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 January 31, 2010
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
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(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 [ ] No [X]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period of time that the registrant was
required to submit and post such files) Yes [ ] 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 March 9, 2010
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Common Stock 27,145,539
MILLER PETROLEUM, INC.
FORM 10-Q
JANUARY 31, 2010
TABLE OF CONTENTS
Page
No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Summary Financial Data at January 31, 2010 (Unaudited), October 31,
2009 (Unaudited), July 31, 2009, (Unaudited) and April 30, 2009 . 3
Consolidated Balance Sheets at January 31, 2010 (Unaudited) and
April 30, 2009 .................................................. 4
Consolidated Statements of Operations for the Three and Nine months
ended January 31, 2010 .......................................... 6
Consolidated Statements of Cash Flows for the Nine months ended
January 31, 2010 and 2009 (Unaudited) ........................... 7
Notes to Consolidated Financial Statements (Unaudited) ............ 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................... 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 29
Item 4T. Controls and Procedures ........................................... 29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 30
Item 1A. Risk Factors ...................................................... 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ....... 30
Item 3. Defaults Upon Senior Securities ................................... 31
Item 4. Submission of Matters to a Vote of Security Holders ............... 31
Item 5. Other Information ................................................. 31
Item 6. Exhibits .......................................................... 31
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 Income
2009-A, LP and Cook Inlet Energy, LLC.
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.
SUMMARY FINANCIAL INFORMATION
(UNAUDITED)
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months ended Months ended
January 31, January 31, January 31, January 31,
2010 2009 2010 2009
------------- ------------- ------------- -------------
Total Revenue .................. 1,162,107 612,838 2,023,131 1,312,679
Total Costs and Expenses ....... 5,371,783 1,489,576 8,046,629 3,536,085
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS ........... (4,209,676) (876,738) (6,023,498) (2,223,406)
NET INCOME (LOSS) .............. $ 271,952,491 $ (556,097) $ 271,868,681 $ 9,153,333
January 31, October 31, July 31, April 30,
2010 2009 2009 2009
(Unaudited) (Unaudited) (Unaudited)
------------- ------------- ------------- -------------
Cash ........................... $ 2,508,186 $ 94,838 $ 100,018 $ 46,566
Cash, restricted ............... 131,499 1,982,489 1,976,510 1,982,552
------------- ------------- ------------- -------------
Total Cash ..................... 2,639,685 2,077,327 2,076,528 2,029,118
Oil and Gas Properties ......... 371,725,938 4,047,713 3,235,278 1,787,911
Total Assets ................... 493,244,733 12,456,570 12,234,383 9,941,733
Total Current Liabilities ...... 1,284,932 3,743,949 3,552,707 2,574,500
Total Long-term Liabilities .... 201,350,622 545,524 661,104 89,251
Total Stockholders' Equity ..... 290,609,179 8,167,097 8,020,572 7,220,736
Total Producing Oil Wells ...... 196 194 173 20
Total Producing Gas Wells ...... 249 263 253 32
------------- ------------- ------------- -------------
Total Producing Wells .......... 445 457 426 52
Gross Oil and Gas Lease Acreage 657,170 54,506 54,256 14,489
Net Oil and Gas Lease Acreage .. 610,728 54,506 54,256 14,489
Total Proved Oil Reserves MBOE . 9.578 (4) 0.129 (3) 0.129 (1) 0.053 (2)
Total Proved Gas Reserves MBOE . 1.149 (4) 0.335 (3) 0.335 (1) 0.311 (2)
Total Proved, Probable, Possible
Oil Reserves MBOE ............ 16.602 (4) 0.168 (3) 0.129 (1) 0.053 (2)
Total Proved Probable, Possible
Gas Reserves MBOE ............ 2.652 (4) 0.335 (3) 0.335 (1) 0.311 (2)
(1) Based on Reserve Reports dated April 30, 2009, June 8, 2009 and June 18,
2009.
(2) Based on Reserve Report dated April 30, 2009.
(3) Based on Reserve Reports dated April 30, 2009, June 8, 2009, June 18, 2009
and October 31, 2009.
(4) Based on Reserve Reports dated April 30, 2009, June 8, 2009, June 18, 2009,
October 31, 2009, and December 10, 2009
3
MILLER PETROLEUM, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
January 31, April 30,
2010 2009
(Unaudited)
------------- -----------
CURRENT ASSETS
Cash and cash equivalents ...................... $ 2,508,186 $ 46,566
Cash, restricted ............................... 131,499 1,982,552
Accounts receivable ............................ 690,605 124,815
Accounts receivable - related parties .......... 30,699 19,882
Prepaid expenses ............................... 20,651 -
Inventory ...................................... 232,071 87,120
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Total Current Assets ........................... 3,613,711 2,260,935
Fixed Assets ................................... 115,924,957 5,751,017
Less: accumulated depreciation ................. (1,503,869) (1,022,017)
------------- -----------
Net Fixed Assets ............................... 114,421,088 4,729,000
OIL AND GAS PROPERTIES
(On the basis of successful efforts accounting) 371,725,938 1,787,911
Land ........................................... 526,500 406,500
Deferred interest .............................. - 6,892
Prepaid offering cost .......................... 305,358 666,476
Cash - restricted, long-term ................... 2,071,488 84,019
Deferred financing costs, net .................. 580,648 -
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Total Other Assets ............................. 3,483,994 1,163,887
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TOTAL ASSETS ................................... $ 493,244,733 $ 9,941,733
============= ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
MILLER PETROLEUM, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
January 31, April 30,
2010 2009
Unaudited
------------- -----------
CURRENT LIABILITIES
Accounts payable - trade ....................... $ 1,016,335 $ 301,082
Accrued expenses ............................... 159,074 271,099
Unearned revenue ............................... 109,523 131,587
Current portion of notes payable ............... - 1,870,732
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Total Current Liabilities ...................... 1,284,932 2,574,500
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LONG-TERM LIABILITIES
Deferred income taxes payable .................. 195,509,846 778
Notes payable, net of debt discount ............ 3,778,771 88,473
Asset retirement liability ..................... 2,062,005 57,246
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Total Long-term Liabilities .................... 201,350,622 146,497
------------- -----------
Total Liabilities .......................... 202,635,554 2,720,997
STOCKHOLDERS' EQUITY
Common stock, 500,000,000 shares authorized at
$0.0001 par value, 26,743,136 and 15,974,356
shares issued and outstanding, respectively . 2,674 1,597
Additional paid-in capital ..................... 20,074,011 8,555,324
Retained earnings (accumulated deficit) ........ 270,532,494 (1,336,185)
------------- -----------
Total Stockholders' Equity ..................... 290,609,179 7,220,736
------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 493,244,733 $ 9,941,733
============= ===========
The accompanying notes are an integral part of these
consolidated financial statements.
5
MILLER PETROLEUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months ended Months ended
January 31, January 31, January 31, January 31,
2010 2009 2010 2009
------------- ------------- ------------- -------------
REVENUES
Oil and gas revenue .................... $ 438,525 $ 62,093 $ 1,055,142 $ 472,993
Service and drilling revenue ........... 723,582 550,745 967,989 839,686
------------- ------------- ------------- -------------
Total Revenue .......................... 1,162,107 612,838 2,023,131 1,312,679
------------- ------------- ------------- -------------
COSTS AND EXPENSES
Cost of oil and gas revenue ............ 201,341 145,569 229,718 203,968
Cost of service and drilling revenue ... 1,916,638 498,953 2,375,291 1,001,299
Selling, general and administrative .... 2,623,553 643,581 4,304,785 1,924,499
Depreciation, depletion and amortization 630,251 201,473 1,136,835 406,319
------------- ------------- ------------- -------------
Total Costs and Expenses ............... 5,371,783 1,489,576 8,046,629 3,536,085
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS ................... (4,209,676) (876,738) (6,023,498) (2,223,406)
OTHER INCOME (EXPENSE)
Interest income ........................ 6,295 15,016 21,766 45,235
Interest expense ....................... (121,848) (17,114) (140,975) (67,347)
Loan fees and costs .................... (576,086) (23,107) (691,463) (97,355)
Gain on sale of equipment .............. - - (9,755) 8,550
Gain on sale of oil and gas properties . - - - 11,715,570
Gain on acquisitions ................... 472,473,332 - 474,292,096 -
------------- ------------- ------------- -------------
Total Other Income (Expense) ........... 471,781,693 (25,205) 473,471,669 11,604,653
------------- ------------- ------------- -------------
NET INCOME (LOSS) BEFORE INCOME TAXES .. 467,572,017 (901,943) 467,448,171 9,381,247
INCOME TAX EXPENSE (BENEFIT) ........... 195,619,527 (345,846) 195,579,490 227,914
------------- ------------- ------------- -------------
NET INCOME (LOSS) ...................... $ 271,952,490 $ (556,097) $ 271,868,681 $ 9,153,333
============= ============= ============= =============
INCOME (LOSS) PER SHARE
BASIC ................................ $ 12.44 $ (0.04) $ 14.14 $ 0.65
DILUTED .............................. $ 9.51 $ (0.04) $ 10.47 $ 0.65
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC ................................ 21,856,076 15,616,856 19,227,773 14,045,298
DILUTED .............................. 28,597,465 15,616,856 25,969,162 14,045,298
The accompanying notes are an integral part of these
consolidated financial statements.
