Unassociated Document
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-KSB
 
x Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended April 30, 2008

¨ Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to _______

Commission File No. 033-02249-FW
 
MILLER PETROLEUM, INC.
(Name of Small Business Issuer in its Charter)
  
  Tennessee
 
  62-1028629
  (State or Other Jurisdiction of
 
  (I.R.S. Employer
  Incorporation or Organization)
 
   Identification No.)
 
3651 Baker Highway
Huntsville, Tennessee 37756
(Address of Principal Executive Offices)
 
(423) 663-9457
(Issuer’s Telephone Number, Including Area Code)
 
Securities Registered Under Section 12(b) of the Act: None

Securities Registered Under Section 12(g) of the Act: None

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  ¨
 
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes x No ¨
 
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
 
The Issuer’s revenues for the fiscal year ended April 30, 2008 were $829,342.
 
The aggregate market value of the Common Stock held by non-affiliates, based on the average closing bid and asked price of the Common Stock on August 12, 2008 was $3,149,468.
 
There are approximately 6,846,670 shares of common voting stock of the Registrant held by non-affiliates. On August 12, 2008 the average bid and asked price was $0.46.
 
As of August 12, 2008, there were 14,566,856 shares of common stock outstanding.
 
Transitional Small Business Disclosure Format: Yes ¨ No x



Forward-Looking Statements
 
This annual report on Form 10-KSB (“Annual Report”) for the period ending April 30, 2008 (“fiscal year 2008”), contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", “could”, "will", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled "Risk Factors” that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
 
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
 
Disclosure Regarding Forward-Looking Statements: Included in this annual report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this Form 10-KSB which address activities, events or developments which we expect or anticipate will or may occur in the future are forward-looking statements.
 
As used in this Annual Report, the terms “we”, “us”, “our” and the “Company” mean “Miller Petroleum, Inc.”
 
Glossary of Terms
 
We are engaged in the business of exploring for and producing oil and natural gas. Oil and gas exploration is a specialized industry. Many of the terms used to describe our business are unique to the oil and gas industry. The following glossary clarifies certain of these terms that may be encountered while reading this report:
 
"Bcf"   means billion cubic feet, used in this Annual Report in reference to gaseous hydrocarbons.
 
"BcfE" means billions of cubic feet of gas equivalent, determined using the ratio of six thousand cubic feet of gas to one barrel of oil, condensate or gas liquids.
 
"Farmout" involves an entity's assignment of all or a part of its interest in or lease of a property in exchange for consideration such as a royalty.
 
"Gross"   oil or gas well or "gross" acre is a well or acre in which we have a working interest.
 
"Mcf"   means thousand cubic feet, used in this Annual Report to refer to gaseous hydrocarbons.
 
"McfE" means thousands of cubic feet of gas equivalent, determined using the ratio of six thousand cubic feet of gas to one barrel of oil, condensate or gas liquids.
 
"MMcf" means million cubic feet, used in this Annual Report to refer to gaseous hydrocarbons.
 
"MBbl"   means thousand barrels, used in this Annual Report to refer to crude oil or other liquid hydrocarbons.
 
"Net" oil and gas wells or "net" acres are determined by multiplying "gross" wells or acres by our percentage interest in such wells or acres.

"Oil and gas lease" or "Lease" means an agreement between a mineral owner, the lessor, and a lessee which conveys the right to the lessee to explore for and produce oil and gas from the leased lands. Oil and gas leases usually have a primary term during which the lessee must establish production of oil and or gas. If production is established within the primary term, the term of the lease generally continues in effect so long as production occurs on the lease. Leases generally provide for a royalty to be paid to the lessor from the gross proceeds from the sale of production.
 
"Prospect"   means a location where both geological and economical conditions favor drilling a well.
 
2


"Proved oil and gas reserves"   are the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e. prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. Reservoirs are considered proved if economic recovery by production is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any, and (B) the immediately adjoining portions not yet drilled, but which can reasonably be judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir.
 
"Proved developed oil and gas reserves"   are those proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas reserves expected to be obtained through the application of fluid injection or other improved secondary or tertiary recovery techniques for supplementing the natural forces and mechanisms of primary recovery are included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed recovery program has confirmed through production response that increased recovery will be achieved.
 
"Proved undeveloped oil and gas reserves" are those proved reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required. Reserves on undrilled acreage are limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units are claimed only where it can be demonstrated with reasonable certainty that there is continuity of production from the existing productive formation. Estimates for proved undeveloped reserves attributable to any acreage do not include production for which an application of fluid injection or other improved recovery technique is required or contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir.
 
"Royalty interest"   is a right to oil, gas, or other minerals, that is not burdened by the costs to develop or operate the related property.
 
"Working interest"   is an interest in an oil and gas property that is burdened with the costs of development and operation of the property.

3

 
 FORM 10-KSB
FOR THE FISCAL YEAR ENDED APRIL 30, 2008

INDEX

   
Page
     
 
PART I
 
Item 1.
Description of Business.
5
Item 2.
Description of Property.
9
Item 3.
Legal Proceedings.
11
Item 4.
Submission of Matters to a Vote of Security Holders.
11
     
 
PART II
 
 Item 5.
Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities.
12
Item 6.
Management’s Discussion and Analysis or Plan of Operation.
13
Item 7.
Financial Statements.
16
Item 8.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
37
Item 8A.
Controls and Procedures.
37
Item 8B.
Other Information.
37
     
 
PART III
 
Item 9.
Directors, Executive Officers, Promoters, Control Persons, and Corporate Governance; Compliance with Section 16(a) of the Exchange Act.
  38
Item 10.
Executive Compensation.
40
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
42
Item 12.
Certain Relationships and Related Transactions, and Director Independence.
43
Item 13.
Exhibits.
44
Item 14.
Principal Accountant Fees and Services.
45

4


PART I
 
Item 1.  Description of Business.

Introduction
 
Corporate History
 
We were founded in 1967 by Deloy Miller, the Chairman of our Board of Directors, as a sole proprietorship. On January 22, 1978, we were incorporated under the laws of the State of Tennessee as “Miller Contract Drilling, Inc.” We changed our name to Miller Petroleum, Inc. on January 13, 1997.
 
Principal Products or Services and Markets
 
The principal markets for our crude oil and natural gas are refining companies, utility companies and private industry end users. Direct purchases of our crude oil are made statewide at our well sites by Barrett Oil Purchasing Company.
 
Our natural gas has multiple markets throughout the eastern United States through gas transmission lines. Access to these markets is presently provided by four companies in North-Eastern Tennessee. Cumberland Valley Resources (“CV Resources”) purchases our natural gas that is produced from the "Delta Leases." Nami Resources Company (“Nami Resources”) purchases our gas from the Jellico West field and Tengasco services the Swan Creek production. Local markets in Tennessee are served by Citizens Gas Utility District (“Citizens Gas”) and the Powell Clinch Utility District. Surplus gas is placed in storage facilities or transported to East Tennessee Natural Gas which serves Tennessee and Virginia.
 
We anticipate that our products will be sold to the aforementioned companies; however, no assurance can be given that we will be able to make such sales or that if we do, we will be able to receive a price that is sufficient to make our operations profitable.

We sold to Atlas America, LLC approximately 30,000 acres of oil and gas leases on June 13, 2008 for $19.625 million. The fields are known as Koppers South and Koppers North. As part of this sale, we entered into a two-year drilling contract to drill wells for Atlas America, LLC. We have acquired two used drilling rigs to perform under this contract. See Management’s Discussion and Analysis or Plan of Operation and the Subsequent Events footnote for more information on this transaction.
 
Distribution Methods of Products or Services
 
Crude oil is stored in tanks at the well site until the purchaser retrieves it by tank truck. Natural gas is delivered to the purchaser via gathering lines into the main gas transmission line.
 
Competitive Business Conditions
 
Our oil and gas exploration activities in Tennessee are undertaken in a highly competitive and speculative business environment. In seeking any other suitable oil and gas properties for acquisition, we compete with a number of other companies located in Tennessee and elsewhere, including large oil and gas companies and other independent operators, many with greater financial resources than us.
 
At the local level, we have several competitors in the areas of the acreage which we have under lease in the State of Tennessee, five of which may be deemed to be significant. These are Consol Energy, Inc., Can Argo Energy Corporation (“CNR”), Champ Oil, John Henry Oil and Tengasco. These companies are in competition with us for oil and gas leases in known producing areas in which we currently operate, as well as other potential areas of interest.
 
Although, our management generally does not foresee difficulties in procuring logging, cementing and well treatment services in the area of our operations, several factors, including increased competition in the area, may limit the availability of logging equipment, cementing and well treatment services in the future. If such an event occurs, it may have a significant adverse impact on the profitability of our operations.

The prices of our products are controlled by the world oil market and the United States natural gas market; thus, competitive pricing behaviors in this regard are considered unlikely; however, competition in the oil and gas exploration industry exists in the form of competition to acquire the most promising acreage blocks and obtaining the most favorable prices for transporting the product.
 
5


Dependence on One or a Few Major Customers  
 
We are dependent on local purchasers of hydrocarbons to purchase our products in the areas where our properties are located. The loss of one or more of our primary purchasers may have a substantial adverse impact on our sales and on our ability to operate profitably.
 
Currently, we are selling oil and natural gas to the following purchasers:

 
·
Barrett Oil Purchasing purchases crude oil from the Koppers Field. Barrett’s purchase price is based on West Texas postings less $4.75.
 
 
·
Cumberland Valley Resources purchases the gas produced from the joint venture with Delta Producers, Inc. in the Jellico East Field, Tennessee. The sales price is Appalachian Index minus Columbia transportation and fuel. CV Resources purchases approximately 20% of total natural gas sales.
 
 
·
Nami Resources LLC purchases natural gas from the Jellico Field. The sales price varies each month, but will not be less than $6.00 per Mcf.
 
