,356
|
|
|
218,741
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
$
|
235,710
|
|
$
|
87,921
|
|
Supplemental Cash Flow and Other Disclosures (Note 12)
See accompanying notes to unaudited consolidated financial
statements
5
Arkanova Energy Corporation
|
Notes to Unaudited 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.
In the opinion of management, the accompanying unaudited
consolidated financial statements include all adjustments, consisting of only
normal recurring accruals, necessary for a fair statement of financial position,
results of operations, and cash flows. The information included in this
quarterly report on Form 10-Q should be read in conjunction with the
consolidated financial statements and the accompanying notes included in our
Annual Report on Form 10-K for the year ended September 30, 2012. The accounting
policies are described in the Notes to the Consolidated Financial Statements
in the 2012 Annual Report on Form 10-K and updated, as necessary, in this Form
10-Q. The year-end consolidated balance sheet data presented for comparative
purposes was derived from audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in the United
States. The results of operations for the three and six months ended March 31,
2013 are not necessarily indicative of the operating results for the full year
or for any other subsequent interim period.
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 $26,226,585 since inception and has a negative working capital of $9,241,629
at March 31, 2013. Management plans to raise additional capital through equity
and/or debt financings. These factors raise substantial doubt regarding
Arkanovas ability to continue as a going concern.
NOTE 3: OIL AND GAS INTERESTS
Arkanova is currently participating in oil and gas exploration
activities in Colorado and Montana. All of Arkanovas oil and gas properties are
located in the United States.
Proven and Developed Properties, Arkansas and Colorado and
Montana
As at March 31, 2013 and September 30, 2012, 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 Arkanovas evaluated oil and gas properties at March 31, 2013 and September
30, 2012 was $1,832,796 and $1,931,723, respectively.
NOTE 4: 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 Three Months Ended March 31,
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
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
|
$
|
(408,377
|
)
|
|
46,514,000
|
|
$
|
(0.01
|
)
|
$
|
(506,136
|
)
|
|
46,514,000
|
|
$
|
(0.01
|
)
|
Effective of Dilutive
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to common stock,
including assumed conversions
|
$
|
(408,377
|
)
|
|
46,514,000
|
|
$
|
(0.01
|
)
|
$
|
(506,136
|
)
|
|
46,514,000
|
|
$
|
(0.01
|
)
|
6
|
|
For the Six Months Ended March 31,
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
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
|
$
|
(892,564
|
)
|
|
48,212,000
|
|
$
|
(0.02
|
)
|
$
|
4,797,850
|
|
|
46,321,000
|
|
$
|
0.10
|
|
Effective of Dilutive
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to common stock,
including assumed conversions
|
$
|
(892,564
|
)
|
|
48,212,000
|
|
$
|
(0.02
|
)
|
$
|
4,797,850
|
|
|
46,345,000
|
|
$
|
0.10
|
|
NOTE 5: RELATED PARTY TRANSACTIONS
(a)
|
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.
|
|
|
(b)
|
At March 31, 2013, the Company owed management fees of
$145,000 (September 30, 2012 - $180,000) to the President of the Company
and $85,029 (September 30, 2012 - $46,379) to the CFO of the
Company.
|
|
|
(c)
|
During the six months ended March 31, 2013, Arkanova
issued 3,000,000 shares of common stock at $0.10 per share to the
President of the Company for cash proceeds of
$300,000.
|
NOTE 6: 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 notes 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 of $14,466 on the $300,000 note was forgiven by
the note holder.
|
|
|
(b)
|
On October 1, 2009, the Companys 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.
|
|
|
|
On October 21, 2011, the Companys 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 Companys 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).
|
7
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 Acquisitions 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 Arkanovas 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 Companys
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 Acquisitions 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.
Arkanova evaluated the application of
ASC 470-50 and ASC 470-60 and determined that the 2011 Note and 2012 Note were
not substantially different. As a result, it was concluded that the revised
terms constituted a debt modification rather than a debt extinguishment.
