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[January 21, 2014]
AXIOM OIL & GAS CORP. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) Critical Accounting Policies and Estimates. Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation.
Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources.
Equity-Based Compensation - We account for equity based compensation transactions with employees under the provisions of ASC Topic No. 718, "Compensation: Stock Compensation" ("Topic No. 718"). Topic No. 718 requires the recognition of the fair value of equity-based compensation in net income. The fair value of common stock issued for compensation is measured at the market price on the date of grant. The fair value of our equity instruments, other than common stock, is estimated using a Black-Scholes option valuation model. This model requires the input of highly subjective assumptions and elections including expected stock price volatility and the estimated life of each award.
In addition, the calculation of equity-based compensation costs requires that we estimate the number of awards that will be forfeited during the vesting period.
The fair value of equity-based awards granted to employees is amortized over the vesting period of the award, and we elected to use the straight-line method for awards granted after the adoption of Topic No. 718.
We account for equity based transactions with non-employees under the provisions of ASC Topic No. 505-50, "Equity-Based Payments to Non-Employees" ("Topic No.
505-50"). Topic No. 505-50 establishes that equity-based payment transactions with non-employees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The fair value of common stock issued for payments to non-employees is measured at the market price on the date of grant. The fair value of equity instruments, other than common stock, is estimated using the Black-Scholes option valuation model. In general, we recognize an asset or expense in the same manner as if we were to pay cash for the goods or services instead of paying with or using the equity instrument.
Other accounting policies are described in the notes to the financial statements included in this Quarterly Report and our Annual Report for the year ended August 31, 2013. The following discussion of our financial condition and results of operations should be read in conjunction with our audited financial statements for the year ended August 31, 2013.
Overview. We were incorporated in the State of Nevada on February 13, 2007, under the name TC Power Management Corp. We are in the exploration stage of our business and have not generated any revenues. We abandoned our previous business of providing consulting services to private and public entities seeking assessment, development, and implementation of energy generating solutions. We changed our planned business activities to the exploration and development of precious metals properties.
2 -------------------------------------------------------------------------------- On January 13, 2011, we entered into a material definitive agreement to acquire all of the shares of Axiom Minerals de Mexico S.A. de C.V ("Axiom Mexico") and on May 10, 2011 we changed our name to Axiom Gold and Silver Corporation. There were no material relationships between Axiom Gold and Silver, its officers and director or its affiliates and any of the shareholders of Axiom Mexico, other than in respect to the material definitive agreement and the pooling agreement described herein. The agreement called for Axiom Gold and Silver, through its wholly owned Mexican subsidiary, Axiom Acquisition Corp, to acquire all of the issued and outstanding shares of Axiom Mexico, by the issuance of eighty thousand (80,000) common shares of Axiom Gold and Silver. The shares were issued to the shareholders of Axiom Mexico on a pro rata basis as to their ownership of Axiom Mexico. Axiom Acquisition Corp. merged with and into Axiom Mexico and the separate corporate existence of Axiom Acquisition Corp. ceased to exist. On May 31, 2012 we sold all of our interest in Axiom Mexico to an unrelated third party for $100 releasing us from any liabilities in Axiom Mexico.
On August 20, 2012, we entered into an option agreement to acquire 13 Fico claims located near Mt. Morrison in the Yukon Territory (the "Fico Claims") for an aggregate amount of two hundred and fifty thousand Canadian Dollars ($250,000 CAD) as follows: (a) $15,000 CAD payable six months after the signing of the agreement, February 20, 2013; (b) $25,000 CAD payable twelve months after signing, August 20, 2013; (c) $60,000 CAD payable twenty-four months after signing, August 20, 2014; (d) $150,000 CAD payable thirty-six months after signing, August 20, 2015. We agreed to make the minimum work commitments on the Fico Claims as follows: (a) $100,000 CAD each in the first and second year of the agreement; (b) $250,000 CAD in the third year of the agreement. The option agreement is subject to a 2% net smelter return royalty. In February 2013 we abandoned the Fico claims.
