UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2010
Commission File Number 000-52522
NORTH AMERICAN ENERGY RESOURCES, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 98-0550352 |
| (State or Other Jurisdiction | (IRS Employer |
| of Incorporation or Organization) | Identification No.) |
| 11005 Anderson Mill Road | |
| Austin, Texas | 78750 |
| (Address of Principal Executive Office) | (Zip Code) |
Issuer’s telephone number (512) 944-9115
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $0.001 PAR VALUE
(Title of each class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 x 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained here-in, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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. (Check one)
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the shares of our common stock, par value $0.001, held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $2,662,020.
As of June 30, 2010, the registrant had outstanding 17,375,539 shares of its common stock, par value of $0.001.
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Report except those Exhibits so incorporated as set forth in the Exhibit index.
NORTH AMERICAN ENERGY RESOURCES, INC.
TABLE OF CONTENTS
FORM 10-K
Part I
| | | | Page |
| PART I | | | |
| Item 1 | | Business | 3 |
| Item 1A | | Risk Factors | 10 |
| Item 1B | | Unresolved Staff Comments | 10 |
| Item 2 | | Properties | 10 |
| Item 3 | | Legal Proceedings | 16 |
| | | | |
| PART II | | | |
| Item 5 | | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 17 |
| Item 6 | | Selected Financial Data | 19 |
| Item 7 | | Management’s Discussion and Analysis of Financial Condition and Results of Operation | 19 |
| Item 7A | | Quantitative and Qualitative Disclosures About Market Risk | 23 |
| Item 8 | | Financial Statements and Supplementary Data | 24 |
| Item 9 | | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 49 |
| Item 9AT | | Controls and Procedures | 49 |
| Item 9B | | Other Information | 50 |
| | | | |
| PART III | | | |
| Item 10 | | Directors, Executive Officers and Corporate Governance | 52 |
| Item 11 | | Executive Compensation | 54 |
| Item 12 | | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 56 |
| Item 13 | | Certain Relationships and Related Transactions, and Director Independence | 58 |
| Item 14 | | Principal Accountant Fees and Services | 58 |
| | | | |
| PART IV | | | |
| Item 15 | | Exhibits and Financial Statement Schedules | 59 |
From time to time, we may publish forward-looking statements relative to such matters as anticipated financial results, business prospects, technological developments and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. The following discussion and analysis should be read in conjunction with the report on the Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements appearing later in this report. All statements other than statements of historical fact included in this Annual Report on Form 10-K are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include, but are not limited to, the following: our current liquidity needs, as described in our periodic reports; changes in the economy; our inability to raise additional capital; our involvement in potential litigation; volatility of our stock price; the variability and timing of business opportunities; changes in accounting policies and practices; the effect of internal organizational changes; adverse state and federal regulation and legislation; and the occurrence of extraordinary or catastrophic events and terrorist acts. These factors and others involve certain risks and uncertainties that could cause actual results or events to differ materially from management’s views and expectations. Inclusion of any information or statement in this report does not necessarily imply that such information or statement is material. We do not undertake any obligation to release publicly revised or updated forward-looking information, and such information included in this report is based on information currently available and may not be reliable after this date.
PART I
ORGANIZATION
North American Energy Resources, Inc. ("NAEY" or the "Company") was originally organized in Nevada on August 22, 2006 with the name Mar Ked Mineral Exploration, Inc. ("Mar Ked"). The Company changed its name from Mar Ked to North American Energy Resources, Inc. on August 11, 2008.
At a special meeting of shareholders held on April 23, 2009, 63% of our shareholders, either in person or by proxy, voted to approve a 1:50 reverse split of the Company's common stock. This amendment to the Company's Articles of Incorporation was filed with the Nevada Secretary of State and became effective on April 27, 2009. Accordingly, all references to shares of our common stock included herein have been retroactively restated to give effect to the reverse split.
On July 28, 2008, the Company acquired 100% of the outstanding stock of North American Exploration, Inc. ("NAE") (formerly Signature Energy, Inc.) for 420,000 shares of our common stock pursuant to a Stock Purchase Agreement ("SPA"). Completion of the SPA resulted in the shareholders of NAE having control of NAEY. Accordingly, the transaction was recorded for accounting purposes as the acquisition of NAE by NAEY with NAE as the acquirer (reverse acquisition). The financial statements of the Company prior to July 28, 2008 are those of NAE. Formerly NAEY used a November 30 year-end. As a result of the reverse acquisition, the Company will utilize the April 30 year-end of NAE after April 30, 2008.
NAE was organized in Nevada on August 18, 2006 as Signature Energy, Inc. and changed its name to North American Exploration, Inc. on June 2, 2008.
The SPA provided that NAEY was to have $1,500,000 in cash and no liabilities at closing. At July 31, 2008, NAEY had $150,000 of the required cash and on August 28, 2008, the parties to the SPA entered into a Modification Agreement ("MA") which provided an extension until January 27, 2009 for the additional cash to be contributed to the Company. At January 27, 2009, the Company had received an additional $50,000 and was still short $1,300,000 of the amount agreed. The MA provided that the Buyer would make contingent issuances of shares to the Seller equal to 95% of all the outstanding stock after issuance. Accordingly, effective April 30, 2009, an additional 13,250,381 shares were issued to the Sellers. The total purchase price for NAE was 13,690,381 shares.
Mar Ked was originally formed to acquire and explore mineral claims, principally in the Yukon Territory, Canada. All activity relating to mining activity was abandoned when NAE was acquired.
Glossary of Oil and Natural Gas Terms
The definitions set forth below apply to the indicated terms as used in this report. All volumes of natural gas referred to herein are stated at the legal pressure base of the state or area where the reserves exist and at 60 degrees Fahrenheit and in most instances are rounded to the nearest major multiple.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in reference to crude oil or other liquid hydrocarbons.
Bcf. One billion cubic feet of natural gas.
Boe. Barrels of oil equivalent in which six Mcf of natural gas equals one Bbl of oil.
Btu. British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
Completion. The installation of permanent equipment for the production of oil or natural gas or, in the case of a dry hole, the reporting of abandonment to the appropriate agency.
Development well. A well drilled within the proved areas of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.
Dry hole or well. A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.
Exploratory well. A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir.
Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.
Gross acres or gross wells. The total acres or wells, as the case may be, in which a working interest is owned.
MBbls. One thousand barrels of crude oil or other liquid hydrocarbons.
MBoe. One thousand Boe.
MMBoe. One million Boe.
Mcf. One thousand cubic feet of natural gas.
MMBbls. One million barrels of crude oil or other liquid hydrocarbons.
MMBtu. One million Btus.
MMcf. One million cubic feet of natural gas.
Net acres or net wells. The sum of the fractional working interests owned in gross acres or gross wells, as the case may be.
Operator. The individual or company responsible for the exploration, exploitation and production of an oil or natural gas well or lease.
PV-10 Value. When used with respect to oil and natural gas reserves, the estimated future gross revenues to be generated from the production of proved reserves, net of estimated production and future development costs, using the prices provided in this report and costs in effect as of the date indicated, without giving effect to non-property related expenses such as general and administrative expenses, debt service and future income tax expenses or to depreciation, depletion and amortization, discounted using an annual discount rate of 10%.
Productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.
Proved developed producing reserves. Proved developed reserves that are expected to be recovered from completion intervals currently open in existing wells and capable of production.
Proved developed reserves. Proved reserves that are expected to be recovered from existing wellbores, whether or not currently producing, without drilling additional wells. Production of such reserves may require a recompletion.
Proved reserves. Those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations —prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for estimation.
Proved undeveloped location. A site on which a development well can be drilled consistent with spacing rules for purposes of recovering proved undeveloped reserves.
Proved undeveloped reserves. Proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion.
Recompletion. The completion for production of an existing wellbore in another formation from that in which the well has been previously completed.
Reserve life. A ratio determined by dividing our estimated existing reserves determined as of the stated measurement date by production from such reserves for the prior twelve month period.
Reservoir. A porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.
3-D seismic. The method by which a three dimensional image of the earth’s subsurface is created through the interpretation of reflection seismic data collected over a surface grid. 3-D seismic surveys allow for a more detailed understanding of the subsurface than do conventional surveys and contribute significantly to field appraisal, exploitation and production.
Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves.
Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production.
Workover. Operations on a producing well to restore or increase production.
BUSINESS
OIL AND GAS DRILLING PROSPECTS
Current natural gas prices have made the Company's natural gas reserves uneconomical to produce. Accordingly, in 2009, the Company recorded an impairment of all of its gas reserves as a result of the low gas prices in effect at the time. In 2010, the Company recorded an impairment of an interest in two oil wells that it had acquired for its common stock in the amount of $108,000. It was determined during 2010, as the result of two failed workover attempts that the unevaluated property costs should be fully impaired and $126,607 was transferred from unevaluated property costs to the full cost pool. The Company recorded an additional impairment of $205,317 at the end of 2010. As a result of the gas reserves continuing to be impaired, the Company wrote off its investment in a pipeline of $132,663 that was principally used to gather the gas production.
The Company currently does not plan to begin producing its natural gas reserves until gas prices improve to at least $5/MCF.
EXPLORATION STAGE COMPANY
We are considered an exploration or exploratory stage company because we are involved in the examination and investigation of leases that we believe may contain commercial oil or gas reserves. We have made limited evaluations of our leases, but there is no assurance that commercially viable reserves of oil or gas exist on our leases. Additional drilling and development will be required to adequately evaluate our leasehold position and we will remain an exploration stage company until that process is completed.
OTHER
The mailing address of our principal executive office is 11005 Anderson Mill Road, Austin, Texas 78750 and our telephone number is 512-944-9115.
FINANCIAL POSITION AND FUTURE FINANCING NEEDS
We are an exploration stage company. We have a limited history in the oil and gas development and production business.
We have not established sources of revenues sufficient to fund the development of business, projected operating expenses and commitments for our fiscal year ending April 30, 2011. We have been in the development stage since our inception, August 18, 2006, have accumulated a net loss of $2,510,626 through April 30, 2010, and incurred a loss of $1,382,974 for the year then ended.
The Company plans to make sales of its common stock in private transactions or to borrow funds as needed to raise sufficient capital to fund the development of business, projected operating expenses and commitments. However, there can be no assurance that we will be able to obtain sufficient funding to develop our current business plan.
COMPETITION
The Company expects to concentrate the majority of its resources on oil and gas development and production. The Company is much smaller than most participants in this industry and has limited expertise in operating an energy business.
GOVERNMENTAL REGULATIONS, APPROVAL, COMPLIANCE
When we elect to participate directly in development of oil and gas properties, our operations are subject to various types of regulation at the federal, state and local levels. Such regulations includes requiring permits for the drilling of wells; maintaining bonding requirements in order to drill or operate wells; implementing spill prevention plans; submitting notification and receiving permits relating to the presence, use and release of certain materials incidental to oil and gas operations; and regulating the location of wells, the method of drilling and casing wells, the use, transportation, storage and disposal of fluids and materials used in connection with drilling and production activities, surface usage and the restoration of properties upon which wells have been drilled, the plugging and abandoning of wells and the transporting of production. Our operations will also be subject to various conservation matters, including the regulation of the size of drilling and spacing units or pro-ration units, the number of wells which may be drilled in a unit, and the unitization or pooling of oil and gas properties. In this regard, some states allow the forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases, which may make it more difficult to develop oil and gas properties. In addition, state conservation laws establish maximum rates of production from oil and gas wells, generally limit the venting or flaring of gas, and impose certain requirements regarding the ratable purchase of production. The effect of these regulations is to limit the amounts of oil and gas we may be able to produce from our wells and to limit the number of wells or the locations at which we may be able to drill.
Our business is affected by numerous laws and regulations, including energy, environmental, conservation, tax and other laws and regulations relating to the oil and gas industry. We plan to develop internal procedures and policies to ensure that our operations are conducted in full and substantial environmental regulatory compliance.
Failure to comply with any laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of injunctive relief or both. Moreover, changes in any of these laws and regulations could have a material adverse effect on business. In view of the many uncertainties with respect to current and future laws and regulations, including their applicability to us, we cannot predict the overall effect of such laws and regulations on our future operations.
We believe that our operations comply in all material respects with applicable laws and regulations and that the existence and enforcement of such laws and regulations have no more restrictive an effect on our operations than on other similar companies in the energy industry. We do not anticipate any material capital expenditures to comply with federal and state environmental requirements.
ENVIRONMENTAL
Operations on properties in which we have an interest are subject to extensive federal, state and local environmental laws that regulate the discharge or disposal of materials or substances into the environment and otherwise are intended to protect the environment. Numerous governmental agencies issue rules and regulations to implement and enforce such laws, which are often difficult and costly to comply with and which carry substantial administrative, civil and criminal penalties and in some cases injunctive relief for failure to comply.
Some laws, rules and regulations relating to the protection of the environment may, in certain circumstances, impose “strict liability” for environmental contamination. These laws render a person or company liable for environmental and natural resource damages, cleanup costs and, in the case of oil spills in certain states, consequential damages without regard to negligence or fault. Other laws, rules and regulations may require the rate of oil and gas production to be below the economically optimal rate or may even prohibit exploration or production activities in environmentally sensitive areas. In addition, state laws often require some form of remedial action, such as closure of inactive pits and plugging of abandoned wells, to prevent pollution from former or suspended operations.
Legislation has been proposed in the past and continues to be evaluated in Congress from time to time that would reclassify certain oil and gas exploration and production wastes as “hazardous wastes.” This reclassification would make these wastes subject to much more stringent storage, treatment, disposal and clean-up requirements, which could have a significant adverse impact on operating costs. Initiatives to further regulate the disposal of oil and gas wastes are also proposed in certain states from time to time and may include initiatives at the county, municipal and local government levels. These various initiatives could have a similar adverse impact on operating costs.
The regulatory burden of environmental laws and regulations increases our cost and risk of doing business and consequently affects our profitability. The federal Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, also known as the “Superfund” law, imposes liability, without regard to fault, on certain classes of persons with respect to the release of a “hazardous substance” into the environment. These persons include the current or prior owner or operator of the disposal site or sites where the release occurred and companies that transported, disposed or arranged for the transport or disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for the federal or state government to pursue such claims.
It is also not uncommon for neighboring landowners and other third parties to file claims for personal injury or property or natural resource damages allegedly caused by the hazardous substances released into the environment. Under CERCLA, certain oil and gas materials and products are, by definition, excluded from the term “hazardous substances.” At least two federal courts have held that certain wastes associated with the production of crude oil may be classified as hazardous substances under CERCLA. Similarly, under the federal Resource, Conservation and Recovery Act, or RCRA, which governs the generation, treatment, storage and disposal of “solid wastes” and “hazardous wastes,” certain oil and gas materials and wastes are exempt from the definition of “hazardous wastes.” This exemption continues to be subject to judicial interpretation and increasingly stringent state interpretation. During the normal course of operations on properties in which we have an interest, exempt and non-exempt wastes, including hazardous wastes, that are subject to RCRA and comparable state statutes and implementing regulations are generated or have been generated in the past. The federal Environmental Protection Agency and various state agencies continue to promulgate regulations that limit the disposal and permitting options for certain hazardous and non-hazardous wastes.
