Notes to the Consolidated Financial Statements
(Unaudited)
Petro
River Oil Corp. (the “
Company
”) is an independent
energy company focused on the exploration and development of
conventional oil and gas assets with low discovery and development
costs, utilizing modern technology. The Company is currently
focused on moving forward with drilling wells on several of its
properties owned directly and indirectly through its interest in
Horizon Energy Partners, LLC (“
Horizon Energy
”), as well as
entering highly prospective plays with Horizon Energy and other
industry-leading partners. Diversification over a number of
projects, each with low initial capital expenditures and strong
risk reward characteristics, reduces risk and provides
cross-functional exposure to a number of attractive risk adjusted
opportunities.
The
Company’s core holdings are in the Mid-Continent Region in
Oklahoma, including in Osage County and Kay County, Oklahoma.
Following the acquisition of Horizon I Investments, LLC
(“
Horizon
Investments
”) in December 2015, the Company has
additional exposure to a portfolio of domestic and international
oil and gas assets consisting of highly prospective conventional
plays diversified across project type, geographic location and risk
profile, as well as access to a broad network of industry leaders
from Horizon Investment’s interest in Horizon
Energy. Horizon Energy is an oil and gas exploration and
development company owned and managed by former senior oil and gas
executives. It has a portfolio of domestic and international
assets. Each of the assets in the Horizon Energy portfolio is
characterized by low initial capital expenditure requirements and
strong risk reward characteristics.
The
Company’s prospects in Oklahoma are owned directly by the
Company and indirectly through Spyglass Energy Group, LLC
(“
Spyglass
”), a
wholly owned subsidiary of Bandolier Energy, LLC
(“
Bandolier
”).
As of January 31, 2018, Bandolier became wholly-owned by the
Company. Bandolier has a 75% working interest in an 87,754-acre
concession in Osage County, Oklahoma. The remaining 25% working
interest is held by the operator, Performance Energy, LLC. As
discussed below in Recent Developments, on January 31, 2019,
Bandolier entered into Assignment of Net Profit Interest agreements
(the “
Assignment
Agreements
”), pursuant to which Bandolier assigned and
transferred a 75% interest in profits in certain planned wells to
investors.
Effective
September 24, 2018, the Company acquired a 66.67% membership
interest in LBE Partners, LLC, a Delaware limited liability company
(“
LBE
Partners
”), from ICO Liquidating Trust, LLC in
exchange for 300,000 restricted shares of the Company’s
common stock. LBE Partners has varying working interests in
multiple oil and gas producing wells located in Texas. The Company
currently anticipates that this acquisition will provide additional
positive cashflow to the Company and increase its oil and gas asset
portfolio.
The
execution of the Company’s business plan is dependent on
obtaining necessary working capital. While no assurances can
be given, in the event management is able to obtain additional
working capital, the Company plans to continue drilling additional
wells on its existing concessions, and to acquire additional
high-quality oil and gas properties, primarily proved producing,
and proved undeveloped reserves. The Company also intends to
explore low-risk development drilling and work-over
opportunities. Management is also exploring farm-in and joint
venture opportunities for the Company’s oil and gas
assets.
Recent Developments
Horizon Subscription Agreement
On
February 25, 2019, Company executed a Subscription Agreement,
pursuant to which the Company purchased 145.454 membership units
(approximately 14.6%) of Horizon Energy Acquisition, LLC
(“
Horizon
”), a
recently formed company focused on oil and gas exploration
activities, for $400,000 (the “
Acquisition of Interest
”). In
connection with Acquisition of Interest, the Company also executed
the Limited Liability Company Agreement for Horizon, which provides
the Company with the right to appoint one Manager to
Horizon’s three-member Board of Managers. The Company
appointed Mr. Cohen, the Company’s Executive Chairman, to the
Board of Managers. Mr. Cohen purchased 36.363 membership units of
Horizon in a separate transaction.
Creation of a New Series A Convertible Preferred Stock
On
January 31, 2019, the Company filed the Certificate of Designations
of Preferences and Rights of Series A Convertible Preferred Stock
(the “
Series A
COD
”) with the Secretary of State for the State of
Delaware – Division of Corporations, designating 500,000
shares of the Company’s preferred stock as Series A
Convertible Preferred, par value $0.00001 per share
(“
Series A
Preferred
”), and each share with a stated value of
$20.00 per share (the “
Stated Value
”). Shares of Series
A Preferred
are not
entitled to dividends unless the Company elects to pay dividends to
holders of its common stock.
Shares of Series A
Preferred rank senior to the Company’s common stock and
Series B Cumulative Convertible Preferred Stock.
Holders
of Series A Preferred have the right to vote, subject to a 9.999%
voting limitation (which does not apply to Scot Cohen), on an
as-converted basis with the holders of the Company’s common
stock on any matter presented to the Company’s stockholders
for their action or consideration; provided, however, that so
long as shares of Series A Preferred remain outstanding, the
Company may not, without first obtaining the affirmative consent of
a majority of the shares of Series A Preferred outstanding, voting
as a separate class, take the following actions: (i) alter or
change adversely the power, preferences and rights provided to the
holders of the Series A Preferred under the Series A COD, (ii)
authorize or create a class of stock that is senior to the Series A
Preferred, (iii) amend its Certificate of Incorporation so as to
adversely affect any rights of the holders of the Series A
Preferred, (iv) increase the number of authorized shares of Series
A Preferred, or (v) enter into any agreements with respect to the
foregoing.
Each
share of Series A Preferred has a liquidation preference equal to
the Stated Value plus all accrued and unpaid dividends. Each share
of Series A Preferred is convertible into that number of shares of
the Company’s common stock (“
Conversion Shares
”) equal to the
Stated Value, divided by $0.40 per share (the “
Conversion Price
”), which
conversion rate is subject to adjustment in accordance with the
terms of the Series A COD; provided, however, that holders of
the Series A Preferred may not convert their shares of Series A
Preferred in the event that such conversion would result in such
holder’s ownership exceeding 4.999% of the Company’s
outstanding common stock (the “
Ownership Limitation
”), which
Ownership Limitation may be increased up to 9.999% at the sole
election of the holder (the “
Maximum
Percentage
”); provided, however, that the
Ownership Limitation and Maximum Percentage do not apply to Mr.
Cohen. Holders of Series A Preferred may elect to convert shares of
Series C Preferred into Conversion Shares at any time.
Series A Financing
On
January 31, 2019 (the “
Closing Date
”), the Company sold
and issued an aggregate of 178,101 units of its securities, for an
aggregate purchase price of $3,562,015, to certain accredited
investors (the “
New
Investors
”) pursuant to a Securities Purchase
Agreement (“
SPA
”) and to certain debtholders
(the “
Debt
Holders
”) pursuant to Debt Conversion Agreements (the
“
Debt Conversion
Agreements
”) (the “
Offering
”). The sale of the units
resulted in net cash proceeds of approximately $2.7 million. The
units sold and issued in the Offering consisted of an aggregate of
(i) 178,101 shares of the Company’s newly created Series A
Preferred shares, convertible into 8,905,037 shares of the
Company’s common stock, and (ii) five-year warrants to
purchase 8,905,037 shares of Company’s common stock, at an
exercise price of $0.50 per share. Pursuant to the Debt Conversion
Agreements, the Debt Holders, consisting of Mr. Cohen and Fortis
Oil & Gas (“
Fortis
”), agreed to convert all
outstanding debt owed to the Debt Holders, amounting to $300,000
and $321,836, respectively, into units issued pursuant to the SPA.
In addition to the conversion of outstanding debt, the Company and
the Debt Holders also agreed to convert all accrued interest
totaling $18,853 and $62,523, respectively.
The
Offering resulted in net cash proceeds to the Company of
approximately $2.7 million, which net proceeds do not include the
amount of debt converted into units by the Debt Holders. The
Company currently intends to use the net proceeds to fund the
drilling of ten additional development and exploration wells in its
Osage County concession (the “
New Drilling Program
”), and a
large exploration venture in the North Sea, United Kingdom with
Horizon Energy Partners, LLC.
