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, 2008
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
--------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3651 BAKER HIGHWAY, HUNTSVILLE, TN 37756
---------------------------------- -----
(Address of principal executive offices) (Zip Code)
(423) 663-9457
--------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Title of Class No. of Shares Outstanding at December 10, 2008
-------------- ----------------------------------------------
Common Stock 15,616,856
MILLER PETROLEUM, INC.
FORM 10-Q
OCTOBER 31, 2008
TABLE OF CONTENTS
Page
No.
----
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at October 31, 2008
(Unaudited) and April 30, 2008 .................................. 3
Condensed Consolidated Statements of Operations for the
Three Months Ended October 31, 2008 and 2007 (Unaudited) and
the Six Months Ended October 31, 2008 and 2007 (Unaudited) ...... 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended October 31, 2008 and 2007 (Unaudited) .......... 6
Notes to Condensed Consolidated Financial Statements (Unaudited) .. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. .......................................... 13
Item 3. Quantative and Qualitative Disclosures About Market Risk. ......... 18
Item 4T Controls and Procedures. .......................................... 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. ................................................ 19
Item 1A. Risk Factors. ..................................................... 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. ...... 19
Item 3. Defaults Upon Senior Securities. .................................. 19
Item 4. Submission of Matters to a Vote of Security Holders. .............. 19
Item 5. Other Information. ................................................ 19
Item 6. Exhibits. ......................................................... 19
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. 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 and our subsidiaries, Miller Rig &
Equipment, LLC, Miller Drilling TN, LLC and Miller Energy Services, LLC.
The information which appears on our web site at
www.millerpetroleum.com is not part of this report.
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MILLER PETROLEUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
October 31, April 30,
2008 2008
Unaudited
------------ ------------
CURRENT ASSETS
Cash ............................................. $ 3,785,779 $ 42,436
Accounts receivable .............................. 156,687 131,302
Accounts receivable - related parties ............ 66,965 5,144
Inventory ........................................ 43,972 65,856
------------ ------------
Total Current Assets ............................. 4,053,403 244,738
Fixed Assets ..................................... 5,316,456 1,161,019
Less: accumulated depreciation ................... (763,976) (595,362)
------------ ------------
Net Fixed Assets ................................. 4,552,480 565,657
OIL AND GAS PROPERTIES
(On the basis of successful efforts accounting) .. 1,764,351 1,544,577
Land ............................................. 606,500 496,500
Deferred interest ................................ 8,209 -
Prepaid offering cost ............................ 242,925 -
Cash - restricted ................................ 83,000 83,000
------------ ------------
Total Other Assets ............................... 940,634 579,500
------------ ------------
TOTAL ASSETS ..................................... $ 11,310,868 $ 2,934,472
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
MILLER PETROLEUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
October 31, April 30,
2008 2008
Unaudited
------------ ------------
CURRENT LIABILITIES
Accounts payable - trade ......................... $ 251,186 $ 389,275
Accrued expenses ................................. 108,706 210,198
Notes payable - related parties .................. - 80,200
Current portion of notes payable ................. 1,858,387 646,430
Income taxes payable ............................. 241,457 -
Shares subject to redemption ..................... - 4,350,000
------------ ------------
Total Current Liabilities ........................ 2,459,736 5,676,103
LONG-TERM LIABILITIES
Deferred income taxes payable .................... 332,303 -
Notes payable - other ............................ 48,248 -
------------ ------------
Total Long-term Liabilities ...................... 380,551 -
Total Liabilities ............................ 2,840,287 5,676,103
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, 500,000,000 shares authorized at
$0.0001 par value, 15,616,856 and 11,666,856
shares issued and outstanding, respectively .. . 1,561 1,166
Additional paid-in capital ....................... 8,452,148 6,949,761
Accumulated earnings (deficit) ................... 16,872 (9,692,558)
------------ ------------
Total Stockholders' Equity (Deficit) ............. 8,470,581 (2,741,631)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....... $ 11,310,868 $ 2,934,472
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
MILLER PETROLEUM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
October 31, October 31, October 31, October 31,
2008 2007 2008 2007
------------ ------------ ------------ ------------
REVENUES
Oil and gas revenue ...................... $ 196,147 $ 174,264 $ 410,900 $ 310,462
Service and drilling revenue ............. 288,429 100,240 288,941 173,148
------------ ------------ ------------ ------------
Total Revenue ............................ 484,576 274,504 699,841 483,610
COSTS AND EXPENSES
Cost of oil and gas revenue .............. 28,988 19,169 58,399 34,151
