Pre-Effective Amendment to Registration of Securities by a Small-Business Issuer — Form SB-2 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: SB-2/A Pre-Effective Amendment to Registration of HTML 818K Securities by a Small-Business Issuer
2: EX-10.7 Material Contract HTML 14K
3: EX-23.2 Consent of Experts or Counsel HTML 7K
4: EX-23.3 Consent of Experts or Counsel HTML 7K
SB-2/A — Pre-Effective Amendment to Registration of Securities by a Small-Business Issuer
Approximate
Date of Commencement of Proposed Sale to the Public: From time to time as
determined by the selling stockholders after the effective date of this
Registration Statement.
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, please
check the following box. x
If
this
form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If
this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering o
If
this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box.
i
CALCULATION
OF REGISTRATION FEE
Title
Of Each Class Of Securities To Be Registered
Amount
To Be Registered
Proposed
Maximum Offering Price PerShare
Proposed
Maximum Aggregate OfferingPrice
Amount
Of RegistrationFee
Shares
of common stock , par value $0.001 per share,
issued
and outstanding
4,671,573
$
4.20
(1)
$
19,620,607.00
$
602.35
Total
Registration Fee
$
602.35
(2)
_________________
(1)
Estimated
solely for the purpose of determining the amount of the registration
fee,
based on the average of the high and low sale price of the common
stock as
reported by the OTC Bulletin Board on June 5, 2007
in
accordance with Rule 457(c) under the Securities Act of
1933.
(2)
Paid
with initial filing.
The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
ii
The
information in this prospectus is not complete and may be changed. We may
not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to
sell
these securities and it is not soliciting an offer to buy these securities
in
any state where the offer or sale is not permitted.
Subject
to completion, dated __________, 2007
NORTHERN
OIL AND GAS, INC.
Prospectus
Northern
Oil and Gas, Inc.
4,671,573
shares of common stock
This
prospectus relates to the offering by the selling stockholders of Northern
Oil
and Gas, Inc. of up to 4,671,573 shares of our common stock, par value $0.001
per share. We are registering the offer and sale of the common stock, in part,
to satisfy registration rights we have granted to some of the selling
stockholders.
We
will
not receive any proceeds from the sale of common stock by the selling
stockholders.
The
selling stockholders have advised us that they will sell the shares of common
stock from time to time in the open market, on the OTC Bulletin Board, in
privately negotiated transactions or a combination of these methods, at market
prices prevailing at the time of sale, at prices related to the prevailing
market prices, at negotiated prices, or otherwise as described under the section
of this prospectus titled “Plan of Distribution.”
Our
common stock is traded on the OTC Bulletin Board under the symbol “NOGS”. On
June 5, 2007,
the closing bid price of the common stock was $4.00 per share.
INVESTING
IN OUR COMMON STOCK INVOLVES RISKS. BEFORE MAKING ANY INVESTMENT IN OUR
SECURITIES, YOU SHOULD READ AND CAREFULLY CONSIDER RISKS DESCRIBED IN THE RISK
FACTORS BEGINNING ON PAGE 4 OF THIS PROSPECTUS .
You
should rely only on the information contained in this prospectus or any
prospectus supplement or amendment. We have nmt authorized anyone to provide
you
with different information.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a criminal
offense.
This
summary highlights information contained elsewhere in this prospectus but might
not contain all of the information that is important to you. Before investing
in
our common stock, you should read the entire prospectus carefully, including
the
“Risk Factors” section and our financial statements and the notes thereto
included elsewhere in this prospectus.
For
purposes of this prospectus, unless otherwise indicated or the context otherwise
requires, all references herein to “we,”“us,”“our,” and “the Company” refer to
Northern Oil and Gas, Inc., a Nevada corporation.
Our
Company
Northern
Oil and Gas, Inc. is a growth-oriented independent energy company engaged in
the
acquisition, exploration, exploitation and development of oil and natural gas
properties.
Our
business strategy is to identify and exploit resources in and adjacent to
existing or indicated producing areas that can be quickly developed and put
in
production at low cost, including the acquisition of producing properties with
exploitation and exploration potential. We also intend to take advantage of
our
expertise in aggressive land acquisition to develop exploratory projects with
extremely attractive growth potential in focus areas and to participate with
other companies in those areas to explore for oil and natural gas using
state-of-the-art 3D seismic technology. We believe our edge lies in our ability
to acquire property in the most exciting new plays in a nimble and efficient
fashion. We are focused on low overhead. For example, our officers, who are
also
major stakeholders, do not currently take salaries. We believe we are in a
position to most efficiently exploit and identify high production oil and gas
properties. We will actively continue to pursue the acquisition of properties
that fit our profile.
Recent
Developments
Prior
to
March 20, 2007, our name was “Kentex Petroleum, Inc.”The Company took its
present form on March 20, 2007, when Northern Oil and Gas, Inc. (“NOG”), a
Nevada corporation engaged in the Company’s current business, merged with and
into our subsidiary, with NOG remaining as the surviving corporation. NOG then
merged into us, and we were the surviving corporation. We then changed our
name
to Northern Oil and Gas, Inc. The holders of NOG’s issued and outstanding
capital stock before the merger surrendered all of their issued and outstanding
capital stock and received 21,173,013 shares of our common stock, par value
of
$0.001 per share. Our stockholders before the merger retained 1,491,110 shares
of common stock, approximately 90% of those shares retained by previous
shareholders are subject to 24 month Lock-Up / Leak-Out Agreements
discussed below.
Our
primary operations are now those formerly operated by Northern Oil and Gas,
Inc., as well as other business activities since March, 2007, as described
in
this Prospectus.
Corporate
Information
Northern
Oil and Gas, Inc. was incorporated under the laws of the State of Nevada on
February 10, 1983. Our principal executive offices are located at 130 Lake
Street West, Suite 300, Wayzata, Minnesota55391. The telephone number at our
principal executive offices is (952) 476-9800. Our website address is
www.northernoil.com. Information contained on our website is not deemed part
of
this prospectus.
The
Offering
Common
Stock Offered (1)
4,671,573
shares
Offering
Price
Market
price or privately negotiated prices.
Common
Stock Outstanding
22,664,123
shares
3
Use
of Proceeds
We
will not receive any proceeds from the sale of the shares offered
by the
selling stockholders.
OTC
Bulletin Board Symbol
NOGS
Risk
Factors
An
investment in our common stock involves a high degree of risk. You
should
carefully consider the risk factors set forth under “Risk Factors”
beginning on page 4 and the other information contained in this prospectus
before making an investment decision regarding our common
stock.
___________________
(1)
These
shares of common stock will not be available to trade publicly until
the
registration statement of which this prospectus is a part is declared
effective by the SEC. This number does not include shares of common
stock
underlying options outstanding under our equity incentive
plan.
An
investment in us involves a high degree of risk. Investors should carefully
consider the risks below before making an investment decision. Our business,
financial condition or results of operations could be materially adversely
affected by any of these risks. In such case, the trading price of our common
stock could decline and investors could lose all or part of their
investment.
Risks
Related to our Business
We
have minimal operating history, which raises substantial doubt as to our ability
to successfully develop profitable business
operations.
We
have a
limited operating history. Our prospects must be considered in light of the
risks, expenses and difficulties frequently encountered in establishing a
business in the oil and natural gas industries. As a result of our recent
acquisition of mineral leases we have yet to generate revenues from operations
and have been focused on organizational, start-up, market analysis, exploratory
drilling and fund raising activities. There is nothing at this time on which
to
base an assumption that our business operations will prove to be successful
or
that we will ever be able to operate profitably. Our future operating results
will depend on many factors, including:
•
our ability to raise adequate working capital;
•
success of our development and exploration;
•
demand for natural gas and oil;
•
the level of our competition;
•
our ability to attract and maintain key management and employees;
and
•
our ability to efficiently explore, develop and produce sufficient quantities
of
marketable natural gas or oil in a highly competitive and speculative
environment while maintaining quality and controlling costs.
To
achieve profitable operations, we must, alone or with others, successfully
execute on the factors stated above, along with continually developing ways
to
enhance our production efforts, when commenced. Despite our best efforts,
we may
not be successful in our exploration or development efforts, or obtain required
regulatory approvals. There is a possibility that some, or all, of our wells
may
never produce natural gas or oil.
4
We
are highly dependent on Michael Reger, our Chief Executive Officer and Chairman
and Ryan Gilbertson, Chief Financial Officer. The loss of either of them, upon
whose knowledge, leadership and technical expertise we rely, would harm our
ability to execute our business plan.
Our
success depends heavily upon the continued contributions of Michael Reger and
Ryan Gilbertson, whose knowledge, leadership and technical expertise would
be
difficult to replace, and on our ability to retain and attract experienced
engineers, geoscientists and other technical and professional staff. If we
were
to lose their services, our ability to execute our business plan would be harmed
and we may be forced to cease operations until such time as we could hire a
suitable replacement for them. Neither Mr. Reger or Mr. Gilbertson have
employment contracts, although between them they control directly or indirectly
approximately 28% of our outstanding shares.
Our
management team does not have extensive experience in public company matters,
which could impair our ability to comply with legal and regulatory
requirements.
Our
management team has had limited U.S. public company management experience or
responsibilities, which could impair our ability to comply with legal and
regulatory requirements such as the Sarbanes-Oxley Act of 2002 and applicable
federal securities laws, including filing required reports and other information
required on a timely basis. It may be expensive to implement and effect programs
and policies in an effective and timely manner that adequately respond to
increased legal, regulatory compliance and reporting requirements imposed by
such laws and regulations, and we may not have the resources to do so. Our
failure to comply with such laws and regulations could lead to the imposition
of
fines and penalties and further result in the deterioration of our
business.
Our
lack of diversification will increase the risk of an investment in the Company,
and our financial condition and results of operations may deteriorate if we
fail
to diversify
.
Our
business focus is on the oil and gas industry in a limited number of properties,
initially in Montana and North Dakota. Larger companies have the ability to
manage their risk by diversification. However, we will lack diversification,
in
terms of both the nature and geographic scope of our business. As a result,
we
will likely be impacted more acutely by factors affecting our industry or the
regions in which we operate than we would if our business were more diversified,
enhancing our risk profile. If we cannot diversify our operations, our financial
condition and results of operations could deteriorate.
Strategic
relationships upon which we may rely are subject to change, which may diminish
our ability to conduct our operations.
Our
ability to successfully acquire additional properties, to discover reserves,
to
participate in drilling opportunities and to identify and enter into commercial
arrangements with customers will depend on developing and maintaining close
working relationships with industry participants and on our ability to select
and evaluate suitable properties and to consummate transactions in a highly
competitive environment. These realities are subject to change and may impair
our ability to grow.
To
develop our business, we will endeavor to use the business relationships of
our
management to enter into strategic relationships, which may take the form of
joint ventures with other private parties and contractual arrangements with
other oil and gas companies, including those that supply equipment and other
resources that we will use in our business. We may not be able to establish
these strategic relationships, or if established, we may not be able to maintain
them. In addition, the dynamics of our relationships with strategic partners
may
require us to incur expenses or undertake activities we would not otherwise
be
inclined to in order to fulfill our obligations to these partners or maintain
our relationships. If our strategic relationships are not established or
maintained, our business prospects may be limited, which could diminish our
ability to conduct our operations.
Competition
in obtaining rights to explore and develop oil and gas reserves and to market
our production may impair our business.
The
oil
and gas industry is highly competitive. Other oil and gas companies may seek
to
acquire oil and gas leases and other properties and services we will need to
operate our business in the areas in which we expect to operate. This
competition is increasingly intense as prices of oil and natural gas on the
commodities markets have risen in recent years. Additionally, other companies
engaged in our line of business may compete with us from time to time in
obtaining capital from investors. Competitors include larger companies which,
in
particular, may have access to greater resources, may be more successful in
the
recruitment and retention of qualified employees and may conduct their own
refining and petroleum marketing operations, which may give them a competitive
advantage. In addition, actual or potential competitors may be strengthened
through the acquisition of additional assets and interests. If we are unable
to
compete effectively or adequately respond to competitive pressures, this
inability may materially adversely affect our results of operation and financial
condition.
5
We
may be unable to obtain additional capital that we will require to implement
our
business plan, which could restrict our ability to
grow.
We
expect
that our current capital and our other existing resources will be sufficient
only to provide a limited amount of working capital, and the revenues generated
from our properties in Montana and North Dakota alone may not be sufficient
to
fund both our continuing operations and our planned growth. We will require
additional capital to continue to operate our business beyond the initial phase
of our current properties, and to further expand our exploration and development
programs to additional properties. We may be unable to obtain additional capital
required.
Future
acquisitions and future exploration, development, production and marketing
activities, as well as our administrative requirements (such as salaries,
insurance expenses and general overhead expenses, as well as legal compliance
costs and accounting expenses) will require a substantial amount of additional
capital and cash flow.
We
may
pursue sources of additional capital through various financing transactions
or
arrangements, including joint venturing of projects, debt financing, equity
financing or other means. We may not be successful in locating suitable
financing transactions in the time period required or at all, and we may not
obtain the capital we require by other means. If we do not succeed in raising
additional capital, our resources may not be sufficient to fund our operations
going forward.
Any
additional capital raised through the sale of equity may dilute the ownership
percentage of our stockholders. This could also result in a decrease in the
fair
market value of our equity securities because our assets would be owned by
a
larger pool of outstanding equity. The terms of securities we issue in future
capital transactions may be more favorable to our new investors, and may include
preferences, superior voting rights and the issuance of other derivative
securities, and issuances of incentive awards under equity employee incentive
plans, which may have a further dilutive effect.
Our
ability to obtain needed financing may be impaired by such factors as the
capital markets (both generally and in the oil and gas industry in particular),
our status as a new enterprise without a significant demonstrated operating
history, the location of our oil and natural gas properties and prices of oil
and natural gas on the commodities markets (which will impact the amount of
asset-based financing available to us) and/or the loss of key management.
Further, if oil and/or natural gas prices on the commodities markets decline,
our revenues will likely decrease and such decreased revenues may increase
our
requirements for capital. If the amount of capital we are able to raise from
financing activities, together with our revenues from operations, is not
sufficient to satisfy our capital needs (even to the extent that we reduce
our
operations), we may be required to cease our operations.
We
may
incur substantial costs in pursuing future capital financing, including
investment banking fees, legal fees, accounting fees, securities law compliance
fees, printing and distribution expenses and other costs. We may also be
required to recognize non-cash expenses in connection with certain securities
we
may issue, such as convertible notes, which may adversely impact our financial
condition.
We
may not be able to effectively manage our growth, which may harm our
profitability.
Our
strategy envisions expanding our business. If we fail to effectively manage
our
growth, our financial results could be adversely affected. Growth may place
a
strain on our management systems and resources. We must continue to refine
and
expand our business capabilities, our systems and processes and our access
to
financing sources. As we grow, we must continue to hire, train, supervise
and
manage new employees. We cannot assure you that we will be able
to:
·
meet
our capital needs;
6
·
expand
our systems effectively or efficiently or in a timely
manner;
·
allocate
our human resources optimally;
·
identify
and hire qualified employees or retain valued employees;
or
·
incorporate
effectively the components of any business that we may acquire in
our
effort to achieve growth.
If
we are
unable to manage our growth, our operations and our financial results could
be
adversely affected by inefficiency, which could diminish our
profitability.
Our
business may suffer if we do not attract and retain talented
personnel.
Our
success will depend in large measure on the abilities, expertise, judgment,
discretion, integrity and good faith of our management and other personnel
in
conducting the business of the Company. We have a small management team, and
the
loss of a key individual or inability to attract suitably qualified staff could
materially adversely impact our business.
Our
success depends on the ability of our management and employees to interpret
market and geological data correctly and to interpret and respond to economic
market and other conditions in order to locate and adopt appropriate investment
opportunities, monitor such investments, and ultimately, if required, to
successfully divest such investments. Further, no assurance can be given that
our key personnel will continue their association or employment with us or
that
replacement personnel with comparable skills can be found. We have sought to
and
will continue to ensure that management and any key employees are appropriately
compensated; however, their services cannot be guaranteed. If we are unable
to
attract and retain key personnel, our business may be adversely
affected.
Our
hedging activities could result in financial losses or could reduce our net
income, which may adversely affect your investment in our common
stock.
In
order
to manage our exposure to price risks in the marketing of our oil and
natural
gas production, we may enter into oil and natural gas price hedging arrangements
with respect to a portion of our expected production.
While
intended to reduce the effects of volatile oil and natural gas prices, such
transactions may limit our potential gains and increase our potential losses
if
oil and natural gas prices were to rise substantially over the price established
by the hedge. In addition, such transactions may expose us to the risk of loss
in certain circumstances, including instances in which:
·
our
production is less than expected;
·
there
is a widening of price differentials between delivery points for
our
production and the delivery point assumed in the hedge arrangement;
or
·
the
counterparties to our hedging agreements fail to perform under the
contracts.
Risks
Related To Our Industry
Our
exploration for oil and gas is risky and may not be commercially successful,
and
the advanced technologies we use cannot eliminate exploration risk, which could
impair our ability to generate revenues from our
operations.
Our
future success will depend on the success of our exploratory drilling program.
Oil and gas exploration involves a high degree of risk. These risks are more
acute in the early stages of exploration. Our expenditures on exploration may
not result in new discoveries of oil or natural gas in commercially viable
quantities. It is difficult to project the costs of implementing an exploratory
drilling program due to the inherent uncertainties of drilling in unknown
formations, the costs associated with encountering various drilling conditions,
such as over-pressured zones and tools lost in the hole, and changes in drilling
plans and locations as a result of prior exploratory wells or additional seismic
data and interpretations thereof.
Even
when
used and properly interpreted, 3D seismic data and visualization techniques
only
assist geoscientists in identifying subsurface structures and hydrocarbon
indicators. They do not allow the interpreter to know conclusively if
hydrocarbons are present or economically producible. In addition, the use of
3D
seismic data becomes less reliable when used at increasing depths. We could
incur losses as a result of expenditures on unsuccessful wells. If exploration
costs exceed our estimates, or if our exploration efforts do not produce results
which meet our expectations, our exploration efforts may not be commercially
successful, which could adversely impact our ability to generate revenues from
our operations.
7
We
may not be able to develop oil and gas reserves on an economically viable basis,
and our reserves and production may decline as a
result.
If
we
succeed in discovering oil and/or natural gas reserves, we cannot assure that
these reserves will be capable of production levels we project or in sufficient
quantities to be commercially viable. On a long-term basis, our viability
depends on our ability to find or acquire, develop and commercially produce
additional oil and natural gas reserves. Without the addition of reserves
through acquisition, exploration or development activities, our reserves and
production will decline over time as reserves are produced. Our future reserves
will depend not only on our ability to develop then-existing properties, but
also on our ability to identify and acquire additional suitable producing
properties or prospects, to find markets for the oil and natural gas we develop
and to effectively distribute our production into our markets.
Future
oil and gas exploration may involve unprofitable efforts, not only from dry
wells, but from wells that are productive but do not produce sufficient net
revenues to return a profit after drilling, operating and other costs.
Completion of a well does not assure a profit on the investment or recovery
of
drilling, completion and operating costs. In addition, drilling hazards or
environmental damage could greatly increase the cost of operations, and various
field operating conditions may adversely affect the production from successful
wells. These conditions include delays in obtaining governmental approvals
or
consents, shut-downs of connected wells resulting from extreme weather
conditions, problems in storage and distribution and adverse geological and
mechanical conditions. While we will endeavor to effectively manage these
conditions, we cannot be assured of doing so optimally, and we will not be
able
to eliminate them completely in any case. Therefore, these conditions could
diminish our revenue and cash flow levels and result in the impairment of our
oil and natural gas interests.
Estimates
of oil and natural gas reserves that we make may be inaccurate and our actual
revenues may be lower than our financial projections.