In
connection with the Offering, on January 31, 2019 Bandolier Energy,
LLC (“
Bandolier
”), a wholly owned
subsidiary of the Company, entered into Assignment of Net Profit
Interest agreements (the “
Assignment Agreements
”) with each
of the New Investors and Debt Holders, pursuant to which (i)
Bandolier assigned and transferred to the New Investors and Debt
Holders a 75% interest in profits, if any, derived from the ten new
wells the Company intends to drill pursuant to the New Drilling
Program, payments of which shall be made to the New Investors and
Debt Holders, pro rata, on a quarterly basis following the full
completion of the New Drilling Program, and (ii) in the event the
Company elects to drill additional wells on its Osage County
concession in the next two years, the New Investors and Debt
Holders shall have the right to participate in and fund the
drilling and production of the next ten wells on the same terms and
conditions set forth in the Assignment Agreements.
Senior Secured Debt Exchange
On
January 31, 2019, the Company entered into agreements (the
“
Secured Debt Conversion
Agreements
”) with Petro Exploration Funding, LLC and
Petro Exploration Funding II, LLC (together, the
“
Secured Debt
Holders
”), pursuant to which they agreed to convert
approximately $2.3 million and $2.8 million, respectively, of
outstanding senior secured debt (including accrued and unpaid
interest) (the “
Senior
Secured Debt
”) owed under the terms of their
respective Senior Secured Promissory Notes into 116,503 and 140,799
shares of the Company’s newly created Series A Preferred,
respectively (the “
Senior
Secured Debt Exchange
”). As a result of the Senior
Secured Debt Exchange, all indebtedness, liabilities and other
obligations arising under the respective Senior Secured Promissory
Notes were cancelled and deemed satisfied in full.
As
additional consideration for the conversion of the Senior Secured
Debt, the Company agreed to (i) reduce the exercise price of
warrants issued to the Secured Debt Holders on June 15, 2017 and
November 6, 2017 from $2.38 and $2.00, respectively, to $0.50 per
share of Common Stock issuable upon the exercise of such warrants,
and (ii) to extend the expiration date of such warrants to five
years from the Closing Date.
Acquisition of Membership Interest in LBE Partners,
LLC
On October 2, 2018, the Company, ICO Liquidating Trust, LLC
(“
ICO
”) and LBE
Partners, which owns various working interests in several oil and
gas wells located in the Hardin oil field in Liberty, Texas,
entered into a Membership Interest Purchase Agreement (the
“
LBE Purchase
Agreement
”), effective September 24, 2018, pursuant to
which the Company purchased a 66.67% membership interest in LBE
Partners from ICO in exchange for 300,000 shares of the
Company’s common stock. Both ICO and LBE Partners are managed
by Scot Cohen, the Company’s Executive
Chairman.
The
Company recorded the purchase of LBE Partners using the acquisition
method of accounting as specified in
ASC 805
“
Business Combinations.
” This
method of accounting requires the acquirer to record the net assets
and liabilities acquired at the historical cost of LBE Partners
because the Company determined that this acquisition was a related
party transaction.
The following table summarizes fair values of the net assets
acquired and liabilities assumed and the allocation of the
aggregate value of the purchase consideration, and non-controlling
interest:
|
Purchase consideration:
|
|
|
Common
stock issued
|
$
333,000
|
|
Total Purchase Consideration
|
$
333,000
|
|
|
|
|
Purchase price allocation:
|
|
|
Cash
|
$
138,686
|
|
Prepaid
drilling costs
|
55,116
|
|
Oil
and gas assets – net
|
2,425,482
|
|
Liabilities
assumed – accounts payable
|
(19,198
)
|
|
Liabilities
assumed – asset retirement obligation
|
(355,800
)
|
|
Non-controlling
interest
|
(748,021
)
|
|
Contributed
capital
|
(1,163,265
)
|
|
Net
assets acquired
|
$
333,000
|
The
following table summarizes, on an unaudited pro forma basis, the
results of operations of the Company as though the acquisition had
occurred as of May 1, 2017 and May 1, 2018 (the beginning of the
fiscal year). The pro-forma amounts presented are not necessarily
indicative of either the actual operation results had the
acquisition transaction occurred as of May 1, 2017 and May 1,
2018.
|
|
For
the Nine Months Ended
January
31, 2019
|
|
|
|
|
|
|
Revenue
|
$
1,324,483
|
$
229,715
|
$
1,554,198
|
|
Net income
(loss)
|
(4,095,264
)
|
55,432
|
(4,039,832
)
|
|
Loss per share of
common share - basic and diluted
|
|
|
$
(0.42
)
|
|
Weighted average
number of common shares outstanding - basic and
diluted
|
|
|
17,877,762
|
|
|
For
the Nine Months Ended
January
31, 2018
|
|
|
|
|
|
|
Revenue
|
$
275,918
|
$
238,872
|
$
514,790
|
|
Net
loss
|
(18,194,287
)
|
(2,501
)
|
(18,196,788
)
|
|
Loss per share of
common share - basic and diluted
|
|
|
$
(1.12
)
|
|
Weighted average
number of common shares outstanding - basic and
diluted
|
|
|
16,298,951
|
At January 31, 2019 the non–controlling interest in
LBE was as follows:
|
Non–controlling
interest at April 30, 2018
|
$
-
|
|
Acquisition of
non–controlling interest in LBE Partners
acquisition
|
748,021
|
|
Contributions from
non–controlling interest
|
300,000
|
|
Non–controlling
share of net loss
|
(30,809
)
|
|
Non–controlling
interest at January 31, 2019
|
$
1,017,212
|
|
2.
|
Going Concern and Management’s Plan
|
The
accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. The Company has incurred significant operating losses
since its inception. As of January 31, 2019, the Company had an
accumulated deficit of approximately $55.1 million, had working
capital of approximately $1.1 million, and had cash and cash
equivalents of approximately $2.1 million. As a result of the
utilization of cash in its operating activities, and the
development of its assets, the Company has incurred losses since it
commenced operations. The Company’s primary source of
operating funds since inception has been debt and equity
financings. In addition, the Company has a limited operating
history prior to its acquisition of Bandolier. These
matters raise substantial doubt about the Company’s
ability to continue as a going concern for the twelve months
following the issuance of these financial statements.
The
consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset amounts
or the classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
Management
is focusing on specific target acquisitions and investments,
limiting operating expenses, and exploring farm-in and joint
venture opportunities for the Company’s oil and gas assets.
No assurances can be given that management will be successful. In
addition, Management intends to raise additional capital through
debt and equity instruments in order to execute its business,
operating and development plans. Management can provide no
assurances that the Company will be successful in its capital
raising efforts. In order to conserve capital, from time to time,
management may defer certain development activity.
The
accompanying unaudited interim consolidated financial statements
are prepared in accordance with generally accepted accounting
principles in the United States (“
U.S. GAAP
”) and include the
accounts of the Company and its wholly owned subsidiaries. All
material intercompany balances and transactions have been
eliminated in consolidation. Non–controlling interest
represents the minority equity investment in the Company’s
subsidiaries, plus the minority investors’ share of the net
operating results and other components of equity relating to the
non–controlling interest.
These
unaudited consolidated financial statements include the Company and
the following subsidiaries:
Bandolier
Energy, LLC; Horizon I Investments, LLC; and MegaWest Energy USA
Corp. and MegaWest Energy USA Corp.’s wholly owned
subsidiaries:
MegaWest
Energy Texas Corp.
MegaWest
Energy Kentucky Corp.
MegaWest
Energy Missouri Corp.
As a
result of the acquisition of membership interest in the Osage
County Concession in November 2017, Bandolier is now a wholly-owned
subsidiary of the Company and the Company consolidates 100% of the
financial information of Bandolier. Bandolier operates the
Company’s Oklahoma oil and gas properties.
