UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
quarterly period ended June 30, 2012.
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
transition period from
to
.
Commission file number: 000-29321
ALLIED RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Nevada
000-31390
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
1403 East 900 South, Salt Lake City, Utah 84105
(Address of principal executive offices) (Zip Code)
(801) 582-9609
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 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 the
past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web
site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date. The number of shares outstanding of the issuer’s common stock, $0.001 par value (the only
class of voting stock), at August 14, 2012, was 5,653,011.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements ............................................................................................................... 3
Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011 (audited) ................ 4
Unaudited Condensed Statements of Operations for the three and six month periods ended
June 30, 2012 and June 30, 2011 ............................................................................................ 5
Unaudited Condensed Statements of Cash Flows for the six month periods ended
June 30, 2012 and June 30, 2011 ............................................................................................ 6
Condensed Notes to Unaudited Financial Statements ............................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .....................................................................................................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................................. 15
Item 4. Controls and Procedures ......................................................................................................... 16
PART II – OTHER INFORMATION
Item 1. Legal Proceedings................................................................................................................... 17
Item 1A. Risk Factors ............................................................................................................................ 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................................................. 21
Item 3. Defaults upon Senior Securities .............................................................................................. 21
Item 4. Mine Safety Disclosures ......................................................................................................... 21
Item 5. Other Information ................................................................................................................... 21
Item 6. Exhibits................................................................................................................................... 21
Signatures ............................................................................................................................................... 22
Index to Exhibits ..................................................................................................................................... 23
2
PART I – FINANCIAL INFORMATION
ITEM 1.
As used herein, the terms “Allied,” “we,” “our,” “us,” “it,” and “its” refer to Allied Resources, Inc., a
Nevada corporation, unless otherwise indicated. In the opinion of management, the accompanying
unaudited financial statements included in this Form 10-Q reflect all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the results of operations for the periods
presented. The results of operations for the periods presented are not necessarily indicative of the results
to be expected for the full year.
3
ALLIED RESOURCES, INC.
June 30,
December 31,
2012
2011
ASSETS
(Unaudited)
(Audited)
Current assets:
Cash
$
1,353,351
1,295,901
Accounts receivable
57,915
72,656
Total current assets
1,411,266
1,368,557
Oil and gas properties (proven), net (successful
efforts method)
751,653
800,744
Deposits
704,701
704,701
Total assets
$
2,867,620
2,874,002
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
39,729
19,226
Total current liabilities
39,729
19,226
Asset retirement obligation
198,172
195,382
Total liabilities
237,901
214,608
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value; 50,000,000 shares
authorized, 5,653,011 issued and outstanding
5,653
5,653
Additional paid-in capital
9,877,828
9,858,512
Accumulated deficit
(7,253,762)
(7,204,771)
Total stockholders' equity
2,629,719
2,659,394
Total liabilities and stockholders' equity
$
2,867,620
2,874,002
The accompanying notes are an integral part of these financial statements
4
ALLIED RESOURCES, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended
Six Months Ended
June 30,
June 30,
2012
2011
2012
2011
Oil and gas revenues
$
169,142
113,130
289,850
270,318
Operating expenses:
Production costs
87,018
87,010
162,670
180,483
Depletion and amortization
24,601
23,970
49,091
46,862
General and administrative expenses
57,198
56,256
129,645
127,378
168,817
167,236
341,406
354,723
Income (loss) from operations
325
(54,106)
(51,556)
(84,405)
Interest income
1,727
2,180
2,565
3,816
Income (loss) before benefit from
income taxes
2,052
(51,926)
(48,991)
(80,589)
Benefit from income taxes - deferred
-
(22,000)
-
(28,000)
Net income (loss)
$
2,052
(29,926)
(48,991)
(52,589)
Loss per common share -
basic and diluted
$
-
(0.01)
(0.01)
(0.01)
Weighted average common shares -
basic and diluted
5,653,000
5,653,000
5,653,000
5,653,000
The accompanying notes are an integral part of these financial statements
5
ALLIED RESOURCES, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2012 and 2011
2012
2011
Cash flows from operating activities:
Net loss
$
(48,991)
(52,589)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depletion and amortization
49,091
46,862
Stock option compensation expense
19,316
19,316
Accretion expense
2,790
4,620
Deferred tax asset
-
(28,000)
Decrease in accounts receivable
14,741
20,907
Increase accounts payable
20,503
14,637
Net cash provided by operating activities
57,450
25,753
Cash flows from investing activities:
-
-
Cash flows from financing activities:
-
-
Net increase in cash
57,450
25,753
Cash, beginning of period
1,295,901
1,311,002
Cash, end of period
$
1,353,351
1,336,755
The accompanying notes are an integral part of these financial statements
6
ALLIED RESOURCES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 2012
Note 1 – Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared by management in
accordance with the instructions in Form 10-Q and, therefore, do not include all information and
footnotes required by generally accepted accounting principles and should, therefore, be read in
conjunction with the Company’s Form 10-K for the year ended December 31, 2011, filed with the
Securities and Exchange Commission. These statements do include all normal recurring adjustments
which the Company believes necessary for a fair presentation of the statements. The interim operations
are not necessarily indicative of the results to be expected for the full year ended December 31, 2012.
