UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2009
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 33-2249-FW
MILLER PETROLEUM, INC.
----------------------
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1028629
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3651 BAKER HIGHWAY, HUNTSVILLE, TN 37756
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(Address of principal executive offices) (Zip Code)
(423) 663-9457
--------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Title of Class No. of Shares Outstanding at September 15, 2009
-------------- -----------------------------------------------
Common Stock 18,324,356
MILLER PETROLEUM, INC.
FORM 10-Q
JULY 31, 2009
TABLE OF CONTENTS
Page
No.
----
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at July 31, 2009 (Unaudited)
and April 30, 2009 .............................................. 3
Condensed Consolidated Statements of Operations for the Three
months ended July 31, 2009 ..................................... 5
Condensed Consolidated Statements of Cash Flows for the Three
months ended July 31, 2009 and 2008 (Unaudited) ................ 6
Notes to Condensed Consolidated Financial Statements (Unaudited) .. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 21
Item 4T. Controls and Procedures ........................................... 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 22
Item 1A. Risk Factors ...................................................... 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ....... 22
Item 3. Defaults Upon Senior Securities ................................... 22
Item 4. Submission of Matters to a Vote of Security Holders ............... 22
Item 5. Other Information ................................................. 22
Item 6. Exhibits .......................................................... 22
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These forward-looking
statements were based on various factors and were derived utilizing numerous
assumptions and other factors that could cause our actual results to differ
materially from those in the forward-looking statements. These factors include,
but are not limited to, the availability of sufficient capital to fund the
anticipated growth of our company, fluctuations in the prices of oil and gas,
the competitive nature of our business environment, our dependence on a limited
number of customers, our ability to comply with environmental regulations,
changes in government regulations which could adversely impact our business and
other factors. Most of these factors are difficult to predict accurately and are
generally beyond our control. You should consider the areas of risk described in
connection with any forward-looking statements that may be made herein or in our
Annual Report on Form 10-K for the year ended April 30, 2009.. Readers are
cautioned not to place undue reliance on these forward-looking statements and
readers should carefully review this report in its entirety. Except for our
ongoing obligations to disclose material information under the Federal
securities laws, we undertake no obligation to release publicly any revisions to
any forward-looking statements, to report events or to report the occurrence of
unanticipated events. These forward-looking statements speak only as of the date
of this report, and you should not rely on these statements without also
considering the risks and uncertainties associated with these statements and our
business.
OTHER PERTINENT INFORMATION
Unless specifically set forth to the contrary, when used in this report
the terms the "Company," "we," "us," "ours," and similar terms refers to Miller
Petroleum, Inc., a Tennessee corporation doing business as Miller Energy
Resources and our subsidiaries, Miller Rig & Equipment, LLC, Miller Drilling TN,
LLC and Miller Energy Services, LLC, East Tennessee Consultants, Inc., East
Tennessee Consultants II, LLC, Miller Energy GP, LLC. Miller Energy Drilling
2009-A LP and Miller Energy Income 2009-A LP.
The information which appears on our web site at www.millerenergyresources.com
is not part of this report.
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MILLER PETROLEUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
July 31, April 30,
2009 2009
Unaudited
------------ ------------
CURRENT ASSETS
Cash ........................................... $ 100,018 $ 46,566
Cash, restricted................................ 1,976,510 1,982,552
Accounts receivable ............................ 236,943 124,815
Accounts receivable - related parties .......... - 19,882
Prepaid expenses................................ 97,613 -
Inventory ...................................... 230,371 87,120
------------ ------------
Total Current Assets ........................... 2,641,455 2,260,935
Fixed Assets 5,907,466 5,751,017
Less: accumulated depreciation ................. (1,130,598) (1,022,017)
------------ ------------
Net Fixed Assets................................ 4,776,868 4,729,000
OIL AND GAS PROPERTIES
(On the basis of successful efforts accounting) 3,235,278 1,787,911
Land ........................................... 526,500 406,500
Deferred interest .............................. 6,276 6,892
Prepaid offering cost........................... 765,513 666,476
Cash - restricted, long-term.................... 282,493 84,019
------------ ------------
Total Other Assets ............................. 1,580,782 1,163,887
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TOTAL ASSETS ................................... $ 12,234,383 $ 9,941,733
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
MILLER PETROLEUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
July 31, April 30,
2009 2009
Unaudited
------------ ------------
CURRENT LIABILITIES
Accounts payable - trade ....................... $ 787,255 $ 301,082
Accrued expenses ............................... 247,646 271,099
Asset retirement liability...................... 272,008 57,246
Unearned revenue................................ 137,240 131,587
Current portion of notes payable ............... 2,108,558 1,870,732
Income taxes payable ........................... - -
------------ ------------
Total Current Liabilities ...................... 3,552,707 2,631,746
LONG-TERM LIABILITIES
Deferred income taxes payable................... 580,863 778
Notes payable - other .......................... 80,241 88,473
------------ ------------
Total Long-term Liabilities .................... 661,104 89,251
Total Liabilities .......................... 4,213,811 2,720,997
STOCKHOLDERS' EQUITY
Common stock, 500,000,000 shares authorized at
$0.0001 par value, 18,324,356 and 15,974,356
shares issued and outstanding, respectively . 1,832 1,597
Additional paid-in capital ..................... 9,282,713 8,555,324
Accumulated deficit ............................ (1,263,973) (1,336,185)
------------ ------------
Total Stockholders' Equity ..................... 8,020,572 7,220,736
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 12,234,383 $ 9,941,733
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
MILLER PETROLEUM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three For the Three
Months Ended Months Ended
July 31, July 31,
2009 2008
------------ ------------
REVENUES
Oil and gas revenue ............................ $ 404,392 $ 214,753
Service and drilling revenue ................... 123,228 512
------------ ------------
Total Revenue .................................. 527,620 215,265
COSTS AND EXPENSES
Cost of oil and gas revenue .................... 24,044 28,086
Cost of service and drilling revenue ........... 244,500 107,823
Selling, general and administrative ............ 652,391 567,322
Depreciation, depletion and amortization ....... 229,161 107,570
------------ ------------
Total Costs and Expenses ....................... 1,150,096 810,801
------------ ------------
LOSS FROM OPERATIONS ........................... (622,476) (595,536)
OTHER INCOME (EXPENSE)
Interest income ................................ 7,971 9,340
Interest expense ............................... (12,869) (30,886)
Loan fees and costs............................. (52,636) (27,866)
