General

The accompanying unaudited interim consolidated financial statements of Miller Energy Resources, Inc. (the “Company” or “Miller”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s annual report on Form 10-K, as amended, for the year ended April 30, 2011. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements as reported in the 2011 annual report on Form 10-K, as amended, have been omitted.

Investments

On June 24, 2011, we acquired a 48% minority interest in each of two limited liability companies, Pellissippi Pointe, LLC and Pellissippi Pointe II, LLC for total cash consideration of $399,934.  We have also agreed to indemnify the sellers of the membership interests with respect to their guaranties of the construction loans held by the Pellissippi Pointe entities, but have not become direct guarantors of the loans ourselves.  The gross outstanding amount under the loans is $5,233,947.  The Pellissippi Pointe entities own two office buildings in West Knoxville, Tennessee.  We will be moving our corporate headquarters into the building as soon as the space is ready for our occupancy.  We have executed a five year lease for the space, and with the addition of us, the building will be fully occupied by tenants.  As the Company is in a position to exercise significant influence, but not control the financial and operating policy decisions of the investee, we account for these investments using the equity method.  These investments are included in our unaudited interim consolidated financial statements in “other assets.”

Financial instruments which potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents, accounts receivable and commodity derivative contracts. 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. Bad debt expense was $0 for the three months ended July 31, 2011 and 2010.

The Company periodically enters into oil derivative instruments that fluctuate with the price of a barrel of oil. The Company does not apply hedge accounting and recognizes all gains and losses on such instruments in earnings in the period in which they occur.

As of July 31, 2011 and April 30, 2011, we had $14,595,791 and $11,538,429, respectively, in restricted and unrestricted cash balances in excess of the $250,000 limit insured by the Federal Deposit Insurance Corporation.

The Company depends upon local purchasers of hydrocarbons to purchase its products in the areas where its properties are located.  Tesoro Corporation currently purchases all oil from our Alaska production facilities and accounts for $8,044,395 or 91% and $3,967,620, or 91% of the Company’s total revenue for the three months ended July 31, 2011 and 2010, respectively.  Tesoro Corporation also accounts for  $1,076,051 or 64%, and $745,180, or 50% of accounts receivable as of July 31, 2011 and 2010, respectively.

The U.S. Department of Interior has contracted with us to perform clean up on certain wells in National Parks. The Department of Interior accounted for $182,592, which was 34% of other revenue for the three months ended July 31, 2011.

The Company had an account receivable from a member of the Board of Directors, and his wife, at July 31, 2011 and April 30, 2011 in the amount of $16,637 and $17,822, respectively, for work performed on oil and gas wells. This board member and his wife own partial interests in the oil and gas wells the Company also owns.

In 2009, we formed both Miller Energy GP, LLC and Miller Energy Income 2009-A, LP (“MEI”). MEI was organized to provide the capital required to invest in various types of oil and gas ventures including the acquisition of oil and gas leases, royalty interests, overriding royalty interests, working interests, mineral interests, real estate, producing and non-producing wells, reserves, oil and gas related equipment including transportation lines and potential investments in entities that invest in such assets except for other investment partnerships sponsored by affiliates of MEI. The Company, through a subsidiary, owns 1% of MEI, however due to the shared management of the Company and MEI, we consolidate this entity.

On August 1, 2009, we entered into a marketing agreement with The Dimirak Companies, an affiliate of Dimirak Financial Corp. and Dimirak Securities Corporation, a broker-dealer and member of FINRA. Mr. Boruff, our CEO, is a director and 49% owner of Dimirak Securities Corporation. Under the terms of this agreement, we engaged The Dimirak Companies to serve as our exclusive marketing agent in a $20 million income fund and a $25.5 million drilling offering, which included the MEI offering. The term of the agreement will expire upon the termination of the offerings. We agreed to pay The Dimirak Companies a monthly consulting fee of $5,000, a marketing fee of 2% of the gross proceeds received in the offerings or within 24 months from the expiration of the term of the agreement, a wholesaling fee of 2% of the proceeds and a reimbursement of pre-approved expenses. The agreement contains customary indemnification, non-circumvention and confidentiality clauses.  During the three months ended July 31, 2011 and 2010, respectively, we paid The Dimirak Companies and their affiliates a total of $15,000 and $42,932, respectively, under the terms of this agreement.

On August 27, 2010, we entered into a consulting arrangement with Matrix Group, LLC, an entity through which one of our directors, David J. Voyticky, provides consulting services to us, including assisting us in locating strategic investments and business opportunities.  In the first quarter of fiscal 2012, and prior to his appointment as our President, we paid Matrix Group, LLC $70,000 for consulting services rendered under this arrangement, together with a $250,000 bonus for the successful closing of the Credit Facility (as described in Note 7).  We also reimbursed it $10,000 of related expenses.  Following his appointment as our President, we have terminated the consulting arrangement.  

