JAYHAWK ENERGY, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion is intended to assist you in understanding our business
and results of operations together with our financial condition. This section
should be read in conjunction with our historical combined and consolidated
financial statements and notes, as well as the selected historical combined and
consolidated financial data included elsewhere in this report. Statements in our
discussion may be forward-looking statements. These forward-looking statements
involve risks and uncertainties. We caution that a number of factors could cause
future production, revenues and expenses to differ materially from our
expectations. Please see "Disclosure Regarding Forward-Looking Statements."
Overview.
JayHawk Energy, Inc. was incorporated in
Colorado
on April 5, 2004 as Bella
Trading Company, Inc. The Company was originally formed to import and sell
jewelry and accessories from
Southeast Asia
. During the third quarter of the
fiscal year ending September 30, 2007, the Company decided to change management,
enter the oil and gas business, and cease all activity in the retail jewelry
industry. At that time the Company changed its name to JayHawk Energy, Inc. and
shifted its focus to the acquisition, development, production and sale of crude
oil and natural gas, primarily from conventional reservoirs within
North America
. During the year ending September 30, 2008, the company acquired its
first oil and gas properties. These oil and gas properties included: (a) working
interests and operations in
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five (5) producing oil wells, surface equipment and related oil and gas leases
in
Divide County, North Dakota
, and (b) thirty-four (34) producing coal bed
methane gas wells and related leases, surface equipment and a 16-mile gas
pipeline and compression station in
Bourbon County, Kansas
, and (c) additional
oil and gas mineral leases covering 11,000 acres in
Bourbon
and
Crawford
Counties,
Kansas
.
On September 1, 2015 the Company disposed of all of its interests, tangible or
intangible, in and to the assets held or owned by the Company in the
State of North Dakota
. The disposition of the Company's
North Dakota
assets was completed
through an asset assignment to a related party.
As of September 30, 2015, the Company continues to control seventy-one (71)
shut-in natural gas wells in
Southeast Kansas
, the Company is actively focused
on shifting to a liquids-rich development focus, primarily in established oil
and gas producing regions of
North America
. The Company's main priority will be
given to projects with near term cash flow potential and proven, producing oil
and gas reserves.
Commodity Prices.
Our results of operations are heavily influenced by commodity prices. Factors
that may impact future commodity prices, including the price of oil and natural
gas, include: (1) weather conditions in
the United States
and where the
Company's property interests are located; (2) economic conditions, including
demand for petroleum-based products, in
the United States
and the rest of the
world; (3) actions by OPEC, the Organization of Petroleum Exporting Countries;
(4) political instability in the
Middle East
and other major oil and natural gas
producing regions; (5) governmental regulations; (6) domestic tax policy; (7)
the price of foreign imports of oil and natural gas; (8) the cost of exploring
for, producing and delivering oil and natural gas; (9) the discovery rate of
new oil and natural gas reserves; (9) the rate of decline of existing and new
oil and natural gas reserves; (10) available pipeline and other oil and natural
gas transportation capacity; (11) the ability of oil and natural gas companies
to raise capital; (12) the overall supply and demand for oil and natural gas;
and (13) the availability of alternate fuel sources.
The Company cannot predict the occurrence of events that may affect future commodity prices or the degree to which these prices will be affected, the prices for any commodity that we produce will generally approximate current market prices in the geographic region of the production. Furthermore, the Company has not entered into any derivative contracts, including swap agreements for oil and gas.
Recent Events.
Termination of Lease Agreement
On or about December 1, 2011, the Company entered into a four-year lease with
Marlin Property Management, LLC, an entity owned by the spouse of Lindsay E.
Gorrill, the Company's former President/CEO and member of the Board of
Directors. Under the terms of the lease the Company was required to pay $2,500
per month for office space in
Coeur d'Alene, Idaho
. For the years ended
September 30, 2015 and 2014, the Company paid $15,000 and $15,000 respectively.
The balance due to the related party including common area expenses as of September 30, 2015 was $Nil as a result of the Lease Termination Agreement described in Notes 15 and 18.
Resignation of Officers and Directors.
On May 15, 2015, Jeff Bright tendered his resignation from the Board of Directors of the Company. On May 31, 2015, Tyrone Docherty tendered his resignation from the Board of Directors of the Company.
Appointment of Director.
On April 17, 2015, Scott Mahoney was appointed to the Board of Directors of the Company and was named Chairman of the Board.
Convertible Debenture Transfer Agreements
On April 17, 2015, Scott Mahoney, the CEO and Manager of Vast Exploration was
appointed to the Board of Directors of the Company in connection with Vast
Exploration, LLC's acquisition of certain convertible debentures described
below. At the time of closing of each Convertible Debenture Transfer Agreement,
Mr. Mahoney was both a Director of the Company and as the CEO and Manager of
Vast Exploration, LLC and was the individual with voting and dispositive control
over Vast Exploration, LLC, and was therefore deemed to be the beneficial owner
of the underlying securities represented by the various debentures. Mr. Mahoney
has disclaimed beneficial ownership of the underlying convertible debenture
securities.