Gain on sale of equipment....................... (9,755) -
Gain on sale of oil and gas properties ......... - 11,715,570
Gain on acquisitions ........................... 761,200 -
------------ ------------
Total Other Income (Expense) ................... 693,911 11,666,158
------------ ------------
NET INCOME BEFORE INCOME TAXES ................. 71,435 11,070,622
INCOME TAX EXPENSE (BENEFIT).................... (778) 790,000
------------ ------------
NET INCOME ..................................... $ 72,213 $ 10,280,622
============ ============
BASIC AND DILUTED- INCOME PER SHARE ............ $ 0.00 $ 0.79
BASIC AND DILUTED- WEIGHTED AVERAGE
SHARES OUTSTANDING ............................ 17,271,639 13,084,247
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
MILLER PETROLEUM, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Three For the Three
Months Ended Months Ended
July 31, 2009 July 31, 2008
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ........................................ $ 72,213 $ 10,280,622
Depreciation, depletion and amortization ........ 229,161 107,570
Adjustments to Reconcile Net Loss to Net Cash
Provided (Used) by Operating Activities:
Loss on sale of equipment ....................... 9,755 -
Gain on sale of oil and gas properties .......... - (11,715,570)
Gain on acquisitions ............................ (761,200) -
Issuance of stock for services .................. - 99,000
Issuance of warrants for financing costs ........ 38,624 27,600
Changes in Operating Assets and Liabilities:
Accounts receivable ........................... (67,342) (758)
Inventory ..................................... (143,251) 31
Prepaid expense ............................... (97,613) -
Accounts payable .............................. 251,311 (192,088)
Accrued expenses .............................. 191,309 (111,663)
Unearned revenue .............................. 5,653 -
Income taxes payable .......................... - 790,000
Deferred interest ............................. 616 -
------------ ------------
Net Cash Used by Operating Activities ........... (270,764) (715,256)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and improvements .......... (25,892) (3,562,621)
Purchase of oil and gas properties .............. (18,112) (374,000)
Sale of oil and gas properties .................. 25,000 13,514,090
Proceeds from sale of equipment ................. 50,000 -
------------ ------------
Net Cash Provided by Investing Activities ....... 30,996 9,577,469
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable ....................... (5,672) (726,868)
Proceeds from borrowing ......................... 235,266 1,912,159
Proceeds from sale of stock ..................... 119,000 -
Cash acquired through acquisition ............... 203,993 -
Restricted cash ................................. 6,042 -
Restricted cash non-current ..................... (166,372) -
Stock repurchase ................................ - (4,350,000)
Prepaid offering cost ........................... (99,037) -
------------ ------------
Net Cash Provided (Used) by Financing Activities 293,220 (3,164,709)
------------ ------------
NET INCREASE IN CASH .............................. 53,452 5,697,504
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .... 46,566 42,436
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD .......... $ 100,018 $ 5,739,940
============ ============
CASH PAID FOR
INTEREST ........................................ $ 87,526 $ 30,886
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND
FINANCING ACTIVITIES:
Financing costs from issuance of warrants and stock $ 38,624 $ 27,600
The Company reported the following non-cash
investing And financing activities in the period.
Cash acquired through issuance of stock ........... $ 203,993 $ -
Restricted cash acquired through issuance of stock $ 196,682 $ -
Net assets acquired through issuance of stock ..... $ 930,525 $ -
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
MILLER PETROLEUM, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
These consolidated financial statements include the accounts of Miller
Petroleum, Inc. (the "Company") and the accounts of its subsidiaries, Miller
Drilling TN, LLC, Miller Rig & Equipment, LLC, Miller Energy Services, LLC, East
Tennessee Consultants, Inc., East Tennessee Consultants II, LLC and Miller
Energy GP, LLC for the comparative period ended July 31, 2009 only, since these
subsidiaries started up subsequent to the quarter ended July 31, 2008. All
inter-company balances have been eliminated in consolidation.
The Company's principal business consists of oil and gas exploration, production
and related property management in the Appalachian region of eastern Tennessee.
The Company's corporate offices are in Huntsville, Tennessee. The Company
operates as one reportable business segment, based on the similarity of
activities.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the Company's April 30, 2009 Annual Report on Form
10-K. The results of operations for the period ended July 31, 2009 are not
necessarily indicative of operating results for the full year. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included.
(2) ACCOUNTING POLICIES
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period amounts presented
to conform to the current period presentations.
INVENTORY
Inventory consists primarily of crude oil in tanks and is carried at cost.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2009, we adopted SFAS No. 141(R), Business Combinations, which
replaces SFAS No. 141, Business Combinations ("SFAS 141R"), and requires an
acquirer to recognize the assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions. This Statement also
requires the acquirer in a business combination achieved in stages to recognize
the identifiable assets and liabilities, as well as the noncontrolling interest
in the acquiree, at the full amounts of their fair values. Additionally, this
Statement requires acquisition-related costs to be expensed in the period in
which the costs were incurred and the services are received instead of including
such costs as part of the acquisition price. SFAS 141(R) makes various other
amendments to authoritative literature intended to provide additional guidance
or to confirm the guidance in that literature to that provided in this
Statement. Our acquisition of the Ky-Tenn Oil, Inc assets and the stock and
membership interests of East Tennessee Consultants, Inc. and East Tennessee
Consultants II, LLC were recorded in accordance with FAS 141(R). See Note 7.
7
All other issued accounting pronouncements but not yet effective have been
determined to be not applicable by management and once adopted is not expected
to have a material impact on the financial position of the Company.
(3) SALE OF OIL AND GAS PROPERTIES AND EQUIPMENT PURCHASES
On June 13, 2008 we sold approximately 30,000 acres of oil and gas leases and
eight drilled but not completed wells to Atlas America, LLC ("Atlas") for
$19.625 million. At that time Wind City Oil & Gas, LLC and related entities were
paid $10.6 million for 2.9 million shares of the Company's common stock, eight
drilled but not completed gas wells, two producing gas wells, and a RD20
drilling rig and related equipment in settlement of all litigation between the
parties.
On November 10, 2008, the Company finalized a drilling contract with Atlas
Energy Resources, LLC, an affiliate of Atlas. This is a two year agreement that
will utilize two of the Company's drilling rigs operating in the East Tennessee
area of the Appalachian Basin. We acquired a 2007 COPCO Model RD III drilling
rig and related equipment drilling rig from Atlas to assist in drilling the
wells. This rig has been mobilized to the site and has commenced drilling
operations. The Company borrowed $1,850,125, secured by a certificate of
deposit, to purchase this drilling rig.
After the sale was completed, the Company paid off all notes, all undisputed
payables, transaction fees of $600,000 to Cresta Capital/Consortium, and paid a
transaction fee of $300,000 and issued 2,500,000 shares of common stock valued
at $825,000 to Mr. Scott Boruff, a former associate of Cresta Capital. Mr.