We plan to establish guidelines and management systems to ensure compliance with environmental laws, rules and regulations if we participate directly in the development of oil and gas resources. The existence of these controls cannot, however, guarantee total compliance with environmental laws, rules and regulations. We will rely on the operator of the properties in which we have an interest to be in substantial compliance with applicable laws, rules and regulations relating to the control of air emissions at all facilities on those properties. Although we plan to maintain insurance against some, but not all, of the risks described above, including insuring the costs of clean-up operations, public liability and physical damage, there is no assurance that our insurance will be adequate to cover all such costs, that the insurance will continue to be available in the future or that the insurance will be available at premium levels that justify our purchase. The occurrence of a significant event not fully insured or indemnified against could have a material adverse effect on our financial condition and operations. Compliance with environmental requirements, including financial assurance requirements and the costs associated with the cleanup of any spill, could have a material adverse effect on our capital expenditures, earnings or competitive position. We do believe, however, that our operators are in substantial compliance with current applicable environmental laws and regulations. Nevertheless, changes in environmental laws have the potential to adversely affect operations. At this time, we have no plans to make any material capital expenditures for environmental control facilities.
EMPLOYEES
It is anticipated that the only active employees of this business in the near future will be its President and Executive Vice President. All other operative functions, such as acquiring leaseholds, creating joint ventures and development and production of oil and gas will be handled by the President, the Executive Vice President or independent contractors and consultants.
Not applicable.
| ITEM 1A: | UNRESOLVED STAFF COMMENTS |
Not applicable.
The Company’s oil and gas business is primarily involved in the development and production of oil and gas. As of April 30, 2010, we have 745 acres under lease in Washington County, Oklahoma which includes 2 producing oil wells. All gas wells were shut-in in February 2009 due to low gas prices.
Proved Reserves and Estimated Future Net Revenue
The following table sets forth our estimated proved reserves and the related estimated pre-tax future net revenues, pre-tax 10% present value and after-tax standardized measure of discounted future net cash flows as of April 30, 2010. These estimates correspond with the method used in presenting the “Supplemental Information on Oil and Gas Operations” in Note 10 to our consolidated financial statements included herein. At April 30, 2010, 100% of the proved reserves have been classified as proved developed producing ("PDP"). There are no proved developed non-producing ("PDNP") reserves.
| | | Total | | | Proved | | | Proved | |
| | | Proved | | | Developed | | | Undeveloped | |
| | | Reserves | | | Reserves | | | Reserves | |
| Total Reserves | | | | | | | | | |
| Oil (BBLs) | | | 2,250 | | | | 2,250 | | | | - | |
| Gas (MCF) | | | - | | | | - | | | | - | |
| BOE (1) | | | 2,250 | | | | 2,250 | | | | - | |
| Pre-tax future net revenue (2) | �� | $ | 154,220 | | | $ | 154,220 | | | $ | - | |
| Pre-tax 10% present value (2) | | | 52,250 | | | | 52,250 | | | | - | |
| Standardized measure of discounted future net cash flows (2)(3) | | $ | 52,250 | | | $ | 52,250 | | | $ | - | |
| | (1) | Gas reserves are converted to barrels of oil equivalent (“BOE”) at the rate of six MCF per BBL of oil, based upon the approximate relative energy content of natural gas and oil, which rate is not necessarily indicative of the relationship of gas and oil prices. |
| | (2) | Estimated pre-tax future net revenue represents estimated future revenue to be generated from the production of proved reserves, net of estimated production and development costs and site restoration and abandonment charges. The amounts shown do not give effect to depreciation, depletion and amortization, or to non-property related expenses such as debt service and income tax expense. |
| | (3) | See Note 10 to the financial statements included in Item 8. |
No estimates of our proved reserves have previously been filed with or included in reports to any federal governmental authority or agency except for our Form 10-K for the year ended April 30, 2009.
The prices used in calculating the estimated future net revenues attributable to proved reserves do not necessarily reflect market prices for oil and gas production subsequent to April 30, 2010. There can be no assurance that all of the proved reserves will be produced and sold within the periods indicated, that the assumed prices will be realized or that existing contracts will be honored or judicially enforced.
Proved Reserves Disclosures
Recent SEC Rule-Making Activity. In December 2008, the SEC announced that it had approved revisions to modernize the oil and gas reserve reporting disclosures. The new disclosure requirements include provisions that:
| | · | Introduce a new definition of oil and gas producing activities. This new definition allows companies to include in their reserve base volumes from unconventional resources. Such unconventional reserves include bitumen extracted from oil sands and oil and gas extracted from coal beds and shale formations. |
| | · | Report oil and gas reserves using an unweighted average price using the prior 12-month period, based on the closing prices on the first day of each month, rather than year-end prices. |
| | · | Permit companies to disclose their probable and possible reserves on a voluntary basis. In the past, proved reserves were the only reserves allowed in the disclosures. We have chosen not to make disclosure under these categories. |
| | · | Requires companies to provide additional disclosure regarding the aging of proved undeveloped reserves. |
| | · | Permit the use of reliable technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserve volumes. |
| | · | Replace the existing "certainty" test for areas beyond one offsetting drilling unit from a productive well with a "reasonable certainty" test. |
| | · | Require additional disclosures regarding the qualifications of the chief technical person who oversees the company's overall reserve estimation process. Additionally, disclosures regarding internal controls over reserve estimation, as well as a report addressing the independence and qualifications of its reserves preparer or auditor will be mandatory. |
We adopted the rules effective April 30, 2010.
The new rule does not allow for prior-year reserve information to be restated, so all information related to periods prior to 2010 is presented consistent with prior SEC rules for the estimation of proved reserves.
Internal Controls Over Reserve Estimates. Our reserve estimates are prepared by an independent petroleum consulting firm who was engaged to audit our reserves. There were no changes to the contents of our reserves. We updated our reserves using the new pricing guidelines required by the SEC.
Production
All of our production was from our leases in Washington, County Oklahoma. The gas gathering system used for selling gas to the market was shut-in during February 2009, and accordingly we had no gas production from that date through April 30, 2010. Our oil production averaged approximately 2.5 BBLs/day during the fourth quarter of 2010 and approximately 0.60 BBLs/day during the year ended April 30, 2010. The wells were shut-in during the majority of the third quarter for repairs. We do not expect the gas gathering system to re-open until gas prices improve.
Project Summary
The Company had encountered three different oil zones during its recent development activities, however, attempts to rework two wells was unsuccessful in obtaining any new commercial production. The Company intends to continue to evaluate its position in Washington County, Oklahoma, but is also evaluating other investment opportunities.
Acreage
The following table summarizes gross and net developed acreage at April 30, 2010.
| | | Developed Acreage | |
| | | Gross | | | Net | |
| Washington County, Oklahoma | | | 745 | | | | 686 | |
Production History
The following table presents the historical information about our natural gas and oil production volumes.
| | | Year ended April 30, | |
| | | 2010 | | | 2009 | |
| Oil production (BBLs) | | | 220 | | | | 46 | |
| Gas production (MCF) | | | - | | | | 1,215 | |
| Total production (BOE) | | | 220 | | | | 249 | |
| Daily production (BOE/d) | | | 0.60 | | | | 0.68 | |
| Average sales price: | | | | | | | | |
| Oil (per BBL) | | $ | 65.33 | | | $ | 37.49 | |
| Gas (per MCF) | | $ | - | | | $ | 3.99 | |
| Total (per BOE) | | $ | 65.33 | | | $ | 26.34 | |
| Average production cost (per BOE) | | $ | 102.64 | | | $ | 148.12 | |
| Average production taxes (per BOE) | | $ | 4.69 | | | $ | 1.90 | |
The average oil sales price amounts above are calculated by dividing revenue from oil sales by the volume of oil sold in BBLs. The average gas price amounts above are calculated by dividing revenue from gas sales by the volume of gas sold in MCF. The total average sales price amounts above are calculated by dividing total revenues by total volume sold in BOE. The average production costs and average production taxes above are calculated by dividing production costs by total production in BOE.
Productive wells
The following table presents our ownership at April 30, 2010, in oil and natural gas wells (a net well is our percentage ownership of a gross well). Natural gas wells are not included since no reserves were attributed to natural gas at April 30, 2010 or 2009.
| | | | | Oil wells | | | Gas wells | | | Total wells | |
| Year | | | | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | |
| | | | | | | | | | | | | | | | | | | | | |
| 2010 | | Oklahoma | | | 2.0 | | | | 1.0 | | | | - | | | | - | | | | 2.0 | | | | 1.0 | |
| 2009 | | Oklahoma | | | 2.0 | | | | 0.5 | | | | - | | | | - | | | | 2.0 | | | | 0.5 | |
Drilling Activities
During 2009, we completed the drilling of 2 oil wells. Our drilling activity was discontinued pending other financing when the agreed capitalization of $1,500,000 was limited to $200,000. We participated in two workovers during 2010 in which we had a carried interest. Both reworks were unsuccessful.
Cost information
We conduct our oil and natural gas activities entirely in the United States and to date only in Washington County, Oklahoma. Costs incurred for property acquisition, exploration and development activities during the years ended April 30, 2010 and 2009 are shown below.
| | | For the years ended April 30, | |
| | | 2010 | | | 2009 | |
| Acquisition of proved properties | | $ | 207,645 | | | $ | 37,316 | |
| Acquisition on non-producing properties | | | 126,607 | | | | - | |
| Development costs | | | 95 | | | | 3,066 | |
| Total costs incurred | | $ | 334,347 | | | $ | 40,382 | |
The acquisition of proved properties and the acquisition of non-producing properties were made primarily through issue of our common stock in 2010.
Reserve Quantity Information
Our estimates of proved reserves and valuation were prepared by an independent petroleum consultant, Christopher Energy. The estimates of proved reserves are inherently imprecise and continually subject to revision based on production history, results of additional exploration and development, price changes and other factors. Our oil and natural gas reserves are attributed solely to properties within the United States. A summary of the changes in quantities of proved developed oil and natural gas reserves is shown below.
| | | | | | Natural Gas | |
| | | Oil (BBLs) | | | (MCF) | |
| Balance, April 30, 2008 | | | - | | | | 1,603,895 | |
| Extensions and discoveries | | | 7,334 | | | | - | |
| Production | | | (46 | ) | | | (1,215 | ) |
| Revisions of estimates | | | - | | | | (1,602,680 | ) |
| Balance, April 30, 2009 | | | 7,288 | | | | - | |
| Acquisition of minerals in place | | | 7,222 | | | | - | |
| Production | | | (220 | ) | | | - | |
| Revisions of estimates | | | (12,040 | ) | | | - | |
| Balance, April 30, 2010 | | | 2,250 | | | | - | |
Standardized Measure of Discounted Future Net Cash Flows
Our standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves and changes in the standardized measure as described below were prepared in accordance with generally accepted accounting principles.
Future income tax expenses are calculated by applying appropriate year-end tax rates to future pre-tax net cash flows relating to proved oil and natural gas reserves, less the tax basis of properties involved. Future income tax expenses give effect to permanent differences, tax credits and loss carryforwards relating to the proved oil and natural gas reserves. Future net cash flows are discounted at a rate of 10% annually to derive the standardized measure of discounted future net cash flows. This calculation procedure does not necessarily result in an estimate of the fair market value or the present value of our oil and natural gas properties. Future income tax expenses were not included due to the Company's net operating loss carryforwards.
The standardized measure of discounted future net cash flows relating to the proved oil and natural gas reserves are shown below.
| | | For the years ended April 30, | |
| | | 2010 | | | 2009 | |
| Future cash flows | | $ | 154,220 | | | $ | 207,103 | |
| Future production costs | | | (87,530 | ) | | | (126,000 | ) |
| Future income taxes | | | - | | | | - | |
| Future net cash flows | | | 66,690 | | | | 81,103 | |
| 10% annual discount for estimated timing of cash flows | | | (14,440 | ) | | | (42,724 | ) |
| Standardized Measure of Discounted Cash Flows | | $ | 52,250 | | | $ | 38,379 | |
The changes in the standardized measure of discounted future net cash flows relating to the proved oil and natural gas reserves are shown below.
| | | For the years ended April 30, | |
| | | 2010 | | | 2009 | |
| Beginning of year | | $ | 38,379 | | | $ | 1,923,078 | |
| Purchase of minerals in place | | | 207,645 | | | | 37,316 | |
| Extensions, discoveries and improved recovery, less related costs | | | - | | | | 1,900 | |
| Development costs incurred during the year | | | 95 | | | | 3,066 | |
| Sales of oil and gas produced, net of production costs | | | 9,270 | | | | 30,795 | |
| Unevaluated costs transferred to full cost pool | | | 126,607 | | | | - | |
| Impairments | | | (313,317 | ) | | | (417,840 | ) |
| Net changes in price and production costs | | | 48,325 | | | | (1,533,970 | ) |
| Revision of previous quantity estimates | | | (64,754 | ) | | | (5,966 | ) |
| End of year | | $ | 52,250 | | | $ | 38,379 | |
Management's Business Strategy Related to Properties
Our goal is to increase stockholder value by investing in oil and gas projects with attractive rates of return on capital employed. We plan to achieve this goal primarily by pursuing acquisitions of additional properties and secondarily by exploiting and developing our existing oil and natural gas properties in Washington County, Oklahoma.
Title to Properties
Title to properties is subject to contractual arrangements customary in the oil and gas industry, liens for current taxes not yet due and, in some instances, other encumbrances. We believe that such burdens do not materially detract from the value of such properties or from the respective interests therein or materially interfere with their use in the operation of the business.
As is customary in the industry, other than a preliminary review of local records, little investigation of record title is made at the time of acquisitions of undeveloped properties. Investigations, which generally include a title opinion of outside counsel, are made prior to the consummation of an acquisition of producing properties and before commencement of drilling operations on undeveloped properties.
IMPAIRMENTS
In 2009, the Company recorded an impairment of all of its gas reserves as a result of the low gas prices in effect at the time. In 2010, the Company recorded an impairment of an interest in two oil wells that it had acquired for its common stock in the amount of $108,000. It was determined during 2010, as the result of two failed workover attempts that the unevaluated property costs should be fully impaired and $126,607 was transferred from unevaluated property costs to the full cost pool. The Company recorded an additional impairment of $205,317 at the end of 2010. As a result of the gas reserves continuing to be impaired, the Company wrote off its investment in a pipeline of $132,663 that was principally used to gather the gas production.