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On April 17, 2015, closing related to a Convertible Debenture Transfer Agreement
("Gorrill Transfer Agreement") entered by the Company, Lindsay E. Gorrill, the
Company's former President/CEO and member of the Board of Directors and Vast
Exploration, LLC ("Vast Exploration") on March 17, 2015 occurred. The Gorrill
Transfer Agreement conveyed a 10% Convertible Debenture originally entered into
between the Company and Mr. Gorrill on June 4, 2014 to Vast Exploration. Mr.
Gorrill received a $200,000 promissory note as consideration for the transfer.
The aggregate amount of the 10% Convertible Debenture and the amount outstanding
on the 10% Convertible Debenture as of the effective date of the Gorrill
Transfer Agreement was $200,000. The Company had not made any payments of
principal or interest at a rate of ten percent (10%). The 10% Convertible
Debenture may be converted into shares of the Company's common stock at a price
of $0.01 per share at any time from the original issue date until the 10%
Convertible Debenture is due. The foregoing summary of the Gorrill Transfer
Agreement's terms is qualified in its entirety by the fully executed Gorrill
Transfer Agreement attached as Exhibit 10.6.
On April 17, 2015, closing occurred related to a Convertible Debenture Transfer
Agreement ("Alpha Transfer Agreement") entered into by the Company, Alpha
Capital Anstalt ("Alpha") and Vast Exploration, LLC ("Vast Exploration") dated
March 17, 2015 and originally executed on or about March 30, 2015. The Alpha
Transfer Agreement conveyed four 10% Senior Secured Convertible Debentures
originally entered into between the Company and Alpha on December 11, 2009,
December 30, 2009, April 21, 2010, October 18, 2010 and one 10% Convertible
Debenture dated June 3, 2014. The aggregate amount of the various debentures at
the time of transfer was $1,209,744. The amount outstanding on the various
debentures at the time of transfer was $967,657. The various convertible
debentures may be converted into shares of the Company's common stock at a price
of $0.01 per share at any time from the original issue date until the various
debentures are due. The foregoing summary of the Alpha Transfer Agreement's
terms is qualified in its entirety by the fully executed Alpha Transfer
Agreement attached as Exhibit 10.7.
On April 17, 2015, closing occurred related to a Convertible Debenture Transfer
Agreement ("Ellis Transfer Agreement") entered into by the Company, Ellis
International Ltd. ("Ellis") and Vast Exploration, LLC ("Vast Exploration")
dated March 17, 2015 and originally executed on or about March 30, 2015. The
Ellis Transfer Agreement conveyed four 10% Senior Secured Convertible Debentures
originally entered into between the Company and Ellis on December 11, 2009,
December 30, 2009, April 22, 2010, October 18, 2010. The aggregate amount of the
various debentures at the time of transfer was $309,173. The amount outstanding
on the various debentures at the time of transfer was $141,877.51. The various
convertible debentures may be converted into shares of the Company's common
stock at a price of $0.01 per share at any time from the original issue date
until the various debentures are due. The foregoing summary of the Ellis
Transfer Agreement's terms is qualified in its entirety by the fully executed
Ellis Transfer Agreement attached as Exhibit 10.8.
On April 17, 2015, closing occurred related to a Convertible Debenture Transfer
Agreement ("Momona Transfer Agreement") entered into by the Company, Momona
Capital. ("Momona") and Vast Exploration, LLC ("Vast Exploration") dated March
17, 2015 and originally executed on or about March 30, 2015. The Momona Transfer
Agreement conveyed four 10% Senior Secured Convertible Debentures originally
entered into between the Company and Momona on December 11, 2009, December 30,
2009, April 22, 2010, October 18, 2010. The aggregate amount of the various
debentures at the time of transfer was $113,333. The amount outstanding on the
various debentures at the time of transfer was $82,749.76. The various
convertible debentures may be converted into shares of the Company's common
stock at a price of $0.01 per share at any time from the original issue date
until the various debentures are due. The foregoing summary of the Momona
Transfer Agreement's terms is qualified in its entirety by the fully executed
Momona Transfer Agreement attached as Exhibit 10.9.
