Puissant Industries, Inc.
Puissant Industries, Inc.
Puissant Industries, Inc.
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2013 and 2012
Note 1—Basis of Presentation
We are providing herein the consolidated interim statements of financial condition of Puissant Industries, Inc. and its subsidiary (collectively the "Company") as of September 30, 2013, and the related consolidated interim statements of operations and cash flows for the three and nine months ended September 30, 2013 and 2012, and the consolidated interim statements of changes in stockholders equity for the nine months ended September 30, 2013 and the year ended December 31, 2012. The consolidated interim financial statements presented herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The consolidated interim financial statements should be read in conjunction with the Company's financial statements and related notes for the year ended December 31, 2012, which are included in the Company's Form 10-K, as filed with the SEC on April 15, 2013.
The information furnished in this report reflects all adjustments consisting of only normal recurring adjustments, which are in the opinion of management necessary for a fair presentation of results for the interim periods. Prior interim period data has been reclassified to conform to current period presentation. These reclassifications have no effect on previously reported results of operations. The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of results that may be expected for the fiscal year ending December 31, 2013.
Note 2—Nature of Operations
Organization
Puissant Industries, Inc. (the “Company”) was organized as a Wyoming corporation on July 6, 2009. As of December 31, 2010, the Company was located in Columbia, Kentucky, in Adair County.
The Company is an oil and natural gas exploration, production and development company geographically focused on the onshore United States. The Company currently has 39 wells assigned to it with over 4,735 acres available for drilling and exploration. The Company redomiciled to the state of Florida and changed its name from American Resource Management, Inc. to Puissant Industries, Inc. on March 17, 2011.
The Company owns 100% of ARM Operating Company (“ARM”). ARM was formed on July 12, 2011, primarily to manage all oil and gas properties of the Company, which includes the operation, development, and maintenance of all oil and gas wells, leases, and reserve activities. ARM will be registered as the operator of wells with all relevant governmental agencies, and it will be responsible for maintaining production and maintenance reports for all wells and facilities of the Company.
Accounting period
The Company has adopted an annual accounting period of January through December.
Puissant Industries, Inc.
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2013 and 2012
Note 3—Summary of significant accounting principles
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP’) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates particularly significant to the financial statements include the following:
| . | Estimates of our reserves of oil, natural gas and natural gas liquids ("NGL"); |
| . | Future cash flows from oil and gas properties; |
| . | Depreciation, depletion and amortization expense; |
| . | Asset retirement obligations; |
| . | Fair values of derivative instruments; |
| . | Fair values of assets acquired and liabilities assumed from business combinations; and |
| . | Natural gas imbalances. |
As fair value is a market-based measurement, it is determined based on the assumptions that market participants would use. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates. Any changes in estimates resulting from continuous changes in the economic environment will be reflected in the financial statements in future periods.
There are numerous uncertainties in estimating the quantity of reserves and in projecting the future rates of production and timing of development expenditures, including future costs to dismantle, dispose and restore our properties. Oil and gas reserve engineering must be recognized as a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way.
Cash and cash equivalents
The Company considers short-term interest bearing investments with initial maturities of three months or less to be cash equivalents. Cash and cash equivalents consist of cash in banks, free credit on investment accounts and money market accounts.
Foreign currency translation
The Company complies with Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 830, “Foreign Currency Matters.” Monetary items are translated at the exchange rate in effect at the balance sheet date; non-monetary items are translated at historical exchange rates. Income and expense items are translated at the average exchange rate for the year. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Puissant Industries, Inc.
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2013 and 2012
Note 3—Summary of significant accounting principles (continued)
Property and equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Repairs and maintenance are expensed as incurred while betterments and improvements are capitalized. When items are sold or retired, the related cost and accumulated depreciation is removed from the accounts and any gain or loss is included in operations.
