Item 1. Business.
Our Background and Name Change. American Energy Development Corp. (“AEDC,” “We,” or the “Company”) was incorporated in the State of Nevada on March 10, 2010 as “LJM Energy Corp.” On July 12, 2011, we filed a Certificate of Amendment to our Articles of Incorporation with the Nevada Secretary of State to change its name from “LJM Energy Corp.” to “American Energy Development Corp.” (the “Name Change”). The effective date of the Name Change with the Nevada Secretary of State was July 14, 2011. We are also qualified to do business in the State of Michigan.
On July 12, 2011, we filed a Certificate of Change pursuant to Section 78.209 of the Nevada Revised Statutes (the “Certificate of Change”) with the Nevada Secretary of State to effectuate a thirty for one forward stock split of our common stock (the “Forward Stock Split”). The Certificate of Change increased the number of authorized shares of our common stock from 100,000,000 to 3,000,000,000 and the number of issued and outstanding shares of common stock for shareholders of record as of July 13, 2011, from 5,705,570 shares to 171,167,100 shares. The effective date of the Forward Stock Split with the Nevada Secretary of State was July 14, 2011.
We have not undertaken any material reclassification, merger, consolidation, or purchase or sale of a significant amount of assets not in the ordinary course of our business. We have not been a party to any bankruptcy, receivership or similar proceeding.
Our Business. We are an exploration stage company focused on exploration, production and development of oil and natural gas in the United States. We currently own interests in certain oil and gas drilling areas and land leases located in Ingham County, Michigan, known as the Dansville Prospect, and seismic data relating to such areas and leases. We also own a working interest in a three well developmental drilling project in Pottawatomie County, Oklahoma, known as the Magnolia Prospect. For all of our working interests, we depend on operating partners to propose, permit and initiate the drilling of wells.
Dansville Prospect. We own a 43.75% working interest in certain oil and gas drilling areas and land leases located on approximately 1,343 acres in Ingham County, Michigan, which contains the Dansville Prospect. Range Michigan LLC (“Range”) is the operator of the Dansville Prospect. The first well in the Dansville Prospect, the Brown 2-12, has completed drilling, in production and generating revenues. The second well in the Dansville Prospect, the Cremer 1-1, was drilled in late April 2012 and cement plugged due to high salt content following geophysical logging for density, porosity and water saturation. Range is currently evaluating completion and development opportunities for the well, which include sidetracking. Based on our most recent independent assessment of the future value of our Dansville Prospect, we recorded an impairment charge of approximately $720,000 during the year ended June 30, 2013. During the prior year, we also recorded impairment charge of approximately $1,145,000.
White-tail Prospect. On June 15, 2012, we entered into and closed a lease acquisition agreement with Range pursuant to which we acquired a 43.75% working interest in Range's right to the oil and gas leases covering the White-tail Prospect, which consists of approximately 4,000 acres in Northern Michigan. Range is the operator of the White-tail Prospect. On February 5, 2013, we entered into an Assignment of Oil and Gas Leases, Termination of Lease Acquisition Agreement and Operating Agreement and Disclaimer (the "Termination Agreement") with Range Michigan LLC ("Range") pursuant to which the Company and Range agreed that (i) the Company assign to Range all of its 43.75% working interest in Range's right to oil and gas leases covering the White-tail Prospect in Northern Michigan (the "Prospect"), effective January 22, 2013, for the nominal consideration of $10 and (ii) both the Company and Range terminate the Lease Acquisition Agreement dated June 15, 2012 by and between the Company and Range (the "Purchase Agreement") and the Joint Operating Agreement dated March 31, 2012 by and between the Company and Range (the "Operating Agreement"), effective January 23, 2013, due to the Company's nonpayment of seismic program costs as required pursuant to the Purchase Agreement. There were no material early termination penalties incurred by the Company in connection with the Termination Agreement. As a result, we recorded a loss on the termination agreement of $291,723 for the year ended June 30, 2013.
Osprey Prospect. On April 17, 2012, we entered into a letter of intent with Range to acquire a 43.75% working interest and a 35% net revenue interest in the Osprey Prospect, which consists of approximately 1,000 acres in Southern Michigan, in exchange for: (i) $30,000 payable in shares of our common stock, (ii) $50,000 payable in cash to reimburse Range for development costs incurred to date and any prior land lease payments for the Osprey Prospect, (iii) our obligation to pay $91,000 in cash within 60 days of the date of the Letter of Intent as a prospect fee upon receipt of the Authority for Expenditure and (iv) our obligation to pay 70% of the total cost of drilling and completion in the Prospect. Range is the operator of the Osprey Prospect. The letter of intent contemplated the closing of the transaction to occur no later than May 30, 2012. However, as of October 12, 2013, we have not closed the acquisition of the Osprey Prospect and we do not intend to pursue this transaction. Accordingly, we have impaired our investment in the Osprey Prospect as of June 30, 2013 of approximately $50,000.
Magnolia Prospect. In March 2010, we entered into a participation agreement with Mid-OK Energy Partners, located in Oklahoma, to acquire participation rights granting us a three percent (3%) working interest in Mid-OK Energy Partners’ working interest in oil, gas and mineral leases represented by a leasehold estate and three well developmental drilling project in Pottawatomie County, Oklahoma (the “Magnolia Prospect”), in exchange for our cash payment of $18,266 and the future payment of a proportional share of drilling and completion costs in the project. On September 16, 2011, we entered into a participation agreement (“Crown Participation Agreement”) with Crown Energy Company (“Crown”), pursuant to which we agreed that our working interest in the Magnolia Prospect would be reduced to one and four tenths percent (1.4%) in exchange for an equivalent reduction in our future drilling and completion costs. We also entered into an operating agreement with Crown which provides that Crown is the operator of the Magnolia Prospect. Two of the wells have been drilled and put into production. Since June 2012, production levels have been minimal and we generate only a de minimus amount of revenues from the Magnolia Prospect.
Fairfax License. In the United Kingdom, our wholly-owned subsidiary, Reservoir Resources Limited, which, through its wholly-owned subsidiary, Fairfax Shelfco 307 Limited (“Fairfax 307”), is the owner of a 95% share in the Petroleum Exploration and Development Licence for UK Onshore Block SU97, known as licence PEDL236 (the “Licence”), which grants to Fairfax 307 an exclusive license during the term of the Licence to search, bore for and obtain petroleum in UK Onshore Block SU97, a 24,700 acre onshore exploration prospect located in the Weald Basin in Windsor, United Kingdom. Reservoir Resources Limited also owns two-dimensional seismic data and information relating to certain areas of the Licence. In December 2012, we determined that the cost to obtain required approval necessary to develop and drill the Windsor Prospect of Reservoir Resources were too significant and the likelihood of obtaining the approval too remote to pursue the prospect further. As a result, we have impaired our investment of Reservoir Resources Limited in the amount of $12,512,535 for the year ended June 30, 2013.
Business Strategy. Our strategy is to increase shareholder value through strategic acquisitions, appraisal drilling and development. We are focused on the acquisition, appraisal development and exploitation of oil and gas properties. We are also searching for possible joint-ventures and new prospects that fit our strategic focus.
Competition. We compete with other companies for financing and for the acquisition of new oil and gas properties. Many of the oil and gas exploration companies with whom we compete have greater financial and technical resources than those available to us. Accordingly, these competitors may be able to spend greater amounts on acquisitions of oil and gas properties of merit, on exploration of their properties and on development of their properties. In addition, they may be able to afford more geological and other technical expertise in the targeting and exploration of oil and gas properties. This competition could result in competitors having properties of greater quality and interest to prospective investors who may finance additional exploration and development. This competition could have an adverse impact on our ability to achieve the financing necessary for us to conduct further exploration of our acquired properties.
We will also compete with other junior oil and gas exploration companies for financing from a limited number of investors that are prepared to make investments in junior oil and gas exploration companies. The presence of competing junior oil and gas exploration companies may have an adverse impact on our ability to raise additional capital in order to fund our exploration programs if investors are of the view that investments in competitors are more attractive based on the merit of the oil and gas properties under investigation and the price of the investment offered to investors.
Our Website. Our website, located at www.aed-corp.com, provides a description of our oil and gas projects, management, industry and contact information. Our website also includes an investor relation section which provides company and industry news, information about oil and gas markets, and our corporate filings with the Securities and Exchange Commission (“SEC”).
Intellectual Property. We do not presently own any copyrights, patents or trademarks, and we may rely on certain proprietary technologies, trade secrets, and know-how that are not patentable.
We own the Internet domain names www.aed-corp.com and www.ljmenergy.com. Under current domain name registration practices, no one else can obtain an identical domain name, but someone might obtain a similar name, or the identical name with a different suffix, such as “.org”, or with a country designation. The regulation of domain names in the United States and in foreign countries is subject to change, and we could be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our domain names.