Boruff was subsequently hired effective August 1, 2008 as the new CEO of the
Company (see Commitments note below). He is a son-in-law of Deloy Miller the
former CEO and current Chairman of the Board of Directors. Cresta was also
granted a warrant to purchase one million shares of the Company's common stock
for $1.00 per share for a period expiring three years after the grant date and
cancelled the five million performance warrants that it held.
The net gain on this sale of oil and gas property transaction was $11,715,570.
A third party interested in aforementioned sale of the oil and gas properties is
contesting the sale, see the Litigation note below.
(4) PARTICIPANT RECEIVABLES AND RELATED PARTY RECEIVABLES
Participant and related party receivables consist of receivables contractually
due from our various joint venture partners in connection with routine
exploration, betterment and maintenance activities. Our collateral for these
receivables generally consists of lien rights over the related oil producing
properties at both April 30, 2009 and July 31, 2009.
8
(5) LONG-TERM DEBT, WARRANTS, LOAN FEES AND RESTRICTED CASH
The Company had the following debt obligations at July 31, 2009 and April 30,
2009
July 31, April 30,
2009 2009
---------- ----------
Note payable to Commercial Bank, secured by cash,
bearing interest at 3.75%, due December 22, 2009 ... 1,850,000 1,850,000
Note payable to Commercial Bank, secured by vehicle,
dated March 31, 2009, bearing interest at 7.50%, due
in monthly payments of $1,376.22, with the final
payment due March 31, 2013 ......................... 52,699 55,786
Note payable to GMAC Financing, secured by vehicle,
dated June 27, 2008, bearing zero interest, due in
monthly payments of $861.58, with the final payment
due June 27, 2012 .................................. 50,833 53,419
Note payable to Commercial Bank, secured by the
Company's main Headquarters and land, located in
Huntsville, Tennessee, dated July 16, 2009, bearing
interest at 10.00%, due in interest only monthly
payments, with the principal payment due January 16,
2010 ............................................... 235,267 -
---------- ----------
Total Notes Payable ........................... 2,188,799 1,959,205
Less current maturities on other notes payable 2,108,558 1,870,732
---------- ----------
Notes Payable - Long-term ..................... $ 80,241 $ 88,473
========== ==========
(6) STOCKHOLDERS' EQUITY
During the three months ended July 31, 2009, we issued the following securities:
2,350,000 shares, which included 350,000 shares issued to an investor for $0.34
per share and expensed at $119,000 and 2,000,000 shares for acquisitions that
occurred during the quarter. See note 7.
In May 2005 the Company entered into a $4.15 million credit agreement which had
terms that specified that the Company would prepare, and file a Registration
Statement that would cover the resale of all of the Registrable Securities,
which Registration Statement, to the extent allowable under the Securities Act
of 1933, as amended, and the rules and regulations promulgated hereunder
(including Rule 416), shall state that such Registration Statement also covers
such indeterminate number of additional shares of Common Stock as may become
issuable upon conversion of or otherwise pursuant to the Notes and Warrants to
prevent dilution resulting from stock splits, stock dividends or similar
transactions. Company would agree to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute, and applicable state securities
laws. The Company is required to issue 40,000 penalty warrants each month the
Company has not registered the aforementioned underlying securities. The shares
are not registered and throughout the quarter ended July 31, 2009, the Company
issued 120,000 penalty warrants at an average exercise price of $1.15 per share
with a five-year term valued and expensed at $38,624.
9
The Company presents "basic" earnings (loss) per share and, if applicable,
"diluted" earnings per share pursuant to the provisions of Statement of
Financial Accounting Standards No. 128. The calculation of diluted earnings per
share is similar to that of basic earnings per share, except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if all potentially dilutive common shares, such as
those issuable upon the exercise of stock options and warrants, were issued
during the period.
There were no dilutive effects of the common stock equivalents for the
outstanding vested stock options and warrants for the three months ended July
31, 2009 and 2008 since the exercise price of such warrants and options exceeded
the market price of the Company's common stock at July 31, 2009 and 2008.
(7) ACQUISITIONS
On June 8, 2009, we closed on the acquisition of certain assets of privately
owned Ky-Tenn Oil, Inc., ("KTO") which includes approximately 35,325 leased
acres located on the Chattanooga Shale and 153 natural gas and oil producing
wells. The primary reason for this acquisition was that it provided the Company
with a large lease position in the middle of Tennessee's prolific Chattanooga
Shale play for future drilling development. Another key to this acquisition is
the fact that in addition to the 153 wells that we will be operating on the KTO
leases, there are over 100 additional wells that can be reworked and put back
into production. In addition, expected synergies are anticipated from combining
operations and personnel. For these assets we issued 1,000,000 shares of our
common stock, which was valued at $320,000 on the date of acquisition. The
acquired assets included 35,325 leased acres with 153 producing oil and gas
wells and $194,400 in restricted bond certificates for well reclamation with a
related liability. In addition a complaint has been filed in United States
District Court for the Eastern District of Tennessee, Northern Division by
Gunsight Holdings, LLC, a Florida limited liability company pertaining to
Ky-Tenn and the Company. The lease which is the subject of the litigation was
included in the assets purchased by us from Ky-Tenn. The Plaintiff is alleging
that the Company and Ky-Tenn have failed or refused to pay royalties due to the
Plaintiff's predecessors and have breached the implied duty of further
exploration by failing to drill required wells, failing to reasonably develop or
explore the property, failing to maintain an active interest in further
development of the property and otherwise failing to act as a prudent operator
of the property thereby causing damages to the Plaintiff exceeding $75,000. The
Plaintiff is seeking a declaratory judgment of its allegations, removal of the
Company and Ky-Tenn from the property, a full accounting of activities related
to the property and all monies received from those activities, damages and costs
of action. We have filed an answer denying the various claims and asserting
affirmative defenses including that there has been continuous production from
the subject lease. While we intend to vigorously defend this action, we are
unable at this time to predict the outcome of the action or whether the company
will have any liability to the Plaintiff. See Note 10. No cash or receivables
were acquired from KTO. A third-party analysis was performed to determine the
fair value of the assets acquired. The report was prepared utilizing methods and
procedures regularly used by petroleum engineers to estimate oil and gas
reserves for properties of this type and character. The recovery of oil and gas
reserves and projection of producing rates are dependent upon many variable
factors including prudent operation, compression of gas when needed, market
demand, installation of lifting equipment and remedial work when required. The
reserves included in this report have been based upon the assumption that the
wells will be operated in a prudent manner under the same conditions existing on
the effective date. The value as determined by this report was $252,455. The
value of the restricted bond certificates had an offsetting retirement
10
liability, therefore, under the guidance of SFAS 141(R) the difference between
the value of the oil and gas properties less the value of the common stock
resulted in a loss of $67,545 was recorded in the Condensed Consolidated
Statements of Operations as a net to Gain on Acquisitions. While, we have not
yet completed the determination of the value of all undeveloped reserves, our
Condensed Consolidated Balance Sheet at July 31, 2009 reflects consolidation of
this entity using preliminary amounts, including an estimated $252,455 in oil
and gas properties (which we anticipate will be retroactively adjusted upon
completion of the aforementioned determinations).