The Company provides for depreciation and amortization over the following estimated useful lives:
| Furniture and fixtures | | | 5-7 | | years |
| Building | | | 39 | | years |
| Land improvements | | | 10 | | years |
| Machinery and equipment | | | 5-7 | | years |
| Computer equipment | | | 3 | | years |
| Office equipment | | | 7 | | years |
| Trucks and trailers | | | 5 | | years |
Oil and Gas Properties
Oil and gas investments are accounted for by the successful efforts method of accounting. Accordingly, the costs incurred to acquire property (proved and unproved), all development costs, and successful exploratory costs are capitalized, whereas the costs of unsuccessful exploratory wells are expensed.
Depletion
The provision for depletion of proved oil and gas properties is calculated on the units-of-production method, whereby capitalized costs, as adjusted for future development costs and asset retirement obligations, are amortized over the total estimated proved reserves. The Company calculates depletion on a quarterly basis.
Inventories
Inventories, consisting primarily of tubular goods and other well equipment held for use in the development and production of natural gas and crude oil reserves, are carried at the lower of cost or market, on a first-in first-out basis. Adjustments are made from time to time to recognize, as appropriate, any reductions in value.
Puissant Industries, Inc.
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2013 and 2012
Note 3—Summary of significant accounting principles (continued)
Unproved Properties
Investments in unproved properties are not depleted pending determination of the existence of proved reserves. Unproved properties are assessed periodically to ascertain whether there is a probability of obtaining proved reserves in the future. When it is determined these properties have been promoted to a proved reserve category or there is no longer any probability of obtaining proved reserves from the properties, the costs associated with these properties is transferred into the amortization base to be included in depletion calculations. Unproved properties whose costs are individually significant are assessed individually by considering the primary lease terms of the properties, the holding period of the properties, and geographic and geological data obtained relating to the properties. Where it is not practicable to assess properties individually as their costs are not individually significant, such properties are grouped for purposes of the periodic assessment.
Long-Lived Assets
In accordance with Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360 “Property, Plant, and Equipment,” the Company records impairment losses on long-lived assets such as oil and gas properties and equipment used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. There was no impairment charges during the three and nine months ended September 30, 2013 and 2012.
Impairment of unproved oil and gas properties are determined by FASB ASC Topic 932, “Extractive Activities—Oil and Gas.”
Fair Value of Financial Instruments
The fair values of the Company’s assets and liabilities that qualify as financial instruments under FASB ASC Topic 825, “Financial Instruments,” approximate their carrying amounts presented in the accompanying balance sheet at September 30, 2013 and December 31, 2012.
Market Risk
Our activities primarily consist of acquiring, owning, enhancing and producing oil and gas properties. The future results of our operations, cash flows and financial condition may be affected by changes in the market price of oil and natural gas. The availability of a ready market for oil and natural gas products in the future will depend on numerous factors beyond our control, including weather, imports, marketing of competitive fuels, proximity and capacity of oil and natural gas pipelines and other transportation facilities, any oversupply or undersupply of oil, natural gas and liquid products, the regulatory environment, the economic environment and, other regional and political events, none of which can be predicted with certainty.
Puissant Industries, Inc.
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September, 2013 and 2012
Note 3—Summary of significant accounting principles (continued)
Oil and Gas Reserve Quantities
Reserves and their relation to estimated future net cash flows impact our depletion and impairment calculations. As a result, adjustments to depletion are made concurrently with changes to reserve estimates. We disclose reserve estimates, and the projected cash flows derived from these reserve estimates, in accordance with SEC guidelines. Our independent engineers will also adhere to the SEC definitions when preparing their reserve reports.
Asset Retirement Obligations
We have significant obligations to plug and abandon oil and natural gas wells and related equipment at the end of oil and natural gas production operations. We incur these liabilities upon acquiring or drilling a well. GAAP requires entities to record the fair value of a liability for an asset retirement obligation (“ARO”) in the period in which it is incurred with a corresponding increase in the carrying amount of the related long-lived asset. Over time, changes in the present value of the liability are accreted and expensed. The capitalized asset costs are depleted as a component of the full cost pool. The fair values of additions to the ARO liability are estimated using present value techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation include estimates of: (i) plug and abandonment costs per well based on existing regulatory requirements; (ii) remaining life per well; (iii) inflation factors; and (iv) a credit-adjusted risk free rate. Future revisions to ARO estimates will impact the present value of existing ARO liabilities and corresponding adjustments will be made to the capitalized asset retirement costs balance. Upon settlement of the liability, we report a gain or loss to the extent the actual costs differ from the recorded liability.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC Topic 740 “Income Taxes,” which requires accounting for deferred income taxes under the asset and liability method. Deferred income tax asset and liabilities are computed for the difference between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on the enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce the deferred income tax assets to the amount expected to be realized.
