UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

 

FORM 10-Q

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 30, 2014

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________________ to _______________

 

333-147501

(Commission file number)

 

HOMELAND RESOURCES LTD.

(Exact name of registrant as specified in its charter)

 

Nevada		26-0841675
(State or other jurisdiction		(IRS Employer
Of incorporation or organization)		Identification No.)

 

(Address of principal executive offices)                              (Zip Code)

 

9120 Double Diamond Parkway, #H269, Reno, Nevada 89521

(Address of principal executive offices)             (Zip Code)

 

(877) 503-4299

(Registrant’s telephone number, including area code)

 

6801 Los Trechos NE, Albuquerque New Mexico 87109

(Former name or former address, if changed since last report)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x  Yes                      ¨  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x  Yes                      ¨  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨  Yes   x  No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 60,800,000 shares of Common Stock, $0.0001 par value, June 13, 2014.

 

 

HOMELAND RESOURCES LTD.

 

		Page
PART I.	UNAUDITED FINANCIAL INFORMATION
Item 1.	Interim Financial Statements
	Balance Sheets April 30, 2014 (unaudited) and July 31, 2013	3
	Statements of Operations (unaudited) Three and Nine months Ended April 30, 2014 and 2013	4
	Statements of Cash Flows (unaudited) Nine months Ended April 30, 2014 and 2013	5
	Notes to Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16
Item 4.	Controls and Procedures	16
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	17
Item 1A.	Risk Factors	17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3.	Defaults Upon Senior Securities	17
Item 4.	Mine Safety Disclosures	17
Item 5.	Other Information	17
Item 6.	Exhibit Index	18
Signatures		19

 

 

HOMELAND RESOURCES LTD.

BALANCE SHEETS

 

		April 30,				July 31,
		2014				2013
		(Unaudited)
ASSETS
Current Assets
Cash		$	53,094			$	5,989
Accounts receivable			7,000				19,000
Prepaid expenses			2,000				-
Total Current Assets			62,094				24,989
Mineral property			1				1
Oil and gas properties, at cost (full cost method)
Properties subject to amortization			1,063,073				347,488
Properties not subject to amortization			72,908				618,981
Less: accumulated depletion, depreciation and impairment			(866,475	)			(140,647	)
Net oil and gas properties			269,506				825,822
Total Assets		$	331,601			$	850,812
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Accounts payable and accrued liabilities		$	323,963			$	256,958
Accounts payable – related party			239,354				207,854
Notes payable – related party			15,000				-
Notes payable			855,709				780,709
Total Current Liabilities			1,434,026				1,245,521
Long Term Liabilities
Asset retirement obligation			4,226				3,875
Total Liabilities			1,438,252				1,249,396
Stockholders’ Deficit
Preferred stock - $0.0001 par value; authorized – 250,000,000 shares Issued and outstanding – none			-				-
Common stock - $0.0001 par value; authorized – 500,000,000 shares    Issued and outstanding – 60,800,000 shares and 60,800,000 shares respectively			6,080				6,080
Additional paid in capital			204,090				189,090
Deficit accumulated during the development stage			(175,610	)			(175,610	)
Accumulated deficit			(1,141,211	)			(418,144	)
Total Stockholders’ Deficit			(1,106,651	)			(398,584	)
Total Liabilities and Stockholders’ Deficit		$	331,601			$	850,812

 

The accompanying notes are an integral part of these unaudited interim financial statements.

 

 

HOMELAND RESOURCES LTD.

STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three Months Ended April 30, 2014				Three Months Ended April 30, 2013				Nine Months Ended April 30, 2014				Nine Months Ended April 30, 2013
REVENUES
Oil and gas revenue		$	8,757			$	29,763			$	68,673			$	85,904
COSTS AND EXPENSES
Lease operating expenses			1,846				1,791				5,548				11,365
Depreciation, depletion, and accretion			24,167				7,180				62,869				15,702
Impairment of oil and gas properties			663,179				-				663,179				-
Consulting fees – related party			10,500				10,500				31,500				31,500
General and administrative			45,323				46,466				114,580				215,428
TOTAL OPERATING EXPENSES			745,015				65,937				877,676				273,995
LOSS FROM OPERATIONS			(736,258	)			(36,174	)			(809,003	)			(188,091	)
OTHER EXPENSES
Interest expense			15,586				12,861				62,042				39,164
Amortization of deferred financing costs			-				4,289				-				12,867
TOTAL OTHER EXPENSES			15,586				17,150				62,042				52,031
Gain on conveyance of interest in oil and gas properties			-				-				147,978				-
Net Loss		$	(751,844	)		$	(53,324	)		$	(723,067	)		$	(240,122	)
Net Loss Per Common Share Basic and Diluted		$	(0.012	)		$	(0.001	)		$	(0.012	)		$	(0.004	)
Weighted average number of common shares outstanding Basic and Diluted			60,800,000				60,800,000				60,800,000				60,477,656

 

The accompanying notes are an integral part of these unaudited interim financial statements.

 

 

HOMELAND RESOURCES LTD.

STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Nine Months Ended April 30, 2014				Nine Months Ended April 30, 2013
OPERATING ACTIVITIES
Net loss		$	(723,067	)		$	(240,122	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation, depletion, and accretion			62,869				15,702
Impairment of oil and gas properties			663,179				-
Gain on conveyance of interest in oil and gas properties			(147,978	)			-
Share based compensation			-				80,000
Amortization of deferred financing costs			-				12,867
Change in non-cash working capital items:
(Increase) Decrease in accounts receivable			12,000				(15,000	)
(Increase) Decrease in prepaid assets			(1,925	)			6,000
Increase in accounts payable and accrued liabilities			122,829				52,012
Increase in accounts payable related party			31,500				31,500
Net cash provided by (used) in operating activities			19,407				(57,041	)
INVESTING ACTIVITIES
Additions to interests in oil and gas properties			(203,807	)			(92,886	)
Proceeds from conveyance of interest in oil and gas properties			141,505				-
Net cash (used) in investing activities			(62,302	)			(92,886	)
FINANCING ACTIVITIES
Proceeds from notes payable			90,000				31,000
Net cash provided by financing activities			90,000				31,000
Net increase (decrease)  in cash			47,105				(118,927	)
Cash beginning of period			5,989				143,552
Cash end of period		$	53,094			$	24,625
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest		$	-			$	-
Cash paid for income taxes		$	-			$	-
NON CASH INVESTING AND FINANCING TRANSACTIONS
Forgiveness of Joint Interest billing costs owed from conveyance of interest in oil and gas properties		$	58,495			$	-

 

The accompanying notes are an integral part of these unaudited interim financial statements.

 

 

HOMELAND RESOURCES LTD.

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

APRIL 30, 2014

 

NOTE 1 - BASIS OF PRESENTATION

 

The interim financial statements of Homeland Resources Ltd. (“we,” “us,” “our,” “Homeland” or the “Company”) are unaudited and contain all adjustments (consisting primarily of normal recurring accruals) necessary for a fair statement of the results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for a full year or for previously reported periods due in part, but not limited to, interest rates, drilling risks, geological risks, the timing of acquisitions, and our ability to obtain additional capital. These interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in Homeland’s Annual Report on Form 10-K for the year ended July 31, 2013, as filed with the Securities and Exchange Commission (“SEC”) on October 29, 2013. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

 

NOTE 2 – GOING CONCERN

 

As of April 30, 2014, our current liabilities exceeded our current assets by $1,371,932 and for the nine months ended April 30, 2014, our net loss was $723,067.  Our results of operations have resulted in an accumulated deficit of $1,316,821 as of April 30, 2014.  We have participated in the drilling of test wells on undeveloped properties.  We had planned further participation in drilling and seismic operations for the remainder of the fiscal year however during the nine months ended April 30, 2014 the results of the Phase-1 exploration program in which we participated, have been primarily unsuccessful. Of six wells drilled five have been deemed to be uneconomic. We do not anticipate that we will be able to make additional expenditures relating to our share of continuing drilling programs during the remainder of the fiscal year 2014. We will need to raise equity or borrow additional capital to fund any further participation in drilling activities. If additional financing is not available, we will be compelled to reduce the scope of our business activities further.  If we are unable to fund our operating cash flow needs and planned capital investments, it may be necessary to sell all or a portion of our interests in our oil and gas properties.

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Accounts Receivable – Accounts receivable consists of amounts receivable from oil and gas sold from our well interests. As of April 30, 2014, our accounts receivable amounted to $7,000, all of which is due from one party, the operator of our oil and gas properties. Management believes this amount to be fully collectible; we will continue to monitor amounts receivable for collectability on a periodic basis.

 

Asset Retirement Obligation – Asset retirement obligations associated with tangible long-lived assets are accounted for in accordance with ASC 410, “Accounting for Asset Retirement Obligations.” The estimated fair value of the future costs associated with dismantlement, abandonment and restoration of oil and gas properties is recorded generally upon the completion of a well. The net estimated costs are discounted to present values using a risk adjusted rate over the estimated economic life of the oil and gas properties. Such costs are capitalized as part of the related asset. The asset is depleted on the units-of-production method on a field-by-field basis. The liability is periodically adjusted to reflect: (1) new liabilities incurred; (2) liabilities settled during the period; (3) accretion expense; and (4) revisions to estimated future cash flow requirements. The accretion expense is recorded as a component of depreciation, depletion, accretion and amortization expense in the accompanying statements of operations.

 

Fair Value of Financial Instruments – The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, notes payable, and interest payable. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.

 

Concentrations - The Company received 100% of its revenues from the operator of its oil and gas properties during the fiscal quarters ended April 30, 2014 and 2013.

 

Revenue Recognition – The Company recognizes oil and gas revenue when production is sold at a fixed or determinable price, persuasive evidence of an arrangement exists, delivery has occurred and title has transferred, and collectability is reasonably assured.

 

 

HOMELAND RESOURCES LTD.

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

APRIL 30, 2014

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Estimates - 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 under different assumptions or conditions.

 

NOTE 4 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

Accounting standards-setting organizations frequently issue new or revised accounting rules. We regularly review all new pronouncements that have been issued to determine their impact, if any, on our financial statements.