We now plan to focus our business strategy on the exploration and development of oil and gas leases, mainly in the United States of America. On October 10, 2013 we changed our name to Axiom Oil and Gas Corp.
On October 25, 2013, we entered into a Farmout Agreement with American Midwest Oil and Gas Corp. ("AMOG"). This is a related party transaction as our majority shareholder and two of our directors, Robert Knight (also an officer) and Ryan Kerr, are also affiliates of AMOG.
AMOG has leases (the "Leases") to explore and develop approximately 14,600 net mineral acres of land located in Toole County, Montana, of which AMOG's net acres amount to approximately 8,000 acres. We have agreed to start drilling a well on the land underlying Leases on or by June 1, 2014 (the "Initial Earning Well"). If we drill the Initial Earning Well to a depth of at least 3,300 feet and ? the Initial Earning Well is capable of producing more than 200 barrels (or 200 Mcf) of hydrocarbons over the first 30 days of production ("Paying Quantities"), AMOG will assign us a 75% working interest (60% net revenue interest) in the Earned Acreage (wells in Toole County are subject to 40 acre spacing) applicable to the Initial Earning Well; and ? the Initial Earning Well is not capable of producing Paying Quantities, AMOG will not assign us any interest in the Earned Acreage applicable to the Initial Earning Well, but will assign a 100% interest in its interest in the wellbore and the associated hydrocarbon production (only insofar as to the quarter quarter section on which the well bottomhole is located).
3-------------------------------------------------------------------------------- If the Initial Earning Well is drilled to a depth of at least 3,300 feet by June 1, 2014, then we shall have the option to drill additional earning wells. Such option shall expire if more than six months elapse between the release of the drilling rig on the prior well and commencement of spudding operations on the next well, provided that any additional well drilled on Earned Acreage shall not count in determining this extension. If we drill any such additional earning well to a depth of at least 3,300 feet and ? the additional earning well is capable of producing in Paying Quantities, AMOG will assign us a 75% working interest (60% net revenue interest) in the Earned Acreage applicable to that well; and ? the additional earning well is not capable of producing in Paying Quantities, AMOG will not assign us any interest in the Earned Acreage applicable to that well, but will assign a 100% interest in its interest in the wellbore and the associated hydrocarbon production (only insofar as to the quarter quarter section on which the well bottomhole is located).
If we complete ten earning wells in Paying Quantities, we can exercise (within 60 days of the date that it is determined that the tenth well is capable of producing in Paying Quantities) an option to acquire 50% of AMOG's interest in all the land underlying the Leases for $100 per net mineral acre.
We anticipate that it will cost approximately $650,000 to drill our first well in the leases we are subject to in the farm out agreement. We do not, currently, have funds available to drill such a well and we are not in negotiations with anyone to acquire such funds. We have until June 1, 2014 to raise the necessary funds. If we do not raise the funds, then the farm out agreement will be cancelled.
If we were successful in raising the necessary funds to drill and complete the first well, and such well produced commercial quantities of oil and gas, we still may not be able to raise additional funds for the second well. If we fail to raise additional funds (assuming the first well is completed on time) the farm out agreement would be cancelled and we would have no further rights under that agreement. We would, however, maintain our working interest and net revenue interest in the completed well.
Operating Agreement The Farmout Agreement deems an Operating Agreement between us and AMOG to be effective as of the date of signing. The Operating Agreement is the standard American Association of Land Man Form 610 - 1989 Model Form Operating Agreement.
Our plan of operation is forward looking, and we may never begin operations.
Plan of Operations Since the sale of Axiom Mexico and the abandonment of the Fico claims, our current business plan is to acquire oil and gas leases located in the United States of America.