On February 6, 2013, the Companys
subsidiary entered into a Loan Modification Agreement to borrow an additional
$1,500,000 and consolidate its 2012 Note into one promissory note in the
principal amount for $10,106,025 (the 2013 Note), including accrued interest
of $291,025. The 2013 Note bears interest at 6% per annum, is due on March 31,
2014, and, as was the case with the 2012 Note, is secured by our guarantee and
also a pledge of all of Acquisitions interest in its wholly owned subsidiary,
Provident. Interest on the 2013 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 $707,422 by the
average stock price of the Company over the 15 business day period immediately
preceding the maturity date. On February 6, 2013, the Company received $500,000
of the $1,500,000 funding from the note holder. The balance of $1,000,000 has
not been received by the Company as of March 31, 2013 and the Company is
expected to receive the $1,000,000 by May 31, 2013..
Arkanova evaluated the application of
ASC 470-50 and ASC 470-60 and determined that the 2012 Note and 2013 Note were
not substantially different. As a result, it was concluded that the revised
terms constituted a debt modification rather than a debt extinguishment.
NOTE 7: COMMON STOCK Common stock
a)
|
On December 14, 2012, Arkanova issued 2,000,000 shares of
common stock at $0.10 per share to the President of the Company for cash
proceeds of $200,000.
|
|
|
b)
|
On December 26, 2012, Arkanova issued 1,000,000 shares of
common stock at $0.10 per share to the President of the Company for cash
proceeds of $100,000.
|
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 Arkanovas 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.
8
During the six months ended March 31, 2013 and 2012, Arkanova
did not grant any stock options and no stock options were exercised. During the
six months ended March 31, 2013, 103,333 (2012 - none) stock options expired
unexercised.
A summary of Arkanovas stock option activity is as
follows:
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2011
|
|
4,953,333
|
|
$
|
0.33
|
|
|
|
|
|
|
|
Expired
|
|
(300,000
|
)
|
|
1.35
|
|
|
|
|
|
|
|
Outstanding, September 30, 2012
|
|
4,653,333
|
|
$
|
0.27
|
|
|
|
|
|
|
|
Expired
|
|
(103,333
|
)
|
|
0.10
|
|
|
|
|
|
|
|
Outstanding, March 31, 2013
|
|
4,550,000
|
|
$
|
0.27
|
|
|
|
|
|
|
|
Exercisable, March
31, 2013
|
|
4,550,000
|
|
$
|
0.27
|
|
|
1.55
|
|
$
|
|
|
At March 31, 2013, 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 March 31, 2013.
Warrants
A summary of the changes in the Companys common share purchase
warrants is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2012 and 2011
|
|
1,168,235
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
(1,068,235
|
)
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2013
|
|
100,000
|
|
$
|
1.00
|
|
|
0.75
|
|
$
|
|
|
As at March 31, 2013, the following common share purchase
warrants were outstanding:
|
|
Remaining Contractual Life
|
Number of Warrants
|
Exercise Price
|
(years)
|
100,000
|
$ 1.00
|
0.75
|
NOTE 8: 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 issuers own stock, including evaluating the instruments 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.
9
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 Companys 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 each period were determined
using a lattice model and the changes in fair value were recognized in the
consolidated statements of operations.
The warrants were valued at each period end until they expire
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, 2012
|
|
206%
|
|
|
257%
|
|
|
316%
|
|
|
386%
|
|
|
417%
|
|
|
March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
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 six months ending March 31,
2013 resulted in a decrease in the derivative liability of $2,919 with a
corresponding gain of $2,919 on derivative instruments. On March 31, 2013, the
purchase warrants expired and the fair value of the derivative liability was
$nil. At September 30, 2013, the fair value of the derivative liability was $2,919. The warrants are expired as of March 31, 2013.
NOTE 9: 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.
