This report contains forward-looking statements that involve risk and
uncertainties. We use words such as "anticipate", "believe", "plan", "expect",
"future", "intend", and similar expressions to identify such forward-looking
statements. Investors should be aware that all forward-looking statements
contained within this filing are good faith estimates of management as of the
date of this filing. Our actual results could differ materially from those
anticipated in these forward-looking statements.
Impact of COVID-19 to our Business
The long-term impacts of the global emergence of novel coronavirus 2019, or
COVID-19, on our business are currently unknown. In an effort to protect the
health and safety of our employees, we took proactive, aggressive action from
the earliest signs of the outbreak in China to adopt social distancing policies
at our locations, including working from home, limiting the number of employees
attending meetings, reducing the number of people in our sites at any one time,
and suspending employee travel. We anticipate that the global health crisis
caused by COVID-19 will continue to negatively impact business activity. We have
observed declining demand and price reductions in the oil and gas sector as
business and consumer activity decelerates across the globe. When COVID-19 is
demonstrably contained, we anticipate a rebound in economic activity, depending
on the rate, pace, and effectiveness of the containment efforts deployed by
various national, state, and local governments.
We will continue to actively monitor the situation and may take further actions
altering our business operations that we determine are in the best interests of
our employees, customers, partners, suppliers, and stakeholders, or as required
by federal, state, or local authorities. It is not clear what the potential
effects any such alterations or modifications may have on our business,
including the effects on our customers, employees, and prospects, or on our
financial results for the remainder of fiscal year 2023.
Company Description and Operations
We are an oil exploration and production company, primarily engaged in
acquisition and exploration efforts to find mineral reserves on various
properties. From our inception in March 2008 through October 2009, we were
primarily engaged in acquisition and exploration efforts for mineral properties.
Beginning in October 2009, we shifted our focus to locating mature oil fields,
with the intention of acquiring those oil fields and recovering stranded oil
using enhanced recovery methods. From June 14, 2011 to December 31, 2020, we
were a management services company, managing the acquisition and operation of
mature oil fields, focused on the recovery of "stranded" oil from those mature
fields using enhanced oil recovery methods for our then sole customer, Stranded
Oil Resources Corporation, or SORC, then a wholly owned subsidiary of Alleghany
Corporation. We performed those services in exchange for a quarterly management
fee and the reimbursement from SORC of our employee related expenses, which fees
and reimbursements were effectively all of our revenues prior to the closing of
the Securities Purchase Agreement with Alleghany described below.
On December 31, 2020, we entered into a Securities Purchase Agreement with
Alleghany Corporation. Under that agreement, we purchased all of the issued and
outstanding shares of SORC. As consideration for the SORC shares, we paid
Alleghany $72,678 in cash and agreed to pay Alleghany a seven-year royalty of
5.0% of our future revenues and net profits from our oil, gas, gas liquids and
all other hydrocarbons, subject to certain adjustments. The royalty rate
increased to 6.0% after December 31, 2022. Currently, there are no ongoing
operations being conducted by SORC.
Under the Securities Purchase Agreement with Alleghany, we also entered into a
Consulting Agreement, under which Alleghany paid us an aggregate of
approximately $1.245 million during calendar year 2021 in exchange for our
providing Alleghany with one to three years of consulting services from certain
of our employees, including Mark See, our Chief Executive Officer.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued
Alleghany no longer pays us any management fees or reimbursement payments for
the monthly expenses of our employees. Those fees and reimbursements were
effectively all of our revenues prior to the closing of the Securities Purchase
Agreement with Alleghany described above.
While we were providing services to Alleghany prior to December 31, 2020, we
gained know-how and operational experience in evaluating, acquiring, operating
and developing oil and gas properties using enhanced oil recovery methods. We
also gained experience in designing, drilling and producing conventional oil
wells without using those methods.
We have identified and leased 45,246 gross acres, and 37,932 net acres, of
mineral property interests in the State of Montana. We began drilling one
exploratory well during May 2022, which has not been completed and has not been
put into production. We are continuing our efforts to complete the well and
begin commercial production. Simultaneously, we are raising funds to continue
field development. Each additional well is planned to have an 80-acre footprint,
so the first 10 wells would affect approximately 800 acres, or less than two
percent of the leased acreage. The ability to secure further funding will drive
future plans and the pace of field development.
In connection with our securing the acreage in Montana described above, our
wholly-owned subsidiary, Lustre Oil Company LLC, or Lustre, entered into an
Acquisition and Participation Agreement with Erehwon Oil & Gas, LLC, or Erehwon.
