Item 1.
Business
This annual report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
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 annual report, unless otherwise specified, all dollar amounts are expressed in United States Dollars and all references to “common shares” refer to the common shares in our capital stock.
As used in this current report and unless otherwise indicated, the terms "we", "us" and "our" mean Midwest Oil & Gas, Inc. and our wholly owned subsidiary, SUDAM Diamonds Ltd., a United Kingdom company, unless otherwise indicated.
Company Information
Our Company was incorporated in the State of Nevada on January 6, 2010 to engage in the acquisition, exploration and development of natural resource properties. We are an exploration stage company with no revenues and limited operating history. Our principal offices are located at 400 West Sycamore Street, Independence, Kansas 67301. Our telephone number is 855-200-6964.
On September 14, 2010, we issued a total of 3,000,000 shares of common stock to 26 unrelated shareholders for cash at $0.015 per share for a total of $45,000 pursuant to the S-1 Registration Statement we filed with the US Securities and Exchange Commission.
Effective October 15, 2012, in accordance with approval from the Financial Industry Regulatory Authority ("FINRA"), we changed our name from Impact Explorations Inc. to Americas Diamond Corp. by way of a merger with our wholly-owned subsidiary Americas Diamond Corp., which was created solely for the name change and effected a forward split of our authorized, issued and outstanding shares of common stock on a 5 new for 1 old basis, such that, our authorized capital increased from 75,000,000 to 375,000,000 shares of common stock and our issued and outstanding shares of common stock increased from 6,000,000 to 30,000,000, all with a par value of $0.001.
Effective November 27, 2012, our stock symbol changed from "IXPL" to "ADMC" to better reflect the new name of our company. The symbol change became effective with the Over-the-Counter Bulletin Board at the opening of trading on November 27, 2012. Our CUSIP number is 03063Y103.
Our subsidiary, SUDAM Diamonds Ltd., was dissolved on May 13, 2014.
Effective June 12, 2014, in accordance with approval from the Financial Industry Regulatory Authority ("FINRA"), we changed our name from Americas Diamond Corp. to Midwest Oil & Gas, Inc.. by way of a merger with our wholly-owned subsidiary Midwest Oil & Gas Inc., which was created solely for the name change.
Effective June 12, 2014, our stock symbol changed from "ADMC" to "MWOG" to better reflect the new name of our Company. 4The symbol change became effective with the Over-the-Counter Bulletin Board at the opening of trading on June 12, 2014. Our CUSIP number is 598340 107.
Company Overview
We are an oil and gas company dedicated to sourcing and securing domestic energy solutions through the exploration, development
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and production of onshore oil and natural gas reserves to maximize shareholder value.
We are focused on enhancing shareholder value through the exploration and development of our assets, with the objective of taking projects, if warranted, to the production stage.
Our vastly experienced management and advisory team have proven track records of taking projects from exploration stages through to production. With further experience in engineering, corporate finance and accounting management are confident in their ability to replicate our historical success on our company’s current acreage.
We are focused on becoming a leading player in the Mississippi Lime through the development of its acreage.  In addition to the production and returns on investment found within its existing acreage, management are continually working towards the acquisition of further properties in proven resource areas in the United States.
Having strategically acquired key assets in the resource-rich Midwest state of Kansas, in close proximity to prolific production and established infrastructure management’s strategy to achieve these objectives combines focusing on increasing existing production through low-risk production enhancement opportunities, further development of production acreage to realize full reserve potential whilst maintaining low overheads to maximize shareholder value.
Our company combines today’s technologies with an experienced, driven executive management team and consulting specialists to secure America’s energy independence whilst providing maximum returns for investors.
As consumption and demand for oil and gas rises throughout North America, we’re seeking to explore, develop and produce fuels from some of the world’s richest resources.
Our Current Business
We are an developmental stage company involved in oil and gas.
Effective January 23, 2013, our Company entered into an employment agreement with Thomas L. Crom, III, whereby Mr. Crom has agreed to perform services as chief financial officer, secretary, treasurer and director of our company on a continuing basis. As compensation, we have agreed to pay Mr. Crom an initial salary of US$6,000 per month and to issue 30,000 shares of our Company's common stock per month, for an aggregate of 90,000 shares per quarter, within the initial term. As a signing bonus, our Company has agreed to issue 25,000 shares of our common stock to Mr. Crom.
Also effective January 23, 2013, we entered into a share issuance agreement with Asia Pacific Capital Ltd., whereby Asia Pacific shall make available up to $3,200,000 by way of advances until the completion date of January 22, 2015 in accordance with the terms of the share issuance agreement. The completion date may be extended for an additional term of up to twelve months at the option of our company or Asia Pacific upon written notice on or before the completion date in accordance with the notice provisions of the share issuance agreement.
Upon receipt of an advance from Asia Pacific, our Company will issue to Asia Pacific, within 15 banking days following the date of the receipt, units at a price equal 95% of the average closing price of our Company's common stock, for the 10 banking days immediately preceding the date of the advance, as quoted on Google Finance, or other source of stock quotes as agreed by the parties. Each unit shall consist of one share of our Company's common stock and one share purchase warrant. Each warrant shall entitle Asia Pacific to purchase one additional share of our Company's common stock at an exercise price equal to 110% of the unit price at which the unit containing the warrant being exercised was issued, for a period of two years from the date such warrant is issued.
Effective February 25, 2013, we entered into a stock purchase agreement among SUDAM Diamonds Ltd. and Daniel Martinez, our president and director, pursuant to which our Company proposed to acquire 100% of the outstanding capital stock of SUDAM in consideration of the issuance of an aggregate of 1,221,695 shares of our common stock, in addition to the assumption of SUDAM's obligations pursuant to a letter of agreement dated January 16, 2013 with Kansai Mining Corporation, a British Columbia, Canada corporation. Subject to closing of the stock purchase agreement SUDAM shall became a wholly owned subsidiary of our company. Upon closing, 250,000 of the 1,221,695 common shares were issued to Kansai, with the balance being issued to various creditors of SUDAM. These shares were issued.
Pursuant to the Kansai Agreement, SUDAM held an option to purchase from Kansai a 3-stage diamond recovery plant and related equipment located in Venezuela, as well as 100% interest in Compania Minera Adamantine CA ("CMA"), a Venezuelan company
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which holds two Venezuelan diamond concessions, Natal I and Natal II. The option to purchase the recovery plant and equipment could be exercised by making aggregate cash payments of $1,735,000 within a 24 month period beginning March 23, 2012 with interest accruing on the purchase price at 6% per annum. SUDAM held title to the assets pending satisfaction of the purchase price, however ownership of the assets and any of our common shares issued to Kansai would be forfeited to Kansai in full if any installment of the purchase price remained in arrears for over 30 days following a notice of default. Late payments would accrue interest at 18% per annum. Approximately $350,000 of the purchase price was satisfied by SUDAM. As of January 31, 2013 payments to Kansai as well as the obligation for CMA were not met.
In September 2013, the financing agreement was in default and as result our Company relinquished back the diamond project to its original owner, Kansai Mining Company. Our Company wrote off all costs associated with this project.
On January 27, 2014, we entered into an agreement to purchase certain oil and gas leases in the State of Kansas, from Intrepid Resources Corporation LLC. See also Properties.
This agreement closed on April 21, 2014. Pursuant to the agreement, Intrepid transferred the leases to a newly incorporated subsidiary while retaining an additional 12.5% royalty interest in the leases and then transferred all of the issued and outstanding shares of the new subsidiary to our company.
Our agreement to acquire the leases from Intrepid will involve a total consideration of $6,000,000 to be paid in $3,000,000 cash and $3,000,000 in restricted common shares of our company. The cash payment of $3,000,000 to Intrepid will be paid in:
a.
a payment of $75,000 within 10 days from April 21, 2014 (of which $65,000 has been paid);
b.
a payment of $75,000 within 60 days from signing the agreement (unpaid); and
c.
a promissory note of $2,850,000 with an annual interest rate of 3.0%. Monthly interest only payments made 60 days from April 21, 2014. Payments on the principal of the note will commence no later than August 1, 2014 and will be the greater of $20,000 or 50% of the net cash flow from production of the leases.
The payment of $3,000,000 in common shares of our company were paid on closing on April 21, 2014 at a deemed price of $0.20 per share for an aggregate of 15,000,000 common shares of our company.
Pursuant to this agreement, Intrepid retained a security interest in the leases, property, equipment and other assets. Our company’s current leases are all located in Montgomery County called: Bell, Brimer and Springer. Theses leases are located within the prolific Mississippi Lime in the Midwest state of Kansas. The acreage offers an opportunity for success in gas and oil production through drilling and working over existing wells. In addition, the area is suitable for water remediation and disposal and the generation of renewable energy through wind turbines.
The Mississippi Lime Formation is a conventional limestone reservoir that responds well to unconventional technologies, due to the heterogenic porosity development within the Mississippian formations it is advantageous to drill horizontal wells to interconnect a larger percentage of porosity with one well bore.
Market, Customers and Distribution Methods
Although future market conditions cannot be predicted, several large and well capitalized markets for oil and gas exist throughout the world. Such markets include a very sophisticated futures market for the pricing and delivery of oil and gas. The price for oil and gas is affected by a number of global factors, including economic strength and resultant demand for oil and gas, fluctuating supplies, mining activities and production by others in the industry, and new and or reduced uses for oil and gas.
The oil and gas industry is highly speculative and of a very high risk nature. As such, oil and gas activities involve a high degree of risk, which even a combination of experience, knowledge and careful evaluation may not be able to overcome.
The oil and gas industry is subject to a number of factors, including intense industry competition, high susceptibility to economic conditions (such as price, foreign currency exchange rates, and capital and operating costs), and political conditions (which could affect such things as import and export regulations, foreign ownership restrictions). Furthermore, the oil and gas activities are subject to all hazards incidental to oil and gas exploration, development and production, as well as risk of damage from earthquakes, any of which could result in work stoppages, damage to or loss of property and equipment and possible environmental damage. Hazards such as unusual or unexpected geological formations and other conditions are also involved in mineral exploration and development.
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Competition
We are a junior oil and gas exploration company. We compete with other oil and gas exploration companies for financing and for the acquisition of new oil and gas properties. Many of the oil and gas exploration companies with whom we compete have greater financial and technical resources than those available to us. Accordingly, these competitors may be able to spend greater amounts on acquisitions of oil and gas properties of merit, on exploration of their oil and gas properties and on development of their oil and gas properties. In addition, they may be able to afford more technical expertise in the targeting and exploration of oil and gas properties. This competition could result in competitors having oil and gas properties of greater quality and interest to prospective investors who may finance additional exploration and development. This competition could adversely impact on our ability to achieve the financing necessary for us to conduct further exploration of our oil and gas properties.
We also compete with other junior oil and gas exploration companies for financing from a limited number of investors that are prepared to make investments in junior oil and gas exploration companies. The presence of competing junior oil and gas exploration companies may impact our ability to raise additional capital in order to fund our exploration programs if investors are of the view that investments in competitors are more attractive based on the merit of the oil and gas properties under investigation and the price of the investment offered to investors. We also compete with other junior and senior oil and gas exploration companies for available resources, including, but not limited to, professional geologists and engineers, equipment, exploration supplies and drill rigs.
Bankruptcy or Similar Proceedings
There has been no bankruptcy, receivership or similar proceeding.
Reorganizations, Purchase or Sale of Assets
There have been no material reclassifications, mergers, consolidations, or purchase or sale of a significant amount of assets not in the ordinary course of business.
Government Regulation
Our oil and gas operations are subject to various United States and International federal, state/provincial and local governmental regulations. Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells, and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas. The production, handling, storage, transportation and disposal of oil and gas, by-products thereof, and other substances and materials produced or used in connection with oil and gas operations are also subject to regulation under federal, state, provincial and local laws and regulations relating primarily to the protection of human health and the environment. To date, expenditures related to complying with these laws have not been significant in relation to the results of operations of our company. The requirements imposed by such laws and regulations are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations.
We expect to be able to comply with all applicable laws and regulations and do not believe that such compliance will have a material adverse effect on our competitive position. We have obtained and intend to obtain all environmental permits, licenses and approvals required by all applicable regulatory agencies to maintain our current oil and gas operations and to carry out our future exploration activities. We are not aware of any material violations of environmental permits, licenses or approvals issued with respect to our operations, and we believe that the operators of the properties in which we have an interest comply with all applicable laws and regulations. We intend to continue complying with all environmental laws and regulations, and at this time we do not anticipate incurring any material capital expenditures to do so.
