UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF
- --- 1934
For the quarterly period ended March 31, 2010
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT
- --- OF 1934
For the transition period from _____________ to _______________
Commission file number: 0-26402
THE AMERICAN ENERGY GROUP, LTD.
(Exact name of Registrant as specified in its charter)
Nevada 87-0448843
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Gorham Island
Suite 303
Westport, Connecticut 06880
(Address of principal executive offices) (Zip code)
203-222-7315
(Registrant's telephone number including area code)
___________________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, Par Value $.001 Per Share
___________________________
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
As of May 17, 2010, the number of Common shares outstanding was 33,157,911
Transitional Small Business Issuer Format (Check one) Yes No [X]
--- ---
THE AMERICAN ENERGY GROUP, LTD.
INDEX TO FORM 10-Q
PART I-FINANCIAL INFORMATION PAGE
Item 1. Financial Statements............................................. 3
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations........................................ 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 12
Items 4 and 4T. Controls and Procedures.......................................... 12
PART II-OTHER INFORMATION
Item 1. Legal Proceedings................................................ 12
Item 1A Risk Factors..................................................... 12
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...... 12
Item 3. Defaults Upon Senior Securities.................................. 13
Item 4. Submission of Matters to a Vote of Security Holders.............. 13
Item 5. Other Information................................................ 13
Item 6. Exhibits......................................................... 13
-2-
PART I-FINANCIAL INFORMATION
THE AMERICAN ENERGY GROUP, LTD.
Balance Sheets
Assets
------
March 31, June 30,
2010
(Unaudited) 2009
------------ ------------
Current Assets
- --------------
Cash $ 4,430 $ 33,879
Funds reserved for acquisitions - related party 602,500 1,139,500
------------ ------------
Total Current Assets 606,930 1,173,379
------------ ------------
Property and Equipment
- ----------------------
Office equipment 27,421 27,421
Leasehold improvements 26,458 26,458
Accumulated depreciation (24,569) (19,341)
------------ ------------
Net Property and Equipment 29,310 34,538
------------ ------------
Other Assets
- ------------
Investment in oil and gas working interest - related party 1,564,431 -
Security deposit 26,209 26,209
------------ ------------
Total Other Assets 1,590,640 26,209
------------ ------------
Total Assets $ 2,226,880 $ 1,234,126
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
- -------------------
Accounts payable $ 61,942 $ 65,519
Security deposits 13,200 13,200
Accrued liabilities 622,940 490,900
------------ ------------
Total Current Liabilities 698,082 573,619
------------ ------------
Total Liabilities 698,082 573,619
------------ ------------
Stockholders' Equity
- --------------------
Common stock, par value $0.001 per share;
authorized 80,000,000 shares; 33,118,773 and
31,019,255 shares issued and outstanding, respectively 33,119 31,019
Capital in excess of par value 10,256,616 8,722,826
Accumulated deficit (8,760,937) (8,093,338)
------------ ------------
Total Stockholders' Equity 1,528,798 660,507
------------ ------------
Total Liabilities and Stockholders' Equity $ 2,226,880 $ 1,234,126
============ ============
See accompanying unaudited notes to the financial statements.
-3-
THE AMERICAN ENERGY GROUP, LTD.