On April 17, 2015, closing occurred related to a Convertible Debenture Transfer
Agreement ("Lane Transfer Agreement") entered into by the Company, Lane
Ventures, Inc. ("Lane") and Vast Exploration, LLC ("Vast Exploration") dated
March 17, 2015 and originally executed on or about March 30, 2015. The Lane
Transfer Agreement conveyed four 10% Senior Secured Convertible Debentures
originally entered into between the Company and Lane on December 11, 2009,
December 30, 2009, April 22, 2010, October 18, 2010. The aggregate amount of the
various debentures at the time of transfer was $61,750. The amount outstanding
on the various debentures at the time of transfer was $46,312.50. The various
convertible debentures may be converted into shares of the Company's common
stock at a price of $0.01 per share at any time from the original issue date
until the various debentures are due. The foregoing summary of the Lane Transfer
Agreement's terms is qualified in its entirety by the fully executed Lane
Transfer Agreement attached as Exhibit 10.10.
On or about April 17, 2015, Vast Exploration notified the Company of its intent
to hold the Company in default of certain provisions of the Convertible
Debentures, including but not limited to additional interest at 18% and
recalculating the principal balances to 125% of their face amount retroactive to
the last known date of compliance.
On April 30, 2015 the Company entered into an Amendment to its outstanding
Convertible Debentures (the "Amendment") with Vast Exploration. Under the terms
of the Amendment the "Beneficial Ownership Limitation" provisions located in
each Convertible Debenture were been deleted. The elimination of the Beneficial
Ownership Limitation permits the Vast Exploration to convert any or all of the
outstanding Convertible Debentures into common shares at any time. Under the
terms of the Amendment the "Conversion Price" for the remaining entire
outstanding balance owed by the Company under the Convertible Debentures has
been reset to $.01 per share. Also, under the terms of the Amendment the
"Derivative Provisions" located in each Convertible Debenture have been deleted.
The fair value of the derivative liability on that date of $1,244,472 was
charged to 'additional paid-in capital'. No other terms of the Convertible
Debentures were amended. The foregoing summary of the Amendment's terms is
qualified in its entirety by the fully executed Amendment attached as Exhibit
10.11.
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Employment Contract - Change of Control
On or about April 30, 2015, the Company reported a Change of Control which
triggered certain provisions of an Executive Employment Contract of Kelly
Stopher - Interim President, CEO and CFO of the Company. The Company accrued a
liability of $57,000 which is included in "other payables, taxes and interest
accrued" at September 30, 2015 and entered into a promissory note for $110,741
for accrued payroll ("Promissory Note"). For the years ended September 30, 2015,
the Company charged "general and administrative" expense in the amount of
$167,781. The foregoing summary of the Promissory Note's terms is qualified in
its entirety by the fully executed Promissory Note attached as Exhibit 10.12.
Revolving Credit Note
On June 30, 2015, the Company entered into a Revolving Credit Note (the "Loan")
with Vast Exploration. Vast Exploration is the controlling shareholder of the
Company and an affiliate of Vast Petroleum Corp. - an entity that entered into a
joint development agreement for the Company's oil and gas operations in
Kansas
in May 2014. Vast Petroleum Corp. was not a party to the Loan. Scott Mahoney,
the Chairman of the Board of JayHawk, is the individual who possesses voting and
dispositive authority on behalf of Vast Exploration. Mr. Mahoney, acting in his
capacity of Chairman of the Board of JayHawk, recused himself from voting on the
approval of the Loan. The Loan permits the Company to borrow up to $100,000 with
an interest rate equal to 1.5% per month of the unpaid principal balance on the
loan. The Company is required to pay principal on demand or, if not sooner
demanded, then on or before June 30, 2016. The Company is required to pay
interest on demand or, if not sooner demanded, then on the 1st day of each
month, commencing August 1, 2015. After demand, interest on the outstanding
balance of the Loan will accrue at a rate equal to 2% per month. Vast
Exploration has the right, at any time after the date of the Loan, at its
election, to convert all or part of the Loan into shares of fully paid and
non-assessable shares of common stock of the Company. The conversion price
shall be the lesser of (a) $0.01 per share of common stock, (b) 50% of the
average of the three lowest trade prices of three separate trading days of
Common Stock recorded during the previous twenty five trading days prior to
conversion, or (c) the lowest effective price per share granted to any person or
entity after the date of this Note to acquire Common Stock, or adjust, whether
by operation of purchase price adjustment, settlement agreements, exchange
agreements, reset provision, floating conversion or otherwise, any outstanding
warrant, option or other right to acquire Common Stock or outstanding Common
Stock equivalents, excluding any outstanding warrants or options that existed
prior to the date of the loan. The foregoing summary of the Loan's terms is qualified in its entirety by the fully executed Loan attached as Exhibit 10.13.
Line of Credit Modification Agreement
On August 6, 2015, the Company entered into a Line of Credit Modification
Agreement with Vast Exploration ("Modification Agreement"). The Agreement
adjusts the maximum principal balance that may be borrowed from $100,000 to
$150,000. At its sole discretion, Vast Exploration may increase the maximum
principal balance beyond $150,000. The foregoing summary of the Modification
Agreement's terms is qualified in its entirety by the fully executed
Modification Agreement attached as Exhibit 10.14.