On July 13, 2011, Cook Inlet Energy, LLC (“CIE”) entered into a consulting agreement with Jexco LLC, an entity owned by Mr. Jonathan Gross, a member of our Board of Directors. Under the terms of this agreement, Jexco LLC provides advice to us in areas related to seismic processing services with contractors located in Houston. The agreement terminates on December 31, 2011 and can be extended upon the consent of the parties. As compensation for the services, we agreed to pay a flat fee of $15,000 for work performed in the Houston metropolitan area and a fee of $2,500 per day for work performed outside of the Houston metropolitan area. We agreed to reimburse Jexco LLC for out of pocket expenses incurred in rendering the services to us. As of July 31, 2011, Jexco LLC had not yet commenced work under this agreement.

Equipment is summarized as follows:

The accounting guidance establishes a fair value hierarchy based on whether the market participant assumptions used in determining fair value are obtained from independent sources (observable inputs) or reflect the Company's own assumptions of market participant valuation (unobservable inputs). A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The accounting guidance establishes three levels of inputs that may be used to measure fair value:

The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and views an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate the Company's or the counterparty's non-performance risk is considered in determining the fair values of liabilities and assets, respectively.

The fair value of our financial instruments at July 31, 2011 and April 30, 2011 follows:

During the three months ended July 31, 2011, the Company participated in fixed price swap commodity derivatives for 300 barrels of oil per day from January 1, 2011 to December 31, 2011 and for 300 barrels of oil per day from May 1, 2011 to April 30, 2012. These instruments are used to manage the inherent uncertainty of future revenues due to oil price volatility. The hedges are priced at $92.13 and $108.25, respectively, per barrel of oil.  The Company has elected not to designate any of its derivative instruments for hedge accounting treatment. As a result, both realized and unrealized gains and losses are recognized in the statement of operations. The asset recorded for these instruments as of July 31, 2011 was $679,207 as the price for a barrel of oil was below the average hedging price of $100.19.

As of July 31, 2011 and April 30, 2011, the Company had 817,055 warrants with exercise price reset provisions, which are considered freestanding derivative instruments which are required to be recorded as liabilities as they are not afforded equity treatment.

The non-current portion of the derivative liability as of April 30, 2011 and July 31, 2011 of $2,732,659 and $2,062,831 relates to 817,055 warrants issued and outstanding in connection with an equity financing in March 2010. The warrants expire in March 2015 so the related fair value of this derivative has been recorded as a non-current liability. The Company utilized the Black-Scholes pricing model with the following weighted average assumptions as of April 30, 2011 and July 31, 2011: risk-free rate of 1.45% and 0.68%, an expected term of 3.91 years and 3.65 years, expected volatility of 77.0% and 88.7%  and a dividend rate of 0.0%.

During the three months ended July 31, 2011 and 2010, the Company recorded gains on derivatives, net, as follows:

For the three months ended July 31, 2011, the gain on derivatives, net of $3,755,656 consisted of $3,654,153 related to the change in fair value and $101,503 related to realized cash settlements.

At July 31, 2011, the estimated fair value of accounts receivable, prepaid expenses, accounts payables and accrued liabilities approximates their carrying value due to their short-term nature. The estimated fair value of the Company’s long-term debt at July 31, 2011 approximates the respective carrying value because the interest rate approximates the current market rate.

On December 27, 2010, we obtained a $5,000,000 line of credit from PlainsCapital Bank.  Our Chairman and CEO pledged personally owned Company stock to secure this 6% short-term bank note, due July 5, 2011.  As of April 30, 2011, the principal balance of the note was $2,000,000. The note was paid in full on June 16, 2011.

On June 13, 2011, the Company entered into a loan agreement (the “Loan Agreement”) with Guggenheim Corporate Funding, LLC (“Guggenheim”), as administrative agent, arranger and lender and Citibank, N.A. and Bristol Investment Fund as lenders.  The loan agreement provides for a credit facility of up to $100 million (the “Credit Facility”) with an initial borrowing base of $35 million. The Credit Facility is secured by substantially all the assets of the Company and its subsidiaries.

Amounts outstanding under the Credit Facility bear interest at a rate per annum equal to the higher of 9.5% or the prime rate plus 4.5%. In addition, the Company is required to pay an additional make-whole payment upon termination or payment in full of the Credit Facility, bringing the interest rate to 25% in the event the amounts are paid by June 30, 2012, 30% in the event repayment is made between July 1 and December 31, 2012, and 35% if payment is made on or after January 1, 2013.  The Company is recording interest expense, using the effective interest method, assuming an interest rate of 35%.