Compliance with environmental requirements, including financial assurance requirements and the costs associated with the cleanup of any spill, could have a material adverse effect on our capital expenditures, earnings or competitive position. Our failure to comply with any laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of injunctive relief, or both. Legislation affecting the oil and gas industry is subject to constant review, and the regulatory burden frequently increases. Changes in any of the laws and regulations could have a material adverse effect on our business, and in view of the many uncertainties surrounding current and future laws and regulations, including their applicability to our operations, we cannot predict their overall effect on our business.
Environmental laws provide for, among other things, restrictions and prohibitions on spills, releases, or emissions of various substances produced in association with oil and gas operations. The laws also require that wells and facility sites be operated,
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maintained, abandoned, and reclaimed to the satisfaction of the applicable regulatory authorities. Compliance with such laws can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability, and potentially increased capital expenditures and operating costs. The discharge of oil or gas or other pollutants into the air, soil, or water may give rise to liabilities to governments and third parties and may require the operator to incur costs to remedy such discharge. In addition, the operator could incur fines, penalties or significant liability for damages, clean-up costs, and penalties in the event of discharges into the environment, environmental damage caused by the operator or previous owners of the property, or non-compliance with environmental laws or regulations. In addition to actions brought by governmental agencies, the operator could face actions brought by private parties or citizens groups. There can be no assurance that the forgoing will not increase the cost of production, development, or exploration activities for the operator or otherwise adversely affect the payment of royalties on the property.
Environmental Regulation
The operator of our future oil and gas interests will be subject to numerous federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Applicable U.S. federal environmental laws include, but are not limited to, the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), the Clean Water Act (“CWA”) and the Clean Air Act (“CAA”). These laws and regulations govern environmental cleanup standards, require permits for air, water, underground injection, solid and hazardous waste disposal and set environmental compliance criteria. In addition, state and local laws and regulations set forth specific standards for drilling wells, the maintenance of bonding requirements in order to drill or operate wells, the spacing and location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, the plugging and abandoning of wells, and the prevention and cleanup of pollutants and other matters. Typically, operators maintain insurance against costs of clean-up operations, but may not be fully insured against all such risks. Additionally, Congress and federal and state agencies frequently revise the environmental laws and regulations, and any changes that result in delay or more stringent and costly permitting, waste handling, disposal and clean-up requirements for the oil and gas industry could have a significant impact on the operator’s costs, resulting in a negative impact on payment of royalties.
The environmental laws and regulations that could have a material impact on the oil and natural gas exploration and production industry, including on the operators of our future oil and gas interests, thereby indirectly impacting our business, including the following:
Hazardous Substances and Wastes. CERCLA, also known as the “Superfund law,” imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that transported or disposed or arranged for the transport or disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file corresponding common law claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.
Waste Discharge. The CWA and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of oil and other substances, into waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the United States Environmental Protection Agency (“EPA”) or an analogous state agency. The CWA and regulations implemented thereunder also prohibit the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by an appropriately issued permit. Spill prevention, control and countermeasure requirements of federal laws require appropriate containment beams and similar structures to help prevent the contamination of navigable waters by a petroleum hydrocarbon tank spill, rupture or leak. In addition, the CWA and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities. Federal and state regulatory agencies can impose administrative, civil and criminal penalties as well as other enforcement mechanisms for noncompliance with discharge permits or other requirements of the CWA and analogous state laws and regulations.
Air Emissions. The CAA and associated state laws and regulations restrict the emission of air pollutants from many sources, including oil and gas operations. New facilities may be required to obtain permits before construction can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. More stringent regulations governing emissions of toxic air pollutants and greenhouse gases (“GHGs”) have been developed by the EPA and may increase the costs of compliance for some facilities.
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Oil Pollution Act. The Oil Pollution Act of 1990, as amended (“OPA”) and regulations thereunder impose a variety of requirements on “responsible parties” related to the prevention of oil spills and liability for damages resulting from such spills in United States waters. A “responsible party” includes the owner or operator of an onshore facility, pipeline or vessel, or the lessee or permittee of the area in which an offshore facility is located. OPA assigns liability to each responsible party for oil cleanup costs and a variety of public and private damages. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of a federal safety, construction or operating regulation. If the party fails to report a spill or to cooperate fully in the cleanup, liability limits likewise do not apply. Few defenses exist to the liability imposed by OPA. OPA imposes ongoing requirements on a responsible party, including the preparation of oil spill response plans and proof of financial responsibility to cover environmental cleanup and restoration costs that could be incurred in connection with an oil spill.
National Environmental Policy Act. Oil and natural gas exploration and production activities on federal lands are subject to the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of Interior, to evaluate major agency actions having the potential to significantly impact the environment. The process involves the preparation of either an environmental assessment or environmental impact statement depending on whether the specific circumstances surrounding the proposed federal action will have a significant impact on the human environment. The NEPA process involves public input through comments which can alter the nature of a proposed project either by limiting the scope of the project or requiring resource-specific mitigation. NEPA decisions can be appealed through the court system by process participants. This process may result in delaying the permitting and development of projects, increase the costs of permitting and developing some facilities and could result in certain instances in the cancellation of existing leases.
Worker Safety. The Occupational Safety and Health Act (“OSHA”) and comparable state statutes regulate the protection of the health and safety of workers. The OSHA hazard communication standard requires maintenance of information about hazardous materials used or produced in operations and provision of such information to employees. Other OSHA standards regulate specific worker safety aspects. Failure to comply with OSHA requirements can lead to the imposition of penalties.
Safe Drinking Water Act. The Safe Drinking Water Act and comparable state statutes restrict the disposal, treatment or release of water produced or used during oil and gas development. Subsurface emplacement of fluids (including disposal wells or enhanced oil recovery) is governed by federal or state regulatory authorities that, in some cases, includes the state oil and gas regulatory authority or the state’s environmental authority. These regulations may increase the costs of compliance for some facilities.
Effect of Existing or Probable Governmental Regulations on our Business
We are subject to the following regulations of the SEC and applicable securities laws, rules and regulations:
Smaller Reporting Company. We are subject to the reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and subject to the disclosure requirements of Regulation S-K of the SEC, as a “smaller reporting company.” That designation will relieve us of some of the informational requirements of Regulation S-K applicable to larger companies.
Sarbanes/Oxley Act. Except Section 302 and 404, we are also subject to the Sarbanes/Oxley Act of 2002. The Sarbanes/Oxley Act created a strong and independent accounting oversight board to oversee the conduct of auditors of public companies and strengthens auditor independence. It also requires steps to enhance the direct responsibility of senior members of management for financial reporting and for the quality of financial disclosures made by public companies; establishes clear statutory rules to limit, and to expose to public view, possible conflicts of interest affecting securities analysts; creates guidelines for audit committee members’ appointment, compensation and oversight of the work of public companies’ auditors; management's assessment of our internal controls; prohibits certain insider trading during pension fund blackout periods; requires companies to evaluate internal controls and procedures; and establishes a federal crime of securities fraud, among other provisions. Compliance with the requirements of the Sarbanes/Oxley Act has and will continue to substantially impact our legal and accounting costs.
Intellectual Property
We do not own, either legally or beneficially, any patent or trademark. We have established a website and maintain the domain www.midwestog.com.
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Research and Development Costs During the Last Two Years
We did not spend any funds on research and development over the last two fiscal years.
Employees
Our only employees are our officers and directors, Thomas L. Crom, III and Daniel Martinez. Mr. Crom currently devotes 20-40 hours per week to company matters and Mr. Martinez currently devotes 10-20 hours per week to company matters.
Effective December 1, 2012, our Company entered into an two year employment agreement with Daniel Martinez, whereby Mr. Martinez has agreed to perform services as president, chief executive officer and director of our company on a continuing basis. As compensation, we have agreed to pay Mr. Martinez an initial salary of US$6,000 per month.
Effective January 23, 2013, our Company entered into an employment agreement with Thomas L. Crom, III, whereby Mr. Crom has agreed to perform services as chief financial officer, secretary, and treasurer of our company on a continuing basis. As compensation, we agreed to pay Mr. Crom an initial salary of US$6,000 per month and to issue 30,000 shares of our company's common stock per month, for an aggregate of 90,000 shares per quarter, within the initial term. As a signing bonus, our company agreed to issue 25,000 shares of our common stock to Mr. Crom In February 2013, we issued the 25,000 shares to Mr. Crom and on May 15, 2014, we issued 390,000 shares to Mr. Crom which was the balance owed as of January 31, 2014.
Both Messrs. Crom and Martinez are also entitled participate in a bonus pool consisting of 5% of the net cash flow from operations. Each is entitled to a minimum participation of 20% of the bonus pool. To date our company has had net cash flow from operations and no other persons are entitled to any participation.
Reports to Securities Holders
We provide an annual report that includes audited financial information to our shareholders. We make our financial information equally available to any interested parties or investors through compliance with the disclosure rules of Regulation S-K for a small business issuer under the Securities Exchange Act of 1934. We are subject to disclosure filing requirements including filing Form 10-K annually and Form 10-Q quarterly. In addition, we will file Form 8K and other proxy and information statements from time to time as required. We do not intend to voluntarily file the above reports in the event that our obligation to file such reports is suspended under the Exchange Act. The public may read and copy any materials that we file with the Securities and Exchange Commission, ("SEC"), at the SEC's Public Reference Room in Washington, DC. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Item 1A.
Item 1A.
Risk Factors
An investment in our Common Stock involves a high degree of risk. In addition to the other information in this Annual Report, the following risk factors should be considered carefully in evaluating the Company and our business. We have sought to identify what we believe to be the most significant risks to our business, but we cannot predict whether, or to what extent, any of such risks may be realized nor can we guarantee that we have identified all possible risks that might arise. Investors should carefully consider all of such risk factors before making an investment decision with respect to our Common Stock. If you decide to buy our Common Stock, you should be able to afford a complete loss of your investment.
RISKS RELATED TO OUR BUSINESS:
There is substantial doubt as to whether we will continue operations. If we discontinue operations, we will go out of business, and you could lose your investment.
Our independent accountant's report to our audited financial statements for the year ended January 31, 2015 indicates that there are a number of factors that raise substantial doubt about our ability to continue as a going concern. Such factors identified in the report are our accumulated deficit since inception, our failure to attain profitable operations and our dependence upon obtaining adequate financing to pay our liabilities. If we are not able to continue as a going concern, it is likely investors will lose their investments.
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The Company is a start-up with a history of operating losses, and we expect to continue to realize losses in the near future, so an investment in Midwest Oil & Gas Inc. is considered a high risk investment whereby you could lose your entire investment. The Company currently has no operations that are producing revenue, and currently relies on investments by third parties to fund its business. Even when the Company begins to generate revenues from operations, the Company may not become profitable or be able to sustain profitability.
We have not yet commenced operations and, therefore, we are considered a "start-up" or "development stage" company. We will incur significant expenses in order to implement our business plan. As an investor, you should be aware of the difficulties, delays and expenses normally encountered by an enterprise in its development stage, many of which are beyond our control, including unanticipated developmental expenses, inventory costs, employment costs, and advertising and marketing expenses. We cannot assure you that our business will prove successful, or that we will ever be able to operate profitably. If we cannot operate profitably, you could lose your entire investment.
Our lack of any operating history makes it difficult for us to evaluate our future business prospects and make decisions based on those estimates of our future performance.
We do not have any material operating history, which makes it impossible to evaluate our business on the basis of historical operations. Furthermore, the Company has abandoned its original business plan and is still in the process of selecting a new direction for the Company’s business. Therefore, our business carries both known and unknown risks. As a consequence, our past results may not be indicative of future results. Although this is true for any business, it is particularly true for us because of our lacking any material operating history.
If we do not obtain additional financing, our business will fail.
Our current operating funds are less than necessary to complete all intended objectives and therefore we will need to obtain additional financing in order to continue our business. We currently do not have any operations and we have no income.
We do not currently have any arrangements for financing and we can provide no assurance to investors that we will be able to find such financing if required. Obtaining additional financing would be subject to a number of factors, including investor acceptance of our business model and general market conditions. These factors may make the timing, amount, terms or conditions of additional financing unavailable to us.
The most likely source of future funds presently available to us is through the sale of equity capital in one or more negotiated private sale transactions. Any sale of share capital will result in dilution to existing shareholders.