Second Line of Credit Modification Agreement
On September 25, 2015, the Company entered into a Second Line of Credit Modification Agreement with Vast Exploration ("Second Modification Agreement").
The Agreement amends the conversion price in the Loan to a non-variable
conversion price of $0.005 per share of common stock to eliminate any provisions
in the Loan that may require derivative accounting. The foregoing summary of the
Second Modification Agreement's terms is qualified in its entirety by the fully
executed Second Modification Agreement attached as Exhibit 10.15.
As of September 30, 2015, the Revolving Credit Note balance of $189,265 including accrued interest was convertible to 37,853,000 shares of the Company's common stock at a share price of $.005 based on the amended conversion price.
Contract Operating Agreement
On July 8, 2015, the Company executed a Contract Operating Agreement (the
"Operating Agreement") with Vast Exploration, effective as of January 1, 2015.
Under the terms of the Operating Agreement, Vast Exploration became the
"operator of record" for all of the Company's properties and is responsible for
the operation of the Company's oil and gas properties, including handling
routine operations, major operations, reporting services and other miscellaneous
services. The Company is required to pay Vast Exploration a monthly fee for
services in the amount of $20,000. The Company remains responsible for all fees,
expenses and taxes related to its properties and has agreed to reimburse Vast
Exploration for any fees, expenses or taxes advanced on the Company's behalf.
The Company has the right to audit the books, records and invoices maintained by
Vast Exploration in its operation of the Company properties. The term of the
Operating Agreement is two years from the effective date of the Operating
Agreement. The Operating Agreement automatically renews for successive one year
terms until the Company or Vast Exploration provide notice of non-renewal. The
Operating Agreement includes mutual indemnities and waivers of consequential and
punitive damages. The Operating Agreement also includes release and hold
harmless provisions for the exclusive benefit of Vast Exploration. Finally, the
Operating Agreement consents to and ratifies any operational services Vast
Exploration had provided to the Company prior to the date the Operating
Agreement was executed. Vast
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Exploration billed the Company $160,000 for the year ended September 30, 2015 -
this amount was charged to 'production expense' and subsequently billed to
working interest partners for their pro-rata share of the expense. The foregoing
summary of the Operating Agreement's terms is qualified in its entirety by the
fully executed Operating Agreement attached as Exhibit 10.4.
Disposition of North Dakota Assets
On October 2, 2015, the Company entered into an Assignment, Bill of Sale and
Conveyance (the "Assignment") with Vast Holdings, LLC ("Vast Holdings") with an
effective date of September 1, 2015. The Assignment sold and assigned to Vast
Holdings, in consideration of ten dollars ($10.00), all of the Company's right,
title, interest and estate, real or personal, movable or immovable, tangible or
intangible, in and to the assets held or owned by the Company in the
State of North Dakota
, including but not limited to: oil, gas and/or mineral leases, fee
mineral interests, leasehold estates, mineral interests, royalty interests,
overriding royalty interests, reversionary interests, net profits interests, and
other similar rights, estates and interests and other agreements, the oil, gas,
and other hydrocarbons produced from or attributable to the assets and all
units, wells, equipment, contracts, and records. The foregoing summary of the
Assignment's terms is qualified in its entirety by the fully executed Assignment
attached as Exhibit 10.16.
Vast Holdings is a wholly owned subsidiary of Vast Exploration, LLC. Vast
Exploration is the controlling shareholder of the Company, the contract operator
of the Company's oil and gas properties and an affiliate of Vast Petroleum Corp.
- an entity that entered into a joint development agreement for the Company's
oil and gas operations in
Kansas
in May 2014. Vast Petroleum Corp. was not a
party to the Assignment. Scott Mahoney, interim President, CEO, CFO and
Chairman of the Board of JayHawk is the individual who possesses voting and
dispositive authority on behalf of Vast Holdings, LLC. Mr. Mahoney, acting in
his capacity of Chairman of the Board of the Company, recused himself from
voting on the approval of the Assignment.
Warrant Purchase Agreement
On September 25, 2015 the Company executed a Warrant Purchase Agreement (the
"Purchase Agreement") pursuant to which the Company to plans to issue and sell
securities, pursuant to Section 4(a)(2) of the Securities Act of 1933 and
Regulation D Rule 506 promulgated thereunder. The terms of the Purchase
Agreement allow a purchaser to receive a credit for its subscription for
securities if the purchaser assumes certain accrued and/or contingent
liabilities of the Company. The exercise price for the securities is $0.0050 per
share for securities issued in exchange for the satisfaction of an assumed debt.
