Form 10QSB for MATRIXX RESOURCE HOLDINGS, INC.
20-Nov-2006
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES", OR SIMILAR LANGUAGE. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS, UNCERTAINTIES AND OTHER FACTORS. ALL FORWARD- -LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF AND SPEAK ONLY AS OF THE DATE HEREOF. THE FACTORS DISCUSSED BELOW UNDER "FORWARD-LOOKING STATEMENTS" AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-QSB AND IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 2006, ARE AMONG THOSE FACTORS THAT IN SOME CASES HAVE AFFECTED THE COMPANY'S RESULTS AND COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
The following discussion should be read in conjunction with the condensed financial statements and notes thereto.
PLAN OF OPERATION
BACKGROUND
The Company emerged from bankruptcy in 1999 as Erly Industries, Inc. For the past seven years, the Company has been engaged in a series of transactions and restructurings designed to acquire assets or an existing business.
The Company's search for an operating business or assets for acquisition was facilitated in September 2004 by the consummation of a significant investment in the Company by a strategic partner. On September 14, 2004, the Company executed a Stock Purchase Agreement (the "SPA") with GarcyCo Capital Corp. ("GCCC"). The SPA called for the issuance by the Company of an aggregate of 400,000 shares of common stock to GCCC in consideration of the payment of $500,000 in cash. The Company was to receive the funds in $50,000 increments each quarter, beginning October 15, 2004. As part of the consideration for the SPA, GCCC was given the right to elect one Board member and agreed to retain Catherine Thompson and Michael Avatar on the Board of Directors and as consultants through December 31, 2007. To date, GCCC has not elected a representative to the Board of Directors of Matrixx.
As of July 18, 2006, GCCC completed its obligation to deliver an aggregate of $500,000 in financing to the Company ahead of schedule.
The Company effected a 1 for 500 reverse stock split to all shareholders of record as of October 15, 2004. The reverse stock split was designed to facilitate the Company's acquisition strategy.
In December 2004, the Company entered into an Agreement and Plan of Reorganization (the "GCCC Agreement") with GCCC. The GCCC Agreement provides that the Company would acquire from GCCC certain property and businesses and in consideration, GCCC shall receive 12,500,000 shares of the Company's Common Stock which will be used for the purposes of acquiring other businesses and assets as identified by GCCC and the Company. GCCC has two years to meet all of the obligations under the GCCC Agreement. Should GCCC fail to meet any or all of its commitments, then GCCC shall be required to forfeit the pro-rata balance of the 12,500,000 shares. Additionally, the Company has issued to GCCC 100 shares of the Company's Series A Convertible Preferred Stock and 100 shares of Series B
Convertible Preferred Stock. The Series A Convertible Preferred Stock is convertible into 50.1% of Matrixx's Common Stock at the time of conversion, which is determined at the sole discretion of GCCC. The Series A Convertible Preferred Stock has one vote per share. The Series B Convertible Preferred Stock is convertible into shares of Common Stock at a ratio of 1 for 1, and the time of conversion shall be determined at the sole discretion of GCCC. Each share of Series B Convertible Preferred Stock is entitled to 1,000,000 votes until such shares are converted into Common Stock.
The Company and GCCC sought to identify and evaluate business opportunities for acquisition or merger to provide long-term growth for its shareholders and to meet the Company's objective of attaining a listing on a national exchange. The Company's current strategy is to target acquisition and investment opportunities in the oil and gas and natural resource exploration industries.
The Company is developing a program for investments in the oil and gas industry which will allow the Company to grow responsibly by contributing to assets with diversification to help mitigate the industry associated risk. The Company's philosophy is to take small interests in relatively low risk opportunities. However, the Company may elect to accept a larger interest when the cost / benefit or cost/risk ratio is perceived to be very low. Management is not experienced in this industry and as such relies upon consultants and partners to bring proposals and to assist with investment decisions. The Company attempts to minimize risk by working with experienced and reputable partners and operators, considering factors such as success rates, experience with certain types of wells, and the cash flow sources of the Company's partners . The Company must also evaluate deal structure for fit with the current portfolio demands and its ability to raise financing. Lastly, the Company also analyzes property specific details such as the type of well, the target depth to be drilled, the field location and proximity of other wells, and if reserves or fields are proven.