Note 2 – Additional Footnotes Included By Reference
There have been no material changes in the information disclosed in the notes to the financial statements
included in the Company’s Form 10-K for the year ended December 31, 2011, filed with the Securities
and Exchange Commission. Therefore, those footnotes are included herein by reference.
Note 3 – Subsequent Events
The Company evaluated its June 30, 2012 financial statements for subsequent events through the date the
financial statements were issued. The Company is not aware of any subsequent events which would
require recognition or disclosure in the financial statements.
7
I T E M 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other
parts of this quarterly report contain forward-looking statements that involve risks and uncertainties.
Forward-looking statements can also be identified by words such as “anticipates,” “expects,” “believes,”
“plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future
performance and our actual results may differ significantly from the results discussed in the forward-
looking statements. Factors that might cause such differences include but are not limited to those
discussed in the subsection entitled Forward-Looking Statements and Factors That May Affect Future
Results and Financial Condition below. The following discussion should be read in conjunction with our
financial statements and notes thereto included in this report. Our fiscal year end is December 31. All
information presented herein is based on the three and six month periods ended June 30, 2012.
ALLIED
Allied is an independent oil and natural gas producer involved in the exploration, development,
production and sale of oil and gas derived from properties located in Calhoun and Ritchie Counties, West
Virginia, and Goliad, Edwards and Jackson Counties, Texas.
Discussion and Analysis
General
Allied intends to utilize available cash to acquire additional oil and gas producing properties and to
implement improved production practices on existing wells to increase production and expand reserves
where practicable. Allied believes that it can achieve production growth while expanding reserves through
improved exploitation of its existing inventory of wells by disposing of non-productive wells and
enhancing producing wells. An evaluation for this objective of our existing portfolio of oil and gas
properties is constantly under consideration. Allied also intends to continue to expand non-operated and
initiate operated acquisitions of additional oil or gas producing properties.
Recovery from producing wells is consistently evaluated to consider cost-efficient work-over methods
designed to improve the performance of the wells. When considering the drilling of new wells, we
conduct a geological review of the prospective area, in cooperation with our independent operator, to
determine the potential for oil and gas. Our own consultants then review available geophysical data
(generally seismic and gravity data) opine as to the prospect for success. In the event that our evaluation
of available geophysical data indicates that the target has significant accumulations of oil and gas, we
then consider the economic feasibility of drilling. The presence of oil and gas for any specific target
cannot guarantee economic recovery. Production depends on many factors including drilling and
completion costs, the distance to pipelines and pipeline pressure, current energy prices, accessibility to the
site, and whether the project is developmental or solely a wildcat prospect.
Allied’s business development strategy is prone to significant risks and uncertainties, certain of which can
have an immediate impact on its efforts to realize positive net cash flow and deter future prospects of
production growth. Historically Allied has not been able to generate sufficient cash flow from operations
to sustain operations and fund necessary exploration or development costs. Therefore, there can be no
assurance that the wells currently producing will provide sufficient cash flows to continue to sustain
operations. Should Allied be unable to continue to generate sufficient cash flow from existing properties,
Allied may have to sell certain properties or interests in such properties or seek financing through
alternative sources such as the sale of its common stock.
8
Allied’s financial condition, results of operations and the carrying value of its oil and natural gas
properties depends primarily upon the prices it receives for oil and natural gas production and the quantity
of that production. Oil and natural gas prices historically have been volatile and are likely to continue to
be volatile in the future. This price volatility can immediately affect Allied’s available cash flow which
can in turn impact the availability of net cash flow for future capital expenditures. A drop in oil and
natural gas prices could also incur a write down of the carrying value of our properties as can a decrease
in production. Allied’s future success will depend on the level of oil and natural gas prices and the
quantity of its production. Since production leads to the depletion of oil and gas reserves, Allied’s ability
to develop or acquire additional economically recoverable oil and gas reserves is vital to its future
success. Unless Allied can obtain additional reserves, current production will decline, which will lead to a
significant reduction in revenue.
West Virginia Well Information
Allied owns varying interests in a total of 145 wells in West Virginia on several leases held by an
independent operator. Some leases contain multiple wells. All the wells in which we have an interest are
situated on developed acreage spread over 3,400 acres in Ritchie and Calhoun Counties. Depth of the
producing intervals varies from 1,730 ft to 5,472 ft. Many of our wells are situated on the same leases and
as such share production equipment in order to minimize lease operating costs.