Statements of Operations
For the Three Months and Nine Months Ended March 31, 2010 and 2009
Unaudited
Three Months Ended Nine Months Ended
------------------------- -------------------------
March 31, March 31, March 31, March 31,
2010 2009 2010 2009
Revenue $ 0 $ 0 $ 0 $ 0
- -------
Cost of Goods Sold 0 0 0 0
- ------------------ ------------ ------------ ------------ ------------
Gross Profit 0 0 0 0
- ------------ ------------ ------------ ------------ ------------
Expenses
- --------
Administrative salaries 122,102 115,200 387,102 363,078
Legal and professional 30,068 149,622 102,188 215,733
General and administrative 51,567 36,785 125,321 94,076
Office overhead expenses 24,141 12,280 42,823 18.097
Depreciation 1,743 1,742 5,228 5,228
------------ ------------ ------------ ------------
Total Expenses 229,621 315,629 662,662 696,212
------------ ------------ ------------ ------------
Net Operating (Loss) (229,621) (315,629) (662,662) (696,212)
------------ ------------ ------------ ------------
Other Income and (Expense)
- -------------------------
Interest expense (1,629) (1,651) (4,776) (4,937)
------------ ------------ ------------ ------------
Total Other Income (Expense) (1,629) (1,651) (4,776) (4,937)
------------ ------------ ------------ ------------
Net (Loss) Before Tax (231,250) (317,280) (667,599) (700,988)
Income Tax 0 0 0 0
------------ ------------ ------------ ------------
Net (Loss) $ (231,250) $ (317,280) $ (667,599) $ (700,988)
============ ============ ============ ============
Basic Loss Per Common Share $ (.01) $ (.01) $ (.02) $ ( .02)
============ ============ ============ ============
Weighted Average Number
Of Shares Outstanding 32,385,087 30,937,191 32,190,968 30,824,974
============ ============ ============ ============
See accompanying unaudited notes to the financial statements.
-4-
THE AMERICAN ENERGY GROUP, LTD.
Statements of Cash Flows
For the Nine Months Ended March 31, 2010 and 2009
(Unaudited)
2010 2009
----------- ----------
Cash Flows From Operating Activities
- ------------------------------------
Net loss $ (667,599) $(700,988)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation 5,228 5,228
Common stock issued for debt and services 140,860 71,460
Changes in operating assets and liabilities:
Increase (decrease) in security deposits 0 4,000
Increase (decrease) in accounts payable (7,578) (39,160)
Increase (decrease) in accrued expenses
and other current liabilities 132,040 206,056
----------- ----------
Net Cash (Used In) Operating Activities (466,449) (384,004)
----------- ----------
Cash Flows From Investing Activities
- ------------------------------------
Funds (reserved for) / released from acquisitions 537,000 371,945
Expenditures for oil and gas working interest (100,000) (0)
----------- ----------
Net Cash Provided By Investing Activities 437,000 371,945
----------- ----------
Cash Flows From Financing Activities
- ------------------------------------
Net Cash Provided By (Used In) Financing Activities 0 0
----------- ----------
Net Increase (Decrease) in Cash (29,449) (12,059)
33,879 26,984
----------- ----------
Cash and Cash Equivalents, Beginning of Period
Cash and Cash Equivalents, End of Period $ 4,430 $ 14,925
=========== ==========
Cash Paid For:
- --------------
Interest $ 4,937 $ 4,776
Taxes $ 0 $ 0
Non-Cash Financing Activities:
- ------------------------------
Common stock issued for payment of debt $ 19,500 $ 60,748
Common stock issued for services rendered $ 51,960 $ 140,860
Common stock issued for oil and gas working interest $1,440,000 $ 0
Warrants issued for oil and gas working interest $ 24,431 $ 0
See accompanying unaudited notes to the financial statements.
-5-
THE AMERICAN ENERGY GROUP, LTD.
Notes to the Financial Statements
March 31, 2010
Note 1 - General
- -------------------
The accompanying unaudited condensed financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in accordance with such rules and
regulations. The information furnished in the interim condensed financial
statements include normal recurring adjustments and reflects all adjustments,
which, in the opinion of management, are necessary for a fair presentation of
such financial statements. Although management believes the disclosures and
information presented are adequate to make the information not misleading, it is
suggested that these interim condensed financial statements be read in
conjunction with the Company's audited financial statements and notes thereto
included in its June 30, 2009 Annual Report on Form 10-K. Operating results for
the three months and nine months ended March 31, 2010 are not necessarily
indicative of the results that may be expected for the year ending June 30,
2010.