Cost of service and drilling revenue ..... 395,847 68,519 502,346 239,706
Selling, general and administrative ...... 713,596 330,319 1,280,918 778,248
Depreciation, depletion and amortization . 97,277 58,379 204,846 110,248
------------ ------------ ------------ ------------
Total Costs and Expenses ................. 1,235,708 476,386 2,046,509 1,162,353
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ..................... 751,132 201,882 1,346,668 678,743
OTHER INCOME (EXPENSE)
Interest income .......................... 20,879 623 30,219 712
Interest expense ......................... (19,347) (60,779) (50,233) (95,431)
Loan fees and costs ...................... (46,382) (43,293) (74,248) (43,293)
Gain on sale of equipment ................ 8,550 88,250 8,550 88,250
Gain on sale of oil and gas properties ... - - 11,715,570 -
------------ ------------ ------------ ------------
Total Other Income (Expense) ............. (36,300) (15,199) 11,629,858 (49,762)
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE INCOME TAXES .... (787,432) (217,081) 10,283,190 (728,505)
INCOME TAX EXPENSE (BENEFIT) ............. (216,240) - 573,760 -
------------ ------------ ------------ ------------
NET INCOME (LOSS) ........................ $ (571,192) $ (217,081) $ 9,709,430 $ (728,505)
============ ============ ============ ============
BASIC AND DILUTED- INCOME (LOSS) PER SHARE $ (0.04) $ (0.02) $ 0.73 $ (0.05)
BASIC AND DILUTED- WEIGHTED AVERAGE
SHARES OUTSTANDING ...................... 14,852,182 14,460,334 13,259,519 14,413,595
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
MILLER PETROLEUM, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Six For the Six
Months Ended Months Ended
October 31, October 31,
2008 2007
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) ................................ $ 9,709,430 $ (728,505)
Depreciation, depletion and amortization ....... 204,846 110,248
Adjustments to Reconcile Net Loss to Net Cash
Provided (Used) by Operating Activities:
Gain on sale of equipment ...................... (8,550) (88,250)
Gain on sale of oil and gas properties ......... (11,715,570) -
Issuance of stock for services ................. 297,000 136,218
Issuance of stock options for services ......... 17,800 34,000
Warrant cost ................................... 73,982 9,293
Changes in Operating Assets and Liabilities:
Accounts receivable .......................... (87,206) (67,932)
Inventory .................................... 21,884 (35,925)
Bank overdraft ............................... - (9,183)
Accounts payable ............................. (138,089) 211,735
Accrued expenses ............................. (101,492) 105,963
Income taxes payable ......................... 573,760 -
------------ ------------
Net Cash Used by Operating Activities .......... (1,152,205) (322,338)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and improvements ......... (4,153,830) -
Option to sell gas properties .................. - 50,000
Sale of oil and gas properties ................. 13,514,090 -
Purchase of oil and gas properties ............. (1,091,423) -
Purchase of land ............................... (110,000) -
Proceeds from sale of equipment ................ 19,000 103,381
Deferred interest .............................. (8,209) -
------------ ------------
Net Cash Provided by Investing Activities ...... 8,169,628 153,381
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable ...................... (730,314) (152,798)
Proceeds from borrowing ........................ 1,912,159 321,755
Stock repurchase ............................... (4,350,000) -
Prepaid offering cost .......................... (105,925) -
------------ ------------
Net Cash Provided (Used) by Financing Activities (3,274,080) 168,957
------------ ------------
NET INCREASE IN CASH ............................. 3,743,343 -
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ... 42,436 -
CASH AND CASH EQUIVALENTS, END OF PERIOD ......... $ 3,785,779 $ -
============ ============
CASH PAID FOR
INTEREST ....................................... $ 146,955 $ 7,692
INCOME TAXES ................................... $ - $ -
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued for prepaid offering costs ... $ 115,000 $ -
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
MILLER PETROLEUM, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
These consolidated financial statements include the accounts of Miller
Petroleum, Inc. and the accounts of its subsidiary, Miller Pipeline Company, Inc
for the comparative period ended October 31, 2007, only, since this subsidiary
was sold in December 2007. All inter-company balances have been eliminated in
consolidation.
These consolidated financial statements include the accounts of Miller
Petroleum, Inc. and the accounts of its subsidiaries, Miller Drilling TN, LLC,
Miller Rig & Equipment, LLC and Miller Energy Services, LLC for the comparative
period ended October 31, 2008 only, since these subsidiaries started up in the
three months ended, October 31, 2008. All inter-company balances have been
eliminated in consolidation.
The Company's principal business consists of oil and gas exploration, production
and related property management in the Appalachian region of eastern Tennessee.
The Company's corporate offices are in Huntsville, Tennessee. The Company
operates as one reportable business segment, based on the similarity of
activities.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the Company's April 30, 2008 Annual Report on Form
10-KSB. The results of operations for the period ended October 31, 2008 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.
