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 October 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: 001-34732
MILLER PETROLEUM, INC.
----------------------
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1028629
--------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3651 BAKER HIGHWAY, HUNTSVILLE, TN 37756
---------------------------------- -----
(Address of principal executive offices) (Zip Code)
(865) 223-6575
--------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant 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 December 7, 2010
-------------- ---------------------------------------------
Common Stock 38,281,253
MILLER PETROLEUM, INC.
FORM 10-Q
OCTOBER 31, 2010
TABLE OF CONTENTS
Page
No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Summary Financial Data at October 31, 2010 and 2009 (Unaudited),
July 31, 2010 (Unaudited), April 30, 2010, and
January 31, 2009 (Unaudited)..................................... 4
Consolidated Balance Sheets at October 31, 2010 (Unaudited) and
April 30, 2010................................................... 6
Consolidated Statements of Operations for the Three and Six Months
ended October 31, 2010 (Unaudited) and 2009 (Unaudited).......... 8
Consolidated Statements of Cash Flows for the Six Months ended
October 31, 2010 and 2009 (Unaudited)............................ 9
Notes to Consolidated Financial Statements (Unaudited)............. 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 27
Item 4. Controls and Procedures............................................ 28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 28
Item 1A. Risk Factors....................................................... 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........ 29
Item 3. Defaults Upon Senior Securities.................................... 29
Item 4. (Removed and Reserved)............................................. 29
Item 5. Other Information.................................................. 29
Item 6. Exhibits........................................................... 29
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:
o the capital intensive nature of oil and gas development and exploration
operations and our ability to raise adequate capital to fully develop
our operations and assets,
2
o our ability to perform under the terms of the Assignment Oversight
Agreement with the Alaska DNR, including meeting the funding
commitments of that agreement,
o fluctuating oil and gas prices and the impact on our results of
operations,
o the impact of the global economic crisis on our business,
o the impact of natural disasters on our Cook Inlet Basin operations,
o the imprecise nature of our reserve estimates,
o our ability to recover proved undeveloped reserves and convert probable
and possible reserves to proved reserves,
o the possibility that present value of future net cash flows will not be
the same as the market value,
o the costs and impact associated federal and state regulations,
o changes in existing federal and state regulations,
o our dependence on third party transportation facilities,
o insufficient insurance coverage,
o conflicts of interest related to our dealings with MEI,
o cashless exercise provisions of outstanding warrants,
o market overhang related to restricted securities and outstanding
options, warrants and convertible notes, and
o adverse impacts on the market price of our common stock from sales by
the holders of our common stock and warrants purchased in recent
private offerings.
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, 2010. 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, and Cook Inlet Energy, LLC
("CIE" or "Cook Inlet Energy").
The information which appears on our web site at www.millerenergyresources.com
is not part of this report.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MILLER PETROLEUM, INC.
SUMMARY FINANCIAL INFORMATION
(UNAUDITED)
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
October 31, October 31, October 31, October 31,
2010 2009 2010 2009
------------- ------------- ------------ -------------
Revenue
Oil and gas revenue .................... $ 6,081,793 $ 212,225 $ 10,872,972 $ 616,617
Service and drilling revenue ........... 593,869 121,179 1,002,937 244,407
------------- ------------- ------------ -------------
Total .................................. 6,675,662 333,404 11,875,909 861,024
Direct Expenses
Oil and gas ............................ 3,611,582 4,333 5,915,689 28,377
Service and drilling ................... 341,408 214,153 837,155 458,653
Depletion expense ...................... 1,660,282 177,182 3,237,130 294,616
------------- ------------- ------------ -------------
Total .................................. 5,613,272 395,668 9,989,974 781,646
------------- ------------- ------------ -------------
Gross Profit (loss) .................... 1,062,390 (62,264) 1,885,935 79,378
Selling, general and administrative .... 3,148,743 1,028,841 5,915,416 1,681,232
Depreciation and amortization .......... 615,615 100,240 1,029,439 211,967
------------- ------------- ------------ -------------
3,764,358 1,129,081 6,944,855 1,893,199
------------- ------------- ------------ -------------
LOSS FROM OPERATIONS ................... (2,701,967) (1,191,345) (5,058,920) (1,813,821)
Total other income ..................... 379,815 996,063 2,993,107 1,689,974
NET LOSS BEFORE INCOME TAXES ........... $ (2,322,153) $ (195,282) $ (2,065,812) $ (123,847)
4
MILLER PETROLEUM, INC.
SUMMARY FINANCIAL INFORMATION
(UNAUDITED)
(continued)
October 31, July 31, April 30, January 31,
2010 2010 2010 2010
(Unaudited) (Unaudited) (Unaudited)
------------- ------------- ------------- -------------
Cash ................................... $ 986,547 $ 472,543 $ 2,750,841 $ 2,508,186
Cash, restricted ....................... 126,697 126,379 126,064 131,499
------------- ------------- ------------- -------------
Total Cash ............................. 1,113,244 598,922 2,876,905 2,639,685
Oil and Gas Properties ................. 378,714,358 378,509,510 376,216,621 371,725,938
Total Assets ........................... 503,324,002 500,921,122 500,452,155 493,244,733
Total Current Liabilities .............. 20,420,719 6,053,165 4,828,333 1,284,932
Total Long-term Liabilities ............ 204,848,993 217,331,590 219,883,001 201,350,622
Total Stockholders' Equity ............. 278,054,291 277,536,367 275,740,821 290,609,179
Total Gross Producing Oil Wells ........ 186 186 188 196
Total Gross Producing Gas Wells ........ 313 323 337 249
------------- ------------- ------------- -------------
Total Gross Producing Wells............. 499 509 525 445
Gross Oil/Gas Lease/License Acreage .... 634,219 634,219 645,683 657,170
Net Oil/Gas Lease/License Acreage ...... 597,224 597,224 603,546 610,728
Total Proved Oil Reserves MBOE ......... 10.344 (1) 10.344 (1) 10.344 (1) 9.578 (2)
Total Proved Gas Reserves MBOE ......... 0.910 (1) 0.910 (1) 0.910 (1) 1.149 (2)
Total Proved, Probable, Possible
Oil Reserves MBOE .................... 17.634 (1) 17.634 (1) 17.634 (1) 16.602 (2)
Total Proved Probable, Possible
Gas Reserves MBOE .................... 3.321 (1) 3.321 (1) 3.321 (1) 2.652 (2)
(1) Based on Reserve Reports dated April 30, 2010.
(2) Based on Reserve Reports dated April 30, 2009, June 8, 2009, June 18, 2009,
October 31, 2009, and December 10, 2009.