 

In July 2013, the Financial Accounting Standards Board (FASB) issued, Accounting Standards Update (ASU) No. 2013-11 "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" (“ASU 2013-11”).  ASU 2013-11 addresses the diversity in practice that exists for the balance sheet presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. ASU No. 2013-11 is effective for the Company’s fiscal quarter ending October 31, 2014. ASU 2013-11 impacts balance sheet presentation only. The Company is currently evaluating the impact of the new rule but believes the balance sheet impact will not be material.

 

There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company's financial position, results of operations or cash flows.

 

NOTE 5 – (LOSS) PER SHARE

 

Basic (loss) per common share is computed by dividing the net (loss) attributable to common shareholders by the weighted average number of shares of common stock outstanding during the period.

 

Diluted net (loss) per common share is computed in the same manner, but also considers the effect of common stock shares underlying any instrument that might have a dilutive impact on weighted average shares outstanding.

 

As of April 30, 2014 we did not have any instruments which would have an impact on our weighted average shares outstanding.

 

NOTE 6 – OIL AND GAS PROPERTIES

 

The Company holds the following oil and gas interests:

 

		April 30, 2014				July 31, 2013
Oil and Gas Properties
Washita Bend 3D Exploration Project		$	72,908			$	579,818
2010-1 Drilling Program			-				39,163
Total Oil and Gas Properties – not subject to amortization			72,908				618,981
Oil and Gas Properties subject to amortization			1,059,412				344,297
Asset Retirement Cost			3,661				3,191
Less: accumulated depletion and impairment			(866,475	)			(140,647	)
Total		$	269,506			$	825,822

 

 

HOMELAND RESOURCES LTD.

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

APRIL 30, 2014

 

Washita Bend 3D Exploration Project

 

In April 2010, we acquired a 5% working interest in the Washita Bend 3D Exploration Project for a total buy-in cost of $46,250. The project provided for the acquisition of approximately 135 miles of 3D seismic data to identify drillable prospects in a study area comprising 119,680 acres in Oklahoma.  The Washita prospect area is located in Cleveland, Garvin, McCain and Pottawatomie Counties, Oklahoma. On May 14, 2013, drilling commenced on the first of an anticipated 8-well Phase-I exploration program. Of the first six wells drilled in connection with this Phase-I exploration program five have been deemed to be non-economic.

 

As a component of the initial Washita Bend purchase agreement, we acquired from the seller a 5% carried working interest to casing point in the first eight wells drilled on this prospect area and in connection with the Phase-1 exploration program. Should we fail to participate in the drilling of any of the Phase-1 wells, we are subject to forfeit our right to our share of seismic data gathered.

 

Subsequent to April 30, 2014, the Company agreed to terminate its obligations to participate in the drilling of the remaining two wells in the Phase-1 exploration program, and as such, we have forfeited our right to our share of seismic data gathered. As of April 30, 2014, accumulated seismic costs for one of the eight committed wells have been moved to the proved properties.

 

As of April 30, 2014, we have recorded impairment expense of $463,550, the relative value of seven wells worth of data, related to forfeiture of seismic data for our failure to participate in the drilling of the remaining two wells in the Phase-1 exploration program. No impairment was recorded during the nine months ended April 30, 2013.

 

2010–1 Drilling Program

 

In April 2010, we acquired a 5% working interest in the 2010-1 Drilling Program located in Garvin County, Oklahoma for total buy-in costs of $39,163. Of the four wells in which we participated related to this program three wells went on production.

 

On December 3, 2013 we conveyed our interest in the Miss Jenny #1-8 to the operator of the well, for total consideration of $200,000 effective November 1, 2013. We received $141,505 in cash and a credit of $58,495 against accrued Joint Interest billing costs owed to the operator. We have recorded a gain in connection with this conveyance in the amount of $147,978.

 

As of April 30, 2014, all of the original buy-in costs have been moved to the proved properties.

 

Impairment

 

Under the full cost method, the Company is subject to a ceiling test.  This ceiling test determines whether there is any impairment to the proved properties. The impairment amount represents the excess of capitalized costs over the present value, discounted at 10%, of the estimated future net cash flows from the proven oil and gas reserves plus the cost, or estimated fair market value.  The Company recorded an impairment charge of $199,629 during the quarter ended April 30, 2014. These charges result from impairment recorded against the Washita Bend 3D Exploration Project as described above, as well as the remaining oil and gas properties for which the book basis exceeded the total amount of the present value of future net revenue and the cost of properties not being amortized (net of impairment).

 

Depletion

 

Under the full cost method, depletion is computed on the units of production method based on proved reserves, or upon reasonable estimates where proved reserves have not yet been established due to the recent commencement of production.  Depletion expense recognized was $24,092 and $7,133 for the three-month periods ended April 30, 2014 and 2013, respectively, and was $62,650 and $15,501 for the nine month periods ended April 30, 2014 and 2013, respectively.

 

 

HOMELAND RESOURCES LTD.

