SurgePays - 10-Q quarterly report FY2011 Q1

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: July 31, 2011

File No. 000-52522

(Address of principal executive offices) (Zip Code)

 
 

Registrant's telephone number:  (504) 561-1151

Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (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

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 21,554,945 shares of common stock outstanding as of August 31, 2011.

            The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission ("Commission"). While these statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto, contained in North American Energy Resources, Inc.’s Form 10-K dated April 30, 2011.

PART I - FINANCIAL INFORMATION

 

 

 

The consolidated financial statements include the accounts of North American Energy Resources, Inc. (“NAER”) and its wholly owned subsidiary, North American Exploration, Inc. (“NAE”) (collectively the “Company”).  All significant intercompany balances and transactions have been eliminated in consolidation.

NAER was incorporated in Nevada on August 22, 2006 as Mar Ked Mineral Exploration, Inc. and changed its name to North American Energy Resources, Inc. on August 11, 2008.  NAE was incorporated in Nevada on August 18, 2006 as Signature Energy, Inc. and changed its name to North American Exploration, Inc. on June 2, 2008.

The condensed consolidated financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and include all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation.  These condensed consolidated financial statements have not been audited.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations for interim reporting.  The Company believes that the disclosures contained herein are adequate to make the information presented not misleading.  However, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report for the year ended April 30, 2011, which is included in the Company’s Form 10-K dated April 30, 2011.  The financial data for the interim periods presented may not necessarily reflect the results to be anticipated for the complete year.

 

NAE is an independent oil and natural gas company engaged in the acquisition, exploration and development of oil and natural gas properties and the production of oil and natural gas.  The Company operates in the upstream segment of the oil and gas industry which includes the drilling, completion and operation of oil and gas wells.  The Company has an interest in a pipeline in Oklahoma which is currently shut-in, but has been used to gather natural gas production.  The Company's gas production was shut-in due to low prices in February 2009 in Washington County, Oklahoma and was sold effective October 1, 2010.  The Company has acquired a non-operated interest in a gas well in Texas County, Oklahoma and is continuing to seek additional acquisition possibilities.

 

On December 15, 2010, the Company introduced a new Executive Team.  Clinton W. Coldren became the new Chairman and Chief Executive Officer and Alan G. Massara became Director, President and Chief Financial Officer.  The new Executive Team is actively reviewing opportunities to acquire additional oil and gas production, development and exploration properties.  The initial focus is on properties that are currently producing, but which contain upside drilling and workover potential.  If successful, any acquisition will require significant new external financings which could materially change the existing capital structure of the Company.  There can be no guarantee that the Company will successfully conclude an acquisition.

Development stage

The Companies are  in the development stage and have realized only nominal revenue to date.  The decline in gas prices and limited reserves caused the Company's original gas development plans  in Washington County, Oklahoma to be cancelled and these properties were sold effective October 1, 2010.  Accordingly, the operation of the Companies are presented as those of a development stage enterprise, from their inception (August 18, 2006).

Going concern

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.  The Company commenced operations in September 2006.

At July 31, 2011 and April 30, 2011 the Company had a working capital deficit of $220,817 and $115,572, respectively.  The Company has an accumulated deficit of $3,078,294  which includes a loss of $105,276 during the three months ended July 31, 2011.  By December 5, 2010, the Company had exchanged 3,329,406 shares of common stock for convertible notes payable principal of $474,358 and $81,890 in accrued interest.  In January 2011, the Company exchanged $38,678 in accounts payable for a convertible note payable due in January 2012 with interest accruing at 4% per annum.  The note is convertible into common stock at $0.10 per share.

Effective October 1, 2010, the Company sold all of its shut-in gas properties and its producing oil properties in Washington County, Oklahoma.  The Company invested in its first non-operated gas well in October 2010 and plans to continue this course as funds become available.

These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  The financial statements do not include any adjustments that may result from the outcome of these uncertainties.

2012 refers to periods ending during the fiscal year ending April 30, 2012 and 2011 refers to periods ended during the fiscal year ended April 30, 2011.

 

 

Certain reclassifications have been made in the financial statements at July 31, 2010 and for the periods then ended to conform to the July 31, 2011 presentation.  The reclassifications had no effect on net loss.

Recent adopted and pending accounting pronouncements

 We have evaluated all recent accounting pronouncements as issued by the Financial Accounting Standards Board ("FASB") in the form of Accounting Standards Updates ("ASU") through August 31, 2011 and find none that would have a material impact on the financial statements of the Company.

NOTE 2:               RELATED PARTY TRANSACTIONS

Accounts payable - related parties includes the following expense reimbursements due to related parties at July 31, 2011 and April 30, 2011.  Amounts due include reimbursements for D&O insurance, rent, travel, legal and cash advances for payment of other administrative expenses.