Governmental Regulation. Our acquisitions of oil and gas properties are subject to various international, federal, state and local governmental regulations. Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells, pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas. The production, handling, storage, transportation and disposal of oil and gas, by-products thereof, and other substances and materials produced or used in connection with oil and gas operations are also subject to regulation under federal, state and local laws and regulations relating primarily to the protection of human health and the environment. To date, we have incurred no cost related to complying with these laws, for remediation of existing environmental contamination and for plugging and reclamation of our oil and gas exploration property. The requirements imposed by such laws and regulations are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations.
Employees. As of October 12, 2013, we have two employees, both of which are full-time. None of our employees are represented by a labor union or covered by a collective bargaining agreement, and we believe our employee relations are good.
Item 1A.
Item 1A. Risk Factors.
An investment in our securities involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this report before making an investment decision with regard to our securities. If any of the following risks actually occurs, our business, financial condition, and/or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. You should only purchase our securities if you can afford to suffer the loss of your entire investment.
Risks Related to our Business:
We have a limited operating history upon which an evaluation of our prospects can be made.
We were incorporated in March 2010. Our lack of operating history makes an evaluation of our business and prospects very difficult. Our prospects must be considered speculative, considering the risks, expenses, and difficulties frequently encountered in the establishment of a new business. We cannot be certain that our business will be successful or that we will generate significant revenues.
We have limited revenues to sustain our operations.
We are currently developing our business and have generated revenues of only $293,464 to date. We are not able to predict whether we will be able to develop our business and generate significant revenues. If we are not able to complete the successful development of our business plan, generate significant revenues and attain sustainable operations, then our business will fail.
We have do not currently have sufficient financial resources to pay our proportional share of drilling costs for the Dansville Prospect.
We have do not currently have sufficient financial resources to pay our proportional share of drilling costs for the Dansville Prospect. In addition, if the actual costs for completion of the test well exceed the initial authority for expenditure, then we will be obligated to pay our proportional share of any additional costs. We do not currently have sufficient funds to pay our proportional share of those costs. Our failure to pay our proportional share of those costs will impair our ability to maintain our current working interest in the Dansville Prospect. We hope to raise additional capital to pay those costs, although we cannot guarantee that we will do so.
We have a history of net losses which will continue and which may negatively impact our ability to achieve our business objectives.
For the period from inception (March 10, 2010) to June 30, 2013, we had limited revenues and a net loss of $(15,610,275). We cannot guarantee that we will be able to generate more significant revenues or that our future operations will result in net income. We may not ever be able to operate profitability on a quarterly or annual basis in the future. Our failure to generate and increase our revenues will harm our business. If the amount of time it takes for us generate revenues is longer than we anticipate or our operating expenses exceed our expectations, our operating results will suffer.
Our independent auditors have expressed substantial doubt about our ability to continue as a going concern.
In their report dated October 18, 2013, our current independent registered public accounting firm stated that our financial statements for the year ended June 30, 2013, were prepared assuming that we would continue as a going concern, and that they have substantial doubt about our ability to continue as a going concern. Our auditors’ doubts are based on our ability to obtain sufficient working capital to fund future operations. If we are unable to raise additional capital, our efforts to continue as a going concern may not prove successful.
We need additional financing to execute our business plan.
The revenues from our current operations are not sufficient to support our operating costs and anticipated drilling programs. We need substantial additional funds to:
● effectuate our business plan;
● fund the acquisition, exploration, development and production of oil and natural gas in the future;
● fund future drilling programs; and
● hire and retain key employees.
We may seek additional funds through public or private equity or debt financing, via strategic transactions, and/or from other sources. There are no assurances that future funding will be available on favorable terms or at all. If additional funding is not obtained, we may need to reduce, defer or cancel drilling programs, planned initiatives, or overhead expenditures to the extent necessary. The failure to fund our operating and capital requirements could have a material adverse effect on our business, financial condition and results of operations.
Additional capital may be costly or difficult to obtain.
Additional capital, whether through the offering of equity or debt securities, may not be available on reasonable terms or at all, especially in light of the recent downturn in the economy and dislocations in the credit and capital markets. If we are unable to obtain required additional capital, we may have to curtail our plans or cut back on existing business and, further, we may not be able to continue operating if we do not generate sufficient revenues from operations needed to stay in business. We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we issue, such as convertible notes and warrants, which may adversely impact our financial condition.
Because we are small and have limited access to additional capital, we may have to limit our exploration and development activity, which may result in a loss of investment.
We have a small asset base and limited access to additional capital. Accordingly, we must limit our exploration and development activity. As such, we may not be able to complete an exploration and development program that is as thorough as our management would like. In that event, existing reserves may go undiscovered. Without finding additional reserves, we cannot generate more significant revenues and investors may lose their investment.
Oil exploration and development activities are subject to many risks which may affect our ability to obtain any level of commercial success.
Oil exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations, and various field operating conditions may negatively affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme weather conditions, insufficient storage or transportation capacity or other geological and mechanical conditions. Production delays and declines from normal field operating conditions cannot be eliminated and can be expected to negatively affect revenue and cash flow levels to varying degrees.
Our commercial success depends on our ability to find, acquire, develop and commercially produce oil and natural gas reserves.
Without the continual addition of new reserves, any existing reserves and the production therefrom will decline over time as such existing reserves are depleted. A future increase in our reserves will depend not only on our ability to explore and develop any properties we may acquire, but also on our ability to select and acquire suitable producing properties or prospects. We cannot guarantee that we will be able to locate satisfactory properties for acquisition or participation. Moreover, if such acquisitions or participations are identified, we may determine that current markets, terms of acquisition and participation or pricing conditions make such acquisitions or participations economically disadvantageous. In addition, because we have limited capital, we may not be able to complete an exploration program as thorough as our management would like. We cannot guarantee that commercial quantities of oil will be discovered or acquired by us.
Our operations rely extensively on third-parties who, if not successful, could have a material adverse affect on our results of operation.
We have only participated in wells operated by third-parties. Our current ability to develop and grow our operations depends on the success of our consultants and drilling partners. As a result, we do not control the timing or success of the development, exploitation, production and exploration activities relating to our leasehold interests. If our consultants and drilling partners are not successful in such activities relating to our leasehold interests, or are unable or unwilling to perform, our financial condition and results of operation would be materially adversely affected.
Our oil and gas operations are subject to operating hazards that may increase our operating costs to prevent such hazards, or may materially affect our operating results if any of such hazards were to occur.
Oil and natural gas exploration, development and production operations are subject to all the risks and hazards typically associated with such operations, including hazards such as fire, explosion, blowouts, cratering, unplanned gas releases and spills, each of which could result in substantial damage to our wells, production facilities, other property and the environment or in personal injury. Oil and gas production operations are also subject to all the risks typically associated with such operations, including encountering unexpected formations or pressures, premature decline of reservoirs and the invasion of water into hydrocarbon producing formations. Losses resulting from the occurrence of any of these risks could negatively affect our results of operations, liquidity and financial condition.
To date, we have generated limited revenues from production of our oil lease interests. In addition, we will not have revenues to support our activities should the wells drilled or properties acquired prove not to be commercially viable. We cannot guarantee that commercial quantities of oil and gas will be successfully produced as a result of our exploration and development efforts. Further there is no guarantee that we will generate sufficient revenues from current production.
Our exploration and development activities will depend in part on the evaluation of data obtained through geophysical testing and geological analysis, as well as test drilling activity.
The results of geophysical testing and geological analysis are subjective, and we cannot guarantee that the exploration and development activities we conduct based on positive analysis will produce oil or gas in commercial quantities or costs. As we perform developmental and exploratory activities, further data required for evaluation of our oil and gas interests will become available. The exploration and development activities that will be undertaken by us are subject to greater risks than those associated with the acquisition and ownership of producing properties. The drilling of development wells, although generally consisting of drilling to reservoirs believed to be productive, may result in dry holes or a failure to produce oil or gas in commercial quantities. Moreover, any drilling of exploratory wells is subject to significant risk of dry holes.
We depend on the services of third parties for material aspects of our operations, including drilling operators, and accordingly if we cannot obtain certain third party services, we may not be able to operate.
We rely on third parties to operate the assets in which we possess an interest. Assuming the presence of commercial quantities of oil on our property, the success of the oil operations, whether considered on the basis of drilling operations or production operations, will depend largely on whether the operator of the property properly fulfills our obligations. As a result, our ability to exercise influence over the operation of these assets or their associated costs is extremely limited. Our performance will therefore depend upon a number of factors that may be outside of our control, including the timing and amount of capital expenditures, the operator’s expertise and financial resources, the approval of other participants, the selection of technology, and risk management practices. The failure of third party operators and their contractors to perform their services in a proper manner will negatively affect our operations.
Our lack of diversification will increase the risk of an investment in us, and our financial condition and results of operations may deteriorate if we fail to diversify.
Our current business focus is on the oil and gas industry in Michigan and Oklahoma. Larger companies have the ability to manage their risk by diversification. However, we currently lack diversification, in terms of both the nature and geographic scope of our business. As a result, we will likely be impacted more acutely by factors affecting our industry or the regions in which we operate, than we would if our business were more diversified, enhancing our risk profile.
If we are unable to successfully compete with the large number of oil and natural gas producers in our industry, we may not be able to achieve profitable operations.