Our working interest is defined as interest in oil and gas that includes responsibility for all drilling,
developing, and operating costs varying from 18.75% to 75%. Our net revenue interest is defined as that
portion of oil and gas production revenue after deduction of royalties, varying from 15.00% to 65.625%.
Texas Well Information
Allied owns varying interests in a total of 10 wells in Texas on four leases managed by independent
operators and an interest in a pipeline gathering system. All the wells in which we have an interest are
situated on developed acreage spread over 2,510 acres in Goliad, Edwards and Jackson Counties. Depth
of the producing intervals varies from 7,600 ft to 9,600 ft.
Our working interest is defined as interest in oil and gas that includes responsibility for all drilling,
developing, and operating costs varying from 3.73% to 21%. Our net revenue interest is defined as that
portion of oil and gas production revenue after deduction of royalties, varying from 2.68% to 12.75%.
Over the six months ended June 30, 2012 two of our natural gas wells in Edwards County, Texas were
plugged and abandoned due to declining production that resulted in uneconomic commercial recovery
from these wells.
Exploration, Development and Operations
Allied intends to continue to purchase non-operated oil and gas producing properties, acquire oil and gas
leases that it will operate and implement improved production efficiencies on existing wells. Our criteria
for purchasing oil and gas producing properties is defined by short term returns on investment, long term
growth in revenue, and development potential, while our criteria for acquiring oil and gas leases is
predicated on a proven record of historical production and our own capacity to operate any given field.
The decrease in natural gas prices has done little to increase the number of opportunities available to us
due to our relatively limited cash position and the uncertainty associated with natural gas prices in the
future. We do however continue to seek out prospective oil and gas properties that meet our acquisition
criteria for a price that is consistent with competing forecasts for energy prices going forward into an
unsettled market.
9
We are further considering future prospects for exploration of the virtually untapped Marcellus and Utica
shale formations that underlie Allied’s oil and gas interests in West Virginia, particularly in Ritchie
County. The Marcellus and Utica shale structures have formed under much of Pennsylvania, Ohio, New
York, West Virginia and adjacent states to become a prospectively major reservoir for natural gas
recovery. Drilling by other operators in Ritchie County has indicated successful rates of recovery and our
own open hole well logs indicate the presence of potentially productive Marcellus shale at a depth of
6,000 feet. However, since exploration of the Marcellus and Utica shale in our area is relatively recent no
natural gas reserves underlying our interests have been determined. Our future plans for exploring the
Marcellus shale are further tempered by the high risk/reward ratio of exploratory drilling in the near term
based on anticipated pricing for natural gas over the next twelve to eighteen months.
Results of Operations
During the period from January 1, 2012 through June 30, 2012, Allied was engaged in evaluating
acquisition opportunities in Yoakum County, Texas, examining the operating efficiencies of existing
wells, overseeing the operation of its oil and gas assets by independent operators and seeking to acquire
oil and gas producing assets. The operation and maintenance of Allied’s oil and gas operations is wholly
dependent on the services provided by five different independent operators. While the services provided
by these operators have proven adequate, the fact that Allied is dependent on the operations of third
parties to maintain its operations and produce revenue does impact its own ability to realize a net profit.
For the fiscal quarter ended June 30, 2012 Allied realized a small profit. Allied believes that the
immediate key to its ability to maintain profitability is that oil and gas prices rise and production
increases. Meanwhile, general and administrative expenses and production costs are constantly evaluated
to guard against increases while we continue to seek out revenue producing acquisitions. Should oil and
gas prices rise, production increase and expenses remain relatively consistent, Allied believes that it will
be able to maintain net profits in future periods.
SI X M ONT H S E NDE D J UNE 30
2012
2011
C H A NG E # C H A NG E %
A V E R A G E DA I L Y PR ODUC T I ON
Oil (bbls/day)
11
5
6
120%
Natural gas (mcf/day)
301
276
25
9%
Barrels of oil equivalent (boe/day)
61
51
10
20%
PR OF I T A B I L I T Y
Petroleum and natural gas revenue
$
289,850 $
270,318
19,532
7%
Net Revenue
289,850
270,318
19,532
7%
Production and operating costs
162,670
180,483
(17,813)
-10%
Field netback
127,180
89,835
37,345
42%
G&A
129,645
127,378
2,267
2%
Net cash flow from operations
(2,465)
(37,543)
35,078
93%
Depletion, depreciation and other charges
49,091
46,862
2,229
5%
Future income taxes
-
-
-
0%
Net loss from operations
$
(51,556) $
(84,405)
32,849
39%
PR OF I T A B I L I T Y PE R B OE
Oil and gas revenue (average selling price)
26.04
29.28
(3.25)
-11%
Production and operating costs
14.61
19.55
(4,94)
-25%
Field netback ($/boe)
11.42
9.73
1.69
17%
Net loss ($/boe)
(4.63)
(9.14)
4.51
49%
Cash flow from operations ($/boe)
(0.22)
(4.07)
3.85
95%
10
Revenue
Revenue for the three month period ended June 30, 2012 increased to $169,142 from $113,130 for the
comparable period ended June 30, 2011, an increase of 50%. Revenue for the six month period ended
June 30, 2012 increased to $289,850 from $270,318 for the six month period ended June 30, 2011. The
revenue increase over the comparable three and six month periods is due to an increase in oil and gas
production despite the decreased prices paid for oil and gas in the current periods. Allied believes that
revenue will decline unless oil production can be increased, either by acquisition or the work-over of
existing wells and natural gas prices rise.