Note 2 - Basic Loss Per Share of Common Stock
- ------------------------------------------------------
Three Months Ended Nine Months Ended
------------------------- -------------------------
March 31, March 31, March 31, March 31,
2010 2009 2010 2009
Loss (numerator) $ (231,250) $ (317,280) $ (667,599) $ (700,988)
------------ ------------ ------------ ------------
Shares (denominator) 32,385,087 30,937,191 32,190,968 30,824,974
------------ ------------ ------------ ------------
Per Share Amount $ (0.01) $ (0.01) $ (0.02) $ (0.02)
============ ============ ============ ============
The basic loss per share of common stock is based on the weighted average number
of shares issued and outstanding during the period of the financial statements.
Stock warrants convertible into 3,942,326 shares of common stock are not
included in the basic calculation because their inclusion would be antidilutive,
thereby reducing the net loss per common share.
Note 3 - Common Stock
- ---------------------
During July, August and September 2009, the Company issued 8,025, 8,904 and
8,228 shares of common stock for payables valued at $6,500, $6,500 and
$6,500, respectively.
During October, November and December 2009, the Company issued 9,420,
10,156 and 9,848 shares of common stock for payables valued at $6,500,
$6,500 and $6,500, respectively.
During October, 2009 the Company issued 2,000,000 shares of common stock
for oil and gas working interest investments.
During December, 2009, the Company issued 14,280 shares of common stock for
services valued at $10,000.
During January, February and March 2010, the Company issued 8,025,
9,848 and 8,784 shares of common stock for payables valued at $6,500,
$6,500 and $6,500, respectively.
-6-
THE AMERICAN ENERGY GROUP, LTD.
Notes to the Financial Statements
March 31, 2010
Note 3 - Common Stock (continued)
- --------------------------------------
During January, 2010, the Company issued 4,000 shares of common stock for
services valued at $2,960.
Note 4 - Investment in Oil and Gas Working Interest - Related Party
- -------------------------------------------------------------------------------
During the quarter ended December 31, 2009, the Company executed an agreement to
acquire from Hycarbex - American Energy, Inc. (Hycarbex), a related party, a two
and one half percent (2-1/2%) working interest in each of the 2,258 square
kilometer Sanjawi Block No. 3068-2, Zone II, Baluchistan Province, Pakistan, and
1,229 square kilometer Zamzama North Block No. 2667-8, Zone III, Sindh Province,
Pakistan. In exchange for the working interest, the Company issued (1) 2,000,000
shares of common stock to Hycarbex, (2) 100,000 warrants with a three year
duration to purchase an additional 100,000 shares at $1.75 per share and (3)
$100,000 in cash. In addition, the purchase agreement requires Hycarbex to
transfer $50,000 per month of the funds remaining in escrowed funds reserved for
acquisitions to the Company until such time as the Company has received $200,000
in royalty payments from the Haseeb Exploratory Well No. 1. Once the Company has
received $200,000 of royalty payments from the Haseeb Exploratory Well No. 1,
any remaining balance in the funds reserved for acquisitions, currently
$602,500, will be forfeited to Hycarbex for additional consideration of the
acquisition of the oil and gas working interests.
The Company has the option to convert the two and one half percent working
interests described above to a one and one half percent gross royalty working
interest at any time.
Note 5 - Warrants
- --------------------
During the quarter ended December 31, 2009, the Company issued 100,000 warrants
to purchase common stock pursuant to the terms of the Carried Working Interest
Purchase and Sale Agreement entered into with Hycarbex - American Energy, Inc.
on October 29, 2009. The warrants provide that up to 100,000 shares may be
purchased at $1.75 per share during the three year period commencing October 29,
2009. The Company estimates the fair value of each stock award at grant date by
using the Black-Scholes option pricing model. The warrants granted during the
quarter ended December 31, 2009 were based on the following assumptions.
