Trio Petroleum Corp. — FY2023 Form 10-K
Reporting period: Fiscal year ended October 31, 2023; comparisons are with the year ended October 31, 2022. This is an annual report, not a standalone fourth-quarter report. The company is an early-stage oil and gas explorer with no revenue-generating operations.
Business context and developments
- The company holds an approximately 85.75% working interest and 68.6% net revenue interest in the approximately 9,300-acre South Salinas Project in Monterey County, California. All South Salinas acreage and reserves are classified as undeveloped; the company reported no proved reserves.
- HV-1 was drilled in May 2023 and encountered oil and gas shows, but testing recovered oil and gas without establishing commercial production. The company planned to resume testing HV-3A in Q1 2024 and, subject to funding, drill permitted wells HV-2 and HV-4 during 2024.
- In October 2023, the company acquired an approximately 21.9% working interest in the idle McCool Ranch field from related party Trio LLC. The purchase price is $500,000, primarily for restart work; production was expected to resume in Q1 2024. Revenue proceeds are subject to a contractual payout waterfall, followed by a return to proportional working-interest shares after specified recoveries.
- After year-end, the company paid $200,000 for an immediate 2% interest in the 960-acre Asphalt Ridge leases in Utah. It retains an option to acquire up to 20% for a total purchase price of $2 million, subject to conditions and an option period through August 10, 2024.
Financial results and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $4.61 million | $0.81 million |
| Operating loss | $4.61 million | $0.81 million |
| Net loss | $6.54 million | $3.80 million |
| Net loss per share, basic and diluted | $0.28 | $0.26 |
| Cash used in operating activities | $4.04 million | $0.50 million |
| Cash used in investing activities | $2.19 million | $0 |
| Cash provided by financing activities | $7.71 million | $0.50 million |
- No operating margin is meaningful because the company had no revenue. General and administrative expense rose to $3.31 million from $0.77 million, while stock-based compensation increased to $1.04 million from $6,202. Management attributed the G&A increase mainly to higher legal, salary, consulting, marketing, insurance, and director costs.
- Interest expense declined to $792,000 from $1.66 million, and the prior-year $1.32 million penalty fee did not recur. FY2023 also included a $1.13 million loss on note conversion.
- At October 31, 2023, cash was $1.56 million, current assets were $1.70 million, and current liabilities were $1.85 million. The filing describes working capital as a deficit of $156,045. Total liabilities were $1.90 million, including a convertible note reported net of discounts at $1.22 million. Accumulated deficit was $10.45 million.
- Oil and gas properties, all classified as unproved and not subject to amortization, totaled $9.95 million. There was no impairment recorded at year-end.
- Financing included the April 2023 IPO, which raised $6.0 million gross and approximately $4.94 million net, and an October secured convertible-note tranche of $2.0 million principal, with approximately $1.5 million net proceeds after discount and issuance costs. The note is secured by company assets and specified oil and gas interests.
Material changes and outlook
- Net loss widened by 72% year over year, primarily as operating expenses increased; operating cash use also rose substantially. Financing reduced current liabilities from $6.71 million to $1.85 million, but the company continued to depend on external capital.
- Management said cash on hand and working capital were sufficient for anticipated requirements for the next 12 months, but also concluded that substantial doubt exists about the company’s ability to continue as a going concern. The auditor’s report includes a going-concern explanatory paragraph. Additional funding is needed for planned drilling and development, and future financing is not assured.
- The company disclosed South Salinas reserve estimates prepared by an independent consultant as of October 31, 2021, not updated to the 2023 year-end. Full-field estimates attributable to the company were approximately 45.7 million BOE of Probable (P2) undeveloped reserves and 117.2 million BOE of Possible (P3) undeveloped reserves; corresponding 10%-discounted pre-tax net cash-flow estimates were $407.6 million and $2.0 billion. These are uncertain estimates, not proved reserves or realized cash flows, and P2 and P3 categories should not be added together.
- South Salinas full-field development depends on further permits, including long-term production and water-disposal approvals. The company also anticipates significant capital needs; its stated development plans include substantial drilling and infrastructure investment.
- After year-end, the October financing agreement was amended and a second tranche closed on January 2, 2024: $550,000 principal, $511,500 gross proceeds, a $0.50 conversion price, and a warrant for up to 445,561 shares at an initial $0.50 exercise price, both subject to adjustments.
Risks, contingencies, and unusual items
- Key risks include ongoing losses, no production revenue, reliance on equity and debt financing, possible dilution, oil-price volatility, drilling uncertainty and cost overruns, and dependence on key personnel and contractors.
- Permits for full-field development, long-term production, and on-site water disposal had not been obtained. Delays or denials could constrain production, future drilling, and project economics. Transportation access and negotiations to use existing pipelines also remain uncertain.
- Reserve projections are based on analogues and probabilistic modeling and are especially uncertain given limited production history. The company cautions that actual recoveries, costs, and project economics may differ materially.
- Several transactions involve Trio LLC, whose management and ownership overlap with Trio Petroleum. The McCool Ranch acquisition and other potential asset transactions therefore carry related-party conflict-of-interest considerations. Asphalt Ridge arrangements also involve Lafayette Energy Corp., whose leadership overlaps with company officers and directors.
- The company reported no pending legal proceedings it believes would have a material adverse effect. It reported effective disclosure controls as of year-end; the filing did not include management’s internal-control assessment or an auditor attestation due to the transition period for newly public companies.
Important facts for investors to verify
- Current cash, debt and financing availability—including payment terms, collateral, conversion adjustments, warrant dilution, and whether any further tranche funding is available.
- Whether McCool Ranch production restarted, what net cash flow the company receives under the purchase-price and working-interest payout waterfall, and whether operations meet restart expectations.
- HV-1 and HV-3A test results, commerciality, and the timing, cost, and funding of HV-2/HV-4 and other planned work.
- Status and timing of South Salinas production, water-disposal, and full-field permits, plus the availability and cost of oil and gas transportation.
- Whether updated independent reserve estimates support the 2021 figures, particularly after HV-1 results, and how estimates compare with actual performance and required capital.
- Execution of the Asphalt Ridge option, remaining diligence and closing conditions, total development funding, and potential conflicts from overlapping related-party interests.