As a
result of the acquisition of a 66.67% membership interest in LBE
Partners effective on September 24, 2018, LBE Partners is now a
subsidiary of the Company, and the Company consolidates the
financial information of LBE Partners with a non-controlling
interest in the remaining 33.33% membership interest. LBE Partners
has varying working interest in multiple oil fields located in
Texas.
Also
contained in the unaudited consolidated financial statements for
the periods ended January 31, 2018 and April 30, 2018 is the
financial information of MegaWest, which prior to January 31, 2018
was 58.51% owned by the Company. The unaudited consolidated
financial statements for the nine months ended January 31, 2018
include the results of operations of MegaWest; however, the assets
and liabilities were written off in the year ended April 30,
2018.
The
unaudited consolidated financial information furnished herein
reflects all adjustments, consisting solely of normal recurring
items, which in the opinion of management are necessary to fairly
state the financial position of the Company and the results of its
operations for the periods presented. This report should be read in
conjunction with the Company’s consolidated financial
statements and notes thereto included in the Company’s Annual
Report on Form 10-K for the year ended April 30, 2018, filed with
the Securities and Exchange Commission (the “
SEC
”) on July 30, 2018. The
Company assumes that the users of the interim financial information
herein have read or have access to the audited financial statements
for the preceding fiscal year and that the adequacy of additional
disclosure needed for a fair presentation may be determined in that
context. Accordingly, footnote disclosure, which would
substantially duplicate the disclosure contained in the
Company’s Annual Report on Form 10-K for the year ended April
30, 2018, has been omitted. The results of operations for the
interim periods presented are not necessarily indicative of results
for the entire year ending April 30, 2019.
|
4.
|
Significant Accounting Policies
|
The
preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during
the reporting period. Actual results could differ from those
estimates.
The
Company’s financial statements are based on a number of
significant estimates, including oil and natural gas reserve
quantities, which are the basis for the calculation of
depreciation, depletion and impairment of oil and natural gas
properties, and timing and costs associated with its asset
retirement obligations, as well as those related to the fair value
of stock options, stock warrants and stock issued for services.
Although management believes that its estimates and assumptions
used in preparation of the financial statements are appropriate,
actual results could differ from those
estimates.
|
(b)
|
Cash
and Cash Equivalents:
|
Cash
and cash equivalents include all highly liquid monetary instruments
with original maturities of three months or less when purchased.
These investments are carried at cost, which approximates fair
value. Financial instruments that potentially subject the Company
to concentrations of credit risk consist primarily of cash
deposits. The Company maintains its cash in institutions insured by
the Federal Deposit Insurance Corporation (“
FDIC
”). At times, the
Company’s cash and cash equivalent balances may be uninsured
or in amounts that exceed the FDIC insurance limits. The Company
has not experienced any loses on such accounts. As of January 31,
2019, approximately $1,725,000 exceed the FDIC insurance
limits.
Receivables
that management has the intent and ability to hold for the
foreseeable future are reported in the balance sheet at outstanding
principal adjusted for any charge-offs and the allowance for
doubtful accounts. Losses from uncollectible receivables are
accrued when both of the following conditions are met: (a)
information available before the financial statements are issued or
are available to be issued indicates that it is probable that an
asset has been impaired at the date of the financial statements,
and (b) the amount of the loss can be reasonably estimated. These
conditions may be considered in relation to individual receivables
or in relation to groups of similar types of receivables. If the
conditions are met, an accrual shall be made even though the
particular receivables that are uncollectible may not be
identifiable. The Company reviews each receivable individually for
collectability and performs on-going credit evaluations of its
customers and adjusts credit limits based upon payment history and
the customer’s current credit worthiness, as determined by
the review of their current credit information, and determines the
allowance for doubtful accounts based on historical write-off
experience, customer specific facts and general economic conditions
that may affect a client’s ability to pay. Bad debt expense
is included in general and administrative expenses, if
any.
Credit
losses for receivables (uncollectible receivables), which may be
for all or part of a particular receivable, shall be deducted from
the allowance. The related receivable balance shall be charged off
in the period in which the receivables are deemed uncollectible.
Recoveries of receivables previously charged off shall be recorded
when received. The Company charges off its account receivables
against the allowance after all means of collection have been
exhausted and the potential for recovery is considered
remote.
The
allowance for doubtful accounts at January 31, 2019 and April 30,
2018 was $0.
|
(d)
|
Oil
and Gas Operations:
|
Oil and Gas Properties
: The Company uses the full-cost
method of accounting for its exploration and development
activities. Under this method of accounting, the costs of both
successful and unsuccessful exploration and development activities
are capitalized as oil and gas property and equipment. Proceeds
from the sale or disposition of oil and gas properties are
accounted for as a reduction to capitalized costs unless the gain
or loss would significantly alter the relationship between
capitalized costs and proved reserves of oil and natural gas
attributable to a country, in which case a gain or loss would be
recognized in the consolidated statements of operations. All of the
Company’s oil and gas properties are located within the
continental United States, its sole cost center.
Oil
and gas properties may include costs that are excluded from costs
being depleted. Oil and gas costs excluded represent investments in
unproved properties and major development projects in which the
Company owns a direct interest. These unproved property costs
include non-producing leasehold, geological and geophysical costs
associated with leasehold or drilling interests and in process
exploration drilling costs. All costs excluded are reviewed at
least annually to determine if impairment has
occurred.
Long-lived
assets are reviewed for impairment whenever events or changes in
circumstances indicate that the historical cost carrying value of
an asset may no longer be appropriate.
Proved Oil and Gas Reserves
: Proved oil and gas reserves are
the estimated quantities of crude oil, natural gas and natural gas
liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. All of
the Company’s oil and gas properties with proved reserves
were impaired to the salvage value prior to the Company’s
acquisition of its interest in Bandolier. The price used to
establish economic viability is the average price during the
12-month period preceding the end of the entity’s fiscal year
and calculated as the un-weighted arithmetic average of the
first-day-of-the-month price for each month within such 12-month
period.
Depletion, Depreciation and Amortization:
Depletion,
depreciation and amortization is provided using the
unit-of-production method based upon estimates of proved oil and
gas reserves with oil and gas production being converted to a
common unit of measure based upon their relative energy content.
Investments in unproved properties and major development projects
are not amortized until proved reserves associated with the
projects can be determined or until impairment occurs. If the
results of an assessment indicate that the properties are impaired,
the amount of the impairment is deducted from the capitalized costs
to be amortized. Once the assessment of unproved properties is
complete and when major development projects are evaluated, the
costs previously excluded from amortization are transferred to the
full cost pool and amortization begins. The amortizable base
includes estimated future development costs and, where significant,
dismantlement, restoration and abandonment costs, net of estimated
salvage value.
In
arriving at rates under the unit-of-production method, the
quantities of recoverable oil and natural gas reserves are
established based on estimates made by the Company’s
geologists and engineers, which require significant judgment, as
does the projection of future production volumes and levels of
future costs, including future development costs. In addition,
considerable judgment is necessary in determining when unproved
properties become impaired and in determining the existence of
proved reserves once a well has been drilled. All of these
judgments may have significant impact on the calculation of
depletion expenses. There have been no material changes in the
methodology used by the Company in calculating depletion,
depreciation and amortization of oil and gas properties under the
full cost method during the nine months ended January 31, 2019 and
2018.
|
(e)
|
Fair
Value of Financial Instruments:
|
The Company follows
paragraph 825-10-50-10 of the FASB Accounting Standards
Codification for disclosures about fair value of its financial
instruments and paragraph 820-10-35-37 of the FASB Accounting
Standards Codification (“
Paragraph 820-10-35-37
”) to
measure the fair value of its financial instruments. Paragraph
820-10-35-37 establishes a framework for measuring fair value in
U.S. GAAP and expands disclosures about fair value measurements. To
increase consistency and comparability in fair value measurements
and related disclosures, Paragraph 820-10-35-37 establishes a fair
value hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value into three (3) broad levels. The fair
value hierarchy gives the highest priority to quoted prices
(unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. The three (3)
levels of fair value hierarchy defined by Paragraph 820-10-35-37
are described below:
Level 1
Quoted market
prices available in active markets for identical assets or
liabilities as of the reporting date.