5
MILLER PETROLEUM, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
October 31, April 30,
2010 2010
(Unaudited)
------------ ------------
CURRENT ASSETS
Cash .......................................... $ 986,547 $ 2,750,841
Cash, restricted .............................. 126,697 126,064
Accounts receivable, net ...................... 1,676,475 1,444,844
Accounts receivable - related parties ......... 49,740 47,446
Tax credits receivable......................... 2,167,044 1,107,000
Inventory ..................................... 627,746 521,639
Prepaid expenses .............................. 1,487,444 275,610
------------ ------------
Total Current Assets .......................... 7,121,693 6,273,444
Fixed Assets, net.............................. 114,170,884 114,820,779
OIL AND GAS PROPERTIES, NET
(On the basis of successful efforts accounting) 378,714,358 376,216,621
Land .......................................... 526,500 526,500
Cash - restricted, long-term .................. 2,314,517 2,071,839
Other assets .................................. 476,050 542,972
------------ ------------
Total Other Assets ............................ 3,317,067 3,141,311
------------ ------------
TOTAL ASSETS .................................. $503,324,002 $500,452,155
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
6
MILLER PETROLEUM, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
October 31, April 30,
2010 2010
(Unaudited)
------------ ------------
CURRENT LIABILITIES
Accounts payable - trade ...................... $ 8,604,077 $ 3,579,112
Accrued expenses .............................. 399,517 421,938
Current derivative liability .................. 11,035,701 720,840
Unearned revenue .............................. 108,473 106,443
Income taxes payable........................... 272,950 -
------------ ------------
Total Current Liabilities ..................... 20,420,718 4,828,333
LONG-TERM LIABILITIES
Deferred income taxes payable ................. 184,195,928 184,468,878
Asset retirement liability .................... 15,662,003 15,662,002
Long term derivative liability ................ 2,706,191 16,708,947
Notes payable, related parties, net ........... 2,284,871 1,803,775
Notes payable - other, net .................... - 1,239,399
------------ ------------
Total Long-term Liabilities ................... 204,848,993 219,883,001
------------ ------------
Total Liabilities ............................. 225,269,711 224,711,334
STOCKHOLDERS' EQUITY
Common stock, 500,000,000 shares authorized at
$0.0001 par value, 36,167,439 and 32,224,894
shares issued and outstanding, respectively 3,617 3,223
Additional paid-in capital .................... 30,939,449 27,620,605
Retained earnings ............................. 247,111,225 248,116,993
------------ ------------
Total Stockholders' Equity .................... 278,054,291 275,740,821
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $503,324,002 $500,452,155
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
7
MILLER PETROLEUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
October 31, October 31, October 31, October 31,
2010 2009 2010 2009
------------- ------------- ------------- -------------
REVENUES
Oil and gas revenue .................... $ 6,081,793 $ 212,225 $ 10,872,972 $ 616,617
Service and drilling revenue ........... 593,869 121,179 1,002,937 244,407
------------- ------------- ------------- -------------
Total Revenue .......................... 6,675,662 333,404 11,875,909 861,024
COSTS AND EXPENSES
Cost of oil and gas revenue ............ 3,611,582 4,333 5,915,689 28,377
Cost of service and drilling revenue ... 341,408 214,153 837,155 458,653
Selling, general and administrative .... 3,148,743 1,028,840 5,915,416 1,681,232
Depreciation, depletion and amortization 2,275,897 277,422 4,266,568 506,583
------------- ------------- ------------- -------------
Total Costs and Expenses ............... 9,377,630 1,524,748 16,934,828 2,674,845
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS ................... (2,701,968) (1,191,344) (5,058,919) (1,813,821)
OTHER INCOME (EXPENSE)
Interest income ........................ 1,174 7,498 5,726 15,469
Interest expense ....................... (410,422) (6,258) (629,758) (19,127)
Gain on derivative securities........... 781,938 - 3,687,895 -
Loan fees and costs..................... (375) (62,742) (90,755) (115,377)
Gain (loss) on sale of equipment........ 7,500 - 7,500 (9,755)
Gain on sale of oil and gas properties.. - - 12,500 -
Gain on acquisitions ................... - 1,057,564 - 1,818,764
------------- ------------- ------------- -------------
Total Other Income...................... 379,815 996,062 2,993,108 1,689,974
------------- ------------- ------------- -------------
NET LOSS BEFORE INCOME TAXES ........... (2,322,153) (195,282) (2,065,811) (123,847)
INCOME TAX BENEFIT...................... 633,477 39,258 1,060,043 40,436
------------- ------------- ------------- -------------
NET LOSS................................ $ (1,688,676) $ (156,024) $ (1,005,768) $ (83,811)
============= ============= ============= =============
LOSS PER SHARE
BASIC ................................ $ (0.05) $ (0.01) $ (0.03) $ (0.00)
DILUTED .............................. $ (0.05) $ (0.01) $ (0.03) $ (0.00)
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC ................................ 34,314,794 18,555,604 33,575,258 17,913,621
DILUTED .............................. 34,314,794 18,555,604 33,575,258 17,913,621
The accompanying notes are an integral part of these
consolidated financial statements.
8
MILLER PETROLEUM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Six For the Six
Months Ended Months Ended
October 31, 2010 October 31, 2009
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ........................................... $ (1,005,768) $ (83,811)
Adjustments to Reconcile Net Loss to Net Cash
Provided (Used) by Operating Activities:
Depreciation, depletion and amortization ......... 4,266,568 506,584
Loss (gain) on sale of equipment ................. (7,500) 9,755
Gain on sale of oil and gas properties............ (12,500) -
Gain on acquisitions ............................. - (1,818,764)
Derivative liability, net ........................ (3,687,895) -
Prepaid offering costs............................ - 213,623
Issuance of equity for services................... - 25,798
Issuance of equity for compensation .............. 1,462,490 -
Issuance of equity for financing costs ........... - 97,499
Changes in Operating Assets and Liabilities:
Accounts receivable ............................ (233,925) 11,677
Tax credits receivable ......................... (1,060,043) -
Inventory ...................................... (106,107) (90,891)
Prepaid expense ................................ (1,211,834) (51,627)
Accounts payable ............................... 5,024,965 213,770
Accrued expenses ............................... (22,420) 190,612
Unearned revenue ............................... 2,030 5,653
Income taxes payable ........................... - (39,259)
Deferred interest .............................. - 1,208
Other assets ................................... 462,684 -
--------------- ---------------
Net Cash Provided (Used) by Operating Activities . 3,870,742 (808,173)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and improvements ........... (171,029) (25,892)
Capital expenditures for oil and gas properties... (5,734,867) (20,681)
Proceeds from sale of oil and gas properties ..... 12,500 25,000
Proceeds from sale of equipment .................. 7,500 50,000
--------------- ---------------
Net Cash Provided (Used) by Investing Activities . (5,885,896) 28,427
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable ........................ - (12,121)
Deferred financing assets ........................ (7,580) -
Proceeds from borrowing .......................... 350,000 300,000
Proceeds from sale of stock, net ................. - 336,875
Cash acquired through acquisition ................ - 203,993
Exercise of equity rights ........................ 151,750 -
Restricted cash .................................. (633) 63
Restricted cash non-current ...................... (242,678) (792)
--------------- ---------------
Net Cash Provided by Financing Activities ........ 250,859 828,018
--------------- ---------------
NET INCREASE (DECREASE) IN CASH .................... (1,764,295) 48,272
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..... 2,750,841 46,566
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........... $ 986,547 $ 94,838
=============== ===============
CASH PAID FOR INTEREST ............................. $ 632,226 $ 101,879
CASH PAID FOR TAXES ................................ $ - $ -
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ITEMS:
Beneficial conversion right of debt issues.......... $ - $ -
Financing costs from issuance of warrants and stock $ - $ 97,499
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
Conversion of debt for equity ...................... $ 1,705,000 $ -
The accompanying notes are an integral part of these
consolidated financial statements.