 

 

Effective June 15, 2011, the Board of Directors approved compensation to begin accruing at the rate of $10,000 per month for each of the two listed executive officers.  At July 31, 2011, accrued expenses included $30,000 accrued for compensation.

 

NOTE 3:               STOCKHOLDER’S EQUITY

PREFERRED STOCK

The Company has 100,000,000 shares of its $0.001 par value preferred stock authorized.  At July 31, 2011 and April 30, 2011, the Company had no shares issued and outstanding.

COMMON STOCK

The Company has 100,000,000 shares of its $0.001 par value common stock authorized.  At July 31, 2011 and April 30, 2011 the Company has 21,554,945 shares issued and outstanding, respectively.

WARRANTS

As a part of their initial compensation, the new Executive Team was granted Warrants with the following primary terms and conditions.  The strike price exceeded the market price when the Warrants were granted.

 

a)      Each Warrant shall entitle the owner to purchase one share of common stock of the Company.  The warrants will contain price protection should shares be used for an acquisition at a price lower than the conversion price in force.  The anti dilution provision will not apply to financings done below the strike price.

b)      The Executive Team is granted three Warrant Certificates as follows:

c)      Other warrant terms are as follows:

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.  No options are outstanding at July 31, 2011.  At July 31, 2011, there are 1,242,333 shares available for grant.

The Company has a convertible note payable in the amount of $38,678 which is due January 6, 2012 with interest accruing at 4% per annum.  The note is convertible into the Company's common stock at $0.10 per share.

COMPARISON OF THREE MONTHS ENDED JULY 31, 2011 AND 2010

Revenues during the three months ended July 31, 2011 and 2010 were as follows:

 

Gas production included 177 MCF sold in 2011.  Oil revenues included 31 net barrels sold in 2010.  As a result of continuing high operating costs, the Company sold all of its producing oil properties and its non-producing gas properties effective October 1, 2010 and acquired one new gas property in a different geographic area.

 

 

The decline in direct oil and natural gas costs is a result of the sale of the high maintenance oil properties effective October 1, 2010 and the simultaneous purchase of an interest in a producing gas well.  The gas well has produced a small profit whereas the operating costs of the oil production always exceeded its revenue.

 

Non-cash compensation declined primarily due to completion of the amortization of consulting agreements in 2010.

 

Other general and administrative expense, net of operator's overhead fee increased in the 2011 period primarily due to new costs associated with the expanding staff and the new office location.  Rent increased $17,342; officer compensation increased $30,000; legal costs increased $32,474; travel and entertainment increased $5,500; and other costs associated with maintaining a separate office also increased.

 

The interest bearing debt decreased during the 2011 period as compared to the 2010 period primarily due to the exchange of common stock for convertible notes payable in December 2010.

 

LIQUIDITY AND CAPITAL RESOURCES

At July 31, 2011, we had $574 in cash and a working capital deficit of $220,817.  Comparatively, we had cash of $716 and a working capital deficit of $115,572 at April 30, 2011.

We estimate that our total planned cash expenditures over the next twelve months will be approximately $100,000 for basic corporate overhead, assuming no increased operations.  We are actively seeking other acquisitions which will require significant new external financing which could materially change the existing capital structure of the Company.

The Company will plan to meet its capital requirements for the next year principally with advances from related parties.

These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  The financial statements do not include any adjustments that may result from the outcome of these uncertainties.

CASH FROM OPERATING ACTIVITIES

Cash used in operating activities was $142 for the three-month period ended July 31, 2011 and cash provided by operations was $516 for the comparable 2010 period.  There has been only nominal activity with a significant portion of the operating loss being paid with advances from related parties or common stock.

CASH USED IN FINANCING ACTIVITIES

We incurred capital costs of $2,893 in the three months ended July 31, 2010 and none in the 2011 period.

We have not attained profitable operations and are dependent upon obtaining a replacement for the related party loans to pursue our business plan.  For these reasons, there is substantial doubt we will be able to continue as a going concern, since we are dependent upon an as yet unknown source to provide sufficient funds to finance future operations until our revenues are adequate to fund our cost of operations.

OFF-BALANCE SHEET ARRANGEMENTS

Not applicable.

ITEM 4T:               CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Under the PCAOB standards, a control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.  A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit the attention by those responsible for oversight of the company's financial reporting.  A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), as of July 31, 2011.  Our management has determined that, as of July 31, 2011, the Company's disclosure controls and procedures are effective.

 

PART II - OTHER INFORMATION

ITEM 1:                 LEGAL PROCEEDINGS

None

ITEM 1A:              RISK FACTORS

Not applicable.

None.

ITEM 3:                 DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4:                 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None

ITEM 5:                 OTHER INFORMATION.

None

ITEM 6:                 EXHIBITS

 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.