Our business will rely heavily upon our President and CEO, Mr. Daniel Martinez.
We have been heavily dependent upon the expertise and management of Mr. Daniel Martinez, our Chief Executive Officer and President, and our future performance will depend upon his continued services. The loss of the services of Mr. Martinez’s services could seriously interrupt our business operations, and could have a very negative impact on our ability to fulfill our business plan and to carry out our existing operations. We currently do not maintain key man life insurance on this individual. There can be no assurance that a suitable replacement could be found for him upon retirement, resignation, inability to act on our behalf, or death.
Our future growth may require recruitment of qualified employees.
In the event of our future growth, we may have to increase the depth and experience of our management team by adding new members. Our future success will depend to a large degree upon the active participation of our sole officer. There is no assurance that we will be able to employ qualified persons on acceptable terms. Lack of qualified employees may adversely affect our business development.
The possibility of a global financial crisis may significantly impact our business and financial condition for the foreseeable future.
The credit crisis and related turmoil in the global financial system may adversely impact our business and our financial condition, and we may face challenges if conditions in the financial markets do not improve. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise financing, which could have a material negative impact on our flexibility to react to changing economic and business conditions. The economic situation could have a material negative impact on our lenders or customers, causing them to fail to meet their obligations to us. We will need additional capital and financing to fund our fiscal
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2015 operating forecast. There is no assurance that additional capital or financing will be available to us on terms that are acceptable to us or at all. The decline in the price of crude oil during the last quarter of 2014 and the continued decline in 2015 have impacted our drilling plans and our ability to raise capital.
Our majority shareholder has the ability to significantly influence any matters to be decided by the shareholders.
Mr. Martinez currently owns approximately 30.8% of our Common Stock. As a result, he can determine the outcome of any corporate matter that requires the approval of the holders of a majority of the shares of our Common Stock, including the election of directors, a merger or acquisition.
Risks Related to the Industry in Which We Compete
Current volatile market conditions and significant fluctuations in energy prices may continue indefinitely, negatively affecting our business prospects and viability.
The oil and gas markets are very volatile, and we cannot predict future oil and natural gas prices. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control. Any substantial decline in the price of oil and natural gas will likely have a material adverse effect on our planned operations and financial condition. The amount of any royalty payment we receive, if any, from the production of oil and gas from our oil and gas interests will depend on numerous factors beyond our control. These factors include, but are not limited to, the following:
·
changes in global supply and demand for oil and natural gas by both refineries and end users;
·
the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls;
·
the price and volume of imports of foreign oil and natural gas;
·
political and economic conditions, including embargoes, in oil-producing countries or affecting other oil-producing activity;
·
the level of global oil and gas exploration and production activity;
·
the level of global oil and gas inventories;
·
weather conditions;
·
technological advances affecting energy consumption;
·
domestic and foreign governmental regulations and taxes;
·
proximity and capacity of oil and gas pipelines and other transportation facilities;
·
the price and availability of competitors’ supplies of oil and gas in captive market areas;
·
the introduction, price and availability of alternative forms of fuel to replace or compete with oil and natural gas;
·
import and export regulations for LNG and/or refined products derived from oil and gas production from the US;
·
speculation in the price of commodities in the commodity futures market;
·
the availability of drilling rigs and completion equipment; and
·
the overall economic environment.
Further, oil and natural gas prices do not necessarily fluctuate in direct relationship to each other. The price of oil has been extremely volatile, and we expect this volatility to continue for the foreseeable future. Recent volatility in 2014 has seen WTI oil prices drop from a high of $107.26 on June 20, 2014, to a low of $57.81 on December 14, 2014. This near term volatility may affect future prices in 2017 and beyond. The volatility of the energy markets makes it difficult to predict future oil and natural gas price movements with any certainty.
Exploration for oil and natural gas is risky and may not be commercially successful, impairing our ability to generate revenues.
Oil and natural gas exploration involves a high degree of risk. These risks are more acute in the early stages of exploration. We may not discover oil or natural gas in commercially viable quantities, if at all. It is difficult to project the costs of implementing an exploratory drilling program due to the inherent uncertainties of drilling in unknown formations, the costs associated with encountering various drilling conditions, such as over pressured zones and tools lost in the hole, and changes in drilling plans, locations as a result of prior exploratory wells or additional seismic data and interpretations thereof, and final commercial terms negotiated with partners. Developing exploratory oil and gas properties requires significant capital expenditures and involves a high degree of financial risk. The budgeted costs of drilling, completing, and operating exploratory wells are often exceeded and can increase significantly when drilling costs rise. Drilling may be unsuccessful for many reasons, including title problems, weather,
MWOG Form 10K January 31, 2015 Page 12 of 50
cost overruns, equipment shortages, and mechanical difficulties. There is no assurance that we will successfully complete any wells or if successful, that the wells would be economically successful. Moreover, the successful drilling or completion of any oil or gas well does not ensure a profit on investment. Exploratory wells bear a much greater risk of loss than development wells. We cannot assure you that our exploration, exploitation and development activities will result in profitable operations, the result of which will materially adversely affect our business.
Oil and gas operations are subject to comprehensive regulation which may cause substantial delays or require capital outlays in excess of those anticipated, causing an adverse effect on the Company.
Oil and gas operations are subject to national and local laws relating to the protection of the environment, including laws regulating removal of natural resources from the ground and the discharge of materials into the environment. Oil and gas operations are also subject to national and local laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Environmental standards imposed by national or local authorities may be changed and any such changes may have material adverse effects on our potential royalties. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus causing an adverse effect on any potential revenue to us.
We will be dependent upon the third party operator of our oil and gas interests.
If and when our prospects proceed to drilling, third parties will act as the operators of our oil and gas wells, and control the drilling and operating activities to be conducted on our properties. Therefore, we may have limited control over certain decisions related to activities on our properties relating to the timing, costs, procedure, and location of drilling or production activities, which could affect the Company’s results.
We may not be able to develop oil and gas reserves on an economically viable basis.
To the extent that we succeed in discovering oil and/or natural gas reserves on our prospects, we cannot assure that these reserves will be capable of production levels we project or in sufficient quantities to be commercially viable. Our future reserves, if any, will depend not only on our ability to develop then-existing properties, but also on our ability to identify and acquire additional suitable producing properties or prospects, to find markets for the oil and natural gas we develop and to effectively distribute our production into markets.
Future oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations and various field operating conditions may adversely affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-downs of wells resulting from extreme weather conditions, problems in storage and distribution and adverse geological and mechanical conditions. While we will endeavor to effectively manage these conditions, we cannot be assured of doing so optimally, and we will not be able to eliminate them completely in any case. Therefore, these conditions could adversely impact our operations.
RISKS RELATED TO OUR COMMON STOCK
The market price of our Common Stock is, and is likely to continue to be, highly volatile and subject to wide fluctuations.
The market price of our Common Stock is likely to continue to be highly volatile and could be subject to wide fluctuations in response to a number of factors, some of which are beyond our control, including but not limited to:
·
dilution caused by our issuance of additional shares of Common Stock and other forms of equity securities;
·
announcements of new acquisitions, expansions or other business initiatives by us or our potential competitors;
·
our ability to take advantage of new acquisitions, expansions or other business initiatives;
·
quarterly variations in our revenues and operating expenses;
·
changes in the valuation of similarly situated companies, both in our industry and in other industries;
·
challenges associated with timely SEC filings;
·
illiquidity and lack of marketability by being an OTC quoted stock;
·
changes in analysts’ estimates affecting our company, our competitors and/or our industry;
·
changes in the accounting methods used in or otherwise affecting our industry;
MWOG Form 10K January 31, 2015 Page 13 of 50
·
additions and departures of key personnel;
·
announcements of technological innovations or new products;
·
fluctuations in interest rates and the availability of capital in the capital markets; and
·
significant sales of our Common Stock, including sales by selling shareholders following the registration of shares under a prospectus.
These and other factors are largely beyond our control, and the impact of these risks, singly or in the aggregate, may result in material adverse changes to the market price of our Common Stock and our results of operations and financial condition.
Because the SEC imposes additional sales practice requirements on brokers who deal in our shares which are penny stocks, some brokers may be unwilling to trade them. This means that you may have difficulty reselling your shares and this may cause the price of the shares to decline.
A penny stock is generally a stock that is not listed on a national securities exchange or NASDAQ, is listed in the "pink sheets" or on the OTC Bulletin Board, has a price per share of less than $5.00, and is issued by a company with net tangible assets less than $5 million.
The penny stock trading rules impose additional duties and responsibilities upon broker-dealers and salespersons effecting purchase and sale transactions in Common Stock and other equity securities, including determination of the purchaser's investment suitability, delivery of certain information and disclosures to the purchaser, and receipt of a specific purchase agreement before effecting the purchase transaction.
Many broker-dealers will not affect transactions in penny stocks, except on an unsolicited basis, in order to avoid compliance with the penny stock trading rules. In the event our Common Stock becomes subject to the penny stock trading rules:
·
such rules may materially limit or restrict the ability to resell our Common Stock, and
·
the liquidity typically associated with other publicly traded equity securities may not exist.
Because of the significant restrictions on trading penny stocks, a public market may never emerge for our securities. If this happens, you may never be able to publicly sell your shares.
Our operating results will fluctuate significantly, and these fluctuations may cause the price of our Common Stock to decline.
Our operating results will likely vary in the future primarily as the result of fluctuations in our revenues and operating expenses, including the expansion of our operations, capital expenditures that we expect to incur, the prices of products and services, and other factors. If our results of operations do not meet the expectations of current or potential investors, the price of our Common Stock may decline.
We do not expect to pay dividends in the foreseeable future.
We do not intend to declare dividends for the foreseeable future, as we anticipate that we will reinvest any future earnings in the development and growth of our business. Therefore, investors will not receive any funds unless they sell their Common Stock, and shareholders may be unable to sell their shares on favorable terms or at all. Investors cannot be assured of a positive return on investment or that they will not lose the entire amount of their investment in our Common Stock.
We may issue additional stock without shareholder consent.
Our Board of Directors, consisting solely of our CEO, Mr. Daniel Martinez, has authority, without action or vote of the shareholders, to issue all or part of our authorized but unissued shares. Additional shares may be issued in connection with future financing, acquisitions, employee stock plans, or otherwise. Any such issuance will dilute the percentage ownership of existing shareholders.
We lack an operating history and have losses which we expect to continue into the future. As a result, we may have to suspend or cease activities.
We were incorporated in January 2010 and have only recently started our exploration activities. We have not, to date, realized any revenues. We have a limited operating history upon which an evaluation of our future success or failure can be made. Our net loss
MWOG Form 10K January 31, 2015 Page 14 of 50
was $4,934,837 from inception to January 31, 2015. Our ability to achieve and maintain profitability and positive cash flow is dependent upon:
·
our ability to locate a profitable mineral property;
·
our ability to generate revenues, and
·
our ability to reduce exploration costs.
Based upon current plans, we expect to incur operating losses in future periods. This will happen because there are expenses associated with the research and exploration of our oil and gas properties. As a result, we may not generate revenues in the future. Failure to generate revenues will cause us to suspend or cease activities.
Because we are small and do not have much capital, we may have to limit our exploration activity which may result in a loss of your investment.
Because we are small and do not have much capital, we must limit our exploration activity. As such we may not be able to complete an exploration program that is as thorough as we would like. In that event, an existing reserve may go undiscovered. Without a reserve, we cannot generate revenues and you will lose your investment.
We may not have access to all of the supplies and materials we need to begin exploration which could cause us to delay or suspend activities.
Competition and unforeseen limited sources of supplies in the industry could result in occasional spot shortages of supplies, such as dynamite, and certain equipment such as bulldozers and excavators that we might need to conduct exploration. If we cannot find the products and equipment we need, we will have to suspend our exploration plans until we do find the products and equipment we need.
Because our officers and/or directors do not have any formal training specific to the technicalities of oil and gas exploration or production, there is a higher risk our business will fail.
Our officers and directors have no formal training as geologists or in the technical aspects of management of an oil and gas company. Their prior business experiences have primarily been in finance and management. With no direct training or experience in these areas, our management may not be fully aware of the specific requirements related to working within this industry. Our management's decisions and choices may not take into account standard engineering or managerial approaches oil and gas companies commonly use. Consequently, our operations, earnings, and ultimate financial success could suffer irreparable harm due to management's lack of experience in this industry.
Because our officers and directors have other outside business activities and will only be devoting approximately 10-40 hours per week to our operations, our operations may be sporadic which may result in periodic interruptions or suspensions of exploration.