10
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 March 31,
2013 as follows:
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Quoted Price in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Instruments
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Balance as of
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
March 31, 2013
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
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
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Balance as of
|
|
|
|
Instruments
|
|
|
Inputs
|
|
|
Inputs
|
|
|
September 30,
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2012
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
$
|
|
|
$
|
|
|
$
|
2,919
|
|
$
|
2,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
$
|
|
|
$
|
|
|
$
|
2,919
|
|
$
|
2,919
|
|
NOTE 10: COMMITMENTS
See Note 6.
(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 March 31, 2013, 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 Companys
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.
|
11
(c)
|
On December 14, 2012, the Company reached a preliminary
settlement with Ms. Billie Eustice, whereby it is contemplated that the
Company 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 Ms. Eustice and the Company, 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. During the six months ended March 31,
2013, the Company recorded a loss of $29,165 on settlement of debt which
represents the difference between the amount recorded in accounts payable
before the settlement and the agreed settlement amount of
$150,000.
|
NOTE 11: ASSET RETIREMENT OBLIGATION
Changes in Arkanovas asset retirement obligations were as
follows:
|
|
Six Months
|
|
|
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Asset retirement obligations, beginning of
period
|
$
|
123,827
|
|
$
|
133,319
|
|
Revision due to property sales
|
|
|
|
|
(20,511
|
)
|
Accretion expense
|
|
5,874
|
|
|
11,019
|
|
|
|
|
|
|
|
|
Asset retirement obligations, end of period
|
$
|
129,701
|
|
$
|
123,827
|
|
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 Providents Two Medicine Cut Bank Sand Unit in
Pondera and Glacier Counties, Montana.
NOTE 12: SUPPLEMENTAL CASH FLOW AND OTHER
DISCLOSURES
|
|
Six Months
|
|
|
Six Months
|
|
|
|
ended
|
|
|
ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Supplemental Disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
$
|
|
|
$
|
16,175
|
|
Income taxes paid
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Noncash Financing and Investing Activities
|
|
|
|
|
|
|
Accounts payable related to
capital expenditures
|
$
|
|
|
$
|
31,489
|
|
Shares issued to extinguish liability
|
$
|
|
|
$
|
720,000
|
|
Asset retirement obligation
revision due to property sales
|
$
|
|
|
$
|
20,511
|
|
Accrued interest converted into note payable
|
$
|
291,025
|
|
$
|
|
|
12
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This quarterly report contains forward-looking statements.
Forward-looking statements are statements that relate to future events or future
financial performance. In some cases, you can identify forward-looking
statements by the use of terminology such as may, should, intend,
expect, plan, anticipate, believe, estimate, project, predict,
potential, or continue or the negative of these terms or other comparable
terminology. These statements speak only as of the date of this quarterly
report. Examples of forward-looking statements made in this quarterly report
include statements pertaining to, among other things:
-
rise in expenses as we proceed to determine the feasibility of developing
our current and future property interests;
-
our estimation that we will require approximately $2,500,000 over the next
12-month period to fund our plan of operations;
-
our need for, and our ability to raise, capital;
-
managements assessment that our company is a going concern;
-
that we do not anticipate incurring any additional lease acquisition costs
during the next twelve months; and
-
our estimated timeline of exploration activity on our properties.
The material assumptions supporting these forward-looking
statements include, among other things:
-
our ability to obtain necessary financing on acceptable terms;
-
timing and amount of expenditures;
-
our ability to obtain necessary drilling and related equipment in a timely
and cost-effective manner to carry out exploration activities;
-
retention of skilled personnel;
-
the timely receipt of required regulatory approvals;
-
continuation of current tax and regulatory regimes; and
-
general economic and financial market conditions.