The exercise price for the securities is $0.0025 per share for securities issued
in exchange for the satisfaction of an assumed
North Dakota
liability. The
securities are subject to adjustment for reverse and forward stock splits, stock
dividends, stock combinations and other similar transactions of the Company's
common stock that occur after the date of the Purchase Agreement. Each purchaser
is required to deliver to the Company, the prior to the issuance of securities,
the following: (a) immediately available funds sufficient to satisfy or
otherwise terminate a given liability; or (b) a "receipt of funds and release of
claims" executed by a creditor of the Company, or other evidence, in a form
satisfactory to the Company in its sole discretion, of the satisfaction of an
assumed debt or
North Dakota
liability by the purchaser. The Purchase Agreement
includes various standard representations and warranties of the purchaser, which
include, a confirmation that a purchaser is an "Accredited Investor" as that
term is defined in Rule 501(a) of Regulation D promulgated under the Securities
Act of 1933. The Purchase Agreement includes the Form of Warrant Agreement that
will be used upon issuance of the securities by the Company. The foregoing
summary of the Purchase Agreement's terms and attached Form of Warrant Agreement
are qualified in their entirety by the fully executed Purchase Agreement and
Form of Warrant Agreement attached as Exhibit 10.17.
Vast Exploration is the controlling shareholder of the Company, the contract
operator of the Company's oil and gas properties and an affiliate of Vast
Petroleum Corp. - an entity that entered into a joint development agreement for
the Company's oil and gas operations in
Kansas
in May 2014. Vast Petroleum Corp.
was not a party to the Agreement. Scott Mahoney, the Chairman of the Board for
the Company, is the individual who possesses voting and dispositive authority on
behalf of Vast Exploration. Mr. Mahoney, acting in his capacity of Chairman of
the Board of the Company, recused himself from voting on the approval of the
Purchase Agreement.
On October 8, 2015, the Company granted 943,336 Warrants ("October 2015
Warrant") to Vast Exploration pursuant to that certain Warrant Purchase
Agreement dated September 25, 2015. The Warrants were granted in consideration
of Vast Exploration's assumption of certain Company liabilities totaling
approximately $471,668.39. The warrants may be exercised any time after October
8, 2015 until the close of business on October 7, 2020 for $0.0050 per share.
The foregoing summary of the October 2015 Warrant's terms is qualified in its
entirety by the fully executed October 2015 Warrant attached as Exhibit 10.19.
On November 3, 2015, the Company granted 396,458 Warrants ("November 2015
Warrant") to Vast Exploration and/or assigns pursuant to that certain Warrant
Purchase Agreement dated September 25, 2015. The Warrants were granted in
consideration of Vast Exploration's elimination of certain Company liabilities
totaling approximately $198,229. The warrants may be exercised any time after
November 3, 2015 until the close of business on November 3, 2020 for $0.0050 per
share. The foregoing summary of the November 2015 Warrant's terms is qualified
in its entirety by the fully executed November 2015 Warrant attached as Exhibit
10.20.
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Subsequent Events.
Resignation of Officers and Directors.
On October 1, 2015, Kelly Stopher tendered his resignation as interim President,
CEO and CFO of the Company. On October 1, 2015, Matthew Wayrynen and Lindsay E.
Gorrill tendered their resignation from the Board of Directors of the Company.
Appointment of Officer and Director.
On October 1, 2015, Kelly Stopher was appointed to the Board of Directors of the
Company. On October 1, 2015, Scott Mahoney was appointed as interim President,
CEO and CFO of the Company.
Liquidity and Capital Resources.
At September 30, 2015 and 2014, the Company's cash balances were $Nil and $177,260, respectively. The Company's accounts receivable totaled $Nil and $55,528, respectively.
The Company's working capital deficit (current liabilities less current assets) was $2,510,515 at September 30, 2015 of which $470,439 is in the form of convertible debentures which are currently due. At September 30, 2014, the Company's working capital deficit was $2,635,213, of which $1,038,687 of convertible debentures were due in the current year and in default.
To fully carry out the Company's business plans the Company needs to raise a
substantial amount of additional capital, or obtain industry joint venture
financing. The Company can give no assurance that it will be able to raise such
capital or enter into any other beneficial business arrangements. The Company
has limited financial resources until such time that it is able to generate such
additional financing or cash flow from operations. The Company's ability to
establish profitability and positive cash flow is dependent upon its ability to
exploit its mineral holdings, generate revenue from its planned business
operations and control exploration cost. Should the Company be unable to raise
adequate capital or to meet the other above objectives, it is likely that the
Company would have to substantially curtail its business activity, and that the
Company's investors would incur substantial losses of their investment.
The accompanying Consolidated Financial Statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As reflected in the
accompanying Consolidated Financial Statements the Company is an independent oil
and gas company with a limited operating history and losses since inception.
These factors, among others, may indicate that the Company will be unable to
continue as a going concern for reasonable period of time.
The Consolidated Financial Statements do not include any adjustments relating to
the recoverability and classification of assets and liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
obtain additional operating capital, and ultimately, to attain profitability.