Although the Loan Agreement doesn’t mature until June 13, 2013, the Company is required to make monthly repayments based on 90% of its consolidated monthly net revenues (after deducting general and administrative expenses to the extent permitted by the Loan Agreement) beginning on October 10, 2011.  In addition, proceeds of certain asset sales and indebtedness and other proceeds received outside the ordinary course of business are required to be used to repay amounts outstanding under the Credit Facility.  As a result, the Company has classified amounts outstanding under the Loan Agreement as of July 31, 2011 as a current liability in the accompanying consolidated balance sheet.

Draws under the Credit Facility are subject to the discretion of Guggenheim and the other lenders.  The borrowing base is redetermined on a scheduled basis twice per year, and more often at the request of the Company or the required lenders.  The redetermination of the borrowing base is at the discretion of the lenders.  The Loan Agreement contains interest coverage, asset coverage and minimum gross production covenants, as well as other affirmative and negative covenants.  In connection with the Loan Agreement, the Company has granted Guggenheim a right of first refusal to provide financing for the acquisition, development, exploration or operation of any oil and gas related properties including wells during the term of the Credit Facility and one year thereafter.

Upon an event of default under the Loan Agreement, all amounts outstanding become immediately due and payable; the lenders may stop making advances under the Credit Facility and may terminate the agreement.  An “event of default” includes, among other things, our failure to pay any amounts when due, our failure to perform under or observe any term, covenant or provision of the Loan Agreement, the occurrence of a Material Adverse Change (as that term is defined in the Loan Agreement), the seizure of or levy upon our assets or properties, our insolvency or bankruptcy, judgments against us in excess of certain amounts, defaults under certain other agreements, the limitation or termination of the any of the guarantors, which includes the Company and all of its subsidiaries, under the Guarantee and Collateral Agreement, the death or incapacitation of either Mr. Scott Boruff or Mr. David Hall, or if either of them cease to be substantially involved in our operations or the breach or termination of the Shareholders Agreement described below.

On the closing date of the Loan Agreement, we paid Guggenheim, ratably for the benefit of the lenders a non-refundable facility fee of $700,000.  We also agreed to pay a non-refundable fee of 2% on increase in the borrowing base from the borrowing base limit then in effect.  At closing we paid Guggenheim a non-refundable fee of $30,000 and agreed to pay annual additional fees in this amount so long as the Loan Agreement remains in effect.  A finder’s fee of 3% of the initial borrowing base of $35 million to Bristol Capital, LLC, a consultant to us and an affiliate of Bristol Investment Fund, Ltd., was also due. To honor this obligation, we issued 100,000 shares of the Company’s restricted stock to Bristol Capital, LLC and agreed to a cash payment of $750,000,  the remaining $250,000 of which was paid subsequent to July 31, 2011.  Such amounts, which total $1,050,000, are included in deferred financing costs along with $1,454,099 of additional costs that have been incurred to complete the financing, and will be amortized into interest expense over the term of the Loan Agreement.

In connection with the Loan Agreement, the Company also entered into a certain Shareholders’ Agreement (the “Shareholders’ Agreement”), dated June 13, 2011, with Scott M. Boruff, Paul W. Boyd, David Hall, Deloy Miller and David Voyticky (the “Shareholders”). The Shareholders’ Agreement provides that the Shareholders may not transfer their shares of common stock of the Company while the loans under the Credit Facility are outstanding, subject to certain exceptions for Messrs. Deloy Miller and Paul W. Boyd. Specifically, Mr. Miller is permitted to transfer a number of shares of our common stock beneficially owned by him which does not exceed the lesser of (a) 2,500,000 shares of common stock, and (b) a number of shares necessary for him to receive net proceeds equal to $10 million, provided that simultaneous with such transfer the Company receives net proceeds from a new issuance of its securities equal to two times the net proceeds received by Mr. Miller and Mr. Miller transfers the shares at the same price and for the same consideration as received by the Company from such new issuance.  Mr. Boyd is permitted to exercise outstanding options to purchase 250,000 shares of the Company’s common stock which expire in September 2011 and to transfer the shares of common stock obtained upon such exercise.  There are no permitted exceptions for the transfer of shares by Messrs. Boruff, Hall or Voyticky.

On August 26, 2011, we entered into the First Amendment to Loan Agreement and Limited Waiver (the “Amendment”) with our lenders under our Credit Facility.  The Amendment revises certain timelines in the Loan Agreement with respect to repayment, provides for an increase of 2% in the applicable margin in certain circumstances, waives certain events of default, lengthens certain reporting deadlines, and revises the make-whole premium. See Note 17 for additional discussion regarding the Amendment.

The Company expects to use the proceeds of the loans made under the Credit Facility to increase oil production both onshore and offshore in Alaska through the drilling of new wells and the reworking of previously producing oil wells and for the purchase of a new drilling rig.  The first three draws, totaling $23,118,691, have been used to make progress payments under the rig contract, to pay off our line of credit with PlainsCapital Bank, and to pay fees associated with the transaction, such as attorney’s fees.