We
will
make estimates of oil and natural gas reserves, upon which we will base our
financial projections. We will make these reserve estimates using various
assumptions, including assumptions as to oil and natural gas prices, drilling
and operating expenses, capital expenditures, taxes and availability of funds.
Some of these assumptions are inherently subjective, and the accuracy of our
reserve estimates relies in part on the ability of our management team,
engineers and other advisors to make accurate assumptions. Economic factors
beyond our control, such as interest rates, will also impact the value of our
reserves. The process of estimating oil and natural gas reserves is complex,
and
will require us to use significant decisions and assumptions in the evaluation
of available geological, geophysical, engineering and economic data for each
property. As a result, our reserve estimates will be inherently imprecise.
Actual future production, oil and natural gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable
oil
and natural gas reserves may vary substantially from those we estimate. If
actual production results vary substantially from our reserve estimates, this
could materially reduce our revenues and result in the impairment of our oil
and
natural gas interests.
Drilling
new wells could result in new liabilities, which could endanger our interests
in
our properties and assets.
There
are
risks associated with the drilling of oil and natural gas wells, including
encountering unexpected formations or pressures, premature declines of
reservoirs, blow-outs, craterings, sour gas releases, fires and spills, among
others. The occurrence of any of these events could significantly reduce our
revenues or cause substantial losses, impairing our future operating results.
We
may become subject to liability for pollution, blow-outs or other hazards.
We
intend to obtain insurance with respect to these hazards; however, such
insurance has limitations on liability that may not be sufficient to cover
the
full extent of such liabilities. The payment of such liabilities could reduce
the funds available to us or could, in an extreme case, result in a total loss
of our properties and assets. Moreover, we may not be able to maintain adequate
insurance in the future at rates that are considered reasonable. Oil and natural
gas production operations are also subject to all the risks typically associated
with such operations, including premature decline of reservoirs and the invasion
of water into producing formations.
8
Decommissioning
costs are unknown and may be substantial. Unplanned costs could divert resources
from other projects.
We
may
become responsible for costs associated with abandoning and reclaiming wells,
facilities and pipelines which we use for production of oil and natural gas
reserves. Abandonment and reclamation of these facilities and the costs
associated therewith is often referred to as “decommissioning.” We have not yet
determined whether we will establish a cash reserve account for these potential
costs in respect of any of our properties or facilities, or if we will satisfy
such costs of decommissioning from the proceeds of production in accordance
with
the practice generally employed in oilfield operations. If decommissioning
is
required before economic depletion of our properties or if our estimates of
the
costs of decommissioning exceed the value of the reserves remaining at any
particular time to cover such decommissioning costs, we may have to draw on
funds from other sources to satisfy such costs. The use of other funds to
satisfy such decommissioning costs could impair our ability to focus capital
investment in other areas of our business.
Our
inability to obtain necessary facilities could hamper our
operations.
Oil
and
gas exploration and development activities are dependent on the availability
of
drilling and related equipment, transportation, power and technical support
in
the particular areas where these activities will be conducted, and our access
to
these facilities may be limited. To the extent that we conduct our activities
in
remote areas, needed facilities may not be proximate to our operations, which
will increase our expenses. Demand for such limited equipment and other
facilities or access restrictions may affect the availability of such equipment
to us and may delay exploration and development activities. The quality and
reliability of necessary facilities may also be unpredictable and we may be
required to make efforts to standardize our facilities, which may entail
unanticipated costs and delays. Shortages and/or the unavailability of necessary
equipment or other facilities will impair our activities, either by delaying
our
activities, increasing our costs or otherwise.
We
may have difficulty distributing our production, which could harm our financial
condition.
In
order
to sell the oil and natural gas that we are able to produce, we will have to
make arrangements for storage and distribution to the market. We will rely
on
local infrastructure and the availability of transportation for storage and
shipment of our products, but infrastructure development and storage and
transportation facilities may be insufficient for our needs at commercially
acceptable terms in the localities in which we operate. This could be
particularly problematic to the extent that our operations are conducted in
remote areas that are difficult to access, such as areas that are distant from
shipping and/or pipeline facilities. These factors may affect our ability to
explore and develop properties and to store and transport our oil and natural
gas production and may increase our expenses.
Furthermore,
weather conditions or natural disasters, actions by companies doing business
in
one or more of the areas in which we will operate, or labor disputes may impair
the distribution of oil and/or natural gas and in turn diminish our financial
condition or ability to maintain our operations.
Prices
and markets for oil and natural gas are unpredictable and tend to fluctuate
significantly, which could reduce profitability, growth and the value of our
business.
Oil
and
natural gas are commodities whose prices are determined based on world demand,
supply and other factors, all of which are beyond our control. World prices
for
oil and natural gas have fluctuated widely in recent years, and rose to record
levels on a nominal basis in 2006. We expect that prices will fluctuate in
the
future. Price fluctuations will have a significant impact upon our revenue,
the
return from our reserves and on our financial condition generally. Price
fluctuations for oil and natural gas commodities may also impact the investment
market for companies engaged in the oil and gas industry. Prices may not remain
at current levels. Future decreases in the prices of oil and natural gas may
have a material adverse effect on our financial condition, the future results
of
our operations and quantities of reserves recoverable on an economic
basis.
Increases
in our operating expenses will impact our operating results and financial
condition.
Exploration,
development, production, marketing (including distribution costs) and regulatory
compliance costs (including taxes) will substantially impact the net revenues
we
derive from the oil and natural gas that we produce. These costs are subject
to
fluctuations and variation in different locales in which we will operate, and
we
may not be able to predict or control these costs. If these costs exceed our
expectations, this may adversely affect our results of operations. In addition,
we may not be able to earn net revenue at our predicted levels, which may impact
our ability to satisfy our obligations.
9
Penalties
we may incur could impair our business.
Failure
to comply with government regulations could subject us to civil and criminal
penalties, could require us to forfeit property rights, and may affect the
value
of our assets. We may also be required to take corrective actions, such as
installing additional equipment or taking other actions, each of which could
require us to make substantial capital expenditures. We could also be required
to indemnify our employees in connection with any expenses or liabilities that
they may incur individually in connection with regulatory action against them.
As a result, our future business prospects could deteriorate due to regulatory
constraints, and our profitability could be impaired by our obligation to
provide such indemnification to our employees.
Environmental
risks may adversely affect our business.
All
phases of the oil and gas business present environmental risks and hazards
and
are subject to environmental regulation pursuant to a variety of federal, state
and municipal laws and regulations. Environmental legislation provides for,
among other things, restrictions and prohibitions on spills, releases or
emissions of various substances produced in association with oil and gas
operations. The legislation also requires that wells and facility sites be
operated, maintained, abandoned and reclaimed to the satisfaction of applicable
regulatory authorities. Compliance with such legislation can require significant
expenditures and a breach may result in the imposition of fines and penalties,
some of which may be material. Environmental legislation is evolving in a manner
we expect may result in stricter standards and enforcement, larger fines and
liability and potentially increased capital expenditures and operating costs.
The discharge of oil, natural gas or other pollutants into the air, soil or
water may give rise to liabilities to governments and third parties and may
require us to incur costs to remedy such discharge. The application of
environmental laws to our business may cause us to curtail our production or
increase the costs of our production, development or exploration
activities.
Our
insurance may be inadequate to cover liabilities we may
incur.
Our
involvement in the exploration for and development of oil and gas properties
may
result in our becoming subject to liability for pollution, blow-outs, property
damage, personal injury or other hazards. Although we expect to obtain insurance
in accordance with industry standards to address such risks, such insurance
has
limitations on liability that may not be sufficient to cover the full extent
of
such liabilities. In addition, such risks may not, in all circumstances, be
insurable or, in certain circumstances, we may choose not to obtain insurance
to
protect against specific risks due to the high premiums associated with such
insurance or for other reasons. The payment of such uninsured liabilities would
reduce the funds available to us. If we suffer a significant event or occurrence
that is not fully insured, or if the insurer of such event is not solvent,
we
could be required to divert funds from capital investment or other uses towards
covering our liability for such events.
Our
business will suffer if we cannot obtain or maintain necessary
licenses.
Our
operations will require licenses, permits and in some cases renewals of licenses
and permits from various governmental authorities. Our ability to obtain,
sustain or renew such licenses and permits on acceptable terms is subject to
change in regulations and policies and to the discretion of the applicable
governments, among other factors. Our inability to obtain, or our loss of or
denial of extension of, any of these licenses or permits could hamper our
ability to produce revenues from our operations.
Challenges
to our properties may impact our financial condition.
Title
to
oil and gas interests is often not capable of conclusive determination without
incurring substantial expense. While we intend to make appropriate inquiries
into the title of properties and other development rights we acquire, title
defects may exist. In addition, we may be unable to obtain adequate insurance
for title defects, on a commercially reasonable basis or at all. If title
defects do exist, it is possible that we may lose all or a portion of our right,
title and interests in and to the properties to which the title defects relate.
If our property rights are reduced, our ability to conduct our exploration,
development and production activities may be impaired.
10
We
will rely on technology to conduct our business and our technology could
become
ineffective or obsolete.
We
rely
on technology, including geographic and seismic analysis techniques and economic
models, to develop our reserve estimates and to guide our exploration,
development and production activities. We will be required to continually
enhance and update our technology to maintain its efficacy and to avoid
obsolescence. The costs of doing so may be substantial, and may be higher than
the costs that we anticipate for technology maintenance and development. If
we
are unable to maintain the efficacy of our technology, our ability to manage
our
business and to compete may be impaired. Further, even if we are able to
maintain technical effectiveness, our technology may not be the most efficient
means of reaching our objectives, in which case we may incur higher operating
costs than we would were our technology more efficient.
Risks
Related to our Common Stock
There
has been a limited trading market for our common
stock.
There
has
been a limited trading market for our common stock on the NASD’s
Over-the-Counter Bulletin Board. The lack of an active market may impair the
ability of our investors to sell their shares of common stock at the time they
wish to sell them or at a price that they consider reasonable. The lack of
an
active market may also reduce the fair market value of the shares of common
stock to be sold under this prospectus. An inactive market may also impair
our
ability to raise capital by selling shares of capital stock and may impair
our
ability to acquire other companies or technologies by using our common stock
as
consideration.
You
may have difficulty trading and obtaining quotations for our common
stock.
Our
common stock is currently quoted on the NASD’s Over-the-Counter Bulletin Board
under the symbol “NOGS.” Our common stock has been actively traded for only a
limited time, and the bid and ask prices for our common stock have fluctuated
widely. As a result, investors may find it difficult to dispose of, or to obtain
accurate quotations of the price of, our common stock. This severely limits
the
liquidity of our common stock and would likely reduce the market price of our
common stock, and hamper our ability to raise additional capital.
The
market price of our common stock is, and is likely to continue to be, highly
volatile and subject to wide fluctuations.
The
market price of our common stock is likely to continue to be highly volatile
and
could be subject to wide fluctuations in response to a number of factors, some
of which are beyond our control, including:
·
dilution
caused by our issuance of additional shares of common stock and other
forms of equity securities, which we expect to make in connection
with
future capital financings to fund our operations and growth, to attract
and retain valuable personnel and in connection with future strategic
partnerships with other companies;
·
announcements
of new acquisitions, reserve discoveries or other business initiatives
by
our competitors;
·
our
ability to take advantage of new acquisitions, reserve discoveries
or
other business initiatives;
·
fluctuations
in revenue from our oil and gas business as new reserves come to
market;
·
changes
in the market for oil and natural gas commodities and/or in the capital
markets generally;
·
changes
in the demand for oil and natural gas, including changes resulting
from
the introduction or expansion of alternative
fuels;
·
quarterly
variations in our revenues and operating
expenses;
·
changes
in the valuation of similarly situated companies, both in our industry
and
in other industries;
changes
in the accounting methods used in or otherwise affecting our
industry;
·
additions
and departures of key personnel;
·
announcements
of technological innovations or new products available to the oil
and gas
industry;
·
announcements
by relevant governments pertaining to incentives for alternative
energy
development programs;
·
fluctuations
in interest rates and the availability of capital in the capital
markets;
and
·
significant
sales of our common stock, including sales by the selling stockholders
following registration of the shares under this
prospectus.
These
and
other factors are largely beyond our control, and the impact of these risks,
singly or in the aggregate, may result in material adverse changes to the market
price of our common stock and/or our results of operations and financial
condition.
Our
operating results may fluctuate significantly, and these fluctuations may cause
the price of our common stock to decline.
Our
operating results will likely vary in the future primarily as the result
of
fluctuations in our revenues and operating expenses, including the coming
to
market of oil and natural gas reserves that we are able to discover and develop,
expenses that we incur, the prices of oil and natural gas in the commodities
markets and other factors. If our results of operations do not meet the
expectations of current or potential investors, the price of our common stock
may decline.
Stockholders
will experience dilution upon the exercise of
options.
As
of
December 31, 2006, there are 2,000,000 shares of common stock underlying options
that may be granted, of which options for 1,100,000 shares of common stock
have
already been granted, pursuant to the Company’s 2006 Incentive Stock Option
Plan. If the holders of those options exercise those options, stockholders
may
experience dilution in the net tangible book value of our common stock. Further,
the sale or availability for sale of the underlying shares in the marketplace
could depress our stock price.
Because
our common stock is deemed a low-priced “Penny” stock, an investment in our
common stock should be considered high risk and subject to marketability
restrictions.
Since
our
common stock is a penny stock, as defined in Rule 3a51-1 under the Securities
Exchange Act, it will be more difficult for investors to liquidate their
investment. Until the trading price of the common stock rises above $5.00 per
share, if ever, trading in the common stock is subject to the penny stock rules
of the Securities Exchange Act specified in rules 15g-1 through 15g-10. Those
rules require broker-dealers, before effecting transactions in any penny stock,
to:
•
Deliver
to the customer, and obtain a written receipt for, a disclosure
document;
•
Disclose
certain price information about the stock;
•
Disclose
the amount of compensation received by the broker-dealer or any associated
person of the broker-dealer;
•
Send
monthly statements to customers with market and price information
about
the penny stock; and
•
In
some circumstances, approve the purchaser’s account under certain
standards and deliver written statements to the customer with information
specified in the rules.
12
Consequently,
the penny stock rules may restrict the ability or willingness of broker-dealers
to sell the common stock and may affect the ability of holders to sell their
common stock in the secondary market and the price at which such holders can
sell any such securities. These additional procedures could also limit our
ability to raise additional capital in the future.
We
do not expect to pay dividends in the foreseeable
future.
We
do not
intend to declare dividends for the foreseeable future, as we anticipate that
we
will reinvest any future earnings in the development and growth of our business.
Therefore, investors will not receive any funds unless they sell their common
stock, and stockholders may be unable to sell their shares on favorable terms
or
at all. Investors cannot be assured of a positive return on investment or that
they will not lose the entire amount of their investment in our common
stock.
This
prospectus contains forward-looking statements within the meaning of Section
27A
of the Securities Act of 1933, as amended (the “Securities Act”), and Section
21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
This prospectus includes statements regarding our plans, goals, strategies,
intent, beliefs or current expectations. These statements are expressed in
good
faith and based upon a reasonable basis when made, but there can be no assurance
that these expectations will be achieved or accomplished. These forward-looking
statements can be identified by the use of terms and phrases such as “believe,”“plan,”“intend,”“anticipate,”“target,”“estimate,”“expect,” and the like,
and/or future-tense or conditional constructions such as “may,”“could,”“should,” etc. Items contemplating or making assumptions about, actual or
potential future sales, market size, collaborations, and trends or operating
results also constitute such forward-looking statements.
Although
forward-looking statements in this prospectus reflect the good faith judgment
of
our management, forward-looking statements are inherently subject to known
and
unknown business, economic and other risks and uncertainties that may cause
actual results to be materially different from those discussed in these
forward-looking statements. Readers are urged not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
prospectus. We assume no obligation to update any forward-looking statements
in
order to reflect any event or circumstance that may arise after the date of
this
prospectus, other than as may be required by applicable law or regulation.
Readers are urged to carefully review and consider the various disclosures
made
by us in our reports filed with the Securities and Exchange Commission which
attempt to advise interested parties of the risks and factors that may affect
our business, financial condition, results of operation and cash flows. If
one
or more of these risks or uncertainties materialize, or if the underlying
assumptions prove incorrect, our actual results may vary materially from those
expected or projected.
On
March20, 2007, we acquired Northern Oil and Gas, Inc., a Nevada Corp. (“NOG”),
pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) by and
among us, Kentex Acquisition Corp., a Nevada corporation and our wholly owned
subsidiary, and NOG. The Merger Agreement provided that, effective March20, 2007, Kentex Acquisition Corp. merged with and into NOG, with NOG as the
surviving corporation (the “Merger”). We issued 21,173,013 shares of our common
stock in exchange for 100% of the outstanding shares of NOG. Upon closing of
the
merger, the former stockholders of NOG thereafter controlled approximately
94%
of our outstanding shares of common stock.
Additional
material terms of the Merger were as follows:
1.
NOG paid to certain Kentex shareholders and consultants $415,000 under a
Principal Shareholders Agreement that was a condition of the Merger Agreement,
in exchange for the cancellation of certain shares of Kentex.
2.
As part of the Principal Shareholders Agreement, immediately following the
closing, these same shareholders of Kentex also agreed to exchange approximately
1,680,000 additional shares of Kentex in consideration of the issuance of
1,310,075 shares of newly issued “restricted securities” that were shares of
common stock of Kentex, in consideration of compromising certain claims for
(i)
expenses advanced to Kentex by any of them; (ii) any other claims that any
of
them may have against Kentex; (iii) their agreement to enter into a
Lock-Up/Leak-Out Agreement covering the resale of these shares as negotiated
by
NOG; and (iv) the granting of certain registration rights regarding an aggregate
of 250,000 of these shares, and demand registration rights to cover all of
these
shares in the event it is subsequently determined that no resale of these
person’s shares can be made unless made pursuant to an effective registration
statement.
13
3.
All shares of Kentex held by certain pre-Merger officers, directors, affiliates
and consultants are subject to a twenty-four (24) month Lock-Up/Leak-Out
Agreement. This Lock-Up/Leak-Out Agreement provides that, after such shares
become available for resale pursuant to SEC Rule 144, sales may only be made
during the leak-out period in accordance with leak-out provisions, which include
a price floor of $1.05 per share, broker’s transactions and a manner of sale
requirement, and allow no more than 1/12 th
of the
holdings to be sold on a cumulative basis for a period of twelve (12) months.
For example, in the second month of the leak-out period, 2/12 th
of the
shares governed by the Lock-Up/Leak-Out Agreement would be available for
resale.
4.
Up to 250,000 of the Kentex shares retained by the pre-Merger shareholders
carry
so-called “piggyback” registration rights, which give the shareholders the right
to include such shares in any registration statement filed by the Company with
the Securities and Exchange Commission (the “SEC”) within twelve (12) months
after the closing of the Merger. Those shares are included in this registration
statement. Such shares are also subject to Lock-Up/Leak-Out Agreements
commencing on the date of the effectiveness of such a registration statement
and
expiring twelve (12) months following the date of the closing of the Merger.
For
example, if the registration statement becomes effective six (6) months
following the closing of the Merger, one-sixth (1/6) of the shares governed
by
the Lock-Up/Leak-Out Agreements would be available on a cumulative basis for
the
remaining six (6) months of the leak-out period. These Lock-Up/Leak-Out
Agreements also includes compliance with “manner of sale” and “broker’s
transactions” requirements of Rule 144, regardless of such registration, and a
price floor of $1.05 per share.
Prior
to
the Merger, Kentex was a “shell company,” meaning that it had no material assets
or operations other than to acquire another business or company; and NOG
was a
recently formed start-up stage company that had just commenced operations.