Our proposed principal product is the production of hydrocarbons. In order to commence the exploration and development of oil and gas leases, we will need to accomplish the following milestones: 1. Acquire and Begin Exploration of Oil and Gas Leases. We will need to raise additional funds or issue shares to pay for the cost of acquisition and exploration of any oil and gas leases.
2. Hire Qualified Staff. We will need to hire qualified people to execute our business plan to explore for hydrocarbons. We will need to raise additional funds to attract qualified people to our Company. We currently have one full time and one part time employee, and we do not intend to hire additional employees at this time.
4 -------------------------------------------------------------------------------- If the necessary funds are raised to drill a well in Toole County we will work closely with American Midwest Oil and Gas Corp. to identify the location of the first well. American Midwest Oil and Gas is the operator, so they will contract all of the necessary contractors to drill and complete a well. Our function, initially, will be to provide capital for the project.
Competition We compete with other oil and gas companies in connection with the acquisition of oil and gas leases and in connection with the recruitment and retention of qualified employees. Many of these companies are much larger than us, have greater financial resources and have been in the oil and gas business much longer than we have. As such, these competitors may be in a better position through size, finances and experience to acquire suitable exploration properties. We may not be able to compete against these companies in acquiring new leases and/or qualified people to work on any of our leases.
There is significant competition for the limited number of oil and gas lease opportunities available and, as a result, we may be unable to continue to acquire attractive oil and gas leases on terms we consider acceptable.
Given the size of the world market for oil and gas relative to individual producers and consumers of oil and gas, we believe that no single company has sufficient market influence to significantly affect the price or supply of oil and gas in the world market.
Governmental Regulations Our business is subject to various levels of government controls and regulations, which are supplemented and revised from time to time. Any hydrocarbon exploration activity conducted by us requires permits from governmental authorities. The various levels of government controls and regulations address, among other things, the environmental impact of oil and gas operations and establish requirements for the abandoning wells after operations have ceased. With respect to the regulation of oil and gas production, legislation and regulations in various jurisdictions establish performance standards, air and water quality emission standards and other design or operational requirements for various components of operations, including health and safety standards. Legislation and regulations also establish requirements for decommissioning, reclamation and rehabilitation of oil and gas operations following the cessation of operations, and may require that some former oil and gas leases be managed for long periods of time. In addition, in certain jurisdictions, we may be subject to foreign investment controls and regulations governing our ability to remit earnings abroad.
The need to comply with applicable laws, regulations and permits will increase the cost of operation and may delay exploration. All permits required for the conduct of oil and gas operations, including the construction of production facilities, may not be obtainable, which would have an adverse effect on any oil and gas project we might undertake. Additionally, failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions, including orders issued by regulatory or judicial authorities causing exploration to cease or be curtailed. Parties engaged in oil and gas operations may be required to compensate those suffering loss or damage by reason of the activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.
Amendments to current governmental laws and regulations affecting oil and gas companies, or the more stringent application thereof, could adversely affect our operations. The extent of any future changes to governmental laws and regulations cannot be predicted or quantified. Generally, new laws and regulations result in increased compliance costs, including costs for obtaining permits, delays or fines resulting from loss of permits or failure to comply with the new requirements.
5 -------------------------------------------------------------------------------- Compliance with Environmental Laws Any future oil and gas operations are subject to extensive laws and regulations governing the protection of the environment, waste disposal, worker safety, and protection of endangered and protected species. We have made, and expect to make in the future, significant expenditures to comply with such laws and regulations. Future changes in applicable laws, regulations and permits or changes in their enforcement or regulatory interpretation could have an adverse impact on our financial condition or results of operations. In the event that we make mineral hydrocarbon discovery and decide to proceed to production, the costs and delays associated with compliance with these laws and regulations could stop us from proceeding with a project or the operation or increase the costs of improvement or production.
Employees We currently have two employees working for us, our CEO and our CFO.
All oil and gas exploration and operations will be contracted out to third parties. In the event that our exploration projects are successful and warrant putting any of our leases into production, such operations may also be contracted out to third parties. We rely on management to handle all matters related to business development and business operations.