The following table summarizes the Company’s asset retirement obligations transactions during the three months ended July 31, 2011:

During the three months ended July 31, 2011, we issued 869,000 shares from the exercise of equity rights.

During the three months ended July 31, 2010, we issued 1,164,489 shares, which included four warrant holders who exercised warrants for 177,600 shares in a cashless exercise that netted them 142,286 shares, three warrant holders who exercised warrants for 76,750 shares with an exercise price of $1.00, and nine note holders who converted $520,000 of their 6% secured convertible notes at a conversion rate of $0.55 and were issued 945,453 shares.

The Company’s Equity Compensation Plan (the “Plan”) enables the Company to offer its employees, officers, directors and consultants an opportunity to acquire a proprietary interest in the Company, and to enable the Company to attract, retain, motivate and reward such persons in order to promote the success of the Company.  The 2010 and 2011 Plans, respectively, authorized 3,000,000 and 8,250,000 shares of common stock.  The Plan allows for the issuance of incentive stock options and nonqualified stock options.  Stock options may not be granted with an exercise price less than the fair market value on the grant date.  For stockholders that own more than 10% of the Company’s common stock, incentive stock options granted must have an exercise price that is at least 10% higher than the fair market value on the grant date.  Stock options granted under the Plan have a term of 10 years except for incentive  stock options granted to stockholders that own more than 10% of the Company’s common stock.  Such options have a term of 5 years.  Vesting provisions are determined by the Compensation Committee of the Board of Directors (“Compensation Committee”).  All awards issued under the Plan must be approved by the Compensation Committee.  At July 31, 2011, there were 1,695,000 additional shares available for the Company to grant under the 2011 Plan.

The Company recorded $2,497,936 and $844,534 of employee non-cash compensation expense related to stock options for the three months ended July 31, 2011 and 2010, respectively. Employee share-based non-cash compensation expense is included in our consolidated statement of operations in “general and administrative” which is the same financial statement caption where we recognize cash compensation paid to these employees. The impact on our basic earnings (loss) per share that resulted from employee share-based non-cash compensation is $(0.06) and $(0.03) for the three months ended July 31, 2011 and 2010, respectively.  The grant date fair value of employee stock options and warrants granted during the three months ended July 31, 2011 and 2010 was $12,941,631 and $992,732, respectively.  The weighted average grant date fair value of employee stock options and warrants granted during the three months ended July 31, 2011 and 2010 was $3.52 and $3.05, respectively.  We estimated the grant date fair value of employee stock options and warrants using the Black-Scholes pricing model with the following weighted average assumptions for the three months period ended July 31, 2011 and 2010:

During the three months ended July 31, 2011, the Company also recorded $218,267 of non-employee non-cash equity related expense for services related to  warrants.  These expenses are included in our consolidated statement of operations in “general and administrative”  and are recognized over the requisite service period.  The grant date fair value of the 300,000 non-employee warrants granted was estimated to be $1,122,512 based on the Black-Scholes pricing model with the following weighted average assumptions:

There were no non-employee warrants granted during the three months ended July 31, 2010.

A summary of the stock options and warrants as of July 31, 2011 and 2010 and changes during the periods is presented below:

The following table summarizes stock options and warrants outstanding and exercisable as of July 31, 2011:

The aggregate intrinsic value of stock options and warrants exercised during the three months ended July 31, 2011 and 2010 was $11,162,299 and $4,132,221, respectively.  The aggregate intrinsic value was calculated as the difference between the exercise price of the underlying awards and the quoted price of our common stock for those awards that had an exercise price below the quoted price on the exercise date.  During the three months ended July 31, 2011 and 2010, we received cash of $1,283,000 and $76,749 for options and warrants exercised.  As of July 31, 2011, we have unrecognized non-cash share-based compensation expense of $24,273,986 with a weighted average term of 2.8 years, over which the expense will be recognized.

The Company has a significant deferred income tax liability recorded related to the excess of the book carrying value of oil and gas properties over their collective income tax bases.  This difference will reverse (through lower tax depletion deductions) over the remaining recoverable life of the properties, resulting in future taxable income in excess of income for financial reporting purposes.  As an independent producer of domestic oil and gas, the Company takes advantage of certain provisions in the Internal Revenue Code allowing for expensing of certain intangible drilling and development costs that are capitalized for book purposes. This temporary difference also reverses over the remaining life of the properties. As a result of these elections, the Company presently has a net operating loss carryover that management expects to be fully utilized against future taxable income.

In August 2008 we engaged a broker-dealer and member of FINRA to assist us in raising capital by means of a private placement of securities. As initial compensation for their services, we paid a $25,000 retainer and issued 250,000 shares of our common stock, valued at $115,000 and agreed to pay a monthly consulting fee of $5,000. In the event that we successfully complete a private offering we would be obligated to pay the firm certain cash compensation and issue them up to an additional 150,000 shares of our common stock in amounts to be determined based upon the gross proceeds received by us from the financing.