Dividend yield 0
Expected volatility 83.902%
Risk free interest 2.00%
Expected lives 3 years
As a result of the 100,000 warrants issued during the quarter ended December 31,
2009, the Company incurred $24,431 of costs which is included in the capitalized
costs of the oil and gas working interests acquired during the quarter ended
December 31, 2009.
Note 6 - Subsequent Events
- ------------------------------
In accordance with ASC 855-10, management of the Company has reviewed all
material events through the date of this report. Management considers the
following subsequent event material. Subsequent to March 31, 2010, the Company
extended the expiration date of outstanding warrants to purchase common stock
originally issued to Iftikhar A. Zahid and Pierce Onthank. The warrants, which
were originally issued on April 12, 2005 and were set to expire on April 12,
2010, have been extended for five years, resulting in a new expiration date of
April 12, 2015. The extension covers 2,000,000 warrants to purchase common
stock, 1,000,000 which shall be exercisable at seventy five cents ($.75),
500,000 which shall be exercisable at $1.00, and 500,000 exercisable at $1.50.
-7-
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
This report contains statements about the future, sometimes referred to as
"forward-looking" statements. Forward-looking statements are typically
identified by the use of the words "believe," "may," "will," "should," "expect,"
"anticipate," "estimate," "project," "propose," "plan," "intend" and similar
words and expressions. We intend the forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in Section
27A of the Securities Act and Section 21E of the Exchange Act. Statements that
describe our future strategic plans, goals or objectives are also
forward-looking statements.
Readers of this report are cautioned that any forward-looking statements,
including those regarding the Company or its management's current beliefs,
expectations, anticipations, estimations, projections, proposals, plans or
intentions, are not guarantees of future performance or results of events and
involve risks and uncertainties, such as:
.. The future results of drilling individual wells and other exploration and
development activities;
.. Future variations in well performance as compared to initial test data;
.. Future events that may result in the need for additional capital;
.. Fluctuations in prices for oil and gas;
.. Future drilling and other exploration schedules and sequences for various
wells and other activities;
.. Uncertainties regarding future political, economic, regulatory, fiscal,
taxation and other policies in Pakistan;
.. Our future ability to raise necessary operating capital.
The forward-looking information is based on present circumstances and on our
predictions respecting events that have not occurred, which may not occur or
which may occur with different consequences from those now assumed or
anticipated. Actual events or results may differ materially from those
discussed in the forward-looking statements as a result of various factors,
including the risk factors detailed in this report. The forward-looking
statements included in this report are made only as of the date of this report.
We are not obligated to update such forward-looking statements to reflect
subsequent event or circumstances.
Overview
Drilling of the first well in Pakistan as to which our overriding royalty
pertains, named the Haseeb No. 1 Well, was successfully completed by
Hycarbex-American Energy, Inc. ("Hycarbex"), the owner and operator of the Yasin
2768-7 Block, in the fourth quarter of the fiscal year ended June 30, 2005. All
testing to date by Hycarbex indicates that the Haseeb No. 1 well will be a
significant commercial gas well.
The drilling of Al-Ali #1 Well, the second well to which our overriding
royalty pertains, was undertaken by Hycarbex to fulfill the work obligations for
the third contract year under the Concession License and was not commercially
successful. The well was plugged. The drilling data is being studied by
Hycarbex in order to determine if further operations would likely yield
commercial volumes of gas.
In 2008, Hycarbex drilled the Yasin Exploratory Well #1. After drilling to
the Sui Main Limestone, which was only one of the target zones for the well,
mechanical difficulties were encountered in the hole. The Sui Main Limestone
showed strong intermittent gas during the drilling, but a steady flow was not
achieved. Hycarbex spent several months attempting to resolve the mechanical
difficulties and considering alternative remedial operations while
simultaneously evaluating the geologic data obtained from the drilling. After
evaluation, Angular redrilling in the same wellbore and other remedial measures
targeted at saving the wellbore were decided against because the preliminary
data collected by Hycarbex indicates that the drilling placement was not at the
optimum position on the producing structure. Hycarbex plans to perform
additional seismic to refine the preliminary data obtained from the drilling
process. Since the drilling reaffirmed Hycarbex's belief that the structure is
very promising, a nearby replacement well is expected to be drilled after
completion of the additional seismic.