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts
 
Royalty agreements relating to oil and gas production are standard in the industry. The amounts of the royalty payments which we receive varies from lease to lease. (See Description of Business - “Current Business” in this Annual Report.)
 
Governmental Approval and Regulation
 
The production and sale of oil and gas are subject to regulation by federal, state and local authorities. None of the principal products that we offer require governmental approval, although permits are required for the drilling of oil and gas wells.
 
Our sales of natural gas are affected by intrastate and interstate gas transportation regulation. Beginning in 1985, the Federal Energy Regulatory Commission (“FERC”), which sets the rates and charges for transportation and sale of natural gas, adopted regulatory changes that have significantly altered the transportation and marketing of natural gas. The stated purpose of FERC’s changes are to promote competition among the various sectors of the natural gas industry. In 1995, FERC implemented regulations generally grandfathering all previously approved interstate transportation rates and establishing an indexing system for those rates by which adjustments are made annually based on the rate of inflation, subject to certain conditions and limitations. These regulations may tend to increase the cost of transporting oil and natural gas by pipeline. Every five years, FERC will examine the relationship between the change in the applicable index and the actual cost changes experienced by the industry. We are not able to predict with certainty what effect, if any, these regulations will have on us.
 
Tennessee law requires that we obtain state permits for the drilling of oil and gas wells and to post a bond with the Tennessee Gas and Oil Board (the “Oil and Gas Board”) to ensure that each well is reclaimed and properly plugged when it is abandoned. The reclamation bonds cost $1,500 per well. The cost for the plugging bonds are $2,000 per well or $10,000 for ten wells. Currently, we have several of the $10,000 plugging bonds. For most of the reclamation bonds, we have deposited a $1,500 Certificate of Deposit with the Oil and Gas Board.
 
The state and regulatory burden on the oil and natural gas industry generally increases our cost of doing business and affects our profitability. While we believe we are presently in compliance with all applicable federal, state and local laws, rules and regulations, continued compliance (or failure to comply) and future legislation may have an adverse impact on our present and contemplated business operations. Because such federal and state regulation are amended or reinterpreted frequently, we are unable to predict with certainty the future cost or impact of complying with these laws.
 
Research and Development
 
We did not incur any research and development expenditures during the fiscal year ended April 30, 2008.
 
Environmental Compliance
 
We are subject to various federal, state and local laws and regulations governing the protection of the environment, such as the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”), and the Federal Water Pollution Control Act of 1972, as amended (the “Clean Water Act”), which affect our operations and costs. In particular, our exploration, development and production operations, our activities in connection with storage and transportation of oil and other hydrocarbons and our use of facilities for treating, processing or otherwise handling hydrocarbons and related wastes may be subject to regulation under these and similar state legislation. These laws and regulations:
 
6

 
 
·
restrict the types, quantities and concentration of various substances that can be released into the environment in connection with drilling and production activities;
 
 
·
limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas; and
 
 
·
impose substantial liabilities for pollution resulting from our operations.
 
Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal fines and penalties or the imposition of injunctive relief. Changes in environmental laws and regulations occur regularly, and any changes that result in more stringent and costly waste handling, storage, transport, disposal or cleanup requirements could materially adversely affect our operations and financial position, as well as those in the oil and natural gas industry in general. While we believe that we are in substantial compliance with current applicable environmental laws and regulations and that continued compliance with existing requirements would not have a material adverse impact on us, there is no assurance that this trend will continue in the future.
 
As with the industry generally, compliance with existing regulations increases our overall cost of business. The areas affected include:

 
·
unit production expenses primarily related to the control and limitation of air emissions and the disposal of produced water;
 
 
·
capital costs to drill exploration and development wells primarily related to the management and disposal of drilling fluids and other oil and natural gas exploration wastes; and
 
 
·
capital costs to construct, maintain and upgrade equipment and facilities.
 
CERCLA, also known as “Superfund,” imposes liability for response costs and damages to natural resources, without regard to fault or the legality of the original act, on some classes of persons that contributed to the release of a “hazardous substance” into the environment. These persons include the “owner” or “operator” of a disposal site and entities that disposed or arranged for the disposal of the hazardous substances found at the site. CERCLA also authorizes the Environmental Protection Agency (“EPA”) and, in some instances, third parties to act in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. It is not uncommon for 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. In the course of our ordinary operations, we may generate waste that may fall within CERCLA’s definition of a “hazardous substance.” We may be jointly and severally liable under CERCLA or comparable state statutes for all or part of the costs required to clean up sites at which these wastes have been disposed.
 
We currently lease properties that for many years have been used for the exploration and production of oil and natural gas. Although we and our predecessors have used operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed or released on, under or from the properties owned or leased by us or on, under or from other locations where these wastes have been taken for disposal. In addition, many of these properties have been operated by third parties whose actions with respect to the treatment and disposal or release of hydrocarbons or other wastes were not under our control. These properties and wastes disposed on these properties may be subject to CERCLA and analogous state laws. Under these laws, we could be required:


 
·
to remove or remediate previously disposed wastes, including wastes disposed or released by prior owners or operators;
 
 
·
to clean up contaminated property, including contaminated groundwater; or to perform remedial operations to prevent future contamination.
 
 
·
to clean up contaminated property, including contaminated groundwater; or to perform remedial operations to prevent future contamination.
 
At this time, we do not believe that we are associated with any Superfund site and we have not been notified of any claim, liability or damages under CERCLA.
 
The Resource Conservation and Recovery Act (“RCRA”) is the principal federal statute governing the treatment, storage and disposal of hazardous wastes. RCRA imposes stringent operating requirements and liability for failure to meet such requirements on a person who is either a “generator” or “transporter” of hazardous waste or an “owner” or “operator” of a hazardous waste treatment, storage or disposal facility. At present, RCRA includes a statutory exemption that allows most oil and natural gas exploration and production waste to be classified as nonhazardous waste. A similar exemption is contained in many of the state counterparts to RCRA. As a result, we are not required to comply with a substantial portion of RCRA’s requirements because our operations generate minimal quantities of hazardous wastes. At various times in the past, proposals have been made to amend RCRA to rescind the exemption that excludes oil and natural gas exploration and production wastes from regulation as hazardous waste. Repeal or modification of the exemption by administrative, legislative or judicial process, or modification of similar exemptions in applicable state statutes, would increase the volume of hazardous waste we are required to manage and dispose of and would cause us to incur increased operating expenses.
 
7

 
The Clean Water Act imposes restrictions and controls on the discharge of produced waters and other wastes into navigable waters. Permits must be obtained to discharge pollutants into state and federal waters and to conduct construction activities in waters and wetlands. The Clean Water Act requires us to construct a fresh water containment barrier between the surface of each drilling site and the underlying water table. This involves the insertion of a seven-inch diameter steel casing into each well, with cement on the outside of the casing. The cost of compliance with this environmental regulation is approximately $10,000 per well. Certain state regulations and the general permits issued under the Federal National Pollutant Discharge Elimination System program prohibit the discharge of produced waters and sand, drilling fluids, drill cuttings and certain other substances related to the oil and natural gas industry into certain coastal and offshore waters. Further, the EPA has adopted regulations requiring certain oil and natural gas exploration and production facilities to obtain permits for storm water discharges. Costs may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans.
 
The Clean Water Act and comparable state statutes provide for civil, criminal and administrative penalties for unauthorized discharges for oil and other pollutants and impose liability on parties responsible for those discharges for the costs of cleaning up any environmental damage caused by the release and for natural resource damages resulting from the release. We believe that our operations comply in all material respects with the requirements of the Clean Water Act and state statutes enacted to control water pollution. 
 
Our operations are also subject to laws and regulations requiring removal and cleanup of environmental damages under certain circumstances. Laws and regulations protecting the environment have generally become more stringent in recent years, and may in certain circumstances impose "strict liability," rendering a corporation liable for environmental damages without regard to negligence or fault on the part of such corporation. Such laws and regulations may expose us to liability for the conduct of operations or conditions caused by others, or for acts which may have been in compliance with all applicable laws at the time such acts were performed. The modification of existing laws or regulations or the adoption of new laws or regulations relating to environmental matters could have a material adverse effect on our operations.
 
In addition, our existing and proposed operations could result in liability for fires, blowouts, oil spills, discharge of hazardous materials into surface and subsurface aquifers and other environmental damage, any one of which could result in personal injury, loss of life, property damage or destruction or suspension of operations. We have an Emergency Action and Environmental Response Policy Program in place. This program details the appropriate response to any emergency that management believes to be possible in our area of operations. We believe we are presently in compliance with all applicable federal and state environmental laws, rules and regulations; however, continued compliance (or failure to comply) and future legislation may have an adverse impact on our present and contemplated business operations.
 
The foregoing is only a brief summary of some of the existing environmental laws, rules and regulations to which our business operations are subject, and there are many others, the effects of which could have an adverse impact on our business. Future legislation in this area will no doubt be enacted and revisions will be made in current laws. No assurance can be given as to what effect these present and future laws, rules and regulations will have on our current future operations.
 
Insurance
 
Our operations are subject to all the risks inherent in the exploration for, and development and production of  oil and gas including blowouts, fires and other casualties. We maintain insurance coverage customary for operations of a similar nature, but losses could arise from uninsured risks or in amounts in excess of existing insurance coverage.
 
Employees
 
We currently have 20 full-time employees.

8


Reports to Security Holders

This annual report will contain audited financial statements. We file all of our required reports and other information with the Commission. The public may read and copy any materials that are filed by us with the Commission at the Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The statements and forms filed by us with the Commission have also been filed electronically and are available for viewing or copying on the Commission maintained Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission. The Internet address for this site can be found at http://www.sec.gov.

Item 2.  Description of Property.
 
Our executive offices presently comprise approximately 6,300 square feet on 14 acres of land in Huntsville, Tennessee that the Company owns.
 