RECENT ACCOUNTING PRONOUNCEMENTS
All issued accounting pronouncements but not yet effective have been determined
to be not applicable by management and once adopted is not expected to have a
material impact on the financial position of the Company.
(3) SALE OF OIL AND GAS PROPERTIES AND EQUIPMENT PURCHASES
On June 13, 2008 we sold approximately 30,000 acres of oil and gas leases and
eight drilled but not completed wells to Atlas America, LLC ("Atlas") for
$19.625 million. At that time Wind City Oil & Gas, LLC and related entities were
paid $10.6 million for 2.9 million shares of the Company's common stock, eight
drilled but not completed gas wells, two producing gas wells, and a RD20
drilling rig and related equipment in settlement of all litigation between the
parties.
On November 10, 2008, the Company finalized a drilling contract with Atlas
Energy Resources, LLC, an affiliate of Atlas. This is a two year agreement that
will utilize two of the Company's drilling rigs operating in the East Tennessee
area of the Appalachian Basin. We acquired a 2007 COPCO Model RD III drilling
rig and related equipment drilling rig from Atlas to assist in drilling the
wells. This rig has been mobilized to the site and has commenced drilling
operations. The Company borrowed $1,850,125, secured by a certificate of
deposit, to purchase this drilling rig.
7
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 Scott Boruff, a former associate of Cresta Capital. 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 sales. 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, 2008 and October 31, 2008.
(5) LONG-TERM DEBT, WARRANTS, LOAN FEES AND RESTRICTED CASH
The Company had the following debt obligations at October 31, 2008 and April 30,
2008.
8
October 31, April 30,
2008 2008
---------- ----------
Notes Payable - Related Parties:
Note payable to the Company's Chairman of the Board of Directors,
Deloy Miller, secured by equipment and truck titles,
interest at 10.752%, due October 18, 2007 .............................. $ - $ 80,200
---------- ----------
- 80,200
Notes Payable - Other:
Note payable to American Fidelity Bank, secured by a trust deed on
property, bearing interest at prime, due in monthly payments
of $2,500, with the final payment due in August 2008 ................... - 346,430
Note payable to Jade Special Strategy, LLC, unsecured, dated March 7,
2007, bearing interest based on a sliding scale approximating
120% and due April 30, 2008 ............................................ - 110,000
Note payable to Jade Special Strategy, LLC, unsecured, dated April 17,
2007, bearing interest based on a sliding scale approximating
120% and due April 30, 2008 ............................................ - 40,000
Note payable to Jade Special Strategy, LLC, unsecured, dated August 2,
2007, bearing interest based on a sliding scale approximating
120% and due April 30, 2008 ............................................ - 65,000
Note payable to Petro Capital Securities, unsecured, dated May 24, 2007,
bearing interest at 10% and due June 30, 2008 .......................... - 35,000
Note payable to P & J Resources, Inc., unsecured, dated April 2, 2008,
bearing interest at 8% ................................................. - 50,000
Note payable to Commercial Bank, secured by a certificate of deposit,
Bearing interest at 3.75%, due December 22, 2008 ....................... 1,848,047 -
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 ...................... 58,588 -
---------- ----------
1,906,635 646,430
---------- ----------
Total Notes Payable ............................................... 1,906,635 726,630
Less current maturities on related party notes payable ............ - 80,200
Less current maturities on other notes payable .................... 1,858,387 646,430
---------- ----------
Notes Payable - Long-term ......................................... 48,248 -
========== ==========
(6) STOCKHOLDERS' EQUITY
During the six months ended October 31, 2008, we issued the following
securities: 3,600,000 shares, which included 2,500,000 shares issued to Mr.
Boruff and 1,000,000 warrants exercisable at $1.00 per share for a period of
three years to Cresta Capital/Consortium attributed as a cost of the sale of oil
and gas properties transaction, as well as 800,000 shares to employees and a
consultant as compensation, which in the aggregate were valued at $825,000 and
$174,000 expensed, respectively; 300,000 shares for past services to the
directors valued at $99,000 and expensed; and penalty warrants for 240,000
common shares at a price of $1.15 per share with a five-year term valued and
expensed at $73,980.
9
In August 2008 we engaged a broker-dealer and member of FINRA to assist us in
raising capital by means of a private placement of securities. As initial
compensation for their services, we paid 250,000 shares of our common stock,
valued at $115,000.
We also repurchased 2,900,000 shares of common stock at $4,350,000, which was
previously recorded as equity subject to being repurchased as of April 30, 2008.