Although management considers these assumptions to be
reasonable based on information currently available to it, they may prove to be
incorrect. These forward-looking statements are only predictions and involve
known and unknown risks, uncertainties and other factors, including:
-
our ability to establish or find resources or reserves;
-
our need for, and our ability to raise, capital;
-
volatility in market prices for natural gas and crude oil;
-
liabilities inherent in natural gas and crude oil operations;
-
uncertainties associated with estimating natural gas and crude oil
resources or reserves;
-
competition for, among other things, capital, resources, undeveloped lands
and skilled personnel;
-
geological, technical, drilling and processing problems; and
-
other factors discussed under the section entitled Risk Factors in our
annual report on Form 10-K filed on December 31, 2012.
These risks, as well as risks that we cannot currently
anticipate, could cause our companys or our industrys actual results, levels
of activity or performance to be materially different from any future results,
levels of activity or performance 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 or performance; except as required by applicable law,
including applicable securities laws, we do not intend to update any of the
forward-looking statements to conform these statements to actual results.
13
Our unaudited 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 period ended March 31, 2013
and 2012
The following summary of our results of operations should be
read in conjunction with our unaudited consolidated financial statements for the
three and six months ending March 31, 2013 and 2012 which are included herein:
|
|
Three Months
|
|
|
Three
Months
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas sales
|
$
|
189,589
|
|
$
|
239,595
|
|
$
|
380,181
|
|
$
|
492,945
|
|
Operator income
|
|
20,250
|
|
|
20,250
|
|
|
40,500
|
|
|
40,500
|
|
Total revenue
|
|
209,839
|
|
|
259,845
|
|
|
420,681
|
|
|
533,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
expenses
|
|
307,236
|
|
|
323,919
|
|
|
633,328
|
|
|
637,057
|
|
Oil and gas production costs
|
|
130,903
|
|
|
264,297
|
|
|
280,699
|
|
|
526,143
|
|
Accretion
|
|
2,939
|
|
|
4,713
|
|
|
5,874
|
|
|
5,381
|
|
Depletion
|
|
58,702
|
|
|
64,923
|
|
|
118,310
|
|
|
133,541
|
|
Gain on transfer of oil and gas
properties
|
|
|
|
|
|
|
|
|
|
|
(161,029
|
)
|
Loss on disposal of equipment
|
|
1,917
|
|
|
|
|
|
1,917
|
|
|
|
|
Operating loss
|
|
(291,858
|
)
|
|
(398,007
|
)
|
|
(619,447
|
)
|
|
(607,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(119,283
|
)
|
|
(112,451
|
)
|
|
(261,337
|
)
|
|
(226,076
|
)
|
Gain on derivative liability
|
|
2,764
|
|
|
4,322
|
|
|
2,919
|
|
|
68,444
|
|
Loss on settlement of debt
|
|
|
|
|
|
|
|
(29,165
|
)
|
|
|
|
Gain on forgiveness of debt
|
|
|
|
|
|
|
|
14,466
|
|
|
5,563,130
|
|
Net (loss) income
|
$
|
(408,377
|
)
|
$
|
(506,136
|
)
|
$
|
(892,564
|
)
|
$
|
4,797,850
|
|
Revenues
During the three months period ended March 31, 2013, we
generated $209,839 in oil and gas sales as compared to $259,845 in oil and gas
sales during the same period ended March 31, 2012. The reason for the decrease
in sales is a result of a lowered average price of crude oil and lower
production.
During the six months period ended March 31, 2013, we generated
$420,681 in oil and gas sales as compared to $533,445 in oil and gas sales
during the same period ended March 31, 2012. The reason for the decrease in
sales is a result of a lowered average price of crude oil and lower
production.
Expenses
Expenses decreased during the three months ended March 31, 2013
to $501,697 as compared to $657,852 during the same period in 2012. The decrease
is largely due to completion of the upgrades to the lease last year.
Expenses decreased during the six months ended March 31, 2013
to $1,040,128 as compared to $1,141,093 during the same period in 2012. The
decrease is largely due to completion of the upgrades to the lease last year
offset by a gain on transfer of oil and gas properties during the period ended
March 31, 2012.