OTHER
The Chief Executive Officer currently provides the Company's corporate office at no charge to the Company.
| ITEM 3: | LEGAL PROCEEDINGS |
There are no pending or threatened lawsuits against us.
PART II
| ITEM 5: | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
(a) MARKET INFORMATION
Our $0.001 par value per share common stock is traded in the over-the-counter market and is quoted on the National Association of Securities Dealers (“NASD”) Over-The Counter Bulletin Board (“OTCBB”) under the symbol “NAEY.OB.” Until we began trading on July 24, 2007, there was no public market for our common stock. Previously we traded under the symbol NAEN.OB.
The following table sets forth the quarterly high and low daily close for our common stock as reported by the OTCBB for the two years ended April 30, 2010 and 2009. The bids reflect inter dealer prices without adjustments for retail mark-ups, mark-downs or commissions and may not represent actual transactions.
| Period (Quarter ended) | | High | | | Low | |
| | | | | | | |
| 2010 | | | | | | |
| April 30, 2010 | | $ | 0.09 | | | $ | 0.04 | |
| January 31, 2010 | | $ | 0.20 | | | $ | 0.06 | |
| October 31, 2009 | | $ | 0.79 | | | $ | 0.20 | |
| July 31, 2009 | | $ | 2.00 | | | $ | 0.13 | |
| | | | | | | | | |
| 2009 | | | | | | | | |
| April 30, 2009 | | $ | 10.35 | | | $ | 0.80 | |
| January 31, 2009 | | $ | 121.50 | | | $ | 10.50 | |
| October 31, 2008 | | $ | 112.50 | | | $ | 50.00 | |
| July 31, 2008 | | $ | 45.00 | | | $ | 18.33 | |
The OTCBB is a quotation service sponsored by the NASD that displays real-time quotes and volume information in over-the-counter (“OTC”) equity securities. The OTCBB does not impose listing standards or requirements, does not provide automatic trade executions and does not maintain relationships with quoted issuers. A company traded on the OTCBB may face loss of market makers and lack of readily available bid and ask prices for its stock and may experience a greater spread between the bid and ask price of its stock and a general loss of liquidity with its stock. In addition, certain investors have policies against purchasing or holding OTCBB securities. Both trading volume and the market value of our securities have been, and will continue to be, materially affected by the trading on the OTCBB.
PENNY STOCK CONSIDERATIONS
Our shares will be “penny stocks” as that term is generally defined in the Securities Exchange Act of 1934 to mean equity securities with a price of less than $5.00. Our shares thus will be subject to rules that impose sales practice and disclosure requirements on broker-dealers who engage in certain transactions involving a penny stock.
Under the penny stock regulations, a broker-dealer selling a penny stock to anyone other than an established customer or accredited investor must make a special suitability determination regarding the purchaser and must receive the purchaser’s written consent to the transaction prior to the sale, unless the broker-dealer is otherwise exempt. Generally, an individual with a net worth in excess of $1,000,000, or annual income exceeding $100,000 individually or $300,000 together with his or her spouse, is considered an accredited investor. In addition, under the penny stock regulations the broker-dealer is required to:
| | · | Deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the Securities and Exchange Commission relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt; |
| | · | Disclose commissions payable to the broker-dealer and our registered representatives and current bid and offer quotations for the securities; |
| | · | Send monthly statements disclosing recent price information pertaining to the penny stock held in a customer’s account, the account’s value and information regarding the limited market in penny stocks; and |
| | · | Make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction, prior to conducting any penny stock transaction in the customer’s account. |
Because of these regulations, broker-dealers may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling shareholders or other holders to sell their shares in the secondary market and have the effect of reducing the level of trading activity in the secondary market. These additional sales practice and disclosure requirements could impede the sale of our securities, if our securities become publicly traded. In addition, the liquidity for our securities may be decrease, with a corresponding decrease in the price of our securities. Our shares in all probability will be subject to such penny stock rules and our shareholders will, in all likelihood, find it difficult to sell their securities.
RECENT SALES OF UNREGISTERED SECURITIES
During the quarter ended April 30, 2010, we sold 200,000 shares of our common stock in a private transaction for $6,000 in cash and issued 1,120,000 shares pursuant to consulting agreements valued at $89,600.
These shares were sold pursuant to an exemption from registration under Section 4(2) promulgated under the Securities Act of 1933, as amended.
There are 41 shareholders of record of the Company’s common stock at June 30, 2010.
The Company has not paid dividends to date and has no plans to do so in the foreseeable future.
| (d) | SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS |
The following table summarizes certain information as of April 30, 2010, with respect to compensation plans (including individual compensation arrangements) under which our common stock is authorized for issuance:
| | | Number of securities to be | | | | | |
| | | issued upon exercise of | | Weighted average exercise | | Number of securities | |
| | | outstanding options, | | price of outstanding | | remaining available | |
Plan category | | warrants and rights | | options, warrants and rights | | for future issuance | |
| | | | | | | | |
| Equity compensation plans approved by security holders: | | | | | | | | | |
| 2008 Plan | | | - | | | | | 1,242,333 | |
| | | | - | | | | | 1,242,333 | |
The North American Energy Resources, Inc. 2008 Stock Option Plan (“Plan”) was filed on September 11, 2008 and reserves 2,500,000 shares for Awards under the Plan. The Company’s Board of Directors is designated to administer the Plan and may designate a Compensation Committee for this purpose.
| ITEM 6: | SELECTED FINANCIAL DATA |
Not applicable.
| ITEM 7: | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This statement contains forward-looking statements within the meaning of the Securities Act. Discussions containing such forward-looking statements may be found throughout this statement. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, the matters set forth in this statement.
Revenues for the years ended April 30, 2010 and 2009 consisted of the following.
| | | 2010 | | | 2009 | |
| | | | | | | |
| Oil and natural gas sales | | $ | 14,343 | | | $ | 6,560 | |
| Pipeline fees | | | - | | | | 2,450 | |
| | | $ | 14,343 | | | $ | 9,010 | |
In 2010, the Company had oil sales of 220 BBL at an average price of $65.20. In 2009, the Company had oil sales of 46 BBL at an average price of $37.49 and gas sales of 1,215 MCF at an average price of $3.99. As a result of the substantial price decline for natural gas, the gathering system supporting our gas production was shut-in in February 2009 and the Company has not had gas sales since that time. Gas sales may resume when gas prices improve.
Costs and expenses consisted of the following for the years ended April 30, 2010 and 2009.
| | | 2010 | | | 2009 | |
| | | | | | | |
| Oil and natural gas production taxes | | $ | 1,033 | | | $ | 472 | |
| Oil and natural gas production expenses | | | 22,580 | | | | 36,882 | |
| Depreciation and amortization | | | 6,943 | | | | 5,799 | |
| Non-cash compensation | | | 759,279 | | | | 388,258 | |
| Asset impairment | | | 445,980 | | | | 417,840 | |
General and administrative expenses, net of operator's overhead fees | | | 112,784 | | | | 257,056 | |
| | | $ | 1,348,599 | | | $ | 1,106,307 | |
Production taxes are a percentage of revenue and vary directly with revenue. Production expenses have decreased due to substantially eliminating production expenses on gas wells which were shut-in. The Company had $9,670 and $8,948 in unrecovered expenses associated with our salt water disposal well in 2010 and 2009, respectively. Non-cash compensation primarily includes the cost of stock grants for consultants in 2010 and 2009. The increase in 2010 is also related to the lack of cash available to compensate consultants.
Asset impairment amounted to $445,980 and $417,840 in 2010 and 2009, respectively. The amount in 2010 includes the transfer to the full cost pool of property costs not previously evaluated of $126,607 due to unsuccessful workover attempts, a total of $313,317 due to ceiling test limitations and $132,663 for the Company's interest in a pipeline which has limited future viability with gas production shut-in.
General and administrative expenses, net of operator's overhead fees is summarized as follows for the two years ended April 30, 2010 and 2009.
| | | 2010 | | | 2009 | |
| | | | | | | |
| Accounting and auditing | | $ | 46,790 | | | $ | 44,120 | |
| Legal and professional | | | 34,161 | | | | 37,091 | |
| Consulting services | | | 1,650 | | | | 85,000 | |
| Bad debt expense | | | 15,415 | | | | 76,000 | |
| Office expenses | | | 11,623 | | | | 12,630 | |
| Shareholder communications | | | 10,345 | | | | 14,515 | |
| Operator overhead fees | | | (7,200 | ) | | | (12,300 | ) |
| | | $ | 112,784 | | | $ | 257,056 | |
During 2009, the Company had more cash available and paid some consulting services with cash, whereas, in 2010, the Company had little cash available and paid for most consulting services with common stock. We recognized a bad debt expense for a note with a balance of $76,000 during 2009, due to the determination that it was unlikely that we would be able to collect the balance. During 2010, we recorded a bad debt allowance of $10,000 and wrote off a note receivable balance of $5,415. Operator overhead fees are the fees charged to wells that the Company operates, which are reimbursed by other owners of the wells. This declined in 2010 due to operating fewer wells.
Other income (expense) consisted of the following for the years ended April 30, 2010 and 2009.
| | | 2010 | | | 2009 | |
| | | | | | | |
| Other income | | $ | - | | | $ | 266 | |
| Interest income - related party | | | 900 | | | | - | |
| Interest expense - related party | | | (49,618 | ) | | | (437 | ) |
| | | $ | (48,718 | ) | | $ | (171 | ) |
The Company incurred interest expense in 2010 with related parties primarily due to converting non-interest bearing advances at April 30, 2009 into a 12% convertible note payable effective May 1, 2009.
GOING CONCERN FACTORS—LIQUIDITY
The accompanying financial statements are prepared assuming the company will continue as a going concern. As of April 30, 2010, the Company’s current liabilities exceed its current assets by $332,656 and its total liabilities exceed its total assets by 274,542. The company has also incurred net losses since its inception. These factors, among others, raise substantial doubt as to the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company expects to raise capital with private placements of common stock and borrow funds as necessary to implement its business plan.
NEW ACCOUNTING STANDARDS
There are several new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) which are not yet effective. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company’s financial position or operating results. See Note 1 to the financial statements.
CRITICAL ACCOUNTING POLICIES
Our discussion of financial condition and results of operations is based upon the information reported in our financial statements. The preparation of these statements requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities at the date of our financial statements. We base our assumptions and estimates on historical experience and other sources that we believe to be reasonable at the time. Actual results may vary from our estimates due to changes in circumstances, weather, politics, global economics, mechanical problems, general business conditions and other factors. Our significant accounting policies are detailed in Note 1 to our financial statements included in this Annual Report. We have outlined below certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by our management.
REVENUE RECOGNITION – We have derived our revenue primarily from the sale of produced crude oil and natural gas. Revenue is recorded in the month the product is delivered to the purchaser. We receive payment from one to three months after delivery. At the end of each month, we estimate the amount of production delivered to purchasers and the price we will receive. Variances between our estimated revenue and actual payment are recorded in the month the payment is received; however, the differences should be insignificant.
FULL COST METHOD OF ACCOUNTING – We account for our oil and natural gas operations using the full cost method of accounting. Under this method, all costs associated with property acquisition, exploration and development of oil and gas reserves are capitalized. Costs capitalized include acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and cost of drilling and equipping productive and non-productive wells. Drilling costs include directly related overhead costs. All of our properties are currently located within the continental United States.
OIL AND NATURAL GAS RESERVE QUANTITIES – Reserve quantities and the related estimates of future net cash flows affect our periodic calculations of depletion and impairment of our oil and natural gas properties. Proved oil and natural gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future periods from known reservoirs under existing economic and operating conditions. Reserve quantities and future cash flows included in this Annual Report are prepared in accordance with guidelines established by the SEC and FASB. The accuracy of our reserve estimates is a function of:
· The quality and quantity of available data;
· The interpretation of that data;
· The accuracy of various mandated economic assumptions; and
· The judgments of the person preparing the estimates.
Our proved reserve information included in this Annual Report is based on estimates prepared by an independent petroleum consultant, Christopher Energy. Because these estimates depend on many assumptions, all of which may differ substantially from actual results, reserve estimates may be different from the quantities of oil and natural gas that are ultimately recovered. We will make changes to depletion rates and impairment calculations in the same period that changes in reserve estimates are made.
All capitalized costs of oil and gas properties, including estimated future costs to develop proved reserves and estimated future costs of site restoration, are amortized on the unit-of-production method using our estimate of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined.
IMPAIRMENT OF OIL AND NATURAL GAS PROPERTIES – We review the value of our oil and natural gas properties whenever management judges that events and circumstances indicate that the recorded carrying value of properties may not be recoverable. We provide for impairments on undeveloped property when we determine that the property will not be developed or a permanent impairment in value has occurred. Under the full cost method the net book value of oil and natural gas properties, less related deferred income taxes, may not exceed the estimated after-tax future net revenues from proved oil and natural gas properties, discounted at 10% (the “Ceiling Limitation”). In arriving at estimated future net revenues, estimated lease operating expenses, development costs, and certain production-related taxes are deducted. In calculating future net revenues, prices and costs in effect at the time of the calculation are held constant indefinitely, except for changes that are fixed and determinable by existing contracts. The net book value is compared to the ceiling limitation on a quarterly and yearly basis. The excess, if any, of the net book value above the ceiling limitation is charged to expense in the period in which it occurs and is not subsequently reinstated.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any material off-balance sheet arrangements.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
None.
| ITEM 7A: | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
| ITEM 8: | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The consolidated financial statements of North American Energy Resources, Inc. and Subsidiary together with the report thereon of Paritz & Company, P.A. for the years ended April 30, 2010 and 2009 and the period from inception (August 18, 2006) through April 30, 2010, is set forth as follows:
INDEX TO FINANCIAL STATEMENTS
| | Page |
| | |
| Report of Independent Registered Public Accounting Firm: | |
| Paritz & Company, P. A. | 25 |
| Consolidated Balance Sheet | 26 |
| Consolidated Statements of Operations | 27 |
| Consolidated Statements of Stockholders’ Deficit | 28 |
| Consolidated Statements of Cash Flows | 32 |
| Notes to Consolidated Financial Statements | 34 |
Paritz & Company, P.A.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
North American Energy Resources, Inc. and Subsidiary
(An Exploration Stage Company)
We have audited the accompanying consolidated balance sheets of North American Energy Resources, Inc. and Subsidiary (An Exploration Stage Company) as of April 30, 2010 and 2009, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years ended April 30, 2010 and 2009 and from inception (August 18, 2006) through April 30, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conduct our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the Consolidated financial position of North American Energy Resources, Inc., and subsidiary (An Exploration Stage Company) as of April 30, 2010 and 2009, and the consolidated results of its operations and its cash flows for the years then ended and for the period from inception (August 18, 2006 to April 30, 2010, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements are prepared assuming the company will continue as a going concern. As discussed in note 8, as of April 30, 2010, the Company’s current liabilities exceed its current assets by $332,656 and its total liabilities exceed its total assets by 274,542. The company has also incurred net losses since its inception. These factors, among others, raise substantial doubt as to the Company’s ability to continue as a going concern. Managements’ plans concerning these matters are also described in note 8. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Paritz & Company, P.A.