In October, 2008 we issued 100,000 shares of our common stock to two individuals
as compensation for a finder's fee related to the introduction of our company to
a broker-dealer.
The Company presents "basic" earnings (loss) per share and, if applicable,
"diluted" earnings per share pursuant to the provisions of Statement of
Financial Accounting Standards No. 128. The calculation of diluted earnings per
share is similar to that of basic earnings per share, except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if all potentially dilutive common shares, such as
those issuable upon the exercise of stock options and warrants, were issued
during the period. Since the Company had a net loss for the six month period
ended October 31, 2007, the assumed effects from the exercise of outstanding
options and warrants would have been anti-dilutive, and, therefore only basic
earnings per share is presented.
There were no dilutive effects of the common stock equivalents for the
outstanding vested stock options and warrants for the six months ended October
31, 2008 since the exercise price of such warrants and options exceeded the
market price of the Company's common stock at October 31, 2008.
(7) STOCK OPTIONS
The Company has adopted SFAS No. 123R, "Share Based Payments". SFAS No. 123R
requires companies to expense the value of employee stock options and similar
awards and applies to all outstanding and vested stock-based awards. In
computing the impact, the fair value of each option is estimated on the date of
grant based on the Black-Scholes options-pricing model utilizing certain
assumptions for a risk free interest rate; volatility; and expected remaining
lives of the awards. The assumptions used in calculating the fair value of
share-based payment awards represent management's best estimates, but these
estimates involve inherent uncertainties and the application of management
judgment. As a result, if factors change and the Company uses different
assumptions, the Company's stock-based compensation expense could be materially
different in the future. In addition, the Company is required to estimate the
expected forfeiture rate and only recognize expense for those shares expected to
vest. In estimating the Company's forfeiture rate, the Company analyzed its
historical forfeiture rate, the remaining lives of unvested options, and the
amount of vested options as a percentage of total options outstanding. If the
Company's actual forfeiture rate is materially different from its estimate, or
if the Company reevaluates the forfeiture rate in the future, the stock-based
compensation expense could be significantly different from what we have recorded
in the current period. The impact of applying SFAS No. 123R approximated
$265,800 and $9,293 in additional compensation expense during the six months
ended October 31, 2008 and 2007, respectively. Such amount is included in
general and administrative expenses on the statement of operations.
For the six months ended October 31, 2008, the Company recorded stock-based
compensation expense of $17,800 related to stock options granted during the
period.
10
During the six months ended October 31, 2008, the Company issued 1,000,000
warrants exercisable at $1.00 per share for a period of three years attributed
as a cost of the sale of oil and gas properties transaction valued at $174,000
and expensed.
Penalty warrants for 240,000 common shares at a price of $1.15 per share with a
five-year term valued and expensed at $74,000.
A summary of the stock options and warrants as of October 31, 2008 and 2007 and
changes during the periods is presented below:
Six Months Ended Six Months Ended
October 31, 2008 October 31, 2007
---------------------- ----------------------
Number of Weighted Number of Weighted
Options Average Options Average
and Exercise and Exercise
Warrants Price Warrants Price
---------- -------- ---------- --------
Balance at April 30 .. 7,535,000 0.20 7,055,000 0.38
Granted .............. 1,615,000 0.84 240,000 1.15
Exercised ............ - - - -
Expired .............. - - - -
Cancelled ............ (5,000,000) 0.22 - -
---------- ----- ---------- -----
Balance at October 31 4,150,000 $0.84 7,295,000 $0.41
Options exercisable at
October 31 ........... 3,790,625 $0.42 2,295,000 $0.46
========== ===== ========== =====
The following table summarizes information concerning stock options and warrants
outstanding and exercisable at October 31, 2008:
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
---------- ----------- ----------- -------- ----------- --------
$0.01-1.15 2,535,000 1.5 Years $ 0.81 2,535,000 $ 0.81
$0.40-1.00 1,125,000 3 years $ 0.94 1,000,000 $ 1.00
$ 0.33 250,000 10 years $ 0.33 15,625 $ 0.33
$ 1.15 240,000 2.5 years $ 1.15 240,000 1.15
----------- -------- ----------- --------
4,150,000 $ 0.84 3,790,625 $ 0.42
=========== ======== =========== ========
All options and warrants were issued at the fair market of common stock on the
date of grant.