14
Liquidity and Capital Resources
Working Capital
|
|
March 31
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
Current assets
|
$
|
466,086
|
|
$
|
249,299
|
|
Current liabilities
|
|
9,707,715
|
|
|
9,103,073
|
|
Working capital (deficiency)
|
$
|
(9,241,629
|
)
|
$
|
(8,853,774
|
)
|
We had cash and cash equivalents of $235,710 and a working
capital deficit of $9,241,629 as of March 31, 2013 compared to cash and cash
equivalents of $74,356 and working capital deficit of $8,853,774 as of September
30, 2012.
We anticipate that we will require approximately $2,500,000 for
operating expenses during the next 12-months as set out below.
Estimated Expenses for the Next 12-Month Period
Re-activate wells / P & A some wells
|
$
|
750,000
|
|
Re-activate one injection well
|
$
|
750,000
|
|
Employee and Consultant Compensation
|
$
|
400,000
|
|
Professional Fees
|
$
|
100,000
|
|
General and Administrative Expenses
|
$
|
500,000
|
|
Total
|
$
|
2,500,000
|
|
Our companys 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 companys cash and cash equivalents will not be sufficient
to meet our working capital requirements for the next 12-month period. We
estimate that we will require approximately $2,500,000 over the next 12-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 12-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 period 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.
15
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 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 included interest at 6% per annum, was due on
December 31, 2011, and was secured by a pledge of all of our subsidiarys
interest in its wholly-owned subsidiary, Provident Energy. Interest on the
promissory note was payable 10 days after maturity in shares of our companys
common stock. The number of shares payable as interest was to 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 note was
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 companys 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 companys 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 included interest at the rate of 6% per annum,
was due and payable on March 31, 2013, and, as was the case with the 2009 Note,
was secured by a pledge of all of our subsidiarys interest in its wholly owned
subsidiary, Provident. Interest on the 2011 Note was 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 was to 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 matured. Our subsidiarys
obligations under the 2011 Note were 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 was 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 was 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 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).
16
The 2012 Note included interest at the rate of 6% per annum,
was due and payable on June 30, 2013, was secured by a pledge of all of our
subsidiarys interest in its wholly owned subsidiary, Provident. Interest on the
2012 Note was 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 was to
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 subsidiarys obligations under the 2012 Note were
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.
Effective February 6, 2013, our wholly owned subsidiary further
modified its loan with Aton effective February 6, 2013 such that Aton increased
the amount outstanding under the 2012 Note by $1,500,000.00 (the 2013
Additional Loan Amount) and consolidated the remaining balance, including
accrued interest from July 1, 2012 to February 6, 2013 equal to approximately
$291,025, under the 2012 Note and the 2013 Additional Loan Amount into one new
amended and restated promissory note in the principal amount of US$10,106,025.00
(the 2013 Note). The 2013 Note bears interest at the rate of 6% per annum, due
and is payable on March 31, 2014, and is secured by a pledge of all of our
wholly owned subsidiarys interest in its wholly owned subsidiary, Provident.
Interest on the 2013 Note is payable 10 days after maturity in shares of our
common stock. On February 8, 2013, we received $500,000 of the 2013 Additional
Loan Amount. We expect the remaining 2013 Additional Loan Amount of $1,000,000
by the end of May 2013.
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 $2,500,000 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
|
August December
|
2013 - Recomplete 5 Cut Bank
wells and re-activate one injection well.
|
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. As of March 31, 2013, we had
6 employees, including Pierre Mulacek and Reginald Denny. We pay Mr. Mulacek an
annual salary of $240,000 and Mr. Denny an annual salary of $190,000. Mr. Denny
has agreed to a temporary suspension to an annual salary of $120,000, the
difference of $70,000 is expected to be paid at a future date.
17
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.