For the three months ended November 30, 2013, as compared to the three months ended November 30, 2012.
Results of Operations Revenues. Since inception, we have yet to generate any revenues from our business operations. Our ability to generate revenues has been significantly hindered by our lack of capital. We hope to generate revenues as we implement our business plan.
Operating Expenses. For the three months ended November 30, 2013, our total operating expenses were $280,959, as compared to total operating expenses of $62,514 for the three months ended November 30, 2012, an increase of $218,445.
Our total operating expenses consist primarily of compensation, legal expenses, accounting expenses and stock based compensation related to being a public company. The increase in operating expenses in the three months ended November 30, 2013, primarily results from stock based compensation we incurred through the issuance of stock to a consultant ($140,000) and the issuance of stock options to our officers and directors ($45,924). We expect that we will continue to incur significant legal and accounting expenses related to being a public company.
Other Income (Expenses). For the three months ended November 30, 2013, we have other income of $72,706, which consists of $77,480 of forgiveness of debt income net of $4,774 of interest expense. For the three months ended November 30, 2012, we had interest expense of $598.
Net Loss. For the three months ended November 30, 2013, our net loss was $208,253, as compared to the three months ended November 30, 2012, in which our net loss was $63,112. We expect to continue to incur net losses for the foreseeable future and until we generate significant revenues.
6 -------------------------------------------------------------------------------- Liquidity and Capital Resources We had cash of $3,260 as of November 30, 2013 and total assets of $4,660 as of that date. As of August 31, 2013, we had cash of $362 and total assets of $1,762. We are seeking to raise additional funds to meet our working capital needs principally through the sales of our securities. In the three months ended November 30, 2013, we received $50,000 in financing through the issuance of convertible debentures to four non-US resident accredited investors. Additionally, in December 2013 and January 2014, we received a total of $25,000 in financing through the issuance of convertible debentures to two non-US resident accredited investors. Additional funding has not been secured and no assurance may be given that we will be able to raise additional funds.
As of November 30, 2013, our total liabilities were $589,304 comprised of $407,304 in accounts payable and accrued expenses (including, $135,000 owed to our CEO/President, for accrued compensation and expenses), $102,000 in notes payable to non-affiliates and $80,000 in convertible debentures. As of August 31, 2013, our total liabilities were $607,539 comprised of $510,539 in accounts payable and accrued expenses (including, $120,000 owed to our current CEO for accrued compensation and expenses), $67,000 in notes payable to non-affiliates and $30,000 in convertible debentures.
At inception, we sold 800,000 shares of common stock to our officers and director for $500 in cash. In 2008, we sold an additional 179,336 shares of common stock through our public offering for proceeds of $112,085. We have used the proceeds from the cash raised in that offering to pay the legal and accounting costs of being a public company. For the year ended August 31, 2011, we sold 172,960 shares of common stock through our public offering for gross proceeds of $1,081,000. We recorded $96,850 of costs related to the offering. We used the proceeds from this offering for general working capital to pay the costs of operations.
In December 2011, we received gross proceeds of $285,904 from the sale of 45,745 shares of common stock at $6.25 per share to one non-U.S. investor pursuant to Regulation S.
Effective August 16, 2012, our current CEO converted $212,218 of accrued and unpaid compensation and reimbursable expenses owed him into 8,488,720 shares of common stock at $0.75 per share. We incurred a charge for share based finance costs of $6,154,322 in the year ended August 31, 2012.
In August 2012, we received gross proceeds of $10,000 from the sale of 16,000 Units at $0.625 per Unit which included 16,000 shares of common stock and warrants to purchase 1,600 shares of common stock at $0.875 per share to a non-US accredited investor pursuant to Regulation S. We incurred offering costs of $1,000 (10% of gross proceeds) plus warrants to purchase 1,143 shares of common stock at $0.875 per share.