Oil and natural gas exploration is intensely competitive in all its phases and involves a high degree of risk. We compete with numerous other participants in the search for and the acquisition of oil and natural gas properties and in the marketing of oil and natural gas. Our competitors include energy companies that have substantially greater financial resources, staff and facilities than us. Our ability to establish additional reserves in the future will depend not only on our ability to explore and develop our existing properties, but also on our ability to select and acquire suitable producing properties or prospects for exploratory drilling. Competitive factors in the distribution and marketing of oil and natural gas include price and methods and reliability of delivery. Competition may also be presented by alternate fuel sources.
We are highly dependent on our strategic relationships, which are subject to change.
Our ability to successfully acquire additional properties, to increase our reserves, to participate in drilling opportunities and to identify and enter into commercial arrangements will depend on developing and maintaining close working relationships with industry participants and our ability to select and evaluate suitable properties and to consummate transactions in a highly competitive environment. Our inability to maintain close working relationships with industry participants or continue to acquire suitable property may impair our ability to execute our business plan.
To develop our business, we need to continue to foster the business relationships of our management to enter into strategic relationships, which may take the form of joint ventures with other private parties and contractual arrangements with other crude oil and natural gas companies. We may not be able to establish these strategic relationships, or if established, we may not be able to maintain them. In addition, our relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to in order to fulfill our obligations to these partners or maintain our relationships. If sufficient strategic relationships are not established and maintained, our business prospects, financial condition and results of operations may be materially adversely affected.
Our property is held in the form of leases and working interests in operating agreements and leases. If the specific requirements of such leases and working interests are not met, the instrument may terminate or expire.
Our property is held under interests in oil and gas leases and working interests in operating agreements and leases. If we fail to meet the specific requirements of each lease or working interest, especially future drilling and production requirements, the lease may be terminated or otherwise expire. We cannot be assured that we will be able to meet our obligations under each lease and working interest. The termination or expiration of our working interest relating to any lease would harm our business, financial condition and results of operations.
Current global financial conditions have been characterized by increased volatility which could negatively impact our business and future prospects.
Current global financial conditions and recent market events have been characterized by increased volatility and the resulting tightening of the credit and capital markets has reduced the amount of available liquidity and overall economic activity. We cannot guarantee that debt or equity financing, the ability to borrow funds or cash generated by operations will be available or sufficient to meet or satisfy our initiatives, objectives or requirements. Our inability to access sufficient amounts of capital on terms acceptable to us for our operations will negatively impact our business, prospects, liquidity and financial condition.
Our officers and directors are engaged in other activities that could conflict with our interests. Therefore, our officers and directors may not devote sufficient time to our affairs, which may affect our ability to conduct business activities and generate revenues.
Our officers and directors have existing responsibilities and may have additional responsibilities to provide management and services to other entities. As a result, conflicts of interest between us and the other activities of those entities may occur from time to time, in that our officers and directors shall have conflicts of interest in allocating time, services, and functions between the other business ventures in which they may be or become involved and our affairs.
We depend on the efforts and abilities of our officers and directors.
We have two full time employees, Herold Ribsskog and Joel Felix. Outside demands on their time may prevent them from devoting sufficient time to our operations. In addition, the demands on their time will increase because of our status as a public company. Mr. Ribsskog and Mr. Felix have very limited experience managing a public company, which may impact our ability to meet our financial and business objectives as potential investors may not want to invest in a company whose management has limited public company experience. The interruption of the services of our management could significantly hinder our operations, profits and future development, if suitable replacements are not promptly obtained. We cannot guarantee that our management will remain with us.
Seasonal weather conditions and other factors could adversely affect our ability to conduct drilling activities.
Our operations could be adversely affected by seasonal weather conditions and wildlife restrictions on federal leases. In some areas, certain drilling and other oil and gas activities can only be conducted during limited times of the year, typically during the summer months. This would limit our ability to operate in these areas and could intensify competition during those times for drilling rigs, oil field equipment, services, supplies and qualified personnel, which may lead to periodic shortages. These constraints and the resulting shortages or high costs could delay our operations and materially increase our operating and capital costs, which could have a material adverse effect upon us and our results of operations.
We are subject to various regulatory requirements, including environmental regulations, and may incur substantial costs to comply and remain in compliance with those requirements.
Our operations in the United States are subject to regulation at the federal, state and local levels, including regulation relating to matters such as the exploration for and the development, production, marketing, pricing, transmission and storage of oil and gas, as well as environmental and safety matters. Failure to comply with applicable regulations could result in fines or penalties being owed to third parties or governmental entities, the payment of which could negatively impact our financial condition or results of operations. Our operations are subject to significant laws and regulations, which may negatively affect our ability to conduct business or increase our costs. Extensive federal, state and local laws and regulations relating to health and environmental quality in the United States affect nearly all of our operations. These laws and regulations set various standards regulating various aspects of health and environmental quality, provide for penalties and other liabilities for the violation of these standards, and in some circumstances, establish obligations to remediate current and former facilities and off-site locations.
Environmental legislation provides for, among other things, restrictions and prohibitions on spills, releases or emissions of various substances produced in association with oil and gas operations. The legislation also requires that wells and facility sites be operated, maintained, abandoned and reclaimed to the satisfaction of the applicable regulatory authorities. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability and potentially increased capital expenditures and operating costs. The discharge of oil or other pollutants into the air, soil or water may give rise to liabilities to governments and third parties and may require us to incur costs to remedy such discharge. No assurance can be given that environmental laws will not result in a curtailment of production or a material increase in the costs of production, development or exploration activities or otherwise adversely impact our financial condition, results of operations or prospects. We could incur significant liability for damages, clean-up costs and/or penalties in the event of discharges into the environment, environmental damage caused by us or previous owners of our property or non-compliance with environmental laws or regulations. In addition to actions brought by governmental agencies, we could face actions brought by private parties or citizens groups.
Moreover, we cannot predict what legislation or regulations will be enacted in the future or how existing or future laws or regulations will be administered, enforced or made more stringent. Compliance with more stringent laws or regulations, or more vigorous enforcement policies of the regulatory agencies, could require us to make material expenditures for the installation and operation of systems and equipment for remedial measures, all of which could have a material adverse effect on our financial condition or results of operations.
The market for oil and natural gas is subject to a number of factors that are beyond our control, and may adversely impact our ability to generate significant revenues, or to achieve profitability.
The marketability and price of oil and natural gas that may be acquired or discovered by us will be affected by numerous factors beyond our control. Our ability to generate significant revenues may depend upon acquiring space on pipelines that deliver hydrocarbons to commercial markets. We may be affected by deliverability uncertainties related to the proximity of our reserves to pipelines and processing facilities, by operational problems with such pipelines and facilities, and by government regulation relating to price, taxes, royalties, land tenure, allowable production, the export of oil and gas and by many other aspects of the oil and gas business.
Our revenues, profitability and future growth and the carrying value of our oil and gas properties are substantially dependent on prevailing prices of oil and natural gas. Our ability to borrow and to obtain additional capital on attractive terms is also substantially dependent upon oil and natural gas prices. Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors beyond our control. These factors include economic conditions in the United States, the actions of the Organization of Petroleum Exporting Countries, governmental regulation, political stability in the Middle East and elsewhere, the foreign supply of oil, the price of foreign imports and the availability of alternative fuel sources. Any substantial and extended decline in the price of oil and natural gas would have an adverse effect on our borrowing capacity, revenues, profitability and cash flows from operations.
Volatile commodity prices make it difficult to estimate the value of producing properties for acquisition and often cause disruption in the market for producing properties, as buyers and sellers have difficulty agreeing on such value. Price volatility also makes it difficult to budget for and project the return on acquisitions and development and exploitation projects.
Our reserve estimates are subject to numerous uncertainties and may be inaccurate.
We currently have measurable proved reserves in the state of Michigan. There are numerous uncertainties inherent in estimating quantities of oil and natural gas reserves and cash flows to be derived therefrom, including many factors beyond our control. In general, estimates of economically recoverable oil and gas reserves and the future net cash flows therefrom are based upon a number of variable factors and assumptions, such as historical production from the properties, production rates, ultimate reserve recovery, timing and amount of capital expenditures, marketability our products, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of which may vary from actual results. All such estimates are to some degree speculative, and classifications of reserves are only attempts to define the degree of speculation involved. For those reasons, estimates of the economically recoverable reserves attributable to any particular group of properties, classification of such reserves based on risk of recovery and estimates of future net revenues expected therefrom prepared by different engineers, or by the same engineers at different times, may vary. Our actual production, revenues, taxes and development and operating expenditures with respect to our reserves will vary from estimates thereof and such variations could be material.
Estimates of proved or unproved reserves that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves rather than actual production history. Estimates based on these methods are generally less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history and production practices will result in variations in the estimated reserves and such variations could be material.
The potential profitability of oil and gas properties depends upon factors beyond our control.
