AI
Monday, May 21, 2007 4:54:02 PM
Form 10QSB for MATRIXX RESOURCE HOLDINGS, INC.
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21-May-2007
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. 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 provided that the Company would acquire from GCCC certain property and businesses to be located by GCCC over a period of two years and in consideration, GCCC would receive 12,500,000 shares of the Company's Common Stock which was to be used for the purposes of acquiring other businesses and assets as identified by GCCC and the Company. The two year time period lapsed in December 2006 and only 4,000,000 of the 12,500,000 shares were utilized for acquisitions. GCCC returned the remaining 8,500,000 shares to the Company, and those shares have been cancelled.
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The GCCC Agreement also required the Company to issue to GCCC100 shares of the Company's Series A Convertible Preferred Stock and 100 shares of Series B ConvertiblePreferred 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'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.
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 oilprospect property. The property is the Clovelly Prospect which is located in southeast Louisiana in the Lafourche Parish.
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 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 was completed in the 2,030 foot sand and placed into productionon August 24, 2006. Subsequently, the Schiurring #1 well developed mechanical problems allowing excess water into the well and rendering it difficult to maintain production. The operator, the Company, and the partners have agreed to plug and abandon the Schiurring #1 well.
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The Schiurring #2 well was completed on December 8, 2006. Due to similar problems encountered as with Schiurring #1, the well is to be re-completed with the anticipation of perforating and producing from the 3,500 foot and the 2,000 foot sands.
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 received 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").
Subsequently the Company has agreed to convey 10% of its participation in the Manvel properties as partial payment for a 10% participation in the Sandy Point Prospect (see below) the Company's reducing its working interest in the Manvel properties to 45%.
Sandy Point Prospect. On November 16, 2006, the Company finalized the terms of an agreement with Texhoma and Sunray to acquire a 10% working interest in the Sandy Point Prospect for an aggregate amount of $35,929. 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 $7,429 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 Fite #3 well completed drilling in April 2007 to the Frio sands, but logs found no evidence for the potential of oil or gas in the sands. The Fite #3 well will be plugged and abandoned.
See "Liquidity and Capital Resources" below for a discussion of costs in connection with these projects.
RESULTS OF OPERATIONS
The Three and Nine MonthsEnded March 31, 2007 Compared To The Three and Nine Months Ended March 31, 2006
Revenues. The Company received $3,846 in revenue from its interests in oil and gas properties during the nine-month period ended March 31, 2007. The Company did not generate any revenue during the three-month period ended March 31, 2007 nor in the corresponding three- and nine-month periods ended March 31, 2006. The Company's entry into the oil and gas and natural resource exploration business began on July 14, 2006. Previously, the Company's focus had 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 $558,911 and $2,535,575 in general and administrative expenses for the respective three- and nine-months ended March 31, 2007, compared to $509,635 and $1,943,352 for the respective three- and nine-months ended March 31, 2006. The increases in 2007 were due primarily to expenses incurred to support and to facilitate the growth of Matrixx, as explained below.
Included in general and administrative expense for the three months ended March 31, 2007 was $435,263 of expense related to the issuance of an aggregate of 50,501,624 shares of Common Stock to consultants in lieu of cash compensation. In addition, $51,488 of expense was related to the issuance of an aggregate of 2,476,118 shares of Common Stock for prepaid consulting expenses. Included in general and administrative expense for the nine months ended March 31, 2007 was $2,078,695 of expense related to the issuance of an aggregate of 113,579,487 shares of Common Stock to consultants in lieu of cash compensation. In addition, $461,424 of expense was related to the issuance of an aggregate of 24,383,800 shares of Common Stock for prepaid consulting expenses. At March 31, 2007, the Company had no cash.
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Consultants receiving stock agreed to receive these securities, in lieu of cash, for payment of services rendered.
Production Expenses. The Company incurred $352 in production expenses during the nine-months ended March 31, 2007. The production expenses included transportation, marketing and severance taxes associated with the production of oil and gas revenues. There were no production expenses for the three- month period ended March 31, 2007, nor for the corresponding three- and nine-month periods in 2006.
Depreciation, Depletion, & Amortization ("D D & A"). The Company recognized $222 in D D & A expense in the nine-month period ended March 31, 2007, but no D D& A expense during the three- month period ended March 31, 2007. There was no D D & A expense recognized in the three- and nine-months ended March 31, 2006. The expense recognized during the nine-months ended March 31, 2007 represents amortization on evaluated oil and gas properties and is computed on the units of production method based on all proved reserves.