9
MILLER PETROLEUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
These consolidated financial statements include the accounts of Miller
Petroleum, Inc. (the "Company") and the accounts of its subsidiaries, Miller
Drilling TN, LLC, Miller Energy Services, LLC, East Tennessee Consultants, Inc.
and East Tennessee Consultants II, LLC for the comparative periods ended October
31, 2010 and 2009. Miller Petroleum, Inc.'s subsidiaries Miller Energy GP, LLC
and Cook Inlet Energy, LLC were included in the consolidation for the period
ended October 31, 2010 only, since these subsidiaries started up subsequent to
the six months ended October 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 in the Cook Inlet Basin of 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, 2010 Annual Report on Form
10-K. The results of operations for the period ended October 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 October 31, 2010 except for
Miller Energy Income, 2009-A, LP("MEI"), which is controlled by the Company. The
non-controlling ownership interests in the net income (loss) are reflected
within non-controlling interests on the Company's consolidated statements of
operations. The non-controlling interests in the assets and liabilities of MEI
are reflected as a component of stockholders' equity on the Company's
consolidated balance sheets. All material intercompany transactions have been
eliminated.
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.
10
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 six months ended October 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 six months ended October 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.
RECENT ACCOUNTING PRONOUNCEMENTS
All issued, but not yet effective accounting pronouncements are determined to be
not applicable or significant by management and once adopted are not expected to
have a material impact on the financial position of the Company.
11
(3) PARTICIPANT RECEIVABLES, RELATED PARTY RECEIVABLES AND PAYABLES
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 October 31, 2010 and April 30, 2010.
The Company had an account receivable from a member of the Board of Directors,
and his family, at October 31, 2010 and April 30, 2010 in the amounts of $24,246
and $29,950, respectively for work performed on oil and gas wells. This board
member and his son own partial interests in the oil and gas wells the Company
also owns.
The Company had notes payable at October 31, 2010 and April 30, 2010 of
$3,071,444 and $2,721,444, respectively, to MEI. MEI's general partner is Miller
Energy GP, LLC, a 100% owned subsidiary of the Company.
4) FIXED ASSETS
Fixed assets consist of the following:
October 31, April 30,
2010 2010
------------- -------------
Machinery & Equipment ............ $ 4,768,658 $ 4,620,219
Pipelines ........................ 17,000,000 17,000,000
Oil platform ..................... 6,000,000 6,000,000
Vehicles ......................... 1,418,415 1,402,094
Buildings ........................ 87,682,810 87,682,810
Office Equipment ................. 83,680 77,411
------------- -------------
116,953,563 116,782,534
Less: accumulated depreciation ... (2,782,679) (1,961,755)
------------- -------------
Net Fixed Assets ................. $ 114,170,884 $ 114,820,779
The increase in Machinery and Equipment primarily resulted from purchase of a
rig. The increase in vehicles resulted from the purchase of two used trucks. The
increase in office equipment primarily resulted from the purchase of new
accounting software and new computers. Depreciation expense for the six months
ended October 31, 2010 and 2009 was $1,029,439 and $211,967 respectively.
(5) DERIVATIVE LIABILITIES
Effective May 1, 2009, the Company adopted the provisions of EITF 07-05
"Determining Whether an Instrument (or Embedded Feature) is Indexed to a
Company's Own Stock," which was codified into ASC Topic 815 - Derivatives and
Hedging. ASC 815 applies to any freestanding financial instruments or embedded
features that have characteristics of a derivative and to any freestanding
financial instruments that are potentially settled in an entity's own common
stock. The Company has 3,030,529 of warrants with exercise reset provisions,
which are considered freestanding derivative instruments. ASC 815 requires these
warrants to be recorded as liabilities as they are no longer afforded equity
treatment. The derivative liability as of October 31, 2010 and April 30, 2010 of
$13,741,892 and $17,429,787, respectively is comprised of three transactions,
2,013,814 warrants issued in the current and past years, which were subject to
an ongoing dispute but was resolved on December 3, 2010. See Note 12. Also,
716,715 warrants were issued in an equity financing in March 2010 and 300,000
warrants were issued pursuant to a consulting arrangement in March 2010.
12
The Company utilized the Black-Scholes pricing model for the 716,715 and 300,000
warrants with the following weighted average assumptions: a risk free rate of
0.51%, expected life terms ranging from 1.9 years to 2.0 years, an expected
volatility of 75% and a dividend rate of 0.0%. The fair value of the warrants
issued and outstanding at May 1, 2009, attributed to this derivative liability
has been determined to be immaterial due to the low stock price in comparison to
the exercise price, hence there was no adjustment to make upon adoption of this
accounting standard. During the six months ended October 31, 2010, the Company
has recorded non-cash gains of $3,687,895 relating to the change in fair value
of these derivative instruments.
Additional Fair Value Language
The accounting guidance establishes a fair value hierarchy based on whether the
market participant assumptions used in determining fair value are obtained from
independent sources (observable inputs) or reflect the Company's own assumptions
of market participant valuation (unobservable inputs). A financial instrument's
categorization within the fair value hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. The accounting guidance
establishes three levels of inputs that may be used to measure fair value:
o Level 1--Quoted prices in active markets that are unadjusted and accessible
at the measurement date for identical, unrestricted assets or liabilities;
o Level 2--Quoted prices for identical assets and liabilities in markets that
are inactive; quoted prices for similar assets and liabilities in active
markets or financial instruments for which significant inputs are observable,
either directly or indirectly; or
o Level 3--Prices or valuations that require inputs that are both unobservable
and significant to the fair value measurement.
The Company considers an active market to be one in which transactions for the
asset or liability occur with sufficient frequency and volume to provide pricing
information on an ongoing basis, and views an inactive market as one in which
there are few transactions for the asset or liability, the prices are not
current, or price quotations vary substantially either over time or among market
makers. Where appropriate the Company's or the counterparty's non-performance
risk is considered in determining the fair values of liabilities and assets,
respectively.