Level
2
Pricing inputs
other than quoted prices in active markets included in Level 1,
which are either directly or indirectly observable as of the
reporting date.
Level 3
Pricing inputs that
are generally observable inputs and not corroborated by market
data.
Financial
assets are considered Level 3 when their fair values are determined
using pricing models, discounted cash flow methodologies or similar
techniques and at least one significant model assumption or input
is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices
(unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used
to measure the financial assets and liabilities fall within more
than one level described above, the categorization is based on the
lowest level input that is significant to the fair value
measurement of the instrument.
The
carrying amount of the Company’s financial assets and
liabilities, such as cash, prepaid expenses, and accounts payable
and accrued liabilities approximate their fair value because of the
short maturity of those instruments.
Transactions
involving related parties cannot be presumed to be carried out on
an arm’s-length basis, as the requisite conditions of
competitive, free-market dealings may not exist. Representations
about transactions with related parties, if made, shall not imply
that the related party transactions were consummated on terms
equivalent to those that prevail in arm’s-length transactions
unless such representations can be substantiated.
The
Company applies the accounting standards for distinguishing
liabilities from equity under U.S. GAAP when determining the
classification and measurement of its preferred stock. Preferred
shares subject to mandatory redemption are classified as liability
instruments and are measured at fair value. Conditionally
redeemable preferred shares (including preferred shares that
feature redemption rights that are either within the control of the
holder or subject to redemption upon the occurrence of uncertain
events not solely within the Company’s control) are
classified as temporary equity. At all other times, preferred
shares are classified as permanent equity.
|
(g)
|
Derivative
Liabilities:
|
The
Company evaluates its options, warrants, convertible notes, or
other contracts, if any, to determine if those contracts or
embedded components of those contracts qualify as derivatives to be
separately accounted for in accordance with paragraph 815-10-05-4
and Section 815-40-25 of the FASB Accounting Standards
Codification. The result of this accounting treatment is that the
fair value of the embedded derivative is marked-to-market each
balance sheet date and recorded as either an asset or a liability.
The change in fair value is recorded in the consolidated statement
of operations as other income or expense. Upon conversion, exercise
or cancellation of a derivative instrument, the instrument is
marked to fair value at the date of conversion, exercise or
cancellation and then the related fair value is reclassified to
equity.
In
circumstances where the embedded conversion option in a convertible
instrument is required to be bifurcated and there are also other
embedded derivative instruments in the convertible instrument that
are required to be bifurcated, the bifurcated derivative
instruments are accounted for as a single, compound derivative
instrument.
The
classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is
re-assessed at the end of each reporting period. Equity instruments
that are initially classified as equity that become subject to
reclassification are reclassified to liability at the fair value of
the instrument on the reclassification date. Derivative instrument
liabilities will be classified in the balance sheet as current or
non-current based on whether or not net-cash settlement of the
derivative instrument is expected within 12 months of the balance
sheet date.
The
Company adopted Section 815-40-15 of the FASB Accounting Standards
Codification (“
Section
815-40-15
”)
to determine whether an
instrument (or an embedded feature) is indexed to the
Company’s own stock. Section 815-40-15 provides
that an entity should use a two-step approach to evaluate whether
an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the
instrument’s contingent exercise and settlement
provisions.
The
Company utilizes a binomial option pricing model to compute the
fair value of the derivative liability and to mark to market the
fair value of the derivative at each balance sheet date. The
Company records the change in the fair value of the derivative as
other income or expense in the consolidated statements of
operations.
The
Company had derivative liabilities of $4,130,451 and $0 as of
January 31, 2019 and April 30, 2018, respectively.
ASU
2014-09, “
Revenue from
Contracts with Customers (Topic 606)
,” supersedes the
revenue recognition requirements and industry-specific guidance
under
Revenue Recognition (Topic
605)
. Topic 606 requires an entity to recognize revenue when
it transfers promised goods or services to customers in an amount
that reflects the consideration the entity expects to be entitled
to in exchange for those goods or services. The Company adopted
Topic 606 on May 1, 2018, using the modified retrospective method
applied to contracts that were not completed as of January 1, 2018.
Under the modified retrospective method, prior period financial
positions and results will not be adjusted. The cumulative effect
adjustment recognized in the opening balances included no
significant changes as a result of this adoption. Although the
Company does not expect 2018 net earnings to be materially impacted
by revenue recognition timing changes, Topic 606 requires certain
changes to the presentation of revenue and related expense
beginning May 1, 2018. Refer to Note 10 –
Revenue from Contracts with Customers
for additional information.
The
Company’s revenue is comprised of revenue from exploration
and production activities as well as royalty revenue related to
royalty interest agreement executed in February 2018. The
Company’s oil is sold primarily to marketers, gatherers, and
refiners. Natural gas is sold primarily to interstate and
intrastate natural-gas pipelines, direct end-users, industrial
users, local distribution companies, and natural-gas marketers.
NGLs are sold primarily to direct end-users, refiners, and
marketers. Payment is generally received from the customer in the
month following delivery.
Contracts
with customers have varying terms, including spot sales or
month-to-month contracts, contracts with a finite term, and
life-of-field contracts where all production from a well or group
of wells is sold to one or more customers. The Company recognizes
sales revenue for oil, natural gas, and NGLs based on the amount of
each product sold to a customer when control transfers to the
customer. Generally, control transfers at the time of delivery to
the customer at a pipeline interconnect, the tailgate of a
processing facility, or as a tanker lifting is completed. Revenue
is measured based on the contract price, which may be index-based
or fixed, and may include adjustments for market differentials and
downstream costs incurred by the customer, including gathering,
transportation, and fuel costs.
Revenue
is recognized for the sale of the Company’s net share of
production volumes. Sales on behalf of other working interest
owners and royalty interest owners are not recognized as
revenue.
|
(i)
|
Stock-Based
Compensation:
|
Generally,
all forms of stock-based compensation, including stock option
grants, warrants, and restricted stock grants are measured at their
fair value utilizing an option pricing model on the award’s
grant date, based on the estimated number of awards that are
ultimately expected to vest.
Under
fair value recognition provisions, the Company recognizes
equity–based compensation net of an estimated forfeiture rate
and recognizes compensation cost only for those shares expected to
vest over the requisite service period of the award.
The
fair value of an option award is estimated on the date of grant
using the Black–Scholes option valuation model. The
Black–Scholes option valuation model requires the development
of assumptions that are input into the model. These assumptions are
the expected stock volatility, the risk–free interest rate,
the option’s expected life, the dividend yield on the
underlying stock and the expected forfeiture rate. Expected
volatility is calculated based on the historical volatility of the
Company’s common stock over the expected option life and
other appropriate factors. Risk–free interest rates are
calculated based on continuously compounded risk–free rates
for the appropriate term. The dividend yield is assumed to be zero,
as the Company has never paid or declared any cash dividends on its
common stock and does not intend to pay dividends on the common
stock in the foreseeable future. The expected forfeiture rate is
estimated based on historical experience.
Determining
the appropriate fair value model and calculating the fair value of
equity–based payment awards requires the input of the
subjective assumptions described above. The assumptions used in
calculating the fair value of equity–based payment awards
represent management’s best estimates, which involve inherent
uncertainties and the application of management’s judgment.
As a result, if factors change and the Company uses different
assumptions, the equity–based compensation expense could be
materially different in the future. In addition, the Company is
required to estimate the expected forfeiture rate and recognize
expense only for those shares expected to vest. If the actual
forfeiture rate is materially different from the Company’s
estimate, the equity–based compensation expense could be
significantly different from what the Company has recorded in the
current period.
The
Company determines the fair value of the stock–based payments
to non-employees as either the fair value of the consideration
received or the fair value of the equity instruments issued,
whichever is more reliably measurable. If the fair value of
the equity instruments issued is used, it is measured using the
stock price and other measurement assumptions as of the earlier of
either (1) the date at which a commitment for performance by the
counterparty to earn the equity instruments is reached, or (2) the
date at which the counterparty’s performance is
complete.