In September 2012, we received gross proceeds of $33,750 from the sale of 54,000 Units at $0.625 per Unit which included 54,000 shares of common stock and warrants to purchase 5,400 shares of common stock at $0.875 per share to three non-US accredited investors pursuant to Regulation S. We incurred offering costs of $3,375 (10% of gross proceeds) plus warrants to purchase 3,857 shares of common stock at $0.875 per share.
In July and August 2013 we received $30,000 through the sale of convertible debentures to two non-US accredited investors pursuant to Regulation S. The debentures are due and payable between June 30, 2014 and July 30, 2013 and carry an interest rate of 20% per annum and are convertible at $.25 per share any time after December 31, 2013 on a post consolidated basis.
7 -------------------------------------------------------------------------------- In September 2013 we received $35,000 through the sale of convertible debentures to two non-US accredited investors pursuant to Regulation S. The debentures are due and payable between June 30, 2014 and July 30, 2014, and carry an interest rate of 20% per annum and are convertible at $.25 per share any time after December 31, 2013 on a post consolidated basis.
In October, 2013, we received $15,000 through the sale of convertible debentures to two non-US resident accredited investors pursuant to Regulation S. The debentures are due and payable June 30, 2014 and carry an interest rate of 20% per annum and are convertible at $.25 per share any time after December 31, 2013 on a post consolidated basis.
Effective October 16, 2013, we entered into a consulting agreement for assistance in certain business and corporate matters, such as strategic and business plans, expansion of the Company's shareholder base and financing alternatives. The term of the agreement is for a period of 90 days from the effective date. We issued the consultant a total of 700,000 shares of Company common stock valued at $140,000, the fair value on the effective date, as compensation under the agreement.
On October 30, 2013, we settled an outstanding payable in the amount of approximately $124,000 through the issuance of an 8% promissory note in the amount of $35,000 due January 31, 2014 and 200,000 shares of our common stock with an agreed upon value of $0.01 per share.
In December 2013, we received $20,000 through the sale of a convertible debenture to a non-US accredited investor pursuant to Regulation S. The debenture is due and payable June 30, 2014 and carries an interest rate of 20% per annum and is convertible at $.25 per share any time after December 31, 2013 on a post consolidated basis.
In January 2014, we received $5,000 through the sale of a convertible debenture to a non-US accredited investor pursuant to Regulation S. The debenture is due and payable June 30, 2014 and carries an interest rate of 20% per annum and is convertible at $.25 per share at any time after issuance on a post consolidated basis.
During fiscal 2014, we expect that our business plan for exploration of oil and gas leases will be a significant cost to us and to complete that plan we will need to raise substantial funds. Furthermore, if we find additional properties for acquisitions that may also require significant capital, not only for the actual acquisition but also for any exploration work that may need to be completed. As well, the legal and accounting costs of being a public company will continue to impact our liquidity and we will need to obtain funds to pay those expenses. Other than the anticipated exploration costs, acquisition costs, increases in legal and accounting costs due to the reporting requirements of being a reporting company, we are not aware of any other known trends, events or uncertainties, which may affect our future liquidity.
In the opinion of management, available funds will not satisfy our working capital requirements to operate at our current level of activity for the next twelve months. Our forecast for the period for which our financial resources will be adequate to support our operations involves risks and uncertainties and actual results could fail as a result of a number of factors. In order to implement our business plan in the manner we envision, we will need to raise additional capital. We cannot guaranty that we will be able to raise additional funds. Moreover, in the event that we can raise additional funds, we cannot guaranty that additional funding will be available on favorable terms. In the event that we experience a shortfall in our capital, we hope that our officers, directors and principal shareholders will contribute funds to pay for our expenses to achieve our objectives over the next twelve months. At this time, though, we do not have any arrangement with any of our officers, directors or shareholders to provide any funding for the Company.
8 -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements We have no off-balance sheet arrangements.
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