Privately-held companies desiring to “go public” in a manner other than an
initial public offering often seek a reorganization or merger with a thinly
capitalized publicly-held company. This process avoids the high cost of the
registration of securities for public sale, including attendant legal and
accounting expenses, and the usually lengthy process involved in the
registration of securities.
Securities
issued to the stockholders of the acquired company (NOG) in these types of
transactions generally are “restricted securities” that cannot be immediately
publicly traded, whereas the shares of the publicly held company (Kentex) are
presently publicly tradable. This liquidity difference is a distinct advantage
to the pre-Merger stockholders of Kentex over the NOG stockholders; however,
the
principal Kentex stockholders were required to execute as part of the Merger
Transaction Documents, Lock-Up/Leak-Out Agreements (described above) that place
substantial limitations on the resale of their respective shares of common
stock
that they will own in the Company and 1,310,075 of these shares are also the
subject of a new holding period under Rule 144 of the SEC.
Immediately
following the Merger, the Company completed a so-called short-form merger with
NOG, in which NOG merged into the Company, and the Company was the surviving
entity. As a part of this short-form merger, the Company changed its name to
“Northern Oil and Gas, Inc.”.
As
a
result of the reverse merger with NOG described above, our main business focus
has been directed to oil and gas exploration and development. Unless
specifically stated otherwise, the information in this prospectus relates to
the
business of NOG, since the Company itself did not engage in any substantial
business activities prior to the Merger.
Business
The
Company is a Nevada corporation formed for the purpose of drilling exploratory
and developmental wells primarily in the Northern Regions of the U.S. and
Southern Canada.
The
primary asset of the Company includes a 22,000+/- acre net leasehold in Sheridan
County, MT. This is a Williston Basin, stacked-pay leasehold. In addition,
the
Company controls approximately 12,000 gross (4,000 net) acres in Mountrail
County, North Dakota.
14
The
12,000 gross, 4,000+/- acre net leasehold in Mountrail County, North Dakota
is
within four miles of the recent EOG Resources (NYSE: EOG) discoveries. The
Company will be targeting the same Bakken Shale resource formation. We believe
that the Bakken formation is one of the most exciting plays in the Continental
U.S. at this time. The North Dakota Geological Survey currently estimates
the
reserves in the Bakken formation to be 300 to 500 Billion Barrels, of which
50%
is thought to be currently recoverable, making it one of the largest resource
plays in the world. The Bakken properties are currently under evaluation
by the
Company’s consulting geologists and drilling is estimated to begin in late 2007.
As of February 12, 2007 NOG closed on approximately 3,016 net acres pursuant
to
the option agreement. Although the Company’s interest in this area constitutes
only a very small percentage of the estimated potential reserves, we think
the
North Dakota Geological Survey estimate is important because it illustrates
why
the Company believes economically recoverable reserves may exist
here.
Operations
The
Company plans to structure its operations in such a way as to mitigate capital
expenditures and streamline selling, general, and administrative expense.
Overhead and staff will be kept to a bare minimum and the majority of
operational duties will be outsourced to consultants and independent
contractors. The Company currently has no employees other than its two officers,
but would expect to eventually have three to five employees, commensurate with
the development of its business. We believe that most operational
responsibilities can be handled by the two officers, and other consultants
to be
engaged as needed. Our officers draw no salaries and have not done so since
the
inception of the Company. They have, however, each received stock options as
total compensation, which we believe aligns their interests with the other
shareholders .
Description
of Property
The
following information is based upon a report prepared by the Company’s
consulting petroleum geologist, Mr. Robert Grabb. Factual background regarding
well production rates, reserves, etc. was obtained from information made
publicly available by the Montana Bureau of Mines and Geology and North Dakota
Department of Mineral Resources, respectively. This information is required
to
be filed by producers with the respective state agencies on a monthly basis.
Current information is available on these agencies’ websites at
www.dnvc.mt.gov
and
www.nd.gov/ndgs/,
respectively.
General
Background
Sheridan
County, Montana
Stacked
Pay Project
Kodiak
Oil and Gas, Inc., drilling on leasehold acquired from Montana Oil Properties
affiliate Reger Oil Properties, made a significant Sheridan County discovery
in
July 2005. Kodiak completed the State 8-16 following an exceptional Mission
Canyon drill stem test. This test recovered 94 barrels of oil during flow
periods that totaled 90 minutes, equating to a daily production rate of slightly
more 1500 barrels of oil per day. Pressures recorded on the test are virtually
unmatched by any Mission Canyon well in the basin and indicate a potentially
sizeable accumulation. Kodiak has since drilled and completed three additional
Mission Canyon wells offsetting the State 8-16. As of March, 2007, according
to
data obtained for the Montana Bureau of Mines and Geology website, the State
8-16 well and its offsets were producing approximately 350 barrels of oil
per
day.
On
the
eastern edge of the Northern Oil leasehold, Nance Petroleum ran pipe on the
State 4-36, a Red River well that was believed to have pay in the Ratcliffe,
Mission Canyon and Red River formations. In the only official production
report
yet released, the 4-36 produced 1075 barrels of oil in five days last October.
Nance then re-entered the Cova #1 and drilled a horizontal Mission Canyon
sidetrack. Nance just completed construction of a tank battery consisting
of
three 500 bbl oil tanks.
Prior
to
the very recent Kodiak and Nance discoveries, the last successful wildcat well
drilled in the area was the Summit Resources 1998 Red River discovery, the
13-35
Nielsen. The Summit Red River discovery, Northern Oil’s position beneath the
Kodiak discovery and the portion of the leasehold abutting the Nance discovery
are products of our geologist’s interpretation. Our geologist, Mr. Bob Grabb,
originated the mid-1990’s Summit Resources Sheridan County exploration program
and was the prospect generator for the Nielsen discovery. More recently, his
interpretation directed the Northern Oil lease acquisition programs, resulting
in our enviable position beneath or immediately adjacent to all three
discoveries drilled in the last eight years. Recently our acquisition of
Mountrail County, ND, also generated by Mr. Grabb and Southfork Exploration,
has
created significant excitement due to its position 4 miles to the northeast
of
the Parshall Field currently being developed by EOG Resources, Inc.
Our
land
acquisition partners, Montana Oil Properties and Southfork Exploration, LLC,
share a long history of success in the Williston Basin; the roots of the two
companies are intertwined with the most innovative operator of the last boom,
Patrick Petroleum. We believe that the expertise and experience of Montana
Oil
Properties and Reger Oil when combined with the proven track record of our
geoscientist yields a knowledge base that is unsurpassed in this part of the
Williston Basin. Utilizing that knowledge base, Northern Oil has assembled
22,000 acres in six prospect areas in addition to Northern’s 4,000+/-
net acre position in Mountrail County, a Bakken Shale resource
play.
15
Reservoirs
& Reserve Potential
Sheridan
County, Montana is one of the premier multi-pay areas in the Williston Basin.
The geologic evolution of the basin was conducive to the development of stacked
pay zones. Recurrent episodes of deformation were focused along specific strands
of deep seated basement faults, localizing the development of structural
closures and pathways for fluids that controlled porosity and reservoir
development. As a result, several fields produce from six or more zones. Wakea
and Comertown fields have each produced from seven different zones; Green Coulee
has produced from six. At least sixteen different zones are known to produce
from twelve different formations in Sheridan County.
Nearly
fifty wells in the county have produced more than 500,000 barrels of oil,
and
the average Red River well will produce 305,000 barrels of oil. Several
wells
have produced more than 1,000,000 barrels of oil, and the Stringer #1 is
expected to ultimately produce an astounding 2,280,000 barrels from the
Red
River.
The
Morken #3, a Ratcliffe producer within our Divide Prospect area, has an
Estimated Ultimate Recoverable of 957,000 barrels. Table 1, below, is a summary
of the production statistics for the seven most commonly completed reservoirs
in
Sheridan County produced by our consulting petroleum geologist, Mr. Robert
Grabb. We do not have any interest in any of the listed wells or
fields.
Average
Cumulative Production in thousands of barrels
Best
Estimated Ultimate Recoverable in thousands of
barrels
Mississippian
146
957
Morken
#3
Divide
Field
Mississippian
90
839
N.
F. Stringer #1
Katy
Lake
Devonian
101
232
Murray
#1
Wakea
Devonian
443
416
Benson
B-3
Medicine
Lake
Devonian
280
1714
State
#1
Raymond
Devonian
167
465
Benson
B-6
Medicine
Lake
Devonian
232
2280
Stringer
#1
Katy
Lake
In
addition to accessing an impressive number of prospective reservoirs, wells
in
Sheridan County have some of the shallowest drilling depths in the basin;
average depths range from 7,200 ft for a Mississippian Ratcliffe well to
slightly less than 11,000 ft for a Red River well. One 11,000-foot Red River
well could conceivably produce more than 2,000,000 barrels of oil and encounter
oil in a more than a dozen different zones.
Technological
Vacuum
Throughout
the history of the oil business, companies that are the first to apply
appropriate technologies have been richly rewarded. For example, the first
application of the anticlinal theory of accumulation, the introduction of
rotary
drilling tools and the first use of reflection seismic led to abrupt increases
in the number of discoveries. Figure 1 shows the exploration history of Sheridan
County over the last 35 years; it depicts the flurry of discoveries coincident
with the introduction of 2-D seismic. Patrick Petroleum utilized this new
technology aggressively and was rewarded with a great deal of success. Many
of
the 1978 to 1984 wildcat field discoveries shown in Figure 1 were drilled
by
Patrick. Nearly two-thirds of the discoveries attributable to 2-D seismic
were
drilled within three and a half years following the introduction of the new
technology to Sheridan County. There have been a few successes, but the pulse
of
discovery that should have followed the introduction of 3-D is notably absent
in
Sheridan County.
16
Although
3-D seismic was first introduced to the Williston Basin as an exploration tool
in the mid-1990s, very few companies have used the tool effectively. Fewer
still
have used the tool effectively in Sheridan County; this fact is born out by
the
anemic pulse of discovery in Sheridan County shown above. We believe that the
company, or companies, that fully and properly utilize this “new” technology
will be responsible for the next spike in the wildcat field
discoveries.
The
use
of 3-D seismic attributes to predict reservoir properties, widespread in many
areas, has been underutilized in Sheridan County. Zones of porosity development
are localized in many Williston Basin reservoirs, and the distribution of Red
River porosity is especially complex. We are firmly convinced that statistically
significant and geologically plausible models of reservoir porosity can be
derived from 3-D data; we further believe that these models will convert many
of
the Sheridan County “near misses” to producers.
It
would
be difficult to craft a scenario where the timing for entry into Sheridan County
could be better. The collapse of oil prices in 1988, followed by the industry’s
seemingly mindless rush to focus exclusively on shallow gas and resource plays,
preserved the many oil prospects of Sheridan County. Subsequent to the Nielsen
13-35 discovery, a test that unequivocally established the utility of 3-D
seismic attribute analysis, only eight wildcats have been drilled in the
Sheridan County Project area. In the nearly eight years since the Nielsen
discovery, that is an average of one well per year. When reasonable land prices
and oil prices approaching all-time highs are combined with a proven technology
that has only been cursorily applied, a phenomenal opportunity
results.
Abundant
Opportunities
Large
portions of Sheridan County are unexplored; larger parts are “under-explored”
and “under-exploited”. Huge blocks of our Sheridan County project area have not
been drilled, and the unexplored, or undrilled, area totals more than 120
square
miles. Consisting of blocks no smaller than six square miles, the potential
of
this undrilled area is huge; furthermore, much of it has not been explored
using
3-D seismic technology. Examples of “under-explored” regions include our Lake
Creek and Antelope Prospect Areas, while examples of “under-exploitation”
include Comertown, Lowell, Lowell South and Divide fields. Four of our six
prospect areas are discussed below.
17
Antelope
Prospect Area
The
Antelope Prospect Area is one of six loosely defined geographic and geologic
subdivisions of our Sheridan County project. It is an example of an unexplored
to “under-explored” region. Antelope Prospect Area is bounded on the north by
Plentywood and Pronghorn fields and is bordered to the south by Wakea and Green
Coulee fields. Figure 2 below is a Red River structure contour map and
Winnipegosis isoporosity map. Eight potential Red River locations are shown
in
the Antelope Prospect Area. In addition to the obvious Red River prospects,
a
well-developed porosity thick occurs in the Winnipegosis. The Winnipegosis
is an
important producing interval in Wakea Field, which is located just south of
the
Antelope Prospect Area. A Prairie Evaporite salt void Red River occurs within
the prospect area, and it is believed that this feature will have important
implications in several Mississippian and Devonian zones. (Northern’s Acreage
Position in Yellow.)
Lake
Creek Prospect Area
Lake
Creek Prospect Area is similarly unexplored to “under-explored”. Ratcliffe,
Mission Canyon, Nisku, Duperow and Red River shows surround the prospect
area.
North of Lake Creek is Comertown Field, widely considered in the industry
to be
one of the classic stacked pay fields in the Williston Basin along with
surrounding areas. The prospect area contains more than 60,000 undrilled
acres.
18
Three
Red
River locations are shown in figure 3, a Red River structure map superimposed
on
a Winnipegosis isoporosity map. The regional stratigraphic pinchout of the
Winnipegosis porosity occurs along the northwest edge of the prospect area
and
is shown on the map to the left.
Furthermore,
a facies change in the Ratcliffe could define a potentially important regional
trap in that formation. Mudrocks are the predominant lithology in the Ratcliffe
west-northwest of the Lake Creek Prospect Area, while to the southeast and
east,
bioclastic material is much more common. This transition could create a regional
trap along the northwest edge of Lake Creek.
Divide
& Coalridge Prospect Areas
A
significant number of “near misses” and “under-exploited” opportunities are
found in the Divide and Coalridge prospect areas. These opportunities are
typified by the 13-35 Nielsen, the 1998 Summit Resources discovery well at
Lowell South.
Lowell
South is an under-developed Red River field that was discovered by Gulf Oil
in
July 1981. The Gulf Jorgenson 1-27-3C initially produced an unimpressive
50
barrels of oil per day and 30,000 cubic feet of gas per day from a very thin
porosity streak in the Red River C Burrowed zone. The Jorgenson 1-27-3C
ultimately produced 22,000 barrels of oil and 15,000 barrels of water; it
was
plugged and abandoned in 1988. Due to the poor performance of the Jorgenson
1-27-3C, the field was ignored for another seven years until Summit Resources
and Brigham Exploration introduced 3-D seismic to the Williston Basin as
an
exploration tool.
19
Lowell
South was one of several strong Winnipeg structures defined by “high and tight”
Red River wells that were targeted by the Summit/Brigham 3-D program. “High and
tight” wells are wells in which the targeted reserve is high (shallow) in the
subject structure, but the reserve itself is believed to cover a relatively
narrow area. The Williston Basin contains numerous examples of structurally
high
Red River wells that are devoid of porosity, with classic examples being
found
at Comertown and Sioux Pass fields. It was known, as Diamond Shamrock’s efforts
at Comertown had strikingly demonstrated, that superb Red River porosity
development can occur structurally lower to “high and tight”
wells.
Only
one
prospect was tested prior to the demise of the Summit/Brigham partnership;
however, a total of two wells were drilled on the prospect. The first well
to be
drilled by the partners, the Nielsen 35-2, was a dry hole.
20
Following
the dry hole, the project’s originating geologist convinced Summit and Brigham
that their Red River seismic model was flawed, and that there were as many
as
four additional locations to be drilled on the Lowell South feature. One
location, the Nielsen 13-35, was interpreted to occupy a slightly higher
structural position and contain stratigraphically higher porosity development
in
the Red River C Laminated zone. The well was begun in November 1997 and
completed in January 1998. The reservoir analysis submitted by the operator
to
the Montana Bureau of Mines and Geology indicates that the Nielsen 13-35
is
ultimately expected to produce 315,000 barrels of oil. The remaining three
locations have not been drilled; one of the remaining locations is arguably
the
best location on the structure. Similar Red River opportunities are found
in the
Divide and Coalridge.
Based
upon information available on the Montana Bureau of Mines and Geology website,
the area encompassing Divide and Coalridge prospect areas contains some of
the
most productive Ratcliffe rocks in the basin. The Morken #3, a Divide Field
well, is expected to ultimately produce almost one million barrels of oil.
In
addition to Ratcliffe production, shows have been encountered in the Midale
and
Mission Canyon zones. Several wells in the Divide Field have produced some
oil
from the Mission Canyon and Red River structures. The Kodiak State 8-16,
however, may have redefined the importance of the Mission Canyon. A drill
steam
test from 7570 ft to 7615 ft recovered 94 barrels of oil during the 90 minutes
that the tool was open.
Ratcliffe
shows and near misses are abundant in the Coalridge and Divide prospect areas.
Virtually every well has a free oil show and several have produced small amounts
of oil. We have identified more a dozen potential Mississippian locations in
the
two areas.
Summary
Excellent
reserve potential in a stacked pay setting with relatively shallow drilling
depths make Sheridan County an attractive target - but that’s just the
beginning. Equally important is fact that 3-D seismic has not been effectively
utilized. The surge in wildcat field discoveries attributable to 3-D seismic
is
yet to come. Furthermore, numerous near misses and under-exploited fields
are
found throughout the project area, and as the Nielsen 13-35 demonstrates,
we
believe important reserves await discovery. See, Fig. 3 Coalridge Prospect
Area.
However, it is important to bear in mind that 3-D seismic data and visualization
technologies only assist geoscientists in identifying subsurface structures
and
hydrocarbon indicators. They do not guarantee that hydrocarbons are present
or,
if present, that they will produce in economic quantities.
Recent
Developments
The
Company entered into a letter agreement with Gallatin Resources, LLC, to
acquire
certain oil and gas leases on approximately 10,000 net mineral acres in
the
Appalachia Basin. The acreage is located in the “Finger Lakes” region in Yates
County, New York. The letter agreement gives the Company the option to
acquire
the subject leases until August 17, 2007, in exchange for consideration
of $1.5
million and 275,000 shares of common stock.
Mr.
Carter Stewart, one of the Company’s directors, owns a 25% interest in Gallatin
Resources, LLC. Acquisition of the leases is subject to the Company’s obligation
to obtain a “fairness opinion” from a third party indicating that the
transaction is fair to the Company.
Seismic
studies associated with the acreage show a highly fractured fault system
in the
Trenton-Black River formation as well as shallow exploration and development
opportunities in the Queenstown-Medina sand and Marcellus shale. We believe
this
Appalachia Basin prospect presents us with the potential of highly productive
gas wells in the Trenton-Black River as well as a multi-year exploration
and
development program in the more shallow resource formations. With companies
such
as Talisman Energy, Chesapeake Energy and Range Resources active in the region,
we believe there are ample opportunities for partnerships to develop this
acreage.
21
Leaseholds
Currently,
we own 22,000 +/- acres of total net leasehold in Sheridan County, MT, and
control 12,000 gross, 4,000+/- net acres in Mountrail County, ND. Of these
leaseholds, all acres are undeveloped. We plan to explore and develop a portion
of this acreage as we identify the best operating partners to do so utilizing
the latest 3-D seismic interpretation.
Reserves
We
do not
have any reserves.
Production
We
currently have no production.
Well
Data
We
have
not completed any wells since our inception.
Office
Locations
We
currently maintain an executive office at 130 Lake Street West, Wayzata, MN55391. This space is leased pursuant to an office lease, on a month-to-month
basis, whereby we pay $1,250.00 per month plus expenses for approximately 750
square feet of office space. We believe this office space will meet our needs
for the foreseeable future.
Markets
and Customers
The
market for oil and natural gas that we will produce depends on factors beyond
our control, including the extent of domestic production and imports of oil
and
natural gas, the proximity and capacity of natural gas pipelines and other
transportation facilities, demand for oil and natural gas, the marketing of
competitive fuels and the effects of state and federal regulation. The oil
and
gas industry also competes with other industries in supplying the energy and
fuel requirements of industrial, commercial and individual
consumers.