The
expense resulting from stock-based compensation is recorded as
general and administrative expenses in the consolidated statement
of operations, depending on the nature of the services
provided.
Income Tax Provision
The
Company utilizes the asset and liability method in accounting for
income taxes. Under this method, deferred tax assets and
liabilities are recognized for operating loss and tax credit
carry-forwards and for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the year in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the results of operations in
the period that includes the enactment date. A valuation allowance
is recorded to reduce the carrying amounts of deferred tax assets
unless it is more likely than not that the value of such assets
will be realized.
Uncertain Tax Positions
The
Company evaluates uncertain tax positions to recognize a tax
benefit from an uncertain tax position only if it is more likely
than not that the tax position will be sustained on examination by
the taxing authorities based on the technical merits of the
position. Those tax positions failing to qualify for initial
recognition are recognized in the first interim period in which
they meet the more likely than not standard or are resolved through
negotiation or litigation with the taxing authority, or upon
expiration of the statute of limitations. De-recognition of a tax
position that was previously recognized occurs when an entity
subsequently determines that a tax position no longer meets the
more likely than not threshold of being sustained.
Interpretation
of taxation rules relating to net operating loss utilization in
real estate transactions give rise to uncertain positions. In
connection with the uncertain tax position, there were no interest
or penalties recorded as the position is expected but the tax
returns are not yet due.
The
Company is subject to ongoing tax exposures, examinations and
assessments in various jurisdictions. Accordingly, the Company may
incur additional tax expense based upon the outcomes of such
matters. In addition, when applicable, the Company will adjust tax
expense to reflect the Company’s ongoing assessments of such
matters, which require judgment and can materially increase or
decrease its effective rate as well as impact operating
results.
The
number of years with open tax audits varies depending on the tax
jurisdiction. The Company’s major taxing jurisdictions
include the United States (including applicable
states).
Basic
net income (loss) per common share is computed by dividing net loss
attributable to stockholders by the weighted-average number of
shares of common stock outstanding during the period. Diluted net
income (loss) per common share is determined using the
weighted-average number of common shares outstanding during the
period, adjusted for the dilutive effect of common stock
equivalents. For the nine months ended January 31, 2019 and
2018, potentially dilutive securities were not included in the
calculation of diluted net loss per share because to do so would be
anti-dilutive.
The
Company had the following common stock equivalents at January 31,
2019 and 2018:
|
|
|
|
|
Series A Preferred
Shares
|
21,770,150
|
-
|
|
Stock
Options
|
2,607,385
|
2,555,385
|
|
Stock Purchase
Warrants
|
11,128,706
|
2,223,669
|
|
Total
|
35,506,241
|
4,779,054
|
|
(l)
|
Recent
Accounting Pronouncements:
|
In February
2016
,
the FASB issued
ASU 2016-02,
Leases
, which aims to make leasing
activities more transparent and comparable and requires
substantially all leases be recognized by lessees on their balance
sheet as a right-of-use asset and corresponding lease liability,
including leases currently accounted for as operating leases. This
ASU is effective for all interim and annual reporting periods
beginning after December 15, 2018, with early adoption
permitted. The Company expects to adopt
ASU 2016-02 beginning May 1, 2019
and is in the process of
assessing the impact that this new guidance is expected to have on
the Company’s financial statements and related
disclosures.
In September
2016
,
the FASB issued
ASU 2016-13,
Financial
Instruments - Credit Losses
. ASU 2016-13 was
issued to provide more decision-useful information about the
expected credit losses on financial instruments and changes the
loss impairment methodology. ASU 2016-13 is effective for
reporting periods beginning after December 15, 2019 using
a modified retrospective adoption method. A prospective transition
approach is required for debt securities for which an
other-than-temporary impairment had been recognized before the
effective date. The Company is currently assessing the impact this
accounting standard will have on its financial statements and
related disclosures.
The
Company does not expect the adoption of any other recently issued
accounting pronouncements to have a significant impact on its
financial position, results of operations, or cash
flows.
The
Company has evaluated all transactions through the date the
consolidated financial statements were issued for subsequent event
disclosure consideration.
The
following table summarizes the activity of the oil and gas assets
by project for the nine months ended January 31, 2019:
|
|
|
|
|
|
|
Balance May 1,
2018
|
$
3,779,414
|
$
-
|
$
100,000
|
$
3,879,414
|
|
Additions
|
688,218
|
2,430,139
|
-
|
3,118,357
|
|
Depreciation,
depletion and amortization
|
(207,700
)
|
(123,883
)
|
-
|
(331,583
)
|
|
Balance January 31,
2019
|
$
4,259,932
|
$
2,306,256
|
$
100,000
|
$
6,666,188
|
|
(1)
|
Other
property consists primarily of four used steam generators and
related equipment that will be assigned to future projects.
As of January
31, 2019, and April 30, 2018, management concluded that impairment
was not necessary as all other assets were carried at salvage
value.
|
Kern and Kay County Projects.
On February 14, 2018, the
Company entered into a Purchase and Exchange Agreement with Red
Fork Resources (“
Red
Fork
”), pursuant to which (i) the Company agreed to
convey to Mountain View Resources, LLC, an affiliate of Red Fork,
100% of its 13.7% working interest in and to an area of mutual
interest (“
AMI
”) in the Mountain View
Project in Kern County, California, and (ii) Red Fork agreed to
convey to the Company 64.7% of its 85% working interest in and to
an AMI situated in Kay County, Oklahoma (the “
Red Fork
Exchange
”). The fair value of
the assets acquired was $108,333 as of the effective date of the
agreement. Following the Red Fork Exchange, the Company and Red
Fork each retained a 2% overriding royalty interest in the projects
that they respectively conveyed. Under the terms of the Purchase
and Exchange Agreement, all revenue and costs, expense, obligations
and liabilities earned or incurred prior to January 1, 2018 (the
“
Effective
Date
”) shall be borne by the original owners of such
working interests, and all of such revenue and costs, expense,
obligations and liabilities that occur subsequent to the effective
date shall be borne by the new owners of such working
interests.
The
acquisition of the additional concessions in Kay County, Oklahoma
added additional prospect locations adjacent to the Company’s
106,000-acre concession in Osage County, Oklahoma. The similarity
of the prospects in Kay and Kern County allows for the leverage of
assets, infrastructure and technical expertise.
Oklahoma Properties.
During the nine months ended January
31, 2019, the Company recorded additions related to development
costs incurred of approximately $688,000 for proven oil and gas
assets.
Texas Properties.
Effective on September 24, 2018, the
Company acquired a 66.67% membership interest in LBE Partners from
ICO in exchange for 300,000 restricted shares of the
Company’s common stock. LBE Partners has varying working
interest in multiple oil and gas producing wells located in Texas.
The Company recorded additions of approximately $2,430,000 for oil
and gas assets related to this acquisition.
|
6.
|
Asset Retirement Obligations
|
The
total future asset retirement obligations were estimated based on
the Company’s ownership interest in all wells and facilities,
the estimated legal obligations required to retire, dismantle,
abandon and reclaim the wells and facilities and the estimated
timing of such payments. The Company estimated the present value of
its asset retirement obligations at both January 31, 2019 and April
30, 2018 based on a future undiscounted liability of $1,098,706 and
$728,091, respectively. These costs are expected to be incurred
within 1 to 24 years. A credit-adjusted risk-free discount rate of
10% and an inflation rate of 2% were used to calculate the present
value.
Changes
to the asset retirement obligations were as follows:
|
|
Nine
Months Ended
January
31,
2019
|
Nine
Months Ended
January 31,
2018
|
|
Balance, beginning
of period
|
$
660,139
|
$
558,696
|
|
Additions
|
359,950
|
16,875
|
|
Change in
estimates
|
(5,786
)
|
55,098
|
|
Disposals
|
-
|
-
|
|
Accretion
|
13,781
|
6,535
|
|
|
1,028,084
|
637,204
|
|
Less: Current
portion for cash flows expected to be incurred within one
year
|
(720,535
)
|
(406,403
)
|
|
Long-term portion,
end of period
|
$
307,549
|
$
230,801
|
During
the nine months ended January 31, 2019 and 2018, the Company
recorded accretion expense of $13,781 and $6,535,
respectively.