-8-
On October 29, 2009, we executed an agreement to acquire from Hycarbex a
two and one half percent (2-1/2%) working interest in each of the 2,258 square
kilometer Sanjawi Block No. 3068-2, Zone II, Baluchistan Province, Pakistan, and
1,229 square kilometer Zamzama North Block No. 2667-8, Zone III, Sindh Province,
Pakistan. Each concession block is operated by Heritage Oil and Gas Limited.
Heritage Oil and Gas Limited is an affiliate of Heritage Oil, plc, an
independent oil and gas company which focuses its oil and gas operations on
Africa, the Middle East, and Russia. In addition to Hycarbex, other working
interest participants in the two Blocks are Sprint Energy (Private) Limited, an
affiliate of Pakistan-based JS Group, and Trakker Energy (Private) Limited, an
affiliate of Pakistan-based TPL Holdings, Ltd. Under the terms of the agreement,
our 2-1/2% working interests will be deemed "carried" by Hycarbex for the
initial two (2) wells on the Sanjawi Block and the initial three (3) wells on
the Zamzama North Block. The term "carried" means that the costs associated with
work programs, seismic, road preparation, drillsite preparation, rig and
equipment mobilization, drilling, reworking, testing, logging completion and
governmental fees (except taxes on production) shall be borne entirely by
Hycarbex. Infrastructure costs such as pipelines and surface facilities
constructed after the first discovery well on each Block are not carried. After
the initial carried wells have been drilled, we are required to bear our
proportionate share of drilling and exploration costs in subsequent wells. The
agreement provides us with the option to convert our working interest in any
well at any time to a 1.5% gross royalty interest free of any exploration costs,
operating costs or deductions related to the well in which the conversion has
been made other than applicable production taxes assessed against the royalty.
Results of Operations
Our operations for the three months and nine months ended March 31, 2010
reflected net operating losses of $229,621 and $662,662, respectively, as
compared to $315,629 and $696,212 for the three months and nine months ended
March 31, 2009, related to salaries, office rental and overhead charges and
legal and professional fees. There were no revenues from operations and our
sole business during the fiscal quarter consisted of management of our Pakistan
and Texas assets. We have had no recurring income stream to date and have been
solely dependent upon cash infusion from the sale of securities and loans.
These proceeds have been and will continue to be used to finance salaries, legal
and accounting expenses and administrative overhead until the commencement of
royalty revenues from gas sales from the Haseeb No. 1 Well. Recent delays in
the timing estimates have related to completion of the surface treatment
facility for the produced gas. The Haseeb Gas Field processing facility is a
high pressure installation which is intended to reduce CO2 and H2S which may be
present in Haseeb raw gas down to pipeline quality gas specification. The main
process train design pressure is 1200 psi (pounds per square inch) for an
operating pressure of 990 psi. The facility consists of 5 pressure vessels
consisting of (i) an inlet production separator where water is separated from
the raw gas and any higher hydrocarbon liquids, resulting in the sour wet gas;
(ii) an inlet filter separator where finite particles are filtered from the gas;
(iii) an amine contractor (absorber) where the sour wet gas is brought into
contact with amine, absorbing excess CO2 and H2S, resulting in sweet gas of
pipeline quality but saturated with H2O; (iv) an amine stripper where
contaminated amine is passed through to remove contaminants and the cleaned
amine is re-circulated; and (v) a glycol contractor where the wet gas is brought
into contact with glycol, removing saturated water and resulting in sweet and
dry gas of pipeline quality.