6
MILLER PETROLEUM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Nine For the Nine
Months Ended Months Ended
January 31, January 31,
2010 2009
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ......................................... $ 271,868,681 $ 9,153,333
Depreciation, depletion and amortization ......... 1,136,835 406,319
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operating Activities:
Loss (gain) on sale of equipment ................. 9,755 (8,550)
Gain on sale of oil and gas properties ........... - (11,715,570)
Gain on acquisitions ............................. (474,292,096) -
Issuance of equity for services .................. 1,093,693 429,800
Issuance of equity for financing costs ........... 235,588 97,089
Write off of prepaid offering costs .............. 344,795 -
Changes in Operating Assets and Liabilities:
Accounts receivable ............................ (550,830) 91,449
Inventory ...................................... 67,277 13,191
Prepaid expense ................................ (20,651) -
Accounts payable ............................... 715,254 (14,590)
Accrued expenses ............................... (54,032) (85,816)
Deferred revenue ............................... (22,064) 63,065
Income taxes payable ........................... 195,509,068 227,914
Deferred interest .............................. 6,892 -
------------- -------------
Net Cash Used by Operating Activities ............ (3,951,835) (1,342,366)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and improvements ........... (43,382) (4,329,881)
Purchase of land ................................. - (110,000)
Sale of oil and gas properties ................... 25,000 13,514,090
Purchase of oil and gas properties ............... (20,849) (1,268,417)
Proceeds from sale of equipment .................. 50,000 19,000
Cash paid for Alaska acquisition ................. (4,541,251) -
Deferred interest ................................ - (7,537)
------------- -------------
Net Cash Provided (Used) by Investing Activities . (4,530,482) 7,817,255
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable ........................ (1,959,205) (732,786)
Asset retirement liability ....................... 184,681 -
Deferred financing assets ........................ (619,360) -
Proceeds from borrowing .......................... 5,576,444 1,912,159
Proceeds from sale of stock, net ................. 5,689,000 -
Cash acquired through acquisition ................ 203,993 -
Exercise of equity rights ........................ 1,800 -
Restricted cash .................................. 1,851,053 7,500
Restricted cash non-current ...................... (792) -
Stock repurchase ................................. - (4,350,000)
Prepaid offering cost ............................ 16,323 (584,115)
------------- -------------
Net Cash Provided (Used) by Financing Activities . 10,943,937 (3,747,242)
------------- -------------
NET INCREASE IN CASH ............................... 2,461,620 2,727,647
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..... 46,566 42,436
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........... $ 2,508,186 $ 2,770,083
============= =============
CASH PAID FOR INTEREST ............................. $ 211,071 $ 67,347
CASH PAID FOR TAXES ................................ $ 0 $ 0
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ITEMS:
Portion of Alaska acquisition financed by equity.... $ 2,071,655 $ -
Beneficial conversion right of debt issues.......... $ 809,263 $ -
Fair value of equity rights issued with debt........ $ 1,048,765 $ -
Common stock issued for prepaid offering costs...... $ - $ 115,000
Cash acquired through issuance of stock ............ $ 203,993 $ -
Restricted cash acquired through issuance of stock.. $ 196,682 $ -
Net assets acquired through issuance of stock ...... $ 1,988,089 $ -
The accompanying notes are an integral part of these
consolidated financial statements.
7
MILLER PETROLEUM, INC.
NOTES TO THE 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 and Miller Energy Services, LLC for the comparative periods
ended January 31, 2010 and 2009. Miller Petroleum, Inc.'s subsidiaries East
Tennessee Consultants, Inc., East Tennessee Consultants II, LLC, Miller Energy
GP, LLC, and Cook Inlet Energy, LLC were included in the consolidation for the
period ended January 31, 2010 only, since these subsidiaries started up
subsequent to the nine months ended January 31, 2009. 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
as well as Anchorage, Alaska. 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 January 31, 2010 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.
PRINCIPLES OF CONSOLIDATION AND NON-CONTROLLING INTEREST
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned at January 31, 2010 except for
Miller Energy Income, 2009-A, LP("MEI"), which is controlled by the Company. All
material intercompany transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Partnership classifies as cash and cash equivalents highly liquid
investments with maturities of less than ninety days. As of January 31, 2010,
the Company has cash which at time is in excess of $250,000, which exceeds the
FDIC insurance limits and is therefore uninsured. Restricted cash relates to
amounts held in escrow for payments on the Bonds, discussed hereafter.
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities that
exist at the date of the Company's consolidated financial statements, as well as
the reported amounts of revenue and costs and expenses during the reporting
periods. The Company's consolidated financial statements are based on a number
of significant estimates, including the revenue and expense accruals, deferred
tax assets and liabilities, depletion, depreciation and amortization, asset
impairments, the probability of forecasted transactions and the allocation of
purchase price to the fair value of assets acquired. Actual results could differ
from those estimates.
8
The natural gas industry principally conducts its business by processing actual
transactions as much as 60 days after the month of delivery. Consequently, the
most recent two months' financial results were recorded using estimated volumes
and contract market prices. Differences between estimated and actual amounts are
recorded in the following month's financial results. Management believes that
the operating results presented for the three and nine months ended January 31,
2010 represent actual results in all material respects.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If it is determined that an asset's estimated future cash flows
will not be sufficient to recover its carrying amount, an impairment charge will
be recorded to reduce the carrying amount for that asset to its estimated fair
value if such carrying amount exceeds the fair value.
The review of the Company's oil and gas properties is done by determining if the
historical cost of proved properties less the applicable accumulated depletion,
depreciation and amortization and abandonment is less than the estimated
expected undiscounted future cash flows. The expected future cash flows are
estimated based on the Company's plans to continue to produce and develop proved
reserves. Expected future cash flow from the sale of production of reserves is
calculated based on estimated future prices. The Company estimates prices based
upon current contracts in place, adjusted for basis differentials and market
related information including published futures prices. The estimated future
level of production is based on assumptions surrounding future prices and costs,
field decline rates, market demand and supply and the economic and regulatory
climates. If the carrying value exceeds the expected future cash flows, an
impairment loss is recognized for the difference between the estimated fair
market value (as determined by discounted future cash flows) and the carrying
value of the assets.
The determination of oil and natural gas reserve estimates is a subjective
process, and the accuracy of any reserve estimate depends on the quality of
available data and the application of engineering and geological interpretation
and judgment. Estimates of economically recoverable reserves and future net cash
flows depend on a number of variable factors and assumptions that are difficult
to predict and may vary considerably from actual results
Oil and gas properties are reviewed annually for impairment or whenever events
or circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment charges are recorded if conditions indicate the Company
will not explore the acreage prior to expiration of the applicable leases or if
it is determined that the carrying value of the properties is above their fair
value. There were no impairments of oil and gas properties or unproved
properties recorded by the Company for the three and nine months ended January
31, 2010 and 2009.