The potential profitability of oil and gas properties is dependent upon many factors beyond our control. For instance, world prices and markets for oil and gas are unpredictable, highly volatile, potentially subject to governmental fixing, pegging, controls, or any combination of these and other factors, and respond to changes in domestic, international, political, social, and economic environments. Additionally, due to worldwide economic uncertainty, the availability and cost of funds for production and other expenses have become increasingly difficult, if not impossible, to project. These changes and events may materially affect our financial performance. In addition, a productive well may become uneconomic in the event that water or other deleterious substances are encountered which impair or prevent the production of oil and/or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. These factors cannot be accurately predicted and the combination of these factors may result in us not receiving an adequate return on invested capital.
The costs to meet our reporting requirements as a public company subject to the Exchange Act of ‘34 will be substantial and may result in us having insufficient funds to operate our business.
We will incur ongoing expenses associated with professional fees for accounting and legal expenses associated with being a public company. We estimate that these costs will range up to $150,000 per year for the next few years. Those fees will be higher if our business volume and activity increases. Those obligations will reduce and possibly eliminate our ability and resources to fund our operations and may prevent us from meeting our normal business obligations.
Risks Related to our Common Stock
Our board of directors has the authority, without stockholder approval, to issue preferred stock with terms that may not be beneficial to common stockholders and may grant voting powers, rights and preference that differ from or may be superior to those of the registered shares.
Our articles of incorporation allow us to issue 5,000,000 shares of preferred stock without any vote or further action by our stockholders. Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of directors also has the authority to issue preferred stock without further stockholder approval, including large blocks of preferred stock. Furthermore, Joel Felix and Herold Ribsskog together serve as our entire board of directors and, therefore, have the ability to issue preferred stock without shareholder approval, especially in the event the offering is not subscribed sufficiently to constitute a majority of the issue and outstanding shares of common stock. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock.
Investors should not look to dividends as a source of income.
In the interest of reinvesting initial profits back into our business, we do not intend to pay cash dividends in the foreseeable future. Consequently, any economic return will initially be derived, if at all, from appreciation in the fair market value of our stock, and not as a result of dividend payments.
Our common stock is subject to penny stock rules, which may make it more difficult for our stockholders to sell their common stock.
Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by the SEC. Penny stocks generally are equity securities with a price of less than $5.00 per share. The penny stock rules require a broker-dealer, prior to a purchase or sale of a penny stock not otherwise exempt from the rules, to deliver to the customer a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock the broker-dealer 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. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules.
Our common shares are thinly-traded, and in the future, may continue to be thinly-traded, and you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate such shares.
We cannot predict the extent to which an active public market for our common stock will develop or be sustained due to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors, and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained.
The market price for our common stock may be particularly volatile given our status as a relatively small company and lack of significant revenues that could lead to wide fluctuations in our share price. You may be unable to sell your common stock at or above your purchase price if at all, which may result in substantial losses to you.
The market for our common shares may be characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will be more volatile than a seasoned issuer for the indefinite future. The potential volatility in our share price is attributable to a number of factors. First, as noted above, our common shares may be sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer that could better absorb those sales without adverse impact on its share price. Secondly, an investment in us is a speculative or “risky” investment due to our lack of revenues or profits to date. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer.
Our stock price may be volatile, which may result in losses to our stockholders.
The stock markets have experienced significant price and trading volume fluctuations, and the market prices of companies quoted on the OTCQB, where our shares of common stock are quoted, generally have been very volatile and have experienced sharp share-price and trading-volume changes. The trading price of our common stock is likely to be volatile and could fluctuate widely in response to many of the following factors, some of which are beyond our control:
·
variations in our operating results;
·
changes in expectations of our future financial performance, including financial estimates by securities analysts and investors;
·
changes in operating and stock price performance of other companies in our industry;
·
additions or departures of key personnel; and
·
future sales of our common stock.
Domestic and international stock markets often experience significant price and volume fluctuations. These fluctuations, as well as general economic and political conditions unrelated to our performance, may adversely affect the price of our common stock. In particular, following initial public offerings, the market prices for stocks of companies often reach levels that bear no established relationship to the operating performance of these companies. These market prices are generally not sustainable and could vary widely. In the past, following periods of volatility in the market price of a public company’s securities, securities class action litigation has often been initiated.
Volatility in our common stock price may subject us to securities litigation.
The market for our common stock is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.
Volatility of stock price may restrict sale opportunities.
Our stock price is affected by a number of factors, including stockholder expectations, financial results, the introduction of new products by us and our competitors, general economic and market conditions, estimates and projections by the investment community and public comments by other persons, and many other factors, many of which are beyond our control. We may be unable to achieve analysts’ revenue or earnings forecasts, which may be based on projected volumes and sales of many product types and/or new products, certain of which are more profitable than others. There can be no assurance that we will achieve projected levels of revenues. As a result, our stock price is subject to significant volatility and stockholders may not be able to sell our stock at attractive prices.
We need additional capital, and the sale of additional shares or other equity securities could result in additional dilution to our stockholders.
Our current cash and cash equivalents and anticipated cash flow from operations are not sufficient to meet our anticipated cash needs for the near future. We require additional cash resources for investments and acquisitions we may decide to pursue. If our resources are insufficient to satisfy our cash requirements, we will seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in additional dilution to our stockholders. The incurrence of additional indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
Item 1B.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Item 2. Properties.
Facilities. Our primary offices are located at 1230 Avenue of the Americas, 7th Floor, New York, NY 10020. Joel Felix, our officer and director, provided approximately 200 square feet of office space at no charge. Our financial statements reflect the fair market value of that space which is approximately $300 per month, or $3,600 for the year ended June 30, 2013. We do not have a written lease or sublease agreement with Mr. Felix. Mr. Felix does not expect to be paid or reimbursed for providing office facilities. We believe that our facilities are adequate for our needs and that additional suitable space will be available on acceptable terms as required.
Dansville Prospect. We own a 43.75% working interest in certain oil and gas drilling areas and land leases located on approximately 1,343 acres in Ingham County, Michigan, which contains the Dansville Prospect. Range is the operator of the Dansville Prospect. The first well in the Dansville Prospect, the Brown 2-12, has completed drilling, in production and yielding cash flaw. The second well in the Dansville Prospect, the Cremer 1-1, was cement plugged due to high salt content following geophysical logging for density, porosity and water saturation and Range is currently evaluating completion and development opportunities for the well, which include sidetracking.
Fairfax License. In the United Kingdom, our wholly-owned subsidiary Reservoir Resources Limited, through its wholly-owned subsidiary, Fairfax 307, owns a 95% share in the Licence for UK Onshore Block SU97, which grants to Fairfax 307 an exclusive license during the term of the Licence to search, bore for and obtain petroleum in UK Onshore Block SU97, a 24,700 acre onshore exploration prospect located in the Weald Basin in Windsor, United Kingdom. Reservoir Resources Limited also owns two-dimensional seismic data and information relating to certain areas of the Licence. In December 2012, we determined that the cost to obtain required approval necessary to develop and drill the Windsor Prospect of Reservoir Resources were too significant and the likelihood of obtaining the approval too remote to pursue the prospect further. As a result, we impaired our investment of Reservoir Resources in the amount of $12,512,535.
Magnolia Prospect. We own a 1.4% working interest in a three well developmental drilling project located on approximately 240 acres in Pottawatomie County, Oklahoma known as the Magnolia Prospect. Crown is the operator of the Magnolia Prospect. Two of the wells have been drilled and put on production. Since June 2012, production levels have been minimal and we generate only a de minimus amount of revenues from the Magnolia Prospect.
Proved Reserves.
The following reserve schedule summarizes the Company's net ownership interests in estimated quantities of proved oil and gas reserves and changes in its proved reserves, all of which are located in Michigan in the continental United States. All reserve estimates for crude oil and natural gas were internally prepared by the Company and estimated by NSAI, independent petroleum engineers. In accordance with SEC guidelines, NSAI's estimates of future net revenues from our properties, and the PV-10 and standardized measure thereof, were determined to be economically producible under existing economic conditions, which requires the use of the 12-month average price for each product, calculated as the unweighted arithmetic average of the first-day-of-the-month price for the period July 2012 through June 2013, except where such guidelines permit alternate treatment, including the use of fixed and determinable contractual price escalations. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of currently producing oil and gas properties. Accordingly, we anticipate that these oil and gas reserve estimates will change as future information becomes available.
The technical person at NSAI, G. Lance Binder, is responsible for preparing the reserves estimates presented herein and meets or exceeds the education, training, and experience requirements set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Mr. Binder has been practicing consulting petroleum engineering at NSAI since 1983. Mr. Binder is a Licensed Professional Engineer in the State of Texas (No. 61794) and has over 33 years of experience in the estimation and evaluation of reserves. He graduated from Purdue University in 1978 with a Bachelor of Science Degree in Chemical Engineering.
Herold Ribsskog, our officer and director, acted as the liaison with the technical person at NSAI. Mr. Ribsskog's technical qualifications are described in the section entitled Management in this Annual Report.