11
(8) COMMITMENTS
On August 6, 2008 the Board of Directors employed Scott M. Boruff as CEO of the
Company. The employment contract, as amended, provided for the following
compensation:
o Base salary of $250,000 per annum, with provision for cost-of-living
increases.
o Options to purchase 250,000 shares of the Company's common stock at an
exercise price per share of $0.33, with vesting in equal annual
installments over a period of four years.
o A restricted stock grant of 250,000 shares of common stock, with vesting
in equal annual installments over a period of four years.
o Incentive Compensation - For each year of the employment term, (i) cash up
to 100% of base salary and (ii) up to 100,000 shares of restricted common
stock, in both instances based upon, and subject to, two performance
benchmarks, gross revenue and EBITDA. One half of each element of
incentive compensation is earned if the gross revenue benchmark is
achieved, and the other half of each element is earned if the EBITDA
benchmark is achieved.
In August 2008 we engaged a broker-dealer and member of FINRA to assist us in
raising capital by means of a private placement of securities. As initial
compensation for their services, we paid the firm a $25,000 retainer, issued the
firm's assigns 250,000 shares of our common stock, valued at $115,000 and agreed
to pay a monthly consulting fee of $5,000. Upon the successful completion of the
private offering we will be obligated to pay the firm certain cash compensation
and issue them up to an additional 150,000 shares of our common stock in amounts
to be determined based upon the gross proceeds received by us from the
financing.
(9) 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 Registrant from
assigning or conveying certain leases described in the Letter of Intent signed
by CNX and the Company on May 30, 2008 (the "Letter of Intent"); to compel the
Company to specifically perform the assignments as described in the Letter of
Intent; and for damages. A Notice of Lien Lis Pendens was issued June 11, 2008.
The court refused to grant a restraining order pending a hearing of the matter
on the merits; however, the order entered into by the court with respect thereto
prohibits Atlas from conveying the leases for 60 days from the date of the
order. Effective June 13, 2008, all of such leases were assigned by the Company
to Atlas. Should CNX prevail in the proceedings described above, Atlas may be
obligated to assign the leases to CNX in consideration of payment to the Company
by CNX of up to approximately $13.3 million, in which event the Company would be
obligated to repay Atlas the sum of $19,625,000.
The Company believes the claims to be baseless and is aggressively defending
this action.
12
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 20 producing oil wells and 30 producing gas
wells. In addition to our engineering and geological capabilities, we have
work-over rigs, dozers, roustabout crews and equipment to set pumping units,
tanks and lay flow lines, winch trucks and trailers for traveling support,
backhoes, ditchers, fusion machines and welders for pipeline and compression
installation, as well as other equipment necessary to take a drilling program
from the development stage to completion. We also sell rigs, oilfield trailers,
compressors and other miscellaneous oil and gas production equipment.
During the first half of fiscal year 2009 we completed two transactions which we
believe had both a positive impact on our balance sheet and removed certain
historical obstacles in our continued growth. These transactions included:
SALES OF LEASES AND WELLS TO ATLAS ENERGY RECOURSES, LLC
Effective as of June 13, 2008 we entered into an agreement with Atlas Energy
Resources, LLC pursuant to which we assigned to Atlas Energy:
o An unencumbered, undivided 100% working interest and an 80% net revenue
interest in and to the oil and gas lease comprising 27,620 acres known as
Koppers North and Koppers South and located in Campbell County, Tennessee;
and an unencumbered, undivided 100% interest and an 82.5% net revenue
interest (net of a 5% overriding royalty interest to us) in and to the oil
and gas lease comprising 1,952 acres adjacent to Koppers North and Koppers
South and located in Campbell County, Tennessee; and
o An unencumbered, undivided 100% working interest and an 80% net revenue
interest in eight gas wells on Koppers South. We have the option to
repurchase the wells within one year form the closing date or within 30
days after the pipeline to be built by Atlas Energy has been completed and
is ready to accept gas for transport.
The transaction is subject to unwinding pursuant to a pending litigation between
our company and CNX Gas Company LLC as previously disclosed. Transferring any of
the leases or any interest thereon was also subject to a 60-day standstill
period which has since expired. The aggregate consideration for the assignment
of the leases and wells to Atlas Energy was $19,625,000, $9,025,000 of which was
paid us and the remaining $10,600,000 of which was paid directly to Wind City
Oil & Gas, LLC in consideration of a settlement of claims between Wind City and
our company described below.
As part of the transaction, we also agreed to contract with Atlas Energy for two
rigs for two years to drill wells, commencing a significant commitment to
contract drilling. To give Atlas Energy the level of service required, during
the first quarter of fiscal 2009 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. We
borrowed $1,850,125, secured by a certificate of deposit, to purchase this
drilling rig.
For two years after the closing date, Atlas Energy granted us the opportunity to
bid on any other drilling or service work that Atlas Energy bids on in the State
of Tennessee. In addition, we entered into:
o A natural gas transportation agreement with Atlas Energy which provides us
access to the Atlas Volunteer Pipeline, to the extent that capacity is
available, on substantially the same terms as those offered to the
producers delivering into the system; and
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o A natural gas processing agreement pursuant to which Atlas Energy will
provide gas processing services to us on substantially the same terms as
those services are provided to other producers delivering gas into the
Atlas Volunteer Pipeline and deliver back to us gas with a heating value
of 1,100 BTUs per cubic foot.