To ensure the highest level of quality assurance and control, the
contractor was required to fabricate and test the vessels following ASME
(American Society of Mechanical Engineers) Code VIII for Pressure Vessels and
"U" stamp them as per physical inspection and certification by a third party
inspector duly authorized by ASME (the "U" stamp is an internationally
recognized hallmark of excellence for the pressure vessel). The inspection
spreads over various stages in the fabrication and testing cycle. ONE/T V/BV, an
Authorized Inspection Agency accredited by ASME was engaged for the inspection
and certification, which included inspection of raw material (plates), fittings
(nozzles), inspection of rolled and welded completed jobs, RT (X-ray films) and
dye penetration test to determine integrity of welds, witnessing of the hydro
test, and reviewing the various technical and test documents. We have been
advised by Hycarbex that based upon the progress of this complex inspection and
certification process, the well is expected to be connected to the gas marketing
line in May or June, 2010, and production revenues are expected to be received
during the third calendar quarter of 2010.
Liquidity and Capital Resources
After emerging from bankruptcy, we funded our operations through private
loans, all of which have been repaid, and through the private sale of securities
including the sale of $3,950,000 of our Common stock. Of this amount, we
deposited $2,100,000 with Hycarbex in trust for future acquisitions of
additional royalty interests in Pakistan. Based upon prior estimates received
from Hycarbex, we previously anticipated that gas sales from the Haseeb No. 1
Well would begin in 2007 and then again in 2008, which did not occur. In the
prior report for the period ended December 31, 2009, the estimate for pipeline
connection obtained from Hycarbex was the month ending February 28, 2010.
However, updated estimates received from Hycarbex now indicate that the well is
expected to be connected to the gas marketing line in May or June, 2010 to
permit completion of all required outsided inspections, and production revenues
are expected to be received during the third calendar quarter of 2010.
-9-
The depletion of available cash on hand resulting from the delay in the
royalty stream from gas sales has created the need for additional operating
capital to meet future requirements. The consideration to be paid by American
Energy Group, Ltd. for the Sanjawi and Zamzama North carried working interests
acquired after the end of the quarter includes 2,000,000 shares of Common Stock
and 100,000 Warrants to purchase Common Stock with a 3-year duration and an
exercise price of $1.75 per share and a commission of $100,000. We are entitled
to redeem the Warrants in the event that our Common Stock trades at $2.00 or
more for twenty (20) consecutive trading days by providing written notice to the
Warrant holder, upon which notice, the holder shall have thirty (30) days to
exercise the Warrant. We also agreed to pay to Hycarbex a contingent cash
consideration to be derived from the funds on deposit with Hycarbex under the
May 11, 2006 Non-Exclusive Agency Agreement in which we engaged Hycarbex to
locate and assist in obtaining concession interests in Pakistan. The amount of
the cash consideration will not be determined until we achieve $200,000 of
aggregate royalty income from our 18% royalty in the Haseeb Exploratory Well No.
1 located on the Yasin Concession Block No. 2768-7. If and when the aggregate
$200,000 sum is received from its royalty interest, then the remaining funds in
escrow under the Non-Exclusive Agency Agreement shall be released to Hycarbex as
its cash payment inclusive of a $100,000 commission as provided in the
Non-Exclusive Agency Agreement. Until this royalty income threshold is
achieved, we will withdraw from the funds on deposit $50,000 per month for
operating capital. As of March 31, 2010, our funds on deposit with Hycarbex
totaled $602,500.
During the fourth quarter of the fiscal year ended June 30, 2005, we
registered 2,000,000 Common shares on a Form S-8 Registration Statement for
issuance to key consultants. We anticipate that some critical services rendered
by third party consultants during the 2010 fiscal year will be paid with common
stock instead of cash assets.