The Company's entry into the oil and gas and natural resource exploration business began on July 14, 2006 with the final approval and closing of the Company's purchase of a 98% interest in the Hazard Lake Property, a 355-hectare gold mining property in the Red Lake District in Ontario, Canada and its purchase of a five percent interest in the Clovelly Prospect, an oil and gas property in the Lafourche Parish, Louisiana.
Acquisitions and Investments
Hazard Lake Property. On October 10, 2005, the Company executed a Purchase Agreement (the "Hazard Agreement") with Overseas Investment Banking Alliance, S.A., a Panamanian corporation ("Overseas"), for the purchase of Overseas' 98% interest in the Hazard Lake Property in Ontario, Canada. The Hazard Lake Property is valued at $397,000, net of impairment costs of $600,000 recognized at June 30, 2006.
The Hazard Lake Property lies within the Archean Birch-Uchi Greenstone Belt of the western Uchi Subprovince of NW Ontario, in an area known as the Red Lake Mining District. The property consists of three unpatented claims, all of which are in good standing, with an aggregate area of approximately 355 hectares. The Company and GCCC have reviewed a proposal for an exploration program, however, the Company's recent focus in the oil and gas sector is expected to take precedence for the near term.
Clovelly Prospect. On November 15, 2005, the Company executed a Letter Agreement (the "Letter Agreement") with Sterling Grant Capital Inc. (formerly Sun Oil and Gas Corp.) to purchase a 5% minority interest in an oil prospect property. The property is the Clovelly Prospect which is located in southeast Louisiana in the Lafourche Parish.
Drilling of the Allain-LeBreton No. 2 well on the Clovelly Prospect commenced on June 19, 2006. Due to difficulties encountered in drilling the No. 2 well, the operator will drill a twin hole. A twin hole is described as drilling a well adjacent to an existing well, such as the No. 2 well. The Company also plans to drill as soon as practicable, an additional well known as a PUD (Proven, Undeveloped well) to a target depth of 12,500 feet.
The No. 2 well encountered a two foot gas discovery, but due to the location of the hole, the drilling may have incurred an offset, whereby an additional 28 feet of discovery may exist containing up to 5 BCFG. While the gas discovery might be considered as an added benefit, the intended cause of drilling the twin is primarily to target what is known as the "M" sand at or about 14,300 feet to 14,500 feet with a prospective size of 10 to 11 million barrels of oil ("MMBO"). The Clovelly field has produced over 30 MMBO, most of which occurred in the "M" sand.
Drilling of the PUD well will likely occur prior to, or concurrently with, the drilling of the twin well and is expected to assist in offsetting cash outlays required for the new well. It is anticipated that this will occur in the late first calendar quarter of 2007.
Buck Snag Field. On August 28, 2006, the Company entered into an Acquisition and Participation Agreement ("Buck Snag Agreement") for the acquisition of a 42.5% working interest in the Buck Snag Field ("Buck Snag") from Texahoma Energy, Inc. (Pink Sheets: TXHE), a Nevada corporation ("Texhoma") , for a purchase price of $150,000. The Company's 42.5% working interest in the leases is subject to an existing overriding 28% Royalty Interest. Pursuant to the terms of the Buck Snag Agreement, Texhoma has the right to back-in for a 12.5% working interest after payout of the investment to the Company. Payout is defined as the receipt by the Company of the equivalent of the purchase price and the investment out of revenue distribution from the Operator. Sunray Operating Company, LLC, located in Sugarland, Texas, ("Sunray" or "Operator"), is the Operator for Buck Snag. Per the Buck Snag Agreement, Sunray is also entitled to a 12.5% working interest, proportionately reduced at payout. Both back-in working interest percentages to Texhoma and to Sunray are already factored into the Company's 42.5% working interest percentage. The Company's payment of $150,000 to Texhoma was for an initial 57.5% participation in Buck Snag but subsequently the Company agreed to convey 15% of its participation as partial payment for a 10% participation in the Sandy Point Prospect.