SETTLEMENT OF WIND CITY LITIGATION
Effective as of June 13, 2008, we also settled all issues and controversies with
Wind City Oil & Gas, LLC ("Wind City"), Wind Mill Oil & Gas, LLC ("Wind Mill")
and Wind City Oil & Gas Management, LLC ("WCOG") pending in the previously
disclosed Tennessee litigation, Tennessee arbitration, and litigation in the
Southern District of New York. Pursuant to the settlement, we paid Wind City
and/or WCOG $10,600,000 for the re-purchase of the 2,900,000 shares of our
common stock and reacquisition of all leases previously assigned by us to Wind
City, Wind Mill or WCOG, all wells and equipment associated with these leases,
all pipeline rights and rights of way, all contract rights, and all other
equipment, property and real property rights. As set forth above, we used a
portion of the proceeds from the Atlas Energy transaction to pay the settlement
amounts.
OUR CURRENT FOCUS
During the second quarter of fiscal 2009 we acquired leases for an additional
3,539 acres for aggregate consideration of approximately $500,000. The terms of
these leases which have a net revenue interest of 87.5% 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. At present we have approximately 17,839 acres of oil and gas leases. We
also retained a 5% royalty interest on a 1,930 acre tract that we expect to be
the subject of Atlas Energy drilling. Additionally, we retained the right to
participate in up to ten wells with a 25% working interest without promote.
With the closing of Atlas Energy transaction and the settlement of the Wind City
litigation our management is now able to focus the majority of its efforts on
growing our company. During fiscal 2009 we have augmented our senior management
through the hiring of Mr. Scott M. Boruff to serve as our CEO and Mr. Paul W.
Boyd to serve as our Chief Financial Officer. We are also continuing to focus
our short-term efforts on five distinct areas, including:
o Investment partnership management pursuant to which we will seek to drill
additional wells, concentrating on the East Tennessee portion of the
Southern Appalachian Basin with emphasis in horizontal drilling in
Devonian Shale,
o Organically growing production through drilling for own benefit on
existing leases, leveraging our 100,000 plus well log database with a view
towards retaining the majority of working interest in the new wells,
o Expanding our contract drilling and service capabilities and revenues,
including through our drilling contract with Atlas Energy and through the
purchase of an additional vertical and horizontal drilling rig,
o Expand our leasing capabilities by implementing strategies unique to the
gas and oil industry to secured leases and enter into new partnerships to
increase monetary capabilities, and
o Increase our overall production through economically viable acquisitions
of additional wells.
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Our ability, however, to implement one or more of these goals is dependent both
upon the availability of additional capital. To fully expand our operations as
set forth above, we will need up to $15 million for the purchase of additional
drilling equipment and up to $50 million to fund the balance of our expansion
plans. To provide the expansion capital, we intend to leverage our existing
assets as well as seek to raise additional capital through the sale of equity
and/or debt securities. To facilitate these capital raising efforts, we have
recently retained a broker-dealer and member of FINRA to assist us. However, our
ability to fully implement our expanded business model 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 various
uncertainties facing 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.
RESULTS OF OPERATIONS
REVENUES
--------
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 increases in oil and gas revenues for both the three and
six months ended October 31, 2008 from the comparable periods in fiscal 2008. In
both periods, the increases in oil and gas revenue resulted primarily from an
increase in production and price, notwithstanding the sale in December 2007 of
eight producing gas wells which had production of approximately 5,300 Mcf per
quarter. At October 31, 2008 oil was priced at $72.75 per barrel versus $77.56
at October 31, 2007 and at October 31, 2008 natural gas was $7.16 per Mcf as
compared to $6.33 per Mcf at October 31, 2007.
For the three months ended October 31, 2008 we produced 1,268 barrels of oil and
11,059 Mcf of natural gas as compared to 1,319 barrels of oil and 13,548 Mcf of
natural gas during the comparable period in 2007. Our increase in revenues for
the three months ended October 31, 2008 is attributable to the price increases
in oil and natural gas. During the three months ended October 31, 2008 our
average sales price per barrel of oil was $97.28 as compared to $70.91 during
the three months ended October 31, 2007. During the three months ended October
31, 2008 as compared to the three months ended October 31, 2007 our average
sales price per Mcf of natural gas was $8.05 as compared to $5.88.