Reserve Technologies. Proved reserves are 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. The term “reasonable certainty” implies a high degree of confidence that the quantities of oil and/or natural gas actually recovered will equal or exceed the estimate. To achieve reasonable certainty, NSAI employed technologies that have been demonstrated to yield results with consistency and repeatability. The technologies and economic data used in the estimation of our proved reserves include, but are not limited to, well logs, geologic maps, production data, historical price and cost information, and property ownership interests.
Oil and Gas Reserve Information (Unaudited). The following reserve quantities and future net cash flow information for our proved reserves located in the United States have been estimated as of June 30, 2013. The determination of oil and gas reserves is based on estimates, which are highly complex and interpretive. The estimates are subject to continuing change as additional information becomes available.
Standardized Measure
The standardized measure of discounted future net cash flows relating to proved oil reserves is as follows:
A summary of the changes in the standardized measure of discounted future new cash flow applicable to proved oil reserves is as follows:
Change in Standardized Measure
The standardized measure of discounted future net cash flows as of June 30, 2013 was calculated using the following Average Fiscal-Year prices:
The standardized measure of discounted future net cash flows is provided using the 12-month unweighted arithmetic average and were held constant throughout the life of the properties. The oil price used as of June 30, 2013 was $88.13 per barrel ("bbl") of oil and is adjusted for quality, transportation fees, and a regional price differential. Future production costs are based on year-end costs and include severance and ad valorem taxes of approximately 7.5%. Each property that is leased by the Company is also charged with field-level overhead in the reserve calculation. The present value of future cash inflows is based on a 10% discount.
The Company used discounted future net cash flows, which is calculated without deducting estimated future income tax expenses, and the present value thereof as one measure of the value of the Company's current proved reserves and to compare relative values among peer companies without regard to income taxes. While future net revenue and present value are based on prices, costs and discount factors which are consistent from company to company, the standardized measure of discounted future net cash flows is dependent on the unique tax situation of each individual company. As of June 30, 2013, the present value of discounted future net cash flows and the standardized measure of discounted future net cash flows are equal because the effects of estimated future income tax expenses are zero.
Production
During the year ended June 30, 2013, we produced approximately 3,505 bbls of oil on a net basis. Based on the net production for the year ended June 30, 2013, our average sales price per barrel was $87.52 on a net basis.
For the year ended June 30, 2013, we had oil production from our interests the Brown 2-12 well in Michigan.
Drilling Activity. During the period from July 1, 2012 through June 30, 2013, we had no further drilling activity.
Delivery Commitments. We are not obligated to provide a fixed and determinable quantity of oil or gas in the near future under existing contracts or agreements in Michigan.
Gross and Net Productive Wells.
Gross and Net Developed Acreage.
Gross and Net Undeveloped Acreage.
Item 3.
Item 3. Legal Proceedings.
We are not currently a party to any legal proceedings.
Item 4.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information. Our common shares are not listed on any stock exchange, but are quoted on the OTCQB under the symbol “AEDC.” The following table sets forth, for the time period indicated, the high and low closing sales price of our common stock as quoted on the OTCQB.
Holders. The approximate number of stockholders of record at October 17, 2013 was thirty three. The number of stockholders of record does not include beneficial owners of our common stock, whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries.
Dividend Policy. We have never declared or paid a cash dividend on our capital stock. We do not expect to pay cash dividends on our common stock in the foreseeable future. We currently intend to retain our earnings, if any, for use in our business. Any dividends declared in the future will be at the discretion of our Board of Directors.
Stock Split. On July 12, 2011, we filed a Certificate of Change pursuant to Section 78.209 of the Nevada Revised Statutes (the “Certificate of Change”) with the Nevada Secretary of State to affect a thirty for one forward stock split of our common stock (the “Forward Stock Split”). The Certificate of Change increased the number of authorized shares of our common stock from 100,000,000 to 3,000,000,000 and the number of issued and outstanding shares of common stock for shareholders of record as of July 13, 2011, from 5,705,570 shares to 171,167,100 shares. The effective date of the Forward Stock Split with the Nevada Secretary of State was July 14, 2011. The Forward Stock Split took effect in the OTC markets at the open of business on July 15, 2011.
Securities Authorized For Issuance Under Equity Compensation Plans. None during the period covered by this report.
Recent sales of unregistered securities. There were no sales of unregistered securities by us within the past three years that were not previously reported.
Purchases of Equity Securities. None during the period covered by this report.
Penny Stock Regulation. Shares of our common stock will probably be subject to rules adopted the SEC that regulate broker-dealer practices in connection with transactions in “penny stocks”. Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in those securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, deliver a standardized risk disclosure document prepared by the SEC, which contains the following:
·
a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading;
·
a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to violation to such duties or other requirements of securities’ laws;
·
a brief, clear, narrative description of a dealer market, including “bid” and “ask” prices for penny stocks and the significance of the spread between the “bid” and “ask” price;
·
a toll-free telephone number for inquiries on disciplinary actions;
·
definitions of significant terms in the disclosure document or in the conduct of trading in penny stocks; and
·
such other information and is in such form (including language, type, size and format), as the SEC shall require by rule or regulation.
Prior to effecting any transaction in penny stock, the broker-dealer also must provide the customer the following:
·
the bid and offer quotations for the penny stock;
·
the compensation of the broker-dealer and its salesperson in the transaction;
·
the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and
·
monthly account statements showing the market value of each penny stock held in the customer’s account.
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for a stock that becomes subject to the penny stock rules. Holders of shares of our common stock may have difficulty selling those shares because our common stock will probably be subject to the penny stock rules.
Item 6.
Item 6. Selected Financial Data.
Not applicable.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
The following discussion relates to a discussion of the financial condition and results of operations of American Energy Development Corp., a Nevada corporation (the “Company”) herein used in this report, unless otherwise indicated, under the terms “Registrant,” “AED,” “we,” “us” and similar terms.
Forward Looking Statements
This following information specifies certain forward-looking statements of management of the company. Forward-looking statements are statements that estimate the happening of future events are not based on historical fact. Forward-looking statements may be identified by the use of forward-looking terminology, such as “may”, “shall”, “could”, “expect”, “estimate”, “anticipate”, “predict”, “probable”, “possible”, “should”, “continue”, or similar terms, variations of those terms or the negative of those terms. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.
The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to:
·
risks associated with drilling and production programs resulting from geological, technical, drilling, seismic and other unforeseen problems;
·
unexpected results of exploration and development drilling and related activities;
·
availability of capital and financing to fund exploration and development drilling activities;
·
increases in operating costs;
·
availability of skilled personnel;
·
unpredictable weather conditions; and
·
other factors listed from time to time in the Company's filings with the Securities and Exchange Commission.
No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements.
Critical Accounting Policy and Estimates. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. In addition, our accounting policies are described at relevant sections in this discussion and analysis and in the notes to the financial statements included in this Annual Report on Form 10-K for the year ended June 30, 2013.
Our Business. We are an exploration stage company focused on exploration, production and development of oil and natural gas in the United States. We currently own interests in certain oil and gas drilling areas and land leases located in Ingham County, Michigan, known as the Dansville Prospect, and seismic data relating to such areas and leases. We also own a working interest in a three well developmental drilling project in Pottawatomie County, Oklahoma, known as the Magnolia Prospect. For all of our working interests, we depend on operating partners to propose, permit and initiate the drilling of wells.
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements for the year ended June 30, 2013, together with notes thereto as included in this Annual Report on Form 10-K.
For the year ended June 30, 2013, as compared to the year ended June 30, 2012
Results of Operations.
Revenues. We had revenues of $204,453 for the year ended June 30, 2013, as compared to revenues of $89,011 for the year ended June 30, 2012. We do not anticipate we will generate more significant revenues from oil and gas sales from our interest in the Dansville Prospect.
Operating Expenses. For the year ended June 30, 2013, our total operating expenses were $14,029,044, as compared to total operating expenses of $1,695,784 for the year ended June 30, 2012. Our operating expenses were comprised of general and administrative expenses of $454,497, loss on sale of oil and gas property of $291,723 and a charge for impairment of oil and gas property of $13,282,824 based on the independent assessment of the future value of its proved reserves at the Brown 2-12 well on the Dansville Prospect and our cessations of any further development of our UK license and our Osprey Prospect. The decrease in general and administrative expenses is primarily related to additional costs related to the decreased size of our operations.
We expect that our future monthly operating expenses for fiscal year 2013 will increase from our current expense levels, plus we expect to incur additional direct costs relating to drilling the Dansville Prospect in Michigan. We will continue to incur significant general and administrative expenses as a result of being a public company, but we also hope to generate more significant revenues from oil and gas sales at the Dansville Prospect.
Net Loss. For the year ended June 30, 2013, our net loss was $13,854,814, as compared to our net loss of $1,618,934 for the year ended June 30, 2012. The larger loss is primarily due to an increase in general and administrative expenses and the impairment of oil and gas property. We expect to begin generating more significant revenues from oil and gas, which we hope will cover our operating costs and reduce our net losses in the future. We cannot guarantee that we will be able to generate additional revenues or, if that we do generate additional revenues, that such revenues will be sufficient to cover our operating costs and reduce our net loss in future periods.