Oil and Gas Leases

We are an exploration and production company that utilizes seismic data, and other technologies for geophysical exploration and development of oil and gas wells. In addition to our engineering and geological capabilities, we have work-over rigs, dozers, roustabout crews and equipment to set pumping units, tanks and lay flow lines, winch trucks and trailers for traveling support, backhoes, ditchers, fusion machines and welders for pipeline and compression installation, as well as other equipment necessary to take a drilling program from the development stage to completion. The company also sells rigs, oilfield trailers, compressors and other miscellaneous oil and gas production equipment.

Existing Production – We have partial ownership in fifteen producing oil wells and twenty-five producing gas wells. The total production and our ownership is as follows:

Oil Production (Bbls)

   
Total All Wells
 
Miller’s %
 
Total
   
April 30, 2006
   
430,846
   
269,562
 
Produced
   
April 30, 2007
   
8,900
   
4,529
 
Total
   
April 30, 2007
   
439,746
   
274,091
 
Produced
   
April 30, 2008
   
9,264
   
4,984
 
Total
   
April 30, 2008
   
449,010
   
279,075
 

Gas Production (Mcf)

   
Total All Wells
 
Miller’s %
 
Total
   
April 30, 2006
   
2,668,560
   
775,245
 
Produced
   
April 30, 2007
   
216,096
   
55,531
 
Total
   
April 30, 2007
   
2,884,656
   
830,776
 
Produced
   
April 30, 2008
   
206,388
   
39,507
 
Total
   
April 30, 2008
   
3,091,044
   
870,283
 
 
Oil and Gas Reserve Analyses
 
Our estimated net proved oil and gas reserves and the present value of estimated cash flows from those reserves are summarized below. The reserves were estimated at April 30, 2008 by Lee Keeling and Associates, Inc., independent petroleum consultants, in accordance with regulations of the Securities and Exchange Commission, using market or contract prices at the end of each of the years presented in the consolidated financial statements. These prices were held constant over the estimated life of the reserves.
 
Ownership interests in estimated quantities of proved oil and gas reserves and changes in net proved reserves, all of which are located in the continental United States, are summarized below for each of the years presented in the consolidated financial statements.

9


   
Oil (Bbl)
 
Gas (Mcf)
 
Proved Reserves
             
Balance April 30, 2006
   
91,279
   
980,730
 
Discoveries and extensions
   
-
 
 
-
 
Revisions of previous estimates
   
(24,977
)
 
(224,155
)
Production
   
(4,898
)
 
(54,765
)
               
Balance, April 30, 2007
   
61,404
   
701,810
 
Discoveries and extensions
   
-
   
-
 
Revisions of previous estimates
   
17,993
   
(662,302
)
Return of proved undeveloped properties to Company
   
-
   
1,851,858
 
Production
   
(4,984
)
 
(39,508
)
               
Balance, April 30, 2008
   
74,413
   
1,851,858
 
               
Proved developed producing reserves at April 30, 2008
   
63,068
   
510,825
 
               
Proved developed producing reserves at April 30, 2007
   
48,591
   
624,404
 

The return of the proved undeveloped properties resulted from the return of the leases from Wind Mill to the Company due to settlement of all litigation.

Our standardized measure of discounted future net cash flows from our estimated proved oil and gas reserves is provided for the financial statement user as a common base for comparing oil and gas reserves of enterprises in the industry and may not represent the fair market value of our oil and gas reserves or the present value of future cash flows of equivalent reserves due to various uncertainties inherent in making these estimates. Those factors include changes in oil and gas prices from year-end prices used in the estimates, unanticipated changes in future production and development costs and other uncertainties in estimating quantities and present values of oil and gas reserves.

The following table presents the standardized measure of discounted future net cash flows from our ownership interests in proved oil and gas reserves as of the end of each of the years presented in the consolidated financial statements. The standardized measure of future net cash flows as of April 30, 2008 and 2007 are calculated using weighted average prices in effect as of those dates. Those prices were $9.36 and $7.96 respectively, per Mcf of natural gas, and $103.31 and $55.77 respectively, per barrel of oil. The resulting estimated future cash inflows are reduced by estimated future costs to develop and produce the estimated proved reserves based on year-end cost levels. Future income taxes are based on year-end statutory rates, adjusted for any operating loss carry forwards and tax credits. The future net cash flows are reduced to present value by applying a 10% discount rate.

Standardized measures of discounted future net cash flows at April 30, 2008 and 2007 are as follows:

   
2008
 
2007
 
Future cash flows
 
$
25,456,619
 
$
8,422,828
 
Future production costs and taxes
   
(3,597,397
)
 
(2,402,638
)
Future development costs
   
(1,471,400
)
 
(13,900
)
Future income tax expense
   
(6,320,225
)
 
(1,861,950
)
Future cash flows
   
14,067,597
   
4,144,340
 
Discount at 10% for timing of cash flows
   
(7,323,458
)
 
(2,144,700
)
Discounted future net cash flows from proved reserves
 
$
6,744,139
 
$
1,999,640
 

Changes in Standardized Measure of Discounted Future Net Cash Flows

The following table summarized the changes in the standardized measure of discounted future net cash flows from estimated production of our proved oil and gas reserves after income taxes for each of the years presented in the consolidated financial statements.

The following table sets forth the changes in the standardized measure of discounted future net cash flows from proved reserves for April 30, 2008 and 2007.
 
   
2008
 
2007
 
Balance, beginning of year
 
$
1,999,640
 
$
3,132,740
 
Sales, net of production costs and taxes
   
(504,265
)
 
(453,670
)
Changes in prices and production costs
   
2,134,824
   
1,008,950
 
Revisions of quantity estimates and return of proved undeveloped properties 
   
6,853,630
   
(3,015,904
)
Sale of minerals in place
   
(714,788
)
 
-
 
Development costs incurred
   
-
   
474
 
Net changes in income taxes
   
(3,024,902
)
 
1,327,050
 
Balances, end of year
 
$
6,744,139
 
$
1,999,640
 
 
10

 
The reserves presented in this Report were evaluated in accordance with Rule 4-10 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”).

Item 3. Legal Proceedings.

CNX Gas Company, LLC (CNX) commenced litigation in the Chancery Court of Campbell County, State of Tennessee on June 11, 2008 (CNX Gas Company, LLC vs. Miller Petroleum Inc., Civil Action No. 08-071) to enjoin the Registrant from assigning or conveying certain leases described in the Letter of Intent signed by CNX and the Registrant on May 30, 2008 (the “Letter of Intent”); to compel the Registrant to specifically perform the assignments as described in the Letter of Intent; and for damages. A Notice of Lien Lis Pendens was issued June 11, 2008. The court refused to grant a restraining order pending a hearing of the matter on the merits; however, the order entered into with the court with respect thereto prohibits Atlas from conveying the leases for 60 days from the date of the order. Effective June 13, 2008, all of such leases were assigned by the Company to Atlas America LLC. Should CNX prevail in the proceedings described above, Atlas may be obligated to assign the leases to CNX in consideration of payment to the Registrant of up to approximately $13.3 million, in which event the Registrant would be obligated to repay Atlas the sum of $19.625 million.
 
Item 4.  Submission of Matters to a Vote of Security Holders.
 
No proposals were submitted for approval by our shareholders during the fourth fiscal quarter ended April 30, 2008.

11


PART II
 
Item 5.  Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities.
 
Market Information
 
Our common stock is quoted on the National Association of Securities Dealers Pink Sheets under the symbol “MILL.PK.” The following quotations, obtained from National Quotation Bureau, reflect the high and low bids for our shares for the periods indicated and are based on inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

   
Bid Prices ($)
 
   
High
 
Low
 
Quarter Ended:
             
July 31, 2007
   
0.25
   
0.25
 
October 31, 2007
   
0.07
   
0.07
 
January 31, 2008
   
0.08
   
0.08
 
April 30, 2008
   
0.22
   
0.10
 
               
July 31, 2006
   
0.95
   
0.80
 
October 31, 2006
   
0.41
   
0.40
 
January 31, 2007
   
0.35
   
0.35
 
April 30, 2007
   
0.32
   
0.32
 

 Holders
 
There were approximately 363 stockholders of record of our common stock as of April 30, 2008.
 
Dividends
 
We have not paid or declared any cash dividends to date and do not anticipate paying any in the foreseeable future. There are no present restrictions that limit our ability to pay dividends or that are likely to do so in the future. We intend to retain earnings, if any, to support the growth of our business.

Shares Issuable Under Equity Compensation Plans
 
The table below provides information, as of April 30, 2008, concerning securities authorized for issuance under equity compensation plans.

 
         
Number of securities
 
           
Remaining available for future
 
   
Number of securities to be
     
issuance under equity
 
   
issued upon exercise of
 
Weighted average exercise price
 
compensation plans (excluding
 
   
outstanding options, warrants
 
of outstanding options, warrants
 
securities reflected in column
 
Plan Category
 
and rights
 
and rights
 
(a))
 
 
 
(a)
 
(b)
 
(c)
 
Equity compensation plans approved by shareholders
   
   
   
 
Equity compensation plans not Approved by shareholders
   
175,000
   
0.7882
   
 
Total
   
175,000
   
0.7882
   
 

Recent Sales of Unregistered Securities
 
None.
 
Share Repurchases
 
None.
 
12

 
Item 6. Management’s Discussion and Analysis or Plan of Operation.
 
Executive Summary
 
The following discussion is intended to facilitate an understanding of our business and results of operations and includes forward-looking statements that reflect our plans, estimates and beliefs. It should be read in conjunction with our audited consolidated financial statements and the accompanying notes to the consolidated financial statements included herein. Our actual results could differ materially from those discussed in these forward-looking statements.

Overview / Recent Events
 
In order to obtain sufficient working capital to continue our operations for the foreseeable future, we decided to sell some of our major assets. We sold approximately 30,000 acres of oil and gas leases to Atlas America LLC for $19.625 million on June 13, 2008. These leases were generally known as Koppers North and Koppers South and included eight proved gas wells, which were drilled but not completed.
 