Business Strategy and Prospects
Our business strategy is to acquire royalty interests and carried working
interests in key productive areas within Pakistan, thereby avoiding typical
exploration-related cost uncertainties. The October 29, 2009 agreement to
acquire from Hycarbex a two and one half percent (2-1/2%) working interest in
each of the 2,258 square kilometer Sanjawi Block No. 3068-2, Zone II,
Baluchistan Province, Pakistan, and 1,229 square kilometer Zamzama North Block
No. 2667-8, Zone III, Sindh Province, Pakistan is consistent with this strategy,
as under the terms of the agreement, our 2-1/2% working interests will be deemed
"carried" by Hycarbex for the initial two (2) wells on the Sanjawi Block and the
initial three (3) wells on the Zamzama North Block. The term "carried" means
that the costs associated with work programs, seismic, road preparation,
drillsite preparation, rig and equipment mobilization, drilling, reworking,
testing, logging completion and governmental fees (except taxes on production)
shall be borne entirely by Hycarbex. Infrastructure costs such as pipelines and
surface facilities constructed after the first discovery well on each Block are
not carried. After the initial carried wells have been drilled, we are required
to bear our proportionate share of drilling and exploration costs in subsequent
wells, but the agreement provides an option to American Energy Group, Ltd. to
convert our working interest in any well at any time to a 1.5% gross royalty
interest free of any exploration costs, operating costs or deductions related to
the well in which the conversion has been made other than applicable production
taxes assessed against the royalty.
Pakistan Royalty and Carried Working Interests/Recent Political Developments in
Pakistan
Through our former Hycarbex subsidiary (before the sale of that
subsidiary), we expended in excess of $10,000,000.00 on drilling and seismic on
the Jacobabad and Yasin blocks in the Republic of Pakistan comprised of over
2,200 square kilometers. The structure, to date, has no Proved Reserves as
that term and the calculation for discounted future net cash flows for reporting
purposes is mandated by the Financial Accounting Standards Board in Statement of
Financial Accounting Standards No. 69, titled "Disclosures About Oil and Natural
Gas Producing Activities". While we did not obtain a commercial discovery well
in any of our previous Pakistan drilling efforts, we have announced the success
of the Haseeb No. 1 well drilled in the fourth quarter of 2005 based upon all
available test results, as well as the completion of 110 kilometers of
additional seismic research by Hycarbex-American Energy, Inc. and subsequent
wells which should provide valuable data for selection of future wells. We
strongly believe that the concession acreage contains oil and gas producing
physical structures which are worthy of further exploration. If successfully
developed, our reserved 18% overriding royalty interest will likely be a good
source of cash revenues because the royalty, by its nature, entitles us to share
in gross, rather than net, production. We are likewise optimistic that our
carried working interest participation in the newly acquired Sanjawi and Zamzama
North concessions operated by Heritage Oil and Gas Limited will yield positive
financial returns. We expect to use these anticipated revenues for further
investment in other revenue generating assets or business activities while
limiting our exposure to the financial risks inherent in oil and gas drilling in
Pakistan by adhering to our business plan of acquiring royalties and carried
interests, which are not subject to such costs.
-10-
While continuous production and favorable hydrocarbon prices are necessary
for the royalty and carried working interests held by the Company to demonstrate
real value, we are optimistic that the imminent connection of the Haseeb No. 1
Well to the gas line to initiate the marketing of the gas produced will prove to
be only one of several wells which will ultimately be drilled on the concession.
We are likewise optimistic that the favorable exploration and development
policies announced by the Pakistan Government, including those set forth in the
Petroleum Policy of 2009 announced in April, 2009, will encourage
Hycarbex-American Energy, Inc. and Heritage Oil, the respective operators of the
Yasin, Sanjawi and Zamzama North blocks, to perform extensive drilling
operations beneficial to the interests we retain.
On February 18, 2008, Asif Ali Zardari succeeded Pervez Musharraf as
President. This change in the political party in power has resulted in numerous
personnel realignments within the several governmental ministries. Isolated
incidents of violence and political protest continue to occur within the country
according to international news sources. Other than previous delays encountered
by Hycarbex in obtaining governmental approval of a surface facility
construction contract for the Haseeb #1 Well, these political events have not
impacted our ownership of the overriding royalty or the ongoing business
practices within the country, including oil and gas exploration, development and
production by Hycarbex and other major foreign and domestic operators doing
business in Pakistan. We cannot predict the effect of future political events
or political changes upon Hycarbex's operations and our expectations of deriving
revenues from our overriding royalty through the sale of gas into Pakistan's
pipeline infrastructure.