The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in the Company’s financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from tax authorities. When facts and circumstances change, the Company reassesses these probabilities and records any changes in the financial statements as appropriate. Accrued interest and penalties related to income tax matters are classified as a component of income tax expense.
Puissant Industries, Inc.
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2013 and 2012
Note 3—Summary of significant accounting principles (continued)
Income Taxes (continued)
In accordance with GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Company files an income tax return in the U.S. federal jurisdiction, and may file income tax returns in various U.S. state and local jurisdictions. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce stockholders’ equity. This policy also provides guidance on thresholds, measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition that is intended to provide better financial statement comparability among different entities. It must be applied to all existing tax positions upon initial adoption and the cumulative effect, if any, is to be reported as an adjustment to stockholder’s equity as of January 1, 2009. Based on its analysis, the Company has determined that the adoption of this policy did not have a material impact on the Company’s financial statements upon adoption. However, management’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof.
Interest and Penalty Recognition on Unrecognized Tax Benefits
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
Comprehensive Income
The Company complies with FASB ASC Topic 220, “Comprehensive Income,” which establishes rules for the reporting and display of comprehensive income (loss) and its components.
Loss Per Common Share
The Company complies with the accounting and disclosure requirements of FASB ASC 260, “Earnings Per Share.” Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per common share incorporates the dilutive effect of common stock equivalents on an average basis during the period.
Stock-Based Compensation
The Company complies with FASB ASC Topic 718 “Compensation – Stock Compensation,” which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. FASB ASC Topic 718 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. FASB ASC Topic 718 requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award the requisite service period (usually the vesting period). No compensation costs are recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. For the nine month periods ended September 30, 2013 and 2012, the Company recorded compensation expense of $-0- and $-0-, respectively.
Puissant Industries, Inc.
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2013 and 2012
Note 3—Summary of significant accounting principles (continued)
Stock-Based Compensation (continued)
Nonemployee awards
The fair value of equity instruments issued to a nonemployee is measured by using the stock price and other measurement assumptions as of the date of either: (i) a commitment for performance by the nonemployee has been reached; or (ii) the counterparty’s performance is complete. Expenses related to nonemployee awards are generally recognized in the same period and in the same period as the Company incurs the related liability for goods and services received. The Company recorded stock compensation of approximately $190,249 and $153,334 during the nine months ended September 30, 2013 and 2012, respectively, related to professional services.
Valuation of Investments in Securities at Fair Value—Definition and Hierarchy
FASB ASC Topic 820 “Fair Value Measurements and Disclosures” provides a framework for measuring fair value under generally accepted accounting principles in the United States and requires expanded disclosures regarding fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Company uses various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. FASB ASC Topic 820 establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations, as follows:
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
Puissant Industries, Inc.
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2013 and 2012
Note 3—Summary of significant accounting principles (continued)
Valuation of Investments in Securities at Fair Value—Definition and Hierarchy (continued)
Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined.
Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy.
Valuation Techniques
The Company values investments in securities that are freely tradable and are listed on a national securities exchange or reported on the NASDAQ national market at their last sales price as of the last business day of the year. At September 30, 2013 and 2012, the Company had no investments classified as securities owned on the balance sheet.
Puissant Industries, Inc.
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2013 and 2012
Note 3—Summary of significant accounting principles (continued)
Certificate of Deposits
The fair values of the bank certificate of deposits are based on the face value of the certificate of deposits.