After, and as a part of the sale, the following actions were taken:
 
·
We paid Wind City Oil & Gas, LLC $10.6 million for 2.9 million shares of our common stock, a 1991 RD20 drilling rig and air compressor, eight drilled but uncompleted gas wells, and two producing gas wells in settlement of all litigation with Wind City Oil & Gas, LLC and related entities.
 
·
We paid transaction fees in the amount of $900,000.
 
·
We paid all our accounts and notes payable, totaling approximately $1,470,000.
 
After the above was accomplished, we had approximately $6.4 million of cash available to fund our future operations.
 
As part of the Atlas transaction, we agreed to contract with Atlas for two rigs for two years to drill wells, commencing a significant commitment to contract drilling. To give Atlas the level of service required, we also purchased a 2007 Atlas RD20 III drilling rig and related equipment for approximately $1.9 million. We expect to begin drilling for Atlas in August 2008, and expect to drill 45 to 52 wells by the fiscal year end. We will also be drilling on our remaining leases and are actively pursuing other oil and gas leases. At present we have 13,491 acres of oil and gas leases. We retained a 5% royalty interest on a 1,930 acre tract that we expect to be the subject of Atlas drilling. Additionally, we retained the right to participate in up to ten wells with a 25% working interest without promote.
 
We are working with several investor groups to secure additional drilling capital for our leases and for additional leases we expect to secure.
 
Results of Operations
 
           
Increase
 
   
April 30,
 
April 30,
 
(Decrease)
 
For the Fiscal Year Ended
 
2008
 
 2007
 
 2007 to 2008
 
REVENUES
                   
                     
Oil and gas revenue
 
$
566,478
 
$
509,742
 
$
56,736
 
Service and drilling revenue
   
262,864
   
834,679
   
(571,815
)
                     
Total Revenue
   
829,342
   
1,344,421
   
(515,079
)
                     
COSTS AND EXPENSES
                   
                     
Cost of oil and gas revenue
   
62,213
   
56,072
   
6,141
 
Cost of service and drilling revenue
   
297,942
   
815,535
   
(517,593
)
Selling, general and administrative
   
1,747,659
   
1,646,788
   
100,871
 
Depreciation, depletion and amortization
   
227,974
   
207,082
   
20,892
 
Impairment loss
   
666,073
   
-
   
666,073
 
                     
Total Costs and Expenses
   
3,001,861
   
2,725,477
   
276,384
 
                     
INCOME (LOSS) FROM OPERATIONS
   
(2,172,519
)
 
(1,381,056
)
 
(791,463
)
                     
OTHER INCOME (EXPENSE)
                   
                     
Interest income
   
2,099
   
1,256
   
843
 
Gain on sale of equipment
   
102,119
   
-
   
102,119
 
Interest expense and financing cost
   
(367,496
)
 
(163,950
)
 
(203,546
)
                     
Total Other Income (Expense)
   
(263,278
)
 
(162,694
)
 
(100,584
)
                     
NET INCOME (LOSS)
 
$
(2,435,797
)
$
(1,543,750
)
$
(892,047
)

13

 
Revenue
 
Oil and gas revenue was $566,478 for the year ended April 30, 2008 as compared to $509,742 for the year ended April 30, 2007, an increase of $56,736. This increase is primarily from the increase in the price of oil.
 
Service and drilling revenue was $262,864 for the year ended April 30, 2008 as compared to $834,679 for the year ended April 30, 2007, a decrease of $571,815. This decrease resulted from the fact that all of the work for the Wind Mill Joint Venture terminated. For the year ended April 30, 2007, $535,000 of the Company’s service and drilling revenue was from work for the Wind Mill Joint Venture.  
 
Cost and Expense
 
The cost of oil and gas revenue was $62,213 for the year ended April 30, 2008 as compared to $56,072 for the year ended April 30, 2007, an increase of $6,141. This increase resulted from an increase in production cost.
 
The cost of service and drilling revenue was $297,942 for the year ended April 30, 2008 as compared to $815,535 for the year ended April 30, 2007, a decrease of $517,593. This decrease is due to the fact that work for the Wind Mill Joint Venture ceased.
 
Selling, general and administrative expense was $1,747,659 for the year ended April 30, 2008 as compared to $1,646,788 for the year ended April 30, 2007, an increase of $100,871. This increase resulted from legal and other costs associated with the lawsuit.
 
Depreciation, depletion and amortization expense was $227,974 for the year ended April 30, 2008 as compared to $207,082 for the year ended April 30, 2007, an increase of $20,892. This increase resulted from additional amortization of oil and gas properties.

The Company expensed an impairment loss of $666,073 for the year ended April 30, 2008 as compared to no impairment loss for the year ended April 30, 2007. This impairment loss resulted from management’s review of oil and gas properties, well equipment and supplies and the write-off of old, unused equipment.

Interest expense and financing cost was $367,496 for the year ended April 30, 2008 as compared to $163,950 for the year ended April 30, 2007, an increase of $203,546. This resulted from the increased cost of borrowing.

   
Average Net Production
     
Fiscal Year
 
Gas / MBTU
 
Sales Price / MBTU
 
2007
   
54,766
 
$
5.65
 
2008
   
39,507
 
$
7.29
 

   
Average Net
     
Fiscal Year
 
Barrels of Oil
 
Sales Price / Bbl
 
2007
   
4,898
 
$
47.88
 
2008
   
4,984
 
$
77.25
 

14


   
2006
 
2007
 
2008
 
Net Productive Wells
   
22.84
   
25.66
   
24.32
 
Developed Acreage
   
1,840
   
2,240
   
2,900
 
Undeveloped Acreage
   
46,920
   
3,100
   
9,529
 
Net Productive Exploratory Wells
   
0
   
0
   
0
 
Net Dry Exploratory Wells
   
1.20
   
0
   
0
 
Net Productive Developmental Wells
   
2.64
   
0
   
0
 
Net Dry Developmental Wells
   
0
   
0
   
0
 

Liquidity
 
Cash used by operating activities was $760,341 for fiscal 2008, an increase of $483,921 from cash used by operating activities in fiscal 2007 of $276,420. Our principal source of liquidity has been oil and gas revenues, loans from unrelated parties, loans from related parties and directors, private placement transactions of our common stock, and participation with investors in various oil and gas wells. During the current year we sold eight gas wells and a pipeline for $576,500. The increase in oil and gas prices enhances our ability to attract investors and to pursue joint ventures in oil and gas.

We sold approximately 30,000 acres of oil and gas leases to Atlas America, LLC on June 13, 2008 for $19.625 million. We settled our litigation with Wind City Oil & Gas and related entities, LLC for $10.6 million, and received back 2.9 mllion shares of our common stock, a 1991 RD20 drilling rig and related equipment and two producing gas wells. We also paid transaction fees of $900K, paid off most of the Company’s accounts payable, all of our notes payable, and had $6.4 million of cash remaining to fund our operations. We purchased a 2007 Atlas RD20 III drilling rig and related equipment for $1.9 million with a note secured by a certificate of deposit.
 
Our long-term cash flows are subject to a number of variables including the level of production and prices as well as various economic conditions that have historically affected the oil and gas business. A material drop in oil and gas prices or a reduction in production and reserves would reduce our ability to fund capital expenditures, reduce debt, meet financial obligations and remain profitable. We operate in an environment with numerous financial and operating risks, including, but not limited to, the inherent risks of the search for, development and production of oil and gas, the ability to buy properties and sell production at prices which provide an attractive return and the highly competitive nature of the industry. Our ability to expand our reserve base is, in part, dependent on obtaining sufficient capital through internal cash flow or the issuance of debt or equity securities.

15

 
 Item 7. Financial Statements.
 
INDEX TO FINANCIAL STATEMENTS
 
Report of Independent Certified Public Accountants
17
 
 
Consolidated Balance Sheets
18-19
 
 
Consolidated Statements of Operations
20
 
 
Consolidated Statements of Stockholders' Equity
21
 
 
Consolidated Statements of Cash Flows
22
 
 
Notes to the Consolidated Financial Statements
23-36

16


MILLER PETROLEUM, INC.
 
CONSOLIDATED FINANCIAL STATEMENTS

    April 30, 2008 and 2007

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors Miller Petroleum, Inc. and Subsidiary
Huntsville, Tennessee
 
We have audited the accompanying consolidated balance sheets of Miller Petroleum, Inc. and its Subsidiary as of April 30, 2008 and April 30, 2007 and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company has determined that it is not required to have, nor was it engaged to perform, an audit of internal control over financial reporting. Our audits 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referenced above present fairly, in all material respects, the financial position of Miller Petroleum, Inc. and its Subsidiary as of April 30, 2008 and 2007, and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
 
/s/ Rodefer Moss & Co, PLLC

Knoxville, Tennessee
DATE

17

 
MILLER PETROLEUM, INC.
Consolidated Balance Sheets

   
April 30
 
April 30
 
   
2008
 
2007
 
           
ASSETS
             
               
CURRENT ASSETS
             
               
Cash
 
$
42,436
 
$
 
Accounts receivable
   
131,302
   
67,276
 
Accounts receivable – related parties
   
5,144
   
180,699
 
Notes receivable
   
-
   
7,900
 
Inventory
   
65,856
   
114,691
 
               
Total Current Assets
   
244,738
   
370,566
 
               
FIXED ASSETS
             
Machinery
   
571,318
   
912,592
 
Vehicles
   
248,062
   
344,427
 
Buildings
   
315,835
   
315,835
 
Office equipment
   
25,804
   
30,083
 
     
1,161,019
   
1,602,937
 
Less: accumulated depreciation
   
(595,362
)
 
(862,717
)
               
Net Fixed Assets
   
565,657
   
740,220
 
               
OIL AND GAS PROPERTIES
   
1,544,577
   
1,462,439
 
(On the basis of successful efforts accounting)
             
               
PIPELINE FACILITIES
   
-
   
181,597
 
               
OTHER ASSETS
             
Investment in joint venture at cost
   
-
   
801,319
 
Land
   
496,500
   
496,500
 
Investments
   
-
   
500
 
Well equipment and supplies
   
-
   
427,948
 
Cash – restricted
   
83,000
   
83,000
 
               
Total Other Assets
   
579,500
   
1,809,267
 
               
TOTAL ASSETS
 
$
2,934,472
 
$
4,564,089
 

See notes to consolidated financial statements.

