Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
All references in this Form 10-Q to the “Company,” “Polar,” “we,” “us,” or “our” are to Polar Petroleum Corp.
Critical Accounting Policy and Estimates.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated 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 consolidated financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. In addition, these accounting policies are described at relevant sections in this discussion and analysis and in the notes to the consolidated financial statements included in this Quarterly Report on Form 10-Q for the period ended June 30, 2013.
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements for the period ended June 30, 2013, together with notes thereto, which are included in this Quarterly Report.
Overview
Polar Petroleum Corp. (the “Company,” the “Registrant,” “Post Data,” or “we,”) was incorporated in the State of Nevada on March 22, 2011 as Post Data, Inc. We were previously a development stage company formed for purposes of decommissioning electronic data storage devices for permanent inoperability and unrecoverability of electronic data contained therein. On July 30, 2012, our management changed and we entered into the oil and gas business to engage in the exploration, development and production of oil and gas properties primarily in the State of Alaska.
On August 22, 2012, we formed a wholly-owned subsidiary, Polar Petroleum (AK) Corp. (the “Subsidiary”), in the State of Alaska for purposes of operating our oil and gas business in the State of Alaska.
On November 5, 2012, the Subsidiary entered into and closed a lease purchase agreement (the “Hemi/Franklin Purchase Agreement”) with Daniel K. Donkel and Samuel H. Cade (together, the “Sellers”) pursuant to which the Subsidiary acquired 100% of the record title of the Sellers to 17 oil and gas leases located in the State of Alaska consisting of approximately 46,399 acres in the North Slope region (the “Leases”), while reserving a royalty of 16.67% for the State of Alaska and an overriding royalty of 4% for the Sellers, in exchange for a total purchase price of $1,250,000, with $150,000 of the purchase price due in cash at closing and the remaining $1,100,000 due in accordance with the terms of a promissory note between the Subsidiary and the Sellers (the “First Promissory Note”). The First Promissory Note bears an annual interest rate of 0.3% (12% after a default) and is payable in installments of $125,000 due every three months for the first year, $100,000 due every three months thereafter and the final payment of $300,000 due on or before October 31, 2014.
On May 31, 2013, our Subsidiary entered into a second Purchase Agreement (the “North Point Thomson Purchase Agreement”) with the Sellers to acquire a 100% working interest in twelve offshore oil and gas leases in the property known as the North Point Thomson Property. Seven of the leases are subject to a 12.5% royalty retained by the State of Alaska and the rest are subject to a royalty of 16.67% retained by the State of Alaska, and all of them carry an overriding royalty of 4% for the Sellers. The North Point Thomson Property comprises approximately 19,662 acres, located in Alaska’s North Slope region. The aggregate purchase price was $1,100,000, $100,000 payable at closing and $1,000,000 evidenced by a promissory note between our Subsidiary and the Sellers (the “Second Promissory Note”). Three of the twelve properties are in the process of being transferred to the Company, while the remaining nine are contingent on repaying the Second Promissory Note. The Second Promissory Note is due on June 14, 2015, and bears interest at 0.3% per annum (12% after a default). We are obligated to pay $125,000 (plus accrued interest) every three months during the term and on the maturity date.
Our Business
We are an exploration stage company focused on exploration, production and development of oil and natural gas in the United States. We currently own interests in certain oil and gas drilling areas and land leases located in the North Slope region of the State of Alaska.
Recent Developments
As previously reported, on March 18, 2013, we entered into a drawdown equity financing agreement (the “Equity Financing Agreement”) with US Energy Investments Ltd. (“US Energy”), pursuant to which we could sell and issue to US Energy, and US Energy was obligated to purchase from us, up to $10,000,000 worth of restricted shares of our common stock from time to time over a 36-month period, provided that certain conditions were met. The effective date of the Agreement was February 7, 2013 (the “Effective Date”). The financing arrangement entered into by us and US Energy is commonly referred to as an “equity line of credit” or an “equity drawdown facility.” Pursuant to the Equity Financing Agreement, we could, in our sole discretion, issue and exercise drawdowns against $10,000,000 over a 36-month period (the “Commitment Period”) commencing on the Effective Date. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in the 2013 Form 10-K for additional information regarding the Equity Financing Agreement.