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

APRIL 30, 2014

 

NOTE 7 – NOTES PAYABLE

 

The Company has recorded the following notes payable:

 

		April 30, 2014				July 31, 2013
Radium Ventures 6.5% (A)		$	55,000			$	55,000
Radium Ventures 6.5% (B)			50,000				50,000
Radium Ventures 7.5% (C)			604,709				604,709
Radium Ventures 6.5% demand loans (D)			146,000				71,000
Subtotal			855,709				780,709
Demand loans – Related party (E)			15,000				-
Total		$	870,709			$	780,709

 

(A)

In April 2010, the Company executed a loan agreement with Radium Ventures Corp. to (“Radium”) for $55,000 at an interest rate of 6.5% per annum for a period of two years. The proceeds have been used for working capital in connection with the Company’s exploration programs. The note is unsecured and is past due.

 

(B)

In May 2010, the Company executed a loan agreement with Radium for $50,000 at an interest rate of 6.5% per annum for a period of two years. The proceeds of the loan have been used for working capital in connection with the Company’s exploration programs. The loan is unsecured and is past due.

 

(C)

In May 2010, the Company signed a loan agreement with Radium to receive up to $1,000,000 by way of advances available through December 31, 2011. The advances will be subject to an interest rate of 7.5% per annum. The Company also committed to issue to Radium 50,000 restricted common shares per each $100,000 advanced. All amounts advanced were payable within 36 months. As of April 30, 2014, $544,709 of these advances were past due. Subsequent to April 30, 2014, additional advances matured and became past due, resulting in all of the advances being past due.

 

(D)

On April 30, 2013, Radium Ventures advanced the Company $31,000 under the terms of a two-year 6.5%, promissory note. The note is unsecured, payable upon demand and can be repaid at any time. The proceeds of this note were used as working capital in connection with our exploration programs. On July 26, 2013, Radium Ventures advanced the Company $40,000 under the terms of a two-year 6.5%, promissory note. The note is unsecured, payable upon demand and can be repaid at any time. The proceeds of this note were used as working capital in connection with our exploration programs. On August 12, 2013 Radium Ventures advanced the Company $45,000 under the terms of a two-year 6.5%, promissory note. The note is unsecured, payable upon demand and can be repaid at any time. The proceeds of this note were used as working capital in connection with our exploration programs. On September 6, 2013, Radium Ventures advanced the Company $30,000 under the terms of a two-year 6.5%, promissory note. The note is unsecured, payable upon demand and can be repaid at any time. The proceeds of this note were used as working capital in connection with our exploration programs.

 

(E)

On October 11, 2013 and October 21, 2013, the Company borrowed a total of $15,000 from two lenders - $7,500 from our Chief Financial Officer, Paul D. Maniscalco, and $7,500 from an individual shareholder. The short term notes bear interest at 15%, and principal and interest are due and payable in six equal installments commencing on February 1, 2014. The notes are convertible into shares of our common stock at $.02 per share at the election of the noteholders, maturity, or in the event of a default of repayment. In connection with this embedded conversion feature we have recorded a charge of $15,000 to interest expense during the quarter ended October 31, 2013. These notes have matured and are past due.

 

 

HOMELAND RESOURCES LTD.

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

APRIL 30, 2014

 

Interest expense incurred during the three- and nine-month periods ended April 30, 2014 amounted to $15,586 and $62,042, respectively. Interest expense incurred during the three- and nine-month periods ended April 30, 2013 amounted to $12,861 and $39,164, respectively. Accrued interest expense related to these notes amounted to $198,473 at April 30, 2014 and has been included in accrued liabilities on the Company’s balance sheet.

 

NOTE 8– DEFERRED FINANCING COSTS

 

The Company recorded deferred financing costs in connection with the cumulative issuance of 250,000 shares of its common stock in connection with our $1,000,000 loan facility (Note 7). The Company considered Accounting Standards Codification (ASC) 835-30, “Interest – Imputation of Interest,” in recording these amounts. The Company recognizes debt issue costs on the balance sheet as deferred charges, and amortizes the balance over the term of the related debt. The Company amortized $nil and $4,289 of deferred financing costs for the three month periods ended April 30, 2014 and 2013, respectively, and amortized $nil and $12,867 of deferred financing costs for the nine-month periods ended April 30, 2014 and 2013, respectively.

 

NOTE 9 –STOCKHOLDERS’ (DEFICIT)

 

As of April 30, 2014, we had 250,000,000 and 500,000,000 shares of preferred stock and common stock authorized, respectively. 10,000,000 shares of preferred stock were designated as Series A Preferred Stock, with a par value of $0.0001 per share. As of April 30, 2014, there were nil and 60,800,000 shares of preferred stock and common stock outstanding, respectively.

 

The Company did not issue any shares of its common stock or preferred shares during the nine month period ended April 30, 2014. The Company did not grant any options or warrants to purchase shares of its common stock or preferred shares during the nine month period ended April 30, 2014.

 

NOTE 10 – STOCK BASED COMPENSATION

 

During the nine months ended April 30, 2014, our board of directors did not approve the issuance of any stock options. A summary of activity for the nine months ended April 30, 2014 is as follows:

 

		Number of Shares				Weighted- Average Exercise Price
Options outstanding —July 31, 2012			250,000			$	0.18
Options exercisable — July 31, 2012			250,000			$	0.18
Granted			-			$	-
Forfeited			-			$	-
Expired			-			$	-
Options outstanding — April 30, 2013			250,000			$	0.18
Options exercisable — April 30, 2013			250,000			$	0.18
Granted			-			$	-
Forfeited			-			$	-
Expired			(250,000	)		$	0.18
Options outstanding — April 30, 2014			-			$	-
Options exercisable — April 30, 2014			-			$	-

 

 

HOMELAND RESOURCES LTD.

