Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report on Form 10-Q contains certain forward-looking statements. All statements other than statements of historical fact are "forward-looking statements" for purposes of these provisions, including any projections of earnings, revenues, or other financial items; any statements of the plans, strategies, and objectives of management for future operation; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; statements of belief; and any statement of assumptions underlying any of the foregoing. Such forward-looking statements are subject to inherent risks and uncertainties, and actual results could differ materially from those anticipated by the forward-looking statements.
These forward-looking statements involve significant risks and uncertainties, including, but not limited to, the following: competition, promotional costs and the risk of declining revenues. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of a number of factors. These forward-looking statements are made as of the date of this filing, and we assume no obligation to update such forward-looking statements. The following discusses our financial condition and results of operations based upon our unaudited financial statements which have been prepared in conformity with accounting principles generally accepted in the United States. It should be read in conjunction with our financial statements and the notes thereto included elsewhere herein.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles.
In this quarterly report, unless otherwise specified, all dollar amounts are expressed in United States Dollars (US$) and all references to "common shares" refer to the common shares in our capital stock.
As used in this quarterly report, the terms "we", "us", "our" and "our company" mean Black Stallion Oil and Gas, Inc., unless otherwise indicated.
General Overview
We were incorporated in the state of Delaware on September 14, 2011.
Our principal business address is 633 W. 5th Street, 26th Floor, Los Angeles, CA, 90071. We have established a fiscal year end of December 31.
Our company's focus is to engage in oil and gas exploration, acquire and develop oil and gas properties, and sell oil and gas produced by these efforts.
We plan to locate and lease existing wells for reactivation for the production of oil and gas that we will then sell, through an operator, to oil and gas brokers and gatherers. The gas sometimes may be sold directly to public utility companies.
Our focus for the current fiscal year will be to pursue acquisition of leases and/or existing oil and gas wells which have potential for production, if revenues warrant.
Currently, we are examining oil and gas exploration opportunities in the Rocky Mountain States, specifically in Montana, Wyoming and Colorado.
In October 2015, our company consolidated a 100% working interest in 12,233.93 acres in oil and gas leases in Teton County, Montana. We also engaged an independent geological firm to identify the most prospective zones and recommendations for additional detailed analysis for these leases.
Our Current Business
Effective February 23, 2014, we entered into a lease assignment agreement with West Bakken Energy Holdings, Ltd. Pursuant to the terms of the lease assignment agreement, we have acquired an undivided 100% interest in West Bakken's interest (a net 50% working interest) in certain oil and gas properties comprising of 12,233.93 acres in Montana, owned by Hillcrest Resources Ltd.
As consideration, we have agreed to issue 1,100,000 shares of our common stock to West Bakken and to issue one share of common stock at a cost basis of $0.50 per share for the $550,000 paid by West Bakken to Hillcrest. The shares were issued October 27, 2015.
Effective September 18, 2015, our company entered into a Master Services Consulting Agreement with Sproule International Limited, a petroleum consulting firm. In accordance with the terms of the agreement, Sproule will conduct a work program on our Woodrow prospect.
Results of Operations
The following summary of our results of operations should be read in conjunction with our financial statements for the periods ended March 31, 2016 and 2015 which are included herein.
Our operating results for the periods ended March 31, 2016 and 2015 are summarized as follows:
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|
|
Three Months Ended
March 31,
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|
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
|
$
|
Nil
|
|
|
$
|
Nil
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
$
|
579
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|
|
$
|
579
|
|
Consulting
|
|
|
$
|
1,000
|
|
|
$
|
10,000
|
|
Contractors
|
|
|
$
|
54,262
|
|
|
$
|
Nil
|
|
Filing fees
|
|
|
$
|
2,235
|
|
|
$
|
338
|
|
Other costs
|
|
|
$
|
17,500
|
|
|
$
|
Nil
|
|
Professional fees:
|
|
|
|
|
|
|
|
|
|
- Accounting
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|
|
$
|
500
|
|
|
$
|
500
|
|
- Auditor's fees
|
|
|
$
|
6,000
|
|
|
$
|
6,000
|
|
- Legal fees
|
|
|
$
|
3,769
|
|
|
$
|
1,762
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|
Rental expense
|
|
|
$
|
1,941
|
|
|
$
|
3,687
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|
Net Income (Loss)
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|
|
$
|
(88,559
|
)
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|
$
|
(24,052
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)
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For the three months ended March 31, 2016 we had total operating expenses of $
88,559
compared to $
24,052
for the three month period ended March 31, 2015. The increase of $
64,504
in operating expenses was primarily due to
an increase in fees paid to contractors.
Since inception on September 14, 2011 until March 31, 2016, we have earned no revenues and have had a cumulative net loss of $
514,791
.