On June 18, 2009 the Company acquired 100% of the stock of East Tennessee
Consultants, Inc., a Tennessee corporation ("ETC") and 100% of the membership
interests in East Tennessee Consultants II, LLC, a Tennessee limited liability
company ("LLC") from the owners of these entities. The acquisition included 221
producing oil and gas wells and consisted of approximately 4,442 acres. ETC was
formed in 1983 to provide oil and gas well operating services and it represented
various working interest owners and the LLC was formed in 1996. The primary
reason for this acquisition is that it is anticipated that these subsidiaries
will operate the wells they own as well as the recently purchased wells from
KY-Tenn Oil, Inc. It is also anticipated that the old wells will be reworked and
that new wells will be drilled from the extensive acreage now owned by us. The
Chattanooga Shale, which is present in a majority of the wells acquired, is a
candidate for stimulation. Completion and reworking of existing oil zones should
add to reserves at a relatively inexpensive price. We issued 1,000,000 shares
for all of ETC and LLC membership interest. Our common shares were valued at
$250,000 on the date of acquisition. Expected synergies are anticipated from
combining operations and personnel, especially when considering the acquisition
of previously mentioned KTO. The acquisition included the following balance
sheet items.
Assets Liabilities and equity
Cash ................. $ 203,993 Accounts payable ......... $ 202,760
Receivables .......... 24,904 Deferred tax ............. 580,864
Fixed assets, net .... 313,458 Value of shares issued ... 250,000
Oil and gas properties 1,319,140 Gain ..................... 828,745
Other assets ......... 874
---------- ----------
Total assets ........... $1,862,369 Total liabilities and equity $1,862,369
========== ==========
We valued this acquisition under the guidance of SFAS 141(R) and, accordingly, a
gain of $828,745 was recorded as of the acquisition date. For the quarter ended
July 31, 2009 the consolidation of this entity increased the Company revenues by
$65,598 and increased costs of revenue by $76,407. The impacts of consolidation
on all other line items within our Condensed Consolidated Statements of
Operations were not significant. While, we have not yet completed the
determination of the value of all undeveloped reserves, our Condensed
Consolidated Balance Sheet at July 31, 2009 reflects consolidation of this
entity using preliminary amounts, including an estimated $1,319,140 in oil and
gas properties (which we anticipate will be retroactively adjusted upon
completion of the aforementioned determinations).
(8) STOCK OPTIONS
We record share-based payments at fair value and record compensation expense for
all share-based awards granted, modified, repurchased or cancelled after the
effective date, in accord with FASB Statement 123(R), Share-Based Payments. We
record compensation expense for outstanding awards for which the requisite
service had not been rendered as of the effective date over the remaining
service period. We adopted Statement 123(R) using a modified prospective
application.
11
We estimated the fair value of options granted during the years ended July 31,
2009 and 2008 on the date of grant, using the Black-Scholes pricing model with
the following assumptions:
2009 2008
-------- --------
Weighted average of expected risk-free interest
rates (Approximate 3 year Treasury Bill rate) ..... 1.49% 2.54%
Expected years from vest date to exercise date ..... 2.5 2.5
Expected stock volatility .......................... 371-391% 516-527%
Expected dividend yield ............................ 0% 0%
The Company recorded $0 and $924,000 of compensation expense, net of related tax
effects, relative to stock options for the three months ended July 31, 2009 and
2008, respectively in accordance with SFAS 123R. Net loss per share basic and
diluted for this expense is $0.00 and $0.07.
The Company has adopted SFAS No. 123R, "Share Based Payments". SFAS No. 123R
requires companies to expense the value of employee stock options and similar
awards and applies to all outstanding and vested stock-based awards. In
computing the impact, the fair value of each option is estimated on the date of
grant based on the Black-Scholes options-pricing model utilizing certain
assumptions for a risk free interest rate; volatility; and expected remaining
lives of the awards. The assumptions used in calculating the fair value of
share-based payment awards represent management's best estimates, but these
estimates involve inherent uncertainties and the application of management
judgment. As a result, if factors change and the Company uses different
assumptions, the Company's stock-based compensation expense could be materially
different in the future. In addition, the Company is required to estimate the
expected forfeiture rate and only recognize expense for those shares expected to
vest. In estimating the Company's forfeiture rate, the Company analyzed its
historical forfeiture rate, the remaining lives of unvested options, and the
amount of vested options as a percentage of total options outstanding. If the
Company's actual forfeiture rate is materially different from its estimate, or
if the Company reevaluates the forfeiture rate in the future, the stock-based
compensation expense could be significantly different from what we have recorded
in the current period. The impact of applying SFAS No. 123R approximated $0 in
additional compensation expense during the three months ended July 31, 2009 and
$924,000 in 2008. Such amount is included in general and administrative expenses
on the statement of operations.
The aggregate intrinsic value is calculated as the difference between the
exercise price of the underlying awards and the quoted price of our common stock
for those awards that have an exercise price currently below the closing price.
During the quarter ended July 31, 2009 and 2008, the aggregate intrinsic value
of stock options and warrants exercised was $0 and $0, respectively, determined
as of the date of exercise.