Galveston County, Texas Leases
We believe that the deeper zones which we currently hold may have
development potential. We have not yet determined the best course for these
assets and near term activity with respect to these assets is not planned.
These leases are held in force by third party production and, therefore, the
leases do not require development of these rights by a certain date.
Off Balance Sheet Arrangements
We had no off balance sheet arrangements during the nine months ended March
31, 2010.
ITEM 3-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not a party to nor does it engage in any activities
associated with derivative financial instruments, other financial instruments
and/or derivative commodity instruments.
ITEMS 4 AND 4T - CONTROLS AND PROCEDURES
In conjunction with this Report on Form 10-Q and the certification of the
disclosures herein, and as required by Rule 13a-15 under the Securities Exchange
Act of 1934 (the "Exchange Act"), the Company's principal executive officer and
principal financial officer, Pierce Onthank, evaluated the effectiveness of the
Company's disclosure controls and procedures and the Company's internal control
over financial reporting as of March 31, 2010. The assessment was conducted in
accordance with the Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on
this assessment, the Company's management concluded that there was no material
weakness in the Company's internal control over financial reporting, and
concluded that the Company's disclosure controls and procedures and the
Company's financial control over financial reporting are effective as of March
31, 2010. The Company is extremely small and once the Company begins receiving
increased revenues from gas royalties (expected to begin during the third
calendar quarter of 2010), management believes that the internal control over
financial reporting should be improved through an increase in staff size,
segregation of financial duties and responsibilities and appointment of an audit
committee by the Board of Directors.
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There have been no changes in the Company's internal controls over
financial reporting identified in connection with the evaluation required by
paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 which occurred during the
fiscal quarter ended March 31, 2010, that have materially affected or are
reasonably likely to materially affect the internal control over financial
reporting. This report does not include an attestation report of the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission because the attestation rules are not yet applicable to
the Company.
PART II-OTHER INFORMATION
ITEM 1-LEGAL PROCEEDINGS
There were no legal proceedings affecting the Company during the quarter
ended March 31, 2010.
ITEM 1A-RISK FACTORS
Not applicable.
ITEM 2-UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The consideration paid by American Energy Group, Ltd. for the Sanjawi and
Zamzama North carried working interests includes 2,000,000 shares of Common
Stock and 100,000 Warrants to purchase Common Stock with a 3-year duration and
an exercise price of $1.75 per share. We are entitled to redeem the Warrants in
the event that our Common Stock trades at $2.00 or more for twenty (20)
consecutive trading days by providing written notice to the Warrant holder, upon
which notice, the holder shall have thirty (30) days to exercise the Warrant.
The parties have stipulated that the value of the Carried Working Interests to
be purchased and the corresponding value of the securities given for the Carried
Working Interests is equal to $3,500,000. Since the securities were issued to
acquire oil and gas convertible working interests, the issuance did not result
in any proceeds to the Company.
ITEM 3-DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended March 31, 2010.
ITEM 5-OTHER INFORMATION
None.
ITEM 6-EXHIBITS
The following documents are filed as Exhibits to this report:
Exhibit 31.1 - Certification by R. Pierce Onthank, President, Chief
Executive Officer and Principal Financial Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a);
Exhibit 32.1 - Certification by R. Pierce Onthank, President, Chief
Executive Officer and Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, Section 1350(a) and (b).
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE AMERICAN ENERGY GROUP, LTD.
By: /s/ R. Pierce Onthank
--------------------------------
R. Pierce Onthank, President, Chief
Executive Officer, Principal Financial
Officer and Director
DATED: May 17, 2010
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