For the first half of fiscal year 2009 we produced 2,385 barrels of oil and
18,827 Mcf of natural gas as compared to 2,418 barrels of oil and 25,942 Mcf of
natural gas during the comparable period in fiscal 2008. During the first half
of fiscal year 2009 our average sales price per barrel of oil was $104.04 as
compared to $65.67 during the first half of fiscal year 2008, and our average
sales price per Mcf of natural gas during the first half of fiscal year 2009 was
$9.90 as compared to $6.46 during the first half of fiscal year 2008.
Service and drilling revenue represents revenues generated from 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 approximately 188% for the three
months ended October 31, 2008 as compared to the three months ended October 31,
2007. During the three months ended October 31, 2007 we did not devote as much
time or resources to the marketing of this service as our management's primary
focus was the sale of the leases to Atlas Energy and the settlement of the Wind
City litigation, both of which are described elsewhere in this report. In
addition, during the second quarter of fiscal 2009 we finalized a two-year
drilling contract with Atlas Energy in November 2008 and have commenced
drilling. Depending upon Atlas Energy's road construction schedule, we expect to
drill approximately six to eight wells per month.
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EXPENSES
--------
We follow the successful efforts method of accounting for our oil and gas
activities. Accordingly, costs associated with the acquisition, drilling and
equipping of successful exploratory wells are capitalized. During the six months
ended October 31, 2008 we capitalized approximately $310,000 of costs associated
with the acquisition, drilling and equipping of these wells as compared to $0
during the comparable periods in fiscal year 2008. However, geological and
geophysical costs, delay and surface rentals and drilling costs of unsuccessful
exploratory wells are charged to expense as incurred and are included in the
cost of service and drilling revenue. Finally, costs of drilling development
wells are capitalized; however, we did not drill any development wells during
either period. Upon the sale or retirement of oil and gas properties, the cost
thereof and the accumulated depreciation or depletion are removed from the
accounts and any gain or loss is credited or charged to operations.
The cost of oil and gas revenue also represents costs associated with contract
fees we pay third parties to monitor the oil wells and record production. Gas
production is metered and read monthly by third party companies which are
specialists. As a percentage of oil and gas revenue, costs of oil and gas
revenue was approximately 14.8% for the three months ended October 31, 2008 as
compared to 11.0% for the three months ended October 31, 2007. As a percentage
of oil and gas revenue, costs of oil and gas revenue was approximately 14.2% for
the first half of fiscal year 2009 as compared to approximately 11.0% for the
first half of fiscal year 2008. These increases reflect the increased cost of
operating the wells, in part due to fuel cost. We anticipate that our cost of
oil and gas revenues will proportionality increase as additional wells are
connected. The cost of service and drilling revenue represents direct labor
costs of employees associated with these services, as well as costs associated
with equipment, parts and repairs. Historically, we have employed approximately
five employees who perform the services related to our service and drilling
revenue at a cost to us of approximately $31,500 per quarter. Our revenues from
these services have not been sufficient to cover the costs of these employees;
however, our management made a strategic determination to retain these highly
qualified individuals while we were refining our direction. These individuals
will provide the services necessary to fulfill the contract drilling services to
Atlas Energy beginning in the third quarter of fiscal 2009 and beyond.
Accordingly, we anticipate that we will begin reporting gross profits from our
service and drilling revenues during the latter half of fiscal 2009.
Selling, general and administrative expense includes salaries, general overhead
expenses, insurance costs, professional fees and consulting fees. The increases
in the three months and six months ended October 31, 2008 as compared to the
three months and six months ended October 31, 2007 primarily reflects one time
legal and professional fees associated with the sales of the leases to Atlas
Energy and the settlement of the Wind City litigation [together with increased
compensation expense, resulting from the addition of executive management as
previously discussed. As a percentage of total revenue, selling, general and
administrative expense increased to approximately 147% for the three months
ended October 31, 2008 as compared to approximately 120% for the comparable
period in fiscal 2008 and approximately 183% for the first half of fiscal 2009
as compared to approximately 161% for the first half of fiscal 2008.
Depreciation, depletion and amortization 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. The increase in depreciation, depletion and amortization in the three
months and six months ended October 31, 2008 as compared to the three months and
six months ended October 31, 2007 reflects an increase in the amount of
depreciation due to the purchase of equipment during the first half of fiscal
year 2009.
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The increase in interest income for the fiscal 2009 periods as compared to the
fiscal 2008 periods results from larger investible funds associated with the
Atlas Energy transaction in June, 2008 as previously discussed.
The decrease in interest expense for the fiscal 2009 periods as compared to the
fiscal 2009 periods reflects the satisfaction of certain loans during the six
months ended October 31, 2008.