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

APRIL 30, 2014

 

All options vested 100% as of the date of grant. During the three months ended April 30, 2014 all of our outstanding options expired.

 

The fair value of each share-based award was estimated on the date of grant using a Black-Scholes pricing model that incorporates the assumptions noted in the following table for the nine months ended April 30:

 

		2014				2013
Expected option term — years			-				2
Weighted-average risk-free interest rate			-				0.34	%
Expected dividend yield			-				0
Weighted-average volatility			-				273.21	%

 

In connection with the issuance of the options to purchase our common shares we have recorded share based compensation of $nil and $nil for the three and nine months ended April 30, 2014, as compared to $nil and $nil for the corresponding prior periods. This amount has been included as a component of general and administrative expense in our unaudited statements of operations.

 

NOTE 11 – COMMITMENTS AND CONTINGENCIES

 

Although not completely estimable as of April 30, 2014, based on the terms of our original agreements with the operator of our oil and gas properties, the Company had anticipated additional expenditures related to its share of the ongoing Phase-1 drilling program as described elsewhere herein, might approach $150,000 through the remainder of the fiscal year 2014. As described elsewhere herein, due to liquidity considerations we will not participate in any additional drilling during the remainder of the fiscal year. During the period ended April 30, 2014, the Company agreed to terminate its obligations to drill the remaining two wells, and as such, we have forfeited our right to our share of seismic data gathered (Note 6).

 

NOTE 12 – RELATED PARTY TRANSACTIONS

 

As of April 30, 2014, the Company owed $239,354 to a related party. As of April 30, 2014, amounts payable to the related party included $163,500 in connection with consulting services provided to the Company, while remaining amounts owed are related to expenses paid on behalf of the Company. During the three and nine months ended April 30, 2014, the Company incurred $10,500 and $31,500, respectively, in consulting expense with the related party. The Company made no cash payments to related parties during the nine months ended April 30, 2014.

 

On October 11, 2013 our Chief Financial Officer and a shareholder each loaned us $7,500 (Note 7). The Company made no cash payments to related parties during the nine months ended April 30, 2014.

 

NOTE 13 – SUBSEQUENT EVENTS

 

The Company has evaluated all transactions through the date of issuance of these financial statements and noted there are no subsequent events that would require disclosure other than those disclosed hereafter. Subsequent to April 30, 2014, we agreed to forfeit our rights to seismic data gathered in connection with the Washita Bend 3D Exploration Project, related to our failure to participate in the drilling of two wells in an ongoing Phase -1 exploration project being conducted on the prospect area.

 

 

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

General

 

Our original business plan was to proceed with the exploration of the Home Ranch Prospect to determine whether there were commercially exploitable reserves of minerals located on the property comprising such mineral claims.  In fiscal 2010, we determined that our ability to explore for minerals on these claims had become economically non-feasible and we therefore suspended our activities on the Home Ranch Prospect indefinitely in order to focus on our oil and gas interests.  We did not conduct any operations or exploration activities on the Home Ranch Prospect during the nine-month period ended April 30, 2014.  At the time of this report, we do not know when or if we will proceed with the Home Ranch Prospect.

 

In April 2010, we acquired working interests in a seismic exploration program as well as a drilling program in oil and gas properties located in Oklahoma, as further described below.  Our present plan of operation is to continue to attempt to invest in oil and gas properties, while commencing a review of the Company's existing business plan and attempting to identify, examine and consider all strategies available to the company, both near and long term, in order to prudently determine the optimal course of action for the Company.

 

Oil and Gas Properties

 

“Bbl” is defined herein to mean one stock tank barrel, or 42 U.S. gallons liquid volume, used in reference to oil or other liquid hydrocarbons.

 

“Mcf” is defined herein to mean one thousand cubic feet of natural gas at standard atmospheric conditions.

 

Washita Bend 3D Exploration Project

 

In April 2010, we acquired a 5% working interest in the Washita Bend 3D Exploration Project for a total buy-in cost of $46,250. The project provided for the acquisition of approximately 135 miles of 3D seismic data to identify drillable prospects in a study area comprising 119,680 acres in Oklahoma.  The Washita prospect area is located in Cleveland, Garvin, McCain and Pottawatomie Counties, Oklahoma. On May 14, 2013, drilling commenced on the first of an anticipated 8-well Phase-I exploration program. Of the first six wells drilled in connection with this Phase-I exploration program five have been deemed to be non-economic.

 

As a component of the initial Washita Bend purchase agreement, we acquired from the seller a 5% carried working interest to casing point in the first eight wells drilled on this prospect area and in connection with the Phase-1 exploration program. Should we fail to participate in the drilling of any of the Phase-1 wells, we are subject to forfeit our right to our share of seismic data gathered.