18

 
MILLER PETROLEUM, INC.
Consolidated Balance Sheets

   
April 30
 
April 30
 
   
2008
 
2007
 
           
LIABILITIES, TEMPORARY EQUITY AND PERMANENT STOCKHOLDERS’ EQUITY (DEFICIT)
             
               
CURRENT LIABILITIES
             
               
Bank overdraft
     
$
16,933
 
Accounts payable – trade
   
389,275
   
276,783
 
Accounts payable – related party
   
-
   
88,809
 
Accrued expenses
   
210,198
   
93,874
 
Notes payable – related parties
   
80,200
   
114,500
 
Current portion of notes payable
   
646,430
   
202,234
 
Liability for stock repurchase
   
4,350,000
   
-
 
               
Total Current Liabilities
   
5,676,103
   
793,133
 
               
LONG-TERM LIABILITIES
             
               
Notes payable
             
Other
   
-
   
326,880
 
               
Total Long-term Liabilities
   
-
   
326,880
 
               
Total Liabilities
   
5,676,103
   
1,120,013
 
               
TEMPORARY EQUITY
             
Common stock, subject to put rights, 2,900,000 shares
   
-
   
4,350,000
 
               
PERMANENT STOCKHOLDERS’ EQUITY
             
               
Common stock: 500,000,000 shares authorized at $0.0001 par value, 11,666,856 and 11,466,856 shares issued and outstanding, respectively
   
1,166
   
1,146
 
Additional paid-in capital
   
7,123,761
   
7,936,724
 
Unearned compensation
   
(174,000
)
 
(1,587,033
)
Accumulated deficit
   
(9,692,558
)
 
(7,256,761
)
               
Total Stockholders’ Equity (Deficit)
   
(2,741,631
)
 
(905,924
)
               
TOTAL LIABILITIES, TEMPORARY EQUITY AND PERMANENT STOCKHOLDERS’ EQUITY
 
$
2,934,472
 
$
4,564,089
 

See notes to consolidated financial statements.

19

 
MILLER PETROLEUM, INC.
Consolidated Statements of Operations

   
For the
 
For the
 
   
Year Ended
 
Year ended
 
   
April 30,
 
April 30,
 
   
2008
 
2007
 
           
REVENUES
             
Oil and gas revenue
 
$
566,478
 
$
509,742
 
Service and drilling revenue
   
262,864
   
834,679
 
               
Total Revenue
   
829,342
   
1,344,421
 
               
COSTS AND EXPENSES
             
Oil and gas cost
   
62,213
   
56,072
 
Service and drilling cost
   
297,942
   
815,535
 
Selling, general and administrative
   
1,747,659
   
1,646,788
 
Depreciation, depletion and amortization
   
227,974
   
207,082
 
Impairment loss
   
666,073
   
-
 
               
Total Costs and Expenses
   
3,001,861
   
2,725,477
 
               
INCOME (LOSS) FROM OPERATIONS
   
(2,172,519
)
 
(1,381,056
)
               
OTHER INCOME (EXPENSE)
             
Interest income
   
2,099
   
1,256
 
Gain on sale of equipment
   
102,119
   
-
 
Interest expense and financing cost
   
(367,496
)
 
(163,950
)
               
Total Other Expense
   
(263,278
)
 
(162,694
)
               
INCOME TAXES
             
               
NET LOSS
 
$
(2,435,797
)
$
(1,543,750
)
               
BASIC AND DILUTED LOSS PER SHARE
 
$
(0.17
)
$
(0.11
)
               
BASIC WEIGHTED AVERAGE NUMBER OF SHARE OUTSTANDING
   
14,454,288
   
14,366,856
 

See notes to consolidated financial statements.

20

 
MILLER PETROLEUM, INC.
Consolidated Statements of Permanent Stockholders’ Equity

           
Additional
             
   
Common
 
Shares
 
Paid-in
 
Unearned
 
Accumulated
     
   
Shares
 
Amount
 
Capital
 
Compensation
 
Deficit
 
Total
 
                           
Balance, April 30, 2006
   
11,466,856
   
1,146
   
6,624,683
   
(751,990
)
 
(5,713,011
)
 
160,828
 
                                       
To reflect compensation earned for the year ended April 30, 2007
                     
376,669
         
376,669
 
                                       
Issuance of warrants for financing cost penalty
               
79,000
               
79,000
 
                                       
Issuance of warrants for financing cost
               
40,453
   
(22,759
)
       
17,694
 
                                       
Stock options issued
               
3,635
               
3,635
 
                                       
Issue of warrants as payment for services
               
1,188,953
   
(1,188,953
)
           
                                       
Net loss for the year ended April 30, 2007
               
 
 
       
(1,543,750
)  
(1,543,750
)
                                       
Balance, April 30, 2007
   
11,466,856
   
1,146
   
7,936,724
   
(1,587,033
)
 
(7,256,761
)
 
(905,924
)
                                       
Amortization of unearned compensation
                     
375,321
         
375,321
 
                                       
Amortization of financing cost warrants
                     
22,759
         
22,759
 
                                       
Adjustment of warrants for services
               
(1,014,953
)
 
1,014,953
             
                                       
Issuance of warrants for financing cost
               
153,010
               
153,010
 
                                       
Issuance of stock for financing cost
   
200,000
   
20
   
48,980
   
 
         
49,000
 
                                       
Net loss for the year ended April 30, 2008
                           
(2,435,797
)
 
(2,435,797
)
                                       
Balance April 30, 2008    
   
11,666,856
 
$
1,166
 
$
7,123,761
 
$
(174,000
)
$
(9,692,558
)
$
(2,741,631
)

See notes to consolidated financial statements.

21

 
MILLER PETROLEUM, INC.
Consolidated Statements of Cash Flows
 
   
April 30,
 
April 30,
 
   
2008
 
2007
 
CASH FLOWS FROM OPERATING ACTIVITIES:
             
Net loss
 
$
(2,435,797
)
$
(1,543,750
)
Adjustments to Reconcile Net Loss to
             
Net Cash from Operating Activities:
             
Depreciation, depletion and amortization
   
227,974
   
207,082
 
Gain on sale of equipment
   
(102,119
)
 
-
 
Impairment loss
   
666,073
   
-
 
Amortization of unearned compensation
   
375,321
   
376,669
 
Warrants issued for financing cost
   
175,769
   
100,329
 
Issuance of stock for financing cost
   
49,000
   
-
 
Changes in Operating Assets and Liabilities:
             
Accounts receivable
   
111,529
   
410,371
 
Inventory
   
48,835
   
(4,539
)
Unbilled service and drilling cost
   
-
   
76,944
 
Bank overdraft
   
(16,933
)
 
(10,320
)
Accounts payable
   
23,683
   
60,099
 
Accrued expenses
   
116,324
   
50,695
 
               
Net Cash from Operating Expenses
   
(760,341
)
 
(276,420
)
               
CASH FLOWS FROM INVESTING ACTIVITIES
             
               
Purchase of equipment
   
-
   
(61,275
)
Proceeds from sale of equipment
   
117,451
   
-
 
Purchase of oil and gas properties
   
-
   
(475
)
Proceeds from sale of well equipment and supplies
   
18,000
   
-
 
Proceeds from sale of pipeline
   
576,500
   
-
 
Changes in note receivable
   
7,900
   
35,100
 
               
Net Cash from Investing Activities
   
719,851
   
(26,650
)
               
CASH FLOWS FROM FINANCING ACTIVITIES
             
               
Payments on notes payable
   
(267,550
)
 
-
 
Proceeds from borrowings
   
350,476
   
299,500
 
Adjustment on notes payable
   
-
   
3,580
 
               
Net Cash from Financing Activities
   
82,926
   
303,080
 
               
NET (INCREASE) DECREASE IN CASH
   
42,436
   
0
 
               
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
   
0
   
0
 
               
CASH AND CASH EQUIVALENTS, END OF YEAR
 
$
42,436
 
$
0
 
 
See notes to consolidated financial statements.

22

 
MILLER PETROLEUM, INC.
Notes to the Consolidated Financial Statements
April 30, 2008 and 2007

Note 1 - Basis of Presentation, Liquidity and Continuing Operations
 
a.   Organization and Basis of Presentation
 
These consolidated financial statements include the accounts of Miller Petroleum, Inc. and the accounts of its subsidiary, Miller Pipeline Company, Inc. All inter-company balances have been eliminated in consolidation.
 
The Company’s principal business consists of oil and gas exploration, production and related property management in the Appalachian region of eastern Tennessee. The Company’s corporate offices are in Huntsville, Tennessee. The Company operates as one reportable business segment, based on the similarity of activities.
 
The Company formed Miller Pipeline Corporation Inc. (“MPC, Inc.”), a wholly-owned subsidiary, to manage the construction and operation of the gathering system used to transport natural gas to market. This pipeline was sold in December 2007.
 
b.   Continuing Operations
 
For the past two years we have been involved in a lawsuit with Wind City Oil & Gas, LLC and related entities.
 
On June 13, 2008 we sold approximately 30,000 acres of oil and gas leases and eight drilled but not completed wells to Atlas America, LLC (Atlas) for $19.625 million. At that time Wind City Oil & Gas, LLC and related entities were paid $10.6 million for 2.9 million shares of Miller’s stock, eight drilled but not completed gas wells, two producing gas wells, and a RD20 drilling rig and related equipment in settlement of all litigation between the parties. See Note 11 for additional information on this subsequent event.
 
The Company entered into a two-year drilling agreement with Atlas to drill wells for them. We have acquired a second drilling rig to assist in drilling the wells.
 