The Buck Snag Prospect covers approximately 280 acres of land in Colorado County, Texas. The Schiurring #1 well on Buck Snag commenced drilling on August 11, 2006 at approximately 500 feet north of the Windsor #2 Schiurring well. On August 18, 2006 the target depth of 4,400 feet was reached. The Schiurring #1 well was completed in the 2,030 foot sand and placed into production on August 24, 2006. Initial flow rate commenced at 120 thousand cubic feet ("MCF") of gas per day, and after the water cleanup, well production was expected to increase to 300 MCF of gas per day. Subsequently, the Schiurring #1 well developed mechanical problems allowing excess water into the well and rendering it difficult to maintain production. The Company, its partners and the operator plan to commence drilling on the Schiurring #2 well on the Buck Snag Prospect on or before December 14, 2006, as required by contractual obligations. Plans to drill future additional wells on the property will be made subsequent to this event. The Schiurring #2 well will be drilled to a depth of 4,400 feet to test the sands at that location.
Manvel Prospects. On October 5, 2006, the Company finalized an Acquisition and Participation Agreement with Texhoma for the acquisition of a majority working interest in two wells located in Brazoria County, Texas (the "Manvel Agreement"). Pursuant to the terms of the Manvel Agreement, the Company shall receive a 55% working interest in the Manvel 2,000 ft. Miocene Exploration prospect ("Miocene Prospect") for $20,000 and a 55% working interest in the Manvel 4,500 ft. Oakville Development well ("Oakville Prospect") for $40,000, (collectively, "Manvel Prospects").
The Company's 55% working interest in the leases is subject to an existing overriding 25% Royalty Interest. Pursuant to the terms of the Manvel Agreement, Texhoma has the right to back-in for a 12.5% working interest after payout of the investment to the Company for each well. Payout is defined as the receipt by the Company of the equivalent of the purchase price and the investment out of revenue distribution from the Operator, Sunray. Per the Manvel Agreement, Sunray is also entitled to a 12.5% working interest, proportionately reduced at payout for each well. Both back-in working interest percentages to Texhoma and to Sunray are already factored into the Company's 55% working interest percentage for both leases.
Sandy Point Prospect. On November 16, 2006, the Company finalized the terms of agreement with Texhoma and Sunray to acquire a 10% working interest in the Sandy Point Prospect for an aggregate amount of $35,928.57. The participation fee is to be paid through a conveyance of 15% of the Company's participation in Buck Snag valued at $22,500; 10% participation in the Manvel properties valued at $6,000; and $7,428.57 in cash. The Company's initial participation in Buck Snag was 57.5%, which was decreased to 42.5% as described above. Additionally, the Company's initial 55% participation in each of the Manvel Prospects has been decreased to 45%. The remaining terms of the Buck Snag and Manvel Agreements were not altered. The Sandy Point Prospect covers 196 acres of land in Brazoria County, Texas. The Fite No. 3 well will be drilled to the Frio formation to a depth of 6,700 to 7,000 feet, where Sunray, the operator for the well, expects to gain approximately 20 feet of structure to an existing producing well known as the Fite No. 1.
RESULTS OF OPERATIONS
The Quarter Ended September 30, 2006 Compared To The Quarter Ended September 30, 2005
Revenues. The Company did not generate any revenue in the quarterly periods ended September 30, 2006 and 2005. The Company's focus has been on the evaluation and selection of existing businesses to effect a merger or acquisition. The Company has been in the development stage since July 2001.