Net Income/Loss
Net income for the three month period ended June 30, 2012 was $2,052 as compared to net losses of
$29,926 for the three month period ended June 30, 2011. Net losses for the six month period ended June
30, 2012 were $48,991 as compared to net losses of $52,589 for the six months period ended June 30,
2011, a decrease of 7%. The transition from net losses to net income in the current three month period can
be wholly attributed to an increase in oil production over that realized in the prior three and six month
periods. Allied expects to maintain net income in future periods subject to oil and gas production and the
constant pricing volatility for these products in the marketplace.
Expenses
General and administrative expenses for the three month period ended June 30, 2012 increased to $57,198
from $56,256 for the comparable three month period ended June 30, 2011, an increase of 2%. General
and administrative services for the six month period ended June 30, 2012 increased to $129,645 from
$127,378 for the comparable six month period ended June 30, 2011. The increase in general
administrative expenses over the comparable three and six month periods can be primarily attributed
increased professional fees. Allied expects that general and administrative expenses will remain relatively
consistent in future periods.
Depletion expenses for the three month periods ended June 30, 2012, and June 30, 2011 were $24,601
and $23,970 respectively. Depletion expenses for the six month periods ended June 30, 2012 and June 30,
2011 were $49,091 and $46,862. Depletion expenses will continue to increase in relation to the aging of
existing oil and gas assets.
Production costs for the three month periods ended June 30, 2012, and June 30, 2011 were $87,018 and
$87,010 respectively. Production costs for the six month periods ended June 30, 2012 were $162,670 and
$180,483 respectively, a decrease of 10%. Production costs include the cost of maintaining the wells,
severance taxes, miscellaneous expenses for soap, solvent, gasoline or electricity and expenses such as
those incurred in swabbing, dozer work or rig time. The decrease in production costs over the current six
month periods can be attributed to decreased work over costs associated with producing wells in the
period. Allied expects that production costs will continue to decrease over future periods as our existing
wells age and energy production drops.
11
Income Tax Expense
As of December 31, 2011 Allied has a net operating loss (NOL) carry forwards of approximately
$2,219,000. Should substantial changes in our ownership occur there would be an annual limitation of the
amount of NOL carry forward which could be utilized. The ultimate realization of these carry forwards is
due, in part, on the tax law in effect at the time and future events, which cannot be determined. During the
year ended December 31, 2011 a valuation allowance was recorded against this net operating loss carried
forward.
Impact of Inflation
Allied believes that inflation has had an effect on operations over the past three years in connection with
production costs. Allied believes that it can offset inflationary increases in production costs by increasing
revenue and improving operating efficiencies.
Capital Expenditures
Allied made no capital expenditures on property or equipment for the six months ended June 30, 2012 or
2011.
Liquidity and Capital Resources
Allied had a working capital surplus of $1,371,537 as of June 30, 2012 and has funded its cash needs
since inception with revenues generated from operations, debt instruments and private equity placements.
Existing working capital and anticipated cash flow are expected to be sufficient to fund operations over
the next twelve months.
Current assets as of June 30, 2012 were $1,411,266 which consisted of $1,353,351 in cash and $57,915 in
accounts receivable. Total assets were $2,867,620 which consisted of current assets, proven oil and gas
properties of $751,653 and deposits of $704,701.
Current liabilities as of June 30, 2012 were $39,729 which consisted of accounts payable. Total liabilities
were $237,901 which consisted of current liabilities and an asset retirement obligation of $198,172.
Stockholders’ equity as of June 30, 2012 was $2,629,719.
Cash flow provided by operations for the six month period ended June 30, 2012 was $57,450 as compared
to cash flow provided by operations of $25,753 for the comparable period six month period ended June
30, 2011. The change in cash flow provided by operations in the current six month period can be
attributed to the increase in depletion and amortization, and the increase in accounts payable offset by the
decrease in accretion expense and the decrease in accounts receivable. Allied expects to realize cash flow
provided by operations as net losses decrease.