Also as previously reported, on June 10, 2013, the SEC announced the suspension, pursuant to Section 12(k) of the Exchange Act, of trading in the securities of the Company, commencing at 9:30 a.m. EDT on June 10, 2013, and terminating at 11:59 p.m. EDT on June 21, 2013. The Commission temporarily suspended trading in the securities of Polar because of questions regarding the accuracy and adequacy of assertions by Polar, and by others, to investors in press releases and promotional material concerning, among other things, the company’s assets, operations, and financial condition.
Also as previously reported, the Company has been informed that the SEC has issued an order directing a private investigation to determine whether (a) Polar, its officers, directors, employees, partners, subsidiaries and/or affiliates, or other persons or entities, may have been or may be offering to sell, selling and delivering after sale to the public, or offering to sell or to buy, certain securities, including, but not limited to Polar common stock, as to which no registration statement was or is in effect and for which no exemption from registration was or is available; (b) Polar, its officers, directors, employees, partners, subsidiaries and/or affiliates, and/or other persons or entities, in the offer or sale or in connection with the purchase or sale of certain securities, may have been or may be employing devices, schemes or artifices to defraud, obtaining money or property by means of untrue statements of material fact or omitting to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were or are made, not misleading, or engaging in transactions, acts, practices or courses of business which operated, operate, or would operate as a fraud or deceit upon any person; (c) consultants, partners and/or affiliates of Polar, and/or others, may have published, given publicity to, or circulated any notice, circular, advertisement, newspaper, article, letter, investment service or communication which, though not purporting to offer Polar’s securities for sale, describes such security for a consideration received or to be received, directly or indirectly, from Polar, without fully disclosing the receipt of such consideration and the amount thereof; or (d) Polar, its officers, directors, employees, partners, subsidiaries and/or affiliates may have been or may be filing or causing to be filed with the SEC annual reports on Form 10-K, current reports on Form 8-K and quarterly reports on Form 10-Q that may have contained untrue statements of material fact or may have omitted and may omit to state material facts necessary, or may have failed to add such further material information as may be necessary, in order to make the statements made, in the light of the circumstances under which they were or are made, not misleading. The SEC has issued to the Company a subpoena for documents and ordered the deposition of Company officers. The Company is unaware of any of the purported actions and omissions referred to above and is cooperating fully with the SEC’s staff in their investigation. There has been no change to the Company’s business plan.
Our common stock was previously quoted on the Over-the-Counter Bulletin Board (“OTCBB”) from January 12, 2012, through June 10, 2013. Our common stock is currently a grey market stock not eligible for quotation on the OTCBB. There is no market maker for our common stock. Grey market stocks are not traded or quoted on an exchange or inter-dealer quotation system, but are reported by broker-dealers to their self-regulatory organization (SRO) and the SRO distributes the trade data to market data vendors and financial websites. Since grey market securities are not traded or quoted on an exchange or inter-dealer quotation system, investor's bids and offers are not collected in a central spot, so market transparency is diminished and Best Execution of orders, or any execution at all, is difficult.
On August 2, 2013, the Equity Financing Agreement was terminated by US Energy, due to the ineligibility of the Company’s common stock for quotation on the OTCBB. (See Item 5,
“
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Market Information” in the 2013 Form 10-K.) There were no early termination penalties incurred by the Company or US Energy as a result of the termination of the Equity Financing Agreement.
The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited financial statements for the period ended June 30, 2013, together with notes thereto, which are included in this Report.
Going Concern:
We have not attained profitable operations and are dependent upon obtaining financing to pursue any extensive acquisitions and activities. For these reasons, our auditors stated in their report on our audited financial statements that they have substantial doubt that we will be able to continue as a going concern without further financing.
Future Financings:
We will continue to rely on equity sales of our common shares in order to continue to fund our business operations. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of the equity securities or arrange for debt or other financing to fund planned acquisitions and exploration activities.
Off-Balance Sheet Arrangements:
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
Results of operates for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012
Expenses
General and administrative expenses for the three months ended June 30, 2013 were $315,254 as compared to $14,602 for the three months ended June 30, 2012. The increase in general and administrative expenses over the comparable three month period can be attributed to increases in consulting expenses, professional fees, and stock compensation expense. General and administrative expenses include accounting costs, consulting fees, leases, employment costs, professional fees, and costs associated with the preparation of disclosure documentation. We expect that general and administrative expenses will remain relatively consistent in future periods, although stock compensation expense will fluctuate based on our stock price and the number of shares awarded, if any.