The agreement with Erehwon allows us to acquire oil and gas interests, and
drill, complete and equip wells, in Valley County, Daniels County and Roosevelt
County, Montana. Our agreement with Erehwon also specifies calculations for
royalty interests and working interests we will receive for the first ten well
completions, and first ten well recompletions, defined as the completion of a
well for production from an existing well bore in another formation. We will
acquire the initial mineral leases, and pay 100% of the initial acquisition
costs, up to $500,000. When the total costs exceed $500,000, Erehwon has the
option to acquire a 10% working interest in any lease we acquired by paying us
10% of our acquisition cost of that lease, resulting in our paying 90% of the
applicable lease's acquisition costs. Until we are repaid the full amount we
paid to complete the first ten wells and first ten recompletions in the acreage,
the working interest split will remain 10% to Erehwon and 90% to us. After we
have recovered our acquisition costs, Erehwon will receive a 20% working
interest. Additional wells and recompletions will have a working interest split
equal to 10% to Erehwon and 90% to us, unless Erehwon exercises its option to
increase its working interest by 10%, as described above.
Under the Erehwon agreement, we fund 100% of the construction costs of the first
ten wells and first ten completions. The lease acquisition costs of any
additional wells will be funded 100% by us; provided, however, that Erehwon will
have the option to repay to us 10% of our acquisition costs to increase its
working interest to 20%. Royalty expense for these wells will consist of a
royalty interest to the landowner and an overriding royalty interest of between
3% and 6% for two individuals who generated the prospects. The two individuals
who generated the prospects will also receive an amount equal to 5% of the cost
of the first ten new completed wells and the first ten completed recompletions.
In January 2022, we executed a Net Profits Interest Agreement with Erehwon and
Olfert No. 11-4 Holdings, LLC, or Olfert Holdings, for the purpose of funding
the first well, Olfert #11-4, under the Acquisition and Participation Agreement
described above. In exchange for Olfert Holdings' funding of the development of
the first well, Olfert Holdings receives 90% of funds resulting from Olfert
#11-4 prior to "Payout" and 50% after "Payout." The Net Profits Interest
Agreement defines "Payout" as the point in time when the aggregate of all 'Net
Profits Interest' payments made to Olfert Holdings under the agreement equals
105% of the total well development costs.
In January 2022, we also entered into the operating agreement for Olfert
Holdings. Pursuant to this operating agreement, we agreed to make a capital
contribution to Olfert Holdings in the amount of $500,000, out of an aggregate
of $1,500,000 of capital to be raised by Olfert Holdings. As of May 31, 2022, we
were credited with a contribution totaling $59,935 of well development costs,
representing a 5.5% interest in Olfert Holdings, based upon the market value of
the assets we contributed. Since then, other investors, including our chief
financial officer (see Related Party Transactions), assumed and funded our
remaining capital contribution commitment.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued
On June 30, 2020, we entered into a Limited Liability Company Agreement of Cat
Creek Holdings LLC, a Montana limited liability company, forming a joint venture
with Lipson Investments LLC and Viper Oil & Gas, LLC for the purchase of certain
oil and gas properties in the Cat Creek Field in Petroleum County and Garfield
County in the State of Montana. Cat Creek Holdings entered into an Asset
Purchase and Sale Agreement with Carrell Oil Company on July 1, 2020. Upon
closing under that agreement, Cat Creek Holdings paid Carrell Oil $400,000 in
cash, subject to certain adjustments resulting from pre- and post-effective date
revenue, expense and tax allocations, in exchange for the Cat Creek Field
properties. We invested $448,900 in Cat Creek Holdings for 50% of its ownership
interests. Lipson Investments LLC and Viper Oil & Gas, LLC, the other two
members of Cat Creek Holdings, have ownership interests of 25% each, which they
received for their respective investments of $224,450. Cat Creek Holdings is
managed by four managers, two of which are designated by us.
Liquidity and Capital Resources
As a result of the transactions described above, we no longer receive management
fee revenue, operations reimbursements, or royalty distributions from Alleghany
or SORC. Any cash we expend for operations and oil field expansion and
development comes from our sales of debt and equity securities. We have a
reserve report from an independent petroleum engineering firm estimating that
interests of proved undeveloped, probable undeveloped and contingent reserves,
and forecasts of economics attributable to certain properties in the Western
Williston Basin of Montana for oil interests acquired by Lustre Oil Company,
LLC, or Lustre, total $67 million of cash flow, discounted at a 10% discount
rate. This evaluation, dated effective May 31, 2022, was prepared using constant
prices and costs, and conforms to Item 1202(a)(8) of Regulation S-K and other
rules of the Securities and Exchange Commission (SEC). We believe that the
reserve report pertains to a small portion of the total acreage of mineral
rights leased by Lustre. As of the date of this filing, we have no producing oil
wells on our Montana leases. We are focused on raising funds to drill and
produce the oil identified in the reserve report. We are currently focused on
two programs summarized below.
First, we are in the process of attempting to raise up to $7.5 million from the
sale of secured convertible promissory notes for operating capital, and to drill
three production wells and a salt water disposal well on selected acreage leased
by Lustre Oil Company. The mineral rights underlying the proposed wells have
been contributed to our 100% wholly owned subsidiary, Hell Creek Crude, LLC, the
units of which are subject to a pledge agreement and serve as collateral
securing the promissory notes. The notes are also convertible into shares of our
common stock at $1.00 per share. As of the filing date, we have issued $490,000
in principal amount of promissory notes to fund the three well program.