The Company intends to acquire additional operating capital through debt or
equity offerings, or through joint ventures or other business arrangements, to
fund its business plan. There is no assurance that the Company will be
successful in raising additional funds.
Cash Flows: Net cash provided by operations decreased primarily due to less
cash being received for the Company's crude oil sales associated with improved
ability to deliver oil to market. Decline in oil prices adversely affected
revenues and costs of workovers on the
North Dakota
- Crosby Project hampered
gross margin. For the year ending at September 30, 2015, cash used by operating
activities exceeded cash provided by operating activities by $317,836. For the
year ending at September 30, 2014, cash used by operating activities exceeded
cash provided by operating activities by $507,935.
There were no cash flows from investing activities for the years ended September 30, 2015 and 2014.
The Cash flows provided from financing activities were $140,576 and $600,000 for
the years ended September 30, 2015 and 2014, respectively. The Company entered
into a Line of Credit agreement with related party Vast Exploration, LLC as a
means to provide cash flow for ongoing capital needs of the Company.
Commitments: As noted in Item 3 of this report, on or about August 1, 2013, the
North Dakota Industrial Commission ("NDIC") submitted an administrative
complaint to the
State of North Dakota
related to plugging and remediation of
the Company's Jenks #1 and Knudsen #1 wells in
Crosby, ND
. The administrative
complaint alleges the Company violated certain portions of the
North Dakota
Century Code and request administrative relief against the Company for violation
of sections of the North Dakota Administrative Code governing the oil and gas
industry.
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On February 18, 2014, the Company entered into a Consent Agreement with the
State of North Dakota
whereby the Company was required to finish reclamation
work, by June 30, 2014, on the two waste water storage pits adjacent to the
Jenks #1 and Knudsen #1 wells respectively. The Consent Agreement required the
Company to plug the "production zone" of the Jenks #1 well. Once plugging was
completed, the Company could then apply for a permit to convert the Jenks #1
well into a salt water disposal well. As a part of the Consent Agreement the
Company agreed to pay a civil penalty of no less than $105,000, consisting of
$25,000 due and payable upon execution of the Consent Agreement and a $16,000
installment payment per month for five successive months thereafter. If the
Company failed to comply with the terms of the Consent Agreement, the Company
would be subject to penalties of up to an additional $420,000 (over and above
the $105,000 penalty agreed to in the Consent Agreement). The Company made the
initial $25,000 payment and subsequently made each monthly payment with the
final installment of $16,000 paid to the
State of North Dakota
on June 26, 2014.
The Company made the final installment payment of $16,000 to the
State of North Dakota
on June 26, 2014. As of September 30, 2014 the Company has completed
substantially all reclamation work and has paid all fines assessed.
On July 10, 2014, the Company completed reclamation work on both the Jenks #1
and Knudsen #1 waste water storage pits. Although reclamation work was to have
been completed by June 30, 2014, unseasonably heavy rains saturated the soil and
limited safe access to the site by heavy equipment delayed scheduled reclamation
until such time as ground conditions improved. The Company also completed
plugging of the 'production zone' on the Jenks #1 well and set a balance plug on
the Knudsen #1 well bore.
Due to the Company's failure to timely submit a cost estimate for the final
plugging, abandonment and reclamation of the Jenks #1 well and site, the NDIC,
on January 28, 2015, pursuant to Commission Order No. 25588 ordered JayHawk to
file a $120,000 bond covering the Jenks #1. The bond was a plugging and
reclamation bond.
On May 9, 2015, the Company received a copy of a Summons and Complaint filed by
the
State of North Dakota
and the NDIC in the Northwest Judicial District Court
of North Dakota alleging JayHawk had violated N.D.C.C. Chapter 38-08 by failing
to post the $120,000 plugging and reclamation bond pursuant to Commission Order
No. 25588. N.D.C.C. § 38-08-16 provides that anyone who violates a provision of
N.D.C.C. Chapter 38-08, or any rule or regulation of the Commission is subject
to a penalty of up to $12,500 for each offense, and each day's violation is a
separate offense. The Complaint's prayer for relief requested that JayHawk be
ordered to deposit $120,000 with the Bank of
North Dakota
to satisfy the
Commission's requirement for the plugging and reclamation bond on the Jenks #1
well. The NDIC also requested that JayHawk pay a fine of $12,500 per day
beginning February 4, 2015, for failure to provide a plugging and reclamation
bond on the Jenks #1. Company management subsequently met with the NDIC, which
resulted in the NDIC staying the litigation subject to JayHawk's immediate
plugging, abandonment and reclamation of the Jenks #1. In September of 2015 the
Company completed final plugging and abandonment of the Jenks #1 and completed a
partial reclamation of the well and site.