Other Expense
Interest expense for the three months ended June 30, 2013 increased to $1,011 from $30 for the three months ended June 30, 2012. We expect that interest expense will continue to increase in future periods.
Income Tax Expense (Benefit)
We have a prospective income tax benefit resulting from a net operating loss carry-forward and start-up costs that will offset any future operating profit.
Capital Expenditures
We have spent significant amounts of capital for the period from inception to June 30, 2013, on unproved oil and gas properties.
Liquidity and Capital Resources
We have been in the exploratory stage since inception and have experienced significant changes in liquidity, capital resources, and stockholders’ equity. We have a working capital deficit of $1,105,078 at June 30, 2013. As of June 30, 2013, current assets were $57,841 in cash and prepaid expenses and deposits of $21,556. As of June 30, 2013, total assets were $2,653,803 including current assets, net property and equipment of $55,390, and unproved oil and gas properties of $2,519,016. As of June 30, 2013, current liabilities were $1,184,475, consisting of accounts payable of $30,881, accrued expenses of $42,667, related party payables of $160,927, and current portion of long-term debt of $950,000. Total liabilities were $2,084,475, including current liabilities and long term debt of $900,000, as of June 30, 2013. Total stockholders’ equity was $569,328 as of June 30, 2013.
For the period from inception of our current exploration stage until June 30, 2013, we used cash flow of $250,266 in our operating activities. Cash flow used in operating activities for the three month period ended June 30, 2013, was $79,645 as compared to $0 for the three month period ended June 30, 2012. The change in cash flow used in operating activities can be attributed to the differences in prepaid expenses, accounts payable, accrued expenses, and related party payables over the respective periods. We expect to continue to use cash flow in operating activities until such time as it can generate revenue from operations.
For the period from inception of its current exploration stage until June 30, 2013, our cash flow used in investing activities was $505,343. Cash flow used in investing activities for the respective three month periods ended June 30, 2013 and 2012 was $139,788 and $0, respectively. We expect to use cash flow in investing activities in future periods in connection with the further development of our unproved oil and gas properties.
For the period from inception of its current exploration stage until June 30, 2013, our cash flow provided by financing activities was $813,450. Cash flow provided by financing activities for the respective three month periods ended June 30, 2013 and 2012 was $275,000 and $0, respectively. We expect to continue to rely on cash flow provided by financing activities until such time as we can generate revenue from our operations.
Our current assets are insufficient to conduct exploration and development activities over the next twelve months or to maintain operations. We need a minimum of $1,800,000 in debt or equity financing to fund the exploration of our current oil and gas leases
over the next twelve months or to maintain operations. However, we have no commitments or arrangements from any financing sources, though our shareholders are the most likely source of loans or equity placements in order for us to maintain operations. There is no assurance that we will be able to raise the amount of capital that we may seek to support our working capital requirements or for further investment in current and future operations. Our inability to obtain financing to complete our development plan for our leases will have a material adverse effect on our business operations.
We have no intention of paying cash dividends in the foreseeable future.
We have no lines of credit or other bank financing arrangements in place.
We have material commitments to the owners of the Alaskan leases in the form of ongoing future minimum lease payments.
We have no defined benefit plan.
We have no current plans for the purchase or sale of any property or equipment.
We have no current plans to make any changes in the number of employees.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management who also serves as the Chief Executive Officer/Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, our management concluded that our disclosure controls and procedures were not effective at the end of this period covered by this report to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms relating to us, and was accumulated and communicated to our management, including our CEO/CFO, as appropriate, to allow timely decisions regarding required disclosure.
As discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2013, the Company’s management identified certain material weaknesses and other deficiencies in the Company’s disclosure controls and procedures and the Company has initiated, or plans to initiate, series of certain measures to address these material weaknesses. The Company is working as quickly as possible to implement these initiatives; however, the lack of adequate working capital and positive cash flow from operations will likely slow this implementation.
Changes in Internal Control over Financial Reporting
There has been no change to our internal control over financial reporting during the three months ended June 30, 2013 that has materially affected, or is likely to materially affect, our internal control over financial reporting.
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