As of July 31, 2011, we have $475,000 in exploration work commitments arising out of two leases over 534,383 acres located in the Susitna River Basin in Alaska. These commitments require the Company to invest in exploration efforts on those leases.

On November 5, 2009, CIE entered into an Assignment Oversight Agreement with the Alaska Department of Natural Resources (“DNR”) which set our certain terms under which the Alaska DNR would approve the assignment of certain specified state oil and gas leases from Pacific Energy Resources to CIE. This agreement remains in place following our acquisition of CIE in December 2009. Generally, the agreement requires CIE to provide the Alaska DNR with additional information and oversight authority to ensure that CIE is acting diligently to develop the oil and gas from Redoubt Shoal, West McArthur River Field and West Foreland Field. Under the terms of the agreement, until the Alaska DNR determines, in its sole discretion, that CIE has completed its development and operation obligations under the assigned leases, CIE agreed to the following:

The agreement required CIE to obtain financing in the minimum amount of $5,150,000 to provide funds to be used for expenditures approved by the Alaska DNR as part of CIE’s plan of development. The funds are to be used for workover and repair of the wells, repair of the physical infrastructure, and construction of a grind and inject plant at the West McArthur River facility, normal operating expenses associated with the leases and infrastructure and other capital project which are to be pre-approved by the Alaska DNR. The agreement also required CIE to demonstrate funding commitments to support restoration of the base production at the Redoubt Unit, including bringing a number of the shut-in wells back on line, which was estimated at $31 million in the agreement but which we have internally increased to $35 million to accommodate the purchase of a drilling right. We have subsequently provided these funds for the West McArthur River facility using a portion of the proceeds of our capital raising efforts described elsewhere herein, and intend to seek alternative sources of funding for the balance of the necessary capital.

CIE is prohibited from using any of the proceeds from the operations under the assigned leases of the funding commitments for non-core oil and gas activities under the assigned leases, or any activities outside the assigned leases, without the prior written approval of the Alaska DNR until the parties mutually agree that the full dismantlement obligation under the assigned leases is funded. The assigned leases will be subject to default and termination should CIE fail to submit the information required under the agreement and expenditure of funds for items or activities do not support core oil and gas activities, as reasonably determined by the Alaska DNR.

The Company qualifies for several credits under Alaska statute 43.55.023:

The Company recognizes a receivable when the amount of the credit is reasonably estimable and receipt is probable of occurrence (based on actual qualifying expenditures incurred). For expenditure and exploration based credits, the credit is recorded as a reduction to the related assets. For carried-forward annual loss credits, the credit is recorded as a reduction to the Alaska production tax. To the extent the credit amount exceeds the Alaska production tax, the credit is recorded as a reduction to general and administrative expenses.

As of April 30, 2011 and July 31, 2011, the Company has reduced the basis of capitalized assets by $3,658,354 for expenditure and exploration credits. Such reductions are recorded on our consolidated balance sheet in “oil and gas properties.” As of April 30, 2011and July 31, 2011, the Company had an outstanding receivable balance from Alaska in the amount of $3,620,336 for a credit application submitted on April 19, 2011.

On October 8, 2009, we filed an action styled Miller Petroleum, Inc. v. Maynard, Civil Action No. 9992 in the Chancery Court for Scott County, Tennessee, seeking a declaratory judgment that there has been continuing commercial production of oil, and oil and gas lease owned by us is still in full force and effect. The defendant filed an Answer and Counterclaim, seeking in the Counterclaim a declaration that the oil and gas lease has expired. Although no compensatory monetary damages have been sought against us, the Counterclaim does seek attorney fees, expenses and costs. On October 27, 2010, a temporary injunction was granted allowing us access to the property at issue in this case. We are presently conducting discovery.

On May 11, 2011, the Court of Appeals of Tennessee at Knoxville returned its opinion in the case styled CNX Gas Company, LLC v. Miller Petroleum, Inc., et al.  As previously reported, CNX Gas Company, LLC (“CNX”) commenced litigation on June 11, 2008 in the Chancery Court of Campbell County, State of Tennessee to enjoin us from assigning or conveying certain leases described in the Letter of Intent signed by CNX and our company on May 30, 2008, to compel us to specifically perform the assignments as described in the Letter of Intent, and for damages. After the trial court granted the motion for summary judgment of the company and other party defendants and dismissed the case, finding that there were no genuine issues of material fact and we were entitled to judgment as a matter of law, CNX appealed.  All parties filed briefs and the Court of Appeals heard oral arguments on May 18, 2010.  In its May 11, 2011 opinion, the Court of Appeals reversed the trial court’s grant of summary judgment in favor of our company and the other party defendants, and remanded the case back to the trial court for further proceedings.  On July 28, 2011, the case was dismissed without prejudice on the motion of CNX.  Subsequent to the balance sheet date, CNX filed another law suit against the Company (see Note 17).