On February 12, 2015, the Company entered into a settlement agreement with the
Staff of the Corporation Commission of the State of Kansas with respect to a
Penalty Order served by the Company for failure to comply with certain portions
of the Kansas Administrative Regulations. The Company was found in violation of
failure to plug, return to service or temporarily abandon 71 wells and assessed
a $7,100 penalty, of which $3,100 was payable immediately, a $2,000 payment due
by April 1, 2015 and the final $2,000 payment by May 1, 2015. The Company has
subsequently submitted seventy-one (71) temporary abandonment applications, of
which seventy-one (71 applications were approved. The Company has up to one
year to plug the wells, return them to service or file additional temporary
abandonment applications.
At September 30, 2015 the Company has no commitments to make any capital expenditures. Any potential future capital expenditures will be dependent on concluding adequate and successful financing arrangements.
Results of Operations
For the years ending September 30, 2015 and 2014 the Company reports net revenues of $244,283 and $394,925, respectively, from the sales of oil and natural gas. Details of these two revenue components follow:
Oil Revenues: As discussed in Note 2 in the "Notes to the Consolidated
Financial Statements" for the period ended September 30, 2015, the Company
recognizes revenues only to the extent of its net working interest, which is the
remainder after deduction of the outside working and royalty interests and the
deduction of severance and production taxes.
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For the years ended September 30, 2015 and 2014, the Company sold a gross 11,681
Bbls and 10,066 Bbls respectively. The Company's Gross working interest in the
revenues generated from the five
North Dakota
oil wells were $244,283 and
$394,925 respectively. Gross receipts reconciled to the Company's net working
interest, or revenue recognized is reflected in the following table:
2015 2014
Gross sales value $ 474,056 $ 757,380
Less: Distributable to outside interest,
production and severance taxes (229,773) (362,455)
Net oil revenues $ 244,283 $ 394,925
The decrease in gross revenues is attributable to the Company's ongoing constraints of working capital and plummeting oil prices during the fiscal year.
Regular and necessary maintenance was often delayed due to lack of sufficient
cash resources. For the year ending September 30, 2015 the average price net of
taxes and transportation costs the Company received for a barrel of oil was
$40.58. During the comparable period ending September 30, 2014 the average
price received per barrel was $75.24. The Company divested of its oil wells on
September 1, 2015.
Gas Revenues: Revenues derived from gas sales for the years ending September
30, 2015 and 2014 were $Nil and $Nil, respectively. The Company suspended
production in 2013 with the intent of re-starting operations in
Kansas
in
anticipation of increased natural gas prices at some point in the future. The
Company did not produce natural gas during the fiscal year ended September 30,
2015, due to low natural gas prices and significant costs associated with
upgrading the meters at its
Bourbon County
tap head. The average price received
for the 12- month period ending September 31, 2015 was $0.00 per mcf. The
average price received for the 12-month period ending September 30, 2014 was
$0.00 per mcf. Subsequent to the fiscal year end at September 30, 2015, the
Company filed permits for Temporary Abandonment on up to 71 well bores in
Kansas
. The Company will determine in fiscal year end September 30, 2016
whether it's
Kansas
- Girard Project remains economically viable under current
market conditions.
Exploration Expenses: There were no exploration expenses incurred during the years ending September 30, 2015 or 2014.
Production Expenses: Production expenses are comprised of field labor,
maintenance, chemicals, fuel, and salt water disposal, less amounts charged
other working interests in the particular wells. These expenses associated with
the Company's
North Dakota
oil operations changed from $230,238 for the year
ending September 30, 2014 to $383,808 for the year ending September 30, 2015, an
increase of $153,750. Prior to the conveyance of the
North Dakota
-
Crosby
Project to Vast Exploration, LLC, the Company incurred $160,000 in contract
operating expense during the year ended September 30, 2015, an expense not
incurred during the prior year comparable period. As well, the Company incurred
workover and maintenance expense of $146,868 for the year ended September 30,
2015 which was $44,360 more than during the year ended September 30, 2014.
Total operating expenses for the years ended September 30, 2015 and 2014 were
$1,186,837 and $1,215,195, respectively. The expenses are segregated as
follows:
Year ended September 30, Year ended
September 30,
Crosby, ND Girard, KS G&A Total 2014
Direct regional costs $ 383,808 $ 15,635 $ - $ 399,443 238,382
Loss on leases and
equipment 39,765 - - 39,765 -
Depreciation, depletion
and amortization 82,571 40,235 - 122,806 257,097
General and
administrative - - 518,931 518,931 424,752
North Dakota
reclamation
costs 90,675 90,675 280,361
Accretion of asset
retirement obligations 11,364 3,853 15,217 14,603
$ 608,183 $ 59,723 $ 518,931 $ 1,186,837 $ 1,215,195
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Depreciation, depletion, amortization, abandonment and asset impairment expense:
The aggregate of these expenses for the years ending September 30, 2015 and 2014
are detailed below.