Expected
timing of asset retirement obligations:
|
Year Ending April
30,
|
|
|
2019
|
$
720,535
|
|
2020
|
-
|
|
2021
|
-
|
|
2022
|
-
|
|
2023
|
-
|
|
Thereafter
|
378,171
|
|
Subtotal
|
1,098,706
|
|
Effect of
discount
|
(70,622
)
|
|
Total
|
$
1,028,084
|
|
7.
|
Related Party Transactions
|
Series A Financing
On
January 31, 2019, the Company entered into a Securities Purchase
Agreement with Scot Cohen,
the Company’s Executive
Chairman
, pursuant to which Mr. Cohen purchased $737,616 of
units in connection with the Series A Financing (the
“
Cohen
Investment
”). In addition, Mr. Cohen also converted
$300,000 and $18,853 of debt and accrued interest, respectively,
owed under the Cohen Loan Agreement, as set forth below, into units
pursuant to a Debt Conversion Agreement (the “
Cohen Debt Conversion
”). As a
result of the Cohen Investment and the Cohen Debt Conversion, the
Company issued Mr. Cohen an aggregate of 51,881 shares of Series A
Preferred and warrants to purchase 2,594,040 shares of the
Company’s common stock. For more information regarding this
transaction, see Note 1.
Acquisition of Membership Interest in LBE Partners
On October 2, 2018, the Company, ICO and LBE Partners entered into
the LBE Assignment Agreement and the LBE Purchase Agreement,
pursuant to which, effective September 24, 2018, the Company
purchased a 66.67% membership interest in LBE Partners from ICO in
exchange for 300,000 restricted shares of the Company’s
common stock to ICO. Both ICO and LBE Partners are managed by Mr.
Cohen.
For more information regarding this transaction,
see Note 1.
Related Party Loan
On June
18, 2018, Bandolier entered into a loan agreement with Scot Cohen
(the “
Cohen Loan
Agreement
”), pursuant to which Mr. Cohen loaned the
Company $300,000 at a 10% annual interest rate, due on September
30, 2018. The purpose of the Cohen Loan Agreement was to provide
the Company with short-term financing in connection with the
Company’s drilling program in Osage County, Oklahoma. On
December 17, 2018, the maturity date of the loan was extended from
September 30, 2018 to March 31, 2019. On January 31, 2019, the
Company and Mr. Cohen entered into a Debt Conversion Agreement,
pursuant to which Mr. Cohen agreed to convert all outstanding debt
and accrued interest owed under the Cohen Loan Agreement into
units, consisting of an aggregate of 15,000 shares of Series A
Preferred and warrants to purchase 750,000 shares of Company common
stock, sold and issued in the Series A Financing. As a result, the
Cohen Loan Agreement was terminated and deemed satisfied in full.
For more information regarding the debt conversion, see Note 1.
Upon conversion of the note, the Company recorded a loss on debt
extinguishment totaling $90,916.
June 2017 $2.0 Million Secured Note Financing
Scot
Cohen owns or controls 31.25% of Funding Corp., the former holder
of the senior secured promissory note in the principal amount of
$2.0 million (the “
June
2017 Secured Note
”) issued by the Company on June 13,
2017. The June 2017 Secured Note accrued interest at a rate of 10%
per annum and was scheduled to mature on June 30, 2020. The June
2017 Secured Note is presented as “Note payable –
related party, net of debt discount” on the consolidated
balance sheets.
On May
17, 2018, the parties executed an extension of the due date of the
first interest payment from June 1, 2018 to December 31, 2018.
As consideration for the interest payment extension, the Company
agreed to pay Funding Corp. an additional 10% of the interest due
June 1, 2018 on December 31, 2018. The Company accrued an
additional $19,160 of interest expense related to this extension.
On December 17, 2018, the parties executed a second extension of
the due date of the first interest payment from December 31, 2018
to March 31, 2019.
On
January 31, 2019, the Company and Funding Corp. entered into a
Secured Debt Conversion Agreement, pursuant to which Funding Corp.
agreed to convert the outstanding balance due under the June 2017
Secured Note, amounting to approximately $2.3 million, into 116,503
shares of Series A Preferred. As a result of the Secured Debt
Exchange, all indebtedness, liabilities and other obligations
arising under the June 2017 Secured Note were cancelled and deemed
satisfied in full.
In
connection with the issuance of the June 2017 Secured Note, the
Company issued to Funding Corp. warrants to purchase 840,336 shares
of the Company’s common stock (the “
June 2017 Warrant
”). Upon
issuance of the June 2017 Secured Note, the Company valued the June
2017 Warrant using the Black-Scholes Option Pricing model and
accounted for it using the relative fair value of $952,056 as debt
discount on the consolidated balance sheet. On January 31,
2019, as additional consideration for the conversion of the amounts
due under the June 2017 Secured Note, the Company agreed to (i)
reduce the exercise price of the June 2017 Warrant from $2.38 per
share to $0.50 per share, and (ii) to extend the expiration date of
the June 2017 Warrant to January 31, 2024.
As
additional consideration for the purchase of the June 2017 Secured
Note, the Company issued to Funding Corp. an overriding royalty
interest equal to 2% in all production from the Company’s
interest in the Company’s concessions located in Osage
County, Oklahoma, originally held by Spyglass, valued at $250,000,
which was recorded as contributed capital, since no repayment was
required, and debt discount on the consolidated balance
sheet.
The
debt discount is amortized over the earlier of (i) the term of the
debt or (ii) conversion of the debt, using the effective interest
method. The amortization of debt discount is included as a
component of interest expense in the consolidated statements of
operations. There was unamortized debt discount of $0 as of January
31, 2019. During the nine months ended January 31, 2019 and 2018,
the Company recorded amortization of debt discount totaling
$994,189 and $144,749, respectively.
As of
January 31, 2019 and April 30, 2018, the outstanding balance, net
of debt discount, was $0 and $1,005,811, respectively, and accrued
interest on the June 2017 Secured Note due to related party was $0
and $174,065, respectively. As a result of the Secured Debt
Exchange, the June 2017 Secured Note was terminated as of January
31, 2019.
November 2017 $2.5 Million Secured Note Financing
Scot
Cohen owns or controls 41.20% of Funding Corp. II, the former
holder of the senior secured promissory note in the principal
amount of $2.5 million (the “
November 2017 Secured Note
”)
issued by the Company on November 6, 2017. The November 2017
Secured Note accrued interest at a rate of 10% per annum and was
scheduled to mature on June 30, 2020. The November 2017 Secured
Note is presented as “Note payable – related party, net
of debt discount” on the consolidated balance
sheets.
On May
17, 2018, the parties executed an extension of the due date of the
first interest payment from June 1, 2018 to December 31, 2018.
As consideration for the interest payment extension, the Company
agreed to pay Funding Corp. II an additional 10% of the interest
due on June 1, 2018 on December 31, 2018. The Company accrued
an additional $14,247 of interest expense related to this
extension. On December 17, 2018, the parties executed a second
extension of the due date of the first interest payment from
December 31, 2018 to March 31, 2019.
On
January 31, 2019, the Company and Funding Corp. II entered into a
Secured Debt Conversion Agreement, pursuant to which Funding Corp.
II agreed to convert the outstanding balance due under the November
2017 Secured Note, amounting to approximately $2.8 million, into
140,799 shares of Series A Preferred stock. As a result of the
Secured Debt Exchange, all indebtedness, liabilities and other
obligations arising under the November 2017 Secured Note were
cancelled and deemed satisfied in full.