Our
oil
production is expected to be sold at prices tied to the spot oil markets. Our
natural gas production is expected to be sold under short-term contracts and
priced based on first of the month index prices or on daily spot market
prices.
Governmental
Regulations
Regulation
of Oil and Natural Gas Production
. Our
oil and natural gas exploration, production and related operations, when
developed, are subject to extensive rules and regulations promulgated by
federal, state, tribal and local authorities and agencies. For example, some
states in which we may operate require permits for drilling operations, drilling
bonds and reports concerning operations and impose other requirements relating
to the exploration and production of oil and natural gas. Such states may also
have statutes or regulations addressing conservation matters, including
provisions for the unitization or pooling of oil and natural gas properties,
the
establishment of maximum rates of production from wells, and the regulation
of
spacing, plugging and abandonment of such wells. Failure to comply with any
such
rules and regulations can result in substantial penalties. The regulatory burden
on the oil and gas industry will most likely increase our cost of doing business
and may affect our profitability. Although we believe we are currently in
substantial compliance with all applicable laws and regulations, because such
rules and regulations are frequently amended or reinterpreted, we are unable
to
predict the future cost or impact of complying with such laws. Significant
expenditures may be required to comply with governmental laws and regulations
and may have a material adverse effect on our financial condition and results
of
operations.
Environmental
Matters
. Our
operations and properties are subject to extensive and changing federal, state
and local laws and regulations relating to environmental protection, including
the generation, storage, handling, emission, transportation and discharge of
materials into the environment, and relating to safety and health. The recent
trend in environmental legislation and regulation generally is toward stricter
standards, and this trend will likely continue. These laws and regulations
may:
22
•
require
the acquisition of a permit or other authorization before construction
or
drilling commences and for certain other
activities;
•
limit
or prohibit construction, drilling and other activities on certain
lands
lying within wilderness and other protected areas;
and
•
impose
substantial liabilities for pollution resulting from its
operations.
The
permits required for our operations may be subject to revocation, modification
and renewal by issuing authorities. Governmental authorities have the power
to
enforce their regulations, and violations are subject to fines or injunctions,
or both. In the opinion of management, we are in substantial compliance with
current applicable environmental laws and regulations, and have no material
commitments for capital expenditures to comply with existing environmental
requirements. Nevertheless, changes in existing environmental laws and
regulations or in interpretations thereof could have a significant impact on
the
Company, as well as the oil and natural gas industry in general.
The
Comprehensive Environmental, Response, Compensation, and Liability Act
(“CERCLA”) and comparable state statutes impose strict, joint and several
liability on owners and operators of sites and on persons who disposed of or
arranged for the disposal of “hazardous substances” found at such sites. It is
not uncommon for the neighboring landowners and other third parties to file
claims for personal injury and property damage allegedly caused by the hazardous
substances released into the environment. The Federal Resource Conservation
and
Recovery Act (“RCRA”) and comparable state statutes govern the disposal of
“solid waste” and “hazardous waste” and authorize the imposition of substantial
fines and penalties for noncompliance. Although CERCLA currently excludes
petroleum from its definition of “hazardous substance,” state laws affecting our
operations may impose clean-up liability relating to petroleum and petroleum
related products. In addition, although RCRA classifies certain oil field wastes
as “non-hazardous,” such exploration and production wastes could be reclassified
as hazardous wastes thereby making such wastes subject to more stringent
handling and disposal requirements.
ESA
. The
Endangered Species Act (“ESA”) seeks to ensure that activities do not jeopardize
endangered or threatened animal, fish and plant species, nor destroy or modify
the critical habitat of such species. Under ESA, exploration and production
operations, as well as actions by federal agencies, may not significantly impair
or jeopardize the species or its habitat. ESA provides for criminal penalties
for willful violations of the Act. Other statutes that provide protection to
animal and plant species and that may apply to our operations include, but
are
not necessarily limited to, the Fish and Wildlife Coordination Act, the Fishery
Conservation and Management Act, the Migratory Bird Treaty Act and the National
Historic Preservation Act. Although we believe that our operations will be
in
substantial compliance with such statutes, any change in these statutes or
any
reclassification of a species as endangered could subject the Company to
significant expenses to modify our operations or could force the Company to
discontinue certain operations altogether.
Competition
We
compete with numerous other oil and gas exploration and production companies.
Many of these competitors have substantially greater resources than us. Should
a
larger and better financed company decide to directly compete with us, and
be
successful in its efforts, our business could be adversely
affected.
Personnel
We
currently have 2 full time employees (the officers of the Company) and employ
the services of several contract personnel. As drilling production activities
increase, we intend to hire additional technical, operational and administrative
personnel as appropriate. We do not expect a significant change in the number
of
full time employees over the next 12 months. We are using and will continue
to
use the services of independent consultants and contractors to perform various
professional services, particularly in the area of land services, reservoir
engineering, drilling, water hauling, pipeline construction, well design,
well-site monitoring and surveillance, permitting and environmental assessment.
We believe that this use of third-party service providers may enhance our
ability to contain general and administrative expenses.
23
Legal
Proceedings
From
time
to time we may become a party to litigation or other legal proceedings that,
in
the opinion of our management are part of the ordinary course of our business.
Currently, no legal proceedings or claims are pending against or involve us
that, in the opinion of our management, could reasonably be expected to have
a
material adverse effect on our business, prospects, financial condition or
results of operations.
Except
as
noted, this prospectus covers shares of our common stock sold in our private
equity offerings in October, 2006 and February, 2007, to “accredited investors”
as defined by Rule 501(a) under the Securities Act, pursuant to an exemption
from registration provided in Regulation D, Rule 506 under Section 4(2) of
the Securities Act, and also 250,000 shares issued to certain of our pre-merger
shareholders in connection with the March 20, 2007 merger. The selling
stockholders may from time to time offer and sell under this prospectus any
or
all of the shares of common stock listed opposite each of their names below.
We
are required, under a registration rights agreement, to register for resale
the
shares of our common stock described in the tables below for the 250,000 shares
issued to the shareholders named in the table in connection with the
merger.
The
following table sets forth information about the number of shares of our common
stock beneficially owned by each selling stockholder that may be offered from
time to time under this prospectus. Certain selling stockholders may be deemed
to be “underwriters” as defined in the Securities Act.
The
table
below has been prepared based upon the information furnished to us by the
selling stockholders as of April 1, 2007. The selling stockholders
identified below may have sold, transferred or otherwise disposed of some or
all
of their shares since the date on which the information in the following table
is presented in transactions exempt from or not subject to the registration
requirements of the Securities Act. Information concerning the selling
stockholders may change from time to time and, if necessary, we will amend
or
supplement this prospectus accordingly. We cannot provide an exact amount,
but
have provided an estimate, of the number of shares of common stock that will
be
held by the selling stockholders upon termination of this offering, because
the
selling stockholders may offer some or all of their common stock under the
offering contemplated by this prospectus. The total number of shares that may
be
sold hereunder will not exceed the number of shares offered hereby. Please
read
the section entitled “Plan of Distribution” in this prospectus.
The
percentage of common stock outstanding is based upon a total of 22,664,123
issued and outstanding shares of our common stock on April 1, 2007. Beneficial
ownership is determined in accordance with Rule 13d-3 of the Securities and
Exchange Commission. Shares underlying options exercisable within 60 days of
April 1, 2007 are considered for the purpose of determining the percent of
the class held by the holder of such options, but not for the purpose of
computing the percentages held by others. The persons and entities named in
the
table have sole voting and sole investment power with respect to the shares
set
forth opposite the stockholder’s name, subject to community property laws, where
applicable, unless otherwise noted in footnotes to the table. None of the
selling stockholders has had a position, office or other material relationship
with us in the past three years, except as indicated in footnotes to the
table.
The
shares listed under “Shares Subject to Lock-Up/Leak-Out Agreements” set forth
below may only be offered and sold in compliance with the Lock-Up/Leak-Out
Agreements described previously.
Beneficial
Owner
Shares
of Common Stock Owned Before the Offering
Shares
of Common Stock Being Offered
Shares
of
Common
Stock
Owned
Upon
Completion
of
the
Offering
Percentage
of Common Stock Outstanding Upon
Completion
of Offering
David
Newman
47,619
47,619
0
*
Gregory
Anthone
142,857
142,857
0
*
24
Beneficial
Owner
Shares
of Common Stock Owned Before the Offering
Shares
of Common Stock Being Offered
Shares
of
Common
Stock
Owned
Upon
Completion
of
the
Offering
Percentage
of Common Stock Outstanding Upon Completion of
Offering
Nick
Henkels
200,000
200,000
0
*
Ervin
Kramer
150,000
100,000
50,000
*
Harry
Youtsos
50,000
50,000
0
*
William
Hartzell
100,000
50,000
50,000
*
Suzanne
Clifford
25,000
25,000
0
*
Mark
Hemann
50,000
50,000
0
*
Dennis
Phenow
150,000
75,000
75,000
*
Pat
Vincelli
50,000
25,000
25,000
*
Travis
Welch
30,000
30,000
0
*
Paul
Cownie
25,000
25,000
0
*
Blue
Sky Investments LLC
25,000
25,000
0
*
Paul
Schreier
40,000
40,000
0
*
William
and Karen Frothinger
80,000
80,000
0
*
Gerald
Auchstetter
80,000
40,000
40,000
*
Joseph
Techar (1)
40,000
40,000
0
*
Darryl
Ekstrom (1)
40,000
40,000
0
*
Mark
Larson
50,000
50,000
0
*
Daniel
A. Deikel Trust Declaration
50,000
50,000
0
*
Amit
Sela
1,004,048
1,004,048
0
*
Bruce
and Colleen Lea
100,000
100,000
0
*
August
Stoffel
70,000
35,000
35,000
*
Scott
and Elizabeth Zbikowski
300,000
100,000
200,000
*
John
Jakway and Carol Jakway
28,572
28,572
0
*
Darin
Paulson
43,000
43,000
0
*
Brian
Manion
315,477
315,477
0
*
Tom
and Peggy Gerrits
50,000
25,000
25,000
*
David
Flod
300,000
100,000
200,000
*
25
Beneficial
Owner
Shares
of Common Stock Owned Before the Offering
Shares
of Common Stock Being Offered
Shares
of
Common
Stock
Owned
Upon
Completion
of
the
Offering
Percentage
of Common Stock Outstanding Upon Completion of
Offering
Affiliated
with a broker-dealer, Capital Quest Securities, Inc. They have represented
to us that they acquired our stock in the ordinary course of business
and
without any agreements, directly or indirectly, with any person to
distribute the stock.
(2)
Acquired
from the Company pursuant to the terms of a consulting
agreement.
(3)
Duane
Jenson is the Chief Executive Officer of Jenson Services, Inc., which
was
a controlling shareholder of the Company until the merger on March20,2007.
(4)
Travis
Jenson is the spouse of Sarah Jenson, who was the Company’s President and
a Director until the merger on March 20, 2007.
(5)
Thomas
Howells is the spouse of Lisa Howells, who was the Company’s Secretary and
a Director until the merger on March 20,2007
USE
OF PROCEEDS
We
will
not receive proceeds from the sale of common stock under this prospectus. We
have agreed to bear the expenses in connection with the registration of the
common stock being offered hereby by the selling stockholders.
DETERMINATION
OF OFFERING PRICE
The
selling stockholders will determine at what price they may sell the offered
shares, and such sales may be made at prevailing market prices, or at privately
negotiated prices. In general, the 250,000 shares covered by the
Lock-Up/Leak-Out Agreements may not be offered or sold at a price lower than
$1.05 per share.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
The
Company’s common stock was listed on the OTC Bulletin Board of the National
Association of Securities Dealers (“NASD”) on January 19, 2006, under the symbol
“KNTX”, but there was no active trading prior to approximately December, 2006.
Effective April 3, 2007, the symbol was changed to “NOGS”.
These
prices were obtained from the National Quotation Bureau, Inc. and do not
necessarily reflect actual transactions, retail markups, mark downs or
commissions. Stock price data before March 20, 2007 is for the prior shell
company, Kentex Petroleum, Inc., and therefore may not be relevant to any
analysis of the post-merger Company.
Holders
The
number of record holders of the Company’s common stock as of April 1, 2007
is approximately 453.
27
Incentive
Stock Option Plan
The
Board
of Directors approved the Incentive Stock Option Plan on November 3, 2006.
The
total number of options that can be granted under the plan will not exceed
2,000,000 shares. Both incentive stock options and non-qualified stock options
may be granted by the Board under the plan. Stock options may be granted by
the
Board of Directors with an option price not less than the fair market value
of
the shares of common stock to which the non-qualified stock option relates
on
the date of grant. However, with respect to incentive stock options, the price
shall not be less than 110% of the fair market value per share on the date
of
the grant in the case of an individual then owning more than 10% of the total
combined voting power of all classes of stock of the corporation.
Each
option granted under the stock option plan will be assigned a time period for
exercise not to exceed ten years after the date of the grant. Certain other
restrictions will apply in connection with this plan affecting when some awards
may be exercised.
In
the
event of a change of control (as defined in the stock option plan), the date
on
which all options outstanding under the stock option plan may first be exercised
will be accelerated.
This
plan
is intended to encourage directors, officers, employees and consultants to
acquire ownership of common stock. The opportunity so provided is intended
to
foster in participants a strong incentive to put forth maximum effort for the
Company’s continued success and growth, to aid in retaining individuals who put
forth such effort, and to assist in attracting the best available individuals
to
the Company in the future.
As
of
December 31, 2006, 1,100,000 options have been issued under this plan. The
Company has agreed to grant an additional 400,000 options under its 2006
Incentive Stock Option Plan to the four (4) directors appointed on May 3,2007 (100,000 each to Messrs. O’Toole, Stewart, King and Grabb) upon their
election at the next annual meeting of shareholders.
The
following table sets forth information as of December 31, 2006 regarding
outstanding options granted under the plan and options reserved for future
grant
under the plan.
Plan
Category
Number
of shares to be issued upon exercise of outstanding options and
rights
(a)
Weighted-average
exercise price of outstanding options and rights
(b)
Number
of shares remaining available for future issuance under equity
compensation plans (excluding shares reflected in column (a))
(c)
Equity
compensation plans approved by stockholders
1,100,000
$
1.05
900,000
Equity
compensation plans not approved by stockholders
We
have
never declared or paid any cash dividends. We currently do not intend to pay
cash dividends in the foreseeable future. We intend to reinvest any earnings
in
the development and expansion of our business. Any cash dividends in the future
to common stockholders will be payable when, as and if declared by our Board
of
Directors, based upon the Board’s assessment of:
•
our
financial condition;
•
earnings;
28
•
need
for funds;
•
capital
requirements;
•
prior
claims of preferred stock to the extent issued and outstanding;
and
•
other
factors, including any applicable
laws.
Therefore,
there can be no assurance that any dividends on the common stock will ever
be
paid.
MANAGEMENT’S
DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
Except
as discussed below, a discussion of our past financial results is not pertinent
to the business plan of the Company on a going forward basis, due to the change
in our business which occurred upon consummation of the merger on March 20,2007.
Overview
and Outlook
We
are an
oil and gas exploration and production company. Our properties are located
in
Montana and North Dakota. Our corporate strategy is to build value in the
Company through the development and acquisition of natural gas and oil assets
that exhibit consistent, predictable, and long-lived production.
We
initially secured the rights to mineral leases on approximately 37,000 gross
acres, 26,000 net acres.
Our
goal
is to consolidate numerous oil and natural gas producing properties within
this
region and enhance their value by, for example, applying new technology for
drilling for and/or producing oil and natural gas more efficiently or securing
additional capital to facilitate the operations. The steps we need to take
to
implement our strategy include:
•
Raise
the necessary capital required to acquire, explore for and produce
oil,
conventional natural gas and unconventional natural
gas;
•
Assemble
a group of talented and experienced employees, partners and consultants
to
execute the strategic objectives;
•
Create
value by executing an ‘asset roll up’ business plan, subsequently
optimizing the value of each newly acquired property. Executing this
phase
of the strategy should in turn provide asset value for the acquisition
and
enhancement of additional properties, and create synergies among
these
assets, further improving their value.
•
Identify
and utilize industry partners to mitigate risk and leverage resources
and
acreage through joint ventures, farmout agreements and strategic
pooling
of acreage.
The
Company is in the early stage of exploring and developing its properties
in
Montana and North Dakota and currently has no production or revenues from
these
properties. Its operations to date have been limited to technical evaluation
of
the properties and the design of exploration and development plans to exploit
the oil and gas resources on those properties, as well as seeking financing
opportunities to acquire additional oil and gas properties.
Oil
and
gas revenues for the period ended December 31, 2006, and the quarter ended
March31, 2007, was $0. We will not have any significant production revenue unless
and
until we are able to establish commercial production in connection with new
drilling activities planned for 2007 or in connection with other acquisition
activities.
Our
expenses to date have consisted principally of general and administrative
costs.
We expect these costs to increase moderately as we proceed with our exploration
and development plans. In the future we expect to incur increased geologic,
geophysical, and engineering costs. Total expenses for the period ended
December 31, 2006 were $76,373.93, and for the quarter ended March 31, 2007
were $297,719. We had a net loss of $76,106.85 for the period ended December31,2006, and a net loss of $287,586 for the quarter ended March 31,2007.
29
Operation
Plan
During
the next twelve months we plan to seek financing opportunities to commence
a
growth plan that will include the acquisition of additional oil and gas
properties as well as begin a larger scale development project on the existing
acreage.
The
Company has several other projects that are in various stages of discussions
and
is continually evaluating oil and gas opportunities in the Continental
U.S.
To
accelerate the exploration and development program we plan to take on Joint
Venture (JV) or Working Interest (WI) partners that will contribute to the
capital costs of drilling and completion and then share in revenues derived
from
production. This economic strategy may allow us to utilize our own financial
assets toward the growth of our leased acreage holdings, pursue the acquisition
of strategic oil and gas producing properties or companies and generally
expand
our existing operations.
Because
of our limited operating history we have yet to generate any revenues from
the
sale of oil or natural gas. Our activities have been limited to the negotiation
of WI agreements, mineral lease acquisition and preliminary analysis of reserves
and production capabilities. Consequently, we have incurred the expenses of
start-up.
Our
future financial results will depend primarily on: (i) the ability to continue
to source and screen potential projects; (ii) the ability to discover commercial
quantities of natural gas and oil; (iii) the market price for oil and gas;
and
(iv) the ability to fully implement our exploration and development program,
which is dependent on the availability of capital resources. There can be no
assurance that we will be successful in any of these respects, that the prices
of oil and gas prevailing at the time of production will be at a level allowing
for profitable production, or that we will be able to obtain additional funding
to increase our currently limited capital resources.
2007
Drilling Projects
The
Company has currently planned at least 5 - 6 wells for calendar year
2007.
Rincon
Exploration
On
April
20,2007 we announced a farm out agreement with Rincon Exploration whereby we
will contribute acreage to a spacing unit to be created for a Red River
Formation test well. Rincon and other partners will bear our share of the costs
to the casing point of the well. We will retain an undivided interest of 25%
in
our share of the spacing unit. This well is expected to be drilled in June
2007.
3-D seismic driven Red River exploration has been very successful in the area
to
date. The location of the well will be T34N-R57E, Section 1: SE/4.
Brigham
Exploration (NASD: BEXP) Joint Venture
On
April23, 2007 Brigham Exploration announced a Williston Basin Joint Venture with
us
under which Brigham will bear a portion of our costs on a series of wells and
begin a continuous drilling program in 2008. Under the terms of the agreement
Brigham expects to drill 4 wells in 2007. 2 of these wells will be on our
acreage position in Mountrail County ND targeting the Bakken Shale. The
approximately 12,000 gross acres included in the Joint Venture are spread
between 19 sections in close proximity to the high producing EOG Resources
(NYSE:EOG) wells in the Parshall field. Based on current data obtained from
the
North Dakota Industrial Commission, Department of Mineral Resources, EOG has
drilled six Bakken wells in the area with three additional wells currently
drilling and another 12 wells permitted to be drilled. The average initial
production rate of these wells is 1,049 barrels of oil and 278 Mcf of gas.