Because our officers and directors have other outside business activities and will only be devoting 10-40 hours per week to our operations, our operations may be sporadic and occur at times which are convenient to our officer and director. As a result, exploration, operations or development of the property may be periodically interrupted or suspended.
One of our officers and our sole director lives outside the United States, making it difficult for an investor to enforce liabilities in foreign jurisdictions.
We are a Nevada corporation and, as such, are subject to the jurisdiction of the State of Nevada and the United States courts for purposes of any lawsuit, action or proceeding by investors herein. An investor would have the ability to effect service of process in any action on our company within the United States. However, since one of our officers and our sole director resides outside the United States, substantially all or a portion of their assets are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon them or to enforce against them judgments obtained in United States courts predicated upon the civil liability provisions of the federal securities laws of the United States or any state thereof.
Our common stock is illiquid and subject to price volatility unrelated to our operations.
If a market for our common stock does develop, its market price could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies in the same industry,
MWOG Form 10K January 31, 2015 Page 15 of 50
trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting us or our competitors. In addition, the stock market itself is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.
A large number of shares may be eligible for future sale and may depress our stock price.
We may be required, under terms of future financing arrangements, to offer a large number of common shares to the public, or to register for sale by future private investors a large number of shares sold in private sales to them.
Sales of substantial amounts of common stock, or a perception that such sales could occur, and the existence of options or warrants to purchase shares of common stock at prices that may be below the then-current market price of our common stock, could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of our equity securities, either of which would decrease the value of any earlier investment in our common stock.
Item 1B.
Item 1B.
Unresolved Staff Comments
As a “smaller reporting company”, we are not required to provide the information required by this Item.
Item 2.
Item 2.
Properties
Our offices are located at 400 West Sycamore Street, Independence, Kansas 67301. The telephone number is 855-200-6964. Management believes the current premises are not sufficient for its future needs. The approximate monthly rent is US $400
Kansas Acquisition
On January 27, 2014, we entered into and closed an asset purchase agreement with an unrelated third party to acquire three oil and gas leases. The interests purchased by our Company are leases to the following properties.
Brimer Lease
The Brimer lease measures approximately 177.0 acres and is located in Rutland, Montgomery County, Kansas. Legal well spacing in the state of Kansas is 330’ for gas and combination wells and 165’ for oil wells which allows for a potential 24 wells to be spaced on the location.
The lease currently holds 13 oil wells, with a gas pipeline “hot” tap located on premises.
The wells on the lease were last actively produced in March 2013 when they produced approximately 32 bopd (barrels of oil per day). The lease is located within the depths of the Weiser sands.
The Springer lease measures approximately 302 acres and is located in Rutland, Montgomery County, Kansas. Legal well spacing in the state of Kansas is 330’ for gas and combination wells and 165’ for oil wells which allows for a potential 41 wells to be spaced on the location
The lease currently holds 10 oil and gas wells, infrastructure and tank battery.
The wells on the lease were last actively produced in May 2011 when they produced approximately 75 bopd, in addition to gas production of 2,516 MCF (thousand cubic feet of natural gas) .
Bell Lease
The Bell lease measures approximately 81 acres and is located in Rutland, Montgomery County, Kansas. Legal well spacing in the state of Kansas is 330’ for gas and combination wells and 165’ for oil wells which allows for a potential 12 wells to be spaced on the location.
The lease currently holds 5 oil wells without equipment and 2 wells ready to produce into a portable tank battery.
The wells on the lease were last actively produced in March 2012 when they produced approximately 31 bopd.
MWOG Form 10K January 31, 2015 Page 16 of 50
The lease is located within the depths of the Weiser sands.
Development Sequence:
The Montgomery County acreages are cutting edge properties in a prime sought after location with potential to bring in historically large amounts of oil and associated gas production. Transmission lines are in place and in reach of the location for the gas production and the historical oil production of the area gives heed to a solid framework for the properties.
The Bell lease has 7 work-over opportunities, Brimer has 13, and the Springer lease has 10. The Bell and Brimer leases are contiguous acreage that allows for both horizontal and vertical drilling. Our Company is evaluating the option to extend the Springer lease to approximately 3,000 acres.
A recommended work program would be to re-establish the production that was present in the formidable 1980’s and 1990’s. There is also the opportunity to drill new wells into the sought after formation. Production of theses contiguous leases are very much coveted in the area for their history of production and their potential for a deeper well to tap into multiple formations.
More formally the following makes the basis for a possible development sequence:
1.
Schedule an inspection on entire leased acreage; gather equipment list and survey;
2.
Increase operators bond to operate wells;
3.
Schedule swabbing to be performed on shut-in wells for oil production;
4.
Put Authorization for Expenditure (“AFE”) together for equipping/re-working (up to 30) shut-in wells;
5.
Perform complete evaluation on drilling program;
6.
Put AFE together for new well locations;
7.
Drill & Complete new wells; and
8.
Develop field to include new and re-worked wells expected to exceed 40 wells.
Initial and Development Budget Proposal:
Action
Cost USD
Bond and Permitting fees
$20,000
Swabbing
$10,000
Equipping and re-working 10 shut in wells
$1,000,000
Total
$1,030,000
Secondary Development Budget Proposal:
Action
Cost USD
Bond and Permitting fees
$50,000
Swabbing
$20,000
Equipping and re-working 20 shut in wells
$2,000,000
1 Well Dry-hole cost
$300,000
Completion
$200,000
Total
$2,570,000
Current trends are showing that production numbers for 2013 in Southeast Kansas are on the incline.
In consideration for the above leases, we issued 15,000,000 restricted shares of our common stock to three US persons. The restricted shares were valued at USD$.20 per share. We purchased 100% of the working interest subject to a 50% net profits interest to the seller when our Company has recovered 100% of its funds spent on future costs such as new wells, reworking cost and other future costs.
MWOG Form 10K January 31, 2015 Page 17 of 50
Geological Setting
The Mississippi Lime Formation in Montgomery County Overview
The Mississippi Lime is having a significant resurgence in activity through the application of new drilling and completion techniques. Over the years, thousands of vertical wells have been completed in the Mississippi Lime. Vertical wells tapped small areas of the lime and production was totally dependent on porosity and permeability at that location.
Since permeability and porosity could run from nothing to 35%, success was measured on how lucky the driller was at hitting a sweet spot while wildcatting. However, current drilling technologies have made the Mississippi Lime a major target.
The Mississippi Lime is a conventional limestone reservoir that responds well to unconventional technologies; due to the heterogenic porosity development within the Mississippian formations it is advantageous to drill horizontal wells to interconnect a larger percentage of porosity with one well bore.
Fracture treatment of the formation during completion in addition to the horizontal placement of the well bore will add significant conduits for production of hydrocarbons adding significant recoverable reserves. These reserves would not be recovered with a conventional vertical well. The Mississippi Lime typically has a lower cost per well. In some cases, drilling and completion expense can total half and even a fourth of a typical unconventional well due to the low-horsepower required.
Most of the drilling concentrated on the Mississippian "Chat" at the top of section. “Chat”, which is not a geological term but a term used to describe the highly porous, water-bearing zone of reworked tripolyte that was redeposited on top of the solid member of the Mississippian formation. The "Chat" portion of the formation was considered a very good reservoir. It varied in thickness from a few feet to 80 feet and in some wells as much as 40 feet were porous.
To understand the oil placement in this area of Kansas one must look at the dynamics of the whole set of formations. On the top of the Mississippian age rocks are a group of impermeable Pennsylvanian age rocks that do not allow oil to migrate further upward. The first layer below the Pennsylvanian is the "Chat" zone mentioned above. Below the "Chat" are additional Mississippian formations called Chester, Manning, Meramec and Osage. Collectively, these are called the Mississippi Lime.
Within the last five years it has been determined that the Mississippi Lime is a valid target for horizontal drilling and vertical drilling with the current drilling technologies. Demonstrated below is the reality that the Mississippi Lime becomes a shallower drilling target in southeast Kansas than the rest of the formation play.
By passing the drill bit through nearly horizontal sections of formation one can intersect multiple porosity zones and fractures. The result is that horizontal wells can connect with far more of the oil formation than their vertical predecessors. Recent drilling has also taken advantage of the "fracking" process of completion. In this process the productive zones are fractured under pressure and those fractures are held open by the introduction of proppants (usually sand). This further enhances the amount of formation that can be drained by one well. "Fracking" has also made it possible to extract oil from low porosity and permeability zones that could not be produced from older vertical wells.
The upshot of horizontal drilling and fracking has been an exciting new oil boom that encompasses northern Oklahoma and southeastern Kansas. The average production from a vertical well in Kansas is 3 bopd with older drilling techniques. It was estimated that prior to 1985 the average well produced about 64,000 barrels of oil. These figures do not suggest big successful wells. However, if we look across the border to wells that have recently been drilled using current drilling technology, or the horizontal technique and fracking we can see why an oil boom is starting in Kansas. Oil wells have come in with initial production of over 1,000 barrels per day plus associated gas. For 860 new wells in Oklahoma the lime production averaged 297 bopd. This success is rapidly moving north.
The State of Kansas Reports that horizontal drilling nearly doubled between 2011 and 2012 and continues to increase. One recent well in Kansas began at 30 barrels of oil per hour and leveled off between 350 to 400 bopd. Between 2011 and 2012 state gas production doubled from 1.1 billion cubic feet of natural gas (BCF) to 2.4 BCF in the Mississippian lime. Oil production is rapidly climbing. There were less than 30 producing horizontal wells in 2011 and one year later there were over 130 producing wells.
The Mississippi Lime is sometimes overlooked in discussions on U.S. shale formations. The play, straddling the Oklahoma/Kansas border, has been drilled for decades with conventional vertical drilling practices. But horizontal drilling technology and hydraulic fracturing techniques are causing Oil and Gas Producers to take a second look at the formation. The Mississippi Lime formation compares favorably to the well-known Bakken play.
MWOG Form 10K January 31, 2015 Page 18 of 50
Below is a comparison between Bakken and Mississippian plays. The Mississippian play will be slightly smaller than the Bakken but can be drilled and completed at much less cost making it an attractive target for independent drillers.
Beyond the Mississippi Lime Formation
Some of the major players in the Mississippi Lime have identified exploring the Woodford Shale, a formation beneath the Mississippian Lime. In Kansas, the formation is also known as the Chattanooga Shale. It’s 50 to 100 feet thick and runs primarily through the southeastern and south-central portions of the state. A 2010 U.S. Geological Survey study estimated there were nearly 400 million barrels of undiscovered oil in the Woodford Shale in Oklahoma, which is very feasible to have comparable numbers in the Shale reserve that is mirrored in southeast Kansas.
The Arbuckle is yet another formation of opportunity. The Arbuckle occurs at depths ranging from about 500 feet in southeastern Kansas to more than 7,000 feet in southwestern Kansas. Arbuckle strata thicken as a whole from north to south and are thickest, up to 1,390 feet, in the southeastern corner of Kansas. It has produced 36 percent of the total oil from 21 oil fields over the last 100 years. It has been described as having columns of oil and gas, which generally are near the top.
Rocks of the Arbuckle Group are composed mostly of light gray to white vuggy, cherty dolomite. The unit has been subdivided and correlated with equivalent exposed strata in adjacent states by study of insoluble residues. Stratigraphic traps in the Arbuckle are also a possibility where porous beds within it may truncate along the flanks of an anticline. In cases such as this, the oil in the Arbuckle may not necessarily be found at the culmination, or highest point, of the anticline. Correlation and mapping of porosity zones within the Arbuckle and their subcrop pattern as they are truncated by an overlying unconformity may be useful in finding these types of stratigraphic traps.
The Arbuckle Group consists of Upper Cambrian and Lower Ordovician deposits. Production from the Arbuckle Dolomite occurs primarily in the north central part of the area with both oil and gas being present. Production is generally found in structurally high porosity zones, many of which may be termed paleogeoraphic or erosional traps.
MWOG Form 10K January 31, 2015 Page 19 of 50
The group includes the Eminence Dolomite, Gasconade Dolomite, Roubidoux Formation, Jefferson City Dolomite, and Cotter Dolomite. The Eminence is Late Cambrian in age; the other formations are Early Ordovician in age. "Arbuckle" sometimes is used for all rocks between the top of the LaMotte Sandstone and the base of the Simpson Group. Some authors restrict the term "Arbuckle" to rocks of Ordovician age.