Cash flow used in investing activities for the six month periods ended June 30, 2012 and June 30, 2011
was $0. Allied expects to use cash flow in investing activities over future periods as the it evaluates
existing wells, identifies exploration opportunities and considers additional acquisitions.
Cash flow from financing activities for the six month periods ended June 30, 2012 and June 30, 2011 was
$0. Allied does not expect to realize cash flow from financing activities in the near term.
12
Allied has adopted a stock option plan pursuant to which it can grant up to 750,000 options to purchase
shares of its common stock to employees, directors, officers, consultants or advisors on the terms and
conditions set forth therein. As of June 30, 2012, 600,000 options have been granted of which 480,000
had vested as of June 30, 2011.
Allied has no lines of credit or other bank financing arrangements in place.
Allied had no commitments for future capital expenditures that were material at June 30, 2012.
Allied has no defined benefit plan or contractual commitment with any of its officers or directors except
each members participation in our stock option plan and a consulting agreement with its sole executive
officer that provides for a monthly fee and participation in our stock option plan.
Allied has no current plans for the purchase or sale of any plant or equipment.
Allied has no current plans to make any changes in the number of employees.
Allied does not expect to pay cash dividends in the foreseeable future.
Off Balance Sheet Arrangements
As of June 30, 2012, Allied has no significant off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are
material to stockholders.
Forward Looking Statements and Factors That May Affect Future Results and Financial Condition
The statements contained in the section titled Management’s Discussion and Analysis of Financial
Condition and Results of Operations, with the exception of historical facts, are forward looking
statements within the meaning of Section 27A of the Securities Act. We are ineligible to rely on the safe-
harbor provision of the Private Litigation Reform Act of 1995 for forward looking statements made in
this current report. Forward looking statements reflect our current expectations and beliefs regarding our
future results of operations, performance, and achievements. These statements are subject to risks and
uncertainties and are based upon assumptions and beliefs that may or may not materialize. These
statements include, but are not limited to, statements concerning:
• our anticipated financial performance and business plan;
• uncertainties related to production volumes of oil and gas;
• the sufficiency of existing capital resources;
• uncertainties related to future oil and gas prices;
• uncertainties related the quantity of our reserves of oil and gas;
• the volatility of the stock market and;
• general economic conditions.
13
We wish to caution readers that our operating results are subject to various risks and uncertainties that
could cause our actual results to differ materially from those discussed or anticipated including the factors
set forth in the section entitled “Risk Factors” included elsewhere in this report. We also wish to advise
readers not to place any undue reliance on the forward looking statements contained in this report, which
reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update
or revise these forward looking statements to reflect new events or circumstances or any changes in our
beliefs or expectations, other that is required by law.
Stock-Based Compensation
Allied has adopted Accounting Standards Codification Topic (“ASC”) 718 Share-Based Payment, which
addresses the accounting for stock-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprise’s equity instruments or that may be settled by the issuance of such equity
instruments.
Allied accounts for equity instruments issued in exchange for the receipt of goods or services from other
than employees in accordance with ASC 505. Costs are measured at the estimated fair market value of the
consideration received or the estimated fair value of the equity instruments issued, whichever is more
reliably measurable. The value of equity instruments issued for consideration other than employee
services is determined on the earliest of a performance commitment or completion of performance by the
provider of goods or services.
Critical Accounting Policies and Estimates
Accounting for Oil and Gas Property Costs. Allied (i) follows the successful efforts method of accounting
for the costs of its oil and gas properties, (ii) amortizes such costs using the units of production method
and (iii) evaluates its proven properties for impairment whenever events or changes in circumstances
indicate that their net book value may not be recoverable. Adverse changes in conditions (primarily gas
price declines) could result in permanent write-downs in the carrying value of oil and gas properties as
well as non-cash charges to operations that would not affect cash flows.
Estimates of Proved Oil and Gas Reserves. An independent petroleum engineer annually estimates
Allied’s proven reserves. Reserve engineering is a subjective process that is dependent upon the quality of
available data and the interpretation thereof. In addition, subsequent physical and economic factors such
as the results of drilling, testing, production and product prices may justify revision of such estimates.
Therefore, actual quantities, production timing, and the value of reserves may differ substantially from
estimates. A reduction in proved reserves would result in an increase in depreciation, depletion and
amortization expense.
Estimates of Asset Retirement Obligations. In accordance with ASC 410, Allied makes estimates of
future costs and the timing thereof in connection with recording its future obligations to plug and abandon
wells. Estimated abandonment dates will be revised in the future based on changes to related economic
lives, which vary with product prices and production costs. Estimated plugging costs may also be adjusted
to reflect changing industry experience. Increases in operating costs and decreases in product prices
would increase the estimated amount of the obligation and increase depreciation, depletion and
amortization expense. Cash flows would not be affected until costs to plug and abandon were actually
incurred.