Recently Adopted Accounting Pronouncements
In October 2012, the FASB issued ASU No 2012-04, “Technical Corrections and Improvements.” This Update makes technical corrections, clarifications, and limited-scope improvements to various Topics throughout the Codification. The changes clarify the Codification or correct unintended application of guidance and are not expected to have a significant impact on current accounting practices. The majority of the amendments in this Update are effective immediately with a few limited scope amendments (mainly related to Plan Accounting) that will be effective for fiscal years beginning after December 15, 2012 for public companies. This guidance had no significant impact on the Company’s financials since it was primarily issued to provide corrections and/or clarifications of currently issued guidance.
In January 2013, the FASB issued ASU 2013-01, “Balance Sheet (Topic 210) – Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The main purpose of this Update is to clarify that the disclosures regarding offsetting assets and liabilities per ASU 2011-11 apply to derivatives including embedded derivatives, repurchase agreements and reverse repurchase agreements and securities borrowing and lending transactions that are offset or subject to a master netting agreement. Other types of transactions are not impacted. This Update is effective for fiscal years beginning on or after January 1, 2013 and for all interim periods within that fiscal year. The Company does not expect this update to impact the Company’s financials since it does not have instruments noted in the update that are offset.
In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The main purpose of this update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The update requires that the effect of significant reclassifications out of accumulated other comprehensive income be reported on the respective line items in net income if the amount being reclassified in its entirety to net income. Furthermore, information about amounts reclassified out of accumulated other comprehensive income must be shown by component. This update is effective prospectively for reporting periods beginning after December 15, 2012 for public companies. The Company does not expect this update to impact its financials since it does not have any comprehensive income items. However, if any are noted in the future, the appropriate disclosures will be incorporated.
Concentration of Credit Risk
The Company maintains its cash and cash equivalents in bank deposit accounts, which, at times may exceed federally insured limits. The Company has not experienced any losses in such accounts. Management believes the Company is not exposed to any significant credit risk related to cash and cash equivalents.
The Company extends credit, primarily in the form of uncollateralized oil and gas sales to various companies in the oil and gas industry, which results in concentrations of credit risk. Concentrations of credit risk may be affected by changes in economic or other conditions within our industry and may impact our overall credit risk. However, we believe that the risk of these unsecured receivables is mitigated by the size, reputation, and nature of the companies to which we extend credit.
Puissant Industries, Inc.
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2013 and 2012
Note 3—Summary of significant accounting principles (continued)
Concentration of Credit Risk (continued)
Historically, the Company has sold its oil and natural gas production to a relatively small number of purchasers. We are not dependent upon, or confined to, any one purchaser or small group of purchasers. Due to the nature of oil and natural gas markets and because oil and natural gas are commodities and there are numerous purchasers in the areas in which we sell production, we do not believe the loss of a single purchaser, or more than one purchaser, would materially affect our ability to sell our production.
For the three and nine months ended September 30, 2013 and 2012, revenues from four customers accounted for 100% of oil and gas production revenues.
Note 4—Convertible Bonds Payable–Related Parties
During April 2012 and September 2012, the Company received $20,000 and $8,000, respectively, of proceeds from the issuance of convertible bonds to related parties. The convertible bonds bear interest at 15% per annum and are due 60 months from the date of the bonds. The bond holder at his sole option may convert all of the principal due into common stock at a price per share of $2.00 per share.
Note 5—Notes Payable – Property and Mineral Rights
On August 1, 2011, the Company entered into a property and mineral and property rights purchase agreement (“Agreement”) in exchange for $25,000. The Agreement provided for a $1,000 down payment, with the balance of $24,000 to be paid in twelve monthly payments of approximately $2,077, which includes interest at 7% per annum. The note was paid in full during the year ended December 31, 2012.
On October 13, 2011, the Company entered into an agreement (“Agreement) to acquired property and property and mineral rights, in exchange for $50,000. The Agreement provided for a $500 down payment, with the balance of $49,500 to be paid in 120 payments of approximately $575, which includes interest at 7% per annum.