Paritz & Company, P.A.
Hackensack, New Jersey
July 29, 2010
NORTH AMERICAN ENERGY RESOURCES, INC. AND SUBSIDIARY
(An Exploration Stage Company)
Consolidated Balance Sheets
April 30, 2010 and 2009
| | | 2010 | | | 2009 | |
| ASSETS | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 3,026 | | | $ | 27,966 | |
| Accounts receivable | | | 13,150 | | | | 53,628 | |
| Due from related party | | | - | | | | 19,993 | |
| Prepaid expenses | | | 250,733 | | | | - | |
| Total current assets | | | 266,909 | | | | 101,587 | |
| Properties and equipment, at cost: | | | | | | | | |
| Proved oil and natural gas properties and equipment using full cost accounting | | | 68,424 | | | | 47,394 | |
| Pipeline | | | - | | | | 144,575 | |
| | | | 68,424 | | | | 191,969 | |
| Accumulated depreciation and amortization | | | (16,174 | ) | | | (15,143 | ) |
| Total properties and equipment | | | 52,250 | | | | 176,826 | |
| Other assets | | | 5,000 | | | | - | |
| Deposits | | | 864 | | | | - | |
| Total assets | | $ | 325,023 | | | $ | 278,413 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' DEFICIT | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | | | | | | | |
| Trade | | $ | 13,554 | | | $ | 47,756 | |
| Oil and gas proceeds due others | | | 4,990 | | | | 956 | |
| Due to related parties | | | - | | | | 2,000 | |
| Advances received from joint interest participants | | | 33,056 | | | | 62,802 | |
| Accrued interest | | | 49,618 | | | | - | |
| Convertible notes payable | | | 510,476 | | | | - | |
| Total current liabilities | | | 611,694 | | | | 113,514 | |
| Long-term debt | | | - | | | | 402,500 | |
| Total liabilities | | | 611,694 | | | | 516,014 | |
| Commitments and contingencies | | | | | | | | |
| | | | | | | | | |
| Stockholders' deficit: | | | | | | | | |
| Preferred stock: $0.001 par value; 100,000,000 shares authorized; no shares issued and outstanding | | | - | | | | - | |
| Common stock: $0.001 par value; 100,000,000 shares authorized; 17,375,539 and 14,035,539 shares issued and outstanding at April 30, 2010 and 2009, respectively | | | 17,376 | | | | 14,036 | |
| Additional paid in capital | | | 2,219,708 | | | | 960,948 | |
| Prepaid officer compensation | | | (12,129 | ) | | | (84,933 | ) |
| Other comprehensive loss | | | (1,000 | ) | | | - | |
| Deficit accumulated during the exploration stage | | | (2,510,626 | ) | | | (1,127,652 | ) |
| Total stockholders' deficit | | | (286,671 | ) | | | (237,601 | ) |
| Total liabilities and stockholders' deficit | | $ | 325,023 | | | $ | 278,413 | |
See accompanying notes to consolidated financial statements
NORTH AMERICAN ENERGY RESOURCES, INC. AND SUBSIDIARY
(An Exploration Stage Company)
Consolidated Statements of Operations
For the years ended April 30, 2010 and April 30, 2009 and the period
from inception (August 18, 2006) through April 30, 2010
| | | | | | | | | Inception | |
| | | | | | | | | (August 18, 2006) | |
| | | | | | | | | through | |
| | | | | | | | | April 30, | |
| | | 2010 | | | 2009 | | | 2010 | |
| Oil and natural gas sales | | $ | 14,343 | | | $ | 6,560 | | | $ | 39,015 | |
| Pipeline fees | | | - | | | | 2,450 | | | | 2,450 | |
| Total revenues | | | 14,343 | | | | 9,010 | | | | 41,465 | |
| Costs and expenses | | | | | | | | | | | | |
| Oil and natural gas production taxes | | | 1,033 | | | | 472 | | | | 2,810 | |
| Oil and natural gas production expenses | | | 22,580 | | | | 36,882 | | | | 98,303 | |
| Depreciation and amortization | | | 6,943 | | | | 5,799 | | | | 14,586 | |
| Compensation | | | 759,279 | | | | 388,258 | | | | 1,147,537 | |
| Asset impairment | | | 445,980 | | | | 417,840 | | | | 863,820 | |
General and administrative expense, net of operator's overhead fees | | | 112,784 | | | | 257,056 | | | | 374,827 | |
| | | | 1,348,599 | | | | 1,106,307 | | | | 2,501,883 | |
| Loss from operations | | | (1,334,256 | ) | | | (1,097,297 | ) | | | (2,460,418 | ) |
| | | | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | | | |
| Other income | | | - | | | | 266 | | | | 320 | |
| Interest income - related party | | | 900 | | | | - | | | | 900 | |
| Interest expense - related party | | | (49,618 | ) | | | (437 | ) | | | (51,428 | ) |
| Total other income (expense) | | | (48,718 | ) | | | (171 | ) | | | (50,208 | ) |
| Net loss | | | (1,382,974 | ) | | | (1,097,468 | ) | | | (2,510,626 | ) |
| Other comprehensive loss | | | | | | | | | | | | |
| Unrealized loss on available-for-sale securities | | | (1,000 | ) | | | - | | | | (1,000 | ) |
| Net comprehensive loss | | $ | (1,383,974 | ) | | $ | (1,097,468 | ) | | $ | (2,511,626 | ) |
| | | | | | | | | | | | | |
| Net loss per common share, basic and diluted | | $ | (0.09 | ) | | $ | (0.08 | ) | | | | |
| | | | | | | | | | | | | |
| Weighted average common shares outstanding | | | 15,850,041 | | | | 13,815,339 | | | | | |
See accompanying notes to consolidated financial statements.
NORTH AMERICAN ENERGY RESOURCES, INC. AND SUBSIDIARY
(An Exploration Stage Company)
Consolidated Statements of Stockholders' Deficit
For the years ended April 30, 2010 and 2009 and the period
from inception (August 18, 2006) through April 30, 2010
| | | | | | | | | | | | | | Intrinsic | |
| | | | | | | | | | | Additional | | | Value of | |
| | | | | Common stock | | | Paid in | | | Common | |
| | | Date | | Shares | | | Amount | | | Capital | | | Stock Options | |
| | | | | | | | | | | | | | | |
| BALANCE August 18, 2006 | | | | | - | | | $ | - | | | $ | - | | | $ | - | |
| Common stock issued for net assets | | 09/01/06 | | | 11,264,485 | | | | 11,265 | | | | 88,735 | | | | - | |
| Common stock issued for cash | | 09/07/06 | | | 1,126,448 | | | | 1,126 | | | | 8,874 | | | | - | |
| Common stock issued for cash | | 09/11/06 | | | 1,126,448 | | | | 1,126 | | | | 8,874 | | | | - | |
| Net loss | | | | | - | | | | - | | | | | | | | - | |
| BALANCE April 30, 2007 | | | | | 13,517,381 | | | | 13,517 | | | | 106,483 | | | | - | |
| Net loss | | | | | - | | | | - | | | | | | | | - | |
| BALANCE April 30, 2008 | | | | | 13,517,381 | | | | 13,517 | | | | 106,483 | | | | - | |
| Acquisition of North American Energy Resources, Inc. | | 07/28/08 | | | 177,000 | | | | 177 | | | | 119,653 | | | | - | |
| Conversion of note payable and accrued interest for common stock | | 07/31/08 | | | 153,000 | | | | 153 | | | | 35,377 | | | | - | |
| Common stock options granted for: | | | | | | | | | | | | | | | | | | |
| 350,000 shares at $1.00 per share | | 08/01/08 | | | - | | | | - | | | | 178,000 | | | | (178,000 | ) |
| 50,000 shares at $1.25 per share | | 08/01/08 | | | - | | | | - | | | | 27,096 | | | | (27,096 | ) |
| Exercise common stock options: | | | | | | | | | | | | | | | | | | |
| for $1.25 per share | | 09/22/08 | | | 100 | | | | - | | | | 6,250 | | | | - | |
| for $1.00 per share | | 09/22/08 | | | 1,000 | | | | 1 | | | | 49,999 | | | | - | |
| for $1.25 per share | | 10/13/08 | | | 100 | | | | - | | | | 6,250 | | | | - | |
| for $1.00 per share | | 10/13/08 | | | 70 | | | | - | | | | 3,500 | | | | - | |
| Accounts payable paid with common stock | | 10/14/08 | | | 90 | | | | - | | | | 9,016 | | | | - | |
| Amortize intrinsic value of options | | 10/31/08 | | | - | | | | - | | | | - | | | | 17,091 | |
| Cancel common stock options | | 11/05/08 | | | - | | | | - | | | | (188,005 | ) | | | 188,005 | |
| Common stock issued for compensation | | 11/07/08 | | | 100 | | | | - | | | | 6,250 | | | | - | |
| Common stock issued for accounts payable | | 11/07/08 | | | 60 | | | | - | | | | 3,000 | | | | - | |
| Common stock issued for consulting service | | 11/12/08 | | | 3,000 | | | | 3 | | | | 310,497 | | | | - | |
| Common stock issued for accounts payable | | 11/17/08 | | | 400 | | | | 1 | | | | 24,999 | | | | - | |
| Capital contribution by shareholder in cash | | 11/30/08 | | | - | | | | - | | | | 50,000 | | | | - | |
| Common stock issued for: | | | | | | | | | | | | | | | | | | |
| Compensation | | 12/09/08 | | | 338 | | | | - | | | | 5,000 | | | | - | |
| Accounts payable | | 12/09/08 | | | 300 | | | | - | | | | 1,200 | | | | - | |
| Accounts payable | | 12/09/08 | | | 400 | | | | - | | | | 6,000 | | | | - | |
| Compensation | | 01/05/09 | | | 500 | | | | 1 | | | | 4,999 | | | | - | |
| Accounts payable | | 01/05/09 | | | 800 | | | | 1 | | | | 3,199 | | | | - | |
| Accounts payable | | 01/05/09 | | | 400 | | | | 1 | | | | 3,999 | | | | - | |
| Accounts payable | | 01/19/09 | | | 4,000 | | | | 4 | | | | 14,996 | | | | - | |
| Compensation | | 01/26/09 | | | 1,500 | | | | 2 | | | | 4,998 | | | | - | |
| Accounts payable | | 02/24/09 | | | 6,000 | | | | 6 | | | | 9,761 | | | | - | |
| Compensation | | 02/24/09 | | | 1,000 | | | | 1 | | | | 1,999 | | | | - | |
| Compensation | | 03/04/09 | | | 4,000 | | | | 4 | | | | 4,996 | | | | - | |
| Compensation | | 04/06/09 | | | 4,000 | | | | 4 | | | | 5,996 | | | | - | |
| Officer compensation | | 04/21/09 | | | 160,000 | | | | 160 | | | | 145,440 | | | | - | |
| Net loss | | | | | - | | | | - | | | | | | | | - | |
| | | | | | | | | | | | | | | | | | | |
| BALANCE April 30, 2009 | | | | | 14,035,539 | | | $ | 14,036 | | | | 960,948 | | | | - | |
(Continued)
See accompanying notes to consolidated financial statements.
NORTH AMERICAN ENERGY RESOURCES, INC. AND SUBSIDIARY
(An Exploration Stage Company)
Consolidated Statements of Stockholders' Deficit, continued
For the years ended April 30, 2010 and 2009 and the period
from inception (August 18, 2006) through April 30, 2010
| | | | | | | | | Deficit | | | | |
| | | | | | Accumulated | | | Accumulated | | | | |
| | | Prepaid | | | Other | | | During the | | | | |
| | | Officer | | | Comprehensive | | | Development | | | | |
| | | Compensation | | | Loss | | | Stage | | | Total | |
| | | | | | | | | | | | | |
| BALANCE August 18, 2006 | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Common stock issued for net assets | | | - | | | | - | | | | - | | | | 100,000 | |
| Common stock issued for cash | | | - | | | | - | | | | - | | | | 10,000 | |
| Common stock issued for cash | | | - | | | | - | | | | - | | | | 10,000 | |
| Net loss | | | - | | | | - | | | | (5,379 | ) | | | (5,379 | ) |
| BALANCE April 30, 2007 | | | - | | | | - | | | | (5,379 | ) | | | 114,621 | |
| Net loss | | | - | | | | - | | | | (24,805 | ) | | | (24,805 | ) |
| | | | | | | | | | | | | | | | | |
| BALANCE April 30, 2008 | | | - | | | | - | | | | (30,184 | ) | | | 89,816 | |
| Acquisition of North American Energy Resources, Inc. | | | - | | | | - | | | | - | | | | 119,830 | |
| Conversion of note payable and accrued interest for common stock | | | - | | | | - | | | | - | | | | 35,530 | |
| Common stock options granted for: | | | | | | | | | | | | | | | | |
| 350,000 shares at $1.00 per share | | | - | | | | - | | | | - | | | | - | |
| 50,000 shares at $1.25 per share | | | - | | | | - | | | | - | | | | - | |
| Exercise common stock options: | | | | | | | | | | | | | | | | |
| for $1.25 per share | | | - | | | | - | | | | - | | | | 6,250 | |
| for $1.00 per share | | | - | | | | - | | | | - | | | | 50,000 | |
| for $1.25 per share | | | - | | | | - | | | | - | | | | 6,250 | |
| for $1.00 per share | | | - | | | | - | | | | - | | | | 3,500 | |
| Accounts payable paid with common stock | | | - | | | | - | | | | - | | | | 9,016 | |
| Amortize intrinsic value of options | | | - | | | | - | | | | - | | | | 17,091 | |
| Cancel common stock options | | | - | | | | - | | | | - | | | | - | |
| Common stock issued for compensation | | | - | | | | - | | | | - | | | | 6,250 | |
| Common stock issued for accounts payable | | | - | | | | - | | | | - | | | | 3,000 | |
| Common stock issued for consulting service | | | - | | | | - | | | | - | | | | 310,500 | |
| Common stock issued for accounts payable | | | - | | | | - | | | | - | | | | 25,000 | |
| Capital contribution by shareholder in cash | | | - | | | | - | | | | - | | | | 50,000 | |
| Common stock issued for: | | | | | | | | | | | | | | | | |
| Compensation | | | - | | | | - | | | | - | | | | 5,000 | |
| Accounts payable | | | - | | | | - | | | | - | | | | 1,200 | |
| Accounts payable | | | - | | | | - | | | | - | | | | 6,000 | |
| Compensation | | | - | | | | - | | | | - | | | | 5,000 | |
| Accounts payable | | | - | | | | - | | | | - | | | | 3,200 | |
| Accounts payable | | | - | | | | - | | | | - | | | | 4,000 | |
| Accounts payable | | | - | | | | - | | | | - | | | | 15,000 | |
| Compensation | | | - | | | | - | | | | - | | | | 5,000 | |
| Accounts payable | | | - | | | | - | | | | - | | | | 9,767 | |
| Compensation | | | - | | | | - | | | | - | | | | 2,000 | |
| Compensation | | | - | | | | - | | | | - | | | | 5,000 | |
| Compensation | | | - | | | | - | | | | - | | | | 6,000 | |
| Officer compensation | | | (84,933 | ) | | | - | | | | - | | | | 60,667 | |
| Net loss | | | - | | | | - | | | | (1,097,468 | ) | | | (1,097,468 | ) |
| | | | | | | | | | | | | | | | | |
| BALANCE April 30, 2009 | | | (84,933 | ) | | | - | | | | (1,127,652 | ) | | $ | (237,601 | ) |
(Continued)
See accompanying notes to consolidated financial statements.