INVENTORY
Inventory consists primarily of crude oil in tanks and is carried at the lower
of cost or market on a "FIFO" basis.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective May 1, 2008, the Company adopted guidance issued by the Financial
Accounting Standards Board ("FASB") on "Fair Value Measurements" for assets and
liabilities measured at fair value on a recurring basis. This guidance
establishes a common definition for fair value to be applied to existing
generally accepted accounting principles that require the use of fair value
measurements, establishes a framework for measuring fair value, and expands
disclosure about such fair value measurements. The adoption of this guidance did
not have an impact on the Company's financial position or operating results, but
did expand certain disclosures.
The Financial Accounting Standards Board ("FASB") defines fair value as the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date.
Additionally, the "FASB" requires the use of valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs.
9
These inputs are prioritized below:
Level 1: Observable inputs such as quoted market prices in active
markets for identical assets or liabilities
Level 2: Observable market-based inputs or unobservable inputs that are
corroborated by market data
Level 3: Unobservable inputs for which there is little or no market
data, which require the use of the reporting entity's own
assumptions.
The Company did not have any Level 2 or Level 3 assets or liabilities as of
January 31, 2010.
The Company discloses the estimated fair values for all financial instruments
for which it is practicable to estimate fair value. As of January 31, 2010, the
fair value short-term financial instruments including cash, accounts receivable,
accounts payable, accrued expenses, and loans, approximates book value due to
their short-term duration.
No fair value valuation was made of the long term debt, as the other conditions
of such debt make it impractical to value.
Cash and cash equivalents include money market securities and commercial paper
and marketable securities representing certificates of deposits maturing in less
than one year that are considered to be highly liquid and easily tradable. These
securities are valued using inputs observable in active markets for identical
securities and are therefore classified as Level 1 within the fair value
hierarchy.
In addition, the Financial Accounting Standards Board ("FASB") issued, "The Fair
Value Option for Financial Assets and Financial Liabilities," effective for May
1, 2008. This guidance expands opportunities to use fair value measurements in
financial reporting and permits entities to choose to measure many financial
instruments and certain other items at fair value. The Company did not elect the
fair value option for any of its qualifying financial instruments, other than
those subject to a recent acquisition.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2009, we adopted the FASB guidance for Business Combinations,
which replaces SFAS No. 141, Business Combinations ("SFAS 141R" FASB ASC
805-10), 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 non-controlling 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. This
guidance makes various other amendments to authoritative literature intended to
provide additional guidance or to conform 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 this
guidance. See Note 7.
In April 2009, the FASB issued FASB ASC 805-20 (formerly FSP SFASNo. 141R-1,
Accounting for Assets Acquired and Liabilities Assumed in a Business Combination
That Arise from Contingencies). FASB ASC 805-20 amends the guidance in FASB ASC
805 (formerly SFAS 141R) relating to the initial recognition and measurement,
subsequent measurement and accounting and disclosures of assets and liabilities
arising from contingencies in a business combination. FASB ASC 805 (formerly FSP
SFAS 141R) is effective for fiscal years beginning after December 15, 2008. We
adopted FASB ASC 805 (formerly FSP SFAS 141R) as of the beginning of fiscal
2009. We will apply the requirements of FASB ASC 805-20 (formerly FSP FAS
141R-1) prospectively to any future acquisitions.
10
In May 2009, the FASB issued FASB ASC 855-10 (formerly SFAS No. 165, Subsequent
Events (SFAS 165)), which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The provisions of
FASB ASC 855-10 (formerly SFAS 165) are effective for interim and annual
reporting periods ending after June 15, 2009. The adoption of FASB ASC 855-10
(formerly SFAS 165) did not have any impact on our financial statements.
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles - a
replacement of FASB Statement No. 162 (SFAS 162). Effective for our financial
statements issued for interim and annual periods commencing with the quarterly
period ended October 31, 2009, the FASB Accounting Standards Codification
(Codification or ASC) is the source of authoritative U.S. GAAP recognized by the
FASB to be applied by nongovernmental entities. Rules and interpretive releases
of the SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. The Codification supersedes all
then-existing, non-SEC accounting and reporting standards. In the FASB's view,
the Codification does not change GAAP, and therefore the adoption of SFAS 168,
now referred to as FASB ASC 105, Generally Accepted Accounting Principles, did
not have an effect on our consolidated financial position, results of operations
or cash flows. However, where we have referred to specific authoritative
accounting literature, both the Codification and pre-Codification GAAP
literature are disclosed. FASB ASC 820, Fair Value Measurements and Disclosures
(formerly SFAS 157, Fair Value Instruments and FASB Staff Position No. FAS
157-2, Effective Date of FASB Statement No. 157) (Topic 820) defines fair value,
establishes a framework for measuring fair value in accordance with GAAP and
expands disclosures about fair value measurement. Topic 820 applies to other
accounting pronouncements that require or permit fair value measurements but
does not require any new fair value measurements. The adoption of Topic 820 for
financial assets and liabilities, as of January 1, 2008, did not have a material
impact on our financial position or operations. Topic 820 delayed the effective
date of Topic 820's fair value measurement requirements for nonfinancial assets
and liabilities that are not required or permitted to be measured at fair value
on a recurring basis. Fair value measurements identified in Topic 820 are
effective for our fiscal year beginning May 1, 2009 and did not have any impact
on our consolidated financial position, results of operations or cash flows.
Consolidations - Improvements to Financial Reporting by Enterprises Involved
with Variable Interest Entities
In December 2009, the FASB issued guidance for Consolidations - Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities
(Topic 810). The amendments in this update are a result of incorporating the
provisions of SFAS No. 167, Amendments to FASB Interpretation No. 46(R). The
provisions of such Statements are effective for fiscal years, and interim
periods within those fiscal years, beginning on or after November 15, 2009.
Earlier adoption is not permitted. The presentation and disclosure requirements
shall be applied prospectively for all periods after the effective date.
Management believes this Statement will not have a material impact on the
financial statements of the Company once adopted.
All other issued, but not yet effective accounting pronouncements, are
determined to be inapplicable or insignificant by management and once adopted
are not expected to have a material impact on the financial position of the
Company.
11
(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 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. As of January 31, 2010, the debt was paid in full.
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 January 31, 2010. No reserve for Allowance
for Doubtful Accounts has been recorded at January 31, 2010 as such accounts are
deemed to be fully collectible.
12
(5) LONG-TERM DEBT
The Company had the following debt obligations at January 31, 2010 and April 30,
2009.
January 31, April 30,
2010 2009
----------- -----------
6% convertible secured promissory notes, secured by
35,235 lease acreage, bearing interest at 6.00%,
due December 4, 2016 ............................. $ 2,855,000 $ -
Secured promissory notes, secured by certain
equipment, bearing interest at 12%, due
November 1, 2013 and December 15, 2013 ........... 2,721,444 -
Note payable to Commercial Bank, secured by cash,
bearing interest at 3.75%, due December 22, 2009 . - 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 ............. - 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 ........................ - 53,419
----------- -----------
Total Notes Payable .......................... 5,576,444 1,959,205
Less current maturities on other notes payable - 1,870,732
Less debt discount ........................... (1,797,673) -
----------- -----------
Notes Payable - Long-term .................... $ 3,778,771 $ 88,473
=========== ===========
In December 2009, the Company raised $2,855,000 as 6% convertible secured
promissory notes. These convertible secured notes bear interest at 6% per annum
and mature in December 2016. The convertible secured notes, including any
accrued and unpaid interest are convertible into common stock at $.55 per share,
at the option of the holder. The conversion price was below market at the time
of this debt raise, as a result the fair value of beneficial conversion feature
was computed to be $809,263. This beneficial conversion feature was recorded as
a debt discount and is being amortized over the term of the debt. The
amortization expense recorded for the quarter ended January 31, 2010 was
$14,808.
On November 1, 2009 we borrowed $2,365,174 from Miller Energy Income 2009-A,LP
("MEI"), a limited partnership of which our wholly-owned subsidiary, Miller
Energy GP, LLC, is the general partner. Under the four year Secured Promissory
Note we issued MEI to evidence this loan, interest is payable at the rate of 12%
per annum, with interest only payments due monthly. On December 15, 2009 we
borrowed an additional $365,270 from MEI and issued it a second four year
Secured Promissory Note which also pays interest at the rate of 12% per annum
with interest only payments due monthly. In connection with these loans, we
granted MEI a first priority security interest in oil and gas drilling equipment
owned by us. Pursuant to the terms of an Escrow Agreement, a third-party escrow
agent has been retained to hold the certificates of title for the collateral to
which title is evidenced by a certificate. The remaining equipment is subject to
a financing statement that has been filed with the Tennessee Secretary of State.