General and Administrative Expenses. The Company incurred $1,158,653 in general and administrative expenses for the quarter ended September 30, 2006, compared to $681,154 for the quarter ended September 30, 2005. The increases in 2006 were due primarily to expenses incurred to facilitate the growth of Matrixx through acquisition and fundraising efforts, as explained below.
Included in general and administrative expense for the quarter ended September 30, 2006 was $1,044,516 of expense related to the issuance of an aggregate of 27,822,292 shares of common stock to consultants in lieu of cash compensation. In addition, $232,268 of expense was related to the issuance of 14,861,127 shares, for prepaid consulting expenses. At September 30, 2006, the Company had no cash. Consultants receiving stock agreed to receive these securities, in lieu of cash, for payment of services rendered.
Sales and Marketing Expenses. The Company has incurred no sales and marketing expenses since the date of inception as it has been a development stage company.
Interest Expense. The Company recognized $5,472 in interest expense in the quarter ended September 30, 2006, and no interest expense in the quarter ended September 30, 2005. The expense recognized during the quarter ended September 30, 2006 represents interest on borrowings during the period.
Net Loss. As a result of the foregoing factors, the Company's net loss increased to $1,164,125 for the quarter ended September 30, 2006, compared to a net loss of $681,154 for the quarter ended September 30, 2005. The net loss per share was $0.01 for the quarterly period ended September 30, 2006, compared to a net loss per shares of $.02 for the quarterly period ended September 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
The Company has an immediate need for capital. At September 30, 2006, the Company had no cash or cash equivalents The Company's operating activities used $99,490 in net cash during the quarter ended September 30, 2006, compared with $84,898 in net cash used by operating activities during the quarter ended September 30, 2005. The cash used by operating activities during the quarter ended September 30, 2006 was primarily due to non-cash gains of $1,146,339 reflecting the issuance of stock for services and prepaid services and $810 for the issuance of stock on a subscription receivable. Other gains contributing to net cash from operating activities include cash include a $130,445 decrease in prepaid assets and an increase in accrued interest of $5,472. These gains were offset by other changes affecting net cash from operating activities at September 30, 2006 including an increase in deferred cost of acquisition of $139,675, a decrease in accounts payable and accrued liabilities of $74,334, a decrease in accrued liabilities - related parties of $3,906, and an increase of $516 in other assets. The cash used by operating activities during the quarter ended September 30, 2005 included non-cash gains of $654,000 reflecting the issuance of stock for services and prepaid services offset by other changes affecting net cash used by operating activities at September 30, 2005. These other changes included a decrease in accrued liabilities of $18,997 and an increase of $52,000 in deferred cost of acquisition offset by a decrease in prepaid expenses of $9,000, and an increase in accrued liabilities - related parties of $4,254.
The Company utilized $318,700 in cash for investing activities during the quarter ended September 30, 2006. The Company invested $25,000 in mineral properties and $293,700 in unproven oil and gas properties during the quarter ended September 30, 2006. There were no investing activities in the quarter ended September 30, 2005. Financing activities provided $418,119 of cash during the quarter ended September 30, 2006, consisting primarily of $262,369 in proceeds from notes payable, $146,190 in proceeds from the subscription receivable to GCCC and a bank overdraft of $9,560. During the quarter ended September 30, 2005, financing activities provided $84,860 of cash consisting primarily of $75,149 in proceeds from the subscription receivable to GCCC and a bank overdraft of $9,711.
The Company has not had any revenues to date, and has experienced operating losses since inception primarily caused by its continued development and administrative costs. As shown in the accompanying financial statements, the Company incurred a net loss of $1,164,125 for the quarter ended September 30, 2006. Since inception, the Company has incurred a net loss of $18,485,406. Primarily as a result of these recurring losses, Matrixx's independent certified public accountants modified their report on the June 30, 2006 financial statements to include an uncertainty paragraph wherein they expressed substantial doubt about the Company's ability to continue as a going concern. Management of the Company is actively seeking additional capital; however, there can be no assurance that such financing will be available on terms favorable to the Company, or at all. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Continuation of the Company as a going concern is dependent on the Company continuing to raise capital, developing significant revenues and ultimately attaining profitable operations.