The Arbuckle Group consists mainly of white, buff, light-gray, cream, and brown crystalline dolomite. Chert is common in the upper part. Where the LaMotte Sandstone is absent, the Bonneterre Dolomite and Arbuckle rocks commonly overlie the Precambrian. The Arbuckle Group has an aggregate thickness exceeding 1,200 feet, and thickens toward Oklahoma and Missouri.
Newly submitted drilling permits and the corresponding rig counts are forward leading indicators of increasing production. All figures are reported to the Kansas Geologic Survey and the Kansas Corporation Commission. The KCC is the regulatory agency along with the Kansas Dept. of Revenue that monitor oil and gas production sold across the state.
Lease prices for land have jumped from less than $10/acre to over $1,000/acre. New technology approaches being applied to this proven area have turned around an area with declining oil production. Southeast Kansas is quickly becoming the rising star among oil and gas plays in the United States.
The emergence of horizontal drilling and fracking in the central midwest is creating oil boom that encompasses northern Oklahoma and southeastern Kansas. The average production from a vertical well in Kansas is 3 bopd with older drilling techniques. It was estimated that prior to 1985 the average well produced about 64,000 barrels of oil. These figures do not suggest big successful wells. However, if we look across the border to wells that have recently been drilled using current drilling technology, or the horizontal technique and fracking we can see why an oil industry may be beginning in Kansas. Oil wells have come in with initial production of over 1,000 barrels per day plus associated gas.
Item 3.
Item 3.
Legal Proceedings
We know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our Company.
Item 4.
Item 4.
Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our shares have been quoted on the OTC Bulletin Board (“OTCBB”) under the symbol “MWOG” since June 12, 2014. Previously our shares were quoted on the OTCBB under the symbol "ADMC" from November 21, 2012. Our stock symbol changed from "ADMC" to "MWOG" to better reflect the new name of our company. The symbol change became effective with the OTCBB at the opening of trading on June 12, 2014. Trading in stocks quoted on the OTCBB is often thin and is characterized by wide fluctuations in trading prices due to many factors that may have little to do with a company’s operations or business prospects. We cannot assure you that there will be a market for our common stock in the future.
OTCBB securities are not listed or traded on the floor of an organized national or regional stock exchange. Instead, OTCBB securities transactions are conducted through a telephone and computer network connecting dealers in stocks. OTCBB issuers are traditionally smaller companies that do not meet the financial and other listing requirements of a regional or national stock exchange.
The following quotations, obtained from Yahoo Finance, reflect the high and low bids for our common shares based on inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
MWOG Form 10K January 31, 2015 Page 20 of 50
(1) Our shares of common stock first traded on December 4, 2012.
Our common shares are issued in registered form. The stock transfer agent for our securities is Empire Stock Transfer, 1859 Whitney Mesa Dr. Henderson, NV 89014.
Holders
On May 18, 2015 we have 22 shareholders and 48,646,630 common shares outstanding.
Dividend Policy
We have not paid any cash dividends on our common stock and have no present intention of paying any dividends on the shares of our common stock. Our current policy is to retain earnings, if any, for use in our operations and in the development of our business. Our future dividend policy will be determined from time to time by our Board of Directors.
Equity Compensation Plan Information
We do not have any equity compensation plans.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
On October 15, 2013, we issued 300,000 shares of our common stock at $0. 10 per share for a total offering price of $150,000 upon the closing of a private placement. The common shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933), in an offshore transaction relying on Regulation S of the Securities Act of 1933.
On October 30, 2013, we issued 150,000 shares of our common stock at $0.10 per share for a total offering price of $15,000 upon the closing of a private placement. The common shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933), in an offshore transaction relying on Regulation S of the Securities Act of 1933
On March 26, 2014, we issued 400,000 shares of our common stock at $0.10 per share for a total offering price of $40,000 upon the closing of a private placement. The common shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933), in an offshore transaction relying on Regulation S of the Securities Act of 1933.
On April 21, 2014, we issued 15,000,000 shares of our common stock at $0.20 per share for a total consideration of $3,000,000 pursuant to the terms of Asset Purchase Agreement dated January 27, 2014. The common shares were issued to three US person based on exemptions from registration found in Section 4(2) of the Securities Act of 1933, as amended.
On May 15, 2014, we issued 400,000 shares of our common stock at $0.10 per share for a total offering price of $40,000 upon the closing of a private placement. The common shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933), in an offshore transaction relying on Regulation S of the Securities Act of 1933.
MWOG Form 10K January 31, 2015 Page 21 of 50
On May 15, 2014, we issued 390,000 shares of our common stock at a deemed price of $0.20 per share for a total price of $78,000 for services rendered to our Company by our chief financial officer, Thomas L. Crom, III, pursuant to the terms of his employment agreement with our company. The common shares were issued to one U.S. person, in a transaction relying on Regulation 144 of the Securities Act of 1933.
On May 19, 2014, we issued 350,000 shares of our common stock at $0.10 per share for a total offering price of $35,000 upon the closing of a private placement. The common shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933), in an offshore transaction relying on Regulation S of the Securities Act of 1933.
On May 19, 2014, we issued 330,000 shares of our common stock at a deemed price of $0.20 per share for a total price of $66,000 for services rendered to our Company by our advisory board members, pursuant to the terms of their advisory board agreements. The common shares were issued to two U.S. person, in a transaction relying on Regulation 144 of the Securities Act of 1933.
On August 26, 2014, we issued 160,000 shares of our common stock at $0.20 per share for a total offering price of $32,000 upon the closing of a private placement. The common shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933), in an offshore transaction relying on Regulation S of the Securities Act of 1933.
On September 18, 2014, we issued 125,000 shares of our common stock at $0.10 per share for a total offering price of $25,000 upon the closing of a private placement. The common shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933), in an offshore transaction relying on Regulation S of the Securities Act of 1933.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
We did not purchase any of our shares of common stock or other securities during our fourth quarter of our fiscal years ended January 31, 2015 and 2014.
Item 6.
Item 6.
Selected Financial Data
As a “smaller reporting company”, we are not required to provide the information required by this Item.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this annual report. The discussions of results, causes and trends should not be construed to imply any conclusion that these results or trends will necessarily continue into the future.
Our audited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.
Results of Operations
Summary for years ending January 31, 2015 and 2014
*During the year ended January 31, 2013, our company had debt cancelled of $9,263 which our company has excluded from this table.
MWOG Form 10K January 31, 2015 Page 22 of 50
Expenses
Our operating expenses for the years ended January 31, 2015 and 2014 are outlined in the table below:
During the fiscal year end January 31, 2015 the Company recognized an impairment loss on these assets of $2,446,934. This took into consideration the existing debt of $3,613,066 on these assets and reduced the net book value to $0.
Revenue
We have not earned any revenues from operations since our inception and we do not anticipate earning revenues in the upcoming quarter.
Liquidity and Financial Condition
Working Capital
We have generated no revenue since inception and have incurred $4,934,837 in expenses through January 31, 2015. We had a net loss of $2,888,165 and $1,905,051 for the years ended January 31, 2015 and 2014, respectively. These expenses consisted of professional fees, administrative expenses and exploration expenses.
Our cash in the bank at January 31, 2015 was $25, with $4,178,545 in outstanding liabilities.
Going Concern
We are an exploration stage company and currently have no operations. Our independent auditor has issued an audit opinion for our company which includes a statement expressing substantial doubt as to our ability to continue as a going concern.
MWOG Form 10K January 31, 2015 Page 23 of 50
Off-Balance Sheet Arrangements
We have no 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 is material to stockholders.
Plan of Operation
We are now investigating other properties on which exploration could be conducted and other business opportunities to enhance shareholder value. If we are unable to find another property or business opportunity, our shareholders will lose some or all of their investment and our business will likely fail.
Critical Accounting Policies
Principles of Consolidation
We generally act as a sole proprietor, but may enter joint agreements with other companies in an effort to achieve our stated operating objectives. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, and include our accounts and our wholly-owned subsidiary, SUDAM Diamonds Ltd., (collectively, the “company”). SUDAM Diamonds Ltd. was dissolved on May 13, 2014. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates and Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents comprise certain highly liquid instruments with an original maturity of three months or less when purchased. At the reporting dates, cash and cash equivalents consist of cash and funds invested in money market accounts.
Investments
Our company measures its investments based on a fair value hierarchy disclosure framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is affected by a number of factors, including the type of asset or liability and their characteristics. This hierarchy prioritizes the inputs into three broad levels as follows:
•
Level 1-Quoted prices in active markets for identical instruments.
•
Level 2-Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
•
Level 3-Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Our Company categorizes its investments as either trading, available for sale, or held to maturity. Our company does not hold any securities for trading purposes or that we believe would be considered held to maturity. Our company’s investments are comprised of available-for-sale securities and are carried at fair value with unrealized gains and losses, net of applicable income taxes, recorded within accumulated other comprehensive income. Our company reviews its investments quarterly for declines in market value that are other than temporary in addition to re-evaluating the investment classification.
MWOG Form 10K January 31, 2015 Page 24 of 50
Accounting for Oil and Gas Properties
The Company utilizes the full cost method to account for its investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including such costs as leasehold acquisition costs, professional fees incurred for the lease acquisitions, capitalized interest costs relating to properties, geological expenditures, and tangible and intangible development costs (including direct internal costs), are capitalized into the full cost pool. When the Company commences production from established proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, will be depleted on the units-of-production method using estimates of proven reserves. Investments in unproved properties and major development projects, including capitalized interest if any, are not depleted until proven reserves associated with the projects can be determined. If the future exploration of unproven properties is determined to be uneconomical, the amount of such properties is added to the capital costs to be depleted. As of January 31, 2015, the Company's oil and gas properties consisted of capitalized acquisition and exploration costs for unproved mineral rights.
Fair Value of Financial Instruments
Our Company’s financial instruments consist of cash and cash equivalents, investments, accounts payable, notes payables, loans from shareholders and accrued expenses. Our Company considers the carrying values of its financial instruments in the financial statements to approximate their fair value due to the short term nature of such items. The fair values of our company's debt instruments are calculated based on debt with similar maturities, credit quality and current market rates of interest. Unless otherwise noted, it is management’s opinion that our Company is not exposed to significant interest risks arising from these financial instruments.
Concentrations
Financial instruments, which could potentially subject our company to credit risk, consist primarily of cash, cash equivalents and investments. Our Company maintains its cash in bank deposit accounts insured by the Federal Deposit Insurance Corporation. Our Company’s account balances, at times, may exceed federally insured limits. Our Company has not experienced material losses in such accounts, and believes it is not exposed to any significant credit risk with respect to its cash accounts.
Our Company’s operations are all related to the oil and gas industry. A reduction in oil and gas prices or other disturbances in the oil and gas market could have an adverse effect on our company’s operations.
Property Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is recorded on the straight-line basis over estimated useful lives that range from three to five years, but do not exceed the useful life of the individual asset. Normal maintenance and repairs are charged to operations while expenditures for major maintenance and improvements are capitalized. When assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss arising from such disposition is included in the consolidated statement of activities.
Impairment of Long-Lived Assets
Management reviews and evaluates the net carrying value of all facilities, including idle facilities, for impairment at least annually, or upon the occurrence of other events or changes in circumstances that indicate that the related carrying amounts may not be recoverable. We estimate the net realizable value of each property based on the estimated undiscounted future cash flows that will be generated from operations at each property, the estimated salvage value of the surface plant and equipment and the value associated with property interests. All assets of an operating segment are evaluated together for purposes of estimating future cash flows.
MWOG Form 10K January 31, 2015 Page 25 of 50
Although management has made a reasonable estimate of factors based on current conditions and information, assumptions underlying future cash flows are subject to significant risks and uncertainties. Estimates of undiscounted future cash flows are dependent upon estimates of metals to be recovered from ore mineralization, and to some extent, identified resources beyond initial mineralization, future production and capital costs and estimated metals prices (considering current and historical prices, forward pricing curves and related factors) over the estimated remaining mine life. It is reasonably possible that changes could occur in the near term that could adversely affect our estimate of future cash flows to be generated from our operating properties. If undiscounted cash flows including an asset’s fair value are less than the carrying value of a property, an impairment loss is recognized. Our company has determined that no impairment exists pertaining to its long-lived assets.