Financial Condition, Liquidity and Capital Resources. As of June 30, 2013, we have cash of $9,683 and accounts receivable of $13,009 which comprises our current assets of $22,692 as of that date. Our total assets of $428,392 as of June 30, 2013 consist of our current assets of $22,692, evaluated oil and gas property of $405,700.
As of June 30, 2013, we had total current liabilities of $249,865 all of which were represented by accounts payable and accrued expenses. We had no other long term liabilities, commitments or contingencies.
On October 3, 2011, we entered into a Securities Purchase Agreement (“Financing Agreement”) with an investor pursuant to which we may, at our sole and exclusive option, issue and sell to the investor (“Investor”), and the Investor shall purchase up to $7,800,000 of our common stock and five-year warrants to purchase common stock (the “Warrants”) from time to time over a two year period at a purchase price of the higher of (i) $0.40 per share, and (ii) eighty percent (80%) of the 10-day volume weighted average price (VWAP) of our common stock. We received an initial drawdown of $200,000 on October 3, 2011, and we issued 500,000 shares of common stock at a purchase price of $0.40 per share and Warrants to purchase 500,000 shares of common stock at an exercise price of 120% of the purchase price, or $0.48 per share. The Warrants expire five years from the date of the investment. The second drawdown of $200,000 was delivered on October 12, 2011 and we issued 500,000 shares of our common stock at a purchase price of $0.40 per share and Warrants to purchase 500,000 shares of our common stock at an exercise price of $0.48 per share to the Investor in connection with the second drawdown. The third drawdown of $50,000 was delivered on February 3, 2012 and we issued 125,000 shares of our common stock at a purchase price of $0.40 per share and Warrants to purchase 125,000 shares of our common stock at an exercise price of $0.48 per share to the Investor in connection with the third drawdown. The fourth drawdown of $1,000,000 was delivered on March 20, 2012 and we issued 1,282,052 shares of our common stock at a purchase price of $0.78 per share and Warrants to purchase 1,282,052 shares of our common stock at an exercise price of $0.94 per share to the Investor in connection with the fourth drawdown. The fifth drawdown of $120,000 was delivered on March 30, 2012 and we issued 162,163 shares of our common stock at a purchase price of $0.74 per share and Warrants to purchase 162,163 shares of our common stock at an exercise price of $0.89 per share to the Investor in connection with the fifth drawdown. The sixth drawdown of $30,000 was delivered on October 31, 2012 and we issued 75,000 shares of our common stock at a purchase price of $0.40 per share and Warrants to purchase 75,000 shares of our common stock at an exercise price of $0.48 per share to the Investor in connection with the sixth drawdown.
On April 17, 2012, we entered into a letter of intent with Range Michigan LLC ("Range") to acquire a 43.75% working interest and a 35% net revenue interest in the Osprey Prospect in Southern Michigan. We did not enter into a definitive agreement with Range for the acquisition of those interests and in October 2012, Range agreed to accept our deposit of $50,000 for the Osprey Prospect as partial payment of certain costs associated with our interests in the White-tail Prospect in Northern Michigan.
On February 5, 2013, we entered into an Assignment of Oil and Gas Leases, Termination of Lease Acquisition Agreement and Operating Agreement and Disclaimer (the “Termination Agreement”) with Range to assign to Range all of our 43.75% working interest in Range’s right to oil and gas leases covering the White-tail Prospect in Northern Michigan, effective January 22, 2013, and to terminate the Lease Acquisition Agreement dated June 15, 2012 (the “Acquisition Agreement”) and the Operating Agreement, effective January 23, 2013, due to our non-payment of certain costs as required pursuant to the Acquisition Agreement. Our prior payments for the interests in the White-tail Prospect were not refunded pursuant to the Termination Agreement. As a result of the Termination Agreement, we recorded a loss from the termination of the prospect in the amount of $291,723.
During the year ended June 30, 2013, the Company paid approximately $90,000 in legal costs related to responding to requests from the staff of the Securities and Exchange Commission (“SEC”). The staff’s requests have sought, among other things, information related to the Company’s Financing Agreement with the Investor and the accompanying issuances of shares to Investor , information concerning the Company’s communications or dealings with consultants who introduced the Company to Investor and to oil and gas opportunities, information concerning oil and gas-related agreements, and information concerning the Company’s sale of shares in connection with its S-1 registration statement and related shareholder communications. The Company is fully cooperating with the staff’s investigation. At this time, the Company cannot predict reasonably the outcome or timing of this matter as it relates to the Company. The Company has determined that for the time being, it is not advisable to seek additional funding from the Investor and that the pending investigation is having a material impact on the Company’s ability to seek new funding. The Company anticipates it will continue to incur significant legal costs related to these matters.
During 2013, we expect that the following will continue to impact our liquidity:
·
significant legal and accounting costs associated with being a public company and costs associated with responding to the SEC.
·
increases in overhead and the use of independent contractors for services to be provided to us.
·
future payments to Range of our proportional share of costs associated with the wells located on Dansville Prospect.
·
additional expenses related to the acquisition of additional oil and gas rights.
Other than those items specified above, we are not aware of any other known trends, events or uncertainties, which may affect our future liquidity.
We have cash of $9,863 as of June 30, 2013. In the opinion of management, available funds will not satisfy our working capital requirements to operate at our current level of activity for the next twelve months. We need additional cash to continue our operations and to develop the Dansville Prospect and other properties. We cannot guarantee that we will be successful in obtaining sufficient capital to develop any of our properties. Our forecast for the period for which our financial resources will be adequate to support our operations involves risks and uncertainties and actual results could fail as a result of a number of factors.
We do not believe we will be able to continue to drawdown funds from the Financing Agreement. Accordingly, we have been, and intend to continue, working toward identifying and obtaining new sources of financing. We cannot guarantee that we will be successful in obtaining additional financing or that additional funding will be available on favorable terms. Any future financing that we may obtain may cause significant dilution to existing stockholders. Any debt financing or other financing of securities senior to common stock that we are able to obtain will likely include financial and other covenants that will restrict our flexibility. Any failure to comply with these covenants would have a negative impact on our business, prospects, financial condition, results of operations and cash flows.
If we are unable to raise additional capital, we may be required to delay, scale back or eliminate portions of our operations or to obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain of our assets. Accordingly, the inability to obtain such financing could result in a significant loss of ownership and/or control of our assets and could also adversely affect our ability to fund our continued operations and our expansion efforts with respect to our oil and gas interests.
We are not currently conducting any research and development activities. We do not anticipate conducting such activities in the near future. We do not currently own any equipment. Our management believes that we will require the services of independent contractors to operate at our current level of activity. Further, as our level of operations increases beyond the level that our current staff can provide, we may need to hire additional employees or independent contractors as well as purchase or lease equipment.
Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The financial statements required by Item 8 are presented in the following order:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
American Energy Development Corp.
We have audited the accompanying balance sheets of American Energy Development Corp. (an exploration stage company) as of June 30, 2013 and 2012, and the related statements of operations, stockholder’s equity (deficit) and cash flows for the years then ended and for the period from inception (March 10, 2010) through June 30, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Energy Development Corp (an exploration stage company) as of June 30, 2013 and 2012, and the results of its operations and its cash flows for the years then ended and for the period from inception (March 10, 2010) through June 30, 2013 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred an operating loss and has an accumulated deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Q Accountancy Corporation
Irvine, California
October 18, 2013
AMERICAN ENERGY DEVELOPMENT CORP.
(An Exploration Stage Company) CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
AMERICAN ENERGY DEVELOPMENT CORP.
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
AMERICAN ENERGY DEVELOPMENT CORP.
(An Exploration Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE PERIOD FROM INCEPTION (MARCH 10, 2010) THROUGH June 30, 2013
See accompanying notes to consolidated financial statements.  
AMERICAN ENERGY DEVELOPMENT CORP. (An Exploration Stage Company) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.  
AMERICAN ENERGY DEVELOPMENT CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation
Nature of Operations
American Energy Development Corp. (the "Company") is currently an exploration stage company under the provisions of Accounting Standards Codification (ASC) No. 915, Development Stage Entities, and was incorporated under the laws of the State of Nevada on March 10, 2010. Since inception, the Company has produced almost no revenues and will continue to report as an exploration stage company until significant revenues are produced.
The Company’s principal activity is the exploration and development of oil and gas properties.
On July 12, 2011, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Nevada Secretary of State to change its name from “LJM Energy Corp.” to “American Energy Development Corp.” (the “Name Change”). The effective date of the Name Change with the Nevada Secretary of State is July 14, 2011.
Exploration Stage
The Company is engaged in the acquisition, exploration and development of producing oil and gas properties. As of June 30, 2013, the Company owns acreage in the State of Michigan which includes a 43.75% working interest in three separate oil and gas leases in Ingham County, Michigan (the “Dansville Prospect”) totaling approximately 1,343 acres along with option rights to acquire a 50% working interest in three (3) prospects located in Trenton Township, Washtenaw County, Trenton Township, Jackson County, and Kinneville Township, Ingham County, Michigan (the “Option Prospects”), and seismic data for certain properties located in Ingham and Calhoun Counties, Michigan for further exploration and analysis. The Company also owns a 1.4% working interest in certain oil and gas leases in Pottawatomie County, Oklahoma (the “Magnolia Prospect”).