Second, we are working with a financial advisor to raise up to $40 million to
develop a 23 well program on acreage where we have leased mineral rights. We are
having ongoing discussions with various private equity groups, family offices
and individual accredited investors regarding financing alternatives. The form
of financing could include our selling working interests in individual leases.
Our cash and cash equivalents at November 30, 2022 was $99,669. Our total debt
outstanding as of November 30, 2022 was $3,316,385, including (i) $617,934 owed
to Alleghany, which is classified as a long-term note payable, and (ii)
$1,041,655 pursuant to the PPP notes, of which we have classified $697,556 as a
long-term note, net of the current portion, totaling $344,099, which is
classified as a current note payable, (iii) $645,938 short term convertible
notes, net of deferred debt discount, (iv) $110,858 revolving note classified as
short-term, (v) a $750,000 note payable due to Cali Fields LLC, classified as
short-term and (vi) a $150,000 demand note payable classified as short-term and
due to our Chief Financial Officer.
On April 28, 2020, we borrowed $1,233,656 under the terms of the Paycheck
Protection Program, or the PPP, authorized by the Coronavirus Aid, Relief and
Economic Security (CARES) Act. On July 19, 2021, we were notified that
$1,209,809 of the principal amount of our PPP loan had been forgiven, leaving
$23,847 in principal payable over the remaining five-year life of the loan. We
are repaying the PPP loan through monthly payments of principal and accrued
interest in the amount of $559 per payment, through April 28, 2025.
Effective as of February 3, 2021, we received a second PPP loan in the amount of
$1,233,655. On April 25, 2022, $66,682 of the principal amount of the loan was
forgiven, leaving $1,166,973 payable over the remaining life of the five-year
loan. We are repaying the loan through monthly payments of $26,752 beginning
June 3, 2022 and ending February 2026.
Results of Operations
During the three and six months ending November 30, 2021, we recorded other
revenue and direct costs totaling $286,118 and $572,236, respectively, for
continued consulting services we provided to Alleghany after the termination of
the Management Services Agreement effective December 31, 2020. We did not record
any similar revenues and direct costs during the six months ending November 30,
2022, as these consulting services were completed effective December 31, 2021.
During the six months ended November 30, 2022 and 2021, we incurred operating
expenses of $1,552,653 and $380,431, respectively. These expenses consisted of
general operating expenses incurred in connection with the day to day operation
of our business, the preparation and filing of our required public reports and
stock option compensation expense. In addition, commencing on January 1, 2022,
our payroll related expenses are now also included in the general operating
expenses, as we are no longer providing any direct management or consulting
services. The increase in expenses for the six months ended November 30, 2022,
as compared to the same period in 2021, is primarily attributable to these
payroll costs, increased accounting and other professional fees, including
public relations and advisory services, and stock-based compensation. We also
experienced increases in other general and administrative expenses, including
insurance and SEC filing costs.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued
During the six months ended November 30, 2022, we recognized other income and
expenses comprised of (i) the $122,682 we received from the Employee Retention
Credit established by the CARES Act, (ii) $74,502 in equity method loss related
to our Cat Creek equity investment, and (iii) $23,885 in other income. During
the six months ended November 30, 2021, we recognized other income and expenses
comprised of the $1,224,908 gain on the PPP loan forgiveness of both principle
and accrued interest, a $7,844 equity method loss and $131,153 in other income
for the sale of a license.
As of the filing date of this report, the Olfert 11-4 exploratory well spudded
in May 2022 has not yet been completed and put into production. We have
discovered economic levels of hydrocarbons, but we have encountered saltwater
intrusion, which necessitates access to a proximate saltwater injection well to
economically dispose of the water. We are continuing our efforts to gain access
to a disposal well to complete the well and begin economical production.
The Olfert 11-4 well has exceeded its original budget and there are some
outstanding construction costs that we have not satisfied. To pay these amounts
owed, we issued an additional capital call to the net profits interest investors
who have no obligation to participate or invest additional funds. We did not
raise additional funds from the capital call, and unpaid contractors have
threatened to attach mechanic liens on the well and foreclose on the drilling
site. We intend to raise additional capital, complete the well and pay the
amounts owed to contractors.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The process of preparing consolidated financial statements requires that we make
estimates and assumptions that affect the reported amounts of liabilities and
stockholders' equity/(deficit) at the date of the consolidated financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Significant estimates in these consolidated financial
statements include estimates related to the valuation of stock-based
compensation and asset retirement obligation. Changes in the status of certain
facts or circumstances could result in a material change to the estimates used
in the preparation of the consolidated financial statements and actual results
could differ from the estimates and assumptions.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued
OFF-BALANCE SHEET ARRANGEMENTS
We do not currently have any off-balance sheet arrangements or other such
unrecorded obligations, and we have not guaranteed the debt of any other party.
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