On May 17, 2011, we were served with a lawsuit filed in the United States District Court for the Eastern District of Tennessee at Knoxville by Troy D. Stafford, the former Chief Financial Officer of our wholly owned subsidiary, Cook Inlet Energy, LLC.  The suit, styled Troy D. Stafford v. Miller Petroleum, Inc., Civil Action No. 3-11CV-206, claims that we terminated Mr. Stafford’s employment without cause in contravention of the terms of the Purchase and Sale Agreement between us and the sellers of CIE (“PSA”), failed or refused to pay his salary, severance, percentage of purchase price, expenses or stock warrant and violated a duty of good faith and fair dealing. The suit seeks damages in excess of $3,000,000, which includes $2,686,700 of damages for loss of vested warrants. We believe the all of the asserted claims are baseless, particularly in view of the fact that we issued the warrants in accordance with the terms of the PSA.  We believe that we had appropriate cause to fire Mr. Stafford after discovering that he had breached certain representations and warranties in the PSA, and had acted in violation of our Code of Conduct. We intend to vigorously defend this action.

On June 15, 2011, a breach of contract lawsuit was filed against us and CIE in the United States District Court for the Eastern District of Pennsylvania styled VAI, Inc. v. Miller Energy Resources, Inc., f/k/a Miller Petroleum, Inc. and Cook Inlet Energy, LLC. The Plaintiff alleges three causes of action: (1) breach of contract, (2) unfair enrichment, and (3) breach of the implied covenant of good faith and fair dealing. The case seeks damages in warrants to purchase our common stock and monetary damages for certain fees and expenses. The Sale Agreement with David Hall, Walter “JR” Wilcox, and Troy Stafford dated December 10, 2009 contains indemnification provisions relevant to this claim. We have filed a Motion to Dismiss for lack of personal jurisdiction.

Subsequent to our first quarter fiscal 2012, we were named as defendants in several class action lawsuits (see Note 17).

We are also party to various routine legal proceedings arising in the ordinary course of our business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.

In May 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 generally provides a uniform framework for fair value measurements and related disclosures between GAAP and International Financial Reporting Standards (“IFRS”). Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation process used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. This update is effective for annual and interim periods beginning on or after December 15, 2011. We are currently evaluating the effect of ASU 2011-04 on our financial statements and related disclosures.

During our fiscal 2011 third quarter ended January 31, 2011, we identified misstatements related to our interim unaudited consolidated balance sheet as of July 31, 2010, and our unaudited consolidated statements of operations and cash flows for the three month period then ended. As a result, we restated our interim unaudited consolidated financial statements for the three months ended July 31, 2010 in our fiscal 2011 third quarter Form 10-Q filed with the SEC on March 22, 2011.  During our fiscal 2011 fourth quarter ended April 30, 2011, we identified additional misstatements that related to our interim unaudited consolidated balance sheet as of July 31, 2010, and our interim unaudited consolidated statements of operations and cash flows for the three month period then ended.  As a result, we reported a second restatement of our interim unaudited consolidated financial statements for the three months ended July 31, 2010 in our fiscal 2011 Form 10-K filed with the SEC on August 29, 2011.  A summary of the corrected misstatements is as follows:

The following is a summary presentation of corrections made to the Company’s interim unaudited consolidated balance sheet as of  July 31, 2010, as previously reported in the restatement footnote that was included in the Company’s Form 10-Q for the fiscal 2011 third quarter, filed with the SEC on March 22, 2011:

The following is a summary presentation of corrections made to the Company’s interim unaudited consolidated statement of operations for the quarter ended July 31, 2010, as previously reported in the restatement footnote that was included in the Form 10-Q for the fiscal 2011 third quarter, filed with the SEC on March 22, 2011:

The following is a summary presentation of corrections made to the Company’s unaudited consolidated statement of cash flows for the quarter ended July 31, 2010, as previously reported in the Company’s Form 10-Q for the fiscal 2011 first quarter, filed with the SEC on September 13, 2010 (the interim unaudited consolidated statement of cash flows was not presented in the restatement footnote that was included in the fiscal 2011 third quarter Form 10-Q filed with the SEC on March 22, 2011, due to the fact that the restatement adjustments have no impact on net cash provided by operating activities, net cash used by investing activities, or net cash provided by financing activities):

On August 26, 2011, we entered into the Amendment with our lenders under the Credit Facility.  The Amendment revises certain timelines in the Loan Agreement with respect to repayment, imposes additional reporting requirements on us, provides for an increase of 2% in the applicable margin in certain circumstances, waives certain events of default, lengthens certain reporting deadlines, and revises the make-whole premium.  The Amendment also makes delisting from the New York Stock Exchange an event of default.