Additionally, the Company owns all of the issued and outstanding shares of Reservoir Resources Limited, which through its wholly-owned subsidiary, Fairfax Shelfco 307 Limited (“Fairfax 307”), is the owner of a ninety-five percent (95%) share in the Petroleum Exploration and Development Licence for UK Onshore Block SU97, known as licence PEDL236 (the “Licence”), which grants to Fairfax 307 an exclusive license during the term of the Licence to search, bore for and obtain petroleum in UK Onshore Block SU97, a 24,700 acre onshore exploration prospect located in the Weald Basin in Windsor, United Kingdom. Reservoir Resources also owns two-dimensional seismic data and information relating to certain areas of the Licence.
In December 2012, the Company determined that the costs to obtain required approvals necessary to develop and drill the Windsor Prospect of Reservoir Resources were too significant and the likelihood of obtaining the approvals too remote to pursue the prospect further. As a result, the Company has impaired its investment of Reservoir Resources.
The Company’s success will depend in large part on its ability to obtain and develop its oil and gas interests. There can be no assurance that oil and gas properties obtained by the Company will contain reserves or that properties with reserves will be profitable to extract. The Company will be subject to local and national laws and regulations which could impact the Company’s ability to execute its business plan.
As discussed in Note 2, the accompanying financial statements have been prepared assuming the Company will continue as a going concern.
AMERICAN ENERGY DEVELOPMENT CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of 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 reported periods. Actual results could materially differ from those estimates.
Cash and Cash Equivalents
For purposes of the balance sheet and statement of cash flows, the Company considers all highly liquid debt instruments purchased with maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments
The Company is required to estimate the fair value of all financial instruments included on its balance sheet under ASC 825, Financial Instruments. The carrying value of cash, accounts payable and accrued expenses approximate their fair value due to the short period to maturity of these instruments.
Oil and Gas Properties
The Company follows the full cost method of accounting for crude oil and natural gas properties. Under this method, all direct costs and certain indirect costs associated with acquisition of properties and successful as well as unsuccessful exploration and development activities are capitalized. Depreciation, depletion, and amortization of capitalized crude oil and natural gas properties and estimated future development costs, excluding unproved properties, are based on the unit-of-production method based on proved reserves.
The cost of investments in unproved properties and major development projects are excluded from capitalized costs to be amortized until it is determined whether or not proved reserves can be assigned to the properties. Until such a determination is made, the properties are assessed annually to ascertain whether impairment has occurred. The costs of drilling exploratory dry holes are included in the amortization base immediately upon determination that the well is dry.
For each cost center, capitalized costs are subject to an annual ceiling test, in which the costs shall not exceed the cost center ceiling. The cost center ceiling is equal to i) the present value of estimated future net revenues computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions; plus ii) the cost of properties not being amortized; plus iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less iv) income tax effects related to differences between the book and tax basis of the properties. If unamortized costs capitalized within a cost center, less related deferred income taxes, exceed the cost center ceiling, the excess is charged to expense and separately disclosed during the period in which the excess occurs.
AMERICAN ENERGY DEVELOPMENT CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Asset Retirement Obligation
The Company accounts for its future asset retirement obligations by recording the fair value of the liability, if any, during the period in which it was incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The increase in carrying value of a property associated with the capitalization of an asset retirement cost is included in proved oil and gas properties within the Company’s balance sheets. The Company depletes the amount added to proved oil and gas property costs using the units-of-production method and the straight-line basis over the life of the assets.
The Company’s asset retirement obligation consists of costs related to the plugging of wells, removal of facilities and equipment and site restoration on its oil and gas properties and gathering assets. The asset retirement liability, if any, will be allocated to operating expense using a systematic and rational method. As of June 302013 and 2012, the Company reviewed plug and abandonment costs of its producing Brown 2-12 well and deemed the amount to be immaterial.
Revenue Recognition
Working interest, royalty and net profit interests are to be recognized as revenue when oil and gas are sold. The Company records the sale of its interests in prospects generally as a reduction to the cost pool without gain or loss recognition unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to a cost center. A significant alteration would typically involve a sale of 25% or more of the proved reserves related to a single full cost pool. All terms of the sale are to be finalized and price readily determinable.
Value of Stock Issued for Services
The Company periodically issues shares of its common stock in exchange for, or in settlement of, services. The Company’s management values the shares issued in such transactions at either the then market price of the Company’s common stock after taking into consideration factors such as volume of shares issued or trading restrictions, or the value of the services rendered, whichever is more readily determinable.
Reclassifications
Certain amounts in the 2012 financial statements have been reclassified for comparative purposes to conform to the current year presentation.
Concentrations of Credit Risk
The Company collects its receivables on its working interests in oil and gas properties from the well operators. As such, the Company generally has relatively few customers. These receivables are unsecured and the Company performs ongoing credit evaluations of the well operators’ financial condition whenever necessary. At June 30, 2013 and 2012, the Company had one customer that accounted for 100% of its oil and gas sales. Bad debt expense is recognized on an account-by-account review after all means of collection have been exhausted and recovery is not probable.
There was no bad debt expense for the years ended June 30, 2013 and 2012.
AMERICAN ENERGY DEVELOPMENT CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.
2. GOING CONCERN
As shown in the accompanying financial statements, the Company has incurred a net operating loss of ($15,260,275) from inception (March 10, 2010) through June 30, 2013. The Company is subject to those risks associated with exploration stage companies. The Company’s present revenues are insufficient to meet operating expenses. Additional debt and equity financing will be required by the Company to fund its development activities and to support operations. However, there is no assurance that the Company will be able to obtain additional financing. Furthermore, the Company's existence is dependent upon management's ability to develop profitable operations. These factors, among others, raise substantial doubt that the Company will be able to continue as a going concern. The financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.
Management is currently devoting substantially all of its efforts to develop its existing oil and gas properties. The Company also continues to search for additional productive properties. There can be no assurance that the Company's efforts will be successful, or that those efforts will translate in a beneficial manner to the Company. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
3. DIRECTOR AGREEMENT
On December 19, 2011, the board of directors of the Company increased the size of the board of directors from two to three directors and appointed Kevin J. Goldrick as a director. On this date, the Company and Mr. Goldrick entered into a director agreement (“Director Agreement”). The Director Agreement provides that Mr. Goldrick will receive an annual cash compensation of $12,000 and equity compensation of 100,000 shares of common stock with the possibility to purchase stock options subject to certain conditions as specified in the Director Agreement. On December 6, 2012, Kevin Goldrick resigned as a director of the Company.
AMERICAN ENERGY DEVELOPMENT CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENTS IN OIL AND GAS PROPERTIES
Dansville Prospect - Proved (Evaluated) Property
On June 14, 2011, the Company entered into and closed an omnibus agreement (“Omnibus Agreement”) with Range Michigan LLC, a Wyoming limited liability company (“Range”), pursuant to which the Company acquired interests in certain oil and gas drilling areas and land leases located in Ingham County, Michigan and seismic data relating to such areas and leases for the total purchase price of 12,000,000 shares of the Company’s common stock for the cost to date of the development and seismic data which was $ 1,085,000. During the year, the company incurred additional costs of approximately $1,152,000. The Omnibus Agreement required the Company to effect a 30-to-1 forward stock split of all shares of Common Stock within 30 days of the effective date of the Omnibus Agreement (“Forward Split”). The forward stock split occurred on July 14, 2011.
On September 19, 2011, the Company entered into a First Amendment to Omnibus Agreement (“Omnibus Amendment”) with Range Michigan LLC, a Wyoming limited liability company (“Range”), pursuant to which the Omnibus Agreement dated June 14, 2011 between the parties was amended to reflect the Company’s name change to American Energy Development Corp. and extend the participation date for the wells from December 31, 2011 to July 1, 2012.
In connection with the Omnibus Amendment, the Company entered into a First Amendment to Participation Agreement (“Participation Amendment”) with Range, pursuant to which the Participation Agreement dated June 14, 2011 between the parties was amended to, among other things, (i) reflect the Company’s name change to American Energy Development Corp., (ii) extend the date in which the Company is required to participate in the Required Wells from December 31, 2011 to July 1, 2012, (iii) provide that it is anticipated that each of the two remaining two of the Required Wells will be spudded by July 1, 2012, and (iv) authorize Range to withhold the first $100,000 from the Company’s share of the proceeds from the production of the first Required Well( the Brown #2 -12 well) for the payment of the option fee specified Option Agreement and Option Amendment as described below.
In connection with the Omnibus Amendment, the Company entered into a First Amendment to Option Agreement (“Option Amendment”) with Range, which provides that in the event the Brown #2-12 Well is a producing well, Range will withhold the first $100,000 of the Company’s share of production proceeds for payment of the option fee and if the Company’s share of the proceeds from the Brown #2-12 Well are insufficient to pay the entire amount of the option fee on or before February 1, 2012then the Company shall pay Range the remaining balance of the option fee on or before February 5, 2012. As of September 30, 2012, the Brown #2-12 well production has been insufficient to pay the Option Fee. The Company has renegotiated with Range to waive the option fee.
