The following discussion should be read in conjunction with our financial statements and notes to those statements. In addition to historical information, the following discussion and other parts of this annual report contain forward-looking information that involves risks and uncertainties.
The Company is a domestic oil and gas exploration and development company focused on the acquisition and exploration of oil and natural gas properties in the Western United States. On December 2, 2013, the Company completed the acquisition of 22 separate oil and gas leases issued by the BLM from FFMJ for an aggregate purchase price of $250,000. The West Ranch Prospect comprises 32,723 acres in the Butte Valley Oil Play Region in North Central Nevada. We have a 100\% working interest and an 82\% net revenue interest in the Leases. If the property is viable and can be developed, we will receive 82\% of the net revenues generated from the property. As the leaseholder, we are responsible for evaluating, exploring, paying for and maintaining the Leases. . In connection with our acquisition of the Leases, we have agreed to drill a test well with a surface and bottom hole location on the Leases for the purpose of hydrocarbon exploration and production. The test well must achieve a depth of 6,000 feet. If we fail to commence drilling with a rig capable of total depth on or before July 5, 2015, the Leases will be reassigned to FFMJ.
Our plan of operations for the next 12 months is to conduct geological mapping, gravity surveying and 2D seismic coverage on the West Ranch Prospect in order to determine the best location for drilling the initial test well. To that end, we have developed an initial exploration plan to identify drilling targets. This initial exploration plan is designed to identify new drilling locations targeting certain geological formations that the Company believes may be capable of producing oil or natural gas in commercial quantities.
As a result of the acquisition of the Leases, the Company is no longer a "shell company," as defined in Rule 12b-2 of the Exchange Act. This change in "shell company" status was previously reported in the Current Report on Form 8-K filed with the SEC on December 6, 2013, as amended by a Form 8-K/A filed on December 13, 2013.
Since the Company's inception on September 22, 2011, it has not generated any revenues and, through the end of the fiscal year 2014, has incurred a cumulative net loss of $1,385,455. In order for us to finance our operations, we will require additional capital. It was our expectation that registration with the SEC and subsequent public listing of our common stock might facilitate our efforts in attracting additional capital. Thus far we have been unsuccessful in identifying credible sources of financing despite our efforts.
Current West Ranch Activities
As of April 2014, the Company had completed two phases of an eight-phase exploration plan designed to systematically reduce risk and optimize selection of one or more new drilling targets by incorporating the results of the two wells drilled to date.
The Company has made significant progress with respect to its exploration plan and is currently working on the remaining phases of exploration, which involves the acquisition of seismic data, the commencement of a well permitting process and the outlining of an effective drilling strategy.
In April 2014, Gaffney, Cline & Associates, an oil and gas consulting firm with offices in Houston, Texas, completed Phase II of an independent assessment of the oil and gas exploration potential of the West Ranch Prospect and surrounding areas. The report made a number of recommendations, including the proposed acquisition of close spacing 2D high resolution seismic over the residual gravity leads and, in the event the Chainman sandstone is oil-bearing, the viability of fracking by drilling an exploration well to the Guilmette in the shallowest structure to maximize the finding of liquids.
Previously, two test wells were drilled within the boundaries of what is now the Company's West Ranch Prospect oil and gas lease position. According to a report undertaken by the Company's Head of Exploration, Consultant Geologist William J. Ehni, neither well penetrated the deeper Guilmette carbonate, but the Permian section has returned multiple oil showings for both wells, indicating the potential for commercial accumulations of oil and gas near both well sites.
Exploration Plan Outline
Phase 1 - Acquire Gravity and Magnetic Data: (COMPLETED)
All available non-exclusive gravity and magnetic data in the areas of interest has been acquired, as well as any additional proprietary data. This data will then be used to reinterpret the West Ranch Prospect's geology with a more complete data set than was initially used when selecting the two older wells. This action has the potential to reveal any targets the original two older wells may have missed.
Currently available non-exclusive data includes gravity data spanning 2,000 gravity stations and over 600 line miles of magnetic data. Supplemental data will include an additional 100 new gravity stations.
Phase 2 - Interpretation of Gravity, Mag and Surface Mapping: (COMPLETED)
The Company used all data sets, combined with surface geology and an air photo interpretation, to refine the structural parameters of the two already identified anticlinal structures. The aim of this process was to reach the crest of those structures, while simultaneously identifying any additional structures that might host commercial quantities of oil and gas. This aim was achieved through the use of gravity data to identify faults, structural highs and Tertiary basin geometry. Magnetic data was also used to delineate faults and a magnetic basement structure.
This interpretation relies on "ground truth" established in the two existing wells, while focusing on possible structural highs that are updip from oil shows observed near these wells. Exploring for structural highs near the historical wells, and/or moving updip from these wells, will be the main focus of the Company's exploration efforts.
Phase 3 - Seismic Permitting: (IN PROGRESS)
A contractor/seismic company will be hired to handle the BLM and Nevada private property permitting process for seismic data acquisition. This process occurs at the point of acquisition.