14
Critical Accounting Policies
In Note 1 to the audited financial statements for the years ended December 31, 2011 and 2010, included
in our Form 10-K, Allied discusses those accounting policies that are considered to be significant in
determining the results of operations and its financial position. Allied believes that the accounting
principles utilized by it conform to accounting principles generally accepted in the United States.
The preparation of financial statements requires Allied’s management to make significant estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature,
these judgments are subject to an inherent degree of uncertainty. On an on-going basis, Allied evaluates
estimates. Allied bases its estimates on historical experience and other facts and circumstances that are
believed to be reasonable, and the results form the basis for making judgments about the carrying value of
assets and liabilities. The actual results may differ from these estimates under different assumptions or
conditions.
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2011-11, “Disclosures about Offsetting Assets and Liabilities”, which will require
disclosures for entities with financial instruments and derivatives that are either offset on the balance
sheet in accordance with ASC 210-20-45 or ASC 815-10-45, or are subject to a master netting
arrangement. ASU No. 2011-11 is effective for interim and annual periods beginning on or after January
1, 2013. Allied is currently evaluating the impact of the adoption of ASU 2011-11 on its financial
position, results of operations, and disclosures.
Other pronouncements issued by the FASB or other authoritative accounting standards groups with future
effective dates are either not applicable or are not expected to be significant to the financial statements of
Allied.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not required.
15
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this report on Form 10-Q, an evaluation was carried out by Allied’s
management, with the participation of the chief executive officer and chief financial officer, of the
effectiveness of Allied’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (“Exchange Act”)). Disclosure controls and procedures are
designed to ensure that information required to be disclosed in reports filed or submitted under the
Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the
Commission’s rules and forms and that such information is accumulated and communicated to
management, including the chief executive officer and chief financial officer, to allow timely decisions
regarding required disclosures.
Based on that evaluation, Allied’s management concluded, as of the end of the period covered by this
report, that Allied’s disclosure controls and procedures were effective in recording, processing,
summarizing, and reporting information required to be disclosed, within the time periods specified in the
Commission’s rules and forms.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) of
the Exchange Act) during the period ended June 30, 2012, that materially affected, or are reasonably
likely to materially affect, Allied’s internal control over financial reporting.
16
PART II – OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
None.
ITEM 1A.
RISK FACTORS
Our future operating results are highly uncertain. Before deciding to invest in us or to maintain or increase
your investment, you should carefully consider the risks described below, in addition to the other
information contained in this quarterly report. If any of these risks actually occur, our business, financial
condition or results of operations could be seriously harmed. In that event, the market price for our
common stock could decline and you might lose all or part of your investment.
Risks Related to Allied’s Business
We have a history of significant operating losses, which losses may reoccur in the future.
Since our inception in 1979, our expenses have often exceeded our income, resulting in losses and an
accumulated deficit of $7,204,771 at December 31, 2011 which had increased to $7,253,762 at June 30,
2012. We recorded net income of $2,052 for the three month period ended June 30, 2012 and may realize
future net losses if revenues do not increase. Our expectation of profitability depends on higher energy
prices and increased production through exploration, development or acquisition. Allied’s success in this
continued endeavor can in no way be assured.
Oil and natural gas prices are volatile. Any substantial decrease in prices would adversely affect our
financial results.
Allied’s future financial condition, results of operations and the carrying value of our oil and natural gas
properties depend primarily upon the prices we receive for oil and natural gas production. Oil and natural
gas prices historically have been volatile and are likely to continue to be volatile in the future. Allied’s
cash flow from operations is highly dependent on the prices we receive for oil and natural gas. This price
volatility also affects the amount of Allied’s cash flow available for capital expenditures and our ability to
borrow money or raise additional capital. The prices for oil and natural gas are subject to a variety of
additional factors that are beyond our control. These factors include:
• the level of consumer demand for oil and natural gas;
• the domestic and foreign supply of oil and natural gas;
• the ability of the members of the Organization of Petroleum Exporting Countries to agree to and
maintain oil price and production controls;
• the price of foreign oil and natural gas;
• domestic governmental regulations and taxes;
• the price and availability of alternative fuel sources;
• weather conditions;
• market uncertainty;
• political conditions or hostilities in energy producing regions, including the Middle East; and
• worldwide economic conditions.
17
These factors and the volatility of the energy markets generally make it extremely difficult to predict
future oil and natural gas price movements with any certainty. Declines in oil and natural gas prices
would not only reduce revenue, but could reduce the amount of oil and natural gas that Allied can
produce economically and, as a result, could have a material adverse effect on our financial condition,
results of operations and reserves. Should the oil and natural gas industry experience significant price
declines, Allied may, among other things, be unable to meet our financial obligations or make planned
expenditures.
Allied’s future performance depends on its ability to find or acquire additional oil or natural gas
reserves.