The fair value of our financial instruments at October 31, 2010 and April 30,
2010 are as follows:
Fair Value Measurements at Reporting Date Using
-----------------------------------------------
Quoted
Prices in
Active
Markets Significant
for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
Description (Level 1) (Level 2) (Level 3)
----------------------- ---------- ----------- ------------
Derivative securities -
April 30, 2010 ........ $ - $ - $ 17,429,787
========== =========== ============
Derivative securities -
October 31, 2010 ...... $ - $ - $ 13,741,892
========== =========== ============
13
(6) LONG-TERM DEBT
The Company had the following debt obligations at October 31, 2010 and April 30,
2010:
October 31, April 30,
2010 2010
----------- -----------
6% convertible secured promissory notes, secured by
35,235 lease acreage, bearing interest at 6.00%,
due December 4, 2016 ............................ $ - $ 1,705,000
Secured promissory notes, secured by certain
equipment, bearing interest at 12%, due
November 1, 2013 and December 1, 2013 ........... 3,071,444 2,721,444
----------- -----------
Total Notes Payable .......................... 3,071,444 4,426,444
Less current maturities on other notes payable - -
Less debt discount ........................... (786,573) (1,383,271)
----------- -----------
Notes Payable - Long-term .................... $ 2,284,871 $ 3,043,173
=========== ===========
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 July 31, 2010 was $38,710.
As of the October 31, 2010, all of the notes have been converted into shares of
our common stock.
On November 1, 2009, December 15, 2009 and May 15, 2010 MEI, a controlled entity
of the Company, extended loans, as amended, of $2,365,174, $356,270, and
$350,000 respectively, totaling $3,071,444 to the Company. These loans bear
interest at a rate of 12% per year and are due in four years. These loans
require monthly payments of interest only, with the principal due at the
maturity date. The Company provided oil and gas drilling equipment as collateral
for the loan. The Company issued 1,329,250 shares of common stock and 1,329,350
warrants to purchase common stock at an exercise price of a $1.00. These common
shares and warrants issued had a fair value of $1,048,765, which have been
recorded as a debt discount to be amortized over 48 months the term of such
debt. Amortization expense of the debt discount costs for the six months ended
October 31, 2010 was $131,096.
ASC 410-20 "Accounting for Asset Retirement Obligations" addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement requires companies to record the present value of obligations
associated with the retirement of tangible long-lived assets in the period in
which it is incurred. The liability is capitalized as part of the estimated
costs to capitalize a well and site remediation once a well is abandoned. Over
time, accretion of the liability is recognized as an operating expense and the
capitalized cost is depreciated over the expected useful life of the related
asset. The changes in the Company's liability for the periods ended April 30,
2010 and October 31, 2010 are as follows:
14
Asset retirement obligation as of April 30, 2010 ...... $ 15,662,003
Changes for 2011 ...................................... -
------------
Asset retirement obligation as of October 31, 2010 .... $ 15,662,003
(7) STOCKHOLDERS' EQUITY
During the six months ended October 31, 2010, we issued the following
securities: 3,942,545 shares, which included four warrant holders who exercised
warrants for 177,600 shares in a cashless exercise that netted the holders
142,286 shares and five other warrant holders exercised warrants for 151,750
shares for an exercise price of $1.00. In addition, fifteen note holders
converted $1,705,000 of their 6% secured convertible notes at a conversion rate
of $0.55 and we issued 3,099,999 shares. We also issued 30,000 shares to an
advisor to the Board for services rendered. And on October 29, 2010, we entered
into a settlement agreement with Petro Capital III, LP and Petro Capital
Advisors, LLC and resolved litigation that had been pending in federal court in
Texas. The settlement agreement resulted in our issuing a total of 518,510
shares of our common stock to Petro Capital III, LP and Petro Capital Advisors,
LLC. The Company also issued 3,100,000 employee and director options between
February 18, 2010 and July 31, 2010 and 100,000 options to an advisor to the
Board on October 1, 2010 which created compensation expense of $1,296,590 for
the six months ended October 31, 2010.
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 October 31, 2010 the exercise price of warrants and options below market
value were $14,729,429, and therefore there are dilutive effects of the common
stock equivalents for the outstanding vested stock options and warrants for the
six months ended October 31, 2010.
(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 six
months ended October 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) .... 1.44% 1.50%
Expected years from vest date to exercise date ..... 3.0 2.5
Expected stock volatility .......................... 50-79% 371-394%
Expected dividend yield ............................ 0% 0%
15
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 Company recorded $1,462,490 and $515,891 of compensation expense, net of
related tax effects, relative to stock options and warrants for the six months
ended October 31, 2010 and 2009, respectively in accordance with the FASB
guidance. Net loss per share basic for this expense is $0.04 and $0.02 and net
loss per share diluted for this expense is $0.04 and $0.02.
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 six months ended October 31, 2010 and 2009, the aggregate intrinsic
value of stock options and warrants outstanding was $3,438,991 and $0,
respectively.
A summary of the stock options and warrants as of October 31, 2010 and 2009 and
changes during the periods is presented below:
Six months ended Six months ended
October 31, 2010 October 31, 2009
---------------------------- ----------------------------
Number of Weighted Number of Weighted
Options and Average Options and Average
Warrants Exercise Price Warrants Exercise Price
----------- -------------- ----------- --------------
Balance at April 30 12,306,305 $ 1.50 4,090,000 $ 0.88
Granted ........... 425,000 5.22 737,500 1.05
Exercised ......... 750,986 0.44 - -
Expired ........... - - 50,000 0.81
Cancelled ......... 135,314 4.78 - -
----------- -------------- ----------- --------------
Balance at
October 31 ........ 11,845,005 2.58 4,777,500 0.90
Options exercisable
at October 31 ..... 6,370,005 $ 1.61 4,590,000 $ 0.93
=========== ============== =========== ==============
16
The following table summarizes information concerning stock options and warrants
outstanding and exercisable at October 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 to 0.69 2,080,000 2.6 $ 0.31 1,955,000 $ 0.31
1.00 to 1.82 4,247,950 3.1 1.07 2,747,950 1.11
2.00 to 2.52 1,750,000 3.6 2.13 750,000 2.30
4.98 to 6.94 3,767,055 8.4 5.73 917,055 5.31
----------- -------- ----------- --------
11,845,005 4.8 $ 2.58 6,370,005 $ 1.61
=========== ======== =========== ========
(9) INCOME TAX
The Company operates several oil and gas wells in Alaska and has leased
properties for other oil and gas exploration purposes. Alaska has investment tax
incentives whereby through June 30, 2010, up to 20% of certain qualified
expenditures are reimbursable via a tax credit which can be sold to other oil
and gas companies at a discount to obtain an immediate realization of such
benefits or such tax credits could be utilized by the Company to offset taxes
due or obtain a refund based on certain future reinvestment criteria. Effective
July 1, 2010, the state of Alaska has increased the tax incentive rate from 20%
to 40% and relaxed the criteria for a refund requirement to be obtained from the
state of Alaska. The Company has recorded a total of $2,167,043 in Tax credits
receivable for an estimate of an investment tax credit incentive refund due from
the state of Alaska, as of October 31, 2010, of which $ 1,060,043 was recorded
during the six months ended October 31, 2010.