Maturities for the note payable is as follows at December 31: | | | |
| 2013 | | $ | 942 | |
| 2014 | | | 4,100 | |
| 2015 | | | 4,400 | |
| 2016 | | | 4,700 | |
| 2017 | | | 5,000 | |
| Thereafter | | | 23,340 | |
| | | $ | 42,482 | |
Puissant Industries, Inc.
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2013 and 2012
Note 6—Notes Payable - Shareholders
During the year ended December 31, 2011, the Company borrowed a total of $15,000 from related party shareholders, repaying $11,000 during the year, leaving a balance due of $4,000. These borrowings are non-interest bearing and due on demand.
Note 7—Common Stock
The Company is authorized to issue 90,000,000 shares of common stock with a par value of $0.001. At September 30, 2013 and 2012, 9,228,005 and 6,041,800 shares were issued and outstanding, respectively.
Note 8—Preferred Stock
The Company is authorized to issue 10,000,000 of preferred stock with a par value of $0.001. At September 30, 2013 and 2012, no shares were issued or outstanding.
Note 9—Equity
On May 10, 2012, the Company issued 100,000 shares of its $0.001 par value common stock to a professional service organization in exchange for professional services. We valued these shares at $2.00 per share. The shares were deemed to have been issued pursuant to an exemption provided by Section 4(2) of the Act, which exempts from registration "transactions by an issuer not involving any public offering."
On August 15, 2012, the Company issued 192,000 shares of its $0.001 par value common stock in exchange for warrants held by shareholders. The shares were deemed to have been issued pursuant to an exemption provided by Section 4(2) of the Act, which exempts from registration "transactions by an issuer not involving any public offering."
On December 15, 2012, the Company issued a total of 410,400 shares of its $0.001 par value common stock for the purchase of support equipment from three related party companies (136,800 issued to each company). We valued these shares at $0.25 per share. The shares were deemed to have been issued pursuant to an exemption provided by Section 4(2) of the Act, which exempts from registration "transactions by an issuer not involving any public offering."
On April 15, 2013, the Company issued 618,722 shares of its $0.001 par value common stock in payment of vendor invoices. We valued these shares at $0.09 per share. The shares were deemed to have been issued pursuant to an exemption provided by Section 4(2) of the Act, which exempts from registration "transactions by an issuer not involving any public offering."
On April 19, 2013, the Company issued 250,000 shares of its $0.001 par value common stock in exchange for professional services. We valued these shares at $0.09 per share. The shares were deemed to have been issued pursuant to an exemption provided by Section 4(2) of the Act, which exempts from registration "transactions by an issuer not involving any public offering."
Puissant Industries, Inc.
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2013 and 2012
Note 9—Equity (continued)
On April 19, 2013, the Company issued 1,265,083 shares of its $0.001 par value common stock in payment of unpaid wages due to two of its officers. The shares were valued at $0.06 per share. The shares were deemed to have been issued pursuant to an exemption provided by Section 4(2) of the Act, which exempts from registration "transactions by an issuer not involving any public offering."
On August 16, 2013, The Company issued 250,000 shares of its $0.001 par value common stock for a cash payment of $50,000. These shares were valued at $0.20 per share. The shares were deemed to have been issued pursuant to an exemption provided by Section 4(2) of the Act, which exempts from registration "transactions by an issuer not involving any public offering."
On August 23, 2013, the Company issued 200,000 shares of its $0.001 par value common stock in exchange for professional services. These shares were valued at $0.20 per share. The shares were deemed to have been issued pursuant to an exemption provided by Section 4(2) of the Act, which exempts from registration "transactions by an issuer not involving any public offering."
Note 10—Related Party
During the year ended December 31, 2011, the Company borrowed a total of $15,000 from related party shareholders, repaying $11,000 during the year, leaving a balance due of $4,000. During the nine months ended September 30, 2012, the Company borrowed an additional $20,000 from related party shareholders. These borrowings are non-interest bearing and due on demand.