Environmental Costs
Environmental expenditures that relate to current operations are charged to operations or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are charged to operations. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the cost can be reasonably estimated. Generally, the timing of these accruals coincides with the earlier of completion of a feasibility study or our company’s commitments to plan of action based on the then known facts. Management has determined that recording a liability pertaining to environmental expenditures as of January 31, 2015 is not needed.
Asset Retirement Obligations
Our Company follows ASC 410-20, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and normal use of the asset.
ASC 410-20 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, our Company will recognize a gain or loss on settlement. Our Company has no oil and gas projects in production as of January 31, 2015, and the asset retirement obligations are usually created as part of the production process. Accordingly, at January 31, 2015, our company had no asset retirement obligations.
Income Tax
Our Company accounts for income taxes under ASC 740, Income Taxes. Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. ASC 740 also requires that uncertain tax positions are evaluated in a two-step process, whereby (1) it is determined whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the related tax authority would be recognized.
Revenue Recognition
We plan to recognize revenue from the sale of product when an agreement of sale exists, product delivery has occurred, title has transferred to the customer and collection is reasonably assured. The price to be received is based upon terms of a sales contract. Our Company has not generated revenue activity for the periods presented in the consolidated financial statements.
Stock Based Compensation
Our Company has adopted ASC 718, Stock Compensation, which requires our company to measure the compensation cost of stock options and other stock-based awards to employees and directors at fair value at the grant date and recognize compensation expense over the requisite service period for awards expected to vest. Our Company has not issued stock options in 2015 or 2014. Our
MWOG Form 10K January 31, 2015 Page 26 of 50
company issues stock for payment of certain professional fees and these stock issuances are expensed based on the market value of the stock on the date granted. Our Company expenses these professional fees at the time of stock issuance as the stock issuance date approximates the date the services are performed.
Per Share Data
Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the year. Diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to warrants, convertible notes and convertible preferred stock.
There were no stock options, warrants or convertible notes or convertible preferred stock outstanding at January 31, 2015 and 2014.
Recent Accounting Pronouncements
Fair Value Measurements and Disclosures ASC 820, Improving Disclosures about Fair Value Measurements: In January 2010, the Financial Accounting Standards Board (FASB) issued accounting guidance intended to improve disclosures related to fair value measurements. This guidance requires significant transfers in and out of Level 1 and Level 2 fair value measurements to be disclosed separately along with the reasons for the transfers. Additionally, in the reconciliation for the fair value measurements using significant unobservable inputs (Level 3), information about purchases, sales, issuances and settlements must be presented separately (cannot net as one number). This guidance also provides clarification for existing disclosures on (i) level of disaggregation and (ii) inputs and valuation techniques. In addition, this guidance includes conforming amendments for employers’ disclosure of postretirement benefit plan assets. This guidance was effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are required for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASC 820 did not have a material impact on our company’s consolidated results of operations or financial position.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company”, we are not required to provide the information required by this Item.
Item 8.
Item 8.
Financial Statements and Supplementary Data
Our audited annual financial statements for the years ended January 31, 2015 and 2014 and cumulative from inception form part of this annual report. They are stated in United States Dollars (US$) and are prepared in accordance with United States generally accepted accounting principles.
MWOG Form 10K January 31, 2015 Page 27 of 50
MWOG Form 10K January 31, 2015 Page 28 of 50
GEORGE STEWART, CPA
316 17TH AVENUE SOUTH
SEATTLE, WASHINGTON 98144
(206) 328-8554 FAX(206) 328-0383
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Midwest Oil & Gas Inc.
I have audited the accompanying balance sheets of Midwest Oil & Gas Inc. (An Exploration Stage Company) as of January 31, 2015 and 2014, and the related statements of operations, stockholders’ equity and cash flows for the years ended January 31, 2015 and 2014. These financial statements are the responsibility of the Company’s management. My responsibility is to express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Midwest Oil & Gas Inc., (An Exploration Stage Company) as of January 31, 2015 and 2014, and the results of its operations and cash flows for the years ended January 31, 2015 and 2014 in conformity with generally accepted accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note # 8 to the financial statements, the Company has had no operations and has no established source of revenue. This raises substantial doubt about its ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note # 8. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/S/ George Stewart
Seattle, Washington
May 20, 2015
MWOG Form 10K January 31, 2015 Page 29 of 50
MIDWEST OIL & GAS INC.
(An Exploration Stage Company)
CONSOLIDATED BALANCE SHEETS
(Expressed in US dollars)
(Audited)
MWOG Form 10-K January 31, 2015 Page 30 of 50
MIDWEST OIL & GAS INC.
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in United States dollars)
(Audited)
The accompanying notes are an integral part of these consolidated financial statements.
MWOG Form 10-K January 31, 2015 Page 31 of 50
MIDWEST OIL & GAS INC.
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in US dollars)
(Audited)
MWOG Form 10-K January 31, 2015 Page 32 of 50
AMERICAS DIAMOND MINING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FROM JANUARY 10, 2010 (INCEPTION) THROUGH THE YEAR ENDED JANUARY 31, 2015
The accompanying notes are an integral part of these consolidated financial statements.
MWOG Form 10-K January 31, 2015 Page 33 of 50
MIDWEST OIL & GAS INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
(Audited)
January 31, 2015
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
We are an oil and gas company dedicated to sourcing and securing domestic energy solutions through the exploration, development and production of onshore oil and natural gas reserves to maximize shareholder value. The Company operates in one reporting segment.
PRINCIPLES OF CONSOLIDATION
We generally act as a sole proprietor, but may enter joint agreements with other companies in an effort to achieve our stated operating objectives. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, and include our accounts and our wholly-owned subsidiary, SUDAM Diamonds Ltd., (collectively, the “company”). SUDAM Diamonds Ltd. was dissolved on May 13, 2014. All significant intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES AND PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents comprise certain highly liquid instruments with an original maturity of three months or less when purchased. At the reporting dates, cash and cash equivalents consist of cash and funds invested in money market accounts.
INVESTMENTS
The Company measures its investments based on a fair value hierarchy disclosure framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is affected by a number of factors, including the type of asset or liability and their characteristics. This hierarchy prioritizes the inputs into three broad levels as follows:
•
Level 1-Quoted prices in active markets for identical instruments.
•
Level 2-Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
•
Level 3-Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
MWOG Form 10-K January 31, 2015 Page 34 of 50
The Company categorizes its investments as either trading, available for sale, or held to maturity. The Company does not hold any securities for trading purposes or that we believe would be considered held to maturity. The Company’s investments are comprised of available-for-sale securities and are carried at fair value with unrealized gains and losses, net of applicable income taxes, recorded within accumulated other comprehensive income. The Company reviews its investments quarterly for declines in market value that are other than temporary in addition to re-evaluating the investment classification.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments consist of cash and cash equivalents, investments, accounts payable, notes payables, loans from shareholders and accrued expenses. The Company considers the carrying values of its financial instruments in the financial statements to approximate their fair value due to the short term nature of such items. The fair values of the Company's debt instruments are calculated based on debt with similar maturities, credit quality and current market rates of interest. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest risks arising from these financial instruments.
CONCENTRATIONS
Financial instruments, which could potentially subject the Company to credit risk, consist primarily of cash, cash equivalents and investments. The Company maintains its cash in bank deposit accounts insured by the Federal Deposit Insurance Corporation. The Company’s account balances, at times, may exceed federally insured limits. The Company has not experienced material losses in such accounts, and believes it is not exposed to any significant credit risk with respect to its cash accounts.
The Company’s operations are all related to the minerals and mining industry. A reduction in oil and gas prices or other disturbances in the oil and gas market could have an adverse effect on the Company’s operations.
ACCOUNTING FOR OIL AND GAS PROPERTIES
The Company utilizes the full cost method to account for its investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including such costs as leasehold acquisition costs, professional fees incurred for the lease acquisitions, capitalized interest costs relating to properties, geological expenditures, and tangible and intangible development costs (including direct internal costs), are capitalized into the full cost pool. When the Company commences production from established proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, will be depleted on the units-of-production method using estimates of proven reserves. Investments in unproved properties and major development projects, including capitalized interest if any, are not depleted until proven reserves associated with the projects can be determined. If the future exploration of unproven properties is determined to be uneconomical, the amount of such properties is added to the capital costs to be depleted. As of January 31, 2015, the Company's oil and gas properties consisted of capitalized acquisition and exploration costs for unproved mineral rights.
The Company assesses the carrying costs for impairment under ASC 930 Extractive Activities - (AS 930) annually. An impairment is recognized when the sum of the expected undiscounted future cash flows is less than the carrying amount of the oil and gas property. Impairment losses, if any, are measured as the excess of the carrying amount of the mineral property over its estimated fair value. If oil and gas properties are subsequently abandoned or impaired, any capitalized costs will be charged to operations.
PROPERTY PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is recorded on the straight-line basis over estimated useful lives that range from three to five years, but do not exceed the useful life of the individual asset. Normal maintenance and repairs are charged to operations while expenditures for major maintenance and improvements are capitalized. When assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss arising from such disposition is included in the consolidated statement of activities.
MWOG Form 10-K January 31, 2015 Page 35 of 50
IMPAIRMENT OF LONG-LIVED ASSETS
Management reviews and evaluates the net carrying value of all facilities, including idle facilities, for impairment at least annually, or upon the occurrence of other events or changes in circumstances that indicate that the related carrying amounts may not be recoverable. We estimate the net realizable value of each property based on the estimated undiscounted future cash flows that will be generated from operations at each property, the estimated salvage value of the surface plant and equipment and the value associated with property interests. All assets of an operating segment are evaluated together for purposes of estimating future cash flows.
Although management has made a reasonable estimate of factors based on current conditions and information, assumptions underlying future cash flows are subject to significant risks and uncertainties. Estimates of undiscounted future cash flows are dependent upon estimates of metals to be recovered from ore mineralization, and to some extent, identified resources beyond initial mineralization, future production and capital costs and estimated metals prices (considering current and historical prices, forward pricing curves and related factors) over the estimated remaining mine life. It is reasonably possible that changes could occur in the near term that could adversely affect our estimate of future cash flows to be generated from our operating properties. If undiscounted cash flows including an asset’s fair value are less than the carrying value of a property, an impairment loss is recognized. The Company has determined that no impairment exists pertaining to its long-lived assets.
ENVIRONMENTAL COSTS
Environmental expenditures that relate to current operations are charged to operations or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are charged to operations. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the cost can be reasonably estimated. Generally, the timing of these accruals coincides with the earlier of completion of a feasibility study or the Company’s commitments to plan of action based on the then known facts. Management has determined that recording a liability pertaining to environmental expenditures as of January 31, 2015 is not needed.
ASSET RETIREMENT OBLIGATIONS
The Company follows ASC 410-20, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and normal use of the asset.
ASC 410-20 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The Company has no oil and gas projects in production as of January 31, 2015, and the asset retirement obligations are usually created as part of the production process. Accordingly, at January 31, 2015, the Company had no asset retirement obligations.
INCOME TAX
The Company accounts for income taxes under ASC 740, Income Taxes. Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. ASC 740 also requires that uncertain tax positions are evaluated in a two-step process, whereby (1) it is determined whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the related tax authority would be recognized.
MWOG Form 10-K January 31, 2015 Page 36 of 50
REVENUE RECOGNITION
We plan to recognize revenue from the sale of product when an agreement of sale exists, product delivery has occurred, title has transferred to the customer and collection is reasonably assured. The price to be received is based upon terms of a sales contract. The Company has not generated revenue activity for the periods presented in the consolidated financial statements.
STOCK BASED COMPENSATION
The Company has adopted ASC 718, Stock Compensation, which requires the Company to measure the compensation cost of stock options and other stock-based awards to employees and directors at fair value at the grant date and recognize compensation expense over the requisite service period for awards expected to vest. The Company has not issued stock options in 2014 or 2015. The Company issues stock for payment of certain professional fees and these stock issuances are expensed based on the market value of the stock on the date granted. The Company expenses these professional fees at the time of stock issuance as the stock issuance date approximates the date the services are performed.
PER SHARE DATA
Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the year. Diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to warrants, convertible notes and convertible preferred stock.
There were no stock options, warrants or convertible notes or convertible preferred stock outstanding at January 31, 2015 and 2014.