Unless Allied successfully replaces the reserves that it produces, defined reserves will decline, resulting in
a decrease in oil and natural gas production, that will produce lower revenues, in turn decreasing cash
flows from operations. Allied has historically obtained the majority of its reserves through acquisition.
The business of exploring for, developing or acquiring reserves is capital intensive. Allied may not be
able to obtain the necessary capital to acquire additional oil or natural gas reserves if cash flows from
operations are reduced, and access to external sources of capital is unavailable. Should Allied not make
significant capital expenditures to increase reserves it will not be able to maintain current production rates
and expenses will continue to exceed revenue.
Climate change legislation or regulations restricting emissions of “greenhouse gases” could result in
increased operating costs and reduced demand for the oil and natural gas that we produce.
On December 15, 2009, the U.S. Environmental Protection Agency (“EPA”) officially published its
findings that emissions of carbon dioxide, methane and other “greenhouse gases” present an
endangerment to human health and the environment because emissions of such gases are contributing to
warming of the Earth’s atmosphere and other climatic changes. These findings by the EPA allow the
agency to proceed with the adoption and implementation of regulations that would restrict emissions of
greenhouse gases under existing provisions of the federal Clean Air Act. In late September 2009, the EPA
had proposed two sets of regulations in anticipation of finalizing its findings that would require a
reduction in emissions of greenhouse gases from motor vehicles and that could also lead to the imposition
of greenhouse gas emission limitations in Clean Air Act permits for certain stationary sources. In
addition, on September 22, 2009, the EPA issued a final rule requiring the reporting of greenhouse gas
emissions from specified large greenhouse gas emission sources in the United States beginning in 2011
for emissions occurring in 2010. The adoption and implementation of any regulations over greenhouse
gases could require us to incur costs to reduce emissions of greenhouse gases associated with our
operations or could adversely affect demand for the oil and natural gas that we produce.
18
On June 26, 2009, the U.S. House of Representatives passed the “American Clean Energy and Security
Act of 2009,” or “ACESA,” which would establish an economy-wide cap-and-trade program to reduce
U.S. emissions of greenhouse gases including carbon dioxide and methane. ACESA would require a 17%
reduction in greenhouse gas emissions from 2005 levels by 2020 and just over an 80% reduction of such
emissions by 2050. Under this legislation, the EPA would issue a capped and steadily declining number
of tradable emissions allowances to certain major sources of greenhouse gas emissions so that such
sources could continue to emit greenhouse gases into the atmosphere. These allowances would be
expected to escalate significantly in cost over time. The net effect of ACESA will be to impose increasing
costs on the combustion of carbon-based fuels such as oil, refined petroleum products, and natural gas.
The U.S. Senate has begun work on its own legislation for restricting domestic greenhouse gas emissions
and the President Obama Administration has indicated its support of legislation to reduce greenhouse gas
emissions through an emission allowance system. Although it is not possible at this time to predict when
the Senate may act on climate change legislation or how any bill passed by the Senate would be
reconciled with ACESA, any future federal laws or implementing regulations that may be adopted to
address greenhouse gas emissions could adversely affect demand for the oil and natural gas that we
produce.
The results of our operations are wholly dependent on the production and maintenance efforts of
independent operators.
The operation and maintenance of our oil and natural gas operations is wholly dependent on independent
local operators. While the services provided by operators of our properties in the past have proven
adequate for the successful operation of our oil and natural gas wells, the fact that we are dependent on
operations of third parties to produce revenue from our assets could restrict our ability to continue
generating a net profit on operations.
Risks Related to the Company’s Stock
The market for our stock is limited and our stock price may be volatile.
The market for our common stock is limited due to low trading volumes and the small number of
brokerage firms acting as market makers. The average daily trading volume for our stock has varied
significantly from week to week and from month to month, and the trading volume often varies widely
from day to day. Due to these limitations there is volatility in the market price and tradability of our stock,
which may cause our shareholders difficulty in selling their shares in the market place.
We incur significant expenses as a result of the Sarbanes-Oxley Act of 2002, which expenses may
continue to negatively impact our financial performance.
We incur significant legal, accounting and other expenses as a result of the Sarbanes-Oxley Act of 2002,
as well as related rules implemented by the Commission, which control the corporate governance
practices of public companies. Compliance with these laws, rules and regulations, including compliance
with Section 404 of the Sarbanes-Oxley Act of 2002, as discussed in the following risk factor, has
substantially increased our expenses, including legal and accounting costs, and made some activities more
time-consuming and costly.
19
Our internal controls over financial reporting may not be considered effective in the future, which
could result in a loss of investor confidence in our financial reports and in turn have an adverse effect
on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 we are required to furnish a report by our
management on our internal controls over financial reporting. Such report must contain, among other
matters, an assessment of the effectiveness of our internal controls over financial reporting as of the end
of the year, including a statement as to whether or not our internal controls over financial reporting are
effective. This assessment must include disclosure of any material weaknesses in our internal controls
over financial reporting identified by management. If we are unable to continue to assert that our internal
controls are effective, our shareholders could lose confidence in the accuracy and completeness of our
financial reports, which in turn could cause our stock price to decline.