Phase 4 - Acquire Seismic Data : (IN PROGRESS)
Seismic data will be acquired, as available, across any potential traps or structures near the two existing wells. This will be done in order to map any structures identified in the gravity and magnetic data as accurately as possible, while also reducing the risk of any subsequent drilling efforts. It is estimated that at least 10 miles of existing data will be located and acquired. In order to satisfactorily evaluate the Leases and tie the two existing wells together with outcrop control, at least 30 miles of new seismic data will be required.
Phase 5 - Interpret Data Sets: (IN PROGRESS)
A complete geologic and geophysical interpretation will enhance the possibility of locating a successful oil and gas drill site. Through the acquisition of additional seismic and gravity data, drilling targets of wells that might have been missed will be identified.
In turn, the Company will attempt to reach the crest of the two identified anticlinal structures.
Phase 6 - Define Drilling Location(s) and Reserves Assessment: (IN PROGRESS)
At this stage in the exploration plan, we will define exploration well location(s). The Company will obtain a petroleum engineer's assessment of potential reserves for target-horizons through an independent third party.
Phase 7 - Commence Well Permitting Process:
As we commence the well permitting process, surface and target locations may be revised or amended at a later stage.
Phase 8 - Decide on Drilling Strategy:
During this phase, the Company may decide to (a) pursue drilling on an individual basis, (b) seek an outside drilling partner, or (c) forego drilling at this time.
Application of 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 of America. 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 disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to impairment of property, plant and equipment, intangible assets, deferred tax assets and fair value computation using the Black Scholes option pricing model. We base our estimates on historical experience and on various other assumptions, such as the trading value of our common stock and estimated future undiscounted cash flows, that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that our estimates, including those for the above-described items, are reasonable.
Our financial statements are presented in conformity with accounting principles generally accepted in the United States of America, as reported for the fiscal years ending on March 31, 2013 and March 31, 2014 and the period from September 22, 2011 (inception) to March 31, 2014. We have summarized our most significant accounting policies.
9 Exploration Stage Company
The Company is currently considered an exploration stage company as defined by Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 915-10-05. As an exploration stage enterprise, the Company discloses the deficit accumulated during the exploration stage and the cumulative statements of operations and cash flows from inception (September 22, 2011) to the current balance sheet date. An entity remains in the exploration stage until such time as, among other factors, revenues have been realized.
Certain prior period amounts have been reclassified to conform to the current period presentation. There was no material effect to the financial statements as result of these reclassifications.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company maintains cash balances in non-interest-bearing accounts, which do not currently exceed federally insured limits. For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. There were no cash equivalents on hand for the periods presented herein.
Fair Value of Financial Instruments
Under FASB ASC 820-10-05, FASB established a framework for measuring fair value in generally accepted accounting principles and expanded disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company's financial statements as reflected herein. The carrying amounts of cash, prepaid expenses and accrued expenses reported on the balance sheet are estimated by management to approximate fair value primarily due to the short term nature of the instruments.
Basic and Diluted Loss per Share
The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an "as if converted" basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the periods presented, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.
The Company adopted FASB guidance on stock based compensation upon inception at September 22, 2011. Under FASB ASC 718-10-30-2, all share-based payments to employees, including grants of employee stock options, are to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The Company has had no compensation expense related to stock based compensation since its inception.
Revenue from the production of oil and natural gas is recognized when persuasive evidence of an arrangement exists (such as a contract with an oil buyer), the Company has delivered the oil, the fee is fixed and determinable, and collectability is reasonably assured.
Advertising and Promotion
All costs associated with advertising and promotions are expensed as incurred.
Deferred tax assets and liabilities are recognized 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 years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such asset will not be recovered through future operations.
10 Uncertain Tax Positions
In accordance with ASC 740, the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be capable of withstanding examination by the taxing authorities based on the technical merits of the position. These standards prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
Various taxing authorities may periodically audit the Company's income tax returns. These audits may include questions regarding the Company's tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter for which an allowance has been established is audited and fully resolved. The Company has not yet undergone an examination by any taxing authorities.
The assessment of the Company's tax position relies on the judgment of management to estimate the exposures associated with the Company's various filing positions.
Recently Issued Accounting Pronouncements
In February 2013, FASB issued Accounting Standards Update ("ASU") No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in this ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP. The new amendments will require an organization to:
· Present (either on the face of the statement where net income is presented or
in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income, but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period; and
· Cross-reference to other disclosures currently required under U.S. GAAP for
other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.
The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012 for public companies. Early adoption is permitted. The adoption of ASU No. 2013-02 is not expected to have a material impact on our financial position or results of operations.
In January 2013, FASB issued ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11. This ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope of the offsetting disclosures, FASB determined that it could make them more operable and cost effective for preparers while still giving financial statement users sufficient information to analyze the most significant presentation differences between financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the amendments in this update will be effective for fiscal periods beginning on, or after January 1, 2013. The adoption of ASU 2013-01 is not expected to have a material impact on our financial position or results of operations.