RECENT ACCOUNTING PRONOUNCEMENTS
Fair Value Measurements and Disclosures ASC 820, Improving Disclosures about Fair Value Measurements: In January 2010, the Financial Accounting Standards Board (FASB) issued accounting guidance intended to improve disclosures related to fair value measurements. This guidance requires significant transfers in and out of Level 1 and Level 2 fair value measurements to be disclosed separately along with the reasons for the transfers. Additionally, in the reconciliation for the fair value measurements using significant unobservable inputs (Level 3), information about purchases, sales, issuances and settlements must be presented separately (cannot net as one number). This guidance also provides clarification for existing disclosures on (i) level of disaggregation and (ii) inputs and valuation techniques. In addition, this guidance includes conforming amendments for employers’ disclosure of postretirement benefit plan assets. This guidance was effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are required for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASC 820 did not have a material impact on the Company’s consolidated results of operations or financial position.
NOTE 2 - ACQUISITION OF ASSETS
2013 Asset Purchase Agreement - Kansai Mining Corporation
Pursuant to a 2013 Asset Purchase Agreement by and among the Company, SUDAM and Kansai Mining Corporation, the Company acquired the assets associated with a diamond project in Venezuela in two parts: first two diamond leases (Natal I and Natal II) owned by Compania Minera Adamantine (“CMA”), a corporation formed in Venezuela and the second part consisting of plant and equipment comprising a 3-stage treatment plant, a 50-70 TPH scrubber and 10 TPH DMS plant and X-Ray final recovery section from Bateman’s in South Africa.
In October 2013 the Company wrote off all capitalized costs associated with this property.
ASC 930-805, states that mineral rights consist of the legal right to explore, extract, and retain at least a portion of the benefits from mineral deposits. Mining assets include mineral rights. Acquired mineral rights are considered tangible assets under ASC 805. ASC 805 requires that mineral rights be recognized at fair value as of the acquisition date. ASC 930-805-30-1 and 30-2 provides that in fair valuing mineral assets, an acquirer should take into account both:
MWOG Form 10-K January 31, 2015 Page 37 of 50
·
The value beyond proven and probable reserves (VBME) to the extent that a market participant would include VBME in determining the fair value of the assets.
·
The effects of anticipated fluctuations in the future market price of minerals in a manner that is consistent with the expectations of market participants.
In order to fair value the mineral rights acquired, management utilized a compilation and review report prepared by a third-party which documented the estimated proven and probable reserves related to the Natal property. Based on these findings, management estimated the VBME and the Company determined that the fair value of the total consideration paid of $980,967 resulting from the Asset Purchase Agreement should be allocated to the mineral rights acquired. The Company has recorded the acquired mineral rights fair value as Mineral properties on the consolidated balance sheet as a separate component of property, plant and equipment. As the mineral rights represent a tangible asset, the assigned fair value should be amortized over the useful life of the mineral right based on the units of production method. Management has preliminarily determined that the useful life for the acquired mineral right approximates twenty years but will reevaluate this estimate at the time production commences. Management will begin the amortization of the asset once development of the site commences in accordance with the units of production method.
There were no material relationships among the Company and Kansai Mining or any of their respective affiliates. It is the policy of the Company to segregate each of its mining projects into separate, wholly owned special purpose vehicles, for the purposes of risk mitigation and financing. When the Kansai Asset Purchase Agreement was executed as the Company believed that it has the resources to develop the mineral rights related to the projects acquired however in September 2013 the Company’s financing agreement was breached and the Company was not able to obtain alternative financing. As a result the Company terminated the Kansai Asset Purchase, returned the property back to Kansai and wrote off all capitalized costs associated with the property.
In January 2014 the Company reached agreement with Kansai which facilitated the acquisition of oil and gas assets. The creditors agreed to accept payment terms from the company of five monthly payment of $10,000 totaling $50,000 beginning January 27, 2014 and to accept the balance of their payment ($548,209) from 10% of the monthly cash flow from the assets being acquired until the debt was repaid. No interest will accrue on the debt. As of January 31, 2015 the Company has made two monthly payments of $20,000 leaving a balance owed of $30,000 which is recorded as a short term liability and the $548,209 has a long term liability. The Company does not yet have income from the oil and gas assets and believes no additional payments will be made to the creditors within the next twelve months.
NOTE 3 - PURCHASE OF OIL ASSETS
On January 27, 2014 we reached agreement to acquire the leases from an unrelated party for a total consideration of $6,000,000 to be paid in $3,000,000 cash and $3,000,000 in restricted common shares of our company. The cash payment of $3,000,000 to the third party will be paid in:
a.
a payment of $75,000 (paid) within 10 days of the date of the agreement
b.
a payment of $75,000 (paid) within 60 days from the date of the agreement a promissory note of $2,850,000 with an annual interest rate of 3.0%. Monthly interest only payments made 60 days from January 21, 2014. Payments on the principal of the note will commence no later than August 1, 2014 and will be the greater of $20,000 or 50% of the net cash flow from production of the leases.
The liability of $3,000,000 is reflected on the financial statement as a long term note $2,730,000 and short term liability of $270,000. As of January 31, 2015 there is no net cash flow from production of the leases so the company’s current obligation over the next twelve months is only the minimum $20,000 monthly payments for a total short term liability of $240,000.
The payment of $3,000,000 in common shares of our Company was paid on closing on April 21, 2014 at a deemed price of $0.20 per share for an aggregate of 15,000,000 common shares of our Company.
The Company recorded the purchase of these assets effective April 21, 2014.
During the fiscal year end January 31, 2015 the Company recognized an impairment loss on these assets of $2,446,934. This took into consideration the existing debt of $3,613,066 on these assets and reduced the net book value to $0.
MWOG Form 10-K January 31, 2015 Page 38 of 50
Pursuant to this agreement, Intrepid retained a security interest in the leases, property, equipment and other assets.
NOTE 4- SHARES TO BE ISSUED
The Company is obligated to issue shares either for services, property purchase agreements or for cash.
All shares in 2014 were valued at $0.20 per share. The services in 2015 were valued at $0.10 and the shares to be issued for a private placements paid in cash were valued at $0.10 per share.
Included in the above are shares to be issued to Mr. Crom pursuant to his employment contract which for January 31, 2015 was 360,000 shares valued at $0.10 per share. (2014-390,000 shares valued at $0.20 per share)
NOTE 5 - INCOME TAX
The Company had net operating loss carry forwards available to offset future taxable income approximating $4,935,037 as of January 31, 2015. The Company has determined that realization of a deferred tax asset that has resulted from the net operating losses is not likely and therefore a full valuation allowance has been recorded against this deferred income tax asset. There are no other material deferred tax positions recorded by the Company.
We do not have an accrual for uncertain tax positions as of January 31, 2015. If interest and penalties were to be assessed, we would charge interest to Interest Expense, and penalties to Other Operating Expense. It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 months of the reporting date.
NOTE 6 - CAPITAL STOCK
Common Stock
As of January 31, 2015, the Company had 48,646,630 share of its $0.001 par value common stock issued and outstanding.
Warrants and Options
As of January 31, 2015, the Company had no warrants or options for the purchase of shares of common stock issued and outstanding:
NOTE 7 - RELATED PARTY TRANSACTIONS
Our President is paid $6,000 per month. As of January 31, 2015 we owe him $124,171 (2014-$55,000) which is included in accounts payable. Our Chief Financial Officer is paid $6,000 per month and receives 30,000 common shares per month. As of January 31, 2015 we him $79,835 (2014-$48,235) which is included in accounts payable. In addition as of January 31, 2015 we owe him an additional 360,000 shares (2014-390,000 shares).
NOTE 8 - FINANCIAL CONDITION AND GOING CONCERN
As of January 31, 2015, the Company had cash on hand as of $25 and a working capital deficit of approximately $4,178,720 and has incurred a loss from operations in 2015. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company's continuance is dependent on raising capital and generating revenues sufficient to sustain
MWOG Form 10-K January 31, 2015 Page 39 of 50
operations. The Company believes that the necessary capital will be raised and has entered into discussions to do so with certain individuals and companies.
The accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to secure the necessary capital and continue as a going concern.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
As part of the purchase of oil and gas assets described in footnote 2 the Company is also obligated to spend $4,000,000 on those leases.
NOTE 10 - SUBSEQUENT EVENTS
None
MWOG Form 10-K January 31, 2015 Page 40 of 50
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Financial Disclosure
There were no disagreements related to accounting principles or practices, financial statement disclosure, internal controls or auditing scope or procedure during the two fiscal years and interim periods.
Item 9A.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer (our principal executive officer) and our chief financial officer (our principal financial officer and principal accounting officer), we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as of the end of the period covered by this report. Based on this evaluation, our chief executive officer (our principal executive officer) and our chief financial officer (our principal financial officer and principal accounting officer) concluded as of the evaluation date that our disclosure controls and procedures were not effective such that the material information required to be included in our Securities and Exchange Commission reports is accumulated and communicated to our management, including our chief executive officer (our principal executive officer) and our chief financial officer (our principal financial officer and principal accounting officer), recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms relating to our company, particularly during the period when this report was being prepared.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, for our company.
Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of its management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Management recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect material misstatements. In addition, effective internal control at a point in time may become ineffective in future periods because of changes in conditions or due to deterioration in the degree of compliance with our established policies and procedures.
A material weakness is a significant deficiency, or combination of significant deficiencies, that results in there being a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
Under the supervision and with the participation of our chief executive officer (our principal executive officer) and our chief financial officer (our principal financial officer and principal accounting officer), management conducted an evaluation of the effectiveness of our internal control over financial reporting, as of January 31, 2014, based on the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under this framework, management concluded that our internal control over financial reporting was not effective as of the evaluation date due to the factors stated below.
Management assessed the effectiveness of our company's internal control over financial reporting as of evaluation date and identified the following material weaknesses:
Insufficient Resources: We have an inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting.
Inadequate Segregation of Duties: We have an inadequate number of personnel to properly implement control procedures.
MWOG Form 10-K January 31, 2015 Page 41 of 50
Lack of Audit Committee and Outside Directors on our Company's Board of Directors: We do not have a functioning audit committee or outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures.
Management is committed to improving its internal controls and will (1) continue to use third party specialists to address shortfalls in staffing and to assist our company with accounting and finance responsibilities, (2) increase the frequency of independent reconciliations of significant accounts which will mitigate the lack of segregation of duties until there are sufficient personnel and (3) may consider appointing outside directors and audit committee members in the future.
Management, including our chief executive officer (our principal executive officer) and our chief financial officer (our principal financial officer and principal accounting officer), has discussed the material weakness noted above with our independent registered public accounting firm. Due to the nature of this material weakness, there is a more than remote likelihood that misstatements which could be material to the annual or interim financial statements could occur that would not be prevented or detected.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management's report in this annual report.
Changes in Internal Controls Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter for our fiscal year ended January 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B.
Other Information
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
All directors of our company hold office until the next annual meeting of the security holders or until their successors have been elected and qualified. The officers of our company are appointed by our board of directors and hold office until their death, resignation or removal from office. Our directors and executive officers, their ages, positions held, and duration as such, are as follows:
Business Experience
The following is a brief account of the education and business experience during at least the past five years of each director, executive officer and key employee of our company, indicating the person’s principal occupation during that period, and the name and principal business of the organization in which such occupation and employment were carried out.
Daniel Martinez - President, Chief Executive Officer and Director
Daniel Martinez has acted as our president, chief executive officer and director since September 14, 2012. Mr. Martinez worked for Ready Clerk Ltd., a financial services company based in London, UK since April 2010 to August 2012. He specialized in preparing, reviewing and evaluating financial statements, notes and related disclosures for U.S. based SEC reporting clients. Prior to this, Mr. Martinez was a tax consultant with EDF Tax LLP, a specialist tax boutique based in
MWOG Form 10-K January 31, 2015 Page 42 of 50
Nottingham, UK, from December 2008 to April 2010. During his time there he assisted successful businesses and entrepreneurs in maximizing their tax efficiency by providing a personalized approach and tailored solutions, focused entirely upon the client's needs. From October 2006 to December 2008 Mr. Martinez was an assistant consultant with PricewaterhouseCoopers LLP, UK, where he specialized in providing tax and accounting solutions to small cap companies, entrepreneurs and private clients. He was also part of a business development team where he was able to use his business and personal networks to develop new clients.