Liquidity and Capital Resources
Working Capital
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|
At
March 31,
2016
|
|
|
At
December 31,
2015
|
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Current Assets
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|
$
|
171,275
|
|
|
$
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28,842
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Current Liabilities
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|
$
|
118,011
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|
|
$
|
12,855
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Working Capital (Deficit)
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|
$
|
53,264
|
|
|
$
|
15,987
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|
Cash Flows
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|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net cash used in operating activities
|
|
$
|
(174,979
|
)
|
|
$
|
(23,311
|
)
|
Net cash provided by (used in) investing activities
|
|
$
|
Nil
|
|
|
$
|
Nil
|
|
Net cash provided by financing activities
|
|
$
|
175,000
|
|
|
$
|
Nil
|
|
Increase (decrease) in cash and cash equivalents
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|
$
|
21
|
|
|
$
|
(23,311
|
)
|
As of March 31, 2016 we had total current assets of $
171,275
, total liabilities of $
118,011
and stockholders' equity of $
906,160
, compared to total current assets of $
28,842
, total liabilities of $
12,855
and stockholders' equity of $
869,462
as of December 31, 2015.
Our working capital was $
53,264
as at March 31, 2016 compared to a working capital of $
15,987
as at December 31, 2015 the increase of working capital as at March 31, 2016 was primarily due to
an increase in prepaid expenses.
Net cash used in our operating activities during the three months ended March 31, 2016 was $
174,979
, as compared to net cash used in operating activities of $
21,336
for the three months ended March 31, 2015.
Net cash in investing activities in the three months ended March 31, 2015 was $
Nil
, compared to $Nil in investing activities during the three months ended March 31, 2015.
Net cash provided by financing activities in the three months ended March 31, 2016 was $
175,000
, compared to net cash used by financing activities of $
Nil
in the three months ended March 31, 2015. The difference in the cash provided by financing activities during the three months ended March 31, 2016 compared to the three months ended March 31, 2015 was due
to proceeds from the issuance of convertible notes
.
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 as of December 31, 2015 that they have substantial doubt that we will be able to continue as a going concern without further financing.
Limited Operating History; Need for Additional Capital
There is no historical financial information about us upon which to base an evaluation of our performance. We are an exploration stage corporation and have not generated revenues from operations. We cannot guarantee we will be successful in our business operations. Our business is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources. To become profitable and competitive, we will need to realize revenue from our oil and gas sales.
Plan of Operation
We are an exploration stage company with no revenues and a short operating history. Our independent auditor has issued an audit opinion which includes a statement expressing substantial doubt as to our ability to continue as a going concern. This means that there is substantial doubt that we can continue as an on-going business for the next twelve months unless we generate sufficient revenues.
There is no assurance we will ever reach that point. In the meantime the continuation of our company is dependent upon the continued financial support from our shareholders, our ability to obtain necessary equity financing to continue operations and the attainment of profitable operations.
Our current cash balance is $
237
. We will therefore require further capital to cover the expenses we will incur during the next twelve months.
Our plan of operation for the next twelve months is to pursue acquisition of leases and/or existing oil and gas wells which have potential for production, if revenues warrant.
Total expenditures over the next 12 months are therefore expected to be approximately $120,000.
Estimated Net Expenditures During the Next Twelve Months
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|
$
|
|
Consulting fees
|
|
|
60,000
|
|
Filing fees
|
|
|
2,000
|
|
Professional fees
|
|
|
50,000
|
|
Other costs
|
|
|
8,000
|
|
Total
|
|
|
120,000
|
|
We have suffered recurring losses from operations. The continuation of our company is dependent upon our company attaining and maintaining profitable operations and raising additional capital as needed.
The continuation of our business is dependent upon obtaining further financing, a successful program of development, and, finally, achieving a profitable level of operations. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
There are no assurances that we will be able to obtain further funds required for our continued operations. We are pursuing various financing alternatives to meet our immediate and long-term financial requirements. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will be unable to conduct our operations as planned, and we will not be able to meet our other obligations as they become due. In such event, we will be forced to scale down or perhaps even cease our operations.
Cash and cash equivalents as of March 31, 2016 was $
237
.
We are not aware of any known trends, demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way.
Future Financings
We anticipate continuing to rely on equity sales of our common stock in order to continue to fund our business operations. Issuances of additional shares will result in dilution to our existing stockholders. There is no assurance that we will achieve any additional sales of our equity securities or arrange for debt or other financing to fund our planned business activities.
We presently do not have any arrangements for additional financing for the expansion of our exploration operations, and no potential lines of credit or sources of financing are currently available for the purpose of proceeding with our plan of operations.
Critical Accounting Policies
The principal accounting policies are set out below, these policies have been consistently applied to the period presented, unless otherwise stated:
Oil and natural gas properties
Our company follows the full-cost method of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including directly related overhead costs, are capitalized.
All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is included in loss from continuing operations before income taxes and the adjusted carrying amount of the unproved properties is amortized on the unit-of-production method.