A summary of the stock options and warrants as of July 31, 2009 and 2008 and
changes during the periods is presented below:
12
Three months ended Three months ended
July 31, 2009 July 31, 2008
---------------------------- ----------------------------
Number of Weighted Number of Weighted
Options and Average Options and Average
Warrants Exercise Price Warrants Exercise Price
----------- -------------- ----------- --------------
Balance at April 30 4,090,000 $ 0.88 2,235,000 $ 0.85
Granted ........... 120,000 1.15 1,120,000 1.02
Exercised ......... - - - -
Expired ........... - - - -
Cancelled ......... - - - -
----------- -------------- ----------- --------------
Balance at July 31 4,210,000 0.88 3,355,000 0.90
Options exercisable
at July 31 ........ 3,960,000 $ 0.92 3,355,000 $ 0.90
=========== ============== =========== ==============
The following table summarizes information concerning stock options and warrants
outstanding and exercisable at July 31, 2009:
Options and Warrants
Options and Warrants Outstanding Exercisable
---------------------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
------------- ----------- ----------- -------- ----------- --------
$0.33 to 0.44 375,000 6.7 $ 0.37 125,000 $ 0.44
0.50 1,000,000 0.8 0.50 1,000,000 0.50
0.80 to 0.86 75,000 0.3 0.82 75,000 0.82
1.00 to 1.15 2,760,000 2.7 1.09 2,760,000 1.10
----------- -------- ----------- --------
4,210,000 2.6 0.83 3,960,000 0.92
=========== ======== =========== ========
All options and warrants were issued at the fair market of common stock on the
date of grant.
(9) COMMITMENTS
On August 6, 2008 the Board of Directors employed Scott M. Boruff as CEO of the
Company. The employment contract, as amended, provided for the following
compensation:
o Base salary of $250,000 per annum, with provision for cost-of-living
increases.
o Options to purchase 250,000 shares of the Company's common stock at an
exercise price per share of $0.33, with vesting in equal annual
installments over a period of four years.
o A restricted stock grant of 250,000 shares of common stock, with vesting
in equal annual installments over a period of four years.
o Incentive Compensation - For each year of the employment term, (i) cash up
to 100% of base salary and (ii) up to 100,000 shares of restricted common
stock, in both instances based upon, and subject to, two performance
benchmarks, gross revenue and EBITDA. One half of each element of
incentive compensation is earned if the gross revenue benchmark is
achieved, and the other half of each element is earned if the EBITDA
benchmark is achieved.
13
In August 2008 we engaged a broker-dealer and member of FINRA to assist us in
raising capital by means of a private placement of securities. As initial
compensation for their services, we paid the firm a $25,000 retainer, issued the
firm's assigns 250,000 shares of our common stock, valued at $115,000 and agreed
to pay a monthly consulting fee of $5,000. Upon the successful completion of the
private offering we will be obligated to pay the firm certain cash compensation
and issue them up to an additional 150,000 shares of our common stock in amounts
to be determined based upon the gross proceeds received by us from the
financing.
(10) LITIGATION
CNX Gas Company, LLC (CNX) commenced litigation in the Chancery Court of
Campbell County, State of Tennessee on June 11, 2008 (CNX Gas Company, LLC vs.
Miller Petroleum Inc., Civil Action No. 08-071) to enjoin the Company from
assigning or conveying certain leases described in the Letter of Intent signed
by CNX and the Company on May 30, 2008 (the "Letter of Intent"); to compel the
Company to specifically perform the assignments as described in the Letter of
Intent; and for damages. A Notice of Lien Lis Pendens was issued June 11, 2008.
The Company moved for entry of summary judgment dismissing the claims asserted
against it by CNX and on January 30, 2009 the court found that the claims of CNX
had no merit. The court granted the Company's motion and dismissed all claims
asserted by CNX in that action. CNX has appealed the ruling.
On May 20, 2009 Gunsight Holdings, LLC, a Florida limited liability company,
filed a complaint in the United States District Court for the Eastern District
of Tennessee, Northern Division, against the Company styled Gunsight Holdings,
LLC, Plaintiff, v Miller Petroleum, Inc. and Ky-Tenn Oil, Inc., Defendants, Case
No. 3-09-CV-221. The litigation surrounds certain rights related to
approximately 6,800 acres in Scott County, Tennessee which KTO purportedly
acquired under a lease assignment from an unrelated party in August 2004. In
September 2008, KTO assigned the Company 75% of its interest in the subject
lease and the working interest in all the wells on the leased land, retaining a
25% interest in the wells consisting of landowner's royalty and overriding
royalty. On June 8, 2009 the Company acquired certain assets from KTO including
KTO's undivided interest in approximately 170 oil and gas wells in Morgan, Scott
and Fentress counties Tennessee, together with all property, fixtures and
improvements, leasehold interest and contract rights related to these wells and
undivided interest in approximately 35,325 acres of oil and gas leases in Scott
and Morgan counties, Tennessee. The lease which is the subject of the litigation
was included in the assets purchased by the Company from KTO in June 2009. The
Plaintiff is alleging that the Company and KTO have failed or refused to pay
royalties due to the Plaintiff's predecessors and have breached the implied duty
of further exploration by failing to drill required wells, failing to reasonably
develop or explore the property, failing to maintain an active interest in
further development of the property and otherwise failing to act as a prudent
operator of the property thereby causing damages to the Plaintiff exceeding
$75,000. The Plaintiff is seeking a declaratory judgment of its allegations,
removal of the Company and KTO from the property, a full accounting of
activities related to the property and all monies received from those
activities, damages and costs of action. We have filed an answer denying the
various claims and asserting affirmative defenses including that there has been
continuous production from the subject lease. While we intend to vigorously
defend this action, we are unable at this time to predict the outcome of the
action or whether the company will have any liability to the Plaintiff. In
addition, in the Company's agreement with KTO dated June 8, 2009, KTO states
that they shall defend, indemnify and save and hold harmless the Company against
all losses or claims with respect to transferred assets that accrue or relate to
times prior to the closing date or any debts, claims, liabilities or obligations
of KTO not expressly assumed by the Company that accrue at any time.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
EXECUTIVE SUMMARY
We are an exploration and production company that utilizes seismic data, and
other technologies for geophysical exploration and development of oil and gas
wells. We have partial ownership in 173 producing oil wells and 253 producing
gas wells. In addition to our engineering and geological capabilities, we have
work-over rigs, dozers, roustabout crews and equipment to set pumping units,
tanks and lay flow lines, winch trucks and trailers for traveling support,
backhoes, ditchers, fusion machines and welders for pipeline and compression
installation, as well as other equipment necessary to take a drilling program
from the development stage to completion. We also sell rigs, oilfield trailers,
compressors and other miscellaneous oil and gas production equipment.
During the first three months of fiscal year 2009 we completed two transactions
which we believe had both a positive impact on our balance sheet and will assist
us in our continued growth. These transactions included:
ACQUISITION OF KY-TENN OIL, INC. ASSETS
On June 8, 2009 we acquired certain assets from Ky-Tenn Oil, Inc., a Kentucky
corporation ("KTO"), an unrelated third party, including KTO's:
o undivided interest in approximately 170 oil and gas wells in Morgan, Scott
and Fentress counties Tennessee, together with all property, fixtures and
improvements, leasehold interest and contract rights related to these
wells;
o undivided interest in approximately 35,325 acres of oil and gas leases in
Scott and Morgan counties, Tennessee;
o interest in an operating agreement with the Tennessee State Energy
Development Partnership;
o interest in a gas gathering pipeline system; and
o other rights related to these assets, including royalty and working
interests, licenses and permits and similar incidental rights.
