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 through December 31, 2020,
we were a management services provider, 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 sole customer at the
time, Stranded Oil Resources Corporation, or SORC. SORC was a wholly-owned
subsidiary of Alleghany Corporation, or Alleghany. We performed these services
for SORC in exchange for a quarterly management fee and the reimbursement of our
employee related expenses. Such fees and reimbursements from SORC 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. Under that agreement, we purchased all of the issued and outstanding
shares of SORC from Alleghany. 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. Under the agreement with
Alleghany, the royalty rate increased to 6.0% on December 31, 2022. Currently,
there are no ongoing operations being conducted by SORC.
Pursuant to the terms of the Securities Purchase Agreement with Alleghany, we
also entered into a Consulting Agreement with Alleghany, 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 enhanced oil recovery 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 leasing 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, through Lustre, to acquire oil and gas
interests, and drill, complete and equip wells, in three counties in Montana.
Our agreement with Erehwon also specifies calculations for royalty interests and
working interests that we will receive for the first ten well completions, and
the first ten well recompletions. A well recompletion is defined as the
completion of a well for production from an existing well bore in another
formation. Under our agreement with Erehwon, we will acquire the initial mineral
leases, and pay 100% of the initial acquisition costs, up to $500,000. When the
total costs we pay 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 us 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's working interest will increase to 20%. Additional
wells and recompletions will have a working interest split equal to 10% to
Erehwon and 90% to us, subject to Erehwon exercising its option to increase its
working interest by 10%, as described above.
Under our agreement with Erehwon, we are required to 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 fully funded by us; provided,
however, that Erehwon will have the option to increase its working interest to
20% by paying us 10% of our acquisition costs related to the wells. Royalty
expense for these wells will consist of a royalty interest to be paid to the
landowner and an overriding royalty interest of between 3% and 6% for two
individuals who generated the prospects. We will also have the obligation to pay
the two individuals who generated the prospects 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
Olfert #11-4, Olfert Holdings will receive 90% of the funds generated by Olfert
#11-4 prior to "Payout" and 50% of such funds 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, assumed and funded our remaining capital contribution
commitment of $440,065.
26
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. The joint venture was
formed 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-effective 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 each. Cat Creek Holdings is managed by four managers, two of whom 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 the sale of our debt and equity securities. An
independent petroleum engineering firm has provided us with a reserve report
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 total approximately $67 million in 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. 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.
We are in the process of attempting to raise up to $7.5 million from the sale of
secured convertible promissory notes. We will use the proceeds from the sale of
these notes for operating capital, and to drill up to three production wells and
a salt water disposal well on selected acreage leased by Lustre. 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 $540,000 in principal amount of promissory
notes to fund the three well program.
We are also working with a financial advisor to raise up to $40 million to
develop a 23 well program on acreage on which 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 for this program could include our selling working
interests in individual oil and gas leases.
Our cash and cash equivalents at February 28, 2023 was $7,176. Our total debt
outstanding as of February 28, 2023 was $3,661,640, including (i) $617,934 owed
to Alleghany, which is classified as a long-term note payable, and (ii)
$1,014,040 pursuant to the Paycheck Protection Program ("PPP") notes, of which
we have classified $617,366 as long-term, net of the current portion, totaling
$396,774, which is classified as a current note payable, (iii) $968,708 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 $200,000 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 PPP. 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 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 through
February 2026.
Results of Operations
During the three and nine months ending February 28, 2022, we recorded other
revenue and direct costs totaling $95,372 and $371,961 and $667,608 and
$1,536,980, 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 three and nine months ending February 28, 2023, as these consulting
services were completed effective December 31, 2021.
During the nine months ended February 28, 2023 and 2022, we incurred operating
expenses of $2,142,823 and $531,582, 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 nine months ended February 28, 2023,
as compared to the same period in 2022, 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued
During the nine months ended February 28, 2023, 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) $47,506 in equity method loss related
to our Cat Creek equity investment, and (iii) $23,885 in other income. During
the nine months ended February 28, 2022, 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 $11,838 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 in the well, but 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 several unpaid contractors
have t attached mechanic liens on the well. One creditor has filed a lawsuit in
Montana against Lustre, the operator of the well, for payment. We intend to
raise additional capital, complete the Olfert 11-4 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.
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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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