Our company's oil and gas property represents an investment in unproved properties. These costs are excluded from the amortized cost pool until proved reserves are found or until it is determined that the costs are impaired. All costs excluded are reviewed at least quarterly to determine if impairment has occurred. The amount of any impairment is charged to expense since a reserve base has not yet been established. Impairment requiring a charge to expense may be indicated through evaluation of drilling results, relinquishing drilling rights or other information.
Currently, our company has no economically recoverable reserves and no amortization base. Our company's unproved oil and gas properties consist of capitalized exploration costs of $850,000 as of March 31, 2016.
Limitation on Capitalized Costs
Under the full-cost method of accounting, we are required, at the end of each fiscal quarter, to perform a test to determine the limit on the book value of our oil and natural gas properties (the "Ceiling Test"). If the capitalized costs of our oil and natural gas properties, net of accumulated amortization and related deferred income taxes, exceed the "Ceiling", this excess or impairment is charged to expense and reflected as additional accumulated depreciation, depletion and amortization or as a credit to oil and natural gas properties. The expense may not be reversed in future periods, even though higher oil and natural gas prices may subsequently increase the Ceiling. The Ceiling is defined as the sum of: (a) the present value, discounted at 10 percent, and assuming continuation of existing economic conditions, of 1) estimated future gross revenues from proved reserves, which is computed using oil and natural gas prices determined as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period (with consideration of price changes only to the extent provided by contractual arrangements including hedging arrangements pursuant to SAB 103), less 2) estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves; plus (b) the cost of properties not being amortized (pursuant to Reg. S-X Rule 4-10 (c)(3)(ii)); plus (c) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; net of (d) the related tax effects related to the difference between the book and tax basis of our oil and natural gas properties.
Cash and cash equivalents
Cash and equivalents include investments with initial maturities of three months or less. Our company maintains our cash balances at credit-worthy financial institutions that are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000.
Prepaid Expenses
Prepaid contracting expenses represents amounts paid in advance for future contractual benefit to be received. Contracting expenses paid in advance are recorded as a prepaid asset and then amortized to the statements of operations over the life of the contract using the straight-line method.
On February 9, 2016, our company entered into a 5 year contracting arrangement with an unrelated party for contracting services related to expertise in the petroleum industry. As compensation for contractor services our company will pay the contractor fees of $180,000 annually in advance.
On February 9, 2016, our company entered into a 12 month contracting arrangement with a related party. As compensation for services our company will pay the contractor fees of $2,500 a month, payable $900 in cash and $1,600 with common stock of our company valued at 50% of market at the date of conversion. The contractor is also entitled to cash compensation of $25,000 upon signing.
Intellectual Properties
Our company has adopted the provisions of ASC 350-50, Website Development Costs. All costs incurred during the planning phase of a website are expensed as research and development.
Costs incurred in the development stage, including the purchase of a domain name, are capitalized and reviewed annually for impairment.
Expenses subsequent to the launch will be expensed as research and development expenses. Our company will expense upgrades and revisions to our website as incurred.
Once the website is available for use, the asset will be amortized over our useful life on a straight line basis, estimated to be 3 years, and is tested for impairment annually.
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities are carried at amortized cost and represent liabilities for goods and services provided to our company prior to the end of the financial year that are unpaid and arise when our company becomes obliged to make future payments in respect of the purchase of these goods and services.
Earnings per share
Our company computes loss per share in accordance with "ASC-260", "Earnings per Share" which requires presentation of both basic and diluted earnings per share on the face of the statement of operations. In periods of losses, basic and diluted loss per share are the same, as the effect of stock warrants and convertible debt on loss per share is anti-dilutive.
Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number of outstanding common shares during the period. Diluted loss per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive potential shares consist of dilutive shares issuable upon the exercise of outstanding stock warrants using the treasury-stock method and convertible debt computed using as-if converted method. Dilutive loss per share excludes all potential common shares if their effect is anti-dilutive.
Income taxes
Income taxes are accounted for in accordance with ASC Topic 740, "Income Taxes." Under the asset and liability method, deferred tax assets and liabilities are recognized for the future consequences of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases (temporary differences). Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are recovered or settled. Valuation allowances for deferred tax assets are established when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Recent Accounting Standards Updates
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842). ASU No. 2016-02 requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company currently in the process of evaluating the impact of adoption of ASU No. 2016-02 on the condensed consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations". The purpose of ASU No. 2016-08 is to clarify the implementation of guidance on principal versus agent considerations. The amendments in ASU No. 2016-08 are effective for interim and annual reporting periods beginning after December 15, 2017. The Company is currently assessing the impact of ASU No. 2016-08 on the condensed consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, "Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting". The amendment is to simplify several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in ASU No. 2016-09 are effective for interim and annual reporting periods beginning after December 15, 2016. The Company is currently assessing the impact of ASU No. 2016-09 on the condensed consolidated financial statements and related disclosures.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. Our Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
Recent Accounting Pronouncements
Management does not anticipate that the recently issued but not yet effective accounting pronouncements will materially impact our company's financial condition.
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 our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.