Allied has not paid dividends to the shareholders of its common stock.
Allied has not paid any dividends to the shareholders of its common stock and has no intention of paying
dividends in the foreseeable future. Any future dividends would be at the discretion of our board of
directors and would depend on, among other things, future earnings, our operating and financial
condition, our capital requirements, and general business conditions.
Allied may require additional capital funding.
Allied may require additional funds, either through additional equity offerings or debt placements, in
order to expand our operations. Such additional capital may result in dilution to our current shareholders.
Further, our ability to meet short-term and long-term financial commitments will depend on future cash.
There can be no assurance that future income will generate sufficient funds to enable us to meet our
financial commitments.
If the market price of our common stock declines as the selling security holders sell their stock, selling
security holders or others may be encouraged to engage in short selling, depressing the market price.
The significant downward pressure on the price of the common stock as the selling security holders sell
material amounts of common stock could encourage short sales by the selling security holders or others.
Short selling is the selling of a security that the seller does not own, or any sale that is completed by the
delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock
at a lower amount than the price at which they sold it short. Significant short selling of a company’s stock
creates an incentive for market participants to reduce the value of that company’s common stock. If a
significant market for short selling our common stock develops, the market price of our common stock
could be significantly depressed.
20
Allied’s common stock is currently deemed to be “penny stock”, which makes it more difficult for
investors to sell their shares.
Allied’s common stock is and will be subject to the “penny stock” rules adopted under section 15(g) of
the Exchange Act. The penny stock rules apply to companies whose common stock is not listed on the
NASDAQ Stock Market or other national securities exchange and trades at less than $5.00 per share or
that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for
three or more years). These rules require, among other things, that brokers who trade penny stock to
persons other than “established customers” complete certain documentation, make suitability inquiries of
investors and provide investors with certain information concerning trading in the security, including a
risk disclosure document and quote information under certain circumstances. Many brokers have decided
not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number
of broker-dealers willing to act as market makers in such securities is limited. If Allied remains subject to
the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for
Allied’s securities. If Allied’s securities are subject to the penny stock rules, investors will find it more
difficult to dispose of Allied’s securities.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3.
DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.
OTHER INFORMATION
None.
ITEM 6.
Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits on page
23 of this Form 10-Q, and are incorporated herein by this reference.
21
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Allied Resources, Inc.
Date
/s/ Ruairidh Campbell
August 14, 2012
Ruairidh Campbell
Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and Director
22
INDEX TO EXHIBITS
Exhibit
Description
3(i) *
Articles of Incorporation dated February 12, 2002 (incorporated by reference to the
Form 10-SB/A filed on April 21, 2003).
3(ii) *
Bylaws (incorporated by reference to the Form 10-SB/A filed on April 21, 2003).
10(i) *
Oil and Gas Well Operating Agreement between Allied and Allstate Energy
Corporation dated May 1, 1996 (incorporated by reference to the Form 10SB/A filed
on April 21, 2003).
10(ii) *
Amendments to Operating Agreements between Allied and Allstate Energy
Corporation dated May 10, 1996 (incorporated by reference to the Form 10SB/A
filed on April 21, 2003).
10(iii) *
Form Gas Purchase Agreement (incorporated by reference to the Form 10SB/A filed
on April 21, 2003).
10(iv)*
Consulting Agreement between Allied and Ruairidh Campbell dated July 1, 2008
(incorporated by reference to the Form 10-Q filed on November 14, 2008).
14 *
Code of Ethics adopted May 3, 2004 (incorporated by reference to the Form 10-
KSB filed on May 26, 2004).
31
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to
Rule 13a-14 of the Securities and Exchange Act of 1934 as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (attached).
32
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to
18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (attached).
99*
Allied Resources, Inc. 2008 Stock Option Plan (incorporated by reference to the
Form 10-Q filed on November 14, 2008).
101. INS
XBRL Instance Document†
101. PRE
XBRL Taxonomy Extension Presentation Linkbase†
101. LAB
XBRL Taxonomy Extension Label Linkbase†
101. DEF
XBRL Taxonomy Extension Label Linkbase†
101. CAL
XBRL Taxonomy Extension Label Linkbase†
101. SCH
XBRL Taxonomy Extension Schema†
*
Incorporated by reference to previous filings of Allied.
†
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed
“furnished” and not “filed” or part of a registration statement or prospectus for
purposes of Section 11 or 12 of the Securities Act of 1933, or deemed “furnished”
and not “filed” for purposes of Section 18 of the Securities and Exchange Act of
1934, and otherwise is not subject to liability under these sections.
23