We used the proceeds from these loans for general corporate purposes including
reducing outstanding debt and to partially fund the Alaska transaction. The
description of the terms and conditions of the Secured Promissory Notes, the
Loan and Security Agreement and the Escrow Agreement do not purport to be
complete and are qualified in their entirety by reference to the full text of
such documents which are filed as Exhibits 10.1-10.4 of this report.
13
(6) STOCKHOLDERS' EQUITY
During the nine months ended January 31, 2010, we issued the following
securities: 10,768,780 shares, which included 350,000 shares issued to an
investor for $0.34 per share and expensed at $119,000, 2,000,000 shares for
acquisitions that occurred during the first quarter (see note 7), 39,100 shares
issued to a vendor in lieu of cash and expensed at $25,799 and 1,329,250 shares
and 1,328,250 warrants with a five year term and an exercise price of $1.00
issued to new investors as an incentive to invest in the Miller Energy Income
2009-A, LP partnership and capitalized at $1,048,765 as a debt discount. Miller
Energy Income 2009-A, LP's general partner is Miller Energy GP, LLC, a 100%
owned subsidiary of Miller Petroleum, Inc. In addition, we issued 350,000 shares
to an individual lender for a short-term financing that was paid off during the
current quarter and expensed at $245,000 and 6,015,000 shares were issued in a
Regulation D stock program, at $1.00 per share. The costs associated with this
equity raise were $326,000. Also, two warrant holders exercised warrants for
700,000 shares in a cashless exercise that netted them 505,430 shares and two
other warrant holders exercised warrants for 180,000 shares for an exercise
price of $1,800.
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 Registerable Securities. The
Company agreed 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 nine months ended January 31, 2010, the Company issued 360,000
penalty warrants at an average exercise price of $1.15 per share with a
five-year term valued and expensed at $235,588.
In the nine months ended January 31, 2010, The Company issued warrants to
purchase 1,000,000 shares to our new President, Ford Graham, which were expensed
at $603,285, warrants to purchase 100,000 shares to our new Investor Relations
Manager, which were expensed at $100,609, warrants to purchase 3,500,000 shares
as part of our Alaska acquisition, which were expensed at $2,071,655 during the
quarter (See Note 7). In addition, we entered into a 6% convertible secured
promissory note program during the quarter, which raised $2,855,000. These notes
have a conversion feature which allows them to convert to common shares at
$0.55, which was a 10% discount to market. This discount resulted in a
beneficial conversion feature which increased additional paid in capital by
$809,263.
The Company presents "basic" earnings (loss) per share and, if applicable,
"diluted" earnings per share pursuant to the accounting guidance issued by the
FASB. 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.
As of January 31, 2010 the exercise price of warrants and options below market
value were 8,336,750, and therefore there are dilutive effects of the common
stock equivalents for the outstanding vested stock options and warrants for the
three and nine months ended January 31, 2010.
(7) ACQUISITIONS
KTO Acquisition
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. 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
the aforementioned 35,325 leased acres with 153 producing oil and gas wells as
14
well as $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 KTO
and the Company. The lease which is the subject of the litigation was included
in the assets purchased by us from KTO. 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. 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 value as determined by this
evaluation was $252,455. The value of the restricted bond certificates had an
offsetting retirement liability, therefore, under the guidance of SFAS
141(R)(FASB ASC 805-10) 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 and
was recorded in the Consolidated Statements of Operations as a net to Gain on
Acquisitions. Pursuant to this FASB guidance, we originally valued these assets
at $252,455 and recorded a loss on the transaction of $67,545. Subsequently, we
completed the determination of the value of all undeveloped reserves for this
acreage during the quarter ended October 31, 2009 and accordingly we recorded an
additional gain of $1,057,564 on this transaction.
No additional supplemental pro-forma information with regards to results of
operations have been provided as the KTO acquisition was a purchase of select
assets only.
ETC Acquisition
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. The
Company 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. 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 Bargain Purchase Gain .... 828,745
Other assets ......... 874
---------- ----------
Total assets ........... $1,862,369 Total liabilities and equity $1,862,369
========== ==========
We valued this acquisition under the FASB guidance and, accordingly, a bargain
purchase of $828,745 was recorded as of the acquisition date. For the nine
months ended January 31, 2010 the consolidation of this entity increased the
Company revenues by $590,455 and increased costs of revenues by $272,628. The
impacts of consolidation on all other line items within our Consolidated
Statements of Operations were not significant. Our Consolidated Balance Sheet at
January 31, 2010 reflects consolidation of this entity by $1,319,140 in oil and
gas properties.
15
Alaska Acquisition
On December 10, 2009, the Company acquired former Alaskan assets of Pacific
Energy Resources ("Pacific Energy") valued at more than $479 million through a
Delaware Chapter 11 Bankruptcy proceeding. The Company acquired the Alaskan oil
and gas assets, which include onshore and offshore production facilities, $215
million in proven energy reserves, $122 million in probable energy reserves and
$31 million in possible energy reserves, providing total reserves of $368
million. The purchased assets include the West McArthur River oil field, the
West Foreland natural gas field, and the Redoubt unit with the Osprey offshore
platform, all located along the west side of the Cook Inlet. Also included in
the asset purchase are 602,000 acres of oil and gas leases as well as completed
3D seismic geology and other production facilities. At closing Miller paid
Pacific Energy a purchase price of $2.25 million and provided $2.22 million for
bonds, contract cure payments and other federal and State of Alaska requirements
to operate the facilities. The Company will operate the facilities through its
recently acquired wholly-owned subsidiary, Cook Inlet Energy LLC ("Cook"), which
has been approved by the State of Alaska as the long-term operator for the
Alaskan oil and gas wells. In October 2009, the Company entered into an
agreement to acquire the majority of Pacific Energy's Alaskan assets. In
November of 2009, the Court approved the sale and the acquisition closed on
December 10, 2009.
On December 10, 2009, the Company acquired 100% of the membership interests in
Cook Inlet Energy, LLC, an Alaska limited liability company from the owners of
this entity. As consideration for this company we issued the sellers, who were
unrelated third parties, stock warrants to purchase three million five hundred
thousand (3,500,000) shares of our common stock. The Warrants were issued in
three tranches with vesting features ranging from immediate to four years and
with exercise prices ranging from $0.01 to $2.00, the fair value of the warrants
issued were determined to be $2,071,655 and were expensed as a cost of the
transaction. In addition, the Company was obligated to deliver $250,000 in cash
by March 10, 2010 to satisfy certain expenses as well as reimbursement for
reasonable out of pocket expenses. As of the date of this filing, this
obligation is still outstanding. 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. David M. Hall, Walter J. Wilcox II and Troy Stafford, would
continue their employment with the acquired company for at least three years
from the closing date of the transaction at their specifically defined
compensation and benefit levels. In addition, Mr. Hall was appointed as a member
of the Company's Board of Directors and as Chief Executive Officer of Cook Inlet
Energy, LLC., Mr. Hall will receive an annual salary of $195,000.
The acquisition included the following balance sheet items:
Assets Liabilities and equity
Inventory............. $ 212,228 Asset Retirement Liability. $ 1,789,995
Fixed Assets.......... 110,000,000 Accounts Payable .......... 3,251,252
Oil and gas properties 368,035,281 Deferred Income Tax Payable 195,509,846
Restricted Cash Long Fair value of equity issued 2,071,655
term ................ 1,789,995 Bargain Purchase Gain ..... 277,414,756
------------ ------------
Total Assets .......... $480,037,504 Total Liabilities & Equity . $480,037,504
In addition, in a related transaction, the Company issued a $3,000,000 6%
Convertible Secured Promissory Note program ("Note"). The Company had raised
$2,855,000 through this program to provide to the Alaskan asset transaction.