On May 27, 2004 the Company executed a Convertible Promissory Note in the principal amount of $160,000 (the "Note") with Interactive Ideas Consulting Group ("IICG"). The Note bears interest at the rate of 8% per annum and was due and payable in full on or before May 26, 2005. The Company believes that there is a sufficient basis on which to dispute the amounts of principal and interest of the Note. As such, the Company accrued interest through the maturity date of May 26, 2005, in the amount of $12,800; no amounts for interest have been accrued beyond that date. As of the date of this filing the Company has not converted the Note and IICG has not requested a conversion.
On September 14, 2004, the Company executed the SPA with GCCC. The SPA called for the issuance by the Company of an aggregate of 400,000 shares of Common Stock to GCCC in consideration of the payment of $500,000 in cash. The Company was to receive the funds in $50,000 increments each quarter, beginning October 15, 2004.
The 400,000 shares were to be held in escrow by the Company and delivered on a pro-rata basis within 10 days of receipt of each installment. All shares are restricted within the meaning of Rule 144 under the Securities Act and must be held indefinitely unless subsequently registered or qualified for exemption. The SPA included a provision that the purchase price per share, and therefore the number of shares to be delivered at the time of each installment payment, would be calculated for each installment at the lesser of: (a) $1.25 or (b) a 37.5% discount to the 10 day trailing closing price of the Company's Common Stock at the time of each payment. At September 14, 2004, the Company had an aggregate of 305,108 shares of Common Stock outstanding on a fully-diluted basis. Based on the price of the Company's Common Stock at that date, GCCC would have owned and controlled approximately 56.73% of the Company's fully-diluted Common Stock and 56.73% of the Company's outstanding Common Stock calculated pursuant to Rule 13d-3(d)(1)(B) of the Securities Exchange Act of 1934. As of July 18, 2006, the Company had received an aggregate of $500,810 in financing from the SPA. On September 18, 2006, the Company delivered 18,543,373 shares of restricted Common Stock, at an average price of $0.027 per share, as calculated using method (b) described above thus completing the terms of the SPA.
The Company and GCCC sought to identify and evaluate business opportunities for acquisition or merger to provide long-term growth for its shareholders and to meet the Company's objective of attaining a listing on a national exchange. On October 10, 2005, the Company executed the Hazard Agreement with Overseas for the purchase of Overseas' 98% interest in the Hazard Lake Property in Ontario, Canada. The Hazard Agreement called for an aggregate purchase price of $397,000, of which a note for $130,000 was issued, payable in annual installments as follows: $25,000 on March 15, 2006, $30,000 on March 15, 2007, $35,000 on March 15, 2008, and $40,000 on March 15, 2009. Overseas extended the March 15, 2006 payment date to coincide with the closing of the acquisition on July 14, 2006. The Company has also issued 2,000,000 shares of Common Stock to Overseas. These shares were delivered from the 12,500,000 shares issued to GCCC pursuant to the terms of the GCCC Agreement. The Hazard Agreement valued the shares at $200,000, or $0.10 per share, based on the current market price on the date of the Hazard Agreement. However, the 12,500,000 escrowed shares were valued at $0.40 per share when issued to GCCC and, therefore, the Company was initially required to value the 2,000,000 shares transferred to Overseas at $0.40 per share for an aggregate value of $800,000, thus making the total purchase price to Matrixx $997,000. As a result of the Company's recently focused attention on acquiring oil and gas properties, it was determined that the value of the Hazard Lake Property in deferred acquisition cost was impaired. At June 30, 2006, the Company recognized an impairment in the value of the Hazard Lake Property of $600,000.