See Note 11 - Subsequent Events for more information regarding this transaction.
 
c.   Accounting Method
 
The Company follows the successful efforts method of accounting for its oil and gas activities. Accordingly, costs associated with the acquisition, drilling and equipping of successful exploratory wells are capitalized. Geological and geophysical costs, delay and surface rentals and drilling costs of unsuccessful exploratory wells are charged to expense as incurred. Costs of drilling development wells are capitalized. Upon the sale or retirement of oil and gas properties, the cost thereof and the accumulated depreciation or depletion are removed from the accounts and any gain or loss is credited or charged to operations.

Depreciation, depletion and amortization of capitalized costs of proved oil and gas properties is provided on a pooled basis using the units-of-production method based upon proved reserves. Acquisition costs of proved properties are amortized by using total estimated units of proved reserves as the denominator. All other costs are amortized using total estimated units of proved developed reserves.
 
Pipeline facilities are stated at original cost. Depreciation of pipeline facilities is provided on a straight-line basis over the estimated useful life of the pipeline of forty years. The pipeline was sold in December 2007.
 
23

 
MILLER PETROLEUM, INC.
Notes to the Consolidated Financial Statements
April 30, 2008 and 2007

Note 1 - Basis of Presentation, Liquidity and Continuing Operations (continued)
 
d.   Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
 
SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” requires that an asset be evaluated for impairment when the carrying amount of an asset exceeds the sum of the undiscounted estimated future cash flows of the asset. In accordance with the provisions of SFAS 144, the Company reviews the carrying values of its long-lived assets whenever events or changes in circumstances indicate that such carrying values may not be recoverable. If, upon review, the sum of the undiscounted pretax cash flows is less than the carrying value of the asset group, the carrying value is written down to estimated fair value. Individual assets we grouped for impairment purposes at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, generally on a field-by-field basis. The fair value of impaired assets is determined based on quoted market prices in active markets, if available, or upon the present values of expected future cash flows using discount rates commensurate with the risks involved in the asset group. The long-lived assets of the Company, which are subject to evaluation, consist primarily of oil and gas properties. For the year ended April 30, 2008 the Company expensed $409,948 of equipment and well supplies in inventory to reflect the new, significant emphasis on drilling activities.

The Company also expensed assets of approximately $179,000 for impaired oil and gas wells and approximately $77,000 for old unused equipment. Collectively, these write-offs are included in the Company’s statement of income for the year ended April 30, 2008 under the caption “Impairment Loss”.

e.   Net Earnings (Loss) per Share:
 
The Company presents “basic” earnings (loss) per share and, if applicable, “diluted” earnings per share pursuant to the provisions of Statement of Financial Accounting Standards No. 128, “Earnings Per Share.” Basic earnings (loss) per share is calculated by dividing net income or loss by the weighted average number of common shares outstanding during each period. The calculation of diluted earnings per share is similar to that of basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, such as those issuable upon the exercise of stock options and warrants, were issued during the period.
 
Since the Company had a net loss for the years ended April 30, 2008 and 2007, the assumed effects of the exercise of the options and warrants to purchase 7,535,000 and 7,055,000 shares of common stock that were outstanding at April 30, 2008 and 2007, respectively, and the application of the treasury stock method would have been anti-dilutive. Therefore, there are no diluted per share amounts in the 2008 and 2007 statements of operations.
 
f.   Cash Equivalents
 
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
 
g.   Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiary MPC, Inc. All significant intercompany transactions have been eliminated.
 
h.   Fixed Assets
 
Fixed assets are stated at cost. Depreciation and amortization are computed using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. The estimated useful lives are as follows:
  
Class
 
Lives in Years
  Building
 
  40
  Machinery and equipment  
 
  5-20
  Vehicles  
 
  5-7
  Office equipment  
 
  5
 
Depreciation expense for the years ended April 30, 2008 and 2007 was $70,821 and $92,096 respectively.

24


MILLER PETROLEUM, INC.
Notes to the Consolidated Financial Statements
April 30, 2008 and 2007

Note 1 - Basis of Presentation, Liquidity and Continuing Operations (continued)
 
i.   Revenue Recognition
 
Oil and gas production revenue is recognized as income as production is extracted and sold. Service and drilling income is recognized at the time it is both earned and we have a contractual right to receive the revenue. Turnkey contracts not completed at year end are reported on the completed contract method of accounting. There were no uncompleted contracts at the end of fiscal 2008 and 2007. Sales of various parts and equipment is immaterial for the years ended April 30, 2008 and 2007 and has been combined with service and drilling revenue.
 
j.   Concentrations of Credit Risk
 
Financial instruments which potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents and accounts receivable. The Company places its cash investments, which at times may exceed federally insured amounts, in highly rated financial institutions.
 
Accounts receivable arise from sales of gas and oil, equipment and services. Credit is extended based on the evaluation of the customer’s creditworthiness, and generally collateral is not required. Accounts receivable more than 45 days old are considered past due. The Company does not accrue late fees or interest income on past due accounts. Management uses the aging of accounts receivable to establish an allowance for doubtful accounts. Credit losses are written off to the allowance at the time they are deemed not to be collectible. Credit losses have historically been minimal and within management’s expectations. The allowance for doubtful accounts was $15,000 at April 30, 2008 and $5,183 April 30, 2007. Accounts receivable more than 90 days old were $18,971 at April 30, 2008 and $177,427 at April 30, 2007. Bad debt expense for the year ended April 30, 2008 was $51,066.
 
k.   Inventory
 
Inventory consists primarily of crude oil in tanks and is carried at cost. Inventory was previously recorded at fair market value, but after a review by management, it was deemed more appropriate to carry it at cost.
 
 l.   Well Equipment and Supplies
 
Well equipment held by the Company in the approximate amount of $410,000 was written off during the year ended April 30, 2008. With the Company’s significant redirection into drilling activities, the Company assessed this equipment for impairment and charged the remaining balance to expense. See Impairment note at (d) above.
 
m.   Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported on the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The most significant assumptions are for asset retirement obligation liabilities and estimated reserves of oil and gas. Oil and gas reserve estimates are developed from information provided by the Company’s management to Lee Keeling & Associates, Inc. of Tulsa, Oklahoma for the years ended April 30, 2008 and 2007, respectively.

n.   Reclassifications
 
Certain amounts and balances pertaining to the April 30, 2007 financial statements have been reclassified to conform with the April 30, 2008 financial statement presentations.
 
o.   Stock Warrants
 
The Company measures its equity transactions with non-employees using the fair value based method of accounting prescribed by Statement of Financial Accounting Standards No. 123R. 

25

 
 
MILLER PETROLEUM, INC.
Notes to the Consolidated Financial Statements
April 30, 2008 and 2007

Note 1 - Basis of Presentation, Liquidity and Continuing Operations (continued)
 
p.   Income Taxes
 
The Company accounts for income taxes using the “asset and liability method.” Accordingly, deferred tax liabilities and assets are determined based on the temporary differences between the financial reporting and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets arise primarily from net operating loss carry forwards. Management evaluates the likelihood of realization of such assets at year-end reserving any such amounts not likely to be recovered in future periods.
 
q.   Recent Accounting Pronouncements
 
In June 2006, FIN 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of SFAS No. 109, clarifies the accounting for uncertainties in income taxes recognized in an enterprise’s financial statements. The Interpretation requires that we determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority. If a tax position meets the more likely than not recognition criteria, FIN 48 requires the tax position be measured at the largest amount of benefit greater than fifty percent (50%) likely of being realized upon ultimate settlement. This accounting standard is effective for fiscal years beginning after December 15, 2006. The effect of adopting FIN 48 did not have a material affect on our financial position and results of operations.
 
In September 2006, the Staff of the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of determining whether the current year’s financial statements are materially misstated. SAB 108 is effective for the Company’s fiscal year 2007 annual financial statements. The adoption of SAB 108 did not have an impact on our financial position, results of operations or cash flows.
 
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”). This standard defines fair value, establishes the framework for measuring fair value in accounting principles generally accepted in the United States and expands disclosure about fair value measurements. This pronouncement applies under other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. This statement is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating the requirements of SFAS No. 157 and have not yet determined the impact on our financial statements.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FAS 115 (“SFAS No.159”). SFAS No. 159 allows companies to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. Unrealized gains and losses shall be reported on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 also establishes presentation and disclosure requirements. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 and will be applied prospectively. We are currently evaluating the impact of adopting SFAS No. 159 on our financial position, results of operations or cash flows.
 
In December 2007, the SEC staff issued Staff Accounting Bulletin (“SAB”) 110, “Share-based Payment”, which amends SAB 107, “Share-based Payment”, to permit public companies, under certain circumstances, to use the simplified method in SAB 107 for employee option grants after December 31, 2007. Use of the simplified method after December 2007 is permitted only for companies whose historical data about their employees’ exercise behavior does nor provide a reasonable basis for estimating the expected term of the options. The Company adopted SAB 110 on January 1, 2008. The adoption of this pronouncement did not have a material effect on the Company’s consolidated financial statements.
 
26


MILLER PETROLEUM, INC.
Notes to the Consolidated Financial Statements
April 30, 2008 and 2007


Note 1 - Basis of Presentation, Liquidity and Continuing Operations (continued)

q.   Recent Accounting Pronouncements (continued)
 
In December 2006, the FASB issued FASB Staff Position No. EITF 00-19-2, Accounting for Registration Payment Arrangements, (“FSP No. EITF 00-19-2”), which addresses an issuer’s accounting for registration payment arrangements. FSP No. EITF 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. The guidance in FSP No. EITF 00-19-2 amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, and FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to include scope exceptions for registration payment arrangements. FSP No. EITF 00-19-2 further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles (GAAP) without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. FSP No. EITF 00-19-2 shall be effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the date of issuance of FSP No. EITF 00-19-2. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of FSP No. EITF 00-19-2, this guidance shall be effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. We adopted FSP No. EITF 00-19-2 effective January 1, 2007. We have not had any transactions subject to EITF 00-19-2 since its adoption, so there has been no material impact to the Company’s financial position, results of operations or cash flows.
 
 r.   Major Customers

 The Company depends upon local purchasers of hydrocarbons to purchase our products in the areas where its properties are located. The loss of one or more of our primary purchasers may have a substantial adverse impact on our sales and ability to operate profitably.
 