NORTH AMERICAN ENERGY RESOURCES, INC. AND SUBSIDIARY
(An Exploration Stage Company)
Consolidated Statements of Stockholders' Deficit, continued
For the years ended April 30, 2010 and 2009 and the period
from inception (August 18, 2006) through April 30, 2010
| | | | | | | | | | | | | | Intrinsic | |
| | | | | | | | | | | Additional | | | Value of | |
| | | | | Common stock | | | Paid in | | | Common | |
| | | Date | | Shares | | | Amount | | | Capital | | | Stock Options | |
| | | | | | | | | | | | | | | |
| BALANCE April 30, 2009 | | | | | 14,035,539 | | | $ | 14,036 | | | $ | 960,948 | | | $ | - | |
| Common stock issued for: | | | | | | | | | | | | | | | | | | |
| consulting agreement | | 05/01/09 | | | 400,000 | | | | 400 | | | | 419,600 | | | | - | |
| consulting agreement | | 05/01/09 | | | 200,000 | | | | 200 | | | | 209,800 | | | | - | |
| oil and gas non-producing property | | 06/09/09 | | | 700,000 | | | | 700 | | | | 125,300 | | | | - | |
| accounts payable | | 07/27/09 | | | 10,000 | | | | 10 | | | | 4,990 | | | | - | |
| consulting agreement | | 07/27/09 | | | 30,000 | | | | 30 | | | | 14,970 | | | | - | |
| consulting agreement | | 07/27/09 | | | 30,000 | | | | 30 | | | | 14,970 | | | | - | |
| oil and gas producing property | | 09/25/09 | | | 350,000 | | | | 350 | | | | 192,150 | | | | - | |
| consulting contract | | 09/25/09 | | | 300,000 | | | | 300 | | | | 182,700 | | | | - | |
| cash | | 02/23/10 | | | 200,000 | | | | 200 | | | | 5,800 | | | | - | |
| consulting agreement | | 02/24/10 | | | 400,000 | | | | 400 | | | | 31,600 | | | | - | |
| consulting agreement - director fees | | 02/24/10 | | | 450,000 | | | | 450 | | | | 35,550 | | | | - | |
| consulting agreement - director fees | | 02/24/10 | | | 150,000 | | | | 150 | | | | 11,850 | | | | - | |
| officer compensation - director fees | | 02/24/10 | | | 120,000 | | | | 120 | | | | 9,480 | | | | - | |
| Other comprehensive loss on available-for- sale securities | | | | | - | | | | - | | | | - | | | | - | |
| Net loss | | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | |
| BALANCE April 30, 2010 | | | | | 17,375,539 | | | $ | 17,376 | | | $ | 2,219,708 | | | $ | - | |
(Continued)
See accompanying notes to consolidated financial statements.
NORTH AMERICAN ENERGY RESOURCES, INC. AND SUBSIDIARY
(An Exploration Stage Company)
Consolidated Statements of Stockholders' Deficit, continued
For the years ended April 30, 2010 and 2009 and the period
from inception (August 18, 2006) through April 30, 2010
| | | | | | | | | Deficit | | | | |
| | | | | | Accumulated | | | Accumulated | | | | |
| | | Prepaid | | | Other | | | During the | | | | |
| | | Officer | | | Comprehensive | | | Development | | | | |
| | | Compensation | | | Loss | | | Stage | | | Total | |
| | | | | | | | | | | | | |
| BALANCE April 30, 2009 | | $ | (84,933 | ) | | $ | - | | | $ | (1,127,652 | ) | | $ | (237,601 | ) |
| Common stock issued for: | | | | | | | | | | | | | | | | |
| consulting agreement | | | - | | | | - | | | | - | | | | 420,000 | |
| consulting agreement | | | - | | | | - | | | | - | | | | 210,000 | |
| oil and gas non-producing property | | | - | | | | - | | | | - | | | | 126,000 | |
| accounts payable | | | - | | | | - | | | | - | | | | 5,000 | |
| consulting agreement | | | - | | | | - | | | | - | | | | 15,000 | |
| consulting agreement | | | - | | | | - | | | | - | | | | 15,000 | |
| oil and gas producing property | | | - | | | | - | | | | - | | | | 192,500 | |
| consulting contract | | | - | | | | - | | | | - | | | | 183,000 | |
| cash | | | - | | | | - | | | | - | | | | 6,000 | |
| consulting agreement | | | - | | | | - | | | | - | | | | 32,000 | |
| consulting agreement - director fees | | | - | | | | - | | | | - | | | | 36,000 | |
| consulting agreement - director fees | | | - | | | | - | | | | - | | | | 12,000 | |
| officer compensation - director fees | | | - | | | | - | | | | - | | | | 9,600 | |
| Other comprehensive loss on available-for- sale securities | | | - | | | | (1,000 | ) | | | - | | | | (1,000 | ) |
| Amortize officer compensation | | | 72,804 | | | | - | | | | - | | | | 72,804 | |
| Net loss | | | - | | | | - | | | | (1,382,974 | ) | | | (1,382,974 | ) |
| BALANCE April 30, 2010 | | $ | (12,129 | ) | | $ | (1,000 | ) | | $ | (2,510,626 | ) | | $ | (286,671 | ) |
See accompanying notes to consolidated financial statements.
NORTH AMERICAN ENERGY RESOURCES, INC. AND SUBSIDIARY
(An Exploration Stage Company)
Consolidated Statements of Cash Flows
For the years ended April 30, 2010 and April 30, 2009 and the period
from inception (August 18, 2006) through April 30, 2010
| | | | | | | | | Inception | |
| | | | | | | | | (August 18, 2006) | |
| | | | | | | | | through | |
| | | | | | | | | April 30, | |
| | | 2010 | | | 2009 | | | 2010 | |
| Operating activities | | | | | | | | | |
| Net loss | | $ | (1,382,974 | ) | | $ | (1,097,468 | ) | | $ | (2,510,626 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | |
| Depreciation and amortization | | | 6,943 | | | | 5,799 | | | | 14,586 | |
| Non-cash compensation | | | 759,279 | | | | 388,258 | | | | 1,147,537 | |
| Asset impairment | | | 445,980 | | | | 417,840 | | | | 863,820 | |
| Bad debt expense | | | 15,415 | | | | 76,000 | | | | 91,415 | |
| Accounts receivable | | | (38,236 | ) | | | (1,397 | ) | | | (96,378 | ) |
| Accrued interest income - related party | | | (900 | ) | | | - | | | | (900 | ) |
| Prepaid expenses and other assets | | | (5,472 | ) | | | - | | | | (5,472 | ) |
| Accounts payable | | | 125,115 | | | | 125,645 | | | | 274,054 | |
| Accrued interest | | | 49,618 | | | | (1,094 | ) | | | 49,898 | |
| Related party advances for working capital | | | - | | | | (17,993 | ) | | | (17,993 | ) |
| Oil and gas proceeds due others | | | 4,034 | | | | 385 | | | | 4,990 | |
| Advances from joint interest owners | | | (29,747 | ) | | | (159,471 | ) | | | (8,417 | ) |
| Net cash used in operating activities | | | (50,945 | ) | | | (263,496 | ) | | | (193,486 | ) |
| | | | | | | | | | | | | |
| Investing activities | | | | | | | | | | | | |
| Payments for oil and natural gas properties and equipment | | | (95 | ) | | | (40,141 | ) | | | (161,418 | ) |
| Cash received in excess of cash paid to acquire North American Energy Resources, Inc. | | | - | | | | 119,830 | | | | 119,830 | |
| Proceeds from sale of oil and natural gas properties | | | - | | | | - | | | | 7,500 | |
| Payments for pipeline | | | - | | | | - | | | | (7,500 | ) |
| Net cash used in investing activities | | | (95 | ) | | | 79,689 | | | | (41,588 | ) |
| Financing activities | | | | | | | | | | | | |
| Loan proceeds | | | - | | | | 13,500 | | | | 48,750 | |
| Loans from shareholders | | | 20,100 | | | | (36,750 | ) | | | 113,350 | |
| Cash contributions from shareholders | | | - | | | | 50,000 | | | | 50,000 | |
| Sale of common stock | | | 6,000 | | | | - | | | | 26,000 | |
| Net cash provided by financing activities | | | 26,100 | | | | 26,750 | | | | 238,100 | |
| Net increase in cash and cash equivalents | | | (24,940 | ) | | | (157,057 | ) | | | 3,026 | |
Cash and cash equivalents, beginning of period | | | 27,966 | | | | 185,023 | | | | - | |
Cash and cash equivalents, end of period | | $ | 3,026 | | | $ | 27,966 | | | $ | 3,026 | |
(Continued)
See accompanying notes to consolidated financial statements.
NORTH AMERICAN ENERGY RESOURCES, INC. AND SUBSIDIARY
(An Exploration Stage Company)
Consolidated Statements of Cash Flows, Continued
For the years ended April 30, 2010 and April 30, 2009 and the period
from inception (August 18, 2006) through April 30, 2010
| | | | | | | | | Inception | |
| | | | | | | | | (August 18, 2006) | |
| | | | | | | | | through | |
| | | | | | | | | April 30, | |
| | | 2010 | | | 2009 | | | 2010 | |
| | | | | | | | | | |
| Supplemental cash flow information | | | | | | | | | |
| Cash paid for interest and income taxes: | | | | | | | | | |
| Interest | | $ | - | | | $ | 437 | | | $ | 437 | |
| Income taxes | | | - | | | | - | | | | - | |
| Non-cash investing and financing activities: | | | | | | | | | | | | |
| Common stock issued for: | | | | | | | | | | | | |
| Notes receivable | | $ | - | | | $ | - | | | $ | 76,000 | |
| Oil and gas properties | | | - | | | | - | | | | 303,670 | |
| Interest in pipeline | | | - | | | | - | | | | 100,000 | |
| Loans to shareholders assumed | | | - | | | | - | | | | (371,000 | ) |
| Advance from joint interest participant assumed | | | - | | | | - | | | | (8,670 | ) |
| | | | | | | | | | | $ | 100,000 | |
| Common stock issued for convertible note payable and accrued interest | | | - | | | | 35,530 | | | | 35,530 | |
| Exchange of joint interest receivable for oil and natural gas properties | | | 15,752 | | | | 37,316 | | | | 53,068 | |
| Common stock options granted | | | - | | | | - | | | | 205,096 | |
| Common stock options cancelled | | | - | | | | - | | | | 188,005 | |
| Common stock issued for consulting agreements | | | 902,600 | | | | - | | | | 902,600 | |
| Unevaluated oil and gas properties | | | 126,000 | | | | - | | | | 126,000 | |
| Proven oil and natural gas properties | | | 192,500 | | | | - | | | | 192,500 | |
| Accounts payable | | | 5,000 | | | | - | | | | 106,183 | |
| Chief executive officer compensation | | | 9,600 | | | | - | | | | 155,200 | |
| Credit balance transferred from accounts receivable to accounts payable | | | 1,068 | | | | - | | | | 1,068 | |
| Accounts receivable applied as payment on note payable to related party | | | 4,572 | | | | - | | | | 4,572 | |
| Option exercises paid by reducing note payable to related party | | | - | | | | - | | | | 75,250 | |
| Advance from shareholder converted to note | | | 2,000 | | | | - | | | | 2,000 | |
See accompanying notes to consolidated financial statements.
NORTH AMERICAN ENERGY RESOURCES, INC. AND SUBSIDIARY
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
| NOTE 1: | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The consolidated financial statements include the accounts of North American Energy Resources ("NAEY") and its wholly owned subsidiary North American Exploration, Inc. (“NAE”) (collectively the "Company").
NAEY was originally organized in Nevada on August 22, 2006 with the name Mar Ked Mineral Exploration, Inc. ("Mar Ked"). The Company changed its name from Mar Ked to North American Energy Resources, Inc. on August 11, 2008.
At a special meeting of shareholders held on April 23, 2009, 63% of our shareholders, either in person or by proxy, voted to approve a 1:50 reverse split of the Company's common stock. This amendment to the Company's Articles of Incorporation was filed with the Nevada Secretary of State and became effective on April 27, 2009. Accordingly, all references to shares of our common stock included herein have been retroactively restated to give effect to the reverse split.
On July 28, 2008, the Company acquired 100% of the outstanding stock of NAE for 420,000 shares of our common stock pursuant to a Stock Purchase Agreement ("SPA"). Completion of the SPA resulted in the shareholders of NAE having control of NAEY. Accordingly, the transaction was recorded for accounting purposes as the acquisition of NAE by NAEY with NAE as the acquirer (reverse acquisition). The financial statements of the Company prior to July 28, 2008 are those of NAE. Formerly NAEY used a November 30 year-end. As a result of the reverse acquisition, the Company will utilize the April 30 year-end of NAE after April 30, 2008.
The SPA provided that NAEY was to have $1,500,000 in cash and no liabilities at closing. At closing, NAEY had $150,000 of the required cash and on August 28, 2008, the parties to the SPA entered into a Modification Agreement ("MA") which provided an extension until January 27, 2009 for the additional cash to be contributed to the Company. At January 27, 2009, the Company had received an additional $50,000 and was still short $1,300,000 of the amount agreed. The MA provided that the Buyer would make contingent issuances of shares to the Seller equal to 95% of all the outstanding stock after issuance. Accordingly, effective April 30, 2009, an additional 13,250,381 shares were issued to the Sellers. The total purchase price for NAE was 13,690,381 shares of common stock.