In
connection with the issuance of the November 2017 Secured Note, the
Company issued to Funding Corp. II warrants to purchase 1.25
million shares of the Company’s common stock (the
“
November 2017
Warrant
”). Upon issuance of the November 2017 Note,
the Company valued the November 2017 Warrant using the
Black-Scholes Option Pricing model and accounted for it using the
relative fair value of $1,051,171 as debt discount on the
consolidated balance sheet. In relation to the financing, Scot
Cohen paid $250,000 for an overriding royalty interest from Funding
Corp. (as discussed below), which was recorded as additional debt
discount on the consolidated balance sheet. On January 31, 2019, as
additional consideration for the conversion of the amounts due
under the November 2017 Secured Note, the Company agreed to (i)
reduce the exercise price of the November 2017 Warrant from $2.00
per share to $0.50 per share, and (ii) extend the expiration date
of the November 2017 Warrant to January 31, 2024.
As
additional consideration for the purchase of the November 2017
Secured Note, the Company issued to Funding Corp. II an overriding
royalty interest equal to 2% in all production from the
Company’s interest in the Company’s concessions located
in Osage County, Oklahoma, originally held by Spyglass (the
“
Existing
Osage County Override
”) then
transferred to Funding Corp. as inducement for the June 2017
Secured Note. The Existing Osage County Override was then acquired
by the Company from Mr. Cohen. As noted above, the override was
accounted for as a debt discount and amortized over the term of the
debt.
The
debt discount is amortized over the earlier of (i) the term of the
debt or (ii) conversion of the debt, using the effective interest
method. The amortization of debt discount is included as a
component of interest expense in the consolidated statements of
operations. There was unamortized debt discount of $0 as of
January 31, 2019. During the nine months ended January 31,
2019 and 2018, the Company recorded amortization of debt discount
totaling $1,145,061 and $79,251, respectively.
As of
January 31, 2019 and April 30, 2018, the outstanding balance, net
of debt discount, was $0 and $1,354,93, respectively, and accrued
interest on the November 2017 Secured Note due to related party was
$0 and $120,548, respectively. As a result of the Secured Debt
Exchange, the November 2017 Secured Note was terminated as of
January 31, 2019.
|
8.
|
Derivative Liabilities
|
As
discussed above in Note 1, on January 31, 2019, the Company sold
and issued an aggregate of 178,101 units, for an aggregate purchase
price of $3,562,015, to certain accredited investors and to certain
debtholders. The units sold and issued in the Offering included
five-year warrants to purchase 8,905,037 shares of Company common
stock, at an exercise price of $0.50 per share.
The
Company identified certain features embedded in the warrants
requiring the Company to classify the warrants as a derivative
liability; specifically, the warrants contain a fundamental
transaction provision that permits their settlement in cash at fair
value of the remaining unexercised portion of this Warrant at the
option of the holder upon the occurrence of a change in
control.
The
fair value of the derivative feature of the warrants on the date of
issuance was calculated using a binomial option model valued with
the following weighted average assumptions:
|
|
|
|
Risk free interest
rate
|
2.43
%
|
|
Dividend
yield
|
0.00
%
|
|
Expected
volatility
|
141.62
%
|
|
Remaining term
(years)
|
5.0
|
As of
January 31, 2019, the derivative liability of the warrants was
$4,130,451. In addition, for the nine months ended January 31,
2019, the Company recorded $508,931 as additional interest expense
on the statement of operations for the portion of the fair value of
the warrant that exceeded face value of the Series A Preferred
shares sold.
As of
January 31, 2019 and April 30, 2018, the Company had 5,000,000
shares of preferred stock, par value $0.00001 per share,
authorized. As of January 31, 2019 and April 30, 2018, the Company
had 29,500 shares of Series B Preferred Stock, par value $0.00001
per share (“
Series B
Preferred
”), authorized, and no Series B Preferred
issued or outstanding. On January 31, 2019, the Company filed the
Series A COD with the Secretary of State with the State of
Delaware, designating 500,000 shares of the Company’s
preferred stock as Series A Preferred. As of January 31, 2019,
there were 435,403 shares of Series A Preferred issued and
outstanding.
On
January 31, 2019, the Company sold and issued 178,101 shares of
Series A Preferred to the New Investors and the Debt Holders in
connection with the Series A Financing. In addition, the Company
issued an aggregate of 257,302 shares of Series A Preferred to
Funding Corp. and Funding Corp. II in connection with the Senior
Secured Debt Exchange. See Note 1 for additional information
regarding the Series A Financing and the Senior Secured Debt
Exchange.
As of
January 31, 2019 and April 30, 2018, the Company had 150,000,000
shares of common stock authorized.
In May
2018, the Company granted a total of 260,000 shares of restricted
common stock to Scot Cohen and Steven Brunner in exchange for a
reduction in cash compensation with a fair value of approximately
$325,000, based on the market price of the Company’s common
stock on the grant date. The shares vest monthly in equal
installments over a 12-month period. During the nine months ended
January 31, 2019, the Company recorded stock-based compensation of
$216,666 related to these grants.
As
discussed in Note 1, on October 2, 2018, pursuant to the LBE
Purchase Agreement, the Company issued 300,000 shares of restricted
common stock to ICO in exchange for a 66.67% interest in LBE
Partners.
As discussed in Note 11, on October 4, 2018, the Company settled
the dispute with its former landlord in exchange for the issuance
of 68,807 shares of Company common stock,
satisfying the
$75,000 liability related to the lease.
There
were 17,938,540 and 17,309,733 shares of Company common stock
issued and outstanding as of January 31, 2019 and April 30,
2018, respectively.
Stock Options
During the nine months ended January 31, 2019, the Company granted
options to purchase 52,000 shares of common stock at an exercise
price of $1.50 per share to consultants. These options vest over a
24-month period and expire ten years from grant date. The
assumptions used for the fair value of the options granted during
the nine months ended January 31, 2019 were as
follows:
|
|
|
|
Exercise
price
|
$
1.30 – 1.50
|
|
Expected
dividends
|
0
%
|
|
Expected
volatility
|
153.10 - 158.73
%
|
|
Risk
free interest rate
|
2.08 – 3.15
|
|
Expected
life of grants
|
|
The
following table summarizes information about the changes of options
for the period from April 30, 2018 to January 31, 2019, and
options outstanding and exercisable at January 31,
2019:
|
|
|
Weighted
Average
Exercise
Prices
|
|
Outstanding
April 30, 2018
|
2,555,385
|
$
2.14
|
|
Granted
|
52,000
|
1.50
|
|
Exercised
|
-
|
|
|
Forfeited/Cancelled
|
-
|
|
|
Outstanding
– January 31, 2019
|
2,607,385
|
$
2.13
|
|
Exercisable
– January 31, 2019
|
2,520,289
|
$
2.17
|
|
Outstanding
– Aggregate Intrinsic Value
|
|
$
-
|
|
Exercisable
– Aggregate Intrinsic Value
|
|
$
-
|
The
following table summarizes information about the options
outstanding and exercisable at January 31, 2019:
|
|
|
|
|
|
|
Weighted
Avg.
Life
Remaining (years)
|
|
|
$
1.30 –
44.00
|
2,607,385
|
0.05
to 9.50
|
2,535,864
|
During
the nine months ended January 31, 2019 and 2018, the Company
expensed $197,117 and $811,123, respectively, related to the
vesting of outstanding options to general and administrative
expense for stock-based compensation
pursuant to employment and
consulting agreements.
As of
January 31, 2019, the Company had approximately $50,244 in
unrecognized stock-based compensation expense related to unvested
options, which will be amortized over a weighted average exercise
period of approximately three years.
Warrants
As
discussed above, on January 31, 2019, the Company sold and issued
an aggregate of 178,101 units to certain accredited investors and
to certain debtholders. The units sold and issued in the Offering
included five-year warrants to purchase 8,905,037 shares of Company
common stock, at an exercise price of $0.50 per share.