Loss on Abandonment of Proven Wells. The Company recognized a $119,065 loss on abandonment of proven wells during the three- and nine- months ended March 31, 2007. There were no losses for the abandonment of proven wells during the three- and nine-month periods ended March 31, 2006. The loss recognized during the three- and nine-month periods ended March 31, 2007 is due to mechanical difficulties which arose on a producing well thus rendering it impracticable to maintain production.
Interest Expense. The Company recognized $15,785 and $33,275 in interest expense for the respective three and nine month periods ended March 31, 2007, and $2,916 and $4,813 in interest expense in the three- and nine-months ended March 31, 2006. The higher expense realized during the three- and nine-month periods ended March 31, 2007 represents interest on borrowings to assist the Company with its acquisition strategy.
Net Loss. As a result of the foregoing factors, the Company's net loss increased to $693,761 for the three months ended March 31, 2007, compared to a net loss of $512,551 for the three months ended March 31, 2006. The net loss per share was negligible for the three months ended March 31, 2007, compared to a net loss per share of $0.01 for the three months ended March 31, 2006. The Company's net loss increased to $2,684,643 for the nine months ended March 31, 2007, compared to a net loss of $1,948,165 for the nine months ended March 31, 2006. The net loss per share was $0.01 for the nine month period ended March 31, 2007, compared to a net loss per share of $0.04 for the nine month period ended March 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
The Company has an immediate need for capital. At March 31, 2007, the Company had no cash or cash equivalents. The Company's operating activitiesused $234,869 in net cash during the nine months ended March 31, 2007, compared with $157,530 in net cash used by operating activities during the nine months ended March 31, 2006. The cash used by operating activities during the nine-months ended March 31, 2007 was primarily due to non-cash gains of $2,250,184 reflecting the issuance of stock for services and prepaid services, $50,000 for the issuance of stock for a finance fee, and $810 for the issuance of stock on a subscription receivable. Other gains contributing to net cash used by operating activities included a $289,934 decrease in prepaid expenses, an increase in accrued liabilities - related parties of $3,299 and an increase in accrued interest of $33,275. These gains were offset by an increase in other assets of $516 and a decrease in accounts payable and accrued liabilities of $177,212. The cash used by operating activities during the nine months ended March 31, 2006 included non-cash gains of $1,697,777 reflecting the issuance of stock for services and prepaid services offset by other changes affecting net cash used by operating activities at March 31, 2006. These other changes included a decrease in prepaid expenses of $161,851, an increase in accounts payable and accrued liabilities of $1,213, an increase of $6,981 in accrued liabilities - related parties, and an increase in accrued interest of $4,813, offset by an increase in deferred cost of acquisition of $82,000.
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The Company utilized $475,078 in cash for investing activities during the nine months ended March 31, 2007. The Company invested $570,299 in unproven oil and gas properties during the nine-months ended March 31, 2007 offset by a decrease in cash paid in advance of acquisitions of $95,000 and $222 in D D & A resulting from the write off of proven oil and gas properties net of D D & A. There were no investing activities in the nine months ended March 31, 2006. Financing activities provided $709,874 of cash during the nine months ended March 31, 2007, consisting primarily of $588,210 in proceeds from notes payable and $146,190 in proceeds from the subscription receivable to GCCC and $475 in bank overdrafts, offset by $25,000 paid on notes payable. During the nine months ended March 31, 2006, financing activities provided $157,555 of cash consisting primarily of $145,055 in proceeds from the subscription receivable to GCCC and $12,500 in proceeds from notes payable.
The Company has received minimal revenues to date from to its recent investments in oil and gas properties, 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 net losses of $693,761 and $2,684,643 for the respective three and nine months ended March 31, 2007. Since inception, the Company has incurred a net loss of $20,005,924. 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 Note is convertible into the Company's common stock after January 2, 2005, at a conversion price equal to the closing bid price for the Company's common stock on the date prior to the date of notice of conversion. Conversion is automatic at maturity if IICG does not request conversion earlier and if there is no event of default. 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 ofMay 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 restricted Common Stock to GCCC in consideration of the payment of $500,000 in cash. The Company was toreceive 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. 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.