$500,000 of this came from related parties; Director and Chief Executive Officer
Scott Boruff and Director Deloy Miller. Interest on the Notes is paid quarterly
and the principal is due December 4, 2016. The Note contains a convertible
feature which the Note holder has the right, but not the obligation, at the
Holder's option, at any time prior to payment in full of the principal balance
of the Note, to convert the unpaid principal amount of the Note, in whole or in
part, into fully paid and nonassessable shares of Miller's Common Stock at the
conversion price of $0.55 per share.
16
A second program issued by the Company during the quarter ended January 31, 2010
was a securities purchase program whereas the company sold 6,015,000 shares of
stock to accredited investors for $1.00 per share. This was a discount of 16.67%
from market value on the date of determination. The Company received $6,015,000
in cash, which was used for general corporate purposes, including reducing debt
and partially financing the Alaska asset acquisition.
As a result of Miller Petroleum, Inc acquiring a portion of the assets and
liabilities Alaskan oil and gas assets from Pacific Energy Alaska Operating LLC
and Pacific Energy Alaska Holdings, LLC through a Chapter 11 U.S. bankruptcy
proceeding via a newly formed entity Cook, and these oil and gas producing
assets were not operational for several months prior to the acquisition due to
the bankruptcy nor were accounting records maintained by Pacific Energy Alaska
Operating LLC and Pacific Energy Alaska Holdings, LLC on an adequate basis to
carve out historical operational results on these specified assets as they were
part of a larger enterprise, the resulting assets and liabilities were deemed
not to have been a separate business for purposes of preparing pro forma
financials with historical results for the past year and / or related stub
period. A pro forma balance sheet has been presented only to reflect the
acquisition.
(8) STOCK OPTIONS AND WARRANTS
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 guidance for "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 estimated the fair value of options and warrants granted during the nine
months ended January 31, 2010 and 2009 on the date of grant, using the
Black-Scholes pricing model with the following assumptions:
2010 2009
-------- --------
Weighted average of expected risk-free interest
rates (Approximate 3 year Treasury Bill rate) ..... 1.43% 2.02%
Expected years from vest date to exercise date ..... 2.2 2.5
Expected stock volatility .......................... 314-403% 293-527%
Expected dividend yield ............................ 0% 0%
The Company recorded $697,683 and $17,800 of compensation expense, net of
related tax effects, relative to stock options and warrants for the nine months
ended January 31, 2010 and 2009, respectively in accordance with the FASB
guidance. Net loss per share basic for this expense is $0.04 and $0.00 and net
loss per share diluted for this expense is $0.03 and $0.00.
The Company has adopted the FASB guidance, "Share Based Payments" FASB ASC
718-10. This guidance 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 this FASB guidance approximated
$697,683 in additional compensation expense during the nine months ended January
31, 2010 and $265,800 in 2009. Such amount is included in general and
administrative expenses on the statement of operations.
17
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 nine months ended January 31, 2010 and 2009, the aggregate intrinsic
value of stock options and warrants outstanding was $9,058,525 and $0,
respectively.
A summary of the stock options and warrants as of January 31, 2010 and 2009 and
changes during the periods is presented below:
Nine months ended Nine months ended
January 31, 2010 January 31, 2009
---------------------------- ----------------------------
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 7,535,000 $ 0.40
Granted ........... 6,671,750 1.00 1,735,000 0.89
Exercised ......... 685,430 0.00 - -
Expired ........... 75,000 0.82 - -
Cancelled ......... 194,570 0.94 5,100,000 0.23
----------- -------------- ----------- --------------
Balance at
January 31 ....... 9,806,750 0.98 4,170,000 0.83
Options exercisable
at January 31 ..... 7,119,250 $ 0.85 3,880,000 $ 0.86
=========== ============== =========== ==============
The following table summarizes information concerning stock options and warrants
outstanding and exercisable at January 31, 2010:
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
------------- ----------- ----------- -------- ----------- --------
$ 0.01 1,270,000 4.2 $ 0.01 1,270,000 $ 0.01
0.33 to 0.69 1,375,000 2.5 0.49 1,187,500 0.51
1.00 to 1.15 5,529,250 3.6 1.05 4,029,250 1.07
1.35 to 2.00 1,632,500 4.3 1.90 632,500 1.75
----------- -------- ----------- --------
9,806,750 3.6 $ 0.98 7,119,250 $ 0.85
=========== ======== =========== ========
(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.
18
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.
In August 2008 we engaged a broker-dealer and member of NASDA 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.
On December 10, 2009, the Company appointed Ford F. Graham as Vice-Chairman of
the Board of Directors of Miller and as President of the Company. Mr. Graham
received a signing bonus of $200,000, an annual initial salary of $200,000 and
for work provided to the Company, an affiliate of Mr. Graham's received stock
warrants to purchase 1,000,000 shares of Company stock, which has exercise
prices ranging from $0.01 to $2.00. Mr. Graham is currently being compensated
under an oral agreement, however, the Company intends to enter into a written
employment agreement in the immediate future under the same terms and
conditions.
On December 10, 2009, the Company appointed David M. Hall as Director of the
Company and Chief Executive Officer of the Company's Alaska subsidiary, Cook
Inlet Energy, LLC. Mr. Hall is compensated at an annual initial salary of
$195,000 and has a three year employment agreement. In addition, the Company
employed Walter J. Wilcox II and Troy Stafford, with three-year employment
agreements to assist Mr. Hall. These gentlemen are currently being compensated
under an oral agreement, however, the Company intends to enter into written
employment agreements in the immediate future under the same terms and
conditions.
On November 1, 2009 we borrowed $2,365,174 from Miller Energy Income 2009-A,LP
("MEI"), a limited partnership of which our wholly-owned subsidiary, Miller
Energy GP, LLC, is the general partner. Under the four year Secured Promissory
Note we issued MEI to evidence this loan, interest is payable at the rate of 12%
per annum, with interest only payments due monthly. On December 15, 2009 we
borrowed an additional $365,270 from MEI and issued it a second four year
Secured Promissory Note which also pays interest at the rate of 12% per annum
with interest only payments due monthly. In connection with these loans, we
granted MEI a first priority security interest in oil and gas drilling equipment
owned by us. Pursuant to the terms of an Escrow Agreement, a third-party escrow
agent has been retained to hold the certificates of title for the collateral to
which title is evidenced by a certificate. The remaining equipment is subject to
a financing statement that has been filed with the Tennessee Secretary of State.
We used the proceeds from these loans for general corporate purposes including
reducing outstanding debt and to partially fund the Alaska transaction. The
description of the terms and conditions of the Secured Promissory Notes, the
Loan and Security Agreement and the Escrow Agreement do not purport to be
complete and are qualified in their entirety by reference to the full text of
such documents which are filed as Exhibits 10.1-10.4 of this report.
(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
19
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. The Company
believes it will prevail in this case.
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 in 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.
On October 8, 2009 the Company filed an action styled Miller Petroleum, Inc. v.
Maynard, Civil Action No. 9992 in the Chancery Court for Scott County,
Tennessee, seeking a declaratory judgment that there has been continuing
commercial production of oil, and oil and gas lease owned by the Company is
still in full force and effect. Defendant Brad Maynard filed an Answer and
Counterclaim, seeking in the Counterclaim a declaration that the oil and gas
lease has expired. Although no compensatory monetary damages have been sought
against the Company the Counterclaim does seek attorney fees, expenses and
costs. There has been no discovery to date and a trial date has not been
assigned.
(11) SUBSEQUENT EVENTS
One of the Alaska oil wells acquired in December 2009, the West McArthur River
Unit-5 (WMRU-5) well, which was not producing was reworked. In March 2010, the
reworked oil well tested at a flowing rate of 578 barrels of oil equivalent per
day.
The company has evaluated subsequent events through March 19, 2010 and has
determined that there were no subsequent events to recognize or disclose in
these financial statements.
20
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 194 producing oil wells and 263 producing
gas wells. In addition to our engineering and geological capabilities, we have 2
production facilities, an offshore platform, 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 nine months of fiscal year 2010, we completed three
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 in 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, 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 this FASB guidance, we originally
valued these assets at $252,455 and recorded a loss on the transaction of
$67,545. Subsequently, we completed the determination of the value of all
undeveloped reserves for this acreage during the quarter ended October 31, 2009
and accordingly we recorded an additional gain of $1,057,564 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)(FASB ASC
805-10), 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.