In October 2012, FASB issued Accounting Standards Update ASU 2012-04, Technical Corrections and Improvements. The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected to have a material impact on our financial position or results of operations.
In August 2012, FASB issued ASU 2012-03, Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update). This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material impact on our financial position or results of operations.
In July 2012, FASB issued ASU 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This update amends ASU 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment and permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles - Goodwill and Other - General Intangibles Other than Goodwill. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity's financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The adoption of ASU 2012-02 has not had a material impact on our financial position or results of operations.
Results of Operations
Year Ended March 31, 2014 versus 2013
We incurred a net loss $1,354,219 for the year ended March 31, 2014 (or $0.02 per share) versus a net loss of $31,012 in the same period in 2013 ($0.00 per share).
The Company had no revenues or operations during the year ended March 31, 2014, 2013 and the period from September 22, 2011 (inception) to March 31, 2014.
General and Administrative Expenses
General and administrative expenses were $101,985 during the year ended March 31, 2014 versus $19,726 for the previous year. The increase is due mostly to increases in advertising and travel costs.
Officer salaries were $464,386 for the year ended March 31, 2014 versus zero for the previous fiscal year. Of the $464,386, $100,000 represents cash payments pursuant to Lawrence Pemble, our Chief Executive Officer, pursuant to his employment agreement of May 31, 2013. The balance of the expense, or $34,386, represents the accrual of the value of Mr. Pemble's first tranche of stock-based compensation, 1,000,000 shares which were issued June 20, 2014.
Professional fees for the year ended March 31, 2014 were $183,493 versus $10,972 in the previous year. The increase is due to statutory filing costs and geological expenses related to our West Ranch Prospect.
As is discussed in Note 4 to the financial statements, we impaired the carrying value of the West Ranch Prospect in the amount of $602,619. We had no such impairment charge in the previous year.
Interest expense was $1,436 for the year ended March 31, 2014 versus $314 for the previous year. Interest expense is comprised entirely from related-party loans made by our Chief Executive Officer, Lawrence Pemble.
Liquidity and Capital Resources
The following table summarizes total assets, accumulated deficit, stockholders' equity (deficit) and working capital at March 31, 2014 and 2013.
March 31 2014 2013 Total assets $ 7,419 $ 4,874 Accumulated deficit (1,385,455 ) (31,236 ) Stockholders' equity (deficit) (102,192 ) (3,722 ) Working capital (102,192 ) (3,722 )
Our principal source of operating capital has been provided from private sales of our common stock. At March 31, 2014, we had a negative working capital position of $102,192. As we continue to develop our business and attempt to expand operational activities, we expect to continue to experience net negative cash flows from operations in amounts not now determinable, and will be required to obtain additional financing to fund operations through common stock offerings and debt borrowings to the extent necessary to provide working capital. We have and expect to continue to have capital expenditure and working capital needs in excess of the cash flow from our operations and borrowing capacity and we do not currently have the liquidity or capital resources to fund our operations at their current level for the next twelve months. We need to raise additional cash to fund our operations and implement our business plan. We expect that the additional financing will (if available) take the form of a private placement of equity. We maintain an on-going effort to locate sources of additional funding, without which we will not be able to remain a viable entity. No financing arrangements are currently under contract, and there are no assurances that we will be able to obtain adequate financing. If we are able to obtain the financing required to remain in business, we will need to substantially increase revenues from their current levels in order to achieve operating profitability. If we are able to obtain the required financing to remain in business, future operating results depend upon a number of factors that are outside of our control.
Our funding sources for the fiscal years ended March 31, 2014 and 2013 have been as follows:
Debt Instruments, Guarantees, and Related Covenants
The Company received unsecured loans to fund operations in the amount of $0 and $7,700 during the year ended March 31, 2014 and 2013, respectively. The unsecured loans in 2013 were from our former CEO, Viatcheslav Gelshteyn and were non-interest bearing and due on demand. On May 31, 2013, Mr. Gelshteyn forgave these loans in connection with the Change in Control.
Sales of Common Stock
During the fiscal year ended March 31, 2014, the Company issued 1,230,000 shares to a single investor in a series of transactions for an aggregate of $730,000 in cash.
We anticipate that we may incur operating losses in the next twelve months. Our revenues are not expected to exceed our investment and operating costs in the next twelve months. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of operations. To address these risks, we must, among other things, seek growth opportunities through investment, implement and successfully execute our business strategy, respond to competitive developments, and attract, retain and motivate qualified personnel. We cannot assure that we will be successful in addressing such risks, and the failure to do so could have a material adverse effect on our business prospects, financial condition and results of operations.
As of March 31, 2014, our balance of cash on hand was $7,419. Our plan for satisfying our cash requirements for the next twelve months is through the sale of shares of our common stock, third party debt financing, and/or traditional bank financing. We cannot assure investors that adequate financing will be available. In the absence of such financing, we may be unable to proceed with our operations.
Off-Balance Sheet Arrangements
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