PETRO RIVER OIL CORP. Except as otherwise indicated by the context, references in this Quarterly
Report to "we," "us," "our," or the "Company" are to the consolidated businesses
of
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide information that is supplemental to, and should be read together with, the Company's consolidated financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q (the "Quarterly Report"). Information in this Item 2 is intended to assist the reader in obtaining an understanding of the consolidated financial statements, the changes in certain key items in those financial statements from quarter to quarter, the primary factors that accounted for those changes, and any known trends or uncertainties that the Company is aware of that may have a material effect on the Company's future performance, as well as how certain accounting principles affect the consolidated financial statements. This includes discussion of (i) Liquidity, (ii) Capital Resources, (iii) Results of Operations, and (iv) Off-Balance Sheet Arrangements, and any other information that would be necessary to an understanding of the Company's financial condition, changes in financial condition and results of operations.
Forward Looking Statements
The following is management's discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management and should be read in conjunction with the accompanying financial statements and their related notes included in this Quarterly Report.
This Quarterly Report contains forward-looking statements. Generally, the words
"believes," "anticipates," "may," "will," "should," "expects," "intends,"
"estimates," "continues," and similar expressions or the negative thereof or
comparable terminology are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties, including the matters
set forth in this Quarterly Report or other reports or documents we file with
the
The following discussion of our financial condition and results of operations is
based upon and should be read in conjunction with our consolidated financial
statements and their related notes included in this Quarterly Report and our
Annual Report on Form 10-K for the year ended
Business Overview
The Company's core holdings are in the
The Company's prospects in
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Effective
The execution of the Company's business plan is dependent on obtaining necessary working capital. While no assurances can be given, in the event management is able to obtain additional working capital, the Company plans to continue drilling additional wells on its existing concessions. The Company also intends to explore low-risk development drilling and work-over opportunities. Management is also exploring farm-in and joint venture opportunities for the Company's oil and gas assets, in addition to the options being considered by management to substantially reduce operating expenses and continue as a going concern, as disclosed under Liquidity and Capital Resources below.
Critical Accounting Policies and Estimates
The Company's significant accounting policies are described in Note 4 to the
annual consolidated financial statements for the years ended
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements. These consolidated
financial statements are prepared in accordance with
The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our consolidated financial statements:
Oil and Gas Operations
The Company follows the full-cost method of accounting for oil and gas
operations, whereby all costs related to exploration and development of oil and
gas reserves are capitalized. Under this method, the Company capitalizes all
acquisition, exploration and development costs incurred for the purpose of
finding oil and natural gas reserves, including salaries, benefits and other
internal costs directly attributable to these activities. Costs associated with
production and general corporate activities, however, are expensed in the period
incurred. Costs are capitalized on a country-by-country basis. To date, there
has only been one cost center,
The present value of estimated future net cash flows is computed by applying the
average first-day-of-the-month prices during the previous twelve-month period of
oil and natural gas to estimated future production of proved oil and natural gas
reserves as of year-end less estimated future expenditures to be incurred in
developing and producing the proved reserves and assuming continuation of
existing economic conditions. Prior to
Following the discovery of reserves and the commencement of production, the Company will compute depletion of oil and natural gas properties using the unit-of-production method based upon production and estimates of proved reserve quantities. Costs associated with unproved properties are excluded from the depletion calculation until it is determined whether or not proved reserves can be assigned to such properties. Unproved properties are assessed for impairment annually. Significant properties are assessed individually.
The Company assesses all items classified as unproved property on an annual basis for possible impairment. The Company assesses properties on an individual basis or as a group if properties are individually insignificant. The assessment includes consideration of the following factors, among others: land relinquishment; intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate impairment, the related exploration costs incurred are transferred to the full cost pool and are then subject to depletion and the ceiling limitations on development oil and natural gas expenditures.
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Proceeds from the sale of oil and gas assets are applied against capitalized costs, with no gain or loss recognized, unless a sale would alter the rate of depletion and depreciation by 25% or more.
Significant changes in these factors could reduce our estimates of future net proceeds and accordingly could result in an impairment of our oil and gas assets. Management will perform annual assessments of the carrying amounts of its oil and gas assets as additional data from ongoing exploration activities becomes available.
Derivative Liabilities
The Company evaluates its options, warrants, convertible notes, or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 815-10-05-4 and Section 815-40-25 of the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. The change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then the related fair value is reclassified to equity.
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.
The Company adopted Section 815-40-15 of the FASB Accounting Standards Codification ("Section 815-40-15") to determine whether an instrument (or an embedded feature) is indexed to the Company's own stock. Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions.
The Company utilizes a binomial option pricing model to compute the fair value of the derivative liability and to mark to market the fair value of the derivative at each balance sheet date. The Company records the change in the fair value of the derivative as other income or expense in the consolidated statements of operations.