 

Subsequent to April 30, 2014, the Company agreed to terminate its obligations to participate in the drilling of the remaining two wells in the Phase-1 exploration program, and as such, we have forfeited our right to our share of seismic data gathered. As of April 30, 2014, accumulated seismic costs for one of the eight committed wells have been moved to the proved properties.

 

As of April 30, 2014, we have recorded impairment expense of $463,550, the relative value of seven wells worth of data, related to the forfeiture of seismic data for our failure to participate in the drilling of the remaining two wells in the Phase-I exploration program.

 

2010–1 Drilling Program

 

In April 2010, we acquired a 5% working interest in the 2010-1 Drilling Program located in Garvin County, Oklahoma for total buy-in costs of $39,163. Of the four wells in which we participated related to this program three wells went on production.

 

On December 3, 2013 we conveyed our interest in the Miss Jenny #1-8 to the operator of the well, for total consideration of $200,000 effective November 1, 2013. We received $141,505 in cash and a credit of $58,495 against accrued Joint Interest billing costs owed to the operator. We have recorded a gain in connection with this conveyance in the amount of $147,978.

 

As of April 30, 2014, all of the original buy-in costs have been moved to the proved properties.

 

 

Loans

 

On August 12, 2013 and September 6, 2013, we borrowed $45,000 and $30,000, respectively, from Radium Ventures Corp. The borrowings are two year demand notes and accrue interest at 6.5% annually. On October 10, 2013 and October 21, 2013, we borrowed $7,500 and $7,500, respectively, from two lenders - $7,500 from our Chief Financial Officer, Paul D. Maniscalco, and $7,500 from an individual shareholder, in order to pay expenditures relating to our share of the drilling programs. The short term notes bear interest at 15%, and principal and interest are due and payable in six equal installments commencing on February 1, 2014. The notes are convertible into shares of our common stock at $.02 per share (a) at the election of the noteholders, (b) at any time after maturity, or (c) upon the event of default. In connection with this embedded conversion feature we have recorded a charge of $15,000 to interest expense during the quarter ended October 31, 2013. These notes have matured and are past due.

 

Results of Operations

 

Three months ended April 30, 2014 compared to the three months ended April 30, 2013.

 

Revenues - We recognized $8,757 in revenues during the three months ended April 30, 2014, compared with $29,763 for the three months ended April 30, 2013.  The decrease in revenue recognized of $21,006 or 71% relates to the sale of our interests in the Miss Jenny #1-8, with an effective date of November 1, 2013, offset slightly by the addition of one well drilled in connection with our Phase-I exploration/drilling program coming on production. Other decreases in production volume resulted from natural decline curves in the wells in which we have ownership interests.

 

Expenses - During the three months ended April 30, 2014, we incurred operating expenses of $745,015 as compared to $65,937 during the three months ended April 30, 2013, resulting in an increase of $679,078.  The increase in direct costs is primarily attributable to the following:

 

·

Impairment charges of $663,179 as compared to $nil in the corresponding prior period impairment expense consisted of $463,550, the relative value of seven wells worth of data, related to forfeiture of seismic data for our failure to participate in the drilling of the remaining two wells in the Phase-1 exploration program, and $199,629 related to the book basis of properties which exceeded the total amount of the present value of future net revenue and the cost of properties not being amortized (net of impairment).

·

Increased lease operating expenses to $1,846 as compared to $1,791 in the corresponding prior period; and

·

Increased depreciation, depletion and accretion expense to $24,167 as compared to $7,180 in the corresponding prior period. The increase in DD&A resulted primarily from increases in our depletion rate resultant from negative adjustments to the pool of capitalized costs incurred in connection with the conveyance of the interests in one of our producing wells, partially offset with decreases in our recoverable reserves related to the conveyance.

 

The above increases were partially offset by:

 

·

Decreased general and administrative expense to $45,323 as compared to $46,466 in the corresponding prior period.

 

Other expenses – We incurred $15,586 in other expenses during the three months ended April 30, 2014, as compared to $17,150 during the three months ended April 30, 2013, resulting in a decrease of $1,564. Charges to other expense relate to interest expense related to our loans and the amortization of deferred financing costs. Outstanding balances on our loans have increased when compared to the prior period, while deferred financing fees have been fully amortized as of the prior period resulting in decreased amortization expense.

 

Net loss – We incurred a net loss of $751,844 for the three months ended April 30, 2014, due to the increase in expenses (primarily the impairment charge), and due to the decreased revenues for the period. Our net loss for the three months ended April 30, 2013 was $53,324.

 

 

Nine months ended April 30, 2014 compared to the nine months ended April 30, 2013.

 

Revenues - We recognized $68,673 in revenues during the nine months ended April 30, 2014, compared with $85,904 for the nine months ended April 30, 2013.  The decrease in revenue recognized of $17,231 or 20% relates to decreased production volumes over the nine-month period and to the sale of our interest in the Miss Jenny #1-8 which was effective November 1, 2013. The decrease was offset by an additional well that came on production in December 2013 as described elsewhere herein.