Operating Activities
Net cash used in operating activities was $(665,343) during the
six months ended March 31, 2013 as compared to $ (1,430,530) during the same
period in 2012. The reason for the decrease is the completion of the field
maintenance upgrades to the Montana oil lease and the salary reductions.
Investing Activities
Net cash used in investing activities was $(56,308) during the
six months ended March 31, 2013 as compared to net cash used in investing
activities of $(78,158) during the same period in 2012. The reason for the
decrease is the decrease in capital improvements during the period.
Financing Activities
Net cash provided by financing activities for the six months
ended March 31, 2013 was $883,005 compared to $1,377,868 of net cash used in
financing activities during the same period in 2012. The reason for the decrease
is a result of repayments of loan payable and related party loans.
Capital Expenditures
As of the six months ended March 31, 2013, 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 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.
18
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 March 31, 2013, 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. As of
March 31, 2013, the proven properties had a value of $1,832,796 using a full
cost method.
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 economic life of our 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 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.
19
RISK FACTORS
Much of the information included in this quarterly 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 $(26,226,585) as at March 31, 2013. 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.
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.
20
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.
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.
21
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:
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the lack of pipeline transmission facilities or carrying capacity;
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government regulation of natural gas and oil production;
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government transportation, tax and energy policies;
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changes in supply and demand; and
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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 Arkansas, 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
Arkansas, 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.
22
We are subject to ongoing obligations under our Acquisition
and Development Agreement.
Under the terms of our Acquisition and Development Agreement,
as modified by an agreement dated May 21, 2007, we will have to pay
approximately an additional $5,600,000 to acquire the remainder of the acreage
which we have committed to acquire, unless we elect to pay a majority of the
costs with shares of our common stock at $1.25 per share. In addition, we are
required to drill five additional wells within 24 months, from the date upon
which Arkanova Delaware makes the last of the lease bonus payments as required
in the agreement. We do not anticipate paying the final lease payment until the
balance of the leases are delivered which at this time is not known when this
may occur. We expect that the total cost of these wells, together with a seismic
program, will require approximately $5,600,000 in additional capital. We will
need to obtain additional equity funding, and possibly additional debt funding
as well, in order to be able to obtain these 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. In addition, while we anticipate that David Griffin
will be able to deliver the mineral rights for all 50,000 acres which we have
contracted for, we have no guarantee that he will be able to do so. We are also
evaluating the possible sale and expiration of said leases in order to
concentrate our resources on the producing Montana property.
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.
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.
23
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 eastern Arkansas, 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.
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 eastern Arkansas, 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 Phillips, Monroe and Deshea Counties, Arkansas, 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:
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severe weather;
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delays or decreases in production, the availability of equipment,
facilities or services;
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delays or decreases in the availability of capacity to transport, gather
or process production; or
24
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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:
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weather conditions in the United States and wherever our property
interests are located;
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economic conditions, including demand for petroleum-based products, in the
United States wherever our property interests are located;
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actions by OPEC, the Organization of Petroleum Exporting Countries;
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political instability in the Middle East and other major oil and gas
producing regions;
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governmental regulations, both domestic and foreign;
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domestic and foreign tax policy;
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the pace adopted by foreign governments for the exploration, development,
and production of their national reserves;
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the price of foreign imports of oil and gas;
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the cost of exploring for, producing and delivering oil and gas;
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the discovery rate of new oil and gas reserves;
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the rate of decline of existing and new oil and gas reserves;
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available pipeline and other oil and gas transportation capacity;
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the ability of oil and gas companies to raise capital;
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the overall supply and demand for oil and gas; and
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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.
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.
25
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 March 31, 2013 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 March 31, 2013 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.
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.
26
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 Commissions penny stock regulations, which may limit a stockholders
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 customers 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 customers 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 is a suitable investment for the purchaser and receive the
purchasers 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 stockholders 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 customers 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.
27
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 the OTC
Markets Group. Trading of our stock through the 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.