NAE was organized in Nevada on August 18, 2006 as Signature Energy, Inc. and changed its name to North American Exploration, Inc. on June 2, 2008.
Business
The Company operates in the upstream segment of the oil and gas industry with activities, including the drilling, completion and operation of oil and gas wells in Oklahoma. The Company also has an interest in a pipeline in its area of operations which is used for gathering its gas and the gas production of other producers.
Exploration stage
The Company is in the exploration stage and has realized only nominal revenue to date. The Company has developed a portion of the leasehold which it owns in Washington County, Oklahoma. Accordingly, the operation of the Company is presented as those of an exploration stage enterprise, from its inception (August 18, 2006).
Cash and cash equivalents
The Company considers all cash on hand; cash in banks and all highly liquid debt instruments purchased with a maturity of three months or less to be cash and cash equivalents. At times cash and cash equivalent balances at a limited number of banks and financial institutions may exceed insurable amounts. The Company believes it mitigates its risks by depositing cash or investing in cash equivalents in major financial institutions.
Revenue recognition
Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, and no other significant obligations of the Company exist and collectability is reasonably assured.
Property and equipment
The Company follows the full cost method of accounting for oil and natural gas operations. Under this method all productive and nonproductive costs incurred in connection with the acquisition, exploration and development of oil and natural gas reserves are capitalized. No gains or losses are recognized upon the sale or other disposition of oil and natural gas properties except in transactions that would significantly alter the relationship between capitalized costs and proved reserves. The costs of unevaluated oil and natural gas properties are excluded from the amortizable base until the time that either proven reserves are found or it has determined that such properties are impaired. The Company had no capitalized costs related to unevaluated properties at April 30, 2010 and 2009. As properties are evaluated, the related costs would be transferred to proven oil and natural gas properties using full cost accounting. All capitalized costs were included in the amortization base as of April 30, 2010 and 2009.
Under the full cost method the net book value of oil and natural gas properties, less related deferred income taxes, may not exceed the estimated after-tax future net revenues from proved oil and natural gas properties, discounted at 10% (the “Ceiling Limitation”). In arriving at estimated future net revenues, estimated lease operating expenses, development costs, and certain production-related taxes are deducted. In calculating future net revenues, in 2010, revenues are based on the arithmetic average of beginning of month prices for the past year and in 2009 revenues are based on prices in effect at the end of 2009. Costs in effect at the time of the calculation for both years are held constant indefinitely, except for changes that are fixed and determinable by existing contracts. The net book value is compared to the ceiling limitation on a quarterly and yearly basis. The excess, if any, of the net book value above the ceiling limitation is charged to expense in the period in which it occurs and is not subsequently reinstated. Reserve estimates used in determining estimated future net revenues have been prepared by an independent consultant. The Company recorded an impairment of $313,317 and $417,840 in 2010 and 2009, respectively.
Other property and equipment consists principally of the Company’s interest in a pipeline. Other property and equipment and related accumulated amortization and depreciation are relieved upon retirement or sale and the gain or loss is included in operations. Renewals and replacements that extend the useful life of property and equipment are treated as capital additions. Accumulated depreciation of other property and equipment at April 30, 2009 is $6,128. The equipment was written off at the end of 2010 and an asset impairment charge of $132,663 was recorded.
The Company assesses the recoverability of the carrying value of its non-oil and gas long-lived assets when events occur that indicate an impairment in value may exist. An impairment loss is indicated if the sum of the expected undiscounted future net cash flows is less than the carrying amount of the assets. If this occurs, an impairment loss is recognized for the amount by which the carrying amount of the assets exceeds the estimated fair value of the asset.
Depreciation and amortization
All capitalized costs of oil and natural gas properties and equipment, including the estimated future costs to develop proved reserves, are amortized using the unit-of-production method based on total proved reserves. Depreciation of other equipment is computed on the straight-line method over the estimated useful lives of the assets, which range from three to twenty-five years.
Natural gas sales and gas imbalances
The Company follows the entitlement method of accounting for natural gas sales, recognizing as revenues only its net interest share of all production sold. Any amount attributable to the sale of production in excess of or less than the Company’s net interest is recorded as a gas balancing asset or liability. At April 30, 2010 and 2009, there were no natural gas imbalances.
Credit and market risk
The Company sells oil and natural gas to one customer and participates with other parties in the drilling, completion and operation of oil and natural gas wells. Joint interest and oil and natural gas sales receivables related to these operations are generally unsecured. The Company provides an allowance for doubtful accounts for certain joint interest owners’ receivable balances when the Company believes the recoverable balance may not be collected. The Company has the right of offset of the joint interest owners’ share of oil and natural gas production against amounts owed by the joint interest owners. Accounts receivable are presented net of the related allowance for doubtful accounts.
In 2010 and 2009, the Company had cash deposits in certain banks that at times exceeded the maximum insured by the Federal Deposit Insurance Corporation. The Company monitors the financial condition of the banks and has experienced no losses on these accounts.
General and administrative expense
The Company receives fees for the operation of jointly owned oil and natural gas properties and records such reimbursements as reductions of general and administrative expense. Such fees totaled approximately $7,200 and $12,300 in 2010 and 2009, respectively.
Oil and natural gas reserve estimates
The Company engaged an independent consultant to prepare its oil and natural gas reserves. Proved reserves, estimated future net revenues and the present value of our reserves are estimated based upon a combination of historical data and estimates of future activity. Consistent with SEC requirements, we have based our revenue projections on the arithmetic average of beginning of the month historical prices in 2010 and on spot prices on the date of the estimate for 2009. The reserve estimates are used in calculating depletion, depreciation and amortization and in the assessment of the Company’s Ceiling Limitation. Significant assumptions are required in the valuation of proved oil and natural gas reserves which, as described herein, may affect the amount at which oil and natural gas properties are recorded. Actual results could differ materially from these estimates.
Income taxes
Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes. Deferred taxes are provided on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, and tax carry forwards. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Earnings (loss) per common share
The Company is required to report both basic earnings per share, which is based on the weighted-average number of common shares outstanding, and diluted earnings per share, which is based on the weighted-average number of common shares outstanding plus all potential dilutive shares outstanding. At April 30, 2010 and 2009, there were no potentially dilutive common stock equivalents. Accordingly, basic and diluted earnings (loss) per share are the same for each of the periods presented.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair value of financial instruments
Financial instruments consist of accounts payable, accrued expenses and short-term borrowings. The carrying amount of these financial instruments approximates fair value due to their short-term nature or the current rates at which the Company could borrow funds with similar remaining maturities.
Stock option plans
The compensation cost relating to share-based payment transactions (including the cost of all employee stock options) is required to be recognized in the financial statements. That cost will be measured based on the estimated fair value of the equity or liability instruments issued. The accounting literature covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models may not necessarily provide a reliable single measure of the fair value of its options. However, the Black-Scholes option valuation model provides the best available estimate for this purpose.
Contingencies
Certain conditions may exist as of the date financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. Company management and its legal counsel assess such contingencies related to legal proceeding that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a liability has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or if probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable would be disclosed.
Asset retirement obligations
The fair value of a liability for an asset retirement obligation is required to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, and that the associated retirement costs be capitalized as part of the carrying amount of the long-lived asset. The Company determines its asset retirement obligation by calculating the present value of the estimated cash flows related to the liability. Periodic accretion of the discount of the estimated liability would be recorded in the statement of operations. At April 30, 2010 and 2009, the Company has estimated that its share of the salvage value of lease equipment would exceed its share of the cost of plugging and abandoning its producing properties.
Recent accounting pronouncements
Below is a listing of the most recent accounting standards and their effect on the Company.
In January 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-06 (ASU 2010-06), Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This amendment to Topic 820 has improved disclosures about fair value measurements on the basis of input received from the users of financial statements. This is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted. The Company adopted the provisions of ASU 2010-06 on January 31, 2010,and it did not have a material effect on the financial position, results of operations or cash flows of the Company.
In January 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-03 (ASU 2010-03), Extractive Activities—Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosures. This amendment to Topic 932 has improved the reserve estimation and disclosure requirements by (1) updating the reserve estimation requirements for changes in practice and technology that have occurred over the last several decades and (2) expanding the disclosure requirements for equity method investments. This is effective for annual reporting periods ending on or after December 31, 2009. However, an entity that becomes subject to the disclosures because of the change to the definition oil- and gas- producing activities may elect to provide those disclosures in annual periods beginning after December 31, 2009. Early adoption is not permitted. The Company adopted the provisions of ASU 2010-03 on April 30, 2010 which did not have a material effect on the financial position, results of operations or cash flows of the Company.
| NOTE 2: | ACCOUNTS AND NOTE RECEIVABLE |
Accounts receivable at April 30, 2010 and 2009 include the following:
| | | 2010 | | | 2009 | |
| | | | | | | |
| Natural gas sales, net | | $ | 4,279 | | | $ | - | |
| Joint interest operations, net | | | 18,871 | | | | 53,628 | |
| Allowance for doubtful accounts | | | (10,000 | ) | | | - | |
| | | $ | 13,150 | | | $ | 53,628 | |
During the two years ended April 30, 2010 and 2009, the Company has acquired interests in oil and gas properties in exchange for $15,752 and $37,316 of joint interest receivables, respectively.
The Company had a note receivable with a balance of $76,000 at April 30, 2008, which was accruing interest at its default rate of 12%. During 2009, the Company recorded $76,000 in bad debt expense and fully reserved the note receivable.
During 2010, the Company established an allowance for doubtful accounts in the amount of $10,000 and wrote off the balance of a note receivable from a related party in the amount of $5,415.
The Company has recorded prepaid expenses from the issue of its common stock for consulting services. The cost, based on the trading price of the stock at the time of the transaction, is amortized to expense over the term of the contracts. The unamortized balances at April 30, 2010 and 2009 are as follows.
| | | 2010 | | | 2009 | |
| Current asset | | | | | | |
| Stockholder relations firm | | $ | 168,000 | | | $ | - | |
| Consulting firm assisting with listing common stock on the Frankfort Exchange | | | 68,625 | | | | - | |
| Administrative management | | | 9,500 | | | | - | |
| Other prepaid expense | | | 4,608 | | | | - | |
| | | $ | 250,733 | | | $ | - | |
| Component of stockholders' deficit | | | | | | | | |
| Chief executive officer compensation | | $ | 12,129 | | | $ | 84,933 | |
| NOTE 4: | RELATED PARTY TRANSACTIONS |
The Company had non-interest bearing obligations to its shareholders at April 30, 2009, of $2,000.
The Company sold its gas pursuant to a contract with a gathering system principally owned by a related party. The Company received a price equal to 70% of the posted price. The related party retained the other 30% of the posted price for gathering fees and marketing fees. At April 30, 2010 and 2009, the gathering system was shut-in due to low gas prices and had no deliveries in 2010.
At April 30, 2009, the Company had advanced $19,993 to one shareholder consultant. During 2010, the Company accrued interest of $900, received a payment of $15,478 and recorded bad debt expense for the balance of $5,415.
In April 2009, the Company issued 160,000 shares of its common stock valued at $145,600 to its Chief Executive Officer for compensation for the period from August 1, 2008 through July 31, 2010. See Note 3. In February 2010, the Company issued an additional 120,000 shares of its common stock valued at $9,600 for director fees to its CEO, issued 450,000 shares of its common stock valued at $36,000 to a Director for director fees and consulting services and issued 150,000 shares of its common stock valued at $12,000 to a company controlled by a Director for director fees and management services.
The Company has notes payable to shareholders in the amount of $406,528 and $389,000 at April 30, 2010 and 2009, respectively, as described in Note 5.
The Chief Executive Officer currently provides the corporate office for the Company at no charge.
| NOTE 5: | CONVERTIBLE NOTES PAYABLE AND LONG-TERM DEBT |
Convertible notes payable and long-term debt consists of the following at April 30, 2010 and 2009.
| | | 2010 | | | 2009 | |
| | | | | | | |
| Convertible note payable due April 27, 2011 with interest at 12% per annum; convertible into the Company's common stock at the rate of $1.00 per share | | $ | 13,500 | | | $ | 13,500 | |
| Convertible note payable due March 1, 2011 with interest at 12% per annum; convertible into the Company's common stock at the rate of $0.10 per share | | | 53,618 | | | | - | |
| Convertible note payable due March 1, 2011 with interest at 12% per annum; convertible into the Company's common stock at the rate of $0.03 per share | | | 36,830 | | | | - | |
| Convertible notes payable to shareholders due April 30, 2011 with interest at 12% per annum; convertible into the Company's common stock at the rate of $0.04 per share | | | 22,100 | | | | - | |
| Convertible note payable to a shareholder due May 1, 2010 with interest at 12% per annum; convertible into the Company's common stock at the rate of $1.50 per share | | | 384,428 | | | | 389,000 | |
| Total | | | 510,476 | | | | 402,500 | |
| Long term debt, less current maturities | | | - | | | | (402,500 | ) |
| Current maturities of long-term debt | | $ | 510,476 | | | $ | - | |
The $389,000 convertible note payable to a shareholder consists of all non-interest bearing advances to this shareholder at April 30, 2009.
| NOTE 6: | STOCKHOLDER’S EQUITY |
PREFERRED STOCK
The Company has 100,000,000 shares of $0.001 par value preferred stock authorized and no shares issued or outstanding at April 30, 2010 and 2009.
COMMON STOCK
The Company has 100,000,000 shares of its $0.001 par value common stock authorized. At April 30, 2010 and 2009 the Company had 17,375,539 and 14,035,539 shares issued and outstanding, respectively.
REVERSE SPLIT
At a special meeting of shareholders held on April 23, 2009, 63% of our shareholders, either in person or by proxy, voted to approve a 1:50 reverse split of the Company's common stock. This amendment to the Company's Articles of Incorporation was filed with the Nevada Secretary of State and became effective on April 27, 2009. Accordingly, all references to shares of our common stock included herein have been retroactively restated to give effect to the reverse split.
CONTINGENT SHARES
On July 28, 2008, the Company acquired 100% of the outstanding stock of NAE for 420,000 shares of our common stock pursuant to a Stock Purchase Agreement ("SPA"). Completion of the SPA resulted in the shareholders of NAE having control of NAEY.
The SPA provided that NAEY was to have $1,500,000 in cash and no liabilities at closing. At July 28, 2008, the closing date, NAEY had $150,000 of the required cash and on August 28, 2008, the parties to the SPA entered into a Modification Agreement ("MA") which provided an extension until January 27, 2009 for the additional cash to be contributed to the Company. At January 27, 2009, the Company had received an additional $50,000 and was still short $1,300,000 of the agreed amount. The MA provided that the Buyer would make contingent issuances of shares to the Seller equal to 95% of all the outstanding stock after issuance. Accordingly, effective April 30, 2009, an additional 13,250,381 shares were issued to the Sellers. The total purchase price of NAE was 13,670,381 shares.