Drilling under the Brigham Joint Venture is expected to commence in the early
third quarter with at least 2 wells drilled in 2007 targeting the Bakken in
Mountrail County. On 640 spacing, there are 19 gross wells that could be drilled
by Brigham and Northern to fully explore and develop the Joint Venture
acreage.
In
Sheridan County, Brigham has announced that they expect to drill at least
2
wells under the JV with the first commencing in the early third quarter.
We will
be carried on the first 2 wells with Brigham covering 90% of the cost and
the
Company earning up to a 37% working interest for our 10% portion of the drilling
costs. Beginning in 2008, Brigham will be subject to a 120 day continuous
drilling provision whereby it will be required to drill every 120 days in
order
to retain future drilling opportunity. The first well will likely be a Mission
Canyon development well offsetting another operator’s Mission Canyon well that
has been a producer of approximately 200,000 barrels of oil to date. The
Mission
Canyon Target is found at approximately 7,600 feet and it is likely that
Brigham
will drill this well horizontally with 3,000 feet of lateral displacement.
The
second 2007 well may also be a Mission Canyon test or possibly a test of
a Red
River structure, which has established quality Red River production. The
Red
River Target is encountered at a depth of approximately 11,600 feet and quality
Red River producers in the area have made 250,000 to over 1,000,000 barrels
of
oil. Based on existing production combined with the over 85 mile 3-D seismic
database Brigham owns, we believe the Sheridan County acreage provides excellent
potential for the discovery and development of significant oil and natural
gas
reserves. On 160 acre spacing there are 137 possible net wells that could
be
drilled to fully explore and develop the acreage position.
30
Liquidity
and Capital Resources
Liquidity
is a measure of a company’s ability to meet potential cash requirements. We have
historically met our capital requirements through the issuance of stock and
by
borrowings. In the future, we anticipate we will be able to provide the
necessary liquidity we need by the revenues generated from the sales of our
oil
reserves in our existing properties, however, if we do not generate sufficient
sales revenues we will continue to finance our operations through equity and/or
debt financings.
The
following table summarizes total current assets, total current liabilities
and
working capital at March 31, 2007.
Satisfaction
of our cash obligations for the next 12 months.
A
critical component of our operating plan impacting our continued existence
is
the ability to obtain additional capital through additional equity and/or debt
financing and JV or WI partnerships. In the event we cannot obtain the necessary
capital to pursue our strategic plan, we may have to cease or significantly
curtail our acreage acquisitions. This would materially impact our ability
to
continue operations. However, due to the low overhead of the Company, we are
not
dependant on new capital if we do not wish to accelerate our drilling programs
and/or buy up working interests in potential wells during the next 18 months.
We
currently are funded to meet our minimum drilling commitments and expected
G&A expenses for the next 18 months.
Since
inception, we have financed cash flow requirements through debt financing and
issuance of common stock for cash and services. As we expand operational
activities, we may continue to experience net negative cash flows from
operations, pending receipt of sales or development fees, and will be required
to obtain additional financing to fund operations through common stock offerings
and debt borrowings to the extent necessary to provide working
capital.
Over
the
next twelve months we believe that existing capital and anticipated funds from
operations will not be sufficient to sustain planned expansion, primarily
acreage acquisition. Consequently, we may seek additional capital in the future
to fund growth and expansion through additional equity or debt financing or
credit facilities. No assurance can be made that such financing would be
available, and if available it may take either the form of debt or equity.
In
either case, the financing could have a negative impact on our financial
condition and our stockholders.
We
anticipate incurring operating losses over the next twelve months. Our lack
of
operating history makes predictions of future operating results difficult.
Our
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of operations,
particularly companies in the oil and gas exploration industry. Such risks
include, but are not limited to, an evolving and unpredictable business model
and the management of growth. To address these risks we must, among other
things, implement and successfully execute our business and marketing strategy,
continue to develop and upgrade technology and products, respond to competitive
developments, and attract, retain and motivate qualified personnel. There
can be
no assurance that we will be successful in addressing such risks, and the
failure to do so can have a material adverse effect on our business prospects,
financial condition and results of operations.
31
Going
Concern
The
financial statements included in our filings have been prepared in conformity
with generally accepted accounting principles that contemplate the continuance
of the Company as a going concern. Management may use borrowings and security
sales to improve the Company’s cash position; however, no assurance can be given
that debt or equity financing, if and when required, will be available. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets and classification of
liabilities that might be necessary should the Company be unable to continue
existence.
Summary
of product research and development that we will perform for the term of our
plan.
We
do not
anticipate performing any significant product research and development under
our
plan of operation until such time as we can raise adequate working capital
to
sustain our operations.
Expected
purchase or sale of any significant equipment.
We
do not
anticipate the purchase or sale of any plant or significant equipment; as such
items are not required by us at this time or anticipated to be needed in the
next twelve months.
Significant
changes in the number of employees.
We
currently have 2 full time employees (the Officers of the Company). As drilling
production activities commence, we may hire additional technical, operational
and administrative personnel as appropriate. We do not expect a significant
change in the number of full time employees over the next 12 months. We are
using and will continue to use the services of independent consultants and
contractors to perform various professional services, particularly in the area
of land services, reservoir engineering, drilling, water hauling, pipeline
construction, well design, well-site monitoring and surveillance, permitting
and
environmental assessment. We believe that this use of third-party service
providers may enhance our ability to contain general and administrative
expenses.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements that have or are reasonably likely
to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
Pursuant
to the merger with NOG, the officers and directors of NOG became the officers
and directors of the Company effective upon closing of the Merger.
Information
as to our current directors and executive officers is as follows:
Name
and Age
Positions
Michael
L. Reger, 31
Director,
Chief Executive Officer and Secretary
Ryan
R. Gilbertson, 31
Director
and Chief Financial Officer
Loren
J. O’Toole, 76
Director
Carter
Stewart, 49
Director
Jack
King, 55
Director
Robert
Grabb, 55
Director
32
Michael
L. Reger,Director,
Chief Executive Officer, Secretary
Mr.
Reger
has been primarily involved in the acquisition of oil & gas mineral rights
for his entire professional life and is a director of Reger Oil based in
Billings, Montana. Mr. Reger holds a BA in Finance and an MBA in
Finance/Management from the University of St. Thomas in St. Paul, Minnesota.
The
Reger family has a history of acreage acquisition in the Williston Basin dating
to 1952.
Ryan
R. Gilbertson, Director and Chief Financial Officer
Mr.
Gilbertson is a Principal of Crystal Bay Capital, a boutique investment banking
firm focused on small to mid-size companies. Mr. Gilbertson’s last
position prior to founding Crystal Bay Companies was Director of Equity
Derivative Trading and Strategy at Piper Jaffray in Minneapolis from March
2004
to August 2006. Prior to Piper Jaffray, Ryan was an Equity Derivative Trader
at
Telluride Asset Management, a multi-strategy hedge fund based in Wayzata,
Minnesota. Ryan holds a BA from Gustavus Adolphus College.
Loren
J. O’Toole, Director
Mr.
O’Toole founded the law firm of O’Toole and O’Toole, based in Plentywood MT. The
firm is a leader in the legal profession specializing in oil and gas throughout
the Rocky Mountain Region. Mr. O’Toole has over 50 years of experience in oil
and gas.
Carter
Stewart, Director
Mr.
Stewart is a Registered Petroleum Geologist who has been generating prospects
in
the Williston Basin for 26 years. Mr. Stewart is the founder of Stewart
Geological, Inc. Stewart Geological, Inc. is currently participating in wells
in
Montana, Wyoming, North Dakota, New York and Alberta, Canada. Mr. Stewart has
been directly involved in the drilling of over 500 wells during his career,
in
several different locations within the U.S. and Canada. He holds a Degree in
Geology from the University of Montana, 1981.
Jack
King, Director
Mr.
King
is with Hancock Resources, a prominent independent oil and gas exploration
and
development corporation based in Billings MT. Mr. King’s 30 years in the
industry began in petroleum land management in the Northern Rockies . Throughout
his career, Mr. King has managed several independent oil and gas companies.
Currently Mr. King sits on the boards of The Montana Petroleum Association,
The
Montana Community Foundation, and The Montana Board of Oil and Gas Conservation
Commission, which is Montana’s oil and gas regulatory Board appointed by the
Governor. Mr. King holds a degree in Economics from the University of
Montana.
Robert
Grabb, Director
Mr.
Grabb
is a Registered Petroleum geologist. He was most recently an integral member
of
the Newfield Exploration (NYSE: NFX) Geologic Team that conceptualized and
commercialized the resource plays that have driven Newfield’s growth. Mr. Grabb
holds B.S. and M.S. Degrees in geology from Montana State University. Mr. Grabb
is also a member of the American Association of Petroleum Geologists and the
Society of Petroleum Engineers.
Election
of Directors and Officers
Directors
are elected to serve until the next annual meeting of stockholders and until
their successors have been elected and qualified. Officers are appointed to
serve until the meeting of the Board of Directors following the next annual
meeting of stockholders and until their successors have been elected and
qualified. Officers may be removed by the Board of Directors at any time, with
or without cause.
Audit
Committee and Financial Expert
We
do not
have an Audit Committee; our directors perform some of the same functions of
an
Audit Committee, such as: recommending a firm of independent certified public
accountants to audit the annual financial statements; reviewing the independent
auditor’s independence, the financial statements and their audit report; and
reviewing management's administration of the system of internal accounting
controls. The Company does not currently have a written audit committee charter
or similar document.
33
We
have
no financial expert. We believe the cost related to retaining a financial expert
at this time is prohibitive. Further, because of our start-up operations and
financial experience of our officers, we believe the services of a financial
expert are not warranted.
Code
of Business Conduct and Ethics
We
have
not adopted a corporate code of ethics.
Our
decision to not adopt such a code of ethics results from our having only two
officers operating as the management for the Company. We believe that as a
result of the limited interaction which occurs, having such a small management
structure for the Company eliminates the current need for such a code, in that
violations of such a code would be reported to the party generating the
violation.
Nominating
Committee
We
do not
have a Nominating Committee or Nominating Committee Charter. Our Board of
Directors performs some of the functions associated with a Nominating Committee.
We have elected not to have a Nominating Committee in that until recently we
had
only three directors and have never received a stockholder nomination for
additional directors.
Director
Independence
We
believe that four member of our Board of Directors, Messrs. O’Toole, Stewart,
King and Grabb, would be “independent directors” under the NASDAQ Stock Market’s
definition set forth in Marketplace Rule 4200(a)(15), if such rule was
applicable to us.
The
following table presents information, to the best of our knowledge, about the
beneficial ownership of our common stock on April 1, 2007, held by those persons
known to beneficially own more than 5% of our capital stock and by our directors
and executive officers. The percentage of beneficial ownership for the following
table is based on 22,664,123 shares of common stock outstanding as of April1,2007.
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and does not necessarily indicate beneficial ownership
for
any other purpose. Under these rules, beneficial ownership includes those shares
of common stock over which the stockholder has sole or shared voting or
investment power. It also includes (unless footnoted) shares of common stock
that the stockholder has a right to acquire within 60 days after April 1, 2007
through the exercise of any option or other right. The percentage ownership
of
the outstanding common stock, however, is based on the assumption, expressly
required by the rules of the Securities and Exchange Commission, that only
the
person or entity whose ownership is being reported has converted options into
shares of our common stock.
Michael
L. Reger, Director, Chief Executive Officer and Secretary
4,320,000
(6)
19.1
%
Ryan
R. Gilbertson, Director and Chief Financial Officer
2,107,500
(7)
9.3
%
Loren
J. O’Toole, Director
-
*
Carter
Stewart, Director
-
*
Jack
King, Director
-
*
Robert
Grabb, Director
-
*
Directors
and Officers as a Group
6,427,500
28.4
%
1.
As
used in this table, “beneficial ownership” means the sole or shared power
to vote, or to direct the voting of, a security, or the sole or shared
investment power with respect to a security (i.e., the power to dispose
of, or to direct the disposition of, a security). The address of
each
member of management is care of the Company.
2.
Figures
are rounded to the nearest tenth of a percent.
3.
Includes
275,000 shares held directly and 3,885,000 shares held by entities
controlled by Mr. Geraci, and of which he may be deemed the beneficial
owner. This includes 905,000 shares held by Lantern Advisors, LLC,
which
is jointly controlled with Mr. Douglas Polinsky, which are also included
in his beneficial shareholdings listed above.
4.
Includes
2,000,000 shares held directly and 2,382,500 shares held by entities
owned
and/or controlled by Mr. Polinsky which may be deemed to be
beneficially owned by him. This includes 905,000 shares held by Lantern
Advisers, LLC, which is jointly controlled with Mr. Joseph Geraci,
II and
which are also included in his beneficial shareholdings listed above.
Further, on December 15, 2006, the Company granted 100,000 stock
options
to Mr. Polinsky in consideration of his services as Director of the
Company. 50,000 options vest on June 15, 2007, and the balance vest
on
December 15, 2007. The 100,000 options are exercisable at $1.05 per
share
for a period of ten (10) years expiring on December 15, 2016. The
50,000
of these option shares which vest June 15, 2007 are included in these
totals, but the 50,000 which vest on December 15, 2007 are not, as
those
options are not immediately exercisable. Mr. Polinsky was a director
of
the Company until May 3, 2007.
5.
The
905,000 shares held by Lantern Advisors, LLC are included in Mr.
Geraci’s
and Mr. Polinsky’s totals above, but they have only been included once in
this total, to avoid double-counting.
6.
Includes
4,069,000 shares held directly and 1,000 shares held by Mr. Reger’s
spouse, which may be deemed to be beneficially owned by him. Further,
on
December 15, 2006, the Company granted 500,000 stock options to Mr.
Reger
in consideration of his services as Chief Executive Officer of the
Company. 250,000 options vest on June 15, 2007, and the balance vest
on
December 15, 2007. The 500,000 options are exercisable at $1.05 per
share
for a period of ten (10) years expiring on December 15, 2016. The
250,000
of these option shares which vest on June 15, 2007 are included in
these
totals, but the 250,000 which vest on December 15, 2007 are not,
as those
options are not immediately
exercisable.
35
7.
Includes
407,500 shares held directly and 1,450,000 shares held by entities
owned
and/or controlled by Mr. Gilbertson, which may be deemed to be
beneficially owned by him. Further, on December 15, 2006, the Company
granted 500,000 stock options to Mr. Gilbertson in consideration
of his
services as Chief Financial Officer of the Company. 250,000 options
vest
on June 15, 2007, and the balance vest on December 15, 2007. The
500,000
options are exercisable at $1.05 per share for a period of ten (10)
years
expiring on December 15, 2016. The 250,000 of these option shares
which
vest on June 15, 2007 are included in these totals, but the 250,000
which
vest on December 15, 2007 are not, as those options are not immediately
exercisable.
EXECUTIVE
COMPENSATION
The
following table sets forth the compensation of the Company’s former executive
officer, Sarah E. Jenson, and the Company’s current officers as of December 31,2006. The current officers received no cash compensation in 2006.
Summary
Compensation Table
Name
and Principal Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan Compensation
($)
Nonqualified
Deferred Compensation Earnings
($)
All
Other Compensation
($)
Total
($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Sarah
E. Jenson, Former President (1)
2006
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
Michael
Reger, Chief Executive Officer
2006
-0-
-0-
-0-
$
400,000
(2)
(4)
-0-
-0-
-0-
$
400,000
Ryan
Gilbertson, Chief Financial Officer
2006
-0-
-0-
-0-
$
400,000
(3)
(4)
-0-
-0-
-0-
$
400,000
(1)
Effective
as of the closing of the merger with NOG, Sarah E. Jenson was replaced
as
officer and director by the officers and directors of
NOG.
(2)
On
December 15, 2006, the Company granted 500,000 stock options to Mr.
Reger
in consideration of his services as Chief Executive Officer of the
Company. 250,000 options vest on June 15, 2007, and the balance vest
on
December 15, 2007. The 500,000 options are exercisable at $1.05 per
share
for a period of ten (10) years expiring on December 15,2016.
(3)
On
December 15, 2006, the Company granted 500,000 stock options to Mr.
Gilbertson in consideration of his services as Chief Financial Officer
of
the Company. 250,000 options vest on June 15, 2007, and the balance
vest
on December 15, 2007. The 500,000 options are exercisable at $1.05
per
share for a period of ten (10) years expiring on December 15,2016.
(4)
See
Note 6 to the Company’s December 31, 2006 Financial Statements (attached)
for a description of the valuation method and assumptions used in
determining the value of the
options..
The
following table sets forth the outstanding equity awards to the Company’s
executive officers as of the year ended December 31, 2006.
36
Outstanding
Equity Awards at Fiscal Year-End
Option
Awards
Stock
Awards
Name
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
Number
of Securities Underlying Unexercised Options
(#)
Unexerciseable
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
Option
Exercise Price
($)
Option
Expiration Date
Number
of Shares or Units of Stock That Have Not Vested
(#)
Market
Value of Shares or Units of Stock That Have Not Vested
(#)
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other
Rights
That Have Not Vested
(#)
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units or
Other Rights That Have Not Vested ($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Michael
Reger
0
500,000
0
$
1.05
12/15/16
0
0
0
0
Ryan
Gilbertson
0
500,000
0
$
1.05
12/15/16
0
0
0
0
Compensation
Committee
We
currently do not have a compensation committee of the Board of Directors. Until
a formal committee is established our entire Board of Directors will review
all
forms of compensation provided to our executive officers, directors, consultants
and employees, including stock compensation.
Termination
of Employment
There
are
no compensatory plans or arrangements, including payments to be received from
the Company, with respect to any person named above which would in any way
result in payments to any such person because of his resignation, retirement,
or
other termination of such person’s employment with the Company, or any change in
control of the Company, or a change in the person’s responsibilities following a
change in control of the Company.
Compensation
of Directors
All
directors will be reimbursed for expenses incurred in attending Board or, when
established, committee meetings. From time to time, certain directors who are
not employees may receive shares of our common stock, or options to purchase
such shares.
The
following table sets forth director compensation for directors who are not
also
executive officers, for the year ended December 31, 2006.
See
Note 6 to the Company’s December 31, 2006 Financial Statements (attached)
for a description of the valuation method and assumptions used in
determining the value of the
options.
The
Company has agreed to issue 100,000 stock options under its 2006 Incentive
Stock
Option Plan to each new director appointed on May 3, 2007 (Messrs. O’Toole,
Stewart, King and Grabb), upon their election at the next annual meeting of
shareholders.
On
October 13 and October 21, 2006, NOG borrowed a total of $123,750 from its
three
directors, Michael Reger, Ryan Gilbertson and Douglas Polinsky pursuant to
promissory notes. These promissory notes did not bear interest. On February1,2007, the Company repaid the outstanding principal on these Notes.
The
Company acquired approximately 3,000 net acres of leases on the Mountrail
County, North Dakota acreage, from Southfork Exploration, LLC, for $90 per
acre,
plus 90 shares of common stock of the Company per acre. The initial closing
of
this transaction occurred on February 12, 2007. The Company also has the option
to acquire approximately an additional 2,000 net acres pursuant to its agreement
with Southfork Exploration, LLC. Southfork Exploration, LLC is owned and
controlled by Mr. J. R. Reger, the brother of Michael Reger, the Company’s Chief
Executive Officer. The Company believes this transaction was concluded on terms
and conditions which were no less favorable than those which would have been
obtained from an unrelated third party.