Loan fees and costs in the first half of fiscal year 2009 represents non-cash
expenses related to the fair value of warrants owed in connection with a prior
financing transaction.
Gain on sale of equipment decreased in the fiscal 2009 periods as compared to
the fiscal 2008 periods due to a decrease in sales of miscellaneous equipment.
During the first half of fiscal year 2009 we recorded a one time 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 are reflected on our balance sheet as treasury shares. As a
result of these one-time transactions, while we reported a net loss of $571,192
for the three months ended October 31, 2008 we reported net income of $9,709,430
for the first half of fiscal year 2009. We do not anticipate that we will enter
into similar transactions in future periods.
LIQUIDITY
Liquidity is the ability of a company to generate funds to support its current
and future operations, satisfy its obligations and otherwise operate on an
ongoing basis. At October 31, 2008 we had working capital of $1,593,667 as
compared to a working capital deficit of $5,431,365 at April 30, 2008. This
change primarily reflects the net cash to us from the sale of the leases and
wells to Atlas Energy and the concurrent settlement of Wind City litigation and
the satisfaction of the liability for stock repurchase.
Net cash used by operating activities in the fiscal 2009 period primarily
reflects cash used to reduce our accounts payables and accrued expenses as a
result of the settlement of the Wind City litigation and increase our income
taxes payable. In the fiscal 2008 period we primarily used cash to pay
professional and other fees associated with the then ongoing Wind City
litigation. Net cash provided by investing activities in the fiscal 2009 period
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 investing activities in the fiscal
2008 period represents proceeds to us from the sale of equipment. Net cash used
in financing activities for the fiscal 2009 period 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. During the fiscal 2008 period cash provided by financing
activities represented the proceeds from short-term borrowings offset by
payments on notes payable.
Our working capital is sufficient to fund our current level operations for the
foreseeable future. However, in order to implement our business strategy to
expand our operations we will need to raise additional capital. During the
second quarter of fiscal 2009 we also commenced a capital raising effort to
raise funds to purchase drilling and work over rigs and other equipment. The
additional equipment is expected to be used to fulfill the Atlas Energy
agreement as well as for proprietary drilling. This private offering, however,
is being conducted on a best efforts basis and there are no assurances we will
raise any capital thereunder or that any funds we do receive will be sufficient
to enable us to purchase the additional equipment. In that event, we would be
required to seek alternative sources of financing for the purchase of the
additional rigs and equipment and there are no assurances that this capital
would be available to us.
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In addition, our long-term cash flows are subject to a number of variables
including the level of production and prices as well as various economic
conditions that have historically affected the oil and gas business. A material
drop in oil and gas prices has recently reduced our liquidity. As of December 8,
2008 oil was priced at $43.95 per barrel, down 40% from the $72.75 per barrel on
October 31, 2008. At December 8, 2008 natural gas was $5.61 per Mcf as compared
to $7.16 per Mcf at October 31, 2008. Also, a reduction in production and
reserves would reduce our operating results in future periods. We operate in an
environment with numerous financial and operating risks, including, but not
limited to, the inherent risks of the search for, development and production of
oil and gas, the ability to buy properties and sell production at prices which
provide an attractive return and the highly competitive nature of the industry.
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, as the end of the period covered by this
report (the "Evaluation Dates"). Based on this evaluation, our Chief Executive
Officer and our Chief Financial Officer have concluded as of the Evaluation
Dates 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.
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.
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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
In September 2008 we issued 300,000 shares of our common stock valued at $99,000
to two directors as compensation for services rendered to us. These issuances
were exempt from registration under the Securities Act of 1933 in reliance on
exemptions provided by Section 4(2) of that act.
In October 2008 we issued 200,000 shares of our common stock valued at $44,000
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 October 2008 we also issued an aggregate of 600,000 shares of our common
stock valued at $132,000 to three employees as additional compensation for their
services in transactions exempt from registration under the Securities Act of
1933 in reliance on exemptions provided by Section 4(2) of that act. The
recipients were accredited or otherwise sophisticated individuals who had such
knowledge and experience in business matters that they were capable of
evaluating the merits and risks of the prospective investment in our securities.
The recipients had access to business and financial information concerning our
company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
31.1 Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer 2002
(Sarbanes-Oxley)
31.2 Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer
32.1 Section 1350 certification of Chief Executive Officer
32.2 Section 1350 certification of Chief Financial Officer
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MILLER PETROLEUM, INC.
Date: December 12, 2008
By: /s/ Scott M. Boruff
-------------------
Scott M. Boruff
Chief Executive Officer,
principal executive officer
Date: December 12, 2008 By: /s/ Paul W. Boyd
----------------
Paul W. Boyd
Chief Financial Officer, principal
financial and accounting officer
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