Beginning October 10, 2011, we are required to use 90% of our Consolidated Net Revenues (as defined in the Loan Agreement) to pay certain fees and expenses, interest, and finally, the outstanding principal under the Loan.  Consolidated Net Revenues do not include certain operating costs, such as royalty interests and lease operating costs, and up to $750,000 will be allocated to our general and administrative expenses.  Should a default exist, this amount would be 100% of our Consolidated Net Revenues.  Should we fail to satisfy certain requirements related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002 by April 30, 2012, our interest rate will increase by 2%.

The deadlines for delivery of our next two quarterly financial statements has been extended to 60 days, and the deadline for delivery of our audited financial statements at our fiscal year end has been extended to 90 days.  The make-whole premium has been revised so as not to include the waiver fee of $115,593 payable in connection with the Amendment or any payments of increased interest due to a default.

We were required under the terms of the Loan Agreement to deliver audited financial statements for our fiscal year ended April 30, 2011 to the lenders within 75 days of the end of our fiscal year, together with certain additional compliance certificates and reports.  We did not deliver the required documents within that the timeframes required under the Loan Agreement.  Subsequent thereto, upon our satisfaction of certain conditions in the Amendment, including the delivery of our audited financial statements together with certain additional compliance certificates and reports to the lenders, these limited events of default under the Loan Agreement were waived and no event of default exists under the Loan Agreement.

On August 4, 2011, a breach of contract case was filed against us in the United States District Court for the Eastern District of Tennessee.  The case, styled CNX Gas Company, LLC v. Miller Energy Resources, Inc., Chevron Appalachia, LLC as successor in interest to Atlas America, LLC Cresta Capital Strategies, LLC and Scott Boruff, arises from the same allegations as the previous action filed in state court and voluntarily dismissed on July 28, 2011.  The federal case seeks money damages from us for breach of contract; however, unlike the previous action, it does not seek specific performance of the assignments at issue.  The Plaintiff claims that the other defendants tortuously interfered with, or induced the breach of, the letter of intent between us and the Plaintiff.  We are drafting a responsive pleading and intend to vigorously defend this suit.

On August 12, 2011, a lawsuit was filed against us in the United States District Court for the Eastern District of Tennessee.  The case, styled Ruben Husu, Individually and on behalf of all others similarly situated v. Miller Energy Resources, Inc. f/k/a Miller Petroleum, Inc., Scott M. Boruff, and Paul W. Boyd was filed on August 12, 2011.   The Company has not yet been served with the suit, and cannot predict when or whether effective service may be made.  The Plaintiff alleges two causes of action against the Defendants: (1) violation of Section 10(b) and Rule 10b-5 of the Exchange Act, (2) violation of Section 20(a) of the Exchange Act.  The case seeks money damages against the Company and the other defendants, and payment of the Plaintiffs’ attorney’s fees.  We have retained DLA Piper LLP to defend us in this action.

On August 16, 2011, a lawsuit was filed against us in the United States District Court for the Eastern District of Tennessee.  The case, styled James D. DiCenso, Individually and on behalf of all others similarly situated v. Miller Energy Resources, Inc. f/k/a Miller Petroleum, Inc., Deloy Miller, Scott M. Boruff, and Paul W. Boyd and David J. Voyticky.  The Company has not yet been served with the suit, and cannot predict when or whether effective service may be made.  The Plaintiff alleges two causes of action against the Defendants: (1) violation of Section 10(b) and Rule 10b-5 of the Exchange Act, (2) violation of Section 20(a) of the Exchange Act.  The case seeks money damages against the Company and the other defendants, and payment of the Plaintiffs’ attorney’s fees.  We have retained DLA Piper LLP to defend us in this action.

On August 18, 2011, a lawsuit was filed against us in the United States District Court for the Eastern District of Tennessee. The case is styled Yingtao Liu, Individually and on behalf of all others similarly situated v. Miller Energy Resources, Inc. f/k/a Miller Petroleum, Inc., Scott M. Boruff, Paul W. Boyd, Deloy Miller, David J. Voyticky, Herman Gettelfinger, Jonathan S. Gross, David M. Hall, Merrill A. McPeak, Charles Stivers, and Don A. Turkleson . The Company has not yet been served with the suit, and cannot predict when or whether effective service may be made. The Plaintiff alleges two causes of action against the Defendants: (1) violation of Section 10(b) and Rule 10b-5 of the Exchange Act, (2) violation of Section 20(a) of the Exchange Act. The case seeks unspecified money damages against the Company and the other defendants, and payment of the Plaintiffs’ attorney’s fees. We have engaged DLA Piper LLP to defend us in this action.