The
Company acquired the Sheridan County, Montana, leasehold interest from Montana
Oil Properties, Inc., for a total payment of $825,000 plus 400,000 shares of
common stock of the Company. The closing of this transaction was also concluded
on February 12, 2007. Montana Oil Properties, Inc. is owned and controlled
by
Mr. Tom Ryan and Mr. Steve Reger, uncles of Michael Reger, Chief Executive
Officer of the Company. The Company believes that the terms and conditions
of
this transaction were no less favorable than those which would have been
obtained from an unrelated third party.
The
Company entered into a letter agreement with Gallatin Resources, LLC, to
acquire
certain oil and gas leases on approximately 10,000 net mineral acres in the
Appalachia Basin. The acreage is located in the “Finger Lakes” region in Yates
County, New York. The letter agreement gives the Company the option to acquire
the subject leases until August 17, 2007, in exchange for consideration of
$1.5
million and 275,000 shares of common stock. Mr. Carter Stewart, one of the
Company’s directors, owns a 25% interest in Gallatin Resources, LLC. Acquisition
of the leases is subject to the Company’s obligation to obtain a “fairness
opinion” from a third party indicating that the transaction is fair to the
Company.
The
selling stockholders and any of their pledgees, donees, transferees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be
at
fixed or negotiated prices. In general, the 250,000 shares covered by the
Lock-Up/Leak-Out Agreements may not be offered or sold at a price lower than
$1.05 per share. The selling stockholders may use any one or more of the
following methods when selling shares:
·
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits investors;
·
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
·
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
·
an
exchange distribution in accordance with the rules of the applicable
exchange;
·
privately
negotiated transactions;
·
to
cover short sales made after the date that this registration statement
is
declared effective by the Securities and Exchange
Commission;
·
broker-dealers
may agree with the selling stockholders to sell a specified number
of such
shares at a stipulated price per
share;
38
·
a
combination of any such methods of sale;
and
·
any
other method permitted pursuant to applicable
law.
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
The
selling stockholders may from time to time pledge or grant a security interest
in some or all of the shares of common stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured parties
may offer and sell shares of common stock from time to time under this
prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
Upon
a
selling stockholder’s notification of the Company that any material arrangement
has been entered into with a broker-dealer for the sale of such stockholder’s
common stock through a block trade, special offering, exchange distribution
or
secondary distribution or a purchase by a broker or dealer, a supplement to
this
prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act.
The
selling stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors
in
interest will be the selling beneficial owners for purposes of this
prospectus.
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act, in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Discounts, concessions, commissions and
similar selling expenses, if any, that can be attributed to the sale of
securities will be paid by the selling stockholder and/or the purchasers. Each
selling stockholder has represented and warranted to the Company that it
acquired the securities subject to this registration statement in the ordinary
course of such selling stockholder’s business and, at the time of its purchase
of such securities such selling stockholder had no agreements or understandings,
directly or indirectly, with any person to distribute any such securities.
As
disclosed in the Selling Stockholder table, five of the selling
stockholders are affiliated with a broker-dealer.
The
Company has advised each selling stockholder that it may not use shares
registered on this registration statement to cover short sales of common stock
made prior to the date on which this registration statement shall have been
declared effective by the Securities and Exchange Commission. If a selling
stockholder uses this prospectus for any sale of the common stock, it will
be
subject to the prospectus delivery requirements of the Securities Act. The
selling stockholders will be responsible to comply with the applicable
provisions of the Securities Act and the Securities Exchange Act, and the rules
and regulations thereunder promulgated, including, without limitation,
Regulation M, as applicable to such selling stockholders in connection with
resales of their respective shares under this registration
statement.
The
Company is paying all fees and expenses incident to the registration of the
shares, but the Company will not receive any proceeds from the sale of the
common stock. The Company has agreed to indemnify certain selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
In
order
to comply with the securities laws of certain states, if applicable, the shares
must be sold in such jurisdiction only through registered or licensed brokers
or
dealers. In addition, in certain states the shares may not be sold unless they
have been registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirements is available
and
is complied with.
39
We
will
make copies of this prospectus available to the selling shareholders, and we
have informed them of the need to deliver copies of this prospectus to
purchasers at or prior to the time of any sale of the shares offered by this
prospectus. To the extent required, this prospectus may be amended and
supplemented from time to time to describe a specific plan of
distribution.
We
may
suspend the use of this prospectus, in the event that there is a material,
or
potentially material, development involving the Company, or there is an
occurrence of an event that renders the information in this prospectus
misleading, incomplete or untrue.
Our
articles of incorporation authorize the issuance of 100,000,000 shares of common
stock, $0.001 par value per share, of which 22,664,123 shares were outstanding
as of April 1, 2007. Holders of common stock have no cumulative voting rights.
Holders of shares of common stock are entitled to share ratably in dividends,
if
any, as may be declared, from time to time by the board of directors in its
discretion, from funds legally available to be distributed. In the event of
a
liquidation, dissolution or winding up of the Company, the holders of shares
of
common stock are entitled to share pro rata all assets remaining after payment
in full of all liabilities. Holders of common stock have no preemptive rights
to
purchase our common stock. There are no conversion rights or redemption or
sinking fund provisions with respect to the common stock. All of the outstanding
shares of common stock are validly issued, fully paid and
non-assessable.
Description
of Options
The
Board of Directors approved the Incentive Stock Option Plan on November 3,2006.
The total number of options that can be granted under the plan will not exceed
2,000,000 shares. As of April 1, 2007, 1,100,000 options have been issued under
this plan at a price of $1.05, and the Company has agreed to issue an additional
400,000 options (100,000 each) to the four directors appointed on May 3,2007.
Transfer
Agent
The
transfer agent for our common stock is Atlas Stock Transfer Company, 8899 South
State, Salt Lake City, Utah84107.
Indemnification;
Limitation of Liability
Under
Nevada law, none of our directors will have personal liability to us or any
of
our stockholders for monetary damages for breach of fiduciary duty as a
director. The foregoing provisions do not eliminate or limit the liability
of a
director (i) for any breach of the director's duty of loyalty to us or our
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under applicable
Sections of the Nevada Revised Statutes, (iv) for the payment of dividends
in
violation of Section 78.300 of the Nevada Revised Statutes or, (v) for any
transaction from which the director derived an improper personal
benefit.
The
Bylaws provide for indemnification of the directors, officers, and employees
of
the Company in most cases for any liability suffered by them arising out of
their activities as directors, officers, and employees of the Company, if they
were not engaged in willful misfeasance or malfeasance in the performance of
their duties; provided that, in the event of a settlement, the indemnification
will apply only when the Board of Directors approves such settlement and
reimbursement as being for the best interests of the Company. The Bylaws,
therefore, limit the liability of directors to the maximum extent permitted
by
Nevada law.
Our
bylaws also provide that the Company may purchase and maintain insurance for
the
benefit of a person who is or was serving as a director, office, employee or
agent of the Company against a liability incurred by him or her as a director,
officer, employee or agent.
40
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted for our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion
of
the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
Anti-Takeover
Effects of Provisions of Nevada State Law
The
Nevada Business Corporation Law contains a provision governing “Acquisition of
Controlling Interest.” This law provides generally that any person or entity
that acquires 20% or more of the outstanding voting shares of a publicly-held
Nevada corporation in the secondary public or private market may be denied
voting rights with respect to the acquired shares, unless a majority of the
disinterested stockholders of the corporation elects to restore such voting
rights in whole or in part. The control share acquisition act provides that
a
person or entity acquires “control shares” whenever it acquires shares that, but
for the operation of the control share acquisition act, would bring its voting
power within any of the following three ranges:
1.
20
to 33 1/3%,
2.
33
1/3 to 50%, or
3.
more
than 50%.
A
“control share acquisition” is generally defined as the direct or indirect
acquisition of either ownership or voting power associated with issued and
outstanding control shares. The stockholders or board of directors of a
corporation may elect to exempt the stock of the corporation from the provisions
of the control share acquisition act through adoption of a provision to that
effect in the articles of incorporation or bylaws of the corporation. Our
articles of incorporation and bylaws do not exempt our common stock from the
control share acquisition act.
The
control share acquisition act is applicable only to shares of “issuing
corporations” as defined by the act. An issuing corporation is a Nevada
corporation, which;
1.
has
200 or more stockholders, with at least 100 of such stockholders
being
both stockholders of record and residents of Nevada;
and
2.
does
business in Nevada directly or through an affiliated
corporation.
At
this
time, we do not have 100 stockholders of record resident of Nevada. Therefore,
the provisions of the control share acquisition act do not apply to acquisitions
of our shares and will not until such time as these requirements have been
met.
At such time as they may apply to us, the provisions of the control share
acquisition act may discourage companies or persons interested in acquiring
a
significant interest in or control of the Company, regardless of whether such
acquisition may be in the interest of our stockholders.
The
Nevada “Combination with Interested Stockholders Statute” may also have an
effect of delaying or making it more difficult to effect a change in control
of
the Company. This statute prevents an “interested stockholder” and a resident
domestic Nevada corporation from entering into a “combination,” unless certain
conditions are met. The statute defines “combination” to include any merger or
consolidation with an “interested stockholder,” or any sale, lease, exchange,
mortgage, pledge, transfer or other disposition, in one transaction or a series
of transactions with an “interested stockholder” having;
1.
an
aggregate market value equal to 5 percent or more of the aggregate
market
value of the assets of the corporation;
2.
an
aggregate market value equal to 5 percent or more of the aggregate
market
value of all outstanding shares of the corporation; or
3.
representing
10 percent or more of the earning power or net income of the
corporation.
An
“interested stockholder” means the beneficial owner of 10 percent or more of the
voting shares of a resident domestic corporation, or an affiliate or associate
thereof. A corporation affected by the statute may not engage in a “combination”
within three years after the interested stockholder acquires its shares unless
the combination or purchase is approved by the board of directors before the
interested stockholder acquired such shares. If approval is not obtained, then
after the expiration of the three-year period, the business combination may
be
consummated with the approval of the board of directors or a majority of the
voting power held by disinterested stockholders, or if the consideration to
be
paid by the interested stockholder is at least equal to the highest
of;
41
1.
the
highest price per share paid by the interested stockholder within
the
three years immediately preceding the date of the announcement of
the
combination or in the transaction in which he became an interested
stockholder, whichever is higher;
2.
the
market value per common share on the date of announcement of the
combination or the date the interested stockholder acquired the shares,
whichever is higher; or
3.
if
higher for the holders of preferred stock, the highest liquidation
value
of the preferred stock.
Mantyla
McReynolds, LLC, an independent registered public accounting firm, has audited
our financial statements for the years ended December 31, 2006 and 2005, as
stated in their report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
We
are
required to comply with the informational requirements of the Securities
Exchange Act of 1934, as amended, and accordingly we file annual reports,
quarterly reports, current reports, proxy statements and other information
with
the SEC. You may read or obtain a copy of these reports at the SEC’s public
reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You
may
obtain information on the operation of the public reference room and their
copy
charges by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that
contains registration statements, reports, proxy information statements and
other information regarding registrants that file electronically with the SEC.
The address of the website is http://www.sec.gov.
We
have
filed with the SEC a registration statement on Form SB-2 under the Securities
Act of 1933, as amended, to register the shares offered by this prospectus.
The
term “registration statement” means the original registration statement and any
and all amendments thereto, including the schedules and exhibits to the original
registration statement or any amendment. This prospectus is part of that
registration statement. This prospectus does not contain all of the information
set forth in the registration statement or the exhibits to the registration
statement. For further information with respect to us and the shares we are
offering pursuant to this prospectus, you should refer to the registration
statement and its exhibits. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete, and you should refer to the copy of that contract or
other
documents filed as an exhibit to the registration statement. You may read or
obtain a copy of the registration statement at the SEC’s public reference
facilities and Internet site referred to above.
Effective
March 20, 2007, immediately following the merger described below, Kentex
Petroleum, Inc. (“Kentex”) completed a so-called short-form merger with its
wholly owned subsidiary Northern Oil and Gas, Inc. in which Northern Oil and
Gas, Inc. merged into Kentex, and Kentex was the surviving entity. As part
of
this short-form merger, Kentex changed its name to Northern Oil and Gas, Inc.
(“the Company”).
Management
has determined that the Company should focus on projects in the oil and gas
industry primarily based in the Rocky Mountain Region of the U.S., specifically
the Williston Basin. This is based upon a belief that this industry is an
economically viable and fast growing sector in which to conduct business
operations. The Company has targeted specific prospects and intends to engage
in
the drilling for oil and gas. The Company is currently an exploration stage
company.
The
Company has two employees at this time, CEO Michael Reger and CFO Ryan
Gilbertson. Michael Reger has a great deal of experience in the oil and gas
industry. The Company will seek to retain independent contractors to assist
in
operating and managing the prospects as well as to carry out the principal
and
necessary functions incidental to the oil and gas business. With the intended
acquisition of oil and natural gas, the Company intends to establish itself
with
an industry partner or partners. Once the Company can establish a revenue base
with cash flow, it will seek opportunities more aggressive in
nature.
On
March20, 2007, Kentex Petroleum, Inc. (“Kentex”) acquired Northern Oil and Gas, Inc.
(“NOG”) through the merger of a wholly owned subsidiary with and into NOG. As a
result of the merger, NOG became a wholly-owned subsidiary of Kentex. The
merger
has been accounted for as a reverse acquisition using the purchase method
of
accounting. Although the merger was structured such that NOG became a
wholly-owned subsidiary of Kentex, NOG has been treated as the acquiring
company
for accounting purposes under Statement of Financial Accounting Standards
No.
141, Business Combinations: due to the following factors: (1) NOG’s stockholders
received the larger share of the voting rights in the merger; (2) NOG received
the majority of the members of the board of directors; and (3) NOG’s senior
management prior to the merger dominated the senior management of the combined
company.
Prior
to
the Merger, Kentex was a “shell company,” meaning that it had no material assets
or operations other than to acquire another business or company; and NOG was
and
is a recently formed exploration stage company that had just commenced
operations. Privately-held companies desiring to “go public” in a manner other
than an Initial Public Offering (“IPO”) often seek a reorganization or merger
with a thinly capitalized publicly-held company. This process avoids the high
cost of the registration of securities for public sale, including attendant
legal and accounting expenses, and the usually lengthy process involved in
the
registration of securities.
As
an
independent oil and gas producer, the Company’s revenue, profitability and
future rate of growth are substantially dependent on prevailing prices of
natural gas and oil. Historically, the energy markets have been very volatile
and it is likely that oil and gas prices will continue to be subject to wide
fluctuations in the future. A substantial or extended decline in natural gas
and
oil prices could have a material adverse effect on the Company’s financial
position, results of operations, cash flows and access to capital, and on the
quantities of natural gas and oil reserves that can be economically
produced.
F-6
NOTE
2BASIS
OF PRESENTATION
The
financial information included herein is unaudited, except the balance sheet
as
of December 31, 2006, which has been derived from our audited financial
statements as of December 31, 2006. However, such information includes all
adjustments (consisting solely of normal recurring adjustments), which are,
in
the opinion of management, necessary for a fair presentation of financial
position, results of operations and cash flows for the interim periods. The
results of operations for interim periods are not necessarily indicative of
the
results to be expected for an entire year.
Certain
information, accounting policies and footnote disclosures normally included
in
the financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted in this Form 10-QSB pursuant to certain rules and regulations of the
Securities and Exchange Commission. These financial statements should be read
in
conjunction with the audited financial statements and notes for the year ended
December 31, 2006.
As
a
result of the reverse acquisition discussed in Note 1, the historical financial
statements presented for periods prior to the acquisition date are the financial
statements of NOG. The operations of Kentex have been included in the financial
statements from the date of acquisition. The common stock per share information
in the condensed financial statements for the three months ended March 31,2007
and for the period from inception (October 5, 2006) through March 31, 2007
and
related notes have been retroactively adjusted to give effect to the reverse
merger on March 20, 2007.
NOTE
3SIGNIFICANT
ACCOUNTING PRACTICES
These
financial statements have been prepared in accordance with generally accepted
accounting principles in the United States of America (“GAAP”).
As
of
March 31, 2007the company has no production or reserves, therefore we have
minimal accounting practices at this time. In the future, as operations occur,
we will publish our accounting practices as such. To this point we have
essentially been a “checkbook” company with no operations and no material
revenues.
Oil
and Natural Gas Properties
The
Company follows the full cost method of accounting for oil and gas operations
whereby all costs related to the exploration and development of oil and gas
properties are initially capitalized into a single cost center ("full cost
pool"). Such costs include land acquisition costs, geological and geophysical
expenses, carrying charges on non-producing properties, costs of drilling
directly related to acquisition, and exploration activities. Currently, we
own
21,354 +/- acres of total net leasehold, both in Sheridan County, MT, and
control 3,016 +/- net acres in Mountrail County, ND (See Note 4). Capitalized
amounts for these properties as of March 31, 2007 consist entirely of
acquisition costs. Of these leaseholds, all acres are undeveloped and unproved.
We plan to develop a portion of this acreage as we identify the best operating
partners to do so.
Proceeds
from property sales will generally be credited to the full cost pool, with
no
gain or loss recognized, unless such a sale would significantly alter the
relationship between capitalized costs and the proved reserves attributable
to
these costs. A significant alteration would typically involve a sale of 25%
or
more of the proved reserves related to a single full costs
pool.
Costs
capitalized will be depleted and amortized on the unit-of-production method
based on the estimated gross proved reserves as determined by independent
petroleum engineers. The costs of unproved properties are withheld from the
depletion base until such time as they are either developed or abandoned.
When
proved reserves are assigned or the property is considered to be impaired,
the
cost of the property or the amount of the impairment is added to costs subject
to depletion calculations.
Net
Income (Loss) Per Common Share
Net
Income (loss) per common share is based on the Net Income (loss) less preferred
dividends divided by weighted average number of common shares
outstanding.
Diluted
earnings per share is computed using weighted average number of common shares
plus dilutive common share equivalents outstanding during the period using
the
treasury stock method. As the Company has a loss for the period ended
March 31, 2007 the potentially dilutive shares are anti-dilutive and are thus
not added into the earnings per share calculation.
As
of the
period ended March 31, 2007 there were no potentially dilutive
shares.
NOTE
4ACQUISITION
OF OIL AND GAS PROPERTIES
NOG
acquired from Montana Oil Properties, Inc. (MOP) certain oil leases in Sheridan
County Montana for a total purchase price of $825,000 and 400,000 shares of
NOG
restricted common stock for 21,354 +/- net acres. MOP retained an overriding
Royalty Interest equal to 7.5%. The principals of MOP are Mr. Steven Reger
and
Mr. Tom Ryan, both are uncles of our CEO, Michael Reger.
On
February 12, 2007, South Fork Exploration, LLC (SFE), a Montana Limited
Liability Company assigned an 80% net revenue interest in leases for 3,016
+/-
net acres in Mountrail County, North Dakota to Northern Oil and Gas, Inc. NOG
paid $271,481 in cash and issued 271,440 shares of restricted common stock.
Additionally NOG has the right to purchase up to a total of 5,000 acres for
the
same consideration per acre up to August, 1, 2007. At this point The Company
anticipates closing on or near the full acreage amount. SFE’s president is J. R.
Reger, brother of NOG CEO Michael Reger. J. R. Reger is also a shareholder
in
NOG.
F-7
NOTE
5PREFERRED
AND COMMON STOCK
There
are
currently no shares of Preferred stock outstanding. There have been 100,000
shares authorized, and there are no rights and privileges currently defined
for
preferred stock.
On
October 5 th
, 2006
the Company issued for cash and subscriptions receivable, 18,000,000 shares
of
par value common stock.
At
December 31, 2006, a total of 18,000,000 common shares were issued and
outstanding.