On December 15, 2012, the Company issued a total of 410,400 shares of its $0.001 par value common stock for the purchase of support equipment from three related party companies. A total of 136,800 shares were issued to each of the following related parties: Sovereign One, Inc., Logos Resources, Inc. and McCrome International, Inc. We valued these shares at $0.25 per share.
On April 15, 2013, the Company issued a total of 618,722 shares of its $0.001 par value common stock to ADID Corporation in payment of invoices totaling $55,865.
On April 19, 2013, the Company issued 1,265,083 shares of its $0.001 par value common stock in payment of unpaid wages of $75,905 due to two of its officers. Mark Holbrook, president and CEO, received 1,216,250 shares and Cora Holbrook, secretary and treasurer, received 48,833 shares. The shares were valued at $0.06 per share.
The Company is related to several other entities by virtue of common ownership and control, which includes stockholders, employees, attorneys, consultants or companies owned by attorneys, consultants, and family members.
Item 1A. Risk Factors
A Smaller Reporting Company, as defined by Item 10 of Regulation S-K, is not required to provide the information required by this item.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
As used in this Form 10-Q, references to “we,” “our” or “us” refer to Puissant Industries, Inc. unless the context otherwise indicates.
The following discussion should be read in conjunction with our financial statements, which are included elsewhere in this Form 10-Q (the “Report”). This Report contains forward-looking statements that 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 or our industry’s actual results, levels of activity, 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.
While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. 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.
Corporate Overview.
Business Description.
We are engaged in oil and gas exploration and development activities in fractured formations located in Kentucky.
On or about January 15, 2005, Sovereign One, Inc., a company controlled by Mark Holbrook, McCrome International Inc., a company controlled by Cora J Holbrook and Logos Resources, Inc., a company controlled by Marshall Holbrook entered into an agreement with A.D.I.D. Corporation, a Kentucky corporation controlled by Marshall Holbrook ("A.D.I.D.") whereby A.D.I.D. agreed to acquire oil and gas leases and properties and assign such oil and gas leases and properties as specified by Sovereign One Inc., McCrome International, Inc., and Logos Resources, Inc.
In exchange for our issuance of an aggregate of 5,250,000 shares of our common stock representing 1,750,000 common shares to each Sovereign One Inc., McCrome International, Inc. and Logos Resources, Inc., A.D.I.D. assigned the following interests to us:
(i) On August 9, 2010, 100% ownership in (a) 34,000 of 2-inch natural gas pipeline and 60,000 feet of 4-inch natural gas pipeline, compressor stations, right of ways and easements located in Clay and Laurel Counties, Kentucky, and (b) 59,000 feet of 2-inch natural gas pipeline and 10,000 feet of 4-inch natural gas pipeline, compressor stations, right of ways and easements located in Whitley County, Kentucky; and (ii) On February 15, 2010, a 100% working interest and an 85% net revenue interests of 39 oil and gas wells and leases (the “Wells”) in Kentucky.
The working interest gives us the ability to explore for and to produce and own oil, gas or other minerals from the wells in which we have an interest. As the working interest owner, we bear the exploration, development, and operating costs. The net revenue interest provides us with 85% of the proceeds from any oil and gas production on the Wells after payment of all operating and development costs.
Beginning in the fourth quarter of 2011, we commenced recompletion of old wells by connecting the wells to our existing pipeline. During this period, we located the first purchaser of the natural gas from the recompleted wells, Seminole Energy Services.
In the fourth quarter of 2011, we acquired the surface mineral and property rights to 100 acres and subsurface rights to 175 acres in Clay County Kentucky.
On July 12, 2011, we formed our wholly owned subsidiary, ARM Operating Company (“ARM”), a Kentucky corporation which manages all of our oil and gas properties and oversees the operation, development, and maintenance of all our oil and gas wells, leases, and reserve activities. ARM is registered as the operator of wells with all relevant governmental agencies, and is responsible for maintaining production and maintenance reports for all of our wells and facilities. Our officers and Board of Directors makes all decisions concerning ARM.