 

Expenses - During the nine months ended April 30, 2014, we incurred operating expenses of $877,676 as compared to $273,995 during the nine months ended April 30, 2013, resulting in an increase of $603,681.  The increase in direct costs is primarily attributable to the following:

 

·

Impairment charges of $663,179 as compared to $nil in the corresponding prior period impairment expense consisted of $463,550, the relative value of seven wells worth of data, related to forfeiture of seismic data for our failure to participate in the drilling of the remaining two wells in the Phase-1 exploration program, and $199,629 related to the book basis of properties which exceeded the total amount of the present value of future net revenue and the cost of properties not being amortized (net of impairment).

·

Increased depreciation, depletion and accretion expense to $62,869 as compared to $15,702 in the corresponding prior period. The increase in DD&A resulted primarily from increases in our depletion rate resultant from negative adjustments to the pool of capitalized costs incurred in connection with the conveyance of the interests in one of our producing wells, partially offset with decreases in our recoverable reserves related to the conveyance.

 

The above increases were partially offset by:

 

·

Decreased lease operating expenses to $5,548 as compared to $11,365 in the corresponding prior period; and

·

Decreases in general and administrative expenses to $114,580 as compared to $215,428 in the corresponding prior period. Decreases in general and administrative expense relate primarily to share based compensation of $nil as compared to $80,000 in the corresponding prior period, as well as marketing and promotions expense of $nil as compared to $17,000 in the corresponding prior period, and decreases in legal expense and management fees.

 

Other expenses– We incurred $62,042 in other expenses during the nine months ended April 30, 2014 as compared to $52,031 during the nine months ended April 30, 2013 resulting in an increase of $10,011. The increase in other expenses is attributable to interest related to increases in our notes payable balances during the current period versus the comparable prior period. Increased interest expense was offset slightly by decreased amortization of deferred financing fees.

 

Other income - We conveyed our interests in the Miss Jenny #1-8 well during the nine months ended April 30, 2014.  The conveyance of this interest resulted in the Company recognizing a gain on the conveyance of $147,978.

 

Net loss – We incurred a net loss of $723,067 for the nine months ended April 30, 2014, due to the increase in expenses (primarily the impairment charge), and due to the decreased revenues for the period. Our net loss for the nine months ended April 30, 2013 was $240,122.

 

Liquidity and Capital Resources

 

As of April 30, 2014, we had cash of $53,094, compared to cash of $5,989 as of July 31, 2013.  Our working capital deficit at April 30, 2014 was $1,371,932, compared to $1,220,532 as of July 31, 2013. The increase in our working capital deficit relates to decreased cash balances resulting from cash used in operations offset by increases in accounts payable and accounts payable due a related party. The statement of cash flows reflects cash of $203,807 used for the purchase of oil and gas properties, offset by proceeds of $141,505 from the conveyance of our interest in oil and gas properties, and a total of $90,000 of cash provided by financing transactions.

 

 

We do not anticipate that we will be able to make additional expenditures relating to our share of continuing drilling programs during the remainder of the fiscal year 2014. As of April 30, 2014, our cash balance was $53,094, and such cash will not be sufficient to meet our requirements under our existing agreements. The ability to draw on our loan facility with Radium expired on December 31, 2011. $709,709 of the amounts drawn on our credit facility, which were due 36 months from initial funding, are past due. Two short term loans totaling $15,000 have matured and are past due. Although we are in negotiations with Radium to extend our credit instruments and despite the fact that the lender has advanced us additional funds, there is no assurance that we will reach such an agreement before we are required to make any expenditures in excess of what we hold in cash. If we exhaust all our cash, are unable to timely arrange for new financing, and do not pay our share of potential drilling program costs, we will be in default of our agreements with the operator of our properties. In such event of default, we may incur significant liabilities, and potentially forfeit our rights to our acquired interests. The conveyance of the interests in one of our producing wells with an effective date of November 1, 2013, may place additional constraints on our cash.

 

Cash Flows

 

		Nine Months Ended April 30,
		2014				2013
Net cash provided by (used in) operating activities		$	19,407			$	(57,041	)
Net cash (used in) investing activities		$	(62,302	)		$	(92,886	)
Net cash provided by  financing activities		$	90,000			$	31,000

 

Net Cash Provided by (Used in) Operating Activities. The changes in net cash provided by (used in) operating activities are attributable to our net income adjusted for non-cash charges as presented in the consolidated statements of cash flows and changes in working capital as discussed above.

 

Net Cash (Used in) Investing Activities. Net cash used in investing activities for the nine months ended April 30, 2014 was $(62,302) as compared to net cash used of $(92,886) for the nine months ended April 30, 2013.  The change in net cash (used in) investing activities relates to the conveyance of interests in oil and gas properties for which we received net proceeds of $141,505 offset by investments in oil and gas properties of $(203,807), as compared to the corresponding prior period wherein we invested $(92,886) in oil and gas properties.

 

Net Cash Provided by Financing Activities.  We received $90,000 in cash from financing activities for the nine months ended April 30, 2014 as compared to $31,000 in the corresponding prior period. Borrowings during the current period were comprised of $75,000 in short term borrowings from Radium Ventures and short term borrowings of $7,500 from our Chief Financial Officer and $7,500 from an individual shareholder.

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements as of April 30, 2014.