(10) COMMITMENTS
Cook Inlet Energy was one of nine successful bidders in the State of Alaska's
Division of Oil & Gas Cook Inlet Area wide 2010 Competitive Oil and Gas Lease
Sale. Cook Inlet Energy will acquire seven tracts which cover an estimated
27,520 acres upon payment of the balance of the purchase price, which is
$727,033. This amount will be due once the title work is complete which we
presently anticipate to be in January 2011. All of these tracts complete acreage
positions covering prospects acquired in Cook Inlet Energy's purchase of a
portfolio of Pacific Energy Alaska assets. We have not included this acreage in
our calculation of gross or net lease acres in this report.
(11) LITIGATION
CNX Gas Company, LLC commenced litigation on June 11, 2008 in the Chancery Court
of Campbell County, State of Tennessee in a case style CNX Gas Company, LLC vs.
Miller Petroleum Inc., Civil Action No. 08-071, to enjoin us from assigning or
conveying certain leases described in the Letter of Intent signed by CNX and our
company on May 30, 2008, to compel us 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. We moved for entry of summary judgment dismissing the
claims asserted against us by CNX and on January 30, 2009 the court found that
CNX's claims had no merit. The court granted our motion and dismissed all claims
asserted by CNX in that action. CNX has appealed the ruling, and briefs have
been submitted to the Court of Appeals of Tennessee. Oral arguments were held on
May 18, 2010, and an opinion from the Court of Appeals is expected any day now.
17
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 us 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 us 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 we
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 us from KTO. The plaintiff is alleging that our 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 our 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. We are
currently in discovery.
On October 8, 2009 we 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 us is still in full force and effect. The
defendant 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 us, the Counterclaim does seek
attorney fees, expenses and costs. On October 27, 2010, a temporary injunction
was granted allowing us access to the property at issue in this case. We are
presently conducting discovery.
We are also party to various routine legal proceedings arising in the ordinary
course of our business. Management believes that none of these actions,
individually or in the aggregate, will have a material adverse effect on our
financial condition or results of operations.
(12) SUBSEQUENT EVENTS
On November 17, 2010, we issued 100,000 shares of stock in a transaction in
which we acquired a jet from three sellers, one of which is a consultant to the
company. Another one of the sellers is affiliated with that consultant. The
third seller is an unrelated party. The Board of Directors made a good faith
valuation of the jet at approximately $550,000, based on the value of comparable
jets. We plan on leasing the jet when it is not in use by us.
18
On November 19, 2010, the Regulatory Commission of Alaska accepted a settlement
agreement between CIE and the Cook Inlet Pipe Line Company ("CIPL"). CIPL, a
subsidiary of Chevron Pipeline Co., operates a 42-mile pipeline on the west side
of Cook Inlet, and is the sole means by which CIE can export its oil production.
This settlement reduced transportation costs for all CIE production by $6.57 per
barrel to a rate of $8.00 per barrel for the remainder of 2010. The actual rate
to be paid by CIE to CIPL for 2010 shall be determined in accordance with the
annual true-up procedure detailed below. The actual rate to be paid for 2010 may
be more or less than $8.00 per barrel after the true-up. The settlement also
lays out a methodology for determining CIE's future pipeline transportation
rates. The rates to be paid by CIE to CIPL during calendar years 2011 through
2014 shall be determined by dividing the agreed annual CIPL revenue requirement
of $17.28 million for each year of the term of the Settlement Agreement by the
forecasted total annual CIPL throughput. CIE has committed to pay for
transportation of a minimum of 260,063 barrels of production in 2010 and 346,750
barrels in each of the years 2011 through 2014. Each February, a true-up
adjustment for the previous year will be made by dividing the $17.28 million
revenue requirement of the pipeline by the actual number of barrels put through
the line by all shippers to determine the rate due to CIPL. After the rate due
to CIPL is determined in accordance with the true-up terms, any overpayment by
CIE up to $250,000 will be credited against future shipments, and any amount
above $250,000 shall be repaid to CIE in cash. In the event that CIE had
underpaid CIPL for the previous year, payment of that shortfall would be made
after the annual true up.
On December 3, 2010, we entered into a settlement agreement with Prospect
Capital Corporation ("Prospect") to resolve all potential claims arising from
the loan transaction in May 2004 in which Prospect acted as one of the lenders.
This dispute was rooted in the same facts and circumstances as the previously
settled lawsuit with Petro Capital III, LP and Petro Capital Advisors, LLC
(collectively "Petro"). The terms of the settlement agreement are similar to the
terms upon which Petro settled their claims. We issued Prospect a total of
2,013,814 shares of our common stock, in exchange for waivers of their claims.
The shares are subject to certain volume limitations for future sales. The
current derivative liability of $11,035,701 has been satisfied with the issuance
of the aforementioned shares.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
We are an independent exploration and production company that utilizes seismic
data, and other technologies for geophysical exploration and development of oil
and gas wells in the Appalachian region of eastern Tennessee and the Cook Inlet
Basin in south central Alaska. In addition to our engineering and geological
capabilities, we provide land drilling services on a contract basis to customers
primarily engaged in natural gas exploration and production.
Currently, we are continuing to develop the acreage we acquired during fiscal
2009 and 2010.
These acquisitions have grown our acreage position to approximately 634,219
acres of gross oil and gas leases and exploration license rights (597,224 net
acres), which includes 471,474 acres under the Susitna Basin Exploration
License.
During the six months ended October 31, 2010, we began reworking two of our
Alaska wells and capitalized approximately $3.9 million of costs associated with
those efforts. In addition, we plan to drill five new wells in the next six to
nine months. However, this is dependent upon the availability of additional
capital.
Our management is focusing 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 three distinct areas, including the following:
o continuing to increase our overall oil and gas production through
maintenance and repairs of nonperforming or underperforming wells,
o organically growing production through drilling for our own benefit on
existing leases and under license rights, leveraging our 100,000 plus
well log database and over 600,000 acres which are either under lease
or part of the Susitna Basin Exploration License, with a view towards
retaining the majority of working interest in the new wells, and
o expanding our contract drilling and service capabilities and revenues,
including drilling and service contracts with third parties.
Our ability, however, to implement one or more of these goals in a timely manner
is dependent upon the availability of additional capital. To expand our
operations as set forth above, we will need up to $15 million to $35 million of
additional capital to develop our Alaska reserves. In addition, we will also
need to raise substantial additional capital to meet our funding commitments
under the Assignment Oversight Agreement with the Alaska Department of Natural
Resources ("Alaska DNR").
We are seeking to leverage our existing assets as well as raise additional
capital through the sale of equity and/or debt securities. We do not have any
firm commitments for the additional capital we need to fully fund our operations
and there are no assurances the capital will be available to us upon terms
acceptable to us, if at all. While we are actively seeking to secure the
additional capital, terms of the Securities Purchase Agreement for the March
2010 private offering contains restrictive covenants which may adversely impact
our ability to raise additional capital until August 2011. If we are not able to
raise the capital as required, we will be unable to fully implement our expanded
business model, and the State of Alaska could terminate the leases which
comprise substantially all of our Cook Inlet Basin assets. We may also be
required to reduce overhead until further capital is obtained.