On August 16, 2011, a lawsuit was filed in the United States District Court for the Eastern District of Tennessee.  The case is styled Steven Arlow, Individually and on behalf of all others similarly situated v. Miller Energy Resources, Inc. f/k/a Miller Petroleum, Inc., Scott M. Boruff, and Paul W. Boyd.  The Company has not yet been served with the suit, and cannot predict when or whether effective service may be made.  The Plaintiff alleges two causes of action against the Defendants: (1) violation of Section 10(b) and Rule 10b-5 of the Exchange Act, (2) violation of Section 20(a) of the Exchange Act.  The cases seek unspecified money damages against the Company and the other defendants, and payment of the Plaintiffs’ attorney’s fees.  We have retained DLA Piper to defend us in this action.

On August 19, 2011, a lawsuit was filed in the United States District Court for the Eastern District of Tennessee.  The case is styled Brandon W. Ward, Individually and on behalf of all others similarly situated v. Miller Energy Resources, Inc. f/k/a Miller Petroleum, Inc., Scott M. Boruff, and Paul W. Boyd. The Company has not yet been served with the suit, and cannot predict when or whether effective service may be made.  The Plaintiff alleges two causes of action against the Defendants: (1) violation of Section 10(b) and Rule 10b-5 of the Exchange Act, (2) violation of Section 20(a) of the Exchange Act.  The cases seek unspecified money damages against the Company and the other defendants, and payment of the Plaintiffs’ attorney’s fees.  We have retained DLA Piper to defend us in this action.

On August 23, 2011, a derivative action was filed against us in Knox County Chancery Court.  The case is styled Marco Valdez, derivatively on behalf Miller Energy Resources, Inc. v. Deloy Miller, Scott M. Boruff, Jonathan S. Gross, Herman Gettelfinger, David Hall, Merrill A. McPeak, Charles M. Stivers, Don A., Turkleson, and David J. Voyticky, and Miller Energy Resources, Inc., nominal defendant.  The suit alleges the following causes of action: (1) Breach of Fiduciary Duty for disseminating false and misleading information; (2) Breach of Fiduciary Duty for failure to maintain internal controls; (3) Breach of Fiduciary Duty for failing to properly oversee and manage the company; (4) Unjust Enrichment; (5) Abuse of Control; Gross Mismanagement, and; (6) Waste of Corporate Assets.  The Plaintiff seeks unspecified money damages from the individual defendants, that the Company take certain actions with respect to its management, restitution to the Company, and the Plaintiff’s attorney fees and costs.  The Company has not yet been served with the suit, and cannot predict when or whether effective service may be made.  The Company intends to vigorously defend the suit.

On August 25, 2011, a derivative action, styled Jacquelyn Flynn, derivatively on behalf Miller Energy Resources, Inc. v. Scott M. Boruff, Paul W. Boyd, Deloy Miller, Jonathan S. Gross, Herman Gettelfinger, David Hall, Merrill A. McPeak, Charles M. Stivers, Don A., Turkleson, and David J. Voyticky, and Miller Energy Resources, Inc., nominal defendant, was filed in the District Court for the Eastern District of Tennessee.  It contains substantially similar claims as Valdez.  The suit alleges the following causes of action: (1) Breach of Fiduciary Duty for disseminating false and misleading information; (2) Breach of Fiduciary Duty for failure to maintain internal controls; (3) Breach of Fiduciary Duty for failing to properly oversee and manage the company; (4) Unjust Enrichment; (5) Abuse of Control; Gross Mismanagement, and; (6) Waste of Corporate Assets.  The Plaintiff seeks unspecified money damages from the individual defendants, that the Company take certain actions with respect to its management, restitution to the Company, and the Plaintiff’s attorney fees and costs.  The Company has not yet been served with the suits, and cannot predict when or whether effective service may be made.  The Company intends to vigorously defend the suit.

On August 31, 2011, a derivative action, styled Patrick P. Lukas, derivatively on behalf Miller Energy Resources, Inc. v. Merrill A. McPeak, Scott M. Boruff, Deloy Miller, Jonathan S. Gross, Herman Gettelfinger, David Hall, Charles M. Stivers, Don A., Turkleson, and David J. Voyticky, and Miller Energy Resources, Inc., nominal defendant, was filed in the District Court for the Eastern District of Tennessee.  It contains substantially similar claims as the other two purported derivative actions.  The suit alleges the following causes of action: (1) Breach of Fiduciary Duty for disseminating materially false and misleading information; (2) Breach of Fiduciary Duty for failing to properly oversee and manage the company; (3) Unjust Enrichment; (4) Abuse of Control; (5) Gross Mismanagement and Waste of Corporate Assets.  The Plaintiff seeks unspecified money damages from the individual defendants, that the Company take certain actions with respect to its management, restitution to the Company, and the Plaintiff’s attorney fees and costs.  The Company has not yet been served with the suit, and cannot predict when or whether effective service may be made.  The Company intends to vigorously defend the suit.