In
October 2006, the Company began a private placement offering of a maximum of
4,000,000 shares for sale for $1.05 (the “Offering”). A minimum of 2,000,000
shares was needed to close on the Offering. As of December 31, 2006, the Company
had sold 750,476 shares for total consideration of $788,000. These funds were
kept in a separate escrow account and were released upon the attainment of
the
minimum in the offering of 2,000,000 shares. Therefore these funds are recorded
as a liability on the Balance Sheet as of 12-31-06 but have subsequently moved
to stockholders’ equity. The Offering was a private placement made under Rule
506 promulgated under the Securities Act of 1933, as amended. The securities
offered and sold (or deemed to be offered and sold, in the case of underlying
shares of common stock) in the Offering have not been registered under the
Securities Act and may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements. The
disclosure about the private placement contained in this report does not
constitute an offer to sell or a solicitation of an offer to buy any securities
of the Company, and is made only as required under applicable law and related
reporting requirements, and as permitted under Rule 135c under the Securities
Act.
On
February 1, 2007, the Offering closed with $2,626,650.60 being raised and
2,501,573 common shares being issued.
NOTE
6RELATED
PARTY TRANSACTIONS
NOG
has
purchased a leasehold interest from South Fork Exploration LLC (SFE). SFE’s
president is J.R. Reger, the brother of Michael Reger, CEO of NOG. J.R. Reger
is
also a shareholder in NOG. See Note 4.
NOG
purchased a leasehold interest from Montana Oil Properties, Inc. (MOP). MOP
is
controlled by Mr. Tom Ryan and Mr. Steven Reger, both are uncles of the
Company’s CEO, Michael Reger. See Note 4.
NOTE
7STOCK
OPTIONS/STOCK BASED COMPENSATION
The
Company’s board of directors approved a stock option plan in October 2006 (“2006
Stock Option Plan”) to provide incentives to employees, directors, officers and
consultants and under which 2,000,000 shares of common stock have been reserved
for issuance. The options can be either incentive stock options or non-statutory
stock options and are valued at the fair market value of the stock on the date
of grant. The exercise price of incentive stock options may not be less than
100% of the fair market value of the stock subject to the option on the date
of
the grant and, in some cases, may not be less than 110% of such fair market
value. The exercise price of non-statutory options may not be less than 100%
of
the fair market value of the stock on the date of grant. As of March 31, 2007,
1,100,000 options were granted at a price of $1.05 per share. 500,000 options
were granted to each Michael Reger and Ryan Gilbertson, and 100,000 options
were
granted to Douglas Polinsky. As stated above, these options have an exercise
price of $1.05 per share. These options will vest at a rate of 50% on June15,2007 and 50% on December 15, 2007.
F-8
The
Company accounts for stock-based compensation under the provisions of Statement
of Financial Accounting Standards (“SFAS”) No. 123(R), Share Based Payment. This
statement requires us to record an expense associated with the fair value of
stock-based compensation. We currently use the Black-Scholes option valuation
model to calculate stock based compensation at the date of grant. Option pricing
models require the input of highly subjective assumptions, including the
expected price volatility. Changes in these assumptions can materially affect
the fair value estimate. We have used a basket of comparable companies to
determine the volatility input. We believe this fairly represents the volatility
we may trade on were we a public company at the time of issuance. The total
fair
value of the options will be recognized as compensation over the 1 year vesting
period. For expense purposes these options have been valued using the
Black-Scholes formula with the following inputs; Interest Rate of 4.75%,
Volatility 64%, Time 10 Years, Stock Price $1.05. The volatility number was
selected by creating a basket of 4 companies we believe accurately represent
our
market position upon becoming publicly traded. The Company received no cash
consideration for these option grants, their vesting is contingent upon the
Grantee’s continued employment with the company.
Currently
Outstanding Options
·
1,100,000
with an Exercise price of $1.05 and a term of 10 years
·
No
options were exercised or forfeited during the period from inception
to
3-31-07
·
No
options are exercisable as of 3-31-07
·
The
company recorded compensation expense related to these options of
$38,575
for the period from inception through December 31, 2006 and $216,986
for
the three months ended March 31, 2007.
·
The
remaining cost of the options will be recognized in 2007 as a compensation
expense of $624,439
NOTE
8GOING
CONCERN
The
Company’s financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company has a history of net losses that
are likely to continue in the future. As of March 31, 207, the Company had
positive working capital of $953,337.
Management
believes that the cash position is sufficient to sustain current operations
through 2007. They plan to mitigate capital expenditures through the use
of
farm-out agreements utilizing various partners’ drilling capital to explore and
develop the properties in exchange for working interest. It should also be
noted
that the Company pays no salaries at this time. However should the Company
decide to enter into agreements to explore and develop properties with its
own
capital, it would need to raise additional funds. There can be no assurances
such funds would be available and in the event they were not the Company
may be
unable to continue to operate. The financial statements do not include any
adjustments that might be necessary should the Company be unable to continue
as
a going concern.
F-9
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Shareholders
Northern
Oil and Gas, Inc.
We
have
audited the accompanying balance sheet of Northern Oil and Gas, Inc. [an
exploration stage company] as of December 31, 2006, and the related statements
of operations, stockholders' deficit, and cash flows for the period from
inception [October 5, 2006] through December 31, 2006. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on
our audit.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides
a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Northern Oil and Gas, Inc., as
of
December 31, 2006, and the results of their operations and their cash flows
for
the period from inception [October 5, 2006] through December 31, 2006 in
conformity with accounting principles generally accepted in the United States
of
America.
Northern
Oil and Gas Inc. was incorporated under the laws of the State of Nevada on
October 5, 2006.
Management
has determined that the Company should focus on projects in the oil and gas
industry primarily based in the Rocky Mountain Region of the U.S., specifically
the Williston Basin. This is based upon a belief that this industry is an
economically viable and fast growing sector in which to conduct business
operations. The Company has targeted specific prospects and intends to engage
in
the drilling for oil and gas. The company is currently an exploration stage
company. Michael Reger, the Company’s President, has a great deal of experience
in the oil and gas industry.
The
Company has two employees at this time, CEO Michael Reger and CFO Ryan
Gilbertson. It will seek to retain independent contractors to assist in
operating and managing the prospects as well as to carry out the principal
and
necessary functions incidental to the oil and gas business. With the intended
acquisition of oil and natural gas, the Company intends to establish itself
with
an industry partner or partners. Once the Company can establish a revenue base
with cash flow, it will seek opportunities more aggressive in
nature.
During
the fourth quarter of 2006, the Company evaluated two opportunities, one from
Montana Oil Properties, Inc and one from South Fork Exploration, LLC. Under
the
Montana Oil Properties Inc. agreement, Northern Oil and Gas, Inc. (NOG) agreed
to acquire from Montana Oil Properties, Inc. (MOP) certain oil leases in
Sheridan County Montana for a total purchase price of $825,000 and 400,000
shares of NOG common stock for 21,354 net acres. MOP will also retain an
overriding Royalty Interest equal to 7.5%. A deposit of $165,000 was paid to
MOP
in fourth quarter 2006, with a closing date of February 12, 2007. The Montana
Oil Properties Acquisition closed as planned on February 12, 2007. The
principals of MOP are Mr. Steven Reger and Mr. Tom Ryan, both are
uncles of our CEO, Michael Reger.
Under
the
South Fork Exploration, LLC (SFE) agreement, NOG agreed to acquire 3,016 net
acres from SFE for $90 per acre and 90 shares of NOG per acre. The initial
closing will take place February 12, 2007. Additionally NOG has the right to
purchase up to a total of 5000 acres for the same consideration up to August1,2007. At this point The Company anticipates closing on or near the full acreage
amount. These leases are Bakken Prospects located in Mountrail County, North
Dakota. SFE shall convey all purchased leases unto NOG utilizing a mutually
acceptable form of assignment and shall deliver 80% net revenue interest in
purchased leases to NOG. A deposit of $65,000 was paid to SFE in fourth quarter
2006, with an initial closing date of February 12, 2007. Subsequently, on
February 12, 2007 the SFE acquisition closed as planned. SFE’s president is J.R.
Reger, brother of NOG CEO Michael Reger.
NOTE
2 - SIGNIFICANT ACCOUNTING PRACTICES
These
financial statements have been prepared in accordance with generally accepted
accounting principles in the United States of America (“GAAP”).
As
of
December 31, 2006the company owns no properties and has no production or
reserves, therefore we have minimal accounting practices at this time. In the
future as property acquisitions are closed we will publish our accounting
practices as such. To this point we have essentially been a “checkbook” company
with no operations and no material revenues. Subsequent to this reporting
period, we have, however, closed on approximately 25,000 net acres as mentioned
previously.
New
Accounting Pronouncements
In
September 2005, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same
Counterparty. This issue addresses the question of when it is appropriate to
measure purchase and sales of inventory at fair value and record them in cost
of
sales and revenues and when they should be recorded as exchanges measured at
the
book value of the item sold. The EITF concluded that purchases and sales of
inventory with the same counterparty that are entered into in contemplation
of
one another should be combined and recorded as exchanges measured at the book
value of the item sold. The consensus has been applied to new arrangements
entered into and modifications or renewals of existing agreements, beginning
in
the second quarter of 2006. The adoption of this statement did not have a
material impact on our results of operations or financial position.
F-15
In
June
2003, the Securities and Exchange Commission (“SEC”) adopted final rules under
Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Commencing with
the Company’s Annual Report for the year ending December 31, 2007, the Company
is required to include a report of management on the Company’s internal control
over financial reporting. The internal control report must include a statement
of management’s responsibility for establishing and maintaining adequate
internal control over financial reporting for the Company; of management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting as of year end; of the framework used by management to evaluate the
effectiveness of the Company’s internal control over financial reporting; and
beginning with the Company’s Annual Report for the year ending December 31,2008, that the Company’s independent accounting firm has issued an attestation
report on management’s assessment of the Company’s internal control over
financial reporting, which report is also required to be filed as part of the
Annual Report on Form 10-KSB.
In
February 2006, the Financial Accounting Standards Board (FASB) issued statement
155, Accounting for Certain Hybrid Financial Instruments - an amendment of
FASB
Statements no. 133 and 140. This statement resolves issues addressed in
Statement 133 Implementation Issue no. D1 “Application of Statement 133 to
Beneficial Interests in Securitized Financial Assets.” This implementation
guidance indicated that entities could continue to apply guidance related to
accounting for beneficial interests in paragraphs 14 and 362 of Statement 140,
which indicate that any security that can be contractually prepaid or otherwise
settled in such a way that the holder of the security would not recover
substantially all of its recorded investment should be subsequently measured
like investments in debt securities classified as available for sale or trading,
and may not be classified as held to maturity. Also, Implementation issue D1
indicated that holders of beneficial interests in securitized financial assets
that are not subject to paragraphs 14 and 362 of Statement 140 are not required
to apply Statement 133 to those beneficial interests, pending further guidance.
Statement 155 eliminates the exemption from Statement 133 for interests in
securitized financial assets. It also allows the preparer to elect fair value
measurement at acquisition, at issuance or when a previously recognized
financial instrument is subject to a remeasurement event. We do not expect
the
adoption of this statement will have a material impact on our results of
operations or financial position.
In
March
2006, the FASB issued statement 156 Accounting for Servicing of Financial Assets
- an amendment of FASB Statement No. 140. Under statement 140, servicing assets
and servicing liabilities are amortized over the expected period of estimated
net servicing income or loss and assessed for impairment or increased obligation
at each reporting date. This statement requires that all separately recognized
servicing assets and servicing liabilities be initially measured at fair value,
if practicable. Subsequent measurement of servicing assets and servicing
liabilities at fair value is permitted, but not required. If derivatives are
used to mitigate risks inherent in servicing assets and servicing liabilities,
those derivatives must be accounted for at fair value. Servicing assets and
servicing liabilities subsequently measured at fair value must be presented
separately in the statement of financial position and there are additional
disclosures for all separately recognized servicing assets and servicing
liabilities. We do not expect the adoption of this statement will have a
material impact on our results of operations or financial position.
In
June
2006, the FASB issued interpretation no 48 Accounting for Uncertainty in Income
Taxes - an Interpretation of FASB Statement No. 109. This interpretation
clarifies the accounting for uncertainty in income taxes recognized in a
company’s financial statements in accordance with FASB Statement No. 109.
Recognition of a tax position should be based on whether it is more likely
than
not that a tax position will be sustained. The tax position is measured at
the
largest amount of benefit that is greater than 50% likely of being realized
upon
settlement. This interpretation is effective for fiscal years beginning after
December 15, 2006. We do not expect the adoption of this interpretation will
have material impact on our results of operations or financial
position.
In
September 2006, the Securities and Exchange Commission (SEC) release Staff
Accounting Bulletin (SAB) No. 108 regarding the effects of prior year
misstatements in considering current year misstatements for the purpose of
a
materiality assessment. The opinion in SAB 108 is that in the case of an error
that has occurred and been immaterial in a number of previous years, the
cumulative effect should be considered in assessing the materiality of the
error
in the current year. If the cumulative effect of the error is material, then
the
current year statements, as well as prior year statements should be restated.
In
the case of restated prior year statements, previously filed reports do not
need
to be amended, if the error was considered immaterial to previous year’s
financial statements. However the statements should be amended the next time
they are filed. The effects of this guidance should be applied cumulatively
to
fiscal years ending after November 15, 2006. Additional disclosure should be
made regarding any cumulative adjustments made in the current year financial
statements. We do not expect the adoption of this SAB will have material impact
on our results of operations or financial position.
F-16
Cash
and Equivalents
Our
cash
positions represent assets held in Checking and Money Market Accounts. These
assets are available to us on a daily basis and are highly liquid in nature.
Pursuant to the terms of our Private Placement the money raised was held in
escrow pending the attainment of the minimum offering of 2,000,000 shares.
Subsequently, on February 1, 2007 the minimum was reached and the proceeds
were
merged into operating and unrestricted investment accounts. Due to the balances
being greater than 100,000, we do not have FDIC coverage on the entire amount
of
bank deposits. The company believes this risk is minimal.
Stock-Based
Compensation
The
Company has accounted for stock-based compensation under the provisions of
Statement of Financial Accounting Standards (“SFAS”) No. 123(R ) , Share Based
Payment. This statement requires us to record an expense associated with the
fair value of stock-based compensation. We currently use the Black-Scholes
option valuation model to calculate stock based compensation at the date of
grant. Option pricing models require the input of highly subjective assumptions,
including the expected price volatility. Changes in these assumptions can
materially affect the fair value estimate. We have used a basket of comparable
companies to determine the volatility input. We believe this fairly represents
the volatility we may trade on were we a public company at the time of issuance.
The total fair value of the options will be recognized as compensation over
the
1 year vesting period.
The
following assumptions were used for the Black-Scholes model:
The
weighted average fair value at the date of grant for stock options granted
is as
follows:
Weighted
average fair value per share
$
1.05
Total
options granted
1,100,000
Total
weighted average fair value of options granted
$
880,000
Income
Taxes
The
Company accounts for income taxes under FASB Statement No. 109, Accounting
for Income Taxes. Deferred income tax assets and liabilities are determined
based upon differences between the financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that
will
be in effect when the differences are expected to reverse.
At
December 31, 2006, the Company has a net operating loss carryforward for Federal
income tax purposes of $30,636 that expires in 2026. The full amount of the
benefit of $7,659 (25% of net operating loss) associated with the carryforward
has been reserved and not recognized because realization of that benefit cannot
be estimated at this time. Below are the reductions in the Bookkeeping loss
for
tax purposes. The current year change in the valuation allowance is
$7,659.
F-17
Reconciliation
between income taxes at the statutory tax rate (25%) and the actual income
tax
provision for continuing operations follows:
Operating
Loss
$
(76,107
)
Statutory
Rate
x
25
%
Expected
Tax Benefit
(19,027
)
Effects
of:
Option
expense
9,644
Non-Deductible
Meals and Entertainment
1,724
Increase
in valuation allowance
7,659
Reported
Provision/(Benefit)
$
—
Use
of
Estimates
The
preparation of financial statements under generally accepted accounting
principles (“GAAP”) in the United States 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.
Net
Income (Loss) Per Common Share
Net
Income (loss) per common share is based on the Net Income (loss) less preferred
dividends divided by weighted average number of common shares
outstanding.
Diluted
earnings per share is computed using weighted average number of common shares
plus dilutive common share equivalents outstanding during the period using
the
treasury stock method. As the Company has a loss for the period ended December31, 2006 the potentially dilutive shares are anti-dilutive and are thus not
added into the earnings per share calculation.
As
of the
period ended December 31, 2006 there were 347,619 potentially dilutive shares
resulting from the issuances of convertible debt.
NOTE
3 - PREFERRED AND COMMON STOCK
There
are
currently no shares of Preferred stock outstanding. There have been 100,000
shares authorized, and there are no rights and privileges currently defined
for
preferred stock.
On
October 5 th
, 2006
the Company issued for cash and subscriptions receivable, 18,000,000 shares
of
par value common stock.
At
December 31, 2006, a total of 18,000,000 common shares were issued and
outstanding.
In
October 2006, the Company began a private placement offering of a maximum of
4,000,000 shares for sale for $1.05 (the “Offering”). A minimum of 2,000,000
shares is needed to close on the Offering. As of December 31, 2006, the Company
had sold 750,476 shares for total consideration of $788,000. These funds are
kept in a separate escrow account and will be released upon the attainment
of
the minimum in the offering of 2,000,000 shares. Therefore these funds are
recorded as a liability on the Balance Sheet as of 12-31-06 but have
subsequently moved to stockholders’ equity. The Offering is a private placement
made under Rule 506 promulgated under the Securities Act of 1933, as amended.
The securities offered and sold (or deemed to be offered and sold, in the case
of underlying shares of common stock) in the Offering have not been registered
under the Securities Act and may not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements.
The disclosure about the private placement contained in this report does not
constitute an offer to sell or a solicitation of an offer to buy any securities
of the Company, and is made only as required under applicable law and related
reporting requirements, and as permitted under Rule 135c under the Securities
Act.
F-18
On
February 1, 2007, the Offering closed with $2,626,650.60 being raised and
2,501,573 common shares being issued.
NOTE
4 - CONVERTIBLE DEBT
There
are
a total of $365,000 in convertible notes bearing 0% interest that are
convertible to stock at a price of $1.05 per share, for a total of 347,619
shares. Of this amount $123,750 are held by our three directors, in the amounts
of $41,250 each. These notes were issued in October 2006, and $200,000 of notes
converted into common shares of the Company on February 1, 2007 at the Offering
price of $1.05 per share. The balance of the notes was repaid without interest,
as per the covenants subsequent to the balance sheet date. All note holders
were
directors and/or shareholders in the company.
NOTE
5 - RELATED PARTY TRANSACTIONS
NOG
has
entered into an agreement with South Fork Exploration LLC (SFE) to acquire
approximately 5,000 net acres of mineral leases in Mountrail County, North
Dakota as described above. SFE’s president is J.R. Reger, the brother of Michael
Reger, CEO of NOG. J.R. Reger is also a shareholder in NOG. See Note
1.
NOG
has
also entered into an acreage acquisition agreement with Montana Oil Properties
(MOP). MOP is controlled by Mr. Tom Ryan and Mr. Steven Reger, both
are uncles of the Company’s CEO, Michael Reger. See Note 1.
With
the
exception of the aforementioned convertible notes, and subscriptions for common
stock receivable there are no monies due to or from related
parties.