 

Going Concern

 

In its report prepared in connection with our fiscal year 2013 financial statements, our independent registered public accounting firm included an explanatory paragraph stating that, because we had an accumulated deficit of $593,754 and a working capital deficit of $1,220,532 at July 31, 2013, there was substantial doubt about our ability to continue as a going concern.  At April 30, 2014, our accumulated deficit was $1,316,821, our stockholder’s deficit amounted to $1,106,651, and our working capital deficit was $1,371,932.  Our continued existence will depend in large part upon our ability to raise sufficient additional capital adequate to fund our participation in drilling and seismic programs through debt and or equity offerings.  Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

Forward Looking Statements

 

Certain statements in this Quarterly Report on Form 10-Q, as well as statements made by us in periodic press releases and oral statements made by our officials to analysts and shareholders in the course of presentations about the Company, constitute “forward-looking statements.”   Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward looking statements.  Such factors include, among other things: (1) the prices of oil and gas; (2) general economic and business conditions; (3) interest rate changes; (4) the relative stability of the debt and equity markets; (5) government regulations particularly those related to the natural resources industries; (6) required accounting changes; (7) disputes or claims regarding our property interests; and (8) other factors over which we have little or no control.

 

Item 3.      Quantitative and Qualitative Disclosures About Market Risk

 

Not required for smaller reporting companies.

 

Item 4.      Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures, as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to our Management including our interim President and our Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Rule 15d-15 under the Exchange Act requires us to carry out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of July 31, 2013, being the date of our most recently completed fiscal year end. This evaluation was conducted by our interim President and Chief Financial Officer. Based on this evaluation we have concluded that the design and operation of our disclosure controls and procedures are not effective since the following significant deficiency:

 

·

There is an inherent lack of segregation of duties with respect to certain transactions involving cash and accounts payable.

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 15d-15(f) under the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of our financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our interim President and Chief Financial Officer has assessed the effectiveness of our internal controls over financial reporting as of April 30, 2014. In making this assessment, the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (1992 version).

 

In conducting the evaluation, our interim President and Chief Financial Officer considered advice from our Independent Registered Public Accounting Firm, StarkSchenkein, LLP (“StarkSchenkein”). StarkSchenkein indicates that there may be significant deficiencies in our internal controls over financial reporting. Specifically, the following potential deficiency has been noted:

 

·

We do not have proper segregation of duties with respect to certain transactions involving cash and accounts payable.

 

 

As a result of this deficiency in our internal controls, our interim President and Chief Financial Officer concluded further that the design and operation of our disclosure controls and procedures may not be effective and that our internal control over financial reporting was not effective. Our Executive Officer also considered various mitigating factors in making this determination. The officer also noted that we are still evaluating and implementing changes in our internal controls in response to the requirements of Sarbanes Oxley §404. During fiscal year ending July 31, 2014, we will attempt to implement appropriate changes as they are identified, including changes to remediate the significant deficiencies in our internal controls. There can be no guarantee that we will be successful in making these changes as they may be considered cost prohibitive.

 

Changes In Internal Controls Over Financial Reporting

 

In connection with the evaluation of our internal controls during our last fiscal quarter, our Chief Financial Officer and interim President have concluded that there were no material changes in our internal control over financial reporting that occurred during the fiscal quarter ended April 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1.       Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

Not required for smaller reporting companies.

 

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds

 

During the quarter ended April 30, 2014, the registrant issued no shares of the Company’s common stock.

 

Item 3.       Defaults Upon Senior Securities

 

None.

 

Item 4.       Mine Safety Disclosures

 

Not applicable.

 

Item 5.       Other Information

 

Not applicable

 

 

Item 6.       Exhibits

 

Regulation S-K Number		Exhibit
3.1		Articles of Incorporation (1)
3.2		Amendment to Articles of Incorporation (1)
3.3		Certificate of Change Pursuant to NRS 78.209 (2)
3.4		Bylaws (1)
10.1		Loan Commitment dated April 19, 2010 from Radium Ventures Corp. (3)
10.2		Loan Commitment dated May 11, 2010 from Radium Ventures Corp. (3)
10.3		Loan Agreement dated May 15, 2010 from Radium Ventures Corp. (3)
10.4		Loan Agreement dated April 19, 2013 from Radium Ventures Corp.
31.1		Rule 15d-14(a) Certification of Paul D. Maniscalco
32.1		Certification of Paul D. Maniscalco Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002
101*		Financial statements from the Quarterly Report on Form 10-Q of Homeland Resources Ltd. for the quarter ended April 30, 2014, formatted in XBRL: (i) the Balance Sheets; (ii) the Statements of Operations; (iii) the Statements of Cash Flows; and (v) the Notes to Financial Statements.

 

(1)

Incorporated by reference to the exhibits to the registrant’s registration statement on Form SB-1 filed November 19, 2007, file number 333-147501.

(2)

Incorporated by reference to the exhibits to the registrant’s current report on Form 8-K filed June 29, 2009, file number 333-147501.

(3)

Incorporated by reference to the exhibits to the registrant’s current report on Form 8-K filed April 19, 2010, file number 333-147501

 

* In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	HOMELAND RESOURCES LTD.
Date: June 16, 2014	By:	/s/ Paul D. Maniscalco
		Paul D. Maniscalco
		Interim President, Chief Operating Officer and Chief Financial Officer
		(principal executive and financial officer)