As consideration for these assets we issued KTO 1,000,000 shares of our common
stock valued at $320,000 and we granted the seller piggy-back registration
rights covering these shares. Pursuant to SFAS 141(R), we have valued these
assets at $252,455 and have recorded a loss on the transaction of $67,545.
However, as previously stated, we have not yet completed the determination of
the value of all undeveloped reserves for this acreage which we anticipate will
be retroactively adjusted upon completion of the aforementioned determinations.
Depending upon the results of this determination, we may reduce this loss or
recognize a gain on this transaction.
ACQUISITION OF EAST TENNESSEE CONSULTANTS
On June 18, 2009 we acquired 100% of the stock of East Tennessee Consultants,
Inc., a Tennessee corporation ("ETC") and 100% of the membership interests in
East Tennessee Consultants II, LLC, a Tennessee limited liability company
("LLC") from the owners of these entities. Pursuant to SFAS 141(R), we have
valued these companies at $1,862,369 and have recorded a gain on the transaction
of $828,745. As consideration for these companies we issued the sellers, who
were unrelated third parties, 1,000,000 shares of our common stock valued at
$250,000. We granted the sellers registration rights covering these shares. ETC
was formed in 1983 to provide oil and gas well operating services and it
represented various working interest owners and the LLC was formed in 1996.
15
Following the closing, it is anticipated that these subsidiaries will operate
the wells they own as well as the recently purchased wells from KTO. It is also
anticipated that the old wells will be reworked and that new wells will be
drilled from the extensive acreage now owned by us. The Chattanooga Shale, which
is present in a majority of the wells acquired, is a candidate for stimulation.
Completion and reworking of existing oil zones should add to reserves at a
relatively inexpensive price.
Under the terms of the stock purchase agreement, the sellers agreed not to
engage in oil and gas operations for a period of three years following the
closing date. We also agreed that each of the sellers, Messrs. Eugene D.
Lockyear, Douglas G. Melton and Jerry G. Southwood, would continue their
employment with the acquired companies for at least three years from the closing
date of the transaction at their same compensation and benefit levels to which
they were entitled in May 2009. In addition, Mr. Lockyear was appointed Vice
President of Operations of our company. We also agreed that if any or all of the
sellers incur any income tax liability as a result of the receipt of the above
shares as consideration for the stock purchase, we agreed to pay a bonus to such
seller equal to the amount of his tax liability within 30 days from the closing
date.
LEASES
During the first quarter of fiscal 2010 these two acquisitions resulted in
additional leases for an additional 39,767 acres for aggregate consideration of
approximately $603,285, bringing the total oil and gas leases held by us to
approximately 54,256 acres. The terms of these new leases have a net revenue
interest ranging from 0.1% to 100.0% and run from three to five years. We are
presently reviewing these leases, as well as our other existing leases, to
determine the capital requirements and timing for drilling additional wells. To
expand our operations by drilling on these leases will require additional
capital. As a part of our fiscal 2009 sale to Atlas Energy, we retained a 5%
royalty interest on a 1,930 acre tract that we expect to be the subject of Atlas
Energy drilling. When wells are developed on this acreage, we stand to share in
any profit they create. Additionally, we retained the right to participate in up
to ten wells with a 25% working interest without promote.
OUR CURRENT FOCUS
With the closing of these two acquisitions, our management is now able to focus
the majority of its efforts on growing our company. In addition to capital
raising we are also continuing to focus our short-term efforts on five distinct
areas, including:
o Investment partnership management pursuant to which we will seek to drill
additional wells, concentrating on the East Tennessee portion of the
Southern Appalachian Basin with emphasis in horizontal drilling in
Devonian Shale,
o Organically growing production through drilling for own benefit on
existing leases, leveraging our 100,000 plus well log database with a view
towards retaining the majority of working interest in the new wells,
o Expanding our contract drilling and service capabilities and revenues,
including through our drilling contract with Atlas Energy and through the
purchase of an additional vertical and horizontal drilling rig,
o Expand our leasing capabilities by implementing strategies unique to the
gas and oil industry to secured leases and enter into new partnerships to
increase monetary capabilities, and
o Increase our overall production through economically viable acquisitions
of additional wells.
16
Our ability, however, to implement one or more of these goals is dependent both
upon the availability of additional capital. To fully expand our operations as
set forth above, we will need up to $15 million for the purchase of additional
drilling equipment and up to $50 million to fund the balance of our expansion
plans. To provide the expansion capital, we are seeking to leverage our existing
assets as well as seek to raise additional capital through the sale of equity
and/or debt securities. To facilitate these capital raising efforts, during
fiscal 2009 we retained a broker-dealer and member of FINRA to assist us and are
attempting to raise capital in a private offering. While our management has
devoted significant time to these efforts during 2009 and in to the first
quarter of 2010, we have not been successful in raising any of these funds. Our
ability to fully implement our expanded business model, however, is dependent on
our ability to raise the additional capital on a timely basis so as to take
advantage of the opportunities we presently have available to us. We face a
number of obstacles, however, in raising the additional capital, including the
relative size of our company, the low trading price of our stock and the lack of
liquidity in the capital markets in general and small-cap companies in
particular. If we are not able to raise the capital as required, we will be
unable to fully implement our expanded business model and will need to delay
future expansion as well as further purchases of leases.
RESULTS OF OPERATIONS
REVENUES
--------
The following table shows the components of our revenues for the quarters ended
July 31, 2009 and 2008, together with their percentages of total revenue in 2009
and percentage change on a year-over-year basis.
For the Three Months Ended
------------------------------------------------
July 31, % of July 31,
2009 Revenue 2008 % Change
--------- ------- --------- --------
REVENUES
Oil and gas revenue ........ $ 404,392 77% $ 214,753 88%
Service and drilling revenue 123,228 23% 512 23968%
--------- ---------
Total Revenue .............. $ 527,620 100% $ 215,265 145%
Oil and gas revenue represents revenues generated from the sale of oil and
natural gas produced from the wells in which we have a partial ownership
interest. Oil and gas revenue is recognized as income as production is extracted
and sold. We reported an approximately 88% increase in oil and gas revenues for
the quarter ended July 31, 2009 over the quarter ended July 31, 2008. The
increase in oil and gas revenue was due to the Company having more wells
producing oil and gas, notwithstanding the end of year decrease in both oil and
gas prices. At July 31, 2009 oil was priced at $55.11 per barrel versus $124.91
at July 31, 2008 and at July 31, 2009 natural gas was $3.50 per Mcf as compared
to $11.47 per Mcf at July 31, 2008.