During the first six months of fiscal 2011, we have been the successful bidder
on additional acreage in Alaska that complements our current acreage,
strategically assigned other leases to another producer, settled one of our
significant lawsuits, and secured the extension of the Susitna Basin Exploration
License for an additional three years.
20
Cook Inlet Energy was one of nine successful bidders in the State of Alaska's
Division of Oil & Gas Cook Inlet Area wide 2010 Competitive Oil and Gas Lease
Sale. Cook Inlet Energy will acquire seven tracts which cover an estimated
27,520 acres upon payment of the balance of the purchase price, which is
$727,033. This amount will be due once the title work is complete which we
presently anticipate to be in January 2011. All of these tracts complete acreage
positions covering prospects acquired in Cook Inlet Energy's purchase of a
portfolio of Pacific Energy Alaska assets. We have not included this acreage in
our calculation of gross or net lease acres in this report.
Cook Inlet Energy assigned four leases with a total gross acreage of 8,828.5
acres to Buccaneer Alaska for a total consideration of $12,500.00, as of June 1,
2010. We retained the overriding royalty interests in each lease including 2% in
the ADL-391108 and ADL-17595-2 leases and 4% in the ADL-390379 and ADL-390370
leases. If Buccaneer Alaska fails to drill at least one well on the leased
acreage by 2013, we will be entitled to a payment of $303,613, and may choose to
cause Buccaneer Alaska to assign any of the leases to us that remain active.
On October 29, 2010, we entered into a settlement agreement with Petro Capital
III, LP and Petro Capital Advisors, LLC and resolved litigation that had been
pending in federal court in Texas. The settlement agreement resulted in our
issuing a total of 518,510 shares of our common stock to Petro Capital III, LP
and Petro Capital Advisors, LLC. Besides the attorney fee savings and certainty
that comes from the settlement and dismissal of the lawsuit, as a result of the
settlement, we will be able to eliminate a substantial amount of the derivative
liability that we have currently booked as a result of the anti-dilution clause
in the warrants at issue in this matter. These warrants, along with the similar
warrants granted to Prospect Capital Corporation (which settled similar claims
against us on December 3, 2010), accounted for 80% of our derivative liability,
which has been eliminated and will no longer be booked going forward.
On October 29, 2010, Cook Inlet Energy secured a three year extension of its
Susitna Basin Exploration License, which is comprised of 471,474 acres. The
terms of the extension require us to spend an aggregate of $750,000 over the
next three years under a new work commitment. This extension will allow us to
identify the most valuable acres covered by the license and convert only the
most promising prospects to leases at the expiration of the license. Had we
failed in securing this extension, we would have had to identify acreage to
convert to leases and acreage to relinquish upon the license's expiration at the
end of October, 2010.
LEASES AND LICENSES
Our current leased and licensed acreage position is 634,219 acres (gross) and
597,224 acres (net). We also hold a total 25,964 acres in ORRIs in Alaska. We do
not include the ORRI acreage in our calculation of leased and licensed acreage.
The terms of our leases and licenses 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 and licenses to determine the capital requirements and timing for
drilling additional wells. To expand our operations by drilling on our leases,
we will require additional capital. We retained royalty interests of 2% and 4%
in the acres assigned to Buccaneer, and will stand to share in any profit
created by wells drilled on this acreage. 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.
21
RESULTS OF OPERATIONS
REVENUES
--------
The following table shows the components of our revenues for the three and six
months ended October 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
----------------------------------------------------
October 31, % of October 31, % of
2010 Revenue 2009 Revenue % Change
----------- ------- ----------- ------- --------
REVENUES
Oil and gas revenue ..... $ 6,081,793 91% $ 212,225 64% 2,766%
Service and drilling
revenue ................ 593,869 9% 121,179 36% 390%
----------- -----------
Total Revenue ........... $ 6,675,662 100% $ 333,404 100% 1,902%
For the Six Months Ended
----------------------------------------------------
October 31, % of October 31, % of
2010 Revenue 2009 Revenue % Change
----------- ------- ----------- ------- --------
REVENUES
Oil and gas revenue ..... $10,872,972 92% $ 616,617 72% 1,663%
Service and drilling
revenue ................ 1,002,937 8% 244,407 28% 310%
----------- -----------
Total Revenue ........... $11,875,909 100% $ 861,024 100% 1,279%
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.
The significant increases in oil and gas revenues for the three and six months
ended October 31, 2010 over the three and six months ended October 31, 2009.
were due to the addition of the Alaskan oil well production during December 2009
which accounted for revenues of approximately $5,848,997 and approximately
$10,505,585, respectively, during the second quarter and first half of fiscal
2011.
At October 31, 2010 oil was priced at $81.45 per barrel versus $77.04 at October
31, 2009 and at October 31, 2010 natural gas was $4.04 per Mcf as compared to
$5.05 per Mcf at October 31, 2009. In addition, we had 186 producing oil wells
and 313 producing gas wells on October 31, 2010 compared to 194 producing oil
wells and 263 producing gas wells on October 31, 2009. For the three months
ended October 31, 2010 we produced 73,008 barrels of oil and 94,335 Mcf of
natural gas as compared to 5,931 barrels of oil and 23,527 Mcf of natural gas
during the three months ended October 31, 2009. For the six months ended October
31, 2010 we produced 147,388 barrels of oil and 145,024 Mcf of natural gas as
compared to5,931 barrels of oil and 42,658 Mcf of natural gas during the six
months ended October 31, 2009. These increases were primarily due to the
addition of Alaska productions.
22
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 390% for the
three months ended October 31, 2010 as compared to the three months ended
October 31, 2009 and 310% for the six months ended October 31, 2010 as compared
to the six months ended October 31, 2009. During the six months ended October
31, 2010 we entered into a contract with National Park Service for plugging
non-company related abandoned wells located in the Big South Fork area in
Tennessee and Kentucky and recorded revenue of $295,972 for the three months
ended October 31, 2010 and $429,417 for the six months ended October 31, 2010.
In addition, for the six months ended October 31, 2010, we recorded a full six
month's worth of service revenue for our subsidiary, East Tennessee Consultants,
Inc. which resulted in revenue of $362,607 as compared to $163,937 recorded
during the six months ended October 31, 2009. East Tennessee Consultants, Inc.
was acquired on June 18, 2009.
The plugging contract will continue throughout the end of our current fiscal
year and we expect to record similar amounts for the next three and six month
periods.