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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 ofthe Hazard Lake Property indeferred acquisition cost was impaired. At June 30, 2006, the Company recognized an impairment in the value of the Hazard Lake Property of $600,000. As of the date of this filing, the Company has not paid the current installment of $35,000 which was due March 15, 2007; however, the Company and Overseas are discussing payment options. The current portion of the note with accrued interest is $68,769, and is included in current liabilities; the balance of $46,574 is included in long-term liabilities.
On November 15, 2005, the Company executed the Letter Agreement with Sterling to purchase a 5% minority interest in an oilprospect 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 March 31, 2007, 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 $102,660.
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 is seeking new sources of funding, 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 executeda Loan Agreement ("Kuma Loan") with Kuma Holdings LTD, aBritish Columbiacorporation ("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. On January 1, 2007, the Kuma Loan was modified to increase the amount of funding available to the Company to $750,000.
As of March 31, 2007, the Company has received $580,710 in funding from the Kuma Loan. Aggregate principal and interest owing on the Kuma Loan at March 31, 2007, is $607,697. On February 22, 2007, the Company issued 4,192,833 shares of restricted Common Stock valued in aggregate at $50,000 for the 10% bonus payable for completion of the initial $500,000 in funding.
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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 from Texahoma. The Company paid $150,000 to Texhoma 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. As of March 31, 2007, the Company has paid the full purchase price of $150,000, plus an additional$72,250 for development of the Schiurring #1 well and $30,761 for the completion costs. The well was completed and initial revenues of $3,846 were received, however, due to mechanical problems, it was determined that the well should be plugged and abandoned. The Company still owes $16,054 for overages in completion costs and $4,250 for the costs to plug and abandon. As of March 31, 2007, the Company has paid an aggregate of $141,253 for drilling and completion of the Schiurring #2 well representing its proportionate share of all cash calls for drilling and completion on the Schiurring #2 well. Due to similar difficulties encountered with the Schiurring #1 well, the Schiurring #2 well will be re-completed in the shallower pay sands. The Company's proportionate share of re-completion costs is expected to be $10,625.
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.
On November 16, 2006, the Company finalized the terms of Agreement with Texhoma and Sunray, for the acquisition of a 10% working interest in the Sandy Point Prospect. The acquisition cost of $35,928 is to be paid through a conveyance of 15% of the Company's participation in Buck Snag valued at $22,500; 10% . . .
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21-May-2007
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. 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 provided that the Company would acquire from GCCC certain property and businesses to be located by GCCC over a period of two years and in consideration, GCCC would receive 12,500,000 shares of the Company's Common Stock which was to be used for the purposes of acquiring other businesses and assets as identified by GCCC and the Company. The two year time period lapsed in December 2006 and only 4,000,000 of the 12,500,000 shares were utilized for acquisitions. GCCC returned the remaining 8,500,000 shares to the Company, and those shares have been cancelled.
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The GCCC Agreement also required the Company to issue to GCCC100 shares of the Company's Series A Convertible Preferred Stock and 100 shares of Series B ConvertiblePreferred 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'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.
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 oilprospect property. The property is the Clovelly Prospect which is located in southeast Louisiana in the Lafourche Parish.
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 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 was completed in the 2,030 foot sand and placed into productionon August 24, 2006. Subsequently, the Schiurring #1 well developed mechanical problems allowing excess water into the well and rendering it difficult to maintain production. The operator, the Company, and the partners have agreed to plug and abandon the Schiurring #1 well.
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The Schiurring #2 well was completed on December 8, 2006. Due to similar problems encountered as with Schiurring #1, the well is to be re-completed with the anticipation of perforating and producing from the 3,500 foot and the 2,000 foot sands.
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 received 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").
Subsequently the Company has agreed to convey 10% of its participation in the Manvel properties as partial payment for a 10% participation in the Sandy Point Prospect (see below) the Company's reducing its working interest in the Manvel properties to 45%.
Sandy Point Prospect. On November 16, 2006, the Company finalized the terms of an agreement with Texhoma and Sunray to acquire a 10% working interest in the Sandy Point Prospect for an aggregate amount of $35,929. 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 $7,429 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 Fite #3 well completed drilling in April 2007 to the Frio sands, but logs found no evidence for the potential of oil or gas in the sands. The Fite #3 well will be plugged and abandoned.
See "Liquidity and Capital Resources" below for a discussion of costs in connection with these projects.