Currently, we are selling oil and natural gas to the following purchasers:
 
Oil:
Barrett Oil Purchasing purchases oil from the Koppers Fields. Barrett accounted for $320,034 of the Company’s total revenue, which was about 38% of the Company’s total revenue.
 
Gas:
Cumberland Valley Resources purchases natural gas produced from the joint venture with Delta Producers, Inc. in the Jellico East Field. Delta Producers Inc. accounted for $355,641 of the Company’s total revenue, which was about 37% of the Company’s total revenue.
 
Tri-Global Holdings, LLC, Montello Resources, LLC and Delta Producers accounted for $196,831, which was about 75% of the Company’s service and drilling revenue.

Note 2 - Statements of Cash Flows Supplemental Disclosure

   
2008
 
2007
 
Cash Paid For:
         
Interest
 
$
52,652
 
$
53,247
 
               
Non-Cash Financing Activities:
             
Financing costs from issuance of warrants and stock
   
224,769
   
96,694
 
Common stock issued for services
   
-
   
380,304
 

27


MILLER PETROLEUM, INC.
Notes to the Consolidated Financial Statements
April 30, 2008 and 2007

Note 3 - Oil and Gas Properties - Pipeline Facilities
 
The Company uses the successful efforts method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs carrying and retaining unproved properties are expensed. The Company amortizes the oil and gas properties using the unit-of-production method based on total proved reserves. The Company capitalized $0 and $475 of oil and gas properties for the years ended April 30, 2008 and 2007, respectively, and recorded $157,153 and $114,986 of amortization expense for the years ended April 30, 2008 and 2007, respectively. The pipeline and eight gas wells were sold on December 14, 2007 for a total consideration of $576,500.

For the year ended April 30, 2008 the Company expensed approximately $179,000 of impaired oil and gas wells.

Note 4 - Long-Term Debt
 
The Company had the following debt obligations at April 30, 2008 and April 30, 2007
 
   
April 30, 2008
 
April 30, 2007
 
Notes Payable  Related Parties:
         
           
Note payable to the Company’s CEO and Chairman of the Board
         
of Directors, Deloy Miller, secured by equipment and truck titles,
         
interest at 10.750%, due October 18, 2008
 
$
80,200
 
$
0
 
               
Note payable to board member Herman Gettlefinger, unsecured, dated
             
February 21, 2007, bearing interest at 11% and due November 1, 2007.
             
This note was paid December 14, 2007
   
 
     42,000  
               
Notes payable to Sharon Miller, Unsecured, dated April 5, 2007 to
             
May 17, 2007, bearing interest at 11%, due November 1, 2007. This
             
note was paid December 14, 2007
   
 
   
72,500
 
 
   
80,200
     114,500  
Notes Payable  Other
             
               
Note payable to American Fidelity Bank, secured by a trust deed
             
on property, bearing interest at prime, due in monthly payments
             
of $2,500, with the final payment due in August 2008
   
346,430
   
344,114
 
               
Note payable to Jade Special Strategy, LLC, unsecured, dated
             
March 7, 2007, bearing interest based on a sliding scale approximating
             
120% and due April 30, 2008, and now accruing interest at 18% (see note below)
   
110,000
   
110,000
 
               
Note payable to Jade Special Strategy, LLC, unsecured, dated
             
April 17, 2007, bearing interest based on a sliding scale approximating
             
120% and due April 30, 2008, and now accruing interest at 18% (see note below)
   
40,000
   
40,000
 
               
Note Payable to Jade Special Strategy, LLC, unsecured, dated
             
August 2, 2007, bearing interest based on a sliding scale approximating
             
120% and due April 30, 2008, and now accruing interest at 18% (see note below)
   
65,000
   
0
 
               
Note payable to Petro Capital Securities, unsecured, dated May 24, 2007,
             
bearing interest at 10% and due June 30, 2008
   
35,000
   
35,000
 
               
Note payable to P & J Resources, Inc., unsecured, dated April 2, 2008
             
bearing interest at 8%
   
50,000
   
0
 
               
 
   
646,430
     529,114  
Total Notes Payable
   
726,630
   
643,614
 
Less current maturities on related party notes payable
   
80,200
   
114,500
 
Less current maturities on other notes payable
   
646,430
   
202,234
 
Notes Payable – Long-term
   
0
   
326,880
 

All of the above notes were paid off during June 2008.

28

 
MILLER PETROLEUM, INC.
Notes to the Consolidated Financial Statements
April 30, 2008 and 2007

Note 4 - Long-Term Debt (continued)

On February 14, 2008 Jade Special Strategy, LLC agreed to extend the notes to April 30, 2008 at a nominal interest rate of 18% per annum, the re-pricing of 200,000 warrants from $0.33 and $0.29 to $0.01, and the issuance of an additional 100,000 warrants at par value. The options represent loan fees and were valued at $59,000.

Note 5 - Related Party Transactions
 
At April 30, 2008 and 2007 the Company has an account receivable from Herman Gettlefinger, a member of the board of directors, and his wife in the amount of $5,145 and $3,676, respectively for work performed on oil and gas wells.
 
The Company had notes payable to Sharon Miller (wife of Deloy Miller, majority stockholder) for $72,500 and a note payable to Herman Gettlefinger for $42,000 at April 30, 2007. These notes were paid off in December 2007.

Note 6 - Asset Retirement Obligation
 
In 2001, the Financial Accounting Standards Board approved the issuance of SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement requires companies to record the present value of obligations associated with the retirement of tangible long-lived assets in the period in which it is incurred. The liability is capitalized as part of the related long-lived asset's carrying amount. Over time, accretion of the liability is recognized as an operating expense and the capitalized cost is depreciated over the expected useful life of the related asset.
 
The changes in the Company’s liability for the years ended April 30, 2008 and 2007 as follows:

Asset retirement obligation as of April 30, 2006
 
$
17,549
 
Accretion expense for 2007
   
16,000
 
Asset retirement obligation as of April 30, 2007
   
33,549
 
Accretion expense for 2008
   
16,000
 
Asset retirement obligation as of April 30, 2008
 
$
49,549
 

The asset retirement obligation is included in the accompanying balance sheet under the caption “Accrued Expenses”.

In addition to this accrual, the Company has $83,000 in restricted cash in escrow for well permits.
 
Note 7 - Income Taxes
 
The Company provides deferred income tax assets and liabilities using the liability method for temporary differences between book and taxable income.
 
A reconciliation of the statutory U. S. Federal income tax and the income tax provision included in the accompanying consolidated statements of operations is as follows:


29


MILLER PETROLEUM, INC.
Notes to the Consolidated Financial Statements
April 30, 2008 and 2007

Note 7 - Income Taxes (continued) 

 
 
2008
 
2007
 
Current Year Addition:
 
 
 
 
 
    Federal statutory rate
   
34
%
 
34
%
   Federal tax benefit at statutory rate
 
$
828,240
 
$
520,000
 
   State income tax, net of benefit
   
104,504
   
68,700
 
   Stock compensation
         
(128,000
)
   Stock warrants
         
(34,100
)
 
   
932,744
   
426,600
 
       Increase in valuation allowance
   
932,744
   
(426,600
)
 
         
      Increase in deferred tax asset and valuation allowance
 
$
0
 
$
0
 
 
         
Cumulative Tax Benefit:
         
   Net operating loss carryforward
 
$
4,504,500
 
$
2,964,600
 
   Stock warrants
   
-
   
40,000
 
   Valuation allowance
   
(4,504,500
)
 
(3,004,600
)
 
         
      Net deferred tax benefit
 
$
0
 
$
0
 
 
The Company recorded a valuation allowance at April 30, 2008 and 2007 equal to the excess of deferred tax assets over deferred tax liabilities, as management is unable to determine that these tax benefits are more likely than not to be realized.

The Company had available, to offset taxable income, cumulative net operating loss carry forwards arising from the periods since the year ended April 30, 1998 of approximately $10,500,000 at April 30, 2008. The carry forwards begin expiring in 2013.

The open tax years years April 30, 2005, 2006, 2007 and 2008.

Note 8 - Stockholders’ Equity
 
For the year ended April 30, 2007, no shares were issued. The Company issued 480,000 warrants in connection with the Prospect / Petro loan at an average exercise price of $1.15 per share during the years ended April 30, 2008 and 2007. On April 30, 2007 the Company engaged consultants to assist in the unwind of the Wind City agreement (note 2) in exchange for options to acquire 5,000,000 shares of the Company’s common stock. The options are to be issued upon board approval of the services and are exercisable at $0.21 per share. Additionally, the Company issued 200,000 warrants in connection with borrowings in March and April of 2007 at an average exercise price of $0.29 per share.

On February 14, 2008 Jade Special Strategy, LLC agreed to extend the notes to April 30, 2008 at a nominal interest rate of 18% per annum, the re-pricing of 200,000 warrants from $0.33 and $0.29 to $0.01, and the issuance of an additional 100,000 shares of stock at grant-date fair value. The options represent loan fees and are valued at $59,000.

Additionally, the Company has warrants and options outstanding from prior periods. All warrants must be adjusted in the event of any forward or reverse split of outstanding common stock. The warrants have no voting rights or liquidation preferences, unless exercised in accordance with the particular warrant.

Prior to adoption of SFAS 123R, the fair value of the options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in fiscal year 2006: 50% volatility, two and a half year life, zero dividend yield, and risk-free interest rate of 4.50%.
 