Year ended September 30,
Percent
2015 2014 $ Change change
Depreciation, depletion and
amortization
Field equipment and drilling
costs - ND 48,464 52,870
(4,406) (8.3%)
Field equipment and drilling
costs - KS 33,240 39,197 (5,957) (15.2%)
Amortization of asset retirement
obligation 11,867 10,899 968 8.9%
Depletion - ND 29,235 154,131
(124,896) (81.0%)
Total depreciation, depletion
and amortization $ 122,806 $ 257,097 $ (134,291) (52.2%)
As discussed in Note 4 of "Notes to the Consolidated Financial Statements,"
management made a review of its
Kansas
- Girard Project. Management's outlook
for the
U.S.
natural gas prices indicated it is unlikely that sufficient
U.S.
demand for natural gas would materialize in the foreseeable future. Using a
historical income approach based upon internal estimates of natural gas prices
and future deliveries, management determined that the unproved and developed
properties in
Girard, Kansas
should be impaired to the extent of the salvage
value of field equipment and pipeline.
General and Administrative Expenses: General and administrative expenses increased 22.2% or $94,179 to $518,931 for the year ending September 30, 2015 from $424,752 for the comparable period ended September 30, 2014.
Year ended September 30,
Percent
2015 2014 $ Change change
Compensation and payroll taxes $ 214,607 $ 90,764 $ 123,842 136.4%
Directors fees 26,500 54,000 27,500 (50.9%)
Stock option expense - 24,803 (24,803) (100.0%)
Legal, professional and
consulting 87,811 60,661 27,150 44.8%
Audit and public company expense 99,085 74,769 24,316 32.5%
Insurance 61,805 65,011 (3,206) (4.9%)
Office and other general and (25,620)
administrative 29,123 54,744 (25,620) (46.8%)
Total $ 518,931 $ 424,752 $ 94,179 22.2%
Compensation and payroll taxes increased $123,842 over the prior period due to
certain change of control provisions and accrued wages due under the terms of an
Executive Compensation Agreement for a former officer of the Company.
Directors' fees were accrued but not paid in the years ended September 30, 2015
and 2014, respectively. During the year ended September 30, 2015, the accrued
directors' fees were forgone for stock grants in lieu of cash payments. The
Company has suspended the customary practice of accruing directors' fees for the
foreseeable future.
There was no Stock Option expense for the year ended September 30, 2015. Stock
options awarded to certain directors, officers and employees of the Company as
part of the 2009 Stock Option Incentive Plan totaled $24,803 recognized in the
year ended September 30, 2014.
Audit fees and public company expense increased for the year ended September 30,
2015 by $24,316 over the comparable year ended September 30, 2014, primarily as
a result of professional fees incurred in various corporate transactions
throughout the fiscal year. Audit fees specifically decreased from $58,697 for
the year ended September 30, 2014 to $51,809 for the year ended September 30,
2015. Public company expense increased from $11,425 for the year ended
September 30, 2014 to $29,863, primarily as a result of expenses associated with
proxy filings and special corporate meetings. Legal, professional and
consulting fees increased $27,150 for the year ended September 30, 2015 compared
to the year ended September 30, 2014 for the same reason.
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Other Income (Expense): Detail of the aggregate of this classification is disclosed in the following table:
Year ended September 30,
Percent
2015 2014 $ Change change
Interest expense $ (211,077) $ (137,503) $ (73,574) (53.5%)
Financing costs (727,845) - (727,845) -
Amortization of debt discount (120,000) (40,000) (80,000) 200.0%
Gain on settlement of
liabilities 317,303 - 317,303
Loss on extinguishment and
conversion of debt (957,528) (383,951) (573,577) 149.4%
Gain (loss) on change in fair
value of conversion option
derivative 389,589 (115,029) 504,618 (438.7%)
Gain on change in fair value of
warrant derivative 19,836 16,856 2,980 17.7%
Total $ (1,289,722) $ (659,627) $ (630,095) 95.5%
Interest expense increased $70,604 during the year ended September 30, 2015
compared to the year ended September 30, 2014. The increase was a result of
additional default interest provisions recognized on certain debentures held by
a related party resulting from a notice of default. Additionally, interest
expense is reported net of interest income, of which there was a minimal amount
reported in the current year as a result of limited excess cash availability for
investment. Cost of financing increased $730,815 during the current fiscal
year, directly related to modification of debenture provisions and notification
of debentures held in default.
As the modification of terms related to certain debentures resulted in extinguishment of debt under ASC 470-50-40-2, the Company charged $957,528 to operations.
The Company also recognized a gain of $317,303 related to settlements of liabilities for officer and director compensation accruals settled with common stock of the Company.
Off Balance Sheet Arrangements.
The Company has no off-balance sheet arrangements.
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