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
21
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 request
of the Seller. As of the date of this filing, no request or payment has been
made.
ACQUISITION OF COOK INLET ENERGY LLC IN ALASKA
On December 10, 2009, the Company acquired former Alaskan assets of Pacific
Energy Resources ("Pacific Energy") valued at more than $479 million through a
Delaware Chapter 11 Bankruptcy proceeding. The Company acquired the Alaskan oil
and gas assets which include onshore and offshore production facilities, $215
million in proven energy reserves, $122 million in probable energy reserves and
$31 million in possible energy reserves, providing total reserves of $368
million. The purchased assets includes the West McArthur River oil field, the
West Foreland natural gas field, and the Redoubt unit with the Osprey offshore
platform, all located along the west side of the Cook Inlet. Also included in
the asset purchase are 602,000 acres of oil and gas leases as well as completed
3D seismic geology and other production facilities. At closing Miller paid
Pacific Energy a purchase price of $2.25 million and provided $2.22 million for
bonds, contract cure payments and other federal and State of Alaska requirements
to operate the facilities. The Company is operating the facilities through its
recently acquired wholly-owned subsidiary, Cook Inlet Energy LLC ("Cook"), which
has been approved by the State of Alaska as the long-term operator for the
Alaskan oil and gas wells. In October 2009, the Company entered into an
agreement to acquire the majority of Pacific Energy's Alaskan assets. In
November of 2009, the Court approved the sale and the acquisition closed on
December 10, 2009.
On December 10, 2009, the Company acquired 100% of the membership interests in
Cook, an Alaska limited liability company from the owners of this entity. As
consideration for these companies we issued the sellers, who were unrelated
third parties, stock warrants to purchase 3,500,000 shares of our common stock.
The Warrants are to be issued in three tranches with vesting features ranging
from immediate to four years and with exercise prices ranging from $0.01 to
$2.00. In addition, the Company was required to deliver $250,000 in cash to
satisfy certain expenses as well as reimbursement for reasonable out of pocket
expenses; such payment has not yet been made. Under the terms of the stock
purchase agreement, the sellers agreed not to engage in non-company related oil
and gas operations for a period of three years following the closing date. We
also agreed that each of the sellers, Messrs. David M. Hall, Walter J. Wilcox II
and Troy Stafford, would continue their employment with the acquired company for
at least three years from the closing date of the transaction at their
specifically defined compensation and benefit levels. In addition, Mr. Hall was
appointed as a member of the Company's Board of Directors and as Chief Executive
Officer of Cook, Mr. Hall will receive an annual salary of $195,000.
FINANCING TRANSACTIONS
In order to finance the expansion of our operations into Alaska and to provide
capital to us for our other operations, during the third quarter of 2010 we
entered into the following financing transactions:
We issued $2,855,000 principal amount 6% Convertible Secured Promissory Notes
(the "Notes")to provide funds for the Alaskan asset transaction. Included in the
sales of these Notes was an aggregate of $500,000 purchased by Messrs. Scott
Boruff, and Deloy Miller, a member of our Board. Interest on the Notes is paid
quarterly and the principal is due December 4, 2016. The Note contains a
convertible feature which the Note holder has the right, but not the obligation,
at the holder's option, at any time prior to payment in full of the principal
balance of the Note, to convert the unpaid principal amount of the Note, in
whole or in part, into fully paid and nonassessable shares of Miller's Common
Stock at the conversion price of $0.55 per share.
We also sold 6,015,000 shares of our Common Stock in private transactions to
accredited investors for $1.00 per share. This was a discount of 16.67% from
market value on the date of determination. The Company received $5,667,000 in
net cash proceeds from this offering, after payment of offering costs,
commissions and finder's fees, which was used for general corporate purposes,
including reducing debt and partially financing the Alaska asset acquisition.
22
On November 1, 2009 we borrowed $2,365,174 from Miller Energy Income 2009-A,LP
("MEI"), a limited partnership of which our wholly-owned subsidiary, Miller
Energy GP, LLC, is the general partner. Under the four year Secured Promissory
Note we issued MEI to evidence this loan, interest is payable at the rate of 12%
per annum, with interest only payments due monthly. On December 15, 2009 we
borrowed an additional $365,270 from MEI and issued it a second four year
Secured Promissory Note which also pays interest at the rate of 12% per annum
with interest only payments due monthly. In connection with these loans, we
granted MEI a first priority security interest in oil and gas drilling equipment
owned by us. Pursuant to the terms of an Escrow Agreement, a third-party escrow
agent has been retained to hold the certificates of title for the collateral to
which title is evidenced by a certificate. The remaining equipment is subject to
a financing statement that has been filed with the Tennessee Secretary of State.
We used the proceeds from these loans for general corporate purposes including
reducing outstanding debt and to partially fund the Alaska transaction. The
description of the terms and conditions of the Secured Promissory Notes, the
Loan and Security Agreement and the Escrow Agreement do not purport to be
complete and are qualified in their entirety by reference to the full text of
such documents which are filed as Exhibits 10.1-10.4 of this report.
LEASES
During the first three quarters of fiscal 2009 our three acquisitions resulted
in additional gross leases of 642,681 acres and additional net leases of 596,239
acres bringing the total oil and gas leases held by us to gross leases of
657,170 acres and net leases of 610,728 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 we will
require additional capital. As a part of our fiscal 2008 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 three acquisitions, our management is now able to
focus the majority of its efforts on growing our company. In addition to raising
capital we are also continuing to focus our short-term efforts on four distinct
areas, including:
o Increase our overall oil and gas production through maintenance and
repairs of nonperforming or underperforming wells from our new Alaska
acquisition,
o Organically growing production through drilling for our own benefit on
existing leases, leveraging our 100,000 plus well log database and over
600,000 lease acreage, 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 our drilling contract with Atlas Energy and the purchase of a
horizontal drilling rig, and
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.
Our ability, however, to implement one or more of these goals is dependent upon
the availability of additional capital. To fully expand our operations as set
forth above, we will need up to $50 million to fund the balance of our expansion
plans. A few of the wells acquired in Alaska, for example, require capital for
repairs and/or maintenance to fully achieve their production potential. We
estimate the costs for these repairs and/or maintenance during the next 12
months to be approximately $5 million. To provide the expansion capital, we are
seeking to leverage our existing assets as well as 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
NASD to assist us and are raising capital in a private offering. Our management
23
has devoted significant time to these efforts during 2009 and through the first
three quarters of our fiscal year ending 2010. We have had moderate success in
raising some 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 we will be
unable to fully utilize the wells in Alaska which require maintenance and/or
repairs 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 three and nine
months ended January 31, 2010 and 2009, together with their percentages of total
revenue in 2010 and percentage change on a period-over-period basis.
For the Three Months Ended
-----------------------------------------------
January 31, % of January 31,
2010 Revenue 2009 % Change
----------- ------- ----------- --------
REVENUES
Oil and gas revenue ........ $ 438,525 38% $ 62,093 606%
Service and drilling revenue 723,582 62% 550,745 31%
----------- -----------
Total Revenue .............. $ 1,162,107 100% $ 612,838 90%
For the Nine Months Ended
-----------------------------------------------
January 31, % of January 31,
2010 Revenue 2009 % Change
----------- ------- ----------- --------
REVENUES
Oil and gas revenue ........ $ 1,055,142 52% $ 472,993 123%
Service and drilling revenue 967,989 48% 839,686 15%
----------- -----------
Total Revenue .............. $ 2,023,131 100% $ 1,312,679 54%
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 a 606% increase in oil and gas revenues for the three
months ended January 31, 2010 over the three months ended January 31, 2009, and
a 123% increase in oil and gas revenues for the nine months ended January 31,
2010 over the nine months ended January 31, 2009. The three and nine month
period increases were due to the addition of the Alaskan oil well production
during the period ended January 31, 2010 which accounted for revenues of
approximately $473,858 for three and nine months then ended.