DIRECT EXPENSES
---------------
The following tables show the components of our direct expenses for the three
and six months ended October 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
----------------------------------------------
October 31, October 31,
2010 Margin 2009 Margin
----------- ------ ----------- ------
DIRECT EXPENSES
Oil and gas ................ $ 3,611,582 41 % $ 4,333 98 %
Service and drilling ....... 341,408 43 % 214,153 (77)%
Depletion expense .......... 1,660,282 n/a 177,183 n/a
----------- -----------
Total direct expenses ...... $ 5,613,272 16 % $ 395,669 (19)%
For the Six Months Ended
----------------------------------------------
October 31, October 31,
2010 Margin 2009 Margin
----------- ------ ----------- ------
DIRECT EXPENSES
Oil and gas ................ $ 5,915,689 46 % $ 28,377 95 %
Service and drilling ....... 837,155 17 % 458,653 (88)%
Depletion expense .......... 3,237,130 n/a 294,617 n/a
----------- -----------
Total direct expenses ...... $ 9,989,974 16 % $ 781,647 9 %
23
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 six months
ended October 31, 2010 we capitalized approximately $5,162,143 of costs
associated with the acquisition, drilling and equipping of these wells as
compared to $21,511 during the six months ended October 31, 2009. 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 oil and gas revenues represents direct labor costs of employees
associated with these services, as well as costs associated with equipment,
parts and repairs. During the three and six months ended October 31, 2010, oil
and gas revenue expenses increased $3,603,528 and $5,883,592 from the three and
six months ended October 31, 2009, respectively, which was primarily due to the
cost of revenues spent to generate oil and gas revenue at our Alaska operations.
The oil and gas margins decreased from 98% to 41% and 95% to 46% for the three
and six month periods comparing fiscal 2010 to 2011 as during 2010 the producing
wells required no new expenditures to produce oil and gas. With the Alaska
wells, we needed to spend costs to get them to produce. In the future, we expect
these margins will fluctuate between 40% and 95% as new wells come on line.
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 six months ended October 31,
2010, service and drilling expenses increased $127,255 and $378,502 from the
three and six months ended October 31, 2009, respectively, due to the contract
with the National Park Service.
During the three and six months ended October 31, 2009, we spent significant
time and expense maintaining and repairing our drilling equipment. This is
primarily the reason the three and six months ended October 31, 2009 reflected
negative margins. As the plugging contract will continue throughout the fiscal
year, we expect similar margins for the next three and six month periods.
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 six
months ended October 31, 2010 depletion expense was $1,660,282, or 25% of total
revenue, and $3,237,130, or 27% of total revenue, as compared to 53% and 34% for
the three and six months ended October 31, 2009. The primary reason for the
increase in depletion expense for the three and six months ended October 31,
2010 was the addition of well production due to acquisitions.
As a result of these components, total direct expenses reflected a margin of 16%
and 16% for the three and six months ended October 31, 2010. This represented an
increase of 35% and 7% over the margin experienced for the three and six months
ended October 31, 2009. However, as a result of higher depletion costs, pipeline
transportation costs and royalties payable to Alaska, our gross margins on oil
and gas sales from our Alaskan operations will generally be less than oil and
gas sales from our Appalachian operations. Given that oil and gas sales from our
Alaskan operations are expected to represent the majority of our oil and gas
sales in future periods, we anticipate that our gross margins will be lower than
those which were historically reported before we acquired these assets. However,
we do expect to see an increased margin of at least 5% in future quarters due to
the reduction of CIPL transportation costs as previously discussed.
24
SELLING, GENERAL AND ADMINISTRATIVE, DEPRECIATION AND AMORTIZATION AND OTHER
INCOME AND EXPENSE
----------------------------------------------------------------------------
The following tables show the components of our selling, general and
administrative, depreciation and amortization and other income and expense for
the three and six months ended October 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
-------------------------------------------
October 31, % of October 31, % of
2010 Revenue 2009 Revenue
----------- ------- ----------- -------
OTHER EXPENSES (INCOME)
Selling, general and administrative $ 3,148,743 47 % $ 1,028,840 309 %
Depreciation and amortization ..... 615,615 9 % 100,239 30 %
Interest expense, net of interest
income ........................... 409,249 6 % (1,240) <1 %
Gain on derivative securities ..... (781,938) (12)% - n/a
Loan fees and costs ............... 375 <1 % 62,742 19 %
Gain on sale of property and
equipment ........................ (7,500) <1 % - -
Loss (gain) on acquisitions ....... - - (1,057,564) (317)%
----------- -----------
Total other expenses (INCOME) ... $ 3,384,543 51 % $ 133,017 40 %
For the Six Months Ended
-------------------------------------------
October 31, % of October 31, % of
2010 Revenue 2009 Revenue
----------- ------- ----------- -------
OTHER EXPENSES (REVENUES)
Selling, general and administrative $ 5,915,416 50 % $ 1,681,232 195 %
Depreciation and amortization ..... 1,029,439 9 % 211,966 25 %
Interest expense, net of interest
income ........................... 624,034 5 % 3,658 <1 %
Gain on derivative securities ..... (3,687,895) (31)% - n/a
Loan fees and costs ............... 90,755 1 % 115,377 13 %
Loss (gain) on sale of property and
equipment ........................ (20,000) <1 % 9,755 1 %
Loss (gain) on acquisitions ....... - - % (1,818,764) (211)%
----------- -----------
Total other expenses (revenues) ... $ 3,951,748 33 % $ 203,224 44 %
Selling, general and administrative expense includes salaries, general overhead
expenses, insurance costs, professional fees and consulting fees. The increase
for the three and six months ended October 31, 2010 as compared to the six
months ended October 31, 2009 primarily reflects the addition of our new Alaska
acquisition for an additional $1,328,776 and $1,946,131 in costs for the three
and six months ended October 31, 2010, respectively. This new layer of expense
will continue in future quarters and may increase as further development in
Alaska occurs. In addition, $946,599 was booked as compensation expense during
the quarter and $1,462,490 was booked during the six months ended October 31,
2010 which reflected the cost of options issued to employees and directors. This
quarterly expense will continue to be amortized throughout fiscal 2013. from the
three and six months ended October 31, 2009 to the three and six months ended
October 31,2010 primarily due to increased work associated with the new
acquisitions and the S-1 filing we just completed. In addition, investor
relations and public relations increased approximately $112,000 in three and six
months ended October 30, 2010 due primarily to our recent listing on The NASDAQ
Stock Market.
25
Depreciation and amortization expenses reflect the usage of our fixed assets
over time. The increase in depreciation and amortization for the three and six
months ended October 31, 2010 as compared to the three and six months ended
October 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.
Interest expense, net of interest income increased $410,489 and $620,376 in the
three and six months ended October 31, 2010 as compared to the three and six
months ended October 31, 2009 primarily due to interest expense on the long-term
debt to a related party as previously described.
Derivative securities liability fluctuates from quarter to quarter based on
changes in the components of the Black-Scholes pricing model including the
Company's ending stock price, risk free rates, expected life terms, expected
volatility and expected dividend rates. During the three and six months ended
October 31, 2010, the Company has recorded non-cash gains of $781,938 and
$3,687,895 relating to the change in fair value of these derivative instruments.
The application of this accounting treatment on our financial statements in
future periods could likewise result in non-cash losses. Accordingly, investors
should not place an undue reliance on these non-cash gains as they are not
reflective of our operating performance.