Mr. Martinez has been a member of the Institute of Chartered Accountant in England and Wales since 2010 and an associate of the institute since 2006. Prior to that he obtained an MA (Merit) in Corporate Strategy and Governance and a Bachelor of Science, Honors, (First Class) in Operations Management from the University of Nottingham, UK in 2006 and 2005 respectively. Mr. Martinez is completed the SEC Institutes’ “SEC Reporting Skills and IPO: Your Guide to Going Public” courses in Boston, MA. Mr. Martinez also serves as president and director of Cindisue Mining Corporation, a US SEC reporting company which is currently inactive. Mr. Martinez served as director and chief financial officer of Liberty Energy Corp from 6 June 2006 to February 19, 2013. Liberty Energy Corp. is a US SEC reporting company with oil and gas operations in the State of Texas.
We appointed Daniel Martinez as president, chief executive officer and director of our company because of his experience with public trading companies and SEC reporting companies, ability to attract funding to our company.
Thomas L. Crom, III - Chief Financial Officer, Secretary, and Treasurer
Thomas L. Crom, III has acted as our chief financial officer, secretary and treasurer since January 23, 2013. Mr. Crom has been a senior mining executive (CMA and MS-tax) with over 25 years’ experience dealing with start-up companies, international operations, natural resources, and serving as chief financial officer with an involvement in operational details for a number of different companies including US and Canadian public companies.
Since October 1993, he has been employed with Eureka Ventures Inc., a private company that performs financial and accounting consulting services for US and Canadian corporations. These services include assisting corporations with quarterly and annual filings, initial public offerings, reverse mergers, secondary offerings and private securities offerings, budgeting, forecasting, risk analysis, assist with shareholder and public relations, development of strategic plans, developing and maintaining strict financial control. Mr. Crom has also been a director and chief financial officer of Kansai Mining Corporation since 2002. Kansai was formerly traded on the TSX-V.
Mr. Crom acquired a Bachelor of Science degree in Commerce, cum laude in the Honors Program in June 1977, with a major in an accounting, from Santa Clara University and further earned a Master's of Science (Taxation) degree, cum laude graduate in October 1982, from Golden Gate University. In 1982, Mr. Crom became a Certified Management Accountant.
We appointed Thomas L. Crom, III as secretary, treasurer, and chief financial officer of our company because of his experience as chief financial officer with numerous public trading companies and his accounting qualifications.
Significant Employees
There are no individuals other than our executive officers who make a significant contribution to our business.
Family Relationships
There are no family relationships between any of our directors, executive officers and proposed directors or executive officers.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
1.
been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences);
MWOG Form 10-K January 31, 2015 Page 43 of 50
2.
had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
3.
been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
4.
been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
5.
been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
6.
been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors and persons who own more than 10% of our common stock to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the SEC regulations to furnish us with copies of all Section 16(a) reports that they file.
(1)
Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during fiscal year ended January 31, 2015, all filing requirements applicable to our officers, directors and greater than 10% percent beneficial owners were complied with.
Code of Ethics
We plan to adopt a code of ethics that obligates our directors, officers and employees to disclose potential conflicts of interest and prohibits those persons from engaging in such transactions without our consent.
Board and Committee Meetings
Our Board of Directors held no formal meetings during the year ended January 31, 2015. All proceedings of the board of Directors were conducted by resolutions consented to in writing by all the directors and filed with the minutes of the proceedings of the directors. Such resolutions consented to in writing by the directors entitled to vote on that resolution at a meeting of the directors are, according to the Nevada General Corporate Law and our Bylaws, as valid and effective as if they had been passed at a meeting of the directors duly called and held.
For the year ended January 31, 2015 we did not have any standing committee of the Board of Directors.
Nomination Process
As of January 31, 2015, we did not effect any material changes to the procedures by which our shareholders may recommend nominees to our Board of Directors. Our Board of Directors does not have a policy with regards to the consideration of any
MWOG Form 10-K January 31, 2015 Page 44 of 50
director candidates recommended by our shareholders. Our Board of Directors has determined that it is in the best position to evaluate our Company’s requirements as well as the qualifications of each candidate when the board considers a nominee for a position on our Board of Directors. If shareholders wish to recommend candidates directly to our board, they may do so by sending communications to the president of our Company at the address on the cover of this annual report.
Audit Committee
We do not currently have an audit committee; the duties of this committee are performed by our entire Board of Directors. We currently do not have nominating, compensation committees or committees performing similar functions. There has not been any defined policy or procedure requirements for shareholders to submit recommendations or nomination for directors.
During fiscal 2015, aside from quarterly review teleconferences, there were no meetings held by this committee. The business of the audit committee was conducted though these teleconferences and by resolutions consented to in writing by all the members and filed with the minutes of the proceedings of the audit committee.
Audit Committee Financial Expert
Our Board of Directors has determined that it has one member, Daniel Martinez, that qualifies as an "audit committee financial expert" as defined in Item 407(d)(5)(ii) of Regulation S-K.
We believe that the members of our Board of Directors are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. We believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome and is not warranted in our circumstances given the early stages of our development and the fact that we have not generated any material revenues to date. In addition, we currently do not have nominating, compensation or audit committees or committees performing similar functions nor do we have a written nominating, compensation or audit committee charter. Our Board of Directors does not believe that it is necessary to have such committees because it believes the functions of such committees can be adequately performed by our Board of Directors.
Item 11.
Item 11.
Executive Compensation
The particulars of the compensation paid to the following persons:
a)
our principal executive officer;
b)
each of our two most highly compensated executive officers who were serving as executive officers at the end of the years ended January 31, 2015 and 2014; and
c)
up to two additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as our executive officer at the end of the years ended January 31, 2015 and 2014;
who we will collectively refer to as the named executive officers of our Company, are set out in the following summary compensation table, except that no disclosure is provided for any named executive officer, other than our principal executive officers, whose total compensation did not exceed $100,000 for the respective fiscal year:
MWOG Form 10-K January 31, 2015 Page 45 of 50
Compensation of Directors
Effective December 1, 2012, our Company entered into an two year employment agreement with Daniel Martinez, whereby Mr. Martinez has agreed to perform services as president, chief executive officer and director of our Company on a continuing basis. As compensation, we have agreed to pay Mr. Martinez an initial salary of US$6,000 per month.
Effective January 23, 2013, our company entered into an employment agreement with Thomas L. Crom, III, whereby Mr. Crom has agreed to perform services as chief financial officer, secretary and treasurer of our Company on a continuing basis. As compensation, we have agreed to pay Mr. Crom an initial salary of US$6,000 per month and to issue 30,000 shares of our company's common stock per month, for an aggregate of 90,000 shares per quarter, within the initial term. As a signing bonus, our Company has agreed to issue 25,000 shares of our common stock to Mr. Crom. In February 2013, we issued the 25,000 shares to Mr. Crom and on May 15, 2014, we issued 390,000 shares to Mr. Crom which was the balance owed as of January 31, 2014. As of January 31, 2015 we owe Mr. Crom an additional 360,000 shares
We do not have any agreements for compensating our directors for their services in their capacity as directors, although such directors are expected in the future to receive stock options to purchase shares of our common stock as awarded by our board of directors.
Pension, Retirement or Similar Benefit Plans
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the board of directors or a committee thereof.
Indebtedness of Directors, Senior Officers, Executive Officers and Other Management
None of our directors or executive officers or any associate or affiliate of our Company during the last two fiscal years is or has been indebted to our company by way of guarantee, support agreement, letter of credit or other similar agreement or understanding currently outstanding.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth, as of May 20, 2015, certain information with respect to the beneficial ownership of our common shares by each shareholder known by us to be the beneficial owner of more than 5% of our common shares, as well as by each of our current directors and executive officers as a group. Each person has sole voting and investment power with
MWOG Form 10-K January 31, 2015 Page 46 of 50
respect to the shares of common stock, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated.
(1)
Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of common stock actually outstanding on May 20, 2015. As of May 20, 2015, there were 48,646,630, shares of our Company’s common stock issued and outstanding.
(2)
Daniel Martinez was appointed as president, chief executive officer and director on September 14, 2012.
(3)
Thomas L. Crom, III was appointed as chief financial officer, secretary, and treasurer on January 23, 2013.
Changes in Control
We are unaware of any contract or other arrangement the operation of which may at a subsequent date result in a change in control of our company.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Except as disclosed herein, no director, executive officer, shareholder holding at least 5% of shares of our common stock, or any family member thereof, had any material interest, direct or indirect, in any transaction, or proposed transaction since the year ended January 31, 2015, in which the amount involved in the transaction exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at the year-end for the last three completed fiscal years.
Director Independence
We currently act with one director, consisting of Daniel Martinez. We have determined that we do not have an “independent director” as defined in NASDAQ Marketplace Rule 4200(a) (15).
MWOG Form 10-K January 31, 2015 Page 47 of 50
Currently our audit committee consists of our entire Board of Directors. We currently do not have nominating, compensation committees or committees performing similar functions. There has not been any defined policy or procedure requirements for shareholders to submit recommendations or nomination for directors.
Our Board of Directors has determined that it has one member, Daniel Martinez, that qualifies as an "audit committee financial expert" as defined in Item 407(d)(5)(ii) of Regulation S-K.
From inception to present date, we believe that the members of our audit committee and the board of directors have been and are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting.
Item 14.
Item 14.
Principal Accounting Fees and Services
The aggregate fees billed for the most recently completed fiscal year ended January 31, 2015 and for fiscal year ended January 31, 2014 for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included in our quarterly reports on Form 10-Q and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:
Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before our independent auditors are engaged by us to render any auditing or permitted non-audit related service, the engagement be:
-
approved by our audit committee (which consists of our entire board of directors); or
-
entered into pursuant to pre-approval policies and procedures established by the board of directors, provided the policies and procedures are detailed as to the particular service, the board of directors is informed of each service, and such policies and procedures do not include delegation of the board of directors’ responsibilities to management.
Our Board of Directors pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by the board of directors either before or after the respective services were rendered.
Our Board of Directors has considered the nature and amount of fees billed by our independent auditors and believes that the provision of services for activities unrelated to the audit is compatible with maintaining our independent auditors’ independence.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules
MWOG Form 10-K January 31, 2015 Page 48 of 50
(2)
All financial statement schedules are omitted because they are not applicable, not material or the required information is shown in the financial statements or notes thereto.
(b)
Exhibits
Exhibit No.
Description
(3)
(i) Articles; (ii) By-laws
3.1
Articles of Incorporation (Incorporated by reference to our Registration Statement on Form S-1 filed on March 9, 2010).
3.2
By-Laws (Incorporated by reference to our Registration Statement on Form S-1 filed on March 9, 2010).
3.3
Articles of Merger (incorporated by reference from our Current Report on Form 8-K filed on October 11, 2012)
3.4
Certificate of Change (incorporated by reference from our Current Report on Form 8-K filed on October 11, 2012).
(10)
Material Contracts
10.1*
Employment Agreement between our Company and Daniel Martinez dated December 2, 2012
10.2
Employment Agreement between our Company and Thomas L. Crom, III dated January 23, 2013 (incorporated by reference to our Current Report on Form 8-K filed on January 24, 2013)
10.3
Share Issuance Agreement between our Company and Asia-Pacific Capital Ltd. dated January 23, 2013 (incorporated by reference to our Current Report on Form 8-K filed on January 24, 2013).
10.4
Stock Purchase Agreement between our Company, SUDAM Diamonds Ltd. and Daniel Martinez dated February 11, 2013 (incorporated by reference to our Current Report on Form 8-K filed on March 1, 2013).
10.5*
Lease Agreement between our company and Intrepid Resources Corporation LLC dated January 27, 2014.
(31)
Rule 13a-14(a) / 15d-14(a) Certifications
31.1*
Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer.
31.2*
Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Principal Financial Officer and Principal Accounting Officer.
(32)
Section 1350 Certifications
32.1*
Certification filed pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer.
32.2*
Certification filed pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Principal Financial Officer and Principal Accounting Officer.
(99)
Additional Exhibits
99.1*
Omitted
101*
Interactive Data File
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
*
Filed herewith.
**
Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections.
MWOG Form 10-K January 31, 2015 Page 49 of 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
MIDWEST OIL & GAS INC.
(Registrant)
Dated: May 28, 2015
/s/ Daniel Martinez
Daniel Martinez
President, Chief Executive Officer and Director
(Principal Executive Officer)
Dated: May 28, 2015
/s/ Thomas L. Crom, III
Thomas L. Crom, III
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: May 28, 2015
/s/ Daniel Martinez
Daniel Martinez
President, Chief Executive Officer and Director
(Principal Executive Officer)
Dated: May 28, 2015
/s/ Thomas L. Crom, III
Thomas L. Crom, III
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal Accounting Officer)
MWOG Form 10-K January 31, 2015 Page 50 of 50