On November 15, 2005, the Company executed the Letter Agreement with Sterling to purchase a 5% minority interest in an oil prospect property known as the Clovelly Prospect ("Clovelly"). The Letter Agreement called for an aggregate purchase price of $115,000, of which $15,000 has been prepaid in cash and the balance of $100,000 was paid with the issuance of 2,000,000 shares of registered Common Stock also delivered from the shares issued to GCCC. The shares were issued on January 30, 2006 from the 12,500,000 shares issued to GCCC pursuant to the terms of the GCCC Agreement, leaving the balance of shares in escrow at 8,500,000. The Letter Agreement valued the shares at $100,000, or $0.05 per share, based on the current market price of the Company's Common Stock on the date of the Letter Agreement. However, the 12,500,000 escrowed shares were valued at $0.40 per share when issued to GCCC and, therefore the Company is required to value the 2,000,000 shares transferred to Sterling at $0.40 per share for an aggregate value of $800,000. It is possible that in the future the Company will be required to recognize an impairment in the value of its interest in the Clovelly investment. As of September 30, 2006, the Company has paid $177,450 in development costs for the first well, the #2 Allain-LeBreton well, drilled at Clovelly with a balance owing of $82,914.
The Company's goal is to invest cash flow proceeds from successes into new projects. To date financing has been supplied by the SPA with GCCC. The Company and GCCC are in discussions to renew the SPA, however, there can be no assurance that a renewal will be reached or that if reached it will be on terms and conditions favorable to the Company. In the interim, on August 1, 2006, the Company executed a Loan Agreement ("Kuma Loan") with Kuma Holdings LTD, a British Columbia corporation ("Kuma").
Pursuant to the terms of the Kuma Loan, the Company may borrow up to $500,000 to pay for acquisitions, cash calls, payables and public company expenses. The Kuma Loan matures in 30 months, on January 31, 2009, and bears interest at 10% per annum payable at maturity. As an incentive for the Kuma Loan, Kuma will receive a 10% bonus payable in restricted Common Stock, to be issued upon receipt of the $500,000 aggregate principal. All shares of Common Stock will be issued to Kuma as restricted stock within the meaning of Rule 144 under the Securities Act and must be held indefinitely unless subsequently registered or qualified for exemption.
As of September 30, 2006, the Company has received $262,369 in funding from the Kuma Loan, including the aggregate amount of $27,021 from July which was loaned in advance based on the agreement in principal as discussed and agreed to by Matrixx and Kuma. Aggregate principal and interest owing on the Kuma Loan at September 30, 2006, is $265,691.
On August 28, 2006, the Company entered into the Buck Snag Agreement for the acquisition of a 42.5% working interest in the Buck Snag Field ("Buck Snag") from Texahoma. The Company paid $150,000 to Texhoma for an initial 57.5% participation in Buck Snag but subsequently, the Company has agreed to convey 15% of its participation as partial payment for a 10% participation in the Sandy Point Prospect. As of September 30, 2006, the Company has paid the full purchase price of $150,000, plus an additional $68,750 for development of the Schiurring #1 well, with $34,761 still owing. On November 9, 2006, the Company received its first revenue payment from proceeds of the Schiurring #1 well in the amount of $3,494. The Company, the operator and partners plan to drill the Schiurring #2 well on or before December 14, 2006. The Company will be obligated to pay its portion, 42.5% of dry hole and completion costs. Estimated dry hole cost and completion costs for the well are $187,500 and $165,450 of which the Company's obligation would be $79,688 and $70,316, respectively.
On October 5, 2006, the Company finalized the Manvel Agreement with Texhoma for the acquisition of 55% majority working interest in the Miocene and Oakville Prospects located in Brazoria County, Texas for an aggregate of $60,000. Subsequently, the Company has agreed to convey 10% of its participation in the Manvel Properties to Texhoma as partial payment for a 10% participation in the Sandy Point Prospect. As of the date of this filing, the Company has paid $30,000 toward the participation cost and is further obligated to 42.5% of estimated dry hole costs for the wells of $76,500 and $45,000, respectively. Should the wells be successful, the Company's estimated portion of completion costs is $25,000 for each Manvel Prospect.
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