Report by Independent Engineering Firm
An independent petroleum-engineering firm provided the following information with respect to the proved reserves attributable to our properties as of December 31, 2012.
| | | | Proved Developed Producing | | | Proved Undeveloped | | | Total Proved | |
| Net Reserves | | | | | | | | | | |
| Natural Gas | -MMcf | | | 3,004.348 | | | | 11,839.560 | | | | 14,843.908 | |
| Oil / Condendsate | -Mbbl | | | 39.317 | | | | 137.606 | | | | 176.923 | |
| | | | | | | | | | | | | | |
| Income Data | | | | | | | | | | | | | |
| Future Gross Revenue | -M$ | | | 10,152.982 | | | | 38,494.999 | | | | 48,647.980 | |
| Deductions | -M$ | | | 2,477.669 | | | | 9,849.277 | | | | 12,326.946 | |
| Future Net Income | | | | | | | | | | | | | |
| Undiscounted | -M$ | | | 7,675.312 | | | | 28,645.722 | | | | 36,321.034 | |
Discounted @10% (Net Present Value) | -M$ | | | 4,402.887 | | | | 13,681.708 | | | | 18,084.595 | |
The foregoing estimated proved reserve data was prepared using unweighted average first-day-of-the-month prices for the year ended December 31, 2012. The Securities and Exchange Commission (SEC) pricing guidelines were used to set the oil and gas prices. An oil price of $94.71 per barrel (Bbl) and a gas price of $2.752 per million British Thermal Unit (MMbtu) were used in this study. The prices were adjusted for energy content, price differentials, and other expenses as needed.
Our proved natural gas reserves were 14.843 billion cubic feet (Bcf), or 2.473 million barrels of oil equivalent (BOE) (1Bbl = 6 Mcf basis). The proved oil reserves were .177 million barrels, for a total of 2.650 million barrels of oil equivalent (BOE). The Net Present Value, discounted at 10%, of the estimated future net cash flow before income taxes (PV-10) of our total proved reserves at December 31, 2012 was $18.084 million.
There are many uncertainties inherent in estimating quantities and values of proved reserves and projecting future rates of production and timing of development. The reserve data set forth herein, although prepared by an independent petroleum engineer in a manner customary in the industry, are estimates only, and the actual quantities and values of oil and gas are likely to differ from the estimated amounts set forth herein. In addition, the reserve estimates for our properties will be affected by future changes in sales prices of oil and gas produced. Other than those filed with the SEC, our estimated reserves have not been filed with or included in any reports to any federal agency.
Results of operations
Three-month period ended September 30, 2013 compared to the three-month period ended September 30, 2012
For the three months ended September 30, 2013, we generated total revenues of $124,726, consisting of $113,628 in oil and gas production revenues and $11,098 in royalty income. For the three-ended September 30, 2012, we generated total revenues of $113,032 consisting entirely of royalty income. The $11,694 increase in our total revenues for the three months ended September 30, 2013 compared to the September 30, 2012 quarter is primarily attributable to the $11,098 of royalty income for the three months ended September 30, 2013 given that the oil and gas production for the three months ended September 30, 2013 and royal income of $113,032 for the three months ended September 30, 2012, were approximately the same. For the three month period ended September 30, 2013 and September 30, 2012, we incurred total costs and expenses of $176,126 and $177,603 respectively. The total costs and expenses for these 2013 and 2012 periods only represents a $1,477 decrease in our operating expenses during the September 30, 2013 quarter compared to the September 30, 2012 quarter; however, there are material differences in the comparisons of type costs and expenses between the 2013 quarter and 2012 quarter, as follows: (a) a $71,087 decrease in lease operating expenses; (b) a $48,965 increase in administrative expenses; and (c) a $20,645 increase in depreciation and depletion with $0 of depreciation and depletion expense during the quarter ended September 30, 2012.