NOTE
6 - STOCK OPTIONS
The
Company’s board of directors approved a stock option plan in October 2006 (“2006
Stock Option Plan”) to provide incentives to employees, directors, officers and
consultants and under which 2,000,000 shares of common stock have been reserved
for issuance. The options can be either incentive stock options or non-statutory
stock options and are valued at the fair market value of the stock on the date
of grant. The exercise price of incentive stock options may not be less than
100% of the fair market value of the stock subject to the option on the date
of
the grant and, in some cases, may not be less than 110% of such fair market
value. The exercise price of non-statutory options may not be less than 100%
of
the fair market value of the stock on the date of grant. As of December 31,2006, 1,100,000 options were granted at a price of $1.05 per share. 500,000
options were granted to each Michael Reger and Ryan Gilbertson, and 100,000
options were granted to Douglas Polinsky. As stated above, these options have
an
exercise price of $1.05 per share. These options will vest at a rate of 50%
on
June 15, 2007 and 50% on December 15, 2007. For expense purposes these options
have been valued using the Black-Scholes formula with the following inputs;
Interest Rate of 4.75%, Volatility 64%, Time 10 Years, Stock Price $1.05. The
volatility number was selected by creating a basket of 4 companies we believe
accurately represent our market position upon becoming publicly traded. The
company received no cash consideration for these option grants, their vesting
is
contingent upon the Grantee’s continued employment with the
company.
Currently
Outstanding Options
•
1,100,000
with an Exercise price of $1.05 and a term of 10 years
•
No
options were exercised or forfeited during the period from inception
to
12-31-06
•
No
options are exercisable as of 12-31-06
•
The
remaining cost of the options will be recognized in 2007 as a compensation
expense of $841,425
F-19
NOTE
7 - RESTRICTED CASH
Per
the
terms of NOG’s Private Placement dated November 7, 2006, until the company
reaches a minimum of 2,000,000 shares or $2,100,000 raised, the proceeds from
the offering will be deposited into a separate account at US Bank. These funds
are held in two accounts at US Bank, one an interest bearing money market
account. On February 1, 2007, the offering closed with $2,626,650.60 being
raised and the money was released from the escrow accounts.
NOTE
8 - SUBSEQUENT EVENTS
On
December 18, 2006, NOG entered into a Letter of Intent with Kentex Petroleum,
Inc. (KNTX), a Nevada Corporation, for the exchange of shares of KNTX for all
of
the issued and outstanding shares of NOG. A $25,000 deposit was deposited into
a
trust account in December 2006. Upon closing, NOG shall pay to certain KNTX
shareholders $390,000. The closing is set for March 2007.
On
February 12, 2007, Montana Oil Properties, A Montana Corporation, assigned
21,354 +/- net acres in Sheridan County Montana to Northern Oil and Gas, Inc.
NOG paid $825,000 in cash and 400,000 shares of restricted stock.
On
February 12, 2007, South Fork Exploration, LLC, a Montana Limited Liability
Company assigned 3,016 +/- net acres in Mountrail County, North Dakota to
Northern Oil and Gas, Inc. NOG paid $271,481 in cash and will issue 271,440
shares of restricted stock.
NOTE
9 - GOING CONCERN
The
Company’s financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company has a history of net losses
that are likely to continue in the future. As of December 31, 2006, the Company
had negative working capital of ($292,132); however, with the closing of the
Private Placement (Note 3), the Company had positive working capital of
approximately $2,000,000 beginning in February 2007.
Management
believes that the cash position is sufficient to sustain current operations
through 2007. They plan to mitigate capital expenditures through the use
of
farm-out agreements utilizing various partners’ drilling capital to explore and
develop the properties in exchange for working interest. It should also be
noted
that the company pays no salaries at this time. However should the Company
decide to enter into agreements to explore and develop properties with its
own
capital, it would need to raise additional funds. There can be no assurances
such funds would be available and in the event they were not the Company
may be
unable to continue to operate. The financial statements do not include any
adjustments that might be necessary should the Company be unable to continue
as
a going concern.
(b)
Unaudited
Pro Forma Condensed Financial Statements .
reflecting the combined financial effect of the Merger as if the
Merger
had been consummated on January 1,2006.
F-20
4,671,573
Shares of Common Stock
NORTHERN
OIL AND GAS, INC.
PROSPECTUS
____________,
2007
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
24. Indemnification of Directors and Officers.
Under
Nevada law, a corporation shall indemnify a director or officer against
expenses, including attorneys’ fees, actually and reasonably incurred by him, to
the extent the director or officer has been successful on the merits or
otherwise in defense of any action, suit or proceeding. A corporation may
indemnify a director or officer who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, against expenses,
including attorneys’ fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with the action,
suit or proceeding. Excepted from that immunity are:
·
a
willful failure to deal fairly with the company or its stockholders
in
connection with a matter in which the director has a material conflict
of
interest;
·
a
violation of criminal law (unless the director had reasonable cause
to
believe that his or her conduct was lawful or no reasonable cause
to
believe that his or her conduct was unlawful);
·
a
transaction from which the director derived an improper personal
profit;
and
·
willful
misconduct.
Our
bylaws include an indemnification provision under which we have the power to
indemnify our directors, officers and former officers and directors (including
heirs and personal representatives) against all costs, charges and expenses
actually and reasonably incurred, including an amount paid to settle an action
or satisfy a judgment to which the director or officer is made a party by reason
of being or having been a director or officer of Northern Oil and Gas, Inc.
or
any of our subsidiaries.
Our
bylaws also provide that our directors may cause us to purchase and maintain
insurance for the benefit of a person who is or was serving as a director,
officer, employee or agent of Northern Oil and Gas, Inc. or any of our
subsidiaries (including heirs and personal representatives) against a liability
incurred by him or her as our director, officer, employee or agent.
Item
25. Other Expenses of Issuance and Distribution.
Set
forth
below is an estimate (except for registration fees, which are actual) of the
approximate amount of the fees and expenses payable by us in connection with
the
issuance and distribution of the shares of common stock being sold by the
selling stockholders pursuant to this registration statement. The selling
stockholders will not bear any portion of such fees and
expenses.
There
have been no sales of unregistered securities within the last three years which
would be required to be disclosed pursuant to Item 701 of Regulation S-B, except
for the following. All sales prior to consummation of the merger on March 20,2007 were made by pre-merger Northern Oil and Gas, Inc., which we acquired
in
the merger.
On
October 6, 2006, NOG issued 18,000,000 shares of our restricted common stock
to
Michael Reger, Ryan Gilbertson, Douglas Polinsky and Joseph Geraci II, their
immediate families, entities they control, or other accredited investors, at
par
value. We believe that the issuance of the shares was exempt from the
registration and prospectus delivery requirements of the Securities Act of
1933
by virtue of Section 4(2) .
The
recipients of the shares were afforded an opportunity for effective access
to files and records of the Company that contained the relevant information
needed to make an investment decision, including the Company’s financial
statements. We reasonably believe that the recipients, immediately prior to
issuing the shares, had such knowledge and experience in financial and
business matters that they were capable of evaluating the merits and risks
of
the investment. The recipients had the opportunity to speak with our officers
and directors on several occasions prior to their investment
decision.
On
December 15, 2006, NOG granted 1,100,000 stock options to officers and directors
in consideration of services to the Company. One-half of the options vest each
six (6) months. The options are exercisable at $1.05 per share for a period
of
ten (10) years expiring on December 15, 2016. We believe that the grant of
the
options was exempt from the registration and prospectus delivery requirements
of
the Securities Act of 1933 by virtue of Section 4(2) .
The
recipients of the options were afforded an opportunity for effective access
to
files and records of the Company that contained the relevant information needed
to make an investment decision, including the Company’s financial statements. We
reasonably believe that the recipients, immediately prior to granting the
options, had such knowledge and experience in financial and business matters
that they were capable of evaluating the merits and risks of the investment,
since they were the officers and directors of the Company.
On
February 1, 2007, NOG issued 2,501,573 shares of our restricted common stock
to
purchasers in our private placement commenced on November 7, 2006, at a price
of
$1.05 per share. We believe that the issuance and sale of the shares was exempt
from the registration and prospectus delivery requirements of the Securities
Act
of 1933 by virtue of Section 4(2) and Regulation D Rule 506. The shares were
issued directly by us and did not involve a public offering or general
solicitation. The recipients of the shares were afforded an opportunity for
effective access to files and records of the Company that contained the relevant
information needed to make their investment decision, including the financial
statements. We reasonably believe that the recipients, immediately prior to
issuing the shares, had such knowledge and experience in financial and business
matters that they were capable of evaluating the merits and risks of their
investment. The recipients had the opportunity to speak with our management
on
several occasions prior to their investment decision.
On
February 12, 2007, NOG issued a total of 271,440 shares of our restricted common
stock to Southfork Exploration, LLC and 400,000 shares of restricted common
stock to Montana Oil and Gas, Inc. in connection with the acquisition of
leasehold interests. We believe that the issuance of the shares was exempt
from
the registration and prospectus delivery requirements of the Securities Act
of
1933 by virtue of Section 4(2) and Regulation D Rule 506 .
The
recipients of the shares were afforded an opportunity for effective access
to
files and records of the Company that contained the relevant information needed
to make its investment decision, including the Company’s financial statements.
We reasonably believe that each recipient, immediately prior to issuing the
shares, had such knowledge and experience in its financial and business matters
that it was capable of evaluating the merits and risks of its investment. Each
recipient had the opportunity to speak with our officers and directors on
several occasions prior to their investment decision.
On
March20, 2007, we issued 21,173,013 shares of our restricted common stock to the
stockholders of Northern Oil and Gas, Inc. pursuant to the merger completed
effective that date between Northern Oil and Gas, Inc., and our wholly owned
subsidiary, Kentex Acquisition Corp., Inc. We believe that the issuance and
sale
of the shares was exempt from the registration and prospectus delivery
requirements of the Securities Act of 1933 by virtue of Section 4(2) and
Regulation D Rule 506. The shares were issued directly by us and did not involve
a public offering or general solicitation. The recipients of the shares were
afforded an opportunity for effective access to files and records of the Company
that contained the relevant information needed to make their investment
decision, including the financial statements and Exchange Act reports. We
reasonably believe that the recipients, immediately prior to issuing the shares,
had such knowledge and experience in financial and business matters that they
were capable of evaluating the merits and risks of their investment. The
recipients had the opportunity to speak with our management on several occasions
prior to their investment decision.
II-2
On
May 3,2007, we issued 45,000 shares of common stock to Ibis Consulting Group, LLC
and
100,000 shares to Insight Capital Consultants Corporation, pursuant to
consulting agreements with them. We believe that the issuance of the shares
was
exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933 by virtue of Section 4(2) and Regulation D Rule 506
.
The
recipients of the shares were afforded an opportunity for effective access
to
files and records of the Company that contained the relevant information needed
to make its investment decision, including the Company’s financial statements
and 34 Act reports. We reasonably believe that each recipient, immediately
prior
to issuing the shares, had such knowledge and experience in its financial and
business matters that it was capable of evaluating the merits and risks of
its
investment. Each recipient had the opportunity to speak with our officers and
directors on several occasions prior to their investment decision.
Incorporated
by reference to Exhibit 2 to the Current Report on Form 8-K filed
with the
Securities and Exchange Commission on March 22, 2007 (File No.
000-30955).
2.2
Written
Action of the Board of Directors of Kentex Petroleum, Inc., constituting
the plan and agreement of short-form merger with Northern Oil and
Gas,
Inc., dated March 20, 2007
Previously
filed.
3.1
Articles
of Incorporation of Northern Oil and Gas, Inc.
Incorporated
by reference to Exhibit 3.1 to the Registration Statement on Form
10-SB
filed with the Securities and Exchange Commission on July 6, 2000
(File
No. 000-30955).
3.2
Certificate
of Amendment of the Articles of Incorporation of Northern Oil and
Gas,
Inc. dated March 27, 1984
Incorporated
by reference to Exhibit 3.3(i) to the Registration Statement on Form
10-SB filed with the Securities and Exchange Commission on July6, 2000
(File No. 000-30955).
Incorporated
by reference to Exhibit 3.3(ii) to the Registration Statement on Form
10-SB filed with the Securities and Exchange Commission on July6, 2000
(File No. 000-30955).
Specimen
Stock Certificate of Northern Oil and Gas, Inc.
Previously
filed.
II-3
5.1
Opinion
of Best & Flanagan LLP.
Previously
filed.
10.1
Montana
Lease acquisition agreement with Montana Oil Properties dated October5,2007
Incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed with
the Securities and Exchange Commission on March 22, 2007 (File
No.
000-30955).
10.2
North
Dakota lease acquisition agreement with Southfork Exploration,
LLC, dated
November 15, 2006
Incorporated
by reference to Exhibit 10.2 to the Current Report on Form 8-K
filed with
the Securities and Exchange Commission on March 22, 2007 (File
No.
000-30955).
Incorporated
by reference to Exhibit 10.3 to the Current Report on Form 8-K
filed with
the Securities and Exchange Commission on March 22, 2007 (File
No.
000-30955).
10.4
Form
of Stock Option Agreement under the Company’s Incentive Stock Option
Plan
Incorporated
by reference to Exhibit 10.4 to the Current Report on Form 8-K
filed with
the Securities and Exchange Commission on March 22, 2007 (File
No.
000-30955).
10.5
Form
of Convertible Promissory Note between the Company and Messrs.
Reger,
Gilbertson and Polinsky
Incorporated
by reference to Exhibit 10.5 to the Current Report on Form 8-K
filed with
the Securities and Exchange Commission on March 22, 2007 (File
No.
000-30955).
10.6
Form
of Principal Shareholders Agreement, with exhibits
Incorporated
by reference to Exhibit 10.6 to the Current Report on Form 8-K
filed with
the Securities and Exchange Commission on March 22, 2007 (File
No.
000-30955).
Consent
of Best & Flanagan LLP (included in Exhibit 5.1).
Previously
filed.
23.2
Consent
of Mantyla McReynolds LLC. *
23.3
Consent
of Robert Grabb*
24.1
Powers
of Attorney
Included
on the signature page hereto. (Previously
filed.)
______________________
*
Filed
herewith
Item
28. Undertakings.
The
undersigned registrant hereby undertakes:
(1)
To
file, during any period in which offers or sales are being made,
a
post-effective amendment to this registration statement
to:
(i)
Include
any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii)
Reflect
in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease
in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation
from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant
to
Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in
the effective registration statement;
and
II-4
(iii)
Include
any additional or changed material information on the plan of
distribution.
(2)
For
determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the
initial
bona fide offering.
(3)
To
file a post-effective amendment to remove from registration any of
the
securities that remain unsold at the end of the
offering.
(4)
For
determining liability of the undersigned small business issuer under
the
Securities Act to any purchaser in the initial distribution of the
securities, the undersigned small business issuer undertakes that
in a
primary offering of securities of the undersigned small business
issuer
pursuant to this registration statement, regardless of the underwriting
method used to sell the securities to the purchaser, if the securities
are
offered or sold to such purchaser by means of any of the following
communications, the undersigned small business issuer will be a seller
to
the purchaser and will be considered to offer or sell such securities
to
such purchaser:
(i)
Any
preliminary prospectus or prospectus of the undersigned small business
issuer relating to the offering required to be filed pursuant to
Rule 424
(§ 230.424 of this chapter);
(ii)
Any
free writing prospectus relating to the offering prepared by or on
behalf
of the undersigned small business issuer or used or referred to by
the
undersigned small business issuer;
(iii)
The
portion of any other free writing prospectus relating to the offering
containing material information about the undersigned small business
issuer or its securities provided by or on behalf of the undersigned
small
business issuer; and
(iv)
Any
other communication that is an offer in the offering made by the
undersigned small business issuer to the
purchaser.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
(the
“Act”) may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the Securities
and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
In
the
event that a claim for indemnification against such liabilities (other than
the
payment by the small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
small business issuer will, unless in the opinion of our counsel the matter
has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
For
the
purpose of determining liability under the Securities Act to any purchaser,
each
prospectus filed pursuant to Rule 424(b) (§ 230.424(b) of this chapter) as part
of a registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance
on
Rule 430A (§ 230.430A of this chapter), shall be deemed to be part of and
included in the registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement or made
in a
document incorporated or deemed incorporated by reference into the registration
statement or prospectus that is part of the registration statement will, as
to a
purchaser with a time of contract of sale prior to such first use, supersede
or
modify any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such date of first use.
II-5
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, as amended,
the
registrant certifies that it has reasonable grounds to believe that it meets
all
of the requirements for filing on Form SB-2 and authorized this amendment
number
1 to the registration statement to be signed on its behalf by the undersigned,
in the City of Minneapolis, State of Minnesota, on July 23,2007.
Northern
Oil and Gas, Inc.
By:
/s/
Michael L.
Reger
Name:
Michael L. Reger
Title:
Chief Executive Officer
POWER
OF ATTORNEY
Each
person whose signature appears below constitutes and appoints, Michael L. Reger
and Ryan R. Gilbertson, or either of them, his true and lawful attorney-in-fact
and agent, acting alone, with full power of substitution and resubstitution,
for
him and in his name, place and stead, in any and all capacities, to sign any
and
all amendments (including post-effective amendments) to this Registration
Statement, and any registration statement of the same offering which is
effective upon filing pursuant to Rule 426(b) under the Securities Act, and
to
file the same, with all exhibits thereto, and other documents in connection
wherewith, with the Commission, granting unto said attorney-in-fact and agent,
each acting alone, full power and authority to do and perform each and every
act
and thing requisite and necessary to be done in and about the premises, as
fully
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all said attorney-in-fact and agent, acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this amendment
number 1 to the registration statement has been signed by the following persons
in the capacities and on the dates indicated:
Incorporated
by reference to Exhibit 2 to the Current Report on Form 8-K filed
with the
Securities and Exchange Commission on March 22, 2007 (File No.
000-30955).
2.2
Written
Action of the Board of Directors of Kentex Petroleum, Inc., constituting
the plan and agreement of short-form merger with Northern Oil and
Gas,
Inc., dated March 20, 2007
Previously
filed.
3.1
Articles
of Incorporation of Northern Oil and Gas, Inc.
Incorporated
by reference to Exhibit 3.1 to the Registration Statement on Form
10-SB
filed with the Securities and Exchange Commission on July 6, 2000
(File
No. 000-30955).
3.2
Certificate
of Amendment of the Articles of Incorporation of Northern Oil and
Gas,
Inc. dated March 27, 1984
Incorporated
by reference to Exhibit 3.3(i) to the Registration Statement on Form
10-SB filed with the Securities and Exchange Commission on July6, 2000
(File No. 000-30955).
Incorporated
by reference to Exhibit 3.3(ii) to the Registration Statement on Form
10-SB filed with the Securities and Exchange Commission on July6, 2000
(File No. 000-30955).
Specimen
Stock Certificate of Northern Oil and Gas, Inc.
Previously
filed.
5.1
Opinion of
Best & Flanagan LLP.
Previously
filed.
10.1
Montana
Lease acquisition agreement with Montana Oil Properties dated October5,2007
Incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed with
the Securities and Exchange Commission on March 22, 2007 (File
No.
000-30955).
10.2
North
Dakota lease acquisition agreement with Southfork Exploration,
LLC, dated
November 15, 2006
Incorporated
by reference to Exhibit 10.2 to the Current Report on Form 8-K
filed with
the Securities and Exchange Commission on March 22, 2007 (File
No.
000-30955).
Incorporated
by reference to Exhibit 10.3 to the Current Report on Form 8-K
filed with
the Securities and Exchange Commission on March 22, 2007 (File
No.
000-30955).
10.4
Form
of Stock Option Agreement under the Company’s Incentive Stock Option
Plan
Incorporated
by reference to Exhibit 10.4 to the Current Report on Form 8-K
filed with
the Securities and Exchange Commission on March 22, 2007 (File
No.
000-30955).
II-7
10.5
Form
of Convertible Promissory Note between the Company and Messrs.
Reger,
Gilbertson and Polinsky
Incorporated
by reference to Exhibit 10.5 to the Current Report on Form 8-K
filed with
the Securities and Exchange Commission on March 22, 2007 (File
No.
000-30955).
10.6
Form
of Principal Shareholders Agreement, with exhibits
Incorporated
by reference to Exhibit 10.6 to the Current Report on Form 8-K
filed with
the Securities and Exchange Commission on March 22, 2007 (File
No.
000-30955).