At January 31, 2010 oil was priced at $72.85 per barrel versus $41.73 at January
31, 2009 and at January 31, 2010 natural gas was $5.13 per Mcf as compared to
$4.42 per Mcf at January 31, 2009. In addition, we had 196 producing oil wells
and 249 producing gas wells on January 31, 2010 compared to 20 producing oil
wells and 30 producing gas wells on January 31, 2009. For the three months ended
January 31, 2010 we produced 7,104 barrels of oil and 43,540 Mcf of natural gas
as compared to 1,448 barrels of oil and 13,248 Mcf of natural gas during the
three months ended January 31, 2009. For the nine months ended January 31, 2010
we produced 13,045 barrels of oil and 81,044 Mcf of natural gas as compared to
3,563 barrels of oil and 32,165 Mcf of natural gas during the nine months ended
January 31, 2009.
24
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 62% for the
three months ended January 31, 2010 as compared to the three months ended
January 31, 2009 and increased 15% for the nine months ended January 31, 2010 as
compared to the nine months ended January 31, 2009. During the three months
ended January 31, 2010 we drilled 10 wells for a customer, which compares to six
wells for the three months ended January 31, 2009.
DIRECT EXPENSES
---------------
The following tables show the components of our direct expenses for the three
and nine months ended January 31, 2010 and 2009. 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
----------------------------------------------
January 31, January 31,
2010 Margin 2009 Margin
----------- ------ ----------- ------
DIRECT EXPENSES
Oil and gas ................ $ 201,340 54 % $ 145,569 (134)%
Service and drilling ....... 1,916,639 (165)% 498,953 9 %
Depletion expense .......... 357,221 n/a 32,205 n/a
----------- -----------
Total direct expenses ...... $ 2,475,200 (113)% $ 676,727 (10)%
For the Nine Months Ended
----------------------------------------------
January 31, January 31,
2010 Margin 2009 Margin
----------- ------ ----------- ------
DIRECT EXPENSES
Oil and gas ................ $ 229,718 78 % $ 203,968 57 %
Service and drilling ....... 2,375,292 (145)% 1,001,299 (19)%
Depletion expense .......... 651,837 n/a 68,457 n/a
----------- -----------
Total direct expenses ...... $ 3,256,847 (61)% $ 1,273,724 3 %
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 nine
months ended January 31, 2010 we capitalized approximately $21,511 of costs
associated with the acquisition, drilling and equipping of these wells as
compared to $1,268,000 during the nine months ended January 31, 2009. During the
nine months ended January 31, 2009 we acquired leases for 5,007 acres for
approximately $666,000 and spent $270,644 on drilling and equipping three
existing wells. 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. 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 service and drilling revenue represents direct labor costs of
employees associated with these services, as well as costs associated with
equipment, parts and repairs. During the three and nine months ended January 31,
2010, we spent over $1.5 million dollars maintaining and readying our Alaska
well operations.
25
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 three and nine
months ended January 31, 2010 depletion expense was $357,221 or 31% of total
revenue and $651,837 or 32% of total revenue, respectively, as compared to 5%
for both the three and nine months ended January 31, 2009. The primary reason
for the increase in depletion expense for the nine months ended January 31, 2010
was the addition of wells as a result of the acquisitions. As a result of these
components, total direct expenses reflected a negative margin of 104% for the
three months ended January 31, 2010, and a negative margin of 56% for the nine
months ended January 31, 2009. This represented a decreased margin of 10%
experienced for the three months ended January 31, 2009 but an increase of 3%
for the nine months ended January 31, 2009.
OTHER EXPENSES (REVENUES)
-------------------------
The following tables show the components of our other expenses (revenues) for
the three and nine months ended January 31, 2010 and 2009. Percentages listed in
the table reflect percentages of total revenue for each component of other
expenses.
For the Three Months Ended
------------------------------------------------
January 31, % of January 31, % of
2010 Revenue 2009 Revenue
------------- ------- ------------ -------
OTHER EXPENSES (REVENUES)
Selling, general and administrative .... $ 2,623,553 226% $ 643,581 105%
Depreciation and amortization .......... 273,030 23% 169,268 28%
Interest expense, net of interest income 115,553 10% 2,098 <1%
Loan fees and costs .................... 576,086 50% 23,107 4%
Gain on sale of equipment .............. - 0% - n/a
Gain on sale of oil and gas properties . - n/a - n/a
Gain on acquisitions ................... (472,473,332) >1,000% - n/a
------------- ------------
Total other expenses (revenues) ........ $(468,885,110) >1,000% $ 838,054 137%
For the Nine Months Ended
------------------------------------------------
January 31, % of January 31, % of
2010 Revenue 2009 Revenue
------------- ------- ------------ -------
OTHER EXPENSES (REVENUES)
Selling, general and administrative .... $ 4,304,785 213% $ 1,280,918 98%
Depreciation and amortization .......... 484,997 24% 136,389 10%
Interest expense, net of interest income 119,211 6% 22,112 2%
Loan fees and costs .................... 691,463 34% 74,248 6%
Gain on sale of equipment .............. 9,755 <1% (8,550) n/a
Gain on sale of oil and gas properties . - n/a (11,715,570) (892)%
Gain on acquisitions ................... (474,292,096) >1,000% - n/a
------------- ------------
Total other expenses (revenues) ........ $(468,681,885) >1,000 % $(10,210,453) (778)%
OTHER EXPENSES (REVENUES)
Selling, general and administrative expense includes salaries, general overhead
expenses, insurance costs, professional fees and consulting fees. The increase
for the three and nine months ended January 31, 2010 as compared to the three
and nine months ended January 31, 2009 primarily reflects the addition of our
new Alaska acquisition reflecting an additional $502,318 in costs for the three
and nine months ended January 31, 2010. In addition, $697,683 was booked as
compensation expense during the quarter, which reflected the cost of warrants
issued to two new employees. In addition, during the nine months ended January
26
31, 2010, we wrote off $344,795 of prepaid offering costs associated with the
Miller Rig & Equipment, LLC. The offering associated with this company ended on
December 1, 2009 and no funds were raised. Depreciation and amortization
expenses reflect the usage of our fixed assets over time. The increase in
depreciation and amortization for the three and nine months ended January 31,
2010 as compared to the three and nine months ended January 31, 2009 reflects an
increase in the amount of depreciation due to the Alaskan assets purchase. These
non-cash expenses will continue at this higher level as the Alaska assets are
being depreciated over a range of 30 to 40 years.
Loan fees and costs of $576,086 and $691,463 for the three and nine months ended
January 31, 2010, respectively, primarily represents non-cash expenses related
to the fair value of warrants issued to new investors as an incentive to invest
in the Miller Energy Income 2009-A, LP partnership as well as expenses related
to the fair value of warrants owed in connection with a prior financing
transaction.
During the three months ended January 31, 2010, we recorded a gain on
acquisitions of $472,473,332. This was due from the Alaskan acquisition as
previously discussed. During the nine months ended January 31, 2009 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 $9,153,333 for the nine months ended January 31, 2009. We do not
anticipate that we will enter into similar transactions in future periods.
As described earlier in this report, during the three and nine months ended
January 31, 2010 we recorded net income of $271,952,491 and $271,868,681,
respectively, primarily as a result of the gain on our Alaskan acquisition.
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 January 31, 2010 we had a working
capital surplus of $766,770 as compared to a working capital deficit of $370,811
at April 30, 2009. This increase in capital surplus is primary due to increased
cash provided from financing activities, while partially offset by cash used by
operating activities.
Net cash used by operating activities for the nine months ended January 31, 2010
period was $3,951,835. This primarily reflects the cash paid for the costs of
revenues and selling, general and administrative expense in excess of revenues
received for the period, which included the gain from the Alaska transaction,
but partially offset by the issuance of equity for services and financing costs
of $1,329,281. Net cash used by operating activities for the nine months ended
January 31, 2009 primarily reflects cash used to reduce our accounts payables
and accrued expenses as a result of the settlement of the Wind City litigation
and an increase in our income taxes payable.
Net cash provided by investing activities for the nine months ended January 31,
2010 of $4,530,482 is primarily due to the cash we paid for the Alaska assets
and the professional fee costs associated with this transaction of $4,541,252.