The
fair values of the 840,336 June 2017 Warrants granted in
conjunction with the June 2017 Secured Note Financing and the 1.25
million November 2017 Warrants granted in connection with the
November 2017 Secured Note Financing (as discussed in Note 7) were
estimated on the date of grant using the Black-Scholes
option-pricing model.
The
following is a summary of the Company’s warrant
activity:
|
|
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Life
Remaining
(Years)
|
|
Outstanding
and exercisable – April 30, 2018
|
2,223,669
|
$
5.02
|
2.57
|
|
Forfeited
|
-
|
-
|
-
|
|
Granted
|
8,905,037
|
0.50
|
5.0
|
|
Outstanding
and exercisable – January 31, 2019
|
11,128,706
|
$
1.09
|
4.34
|
The
aggregate intrinsic value of the outstanding warrants was
$5,497,687 at January 31, 2019.
|
10.
|
Revenue from Contracts with Customers
|
Change in Accounting Policy.
The Company adopted ASU
2014-09, “
Revenue from
Contracts with Customers (Topic 606)
,” on May 1, 2018,
using the modified retrospective method applied to contracts that
were not completed as of May 1, 2018. Refer to Note 4
–
Significant Accounting
Policies
for additional information.
Exploration and Production.
There were no significant
changes to the timing or valuation of revenue recognized for sales
of production from exploration and production
activities.
Disaggregation of Revenue from Contracts with Customers.
The
following table disaggregates revenue by significant product type
for the nine months ended January 31, 2019:
|
|
For
the Three Months Ended January 31, 2019
|
For
the Nine Months Ended January 31, 2019
|
|
Oil
sales
|
$
309,381
|
$
1,279,172
|
|
Natural gas
sales
|
14,734
|
29,440
|
|
Royalty
revenue
|
15,871
|
15,871
|
|
Total revenue from
customers
|
$
339,986
|
$
1,324,483
|
There
were no significant contract liabilities or transaction price
allocations to any remaining performance obligations as of January
31, 2019 or April 30, 2018.
|
11.
|
Contingency and Contractual Obligations
|
Pending
Litigation
(a) In
January 2010, the Company experienced a flood in its Calgary office
premises as a result of a broken water pipe. There was significant
damage to the premises, rendering them unusable until the landlord
had completed remediation. Pursuant to the lease contract, the
Company asserted that rent should be abated during the remediation
process and accordingly, the Company did not pay any rent after
December 2009. During the remediation process, the Company engaged
an independent environmental testing company to test for air
quality and for the existence of other potentially hazardous
conditions. The testing revealed the existence of potentially
hazardous mold and the consultant provided specific written
instructions for the effective remediation of the premises. During
the remediation process, the landlord did not follow the
consultant’s instructions and correct the potentially
hazardous mold situation, and subsequently in June 2010 gave notice
and declared the premises to be ready for occupancy. The Company
re-engaged the consultant to re-test the premises and the testing
results again revealed the presence of potentially hazardous mold.
The Company determined that the premises were not fit for
re-occupancy and considered the landlord to be in default of the
lease. The landlord subsequently terminated the lease.
On
January 30, 2014, the landlord filed a Statement of Claim against
the Company for rental arrears in the amount aggregating CAD
$759,000 (approximately USD $574,000 as of January 31, 2019). The
Company filed a defense and on October 20, 2014, it filed a summary
judgment application stating that the landlord’s claim is
barred, as it was commenced outside the two-year statute of
limitation period under the Alberta Limitations Act. The landlord
subsequently filed a cross-application to amend its Statement of
Claim to add a claim for loss of prospective rent in an amount of
CAD $665,000 (approximately USD $503,000 as of January 31, 2019).
The applications were heard on June 25, 2015
and the court allowed
both the Company’s summary judgment application and the
landlord’s amendment application. Both of these orders were
appealed though two levels of the Alberta courts and the appeals
were dismissed at both levels. On October 4, 2018, the Company
settled the dispute with the landlord in exchange for the issuance
of 68,807 shares of Company common stock,
satisfying the
$75,000 liability related to the lease.
(b) In
September 2013, the Company was notified by the Railroad Commission
of Texas (the “
Railroad
Commission
”) that the Company was not in compliance
with regulations promulgated by the Railroad Commission. The
Company was therefore deemed to have lost its corporate privileges
within the State of Texas and as a result, all wells within the
state would have to be plugged. The Railroad Commission therefore
collected $25,000 from the Company, which was originally deposited
with the Railroad Commission, to cover a portion of the estimated
costs of $88,960 to plug the wells. In addition to the above, the
Railroad Commission also reserved its right to separately seek any
remedies against the Company resulting from its
noncompliance.
(c) On
August 11, 2014, Martha Donelson and John Friend amended their
complaint in an existing lawsuit by filing a class action complaint
styled:
Martha Donelson and
John Friend, et al. v. United States of America, Department of the
Interior, Bureau of Indian Affairs and Devon Energy Production, LP,
et al.,
Case No. 14-CV-316-JHP-TLW, United States
District Court for the Northern District of Oklahoma (the
“
Proceeding
”). The
plaintiffs added as defendants twenty-seven (27) specifically named
operators, including Spyglass, as well as all Osage County
lessees and operators who have obtained a concession agreement,
lease or drilling permit approved by the Bureau of Indian Affairs
(“
BIA
”) in Osage County
allegedly in violation of National Environmental Policy Act
(“
NEPA
”). Plaintiffs seek
a declaratory judgment that the BIA improperly approved oil and gas
leases, concession agreements and drilling permits prior to August
12, 2014, without satisfying the BIA’s obligations under
federal regulations or NEPA, and seek a determination that such oil
and gas leases, concession agreements and drilling permits are
void
ab
initio
. Plaintiffs are seeking damages against the
defendants for alleged nuisance, trespass, negligence and unjust
enrichment. The potential consequences of such complaint could
jeopardize the corresponding leases.
On
October 7, 2014, Spyglass, along with other defendants, filed a
Motion to Dismiss the August 11, 2014 Amended Complaint on various
procedural and legal grounds. Following the significant briefing,
the Court, on March 31, 2016, granted the Motion to Dismiss as to
all defendants and entered a judgment in favor of the defendants
against the plaintiffs. On April 14, 2016, Spyglass with the other
defendants, filed a Motion seeking its attorneys’ fees and
costs. The motion remains pending. On April 28, 2016, the
Plaintiffs filed three motions: a Motion to Amend or Alter the
Judgment; a Motion to Amend the Complaint; and a Motion to Vacate
Order. On November 23, 2016, the Court denied all three of
Plaintiffs’ motions. On December 6, 2016, the Plaintiffs
filed a Notice of Appeal to the Tenth Circuit Court of Appeals.
That appeal is pending as of the filing date of these financial
statements. There is no specific timeline by which the Court of
Appeals must render a ruling. Spyglass intends to continue to
vigorously defend its interest in this matter.
(d)
MegaWest Energy Missouri Corp. (“
MegaWest Missouri
”), a wholly
owned subsidiary of the Company, is involved in two cases related
to oil leases in West Central, Missouri. The first case
(
James Long and Jodeane Long v.
MegaWest Energy Missouri and Petro River Oil Corp.
, case
number 13B4-CV00019)
is a case for unlawful
detainer, pursuant to which the plaintiffs contend that MegaWest
Missouri oil and gas lease has expired and MegaWest Missouri is
unlawfully possessing the plaintiffs’ real property by
asserting that the leases remain in effect. The case was
originally filed in Vernon County, Missouri on September 20,
2013. MegaWest Missouri filed an Answer and Counterclaims on
November 26, 2013 and the plaintiffs filed a motion to dismiss the
counterclaims. MegaWest Missouri filed a motion for Change of Judge
and Change of Venue and the case was transferred to Barton County.
The court granted the motion to dismiss the counterclaims on
February 3, 2014.
As to the other allegations in the
complaint, the matter is still pending.
The
Company is from time to time involved in legal proceedings in the
ordinary course of business. It does not believe that any of these
claims and proceedings against it is likely to have, individually
or in the aggregate, a material adverse effect on its financial
condition or results of operations.