For the quarter ended July 31, 2009 we produced 2,449 barrels of oil and 19,131
Mcf of natural gas as compared to 1,117 barrels of oil and 7,768 Mcf of natural
gas during the quarter ended July 31, 2008.
17
Service and drilling revenue represents revenues generated from drilling,
maintenance and repair of third party wells. Service and drilling income is
recognized at the time it is both earned and we have a contractual right to
receive the revenue. Our service and drilling revenue increased 23,968% for the
quarter ended July 31, 2009 as compared to the quarter ended July 31, 2008.
During the quarter ended July 31, 2009 the acquisitions we closed on during the
quarter contributed $65,598 to this positive variance for primarily for services
performed on third party wells. During the quarter ended July 31, 2008 we did
not devote any time or resources to the marketing of this service as our
management's primary focus was the sale of the leases to Atlas Energy and the
settlement of the Wind City litigation, both of which are described elsewhere in
this report.
DIRECT AND OTHER EXPENSES
-------------------------
The following tables show the components of our direct and other expenses for
the years ended April 30, 2009 and 2008. Percentages listed in the table reflect
margins for each component of direct expenses and percentages of total revenue
for each component of other expenses.
For the Three Months Ended
------------------------------------------------
July 31, July 31,
2009 Margin 2008 Margin
--------- ------ --------- --------
DIRECT EXPENSES
Oil and gas ................ $ 24,044 94% $ 28,086 87%
Service and drilling ....... 244,500 (98)% 107,823 (20959)%
Depletion expense .......... 117,434 n/a 36,252 n/a
--------- ---------
Total direct expenses ...... $ 385,978 27% $ 172,161 20%
For the Three Months Ended
--------------------------------------------------
July 31, % of July 31, % of
2009 Revenue 2008 Revenue
----------- ------- ------------ --------
OTHER EXPENSES (REVENUES)
Selling, general and administrative .... $ 652,392 124% $ 567,322 264%
Depreciation and amortization .......... 111,727 21% 71,318 33%
Interest expense, net of interest income 4,898 1% 21,546 10%
Loan fees and costs .................... 52,636 10% 27,866 13%
Gain on sale of equipment .............. 9,755 2% - n/a
Gain on sale of oil and gas properties . - n/a (11,715,570) (5,442)%
Gain on acquisitions ................... (761,200) (144)% - n/a
----------- ------------
Total other expenses (revenues) ........ $ 70,208 276% $(11,027,518) (5,123)%
18
DIRECT EXPENSES
We follow the successful efforts method of accounting for our oil and gas
activities. Accordingly, costs associated with the acquisition, drilling and
equipping of successful exploratory wells are capitalized. During the quarter
ended July 31, 2009 we capitalized approximately $19,036 of costs associated
with the acquisition, drilling and equipping of these wells as compared to
$292,000 during the three months ended July 31, 2008. However, geological and
geophysical costs, delay and surface rentals and drilling costs of unsuccessful
exploratory wells are charged to expense as incurred and are included in the
cost of service and drilling revenue. Finally, costs of drilling development
wells are capitalized; however, we did not drill any development wells during
the quarters ended July 31, 2009 and 2008. Upon the sale or retirement of oil
and gas properties, the cost thereof and the accumulated depreciation or
depletion are removed from the accounts and any gain or loss is credited or
charged to operations.
The cost of oil and gas revenue also represents costs associated with contract
fees we pay third parties to monitor the oil wells and record production. Gas
production is metered and read monthly by third party companies which are
specialists. We increased the number of oil and gas wells that we have partial
ownership in quarter ended July 31, 2009. Total producing oil wells grew from 17
as of July 31, 2008 to 173 as of July 31, 2009 and gas wells grew from 27 on
July 31, 2008 to 253 as of July 31, 2009. The increase in wells is primarily due
to the 153 oil wells and 221 gas wells acquired during the quarter ended July
31, 2009 as previously stated. However, the acquisitions did not occur as the
beginning of the quarter and thus, did not impact the quarter ended July 31,
2009 fully. As a percentage of oil and gas revenue, costs of oil and gas had a
margin of 94% for the quarter ended July 31, 2009 as compared to 87% for the
quarter ended July 31, 2008. We anticipate that the costs of oil and gas
revenues will proportionality increase as additional wells are connected.
The cost of service and drilling revenue represents direct labor costs of
employees associated with these services, as well as costs associated with
equipment, parts and repairs. The cost of service and drilling revenue has risen
significantly for the quarter ended July 31, 2009 as compared to the quarter
ended July 31, 2008. During the quarter ended July 31, 2009, we spent
significant time and expense maintaining and repairing our drilling equipment.
Depletion of capitalized costs of proved oil and gas properties is provided on a
pooled basis using the units-of-production method based upon proved reserves.
Acquisition costs of proved properties are amortized by using total estimated
units of proved reserves as the denominator. All other costs are amortized using
total estimated units of proved developed reserves. During the quarter ended
July 31, 2009 depletion expense was $117,434 or 22% of total revenue as compared
to 17% for the quarter ended July 31, 2008. As a result of these components,
total direct expenses reflected a margin of 27% for the quarter ended July 31,
2009, an improvement from the 20% margin experienced for the quarter ended July
31, 2008.
OTHER EXPENSES (REVENUES)
Selling, general and administrative expense includes salaries, general overhead
expenses, insurance costs, professional fees and consulting fees. The increase
for the quarter ended July 31, 2009 as compared to the quarter ended July 31,
2008 primarily reflects increased compensation expense, resulting from the
addition of executive management as previously discussed. As a percentage of
total revenue, selling, general and administrative expense decreased to
approximately 124% for the quarter ended July 31, 2009 as compared to
approximately 264% for the quarter ended July 31, 2008.
19
Depreciation and amortization expenses reflect the usage of our fixed assets
over time. The increase in depreciation and amortization for the quarter ended
July 31, 2009 as compared to the quarter ended July 31, 2008 reflects an
increase in the amount of depreciation due to the purchase of equipment as well
as the recording of the equipment from the new acquisitions, as previously
mentioned.
The decrease in interest expense, net of interest income for the quarter ended
July 31, 2009 as compared to the quarter ended July 31, 2008 reflects the
satisfaction of certain loans during the twelve months ended July 31, 2009.