COMMON STOCK OPTIONS
The North American Energy Resources, Inc. 2008 Stock Option Plan ("Plan") was filed on September 11, 2008 and reserved 2,500,000 shares for awards under the Plan. The Company's Board of Directors is designated to administer the Plan and may form a Compensation Committee for this purpose. The Plan terminates on July 23, 2013.
Options granted under the Plan may be either "incentive stock options" intended to qualify as such under the Internal Revenue Code, or "non-qualified stock options." Options outstanding under the Plan have a maximum term of up to ten years, as designated in the option agreements.
A summary of stock option activity during the years ended April 30, 2010 and 2009 follows.
| | | | | | Weighted | | | | |
| | | | | | average | | | Initial | |
| | | | | | exercise | | | intrinsic | |
| | | Shares | | | price | | | value | |
| | | | | | | | | | |
| Outstanding, April 30, 2008 | | | 0 | | | | 0 | | | | 0 | |
| | | | | | | | | | | | | |
| Granted | | | 1,586,167 | | | $ | 0.32 | | | $ | 205,096 | |
| Exercised | | | (1,257,667 | ) | | $ | 0.14 | | | | (17,091 | ) |
| Forfeited/cancelled | | | (328,500 | ) | | $ | 0.97 | | | | (188,005 | ) |
| Outstanding, April 30, 2009 | | | - | | | | | | | $ | - | |
| Granted | | | - | | | | | | | | - | |
| Exercised | | | - | | | | | | | | - | |
| Forfeited/cancelled | | | - | | | | | | | | - | |
| Outstanding, April 30, 2010 | | | - | | | | | | | $ | - | |
| Plan shares available for grant | | | 1,242,333 | | | | | | | | | |
The fair value of each option on the date of grant is estimated using the Black Scholes option valuation model. The following weighted-average assumptions were used for options granted during the year ended April 30, 2009.
| | | 2009 | |
| | | | |
| Expected term | | 3 years | |
| Expected average volatility | | | 126.39 | % |
| Expected dividend yield | | | 0 | % |
| Risk-free interest rate | | | 3.50 | % |
| Expected annual forfeiture rate | | | 0 | % |
The Company has not provided a deferred tax benefit or expense for the years ended April 30, 2010 and 2009, as all net deferred tax assets have a full valuation allowance.
Actual income tax benefit applicable to net loss before income taxes is reconciled with the “normally expected” federal income tax as follows:
| | | 2010 | | | 2009 | |
| | | | | | | |
| "Normally expected" income tax benefit | | $ | (470,200 | ) | | $ | (373,200 | ) |
| State income taxes net of federal income tax benefit | | | (55,300 | ) | | | (43,900 | ) |
| Valuation allowance | | | 525,500 | | | | 417,100 | |
| Total | | $ | - | | | $ | - | |
The Company’s income tax provision was computed based on the federal statutory rate and the average state rate, net of the related federal benefit. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
| | | 2010 | | | 2009 | |
| | | | | | | |
| Net operating loss carryforward | | $ | 675,400 | | | $ | 271,200 | |
| Depreciable/depletable property, plant and equipment | | | 278,700 | | | | 157,400 | |
| Valuation allowance | | | (954,100 | ) | | | (428,600 | ) |
| Total | | $ | - | | | $ | - | |
At April 30, 2010, the Company has a net operating loss carryforward in the amount of approximately $1,777,000, which expires between 2027 and 2030.
The accompanying financial statements are prepared assuming the company will continue as a going concern. As of April 30, 2010, the Company’s current liabilities exceed its current assets by $332,656 and its total liabilities exceed its total assets by 274,542. The company has also incurred net losses since its inception. These factors, among others, raise substantial doubt as to the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company expects to raise capital with private placements of common stock and borrow funds as necessary to implement its business plan.
The Company recorded the following asset impairments during the years ended April 30, 2010 and 2009.
| | | 2010 | | | 2009 | |
| | | | | | | |
| Ceiling test limitation of oil and gas reserves | | $ | 313,317 | | | $ | 417,840 | |
| Impairment of interest in pipeline | | | 132,663 | | | | - | |
| | | $ | 445,980 | | | $ | 417,840 | |
In 2009, the Company recorded an impairment of all of its gas reserves as a result of the low gas prices in effect at the time. In 2010, the Company recorded an impairment of an interest in two oil wells that it had acquired for its common stock in the amount of $108,000. It was determined during 2010, as the result of two failed workover attempts that the unevaluated property costs should be fully impaired and $126,607 was transferred from unevaluated property costs to the full cost pool. The Company recorded an impairment of $205,317 at April 30, 2010 based on its estimate of reserves. In addition, as a result of the gas reserves continuing to be impaired, the Company wrote off its investment in a pipeline of $132,663 that was principally used to gather the gas production.
| NOTE 10: | SUPPLEMENTARY OIL AND GAS RESERVE INFORMATION (UNAUDITED) |
The Company has interest in oil and natural gas properties that are all located in Washington County, Oklahoma at April 30, 2010 and 2009.
The Company engaged an independent consultant to prepare its own year-end estimates of future net recoverable oil and natural gas reserves. Estimated proved net recoverable reserves as shown below include only those quantities that can be expected to be commercially recoverable using the beginning of month average prices in 2010 and the end of year prices in 2009 and costs in effect at the balance sheet dates existing under existing regulatory practices and with conventional equipment and operating methods.
Proved developed reserves represent only those reserves expected to be recovered through existing wells. Proved undeveloped reserves would include those reserves expected to be recovered from new wells on un-drilled acreage or from existing wells on which a relatively major expenditure is required for re-completion.
Capitalized costs relating to oil and natural gas producing activities and related accumulated depreciation and amortization at April 30, 2010 and 2009 are summarized as follows:
| | | 2010 | | | 2009 | |
| | | | | | | |
| Proved oil and natural gas properties under full cost | | $ | 68,424 | | | $ | 47,394 | |
| Accumulated depreciation and amortization | | | (16,174 | ) | | | (9,015 | ) |
| | | $ | 52,250 | | | $ | 38,379 | |
Costs incurred in oil and natural gas producing activities for the year ended April 30, 2010 and 2009 are summarized as follows:
| | | 2010 | | | 2009 | |
| | | | | | | |
| Acquisition of proved properties | | $ | 207,645 | | | $ | 37,316 | |
| Acquisition of non-producing properties | | | 126,607 | | | | - | |
| Development costs | | | 95 | | | | 3,066 | |
| | | $ | 334,347 | | | $ | 40,382 | |
| | | | | | | | | |
| Amortization rate per equivalent BOE | | $ | 23.22 | | | $ | 5.27 | |
Net quantities of proved and proved developed reserves of oil and natural gas are summarized as follows:
| | | Oil (BBLs) | | | Gas (MCF) | |
| | | | | | | |
| Balance, April 30, 2008 | | | - | | | | 1,603,895 | |
| Extensions and discoveries | | | 7,334 | | | | | |
| Revisions of estimates | | | - | | | | (1,602,680 | ) |
| Production | | | (46 | ) | | | (1,215 | ) |
| Balance, April 30, 2009 | | | 7,288 | | | | - | |
| Extensions and discoveries | | | - | | | | - | |
| Acquisition of producing reserves | | | 7,222 | | | | - | |
| Revisions of estimates | | | (12,040 | ) | | | - | |
| Production | | | (220 | ) | | | - | |
| Balance, April 30, 2010 | | | 2,250 | | | | - | |
The following is a summary of a standardized measure of discounted net cash flows related to the Company’s proved oil and natural gas reserves. For these calculations, estimated future cash flows from estimated future production of proved reserves were computed using the arithmetic average of beginning of month prices for the year ended April 30, 2010 and oil and natural gas spot prices as of the end of the period presented for 2009. Future development and production costs attributable to the proved reserves were estimated assuming that existing conditions would continue over the economic lives of the individual leases and costs were not escalated for the future. Estimated future income tax expenses were calculated by applying future statutory tax rates (based on the current tax law adjusted for permanent differences and tax credits) to the estimated future pretax net cash flows related to proved oil and natural gas reserves, less the tax basis of the properties involved.
The Company cautions against using this data to determine the fair value of its oil and natural gas properties. To obtain the best estimate of the fair value of the oil and natural gas properties, forecasts of future economic conditions, varying discount rates, and consideration of other than proved reserves would have to be incorporated into the calculation. In addition, there are significant uncertainties inherent in estimating quantities of proved reserves and in projection rates of production that impair the usefulness of the data.
In 2009, the Company recorded an impairment of all of its gas reserves as a result of the low gas prices in effect at the time. In 2010, the Company recorded an impairment of an interest in two oil wells that it had acquired for its common stock in the amount of $108,000. It was determined during 2010, as the result of two failed workover attempts that the unevaluated property costs should be fully impaired and $126,607 was transferred from unevaluated property costs to the full cost pool. The Company recorded an impairment of $205,317 at the end of 2010. In addition, as a result of the gas reserves continuing to be impaired, the Company wrote off its investment in a pipeline of $132,663 that was principally used to gather the gas production.
The standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves at April 30, 2010 and 2009 are summarized as follows:
| | | 2010 | | | 2009 | |
| | | | | | | |
| Future cash inflows | | $ | 154,220 | | | $ | 207,103 | |
| Future production costs | | | (87,530 | ) | | | (126,000 | ) |
| Future income tax expenses | | | - | | | | - | |
| Future net cash flows | | | 66,690 | | | | 81,103 | |
| 10% annual discount for estimated timing of cash flows | | | (14,440 | ) | | | (42,724 | ) |
| Standardized measure of discounted future net cash flows | | $ | 52,250 | | | $ | 38,379 | |
The following are the principal sources of changes in the standardized measure of discounted future net cash flows of the Company for the years ended April 30, 2010 and 2009:
| | | 2010 | | | 2009 | |
| Standardized measure of discounted future net cash flows at beginning of period | | $ | 38,379 | | | $ | 1,923,078 | |
| Changes during the period: | | | | | | | | |
| Sales of natural gas produced, net of production costs | | | 9,270 | | | | 30,795 | |
| Net changes in prices and production costs | | | 48,325 | | | | (1,533,970 | ) |
| Impairments | | | (313,317 | ) | | | (417,840 | ) |
| Unevaluated costs transferred to full cost pool | | | 126,607 | | | | - | |
| Development costs incurred and revisions | | | 95 | | | | 4,966 | |
| Purchase of reserves in place | | | 207,645 | | | | 37,316 | |
| Revision of previous quantity estimates | | | (64,754 | ) | | | (5,966 | ) |
| Net change | | | 13,871 | | | | (1,884,699 | ) |
| Standardized measure of discounted future net cash flows at end of period | | $ | 52,250 | | | $ | 38,379 | |
Prices used in computing these calculations of future production of proved reserves were $68.47 per BBL of oil at April 30, 2010 and $37.80 per BBL of oil and $1.90 per thousand cubic feet (MCF) of natural gas at April 30, 2009. Gas reserves were still shut-in at April 30, 2010 and were not revalued.
| ITEM 9: | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
| ITEM 9AT: | CONTROLS AND PROCEDURES |
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that are filed under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Under the supervision of and with the participation of management, including the principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of April 30, 2010, and, based on its evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are not effective primarily due to a lack of segregation of duties.
(b) Changes in Disclosure Controls and Internal Controls
There were no changes in our disclosure controls and internal control over financial reporting during the quarter ended April 30, 2010 that materially affected, or are reasonably likely to materially affect, our disclosure controls and our internal control over financial reporting.
(c) Management’s Annual Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the SEC, internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting is supported by written policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations which may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of April 30, 2010. In making this assessment, management used the framework set forth in the report entitled “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of April 30, 2010, due primarily to a lack of segregation of duties.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permits us to provide only management’s report in this annual report.
| ITEM 9B: | OTHER INFORMATION |
Pursuant to General Instruction B of Form 8-K, any reports previously or in the future submitted under Item 2.02 (Results of Operations and Financial Condition) are not deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 and the Company is not subject to the liabilities of that section, unless the Company specifically states that the information is to be considered “filed” under the Exchange Act or incorporates it by reference into a filing under the Securities Act or Exchange Act. If a report on Form 8-K contains disclosures under Item 2.02, whether or not the report contains disclosures regarding other items, all exhibits to such report relating to Item 2.02 will be deemed furnished, and not filed, unless the registrant specifies, under Item 9.01 (Financial Statements and Exhibits), which exhibits, or portions of exhibits, are intended to be deemed filed rather than furnished pursuant to this instruction. The Company is not incorporating, and will not incorporate, by reference these reports into a filing under the Securities Act of 1933, as amended, or the Exchange Act of 1934, as amended.
In 2010, the Company recorded an impairment of an interest in two oil wells that it had acquired for its common stock in the amount of $108,000. It was determined during 2010, as the result of two failed workover attempts that the unevaluated property costs should be fully impaired and $126,607 was transferred from unevaluated property costs to the full cost pool. The Company recorded an impairment of $205,317 at the end of 2010. In addition, as a result of the gas reserves continuing to be impaired, the Company wrote off its investment in a pipeline of $132,663 that was principally used to gather the gas production.
PART III
| ITEM 10: | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Executive Officers and Directors
The following section sets forth the names, ages and current positions with the Company held by the Directors, Executive Officers and Significant Employees; together with the year such positions were assumed. We are not aware of any arrangement or understanding between any Director or Executive Officer and any other person pursuant to which he was elected to his current position. Each Executive Officer will serve until he or she resigns or is removed or otherwise disqualified to serve, or until his or her successor is elected and qualified.
Each Director will serve until he or she resigns or is removed or otherwise disqualified to serve or until his or her successor is elected. The Company currently has three Directors.
| | | | | | | DATE FIRST |
| NAME | | AGE | | POSITION | | ELECTED/APPOINTED |
| | | | | | | |
| Ross E. Silvey | | 80 | | President, | | June 24, 2008 |
| | | | | Chief Executive Officer, | | |
| | | | | Chief Financial Officer | | |
| | | | | and Director | | |
| | | | | | | |
| Michael D. Pruitt | | 49 | | Executive Vice President | | December 29, 2009 |
| | | | | and Director | | |
| | | | | | | |
| George S. Young | | 58 | | Director | | December 29, 2009 |
ROSS E. SILVEY has owned and operated franchised automobile businesses, finance companies and insurance companies for over thirty years. Dr. Silvey has taught as an adjunct or full-time professor most of the courses in the upper division and MBA programs at the University of Tulsa, Oral Roberts University, Langston University and Southern Nazarene University. His formal education is an MBA from the Harvard Business School. He has also been awarded the Ph.D. degree from the Walden Institute of Advance Studies. Dr. Silvey is also a director of Global Beverage Solutions, Inc. and Double Eagle Holdings, Ltd.