RESULTS OF OPERATIONS
The Three and Nine MonthsEnded March 31, 2007 Compared To The Three and Nine Months Ended March 31, 2006
Revenues. The Company received $3,846 in revenue from its interests in oil and gas properties during the nine-month period ended March 31, 2007. The Company did not generate any revenue during the three-month period ended March 31, 2007 nor in the corresponding three- and nine-month periods ended March 31, 2006. The Company's entry into the oil and gas and natural resource exploration business began on July 14, 2006. Previously, the Company's focus had 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 $558,911 and $2,535,575 in general and administrative expenses for the respective three- and nine-months ended March 31, 2007, compared to $509,635 and $1,943,352 for the respective three- and nine-months ended March 31, 2006. The increases in 2007 were due primarily to expenses incurred to support and to facilitate the growth of Matrixx, as explained below.
Included in general and administrative expense for the three months ended March 31, 2007 was $435,263 of expense related to the issuance of an aggregate of 50,501,624 shares of Common Stock to consultants in lieu of cash compensation. In addition, $51,488 of expense was related to the issuance of an aggregate of 2,476,118 shares of Common Stock for prepaid consulting expenses. Included in general and administrative expense for the nine months ended March 31, 2007 was $2,078,695 of expense related to the issuance of an aggregate of 113,579,487 shares of Common Stock to consultants in lieu of cash compensation. In addition, $461,424 of expense was related to the issuance of an aggregate of 24,383,800 shares of Common Stock for prepaid consulting expenses. At March 31, 2007, the Company had no cash.
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Consultants receiving stock agreed to receive these securities, in lieu of cash, for payment of services rendered.
Production Expenses. The Company incurred $352 in production expenses during the nine-months ended March 31, 2007. The production expenses included transportation, marketing and severance taxes associated with the production of oil and gas revenues. There were no production expenses for the three- month period ended March 31, 2007, nor for the corresponding three- and nine-month periods in 2006.
Depreciation, Depletion, & Amortization ("D D & A"). The Company recognized $222 in D D & A expense in the nine-month period ended March 31, 2007, but no D D& A expense during the three- month period ended March 31, 2007. There was no D D & A expense recognized in the three- and nine-months ended March 31, 2006. The expense recognized during the nine-months ended March 31, 2007 represents amortization on evaluated oil and gas properties and is computed on the units of production method based on all proved reserves.
Loss on Abandonment of Proven Wells. The Company recognized a $119,065 loss on abandonment of proven wells during the three- and nine- months ended March 31, 2007. There were no losses for the abandonment of proven wells during the three- and nine-month periods ended March 31, 2006. The loss recognized during the three- and nine-month periods ended March 31, 2007 is due to mechanical difficulties which arose on a producing well thus rendering it impracticable to maintain production.
Interest Expense. The Company recognized $15,785 and $33,275 in interest expense for the respective three and nine month periods ended March 31, 2007, and $2,916 and $4,813 in interest expense in the three- and nine-months ended March 31, 2006. The higher expense realized during the three- and nine-month periods ended March 31, 2007 represents interest on borrowings to assist the Company with its acquisition strategy.
Net Loss. As a result of the foregoing factors, the Company's net loss increased to $693,761 for the three months ended March 31, 2007, compared to a net loss of $512,551 for the three months ended March 31, 2006. The net loss per share was negligible for the three months ended March 31, 2007, compared to a net loss per share of $0.01 for the three months ended March 31, 2006. The Company's net loss increased to $2,684,643 for the nine months ended March 31, 2007, compared to a net loss of $1,948,165 for the nine months ended March 31, 2006. The net loss per share was $0.01 for the nine month period ended March 31, 2007, compared to a net loss per share of $0.04 for the nine month period ended March 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
The Company has an immediate need for capital. At March 31, 2007, the Company had no cash or cash equivalents. The Company's operating activitiesused $234,869 in net cash during the nine months ended March 31, 2007, compared with $157,530 in net cash used by operating activities during the nine months ended March 31, 2006. The cash used by operating activities during the nine-months ended March 31, 2007 was primarily due to non-cash gains of $2,250,184 reflecting the issuance of stock for services and prepaid services, $50,000 for the issuance of stock for a finance fee, and $810 for the issuance of stock on a subscription receivable. Other gains contributing to net cash used by operating activities included a $289,934 decrease in prepaid expenses, an increase in accrued liabilities - related parties of $3,299 and an increase in accrued interest of $33,275. These gains were offset by an increase in other assets of $516 and a decrease in accounts payable and accrued liabilities of $177,212. The cash used by operating activities during the nine months ended March 31, 2006 included non-cash gains of $1,697,777 reflecting the issuance of stock for services and prepaid services offset by other changes affecting net cash used by operating activities at March 31, 2006. These other changes included a decrease in prepaid expenses of $161,851, an increase in accounts payable and accrued liabilities of $1,213, an increase of $6,981 in accrued liabilities - related parties, and an increase in accrued interest of $4,813, offset by an increase in deferred cost of acquisition of $82,000.