Net cash provided by investing activities for the nine months ended January 31,
2009 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 $10,943,937 for the nine months
ended January 31, 2010 primarily reflects the net cash received from the sale of
stock of $5,689,000, proceeds received from borrowings of $5,576,444, a
$1,851,053 decrease in restricted cash due to payoff of a bank financing, and
cash acquired through acquisitions of $203,993, which was partially offset by
payments on notes payable of $1,959,205. Net cash used in financing activities
for the nine months ended January 31, 2009 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.
27
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
increase in oil and gas prices has recently increased our liquidity. At January
31, 2010 oil was priced at $72.85 per barrel versus $41.73 at January 31, 2009
and at January 31, 2010 natural gas was $5.13 per Mcf as compared to $4.42 per
Mcf at January 31, 2009.
However, 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
worst 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.
ISSUANCE OF NOTES TO MILLER INCOME FUND
On November 1, 2009 and on December 15, 2009 Miller Energy Income 2009-A, LP, a
controlled entity of the Company in which one of our wholly-owned subsidiaries
is General Partner, extended loans totaling $2,721,444 to the Company at the
simple interest rate of 12% per year and due in four years. The Company provided
oil and gas drilling equipment as collateral for the loan. This liability
provides for monthly payments of $27,214.
MODERNIZATION OF OIL AND GAS REPORTING
In December 2008, the Securities and Exchange Commission ("SEC") announced that
it had approved revisions to its oil and gas reporting disclosures by adopting
amendments to Rule 4-10 of Regulation S-X and Items 201, 801, and 802 of
Regulation S-K. These new disclosure requirements are referred to as
"Modernization of Oil and Gas Reporting" and include provisions that:
o Introduce a new definition of oil and gas producing activities. This new
definition allows companies to include in their reserve base volumes from
unconventional resources. Such unconventional resources include bitumen
extracted from oil sands and oil and gas extracted from coal beds and
shale formations.
o Report oil and gas reserves using an un-weighted average price using the
prior 12-month period, based on the closing prices on the first day of
each month, rather than year-end pricing. This should maximize the
comparability of reserve estimates among companies and mitigate the
distortion of the estimates that arises when using a single pricing date.
o Permit companies to disclose their probable and possible reserves on a
voluntary basis. Current rules limit disclosure to only proved reserves.
o Update and revise reserve definitions to reflect changes in the oil and
gas industry and new technologies. New updated definitions include "by
geographic area" and "reasonable certainty."
o Permit the use of new technologies to determine proved reserves if those
technologies have been demonstrated empirically to lead to reliable
conclusions about reserves volumes.
o Require additional disclosures regarding the qualifications of the chief
technical person who oversees its overall reserve estimation process.
Additionally, disclosures are required related to internal controls over
reserve estimation, as well as a report addressing the independence and
qualifications of a company's reserves preparer or auditor based on
Society of Petroleum Engineers criteria.
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We will begin complying with the disclosure requirements in our annual report on
Form 10-K for the year ending April 30, 2010. The new rules may not be applied
to disclosures in quarterly reports prior to the first annual report in which
the revised disclosures are required. We are currently in the process of
evaluating the new requirements.
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, with the exception of two late
filed 8-Ks. Given the late filings, procedures have been put into place this
quarter to streamline the 8-K process by assigning specific roles in the process
to individual employees. We believe these new procedures will enhance our
existing controls and prevent further late filings.
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.
Management has excluded Cook Inlet Energy, LLC from its assessment of internal
control over financial reporting as of January 31, 2010 because it was acquired
by the Company during December 2009 through a bankruptcy proceeding. Total
assets and total revenues of Cook Inlet Energy, LLC represent approximately 97%
or $479.5 million and 41% or $473,858 of the consolidated financial statement
amounts as of, and for the quarter ended January 31, 2010.
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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
From September 2009 through December 2009, we issued 1,329,250 shares of our
common stock to accredited investors 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.
In October 2009 we issued 39,100 shares of our common stock valued at $25,799 to
an individual as compensation for services rendered to us. This issuance was
exempt from registration under the Securities Act of 1933 in reliance on an
exemption provided by Section 4(2) of that act.
In November 2009, we issued 350,000 shares of our common stock to a lender in
exchange for a short-term $350,000 note. The recipient was an accredited or
otherwise sophisticated investor who had such knowledge and experience in
business matters and was capable of evaluating the merits and risks of the
prospective investment in our securities. The recipient had access to business
and financial information concerning our company.
In January 2010, we issued 327,586 shares of our common stock to a warrant
holder upon exercise of a common stock purchase warrant to purchase 500,000
shares of our common stock with an exercise price of $1.00 per share who
utilized the cashless exercise option of the warrant 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. The recipient was an accredited
or otherwise sophisticated investor who had such knowledge and experience in
business matters and was capable of evaluating the merits and risks of the
prospective investment in our securities. The recipient had access to business
and financial information concerning our company.
In January 2010, we issued 177,844 shares of our common stock to a warrant
holder upon exercise of a common stock purchase warrant to purchase 200,000
shares of our common stock with an exercise price of $0.50 per share who
utilized the cashless exercise option of the warrant 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. The recipient was an accredited
or otherwise sophisticated investor who had such knowledge and experience in
business matters and was capable of evaluating the merits and risks of the
prospective investment in our securities. The recipient had access to business
and financial information concerning our company.
In January 2010, we issued 50,000 shares of our common stock to a warrant holder
upon exercise of a common stock purchase warrant to purchase 50,000 shares of
our common stock with an exercise price of $0.01 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. The recipient was
an accredited or otherwise sophisticated investor who had such knowledge and
experience in business matters and was capable of evaluating the merits and
risks of the prospective investment in our securities. The recipient had access
to business and financial information concerning our company.
In January 2010, we issued 130,000 shares of our common stock to a warrant
holder upon exercise of a common stock purchase warrant to purchase 130,000
shares of our common stock with an exercise price of $0.01 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. The recipient was
an accredited or otherwise sophisticated investor who had such knowledge and
experience in business matters and was capable of evaluating the merits and
risks of the prospective investment in our securities. The recipient had access
to business and financial information concerning our company.
30
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
On November 1, 2009 we borrowed $2,365,174 from Miller Energy Income 2009-A, LP
("MEI"), a limited partnership of which our wholly-owned subsidiary, Miller
Energy GP, LLC, is the general partner. Under the four year Secured Promissory
Note we issued MEI to evidence this loan interest is payable at the rate of 12%
per annum, with interest only payable monthly.
On December 15, 2009 we borrowed an additional $356,270 from MEI and issued it a
second four year Secured Promissory Note which also pays interest at the rate of
12% per annum with interest only payments due monthly.
In connection with these loans, we granted MEI a first priority security
interest in oil and gas drilling equipment owned by us. Pursuant to the terms of
an Escrow Agreement, a third-party escrow agent has been retained to hold the
certificates of title for the equipment to which title is evidenced by a
certificate. The remaining equipment is subject to a financing statement that
has been filed with the Tennessee Secretary of State.
We used the proceeds from these loans for general corporate purposes including
reducing outstanding debt and to partially fund the Alaska transaction.
The description of the terms and conditions of the Secured Promissory Notes, the
Loan and Security Agreement and the Escrow Agreement do not purport to be
complete and are qualified in their entirety by reference to the full text of
such documents which are filed as Exhibits 10.1, 10.2, 10.3 and 10.4 of this
report.
ITEM 6. EXHIBITS.
10.1 First Secured Promissory Note from Miller Petroleum, Inc.
10.2 Second Secured Promissory Note from Miller Petroleum, Inc.
10.3 Loan and Security Agreement between Miller Petroleum, Inc and Miller
Energy Income 2009-A, LP
10.4 Escrow Agreement
31.1 Rule 13a-14(a)/15d-14(a) certificate of Chief Executive Officer
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
31
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: March 22, 2010 By: /s/ Scott M. Boruff
-------------------
Scott M. Boruff
Chief Executive Officer,
principal executive officer
Date: March 22, 2010 By: /s/ Paul W. Boyd
----------------
Paul W. Boyd
Chief Financial Officer, principal
financial and accounting officer
32