For 2007, the Company continued to use the simplified method for determining estimated option life, due to significant structural changes in its business. Option grants were valued using two and a half to three year lives and volatility of 300%.

30


MILLER PETROLEUM, INC.
Notes to the Consolidated Financial Statements
April 30, 2008 and 2007

 Note 8 - Stockholders’ Equity (continued)
 
Information regarding the options and warrants at April 30, 2008 and 2007 is as follows:
 
 
 
2008 
 
2007 
 
 
 
Weighted
Shares
 
Average
Exercise Price
 
Weighted
Shares
 
Average
Exercise Price
 
Options outstanding,
 
 
 
 
 
 
 
 
 
   beginning of year
   
7,055,000
 
$
0.37
   
1,550,000
 
$
0.81
 
Options canceled
               
200,000
   
2.00
 
Options exercised
               
-
   
-
 
Options granted
   
480,000
 
$
1.15
   
5,705,000
 
$
0.53
 
Options outstanding,
                 
    end of year
   
7,535,000
         
7,055,000
 
$
0.38
 
Options exercisable,
                 
   end of year
   
2,535,000
         
2,055,000
 
$
0.77
 
Option price range,
                 
   end of year
       
$
0.01 to 1.15
     
$
0.21 to 1.15
 
Option price range,
                 
   exercised shares
       
n/a
       
n/a
 
Options available for grant
                 
   at end of year
       
n/a
       
n/a
 
Weighted average fair value of
                 
   options granted during the year
     
$
0.20
     
$
0.23
 
 
Note 9 - Contingencies
 
The Company’s activities are subject to federal, state and local laws and regulations governing environmental quality and pollution control in the United States. The company cannot predict what effect future regulations or legislation, enforcement policies, and claims for damages to property, employees, other persons and the environment resulting from the Company’s operations could have on its activities. Although no assurances can be made, the Company’s management believes that absent the occurrence of an extraordinary event, compliance with existing laws, rules and regulations regulating the release of materials in the environment or otherwise relating to the protection of the environment will not have a material effect upon the Company’s financial position.
 
Note 10 - Disclosures about Fair Value of Financial Instruments
 
The carrying amount reported on the balance sheet for cash, accounts and notes receivable, accounts payable and accrued liabilities approximates fair value because of the immediate or short-term maturity of these financial instruments. The carrying value of notes payable approximate fair value due to the settlement at carrying value of these obligations subsequent to the balance sheet date.

31

 
MILLER PETROLEUM, INC.
Notes to the Consolidated Financial Statements
April 30, 2008 and 2007

Note 11 – Subsequent Events / Litigation / Employment of New CEO

The Company sold approximately 30,000 acres of oil and gas leases and eight drilled, proved, but uncompleted gas wells for a total consideration of $19.625 million on June 13, 2008. As part of this transaction, the Company paid Wind City Oil & Gas, LLC and related companies $10.6 million in return for 2.9 million shares of Miller’s common stock, the return of all of the Company’s oil and gas leases, a used RD20 drilling rig, compressor and related components, eight drilled but uncompleted gas wells, and two producing gas wells in settlement of all litigation between the Company and Wind City Oil & Gas, LLC.

After the sale was completed, the Company paid off all notes, all undisputed payables, transaction fees of $600,000 to Cresta Capital/Consortium, and paid a transaction fee of $300,000 to Scott Boruff, the new CEO of Miller (see Employment of New CEO below), a former associate of Cresta and a son-in-law of Deloy Miller the former CEO and current Chairman of the Board of Directors.

Cresta was also granted a warrant to purchase one million shares of the Company’s common stock for $1.00 per share for a period expiring three years after the grant date and cancelled the five million performance warrants that it held.

The following proforma balance sheet reflects the sale:

           
After
 
   
April 30, 2008
 
Adjustment
 
Adjustment
 
Assets
             
               
Cash
 
$
42,436
 
$
6,400,000
 
$
6,442,436
 
Other Current Assets
   
202,302
   
 
     202,302  
Total Current Assets
   
244,738
   
 
     6,644,738  
                     
Net Fixed Assets
   
565,657
   
810,000
   
1,375,657
 
                     
Oil & Gas Properties
   
1,544,577
   
(801,319
)
 
993,258
 
           
250,000
       
                     
Other Assets
   
579,500
   
 
   
579,500
 
                     
Total Assets
 
$
2,934,472
 
 
 
 
$ 
 9,593,153  
                     
Liabilities & Stockholders’ Equity
                   
Liabilities
                   
Accounts Payable &
                   
Accrued Expenses
 
$
599,473
 
$
(500,000
)
$
99,473
 
Notes Payable
   
726,630
   
(726,630
)
 
-
 
Liability for Stock Repurchase
   
4,350,000
   
(4,350,000
)
 
-
 
Total Liabilities
   
5,676,103
   
 
     99,473  
                     
Stockholders’ Equity
   
(2,741,631
)
 
12,235,311
   
9,493,680
 
                     
                   
Stockholders’ Equity
 
$
2,934,472
 
 
 
 
$ 
 9,593,153  

32

 
MILLER PETROLEUM, INC.
Notes to the Consolidated Financial Statements
April 30, 2008 and 2007

Note 11 - Subsequent Events / Litigation / Employment of New CEO (continued)

On June 20, 2008 the Company purchased a 2007 Atlas COPCO Model RD III drilling rig and related equipment for approximately $1.9 million. This equipment was financed with a $1.85 million loan secured by a certificate of deposit.

CNX Gas Company, LLC (CNX) commenced litigation in the Chancery Court of Campbell County, State of Tennessee on June 11, 2008 (CNX Gas Company, LLC vs. Miller Petroleum Inc., Civil Action No. 08-071) to enjoin the Registrant from assigning or conveying certain leases described in the Letter of Intent signed by CNX and the Registrant on May 30, 2008 (the “Letter of Intent”); to compel the Registrant to specifically perform the assignments as described in the Letter of Intent; and for damages. A Notice of Lien Lis Pendens was issued June 11, 2008. The court refused to grant a restraining order pending a hearing of the matter on the merits; however, the order entered into by the court with respect thereto prohibits Atlas from conveying the leases for 60 days from the date of the order. Effective June 13, 2008, all of such leases were assigned by the Company to Atlas America, LLC. Should CNX prevail in the proceedings described above, Atlas may be obligated to assign the leases to CNX in consideration of payment to the Registrant by CNX of up to approximately $13.3 million, in which event the Registrant would be obligated to repay Atlas the sum of $19,625,000.

Management’s opinion is that CNX has no proof or basis of its claims in law or in fact, and management’s opinion is that this lawsuit will be dismissed.

On August 6, 2008 the Board of Directors employed Scott M. Boruff as CEO of the Company. The employment contract provided for the following compensation:

 
·
Base salary of $250,000 per annum, with provision for cost-of-living increases.

 
·
Sign-on bonus of $300,000, payable immediately in connection with Mr. Boruff’s assistance with the Atlas Transaction.

 
·
Options to purchase 250,000 shares of the Registrant’s common stock at an exercise price per share of $0.33, with vesting in equal annual installments over a period of four years.

 
·
A restricted stock grant of 250,000 shares of common stock, with vesting in equal annual installments over a period of four years.

 
·
Incentive Compensation – For each year of the employment term, (i) cash up to 100% of base salary and (ii) up to 100,000 shares of restricted common stock, in both instances based upon, and subject to, two performance benchmarks, gross revenue and EBITDA. One half of each element of incentive compensation is earned if the gross revenue benchmark is achieved, and the other half of each element is earned if the EBITDA benchmark is achieved.

Mr. Boruff is the son-in-law of Deloy Miller, the former CEO and current Chairman of the Board of Directors.

33

 
MILLER PETROLEUM, INC.
Notes to the Consolidated Financial Statements
April 30, 2008 and 2007

Note 12 - S.F.A.S. 69 Supplemental Disclosures (Unaudited)

a. Capitalized Costs Relating to Oil and Gas Producing Activities at April 30, 2008 and 2007 are as follows:

 
 
2008
 
2007
 
Proved oil and gas properties and related lease equipment
         
     Developed
 
$
2,736,509
 
$
2,783,855
 
     Non-developed
             
 
   
2,736,509
   
2,783,855
 
Accumulated depletion
   
(1,191,931
)
 
(1,321,416
)
Net Capitalized Costs
 
$
1,544,578
 
$
1,462,439
 
 
b. Costs Incurred in Oil and Gas Property Acquisition, Exploration, and Development Activities  
  
Acquisition of Properties Proved and Unproved
 
$
 
 
$
-
 
Exploration Costs
         
-
 
Development Costs
         
474
 
Total
  $    
$
474
 
 
c. Results of Operations for Producing Activities  
 
 
 
2008  
 
2007 
 
Production revenues
 
$
566,478
 
$
509,742
 
Production costs
   
(62,213
)
 
(56,072
)
Depreciation and amortization
   
(157,153
)
 
(144,496
)
Results of operations for producing activities
         
(excluding corporate overhead and interest costs)
 
$
347,112
 
$
309,174
 
 
d. Reserve Quantity Information
 
The following schedule estimates proved oil and natural gas reserves attributable to the Company. Proved reserves are estimated quantities of oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those which are expected to be recovered through existing wells with existing equipment and operating methods. Reserves are stated in barrels of oil (Bbls) and thousands of cubic feet of natural gas (Mcf). Geological and engineering estimates of proved oil and natural gas reserves at one point in time are highly interpretive, inherently imprecise and subject to ongoing revisions that may be substantial in amount. Although every reasonable effort is made to ensure that the reserve estimates reported represent the most accurate assessments possible, these estimates are by their nature generally less precise than other estimates presented in connection with financial statement disclosures.

34


MILLER PETROLEUM, INC.
Notes to the Consolidated Financial Statements
April 30, 2008 and 2007


Note 12 - S.F.A.S. 69 Supplemental Disclosures (Unaudited) (Continued)

 
 
Oil (Bbls)
 
Gas (Mcf)
 
Proved reserves