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The Company utilized $475,078 in cash for investing activities during the nine months ended March 31, 2007. The Company invested $570,299 in unproven oil and gas properties during the nine-months ended March 31, 2007 offset by a decrease in cash paid in advance of acquisitions of $95,000 and $222 in D D & A resulting from the write off of proven oil and gas properties net of D D & A. There were no investing activities in the nine months ended March 31, 2006. Financing activities provided $709,874 of cash during the nine months ended March 31, 2007, consisting primarily of $588,210 in proceeds from notes payable and $146,190 in proceeds from the subscription receivable to GCCC and $475 in bank overdrafts, offset by $25,000 paid on notes payable. During the nine months ended March 31, 2006, financing activities provided $157,555 of cash consisting primarily of $145,055 in proceeds from the subscription receivable to GCCC and $12,500 in proceeds from notes payable.
The Company has received minimal revenues to date from to its recent investments in oil and gas properties, 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 net losses of $693,761 and $2,684,643 for the respective three and nine months ended March 31, 2007. Since inception, the Company has incurred a net loss of $20,005,924. 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 Note is convertible into the Company's common stock after January 2, 2005, at a conversion price equal to the closing bid price for the Company's common stock on the date prior to the date of notice of conversion. Conversion is automatic at maturity if IICG does not request conversion earlier and if there is no event of default. 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 ofMay 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 restricted Common Stock to GCCC in consideration of the payment of $500,000 in cash. The Company was toreceive 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. 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.
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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 ofthe Hazard Lake Property indeferred acquisition cost was impaired. At June 30, 2006, the Company recognized an impairment in the value of the Hazard Lake Property of $600,000. As of the date of this filing, the Company has not paid the current installment of $35,000 which was due March 15, 2007; however, the Company and Overseas are discussing payment options. The current portion of the note with accrued interest is $68,769, and is included in current liabilities; the balance of $46,574 is included in long-term liabilities.
On November 15, 2005, the Company executed the Letter Agreement with Sterling to purchase a 5% minority interest in an oilprospect 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 March 31, 2007, 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 $102,660.
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 is seeking new sources of funding, 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 executeda Loan Agreement ("Kuma Loan") with Kuma Holdings LTD, aBritish Columbiacorporation ("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. On January 1, 2007, the Kuma Loan was modified to increase the amount of funding available to the Company to $750,000.
As of March 31, 2007, the Company has received $580,710 in funding from the Kuma Loan. Aggregate principal and interest owing on the Kuma Loan at March 31, 2007, is $607,697. On February 22, 2007, the Company issued 4,192,833 shares of restricted Common Stock valued in aggregate at $50,000 for the 10% bonus payable for completion of the initial $500,000 in funding.
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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 from Texahoma. The Company paid $150,000 to Texhoma 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. As of March 31, 2007, the Company has paid the full purchase price of $150,000, plus an additional$72,250 for development of the Schiurring #1 well and $30,761 for the completion costs. The well was completed and initial revenues of $3,846 were received, however, due to mechanical problems, it was determined that the well should be plugged and abandoned. The Company still owes $16,054 for overages in completion costs and $4,250 for the costs to plug and abandon. As of March 31, 2007, the Company has paid an aggregate of $141,253 for drilling and completion of the Schiurring #2 well representing its proportionate share of all cash calls for drilling and completion on the Schiurring #2 well. Due to similar difficulties encountered with the Schiurring #1 well, the Schiurring #2 well will be re-completed in the shallower pay sands. The Company's proportionate share of re-completion costs is expected to be $10,625.
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.
On November 16, 2006, the Company finalized the terms of Agreement with Texhoma and Sunray, for the acquisition of a 10% working interest in the Sandy Point Prospect. The acquisition cost of $35,928 is to be paid through a conveyance of 15% of the Company's participation in Buck Snag valued at $22,500; 10% . . .
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