As described earlier in this report, and due primarily to the reasons described
above, during the three and six months ended October 31, 2010 we recorded net
losses of $1,688,676 and $1,005,768, respectively.
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 October 31, 2010 we had a working
capital deficit of 13,299,026 as compared to a working capital surplus of
$1,445,111 at April 30, 2010. This decrease in capital surplus is primarily due
to an increase in cash related selling, general and administrative expenses for
the six months ended October 31, 2010 of approximately $2,771,694 as well as a
$5,734,867 first fiscal half-year investment in oil and gas properties which
represents capital expenditures for the reworking of oil and gas wells in
Alaska. In addition, current derivative liabilities increase $10,314,861 due to
the December 3, 2010 settlement agreement with Prospect as previously discussed.
These increases were partially offset by an increase of total revenue of
$11,014,885 for the six months ended October 31, 2010 over the six months ended
October 31, 2009. As previously discussed, certain of these general and
administrative expenses, such as the new Alaska general and administrative
expenses, will continue and may even increase in the future as further
development occurs.
Net cash provided by operating activities for the six months ended October 31,
2010 period was $3,870,743. This primarily reflects the increase of oil and gas
revenue received in excess of the direct costs of oil and gas revenues paid for
the period. Net cash used by operating activities for the six months ended
October 31, 2009 period was $808,173. This primarily reflects the cash paid for
the costs of revenues and selling, general and administrative expense in excess
of revenues received for the six month period.
Net cash used by investing activities for the six months ended October 31, 2010
of $5,885,896 is primarily due to the $5,734,867 capital expenditures to rework
wells we acquired in Alaska. Net cash provided by investing activities for the
six months ended October 31, 2009 of $28,427 reflects the net cash we received
from the sale of equipment and oil and gas properties, partially offset by the
purchase of additional equipment and oil and gas properties.
26
Net cash provided by financing activities of $250,858 for the six months ended
October 31, 2010 primarily reflects $350,000 in proceeds from borrowing on May
15, 2010 from MEI as previously discussed. Net cash provided by financing
activities of $828,018 for the six months ended October 31, 2009 primarily
reflects cash received from the proceeds of borrowings of $300,000, sale of
stock of $336,875 and cash acquired through acquisitions of $203,993.
We do not presently have any commitment for capital expenditures other than
related to the Osprey platform and onshore assets as described below. However,
as set forth earlier in this section we require a substantial amount of capital
to fund our other obligations associated with the acquisition of the Alaskan
assets.
Under the terms of the purchase agreement for the Alaskan assets and the
Assignment Oversight Agreement, Cook Inlet Energy assumed all liabilities
related to the plugging, abandonment, decommissioning, removal and/or
restoration liabilities associated with or arising from the acquired assets with
respect to all periods prior to, on or after the closing date. Under the terms
of the purchase agreement for the Alaskan assets, these assumed liabilities
include approximately $10 million for the onshore assets and approximately $40
million associated with a retirement liability for the Osprey platform, of which
approximately $6.6 million is presently on deposit in an escrow fund with the
State of Alaska. We are presently in discussion with the State of Alaska to
reduce these amounts to levels we believe are more realistic. During the fourth
quarter of 2010 we accrued approximately $15.0 million for these liabilities,
which includes approximately $3.5 million for the onshore assets and
approximately $10.0 million for the Osprey platform. We are also seeking to
obtain confirmation from the State of Alaska that the $6.6 million, currently in
the escrow account is specifically allocated to the Osprey platform.
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 prices has recently increased our potential liquidity. At
October 31, 2010 oil was priced at $81.45 per barrel versus $77.04 at October
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable to a smaller reporting company.
27
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure 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"). During fiscal
2010 we failed to timely file with the SEC several Current Reports on Form 8-K.
In an effort to remediate these weaknesses, during the fourth quarter of 2010 we
filled the position of a General Counsel. The General Counsel has developed
systems which should ensure that the information required to be disclosed in our
reports under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods prescribed by SEC rules and
regulations, and that such information is accumulated and communicated to our
management to allow timely decisions regarding required disclosure. As a result
of these remediation efforts, as of the Evaluation Date, our Chief Executive
Officer and Chief Financial Officer, concluded that we maintain disclosure
controls and procedures that are effective in providing reasonable assurance
that information required to be disclosed in our reports under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods prescribed by SEC rules and regulations, and that such information
is accumulated and communicated to our management to allow timely decisions
regarding required disclosure.
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.
Changes in Internal Control Over Financial Reporting. There was no change in our
internal control over financial reporting during our last fiscal quarter that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are party to various routine legal proceedings arising in the ordinary course
of our business. Management believes that none of these actions, individually or
in the aggregate, will have a material adverse effect on our financial condition
or results of operations.
ITEM 1A. RISK FACTORS.
Not applicable to a smaller reporting company.
28
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On October 1, 2010 we issued 30,000 shares of our common stock under our stock
plan valued at $165,900 to Greg Kirkland, an advisor to the Board for services
rendered. The issuance was exempt from registration under the Securities Act 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.
On October 29, 2010, we issued 518,510 shares of our common stock upon the
cashless exercise of warrants held by Petro Capital III, LP and Petro Capital
Advisors, LLC as part of a settlement agreement resolving litigation between us
and these two parties. The issuance was exempt from registration under the
Securities Act in reliance on an exemption provided by Section 4(2) of that act.
The recipients were accredited investors and had access to business and
financial information concerning our company.
On November 17, 2010 we issued 100,000 shares of our common stock valued at
$550,000 but recorded at cost of $453,000 as consideration for the purchase of
an aircraft as described below. The issuance was exempt from registration under
the Securities Act in reliance on an exemption provided by Section 4(2) of that
act. The recipients were accredited investors and had access to business and
financial information concerning our company.
On December 3, 2010, we issued 2,013,814 shares of our common stock upon the
cashless exercise of warrants held by Prospect Capital Corporation ("Prospect")
as part of a settlement agreement resolving a dispute between us and Prospect.
The issuance was exempt from registration under the Securities Act in reliance
on an exemption provided by Section 4(2) of that act. The recipients were
accredited investors and had access to business and financial information
concerning our company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. (REMOVED AND RESERVED).
ITEM 5. OTHER INFORMATION.
On November 17, 2010, we purchased a jet aircraft which was owned in part by a
consultant to the company in exchange for 100,000 shares of our common stock
valued at $4.53. Another one of the sellers is affiliated with that consultant.
The third seller is an unrelated party. The Board of Directors made a good faith
valuation of the jet at approximately $550,000, based on the value of comparable
jets. We plan on leasing the jet when it is not in use by us.
ITEM 6. EXHIBITS.
10.38 Aircraft Purchase 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
29
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: December 10, 2010 By: /s/ Scott M. Boruff
-------------------
Scott M. Boruff
Chief Executive Officer,
principal executive officer
Date: December 10, 2010 By: /s/ Paul W. Boyd
----------------
Paul W. Boyd
Chief Financial Officer, principal
financial and accounting officer
30