Nine-month period ended September 30, 2013 compared to the nine-month period ended September 30, 2012
For the nine months ended September 30, 2013, we generated total revenues of $357,962, consisting of $325,635 in oil and gas production revenues and $31,327 in royalty income. We reported $358,352 of total revenues for the nine-months ended September 30, 2012, consisting entirely of royalty income, whereas in the 2013 period revenues were primarily attributable to $325,635 of oil and gas production revenues. There is an immaterial decrease in total revenues of $390 between total revenues from the 2013 period to the 2012 period. For the nine month period ended September 30, 2013 and September 30, 2012, we incurred operating expenses of $529,884 and $357,962, respectively, representing increased expenses of $171,922. This increase is primarily attributable to a $337,630 increase in administrative expenses offset by a $205,360 decrease in lease operating expenses.
Liquidity
At September 30, 2013, we had total current assets of $287,344 consisting of $57,092 in cash, $48,000 in accounts receivable and $182,252 in prepaid expenses for professional services. Total current liabilities at September 30, 2013 were $36,543, consisting of accounts and accrued expenses payable of $28,492, notes payable - current portion of $4,051 and due to related parties of $4,000. At September 30, 2013, we had positive working capital of $250,801.
Our material sources and uses of cash for the nine months ended September 30, 2013 and 2012 are as follows:
| | | 2013 | | | 2012 | |
| Net cash (used in) operating activities | | $ | 117,110 | | | $ | 8,012 | |
| Proceeds from related party loans, net | | $ | 0 | | | $ | 20,000 | |
| Payments on notes payable | | $ | 2,858 | | | $ | 18,304 | |
| Pr | | | | | | | | |
| Increase (decrease) in cash | | $ | 36,174 | | | $ | (6,316 | ) |
Our net loss of $179,938 for the nine months ended September 30, 2013 compared to a net loss of $159,999 for the nine months ended September 30, 2012 represents an increased net loss of $19,939 compared to the nine months ended September 30, 2012. The primary component of our negative operating cash flow for the nine months ended September 30, 2013 were our administrative expenses of $422,717, which amount primarily consisted of matters pertaining to the exploitation of our existing properties and continued concentration of our planning efforts in the Appalachian Basin Devonian Shale area.
TRENDS AND UNCERTAINTIES
Our operations are subject to certain trends and uncertainties:
| o | Supply and demand factors in the oil and gas industry; |
| o | Actions by United States policy makers in the oil and gas industry, particularly those that impact upon supply, demand and price; |
| o | Whether we are able to obtain adequate financing to expand our operations; |
| o | Fluctuating changes in the market price of oil and natural gas; and |
| o | Weather, imports, marketing of competitive fuels, proximity and capacity of oil and natural gas pipelines and other transportation facilities, any oversupply or undersupply of oil, natural gas and liquid products, the regulatory environment, the economic environment and, other regional and political events, none of which can be predicted with certainty; |
SIGNIFICANT ACCOUNTING POLICIES
We report revenues and expenses using the accrual method of accounting for financial and tax reporting purposes.
USE OF ESTIMATES
Management uses estimates and assumption in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.
INCOME TAXES
We account for income taxes under ASC 740 “Income Taxes” which codified SFAS 109, “Accounting for Income Taxes” and FIN 48 “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that we will not realize tax assets through future operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounting Standards Codification Topic 820, “Disclosures About Fair Value of Financial Instruments,” requires the Company to disclose, when reasonably attainable, the fair market values of its assets and liabilities, which are deemed to be financial instruments. Our financial instruments consist primarily of cash.
PER SHARE INFORMATION
We compute net loss per share accordance with FASB ASC 205 “Earnings per Share”. FASB ASC 205 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement.
Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all potentially dilutive common shares outstanding during the period. Diluted EPS excludes all potentially dilutive shares if their effect is anti-dilutive.
STOCK OPTION GRANTS
We have not granted any stock options to our officers and directors since our inception. Upon the further development of our business, we will likely grant options to directors and officers consistent with industry standards for junior oil and gas companies.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Inapplicable. We have no market sensitive instruments.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the 1934 Act). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
Changes in Internal Control Over Financial Reporting.
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 240.15d-15 that occurred during our last fiscal quarter that has materially affected, or is reasonable likely to materially affect, our internal control over financial reporting.