MICHAEL D. PRUITT is a long-time entrepreneur with a proven track record, possesses the expertise to evaluate potential investments, form key relationships and recognize a strong management team. Mr. Pruitt founded Avenel Financial Group, a boutique financial services firm concentrating on emerging technology company investments. The business succeeded immediately, and in order to grow Avenel Financial Group to its full potential and better represent the company's ongoing business model, he formed Avenel Ventures, an innovative technology investment and business development company. In the late 1980s, Mr. Pruitt owned Southern Cartridge, Inc., which he eventually sold to MicroMagnetic, Inc., where he continued working as Executive Vice President and a Board member until Southern Cartridge was sold to Carolina Ribbon in 1992. From 1992 to 1996, Mr. Pruitt worked in a trucking firm where he was instrumental in increasing revenues from $6 million to $30 million. The firm was sold in 1996 to Priority Freight Systems. Between 1997 and 2000, Mr. Pruitt assisted several public and private companies in raising capital, recruiting management and preparing companies to go public or be sold. He was the CEO, President and Chairman of the Board of Onetravel Holdings, Inc. (formerly RCG Companies), a publicly traded holding company formerly listed on the AMEX. Mr. Pruitt received a Bachelor of Arts degree from Coastal Carolina University in Conway, South Carolina, where he sits on the Board of Visitors of the Wall School of Business. Mr. Pruitt is currently a director of Chanticleer Holdings, Inc., Green St. Energy, Inc. and Efftec International, Inc. and is Chief Executive Officer of Chanticleer Holdings, Inc. and Efftec International, Inc.
GEORGE S. YOUNG became a director on December 29, 2009. Mr. Young has been involved in over $9 billion in natural resource debt and equity financings in legal practice and business management of gold, mining and natural resources. Since 2005, Mr. Young has been a consultant for project acquisitions, seed capital formation and structuring IPOs and other financings and listing on public exchanges for various public companies in the oil and gas and resource industries. From 2003 to 2008, Mr. Young was founder, director and vice president of International Royalty Corp. From 2002 to 2005, Mr. Young was president and CEO of MAG Silver Corp in Vancouver, B.C. From 1998 to 2002, Mr. Young was in private law practice in Salt Lake City, Utah. Mr. Young received his J.D. from the University of Utah College of Law in 1979 and his B.S. in Metallurgical Engineering from the University of Utah in 1975. Mr. Young is a member of the Society of Mining Engineers and the State Bar Associations of Colorado, Utah and Texas. Mr. Young is president, chief operating officer and a director of Mexoro Minerals Ltd. and is the chief executive officer and director of Fellows Energy Ltd.
Audit Committee
The Board of Directors of the Company serves as the audit committee.
Compliance with Section 16(a) Of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s executive officers, directors and persons who own more than ten percent of the Company’s common stock to file initial reports of ownership and changes in ownership with the SEC. Additionally, SEC regulations require that the Company identify any individuals for whom one of the referenced reports was not filed on a timely basis during the most recent fiscal year or prior fiscal years. The Company's new directors were late filing their notifications when they became directors and all directors were late filing changes in stock ownership.
Code of Ethics
The Company has not yet adopted a code of ethics to apply to its principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions.
NOMINATING COMMITTEE
We do not currently have a standing nominating committee, or a committee performing similar functions. The full Board of Directors currently serves this function.
| ITEM 11: | EXECUTIVE COMPENSATION |
The Compensation Committee of the Board of Directors deliberates executive compensation matters to the extent they are not delegated to the Chief Executive Officer.
| a. | Summary Compensation Table |
The following table shows the compensation of the Company’s Chief Executive Officer and each executive officer whose total cash compensation exceeded $100,000 for the three years ended April 30, 2010 (no compensation was paid until 2009).
ANNUAL COMPENSATION
| | | | | | | | Stock | | | | |
| Name and Principal Position | | Year | | Salary | | | Awards | | | Total | |
| | | | | | | | | | | | |
| Ross E. Silvey (CEO since | | 2010 | | $ | - | | | $ | 82,404 | | | $ | 82,404 | |
| June 2008) (1) | | 2009 | | | - | | | | 60,667 | | | | 60,667 | |
| | | 2008 | | | N/A | | | | N/A | | | | N/A | |
| | | | | | | | | | | | | | | |
| Vladimir Fedyunin (CEO from | | 2010 | | | N/A | | | | N/A | | | | N/A | |
| April 2008 until June 2008) | | 2009 | | | - | | | | - | | | | - | |
| | | 2008 | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | |
| Maria Camila Maz (CEO from | | 2010 | | | N/A | | | | N/A | | | | N/A | |
| November 2007 until April 2008) | | 2009 | | | N/A | | | | N/A | | | | N/A | |
| | | 2008 | | | - | | | | - | | | | - | |
Narrative disclosure to summary compensation table
Required columns for bonus, option awards, non-entity incentive plan compensation, change in pension value and nonqualified deferred compensation earnings and all other compensation are omitted from the table above as the amounts are all zero.
Compensation levels and amounts are determined by the Board of Directors based on amounts paid to executives in similar sized companies with similar responsibilities. Mr. Silvey was granted 160,000 shares of our restricted common stock valued at $145,600 in exchange for his services for the period July 1, 2008 through June 30, 2010. The value of the amount earned in 2009 of $60,667 is included in the 2009 period above and the remaining $84,933 is included in prepaid expenses in the consolidated balance sheet at April 30, 2009. In 2010, Mr. Silvey's compensation included $72,804 from amortization of the stock issued in 2009 and $9,600 from the value of 120,000 shares issued in 2010 for director fees.
EMPLOYMENT AGREEMENTS
The Company does not have any current employment agreements with its officers and directors. The Company intends to pay its Executives and Directors salaries, wages, or fees commensurate with experience and industry standards in relationship to the success of the company.
| b. | Grants of plan-based awards table |
There were no grants of plan-based awards during the year for the named individual.
| c. | Outstanding equity awards at fiscal year-end table |
There were no outstanding equity awards at fiscal year-end for the named individual.
| d. | Option exercises and stock vested table |
There were no option exercises during the year and no stock vested at fiscal year-end for the named individual.
There are no pension plans.
| f. | Nonqualified defined contribution and other nonqualified deferred compensation plans |
There are no nonqualified defined contribution or other nonqualified deferred compensation plans.
| g. | Potential payments upon termination or changes-in-control |
There are no potential payments upon termination or changes-in-control for the named individual.
| h. | Compensation of directors |
Dr. Silvey received $9,600 from the value of 120,000 shares issued in 2010 for director fees. Mr. Young received $36,000 from the value of 450,000 shares issued in 2010 for director fees and consulting fees and Mr. Pruitt's company received $12,000 from the value of 150,000 shares issued in 2010 for director fees and management services.
| i. | Compensation committee interlocks and insider participation |
The Board of Directors currently serves as the compensation committee.
| j. | Compensation committee report |
Based on the Compensation Discussion and Analysis required by Item 402(b) between the compensation committee and management, the compensation committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the 10-K.
| ITEM 12: | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
| (a) | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
The table below lists the beneficial ownership of the Company’s voting securities by each person known to be the beneficial owner of more than 5% of such securities. As of April 30, 2010 and June 30, 2010, there were 17,375,539 shares of the Company’s common stock issued and outstanding. To the best of our knowledge, the persons named have sole voting and investment power with respect to such shares, except as otherwise noted. There are not any pending or anticipated arrangements that may cause a change in control.
The information presented below regarding beneficial ownership of our voting securities has been presented in accordance with the rules of the Securities and Exchange Commission and is not necessarily indicative of ownership for any other purpose. Under these rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares the power to vote or direct the voting of the security or the power to dispose or direct the disposition of the security. A person is deemed to own beneficially any security as to which such person has the right to acquire sole or shared voting or investment power within 60 days through the conversion or exercise of any convertible security, warrant, option or other right. More than one person may be deemed to be a beneficial owner of the same securities. The percentage of beneficial ownership by any person as of a particular date is calculated by dividing the number of shares beneficially owned by such person, which includes the number of shares as to which such person has the right to acquire voting or investment power within 60 days, by the sum of the number of shares outstanding as of such date plus the number of shares as to which such person has the right to acquire voting or investment power within 60 days. Consequently, the denominator used for calculating such percentage may be different for each beneficial owner. We believe that the beneficial owners of our common stock listed below have sole voting and investment power with respect to the shares shown.
The following information lists, as to each class, equity securities beneficially owned by all officers and directors, and of the directors and officers of the issuer, as a group as of April 30, 2010.
| | | Name and | | Amount and | | | | |
| | | address | | nature of | | | | |
| | | of beneficial | | beneficial | | | Percent | |
| Title of class | | owner | | owner | | | of class | |
| | | | | | | | | |
| Common | | Ross Silvey | | | 280,000 | | | | 1.6 | % |
| | | 11005 Anderson Mill Road | | | | | | | | |
| | | Austin, TX 78750 | | | | | | | | |
| | | | | | | | | | | |
| Common | | Michael D. Pruitt (1) | | | 2,735,440 | | | | 15.7 | % |
| | | 11220 Elm Lane, Ste 203 | | | | | | | | |
| | | Charlotte, NC 28277 | | | | | | | | |
| | | | | | | | | | | |
| Common | | George S. Young | | | 450,000 | | | | 2.6 | % |
| | | 402 Linden | | | | | | | | |
| | | Borger, TX 79007 | | | | | | | | |
| | | | | | | | | | | |
| Common | | All officers and directors | | | 3,465,440 | | | | 19.9 | % |
| | | as a group (3 persons) | | | | | | | | |
(1) The shares beneficially owned by Mr. Pruitt include 1,885,440 shares owned by Avenel Financial Group, Inc. which is wholly owned by Mr. Pruitt; 700,000 shares owned by Chanticleer Holdings, Inc. of which Mr. Pruitt is Chief Executive Officer, a director and 17.33% owner; and 150,000 shares owned by Avenel Ventures, LLC, which is wholly owned by Chanticleer Holdings, Inc.
Equity Compensation Plan Information
| | | | | | | Number of securities | |
| | | | | | | remaining available for | |
| | | | | | | future issuance under | |
| | | Number of securities to be | | Weighted-average exercise | | equity compensation | |
| | | issued upon exercise of | | price of outstanding | | plans (excluding | |
| | | outstanding options, | | options, warrants | | securities reflected | |
| Plan category | | warrants and rights | | and rights | | in the first column | |
| | | | | | | | |
| Equity compensation plans approved by security holders | | | - | | | | | 1,242,333 | |
| | | | | | | | | | |
| Equity compensation plans not approve by security holders | | | - | | | | | - | |
| | | | | | | | | | |
| Total | | | - | | | | | 1,242,333 | |
The North American Energy Resources, Inc. 2008 Stock Option Plan (“Plan”) was filed on September 11, 2008 and reserved 2,500,000 shares for Awards under the Plan. The Company’s Compensation Committee is designated to administer the Plan at the direction of the Board of Directors.
| ITEM 13: | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The Company had non-interest bearing obligations to its shareholders at April 30, 2009, of $2,000.
The Company sold its gas pursuant to a contract with a gathering system principally owned by a related party. The Company received a price equal to 70% of the posted price. The related party retained the other 30% of the posted price for gathering fees and marketing fees. At April 30, 2010 and 2009, the gathering system was shut-in due to low gas prices and had no deliveries in 2010.
At April 30, 2009, the Company had advanced $19,993 to one shareholder consultant. During 2010, the Company accrued interest of $900, received a payment of $15,478 and recorded bad debt expense for the balance of $5,415.
In April 2009, the Company issued 160,000 shares of its common stock valued at $145,600 to its Chief Executive Officer for compensation for the period from August 1, 2008 through July 31, 2010. See Note 3. In February 2010, the Company issued an additional 120,000 shares of its common stock valued at $9,600 for director fees to its CEO, 450,000 shares of its common stock valued at $36,000 to a Director for director fees and consulting services and 150,000 shares of its common stock valued at $12,000 to a company controlled by a Director for director fees and consulting services.
The Company has notes payable to shareholders in the amount of $406,528 and $389,000 at April 30, 2010 and 2009, respectively, as described in Note 6.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Audit Fees – The aggregate fees billed as of June 30, 2010 for professional services rendered by the Company’s accountant was approximately $9,250 and $15,500 for the audit of the Company’s annual financial statements and the quarterly reviews for the fiscal years ended April 30, 2010 and 2009. The costs for the audit of 2010 had not been billed at June 30, 2010.
Audit-Related Fees – None.
Tax Fees – None.
All Other Fees – Other than the services described above, no other fees were billed for services rendered by the principal accountant.
Audit Committee Policies and Procedures – Not applicable.
If greater than 50 percent, disclose the percentage of hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees – Not applicable.
PART IV
| ITEM 15: | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| | (a) | The following documents are filed as part of this report: |
| | 1. | Financial Statements – The following consolidated financial statements of North American Energy Resources, Inc. are contained in Item 8 of this Form 10-K: |
| | · | Report of Independent Registered Public Accountant |
| | · | Consolidated Balance Sheets at April 30, 2010 and 2009 |
| | · | Consolidated Statements of Operations – For the years ended April 30, 2010 and 2009 and from inception (August 18, 2006) through April 30, 2010 |
| | · | Consolidated Statements of Stockholders’ Deficit - From inception (August 18, 2006) through April 30, 2010 |
| | · | Consolidated Statements of Cash Flows – For the years ended April 30, 2010 and 2009 and from inception (August 18, 2006) through April 30, 2010 |
| | · | Notes to the Consolidated Financial Statements |
| | 2. | Financial Statement Schedules were omitted, as they are not required or are not applicable, or the required information is included in the Financial Statements. |
| | 3. | Exhibits – The following exhibits are filed with this report or are incorporated herein by reference to a prior filing, in accordance with Rule 12b-32 under the Securities Exchange Act of 1934. |
| Exhibit | | Description |
| | | |
| 31.1 | | Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 |
| | | |
| 32.1 | | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 |
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | NORTH AMERICAN ENERGY RESOURCES, INC. |
| | |
| July 29, 2010 | /s/ Ross Silvey |
| | Ross Silvey, President, CEO and CFO |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| July 29, 2010 | /s/ Ross Silvey |
| | Ross Silvey, Director, President, CEO and CFO |
| | |
| July 29, 2010 | /s/ Michael D. Pruitt |
| | Michael D. Pruitt, Director |
| | |
| July 29, 2010 | /s/ George S. Young |
| | George S. Young, Director |