Loan fees and costs of $52,636 for the quarter ended July 31, 2009 primarily
represents non-cash expenses related to the fair value of warrants owed in
connection with a prior financing transaction.
During the quarter ended July 31, 2008 we recorded a gain of $11,715,570 on the
sale of the oil and gas leases to Atlas Energy and the concurrent settlement of
the Wind City litigation as described elsewhere herein. As part of the
settlement we repurchased 2,900,000 shares of our common stock for $4,350,000
which is reflected on our balance sheet as shares subject to redemption. As a
result of the one-time settlement transaction, we reported a net income of
$10,280,622 for the quarter ended July 31, 2008. We do not anticipate that we
will enter into similar transactions in future periods.
As described earlier in this report, during the three months ended July 31, 2009
we recorded a loss of $67,545 in connection with our acquisition of assets from
KTO and we recorded a gain of $828,745 in connection with our acquisitions of
ETC and LLC. . The net gain for the quarter ended July 31, 2009 was $761,200.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate adequate amounts of cash to
meet the enterprise's needs for cash. At July 31, 2009 we had a working capital
deficit of $911,252 as compared to a working capital deficit of $370,811 at
April 30, 2008. This increase in capital deficit is primary due to losses from
operations.
Net cash used by operating activities for the quarter ended July 31, 2009 period
was $270,764. This primarily reflects the cash paid for the costs of revenues
and selling, general and administrative expense in excess of revenues received
for the quarter. Net cash used by operating activities for the quarter ended
July 31, 2008 primarily reflects cash used to reduce our accounts payables and
accrued expenses as a result of the settlement of the Wind City litigation and
increase our income taxes payable.
Net cash provided by investing activities for the quarter ended July 31, 2009 of
$30,996 reflects the net cash we received from the sale of equipment and oil and
gas properties, partially offset by the purchase of additional equipment and oil
and gas properties. Net cash provided by investing activities for the quarter
ended July 31, 2008 reflects the net cash we received from the Atlas Energy
transaction offset by the funds used to satisfy certain notes payables and
accounts payable, purchase additional drilling equipment and vehicles and funds
used for the purchase of a lease and capitalized costs associated with the
receipt of two producing gas wells from Wind City.
Net cash provided by financing activities of $293,220 for the quarter ended July
31, 2009 primarily reflects cash received from the proceeds of borrowings of
$235,266, sale of stock of $119,000 and cash acquired through acquisitions of
$203,993 and were partially offset by the cash spent on prepaid offering costs
of 99,037 and the increase in restricted cash non-current of $166,372 due to the
acquisitions. Net cash used in financing activities for the quarter ended July
31, 2008 reflects the repayment of notes payable and the repurchase of shares of
our common stock as part of the Wind City settlement offset by proceeds from
borrowings to finance the purchase of equipment.
20
We have no commitment for capital expenditures during the next 12 months.
Within the next 12 months, we have debt obligations that total $2,108,588. Of
this, the most significant piece is a note payable to Commercial Bank, secured
by cash and due December 22, 2009. As this note is secured by cash, this
obligation, if still outstanding at that time, will either be renewed or paid
off using the cash security. The Company believes it will have sufficient funds
to honor its obligations on the remaining $258,588.
In order to implement our business strategy to expand our operations we will
need to raise additional capital. During fiscal 2009 we also commenced a capital
raising effort to raise funds to purchase drilling and work over rigs and other
equipment. The additional equipment could also be used on the Atlas Energy
agreement but would be available for proprietary drilling. This private
offering, however, is being conducted on a best efforts basis and there are no
assurances we will raise any capital thereunder or that any funds we do receive
will be sufficient to enable us to purchase the additional equipment. To date,
we have not sold any securities in this offering. In the event we continue to be
unsuccessful in our efforts to raise capital in this private offering, we would
be required to seek alternative sources of financing for the purchase of the
additional rigs and equipment and there are no assurances that this capital
would be available to us.
In addition, our long-term cash flows are subject to a number of variables
including the level of production and prices as well as various economic
conditions that have historically affected the oil and gas business. A material
drop in oil and gas prices has recently reduced our liquidity. At July 31, 2009
oil was priced at $55.11 per barrel versus $124.91 at July 31, 2008 and at July
31, 2009 natural gas was $3.50 per Mcf as compared to $11.47 per Mcf at July 31,
2008. Also, a reduction in production and reserves would reduce our operating
results in future periods. We operate in an environment with numerous financial
and operating risks, including, but not limited to, the inherent risks of the
search for, development and production of oil and gas, the ability to buy
properties and sell production at prices which provide an attractive return and
the highly competitive nature of the industry. While we do not anticipate a
worse case scenario, if we are not successful in securing new capital and the
price of oil and gas does not rise significantly and if we were unable to secure
more drilling and servicing contracts, we would need to consider reducing
overhead in an attempt to achieve an operating profit, based on the revenue of
our existing producing oil and gas wells.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable to a smaller reporting company.
ITEM 4T. CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and our Chief Financial Officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) under the Securities
Exchange Act of 1934, as amended, at the end of the period covered by this
report (the "Evaluation Date"). Based on this evaluation, our Chief Executive
Officer and our Chief Financial Officer have concluded as of the Evaluation Date
that our disclosure controls and procedures were effective such that the
information relating to our company required to be disclosed in our reports
filed with the Securities and Exchange Commission (i) is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms
and (ii) is accumulated and communicated to our management, including our Chief
Executive Officer and our Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
21
Our management, including the Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures will
prevent all error and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control system's objectives will be met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, have
been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. The design of any system of controls is based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions.
There was no change in our internal control over financial reporting identified
in connection with the evaluation that occurred during our last fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS.
Not applicable to a smaller reporting company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On June 1, 2009, we issued and sold 350,000 shares of our common stock to an
accredited investor at a price of $0.34 per share in a private transaction
exempt from registration under the Securities Act of 1933 in reliance on an
exemption provided by Section 4(2) of that act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
31.1 Rule 13a-14(a)/15d-14(a) certificate of Chief Executive Officer 2002
31.2 Rule 13a-14(a)/15d-14(a) certificate of Chief Financial Officer
32.1 Section 1350 certification of Chief Executive Officer
32.2 Section 1350 certification of Chief Financial Officer
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MILLER PETROLEUM, INC.
Date: September 21, 2009 By: /s/ Scott M. Boruff
-------------------
Scott M. Boruff
Chief Executive Officer,
principal executive officer
Date: September 21, 2009 By: /s/ Paul W. Boyd
----------------
Paul W. Boyd
Chief Financial Officer, principal
financial and accounting officer
23