Revenue Recognition
ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," supersedes the
revenue recognition requirements and industry-specific guidance under Revenue
Recognition (Topic 605). Topic 606 requires an entity to recognize revenue when
it transfers promised goods or services to customers in an amount that reflects
the consideration the entity expects to be entitled to in exchange for those
goods or services. The Company adopted Topic 606 on
The Company's revenue is comprised revenue from exploration and production
activities as well as royalty revenues related to a royalty interest agreement
executed in
Contracts with customers have varying terms, including spot sales or month-to-month contracts, contracts with a finite term, and life-of-field contracts where all production from a well or group of wells is sold to one or more customers. The Company recognizes sales revenues for oil, natural gas, and NGLs based on the amount of each product sold to a customer when control transfers to the customer. Generally, control transfers at the time of delivery to the customer at a pipeline interconnect, the tailgate of a processing facility, or as a tanker lifting is completed. Revenue is measured based on the contract price, which may be index-based or fixed, and may include adjustments for market differentials and downstream costs incurred by the customer, including gathering, transportation, and fuel costs.
Revenues are recognized for the sale of the Company's net share of production volumes. Sales on behalf of other working interest owners and royalty interest owners are not recognized as revenues.
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Recent Accounting Pronouncements
In
In addition, the Company elected practical expedients provided by the new
standard whereby, the Company has elected to not reassess its prior conclusions
about lease identification, lease classification, and initial direct costs and
to retain off-balance sheet treatment of short-term leases (i.e., 12 months or
less and does not contain a purchase option that the Company is reasonably
certain to exercise). As a result of the short-term expedient election, the
Company has no leases that require the recording of a net lease asset and lease
liability on the Company's consolidated balance sheet or have a material impact
on consolidated earnings or cash flows as of
In
In
In
The Company does not expect the adoption of any other recently issued accounting pronouncements to have a significant impact on its financial position, results of operations, or cash flows.
Results of Operations
Results of Operations for the Three Months Ended
Oil and Natural Gas Sales
During the three months ended
We have listed below the total production volumes and total revenue net to the
Company for the three months ended
For the Three Months For the Three Months
Ended Ended
October 31, 2019 October 31, 2018
Oil volume (BBL) 4,773 6,452
Gas volume (MCF) 6,038 6,669
Volume equivalent (BOE)(1) 5,779 7,564
Revenue $265,731 $410,432 (1) Assumes 6 Mcf of natural gas is equivalent to 1 barrel of oil.
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Royalty Revenue
In connection with the Purchase and Exchange Agreement dated
Lease Operating Expense
During the three months ended
General and Administrative Expense
General and administrative expense for the three months ended
For the Three Months Ended For the Three Months Ended
October 31, 2019 October 31, 2018
Salaries and benefits $53,712 $107,413
Professional fees 212,592 208,942
Office and administrative 74,507 91,000
Total $340,811 $407,355 Salaries and benefits included non-cash stock-based compensation of
Other Income (Expense)
During the three months ended
Results of Operations for the Six Months Ended
Oil Sales
During the six months ended
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We have listed below the total production volumes and total revenue net to the
Company for the six months ended
For the Six Months Ended For the Six Months Ended
October 31, 2019 October 31, 2018
Oil volume (BBL) 10,670 14,866
Gas volume (MCF) 12,984 7,432
Volume equivalent (BOE)(1) 12,834 16,105
Revenue $584,952 $984,497 (1) Assumes 6 Mcf of natural gas is equivalent to 1 barrel of oil.
Royalty Revenue
In connection with the Purchase and Exchange Agreement dated
Lease Operating Expense
During the six months ended
General and Administrative Expense
General and administrative expense for the six months ended
For the Six Months Ended For the Six Months Ended
October 31, 2019 October 31, 2018
Salaries and benefits $134,484 $390,897
Professional fees 391,412 348,562
Office and administrative 133,193 174,453
Total $659,089 $913,912 Salaries and benefits include non-cash stock-based compensation of
Other Income (Expense)
During the six months ended
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Liquidity and Capital Resources
At
As a result of the utilization of cash in its operating activities, and the
development of its assets, the Company has incurred losses since it commenced
operations. In addition, the Company has a limited operating history. At
On
On
In June and
The current level of working capital, along with results from operations, are insufficient to maintain current operations as well as the planned added operations for the next 12 months. As a result, management is focused on limiting operating expenses, deferring certain development activity, and exploring farm-in and joint venture opportunities for the Company's oil and gas assets. In addition, management is currently exploring various options to substantially reduce operating expenses and maximize the value of its assets, including its interest in Bandolier and Horizon Energy. Such options include, but are not limited to, asset sales, mergers, voluntarily terminating and/or suspending our statutory reporting obligations under the Securities Exchange Act of 1934, as amended, and other options that would allow the Company to continue as a going concern. No assurances can be given that management will be successful. In addition, Management may raise additional capital through debt and equity instruments in order to execute its business, operating and development plans. Management can provide no assurances that the Company will be successful in its capital raising or other efforts to continue as a going concern.
Operating Activities
During the six months ended
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Investing Activities
Investing activities during the six months ended
Financing Activities
Financing activities during the six months ended
Capitalization
The number of outstanding shares of the Company's common stock and the number of shares that could be issued if all common stock equivalents are converted to shares was as follows:
October 31, October 31,
2019 2018
As of
Convertible preferred shares 21,520,153 -
Common shares 18,188,540 17,938,540
Stock options 2,580,885 2,607,385
Stock purchase warrants 11,128,706 2,223,669
53,418,284 22,769,594
Off-Balance Sheet Arrangements
None.
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