The Company will remit to the seller an overriding royalty interest of 2.5% of the overall gross market value at the time of production of all oil and gas produced from the licensed areas from proceeds of the sale of oil and gas produced. The property currently has one well that is producing in which they hold a net realizable interest of 26%.
During the year ended June 30, 2013 and 2012, the Company recorded impairment charges on Dansville prospect of approximately $720,000 and $1,145,000 based on the independent assessment of the future value of its proved reserves.
AMERICAN ENERGY DEVELOPMENT CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENTS IN OIL AND GAS PROPERTIES (Continued)
Reservoir Resources
On September 13, 2011, the Company entered into a Purchase Agreement with Pepper Canister Nominees Limited pursuant to which the Company will acquire all of the issued and outstanding shares of the Seller’s wholly-owned subsidiary, Reservoir Resources Limited, which, through its wholly-owned subsidiary, owns an oil and gas exploration and development license in the United Kingdom in exchange for 12,500,000 shares of the Company’s common stock valued at $12,500,000 ($1.00 per share) . The Company is subject to development requirements whereby the Company must drill at least one well in the licensed area to a depth of 400 meters to be spudded by December 31, 2012 (“Target Date”), failure of which will result in the Seller being granted the option to cancel the Purchase Agreement within 60 days of the Target Date, re-acquire all shares of Reservoir Resources and retain 50% of the Company’s shares received as the Purchase Price. The purchase of Reservoir Resources was completed on March 12, 2012. The Company is currently undergoing various reserve studies to assess potential production and to continue the development of the wells purchased.
The allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values was as follows:
In December 2012, the Company determined that the costs to obtain required approvals necessary to develop and drill the Windsor Prospect of Reservoir Resources were too significant and the likelihood of obtaining the approvals too remote to pursue the prospect further. As a result, the Company has impaired its investment of Reservoir Resources in the amount of $12,512,535.
White Tail Prospect
On March 6, 2012, the Company entered into a letter of intent to acquire a forty three and seventy five hundredths percent (43.75%) working interest and a thirty five percent (35%) net revenue interest in the White-tail Prospect from Range Michigan LLC, a Wyoming limited liability company, which covers approximately 4,000 acres.
In consideration of the purchase of the interests in the White-tail Prospect, the Company agreed to pay Range a total purchase price of $487,500. The Company paid Range $87,500 to reimburse Range for development costs incurred to date and on June 15, 2012, the Company issued 476,191 common shares for $200,000, or $0.42/share. The Company further agreed to pay one hundred percent (100%) of the Authority For Expenditure (“AFE”) for a 3-D high resolution seismic survey of the White-tail Prospect. The Company has incurred approximately $226,000 of the AFE. On February 5, 2013, the Company entered into an Assignment of Oil and Gas Leases, Termination of Lease Acquisition Agreement and Operating Agreement and Disclaimer (the "Termination Agreement") with Range Michigan LLC ("Range") pursuant to which the Company and Range agreed that (i) the Company assign to Range all of its 43.75% working interest in Range's right to oil and gas leases covering the White-tail Prospect in Northern Michigan (the "Prospect"), effective January 22, 2013, for the nominal consideration of $10 and (ii) both the Company and Range terminate the Lease Acquisition Agreement dated June 15, 2012 by and between the Company and Range (the "Purchase Agreement") and the Joint Operating Agreement dated March 31, 2012 by and between the Company and Range (the "Operating Agreement"), effective January 23, 2013, due to the Company's non-payment of seismic program costs as required pursuant to the Purchase Agreement. There were no material early termination penalties incurred by the Company in connection with the Termination Agreement. As a result, the Company recorded a loss on the Termination Agreement of $291,723 for the year ended June 30, 2013.
AMERICAN ENERGY DEVELOPMENT CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENTS IN OIL AND GAS PROPERTIES (Continued)
Osprey Prospect
On April 17, 2012, the Company entered into a letter of intent to acquire 43.75% working interest and a 35% net revenue interest in the Osprey Prospect from Range Michigan LLC, a Wyoming limited liability company.
In consideration of the purchase of the interests in the Osprey Prospect, the Company will pay Range a total purchase price of $80,000. The Company paid Range $50,000 to reimburse Range for development costs incurred to date and any prior land lease payments. In October 2012, Range agreed to accept our reimbursement costs of $40,000 as partial payment on the prospect. As of June 30, 2013, the Company has not closed the acquisition of the Osprey Prospect and does not intend to pursue this transaction. Accordingly, the Company has impaired its investment in the Osprey Prospect as of June 30, 2013 of approximately $50,000.
5. ADVISOR AGREEMENT
On September 20, 2011, the Company entered into an Advisory Board Member Agreement (“Advisor Agreement”) with Desmond Oswald, pursuant to which the Company appointed Mr. Oswald to serve as an advisor to the Company continuing indefinitely, until terminated at any time by Mr. Oswald or the Company. The Advisor Agreement provides that Mr. Oswald will be available at a minimum of one time per quarter a year for advisory board meetings to (i) facilitate introductions to potential partners, suppliers, customers and investors, (ii) provide opinions to assist the Company in identify and recruiting potential technical, strategic and other partners or individuals, and (iii) apprise the Company of technological, competitive and other changes and developments that he may from time to time become aware of. The Advisor Agreement also provides that Mr. Oswald is paid $900 for the preparation and attendance of each advisory board meeting and Mr. Oswald was issued 90,000 shares of the Company’s common stock as compensation subject to certain vesting requirements as specified in the Advisor Agreement.
6. LOANS FROM STOCKHOLDER
On March 31, 2010, the Company issued a promissory note to a stockholder and officer of the Company in exchange for a loan of $30,000 with interest that accrued at the rate of 10% per annum. On March 22, 2012, the Company repaid the loan and the stockholder and officer of the Company forgave the accrued interest due to him on this promissory note and contributed the same amount to capital.
On December 2, 2011, the Company issued a promissory note to a stockholder and officer of the Company in the amount of $109,962. The promissory note, which was due on June 2, 2012, including interest at the annual rate of 5% was repaid on March 22, 2012. On this date, the stockholder and officer of the Company forgave the accrued interest due to him on this promissory note and contributed the same amount to capital.
On December 23, 2011, a stockholder and officer of the Company provided an advance to fund operations. The advance was unsecured, non-interest bearing and due on demand. On March 22, 2012 the Company repaid the amount due of $13,488.
AMERICAN ENERGY DEVELOPMENT CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. COMMON STOCK
On June 14, 2011, the Company issued 12,000,000 shares of its common stock in connection with the Omnibus Agreement as discussed in Note 4.
During the year ended June 30, 2011, the Company issued 69,167,100 shares of common stock to unrelated investors at $0.003 per share for a total of $230,557.
On July 12, 2011, the Company filed a Certificate of Change pursuant to Section 78.209 of the Nevada Revised Statutes (the “Certificate of Change”) with the Nevada Secretary of State to effect a thirty for one forward stock split of the Company’s common stock (the “Forward Stock Split”). The Certificate of Change increased the number of authorized shares of the Company’s common stock from 100,000,000 to 3,000,000,000 and the number of issued and outstanding shares of common stock for shareholders of record as of July 13, 2011, from 5,705,570 shares to 171,167,100 shares. The Company’s common stock continues to be $.001 par value. Fractional shares were rounded upward. The effective date of the Forward Stock Split with the Nevada Secretary of State was July 14, 2011. These financial statements reflect the Forward Stock Split
On September 20, 2011, the Company issued 90,000 shares of its common stock pursuant to the Advisory Agreement discussed in Note 5.
On October 3, 2011, the Company entered into a Securities Purchase Agreement (the “Financing Agreement”) with an investor (the “Investor”) pursuant to which the Company, at its sole and exclusive option, may issue and sell to the Investor, and the Investor shall purchase up to $7,800,000 of the Company’s $0.001 par value common stock and five-year warrants to purchase common stock (the “Warrants”) from time to time over a two year period at a purchase price (the “Purchase Price”) of the higher of (i) $0.40 per share, and (ii) eighty percent (80%) of the 10-day volume weighted average price (VWAP) of the Company’s common stock. The Company shall have sole discretion to issue and sell the common stock and Warrants pursuant to the Financing Agreement and the Investor shall have no right to acquire the common stock and Warrants from the Company until a drawdown notice is received from the Company. The Investor shall have sole discretion in determining whether the proposed use of proceeds as provided by the Company in the drawdown notice is acceptable to the Investor.
The Company received an initial drawdown of $200,000 (“First Drawdown”) on October 3, 2011. In exchange for the First Drawdown, the Company issued 500,000 shares of common stock at a purchase price of $0.40 per share and Warrants to purchase 500,000 shares of common stock at an exercise price of 120% of the purchase price, or $0.48 per share. The Warrants expire five years from the date of the investment.
On October 12, 2011, the Company received an additional $200,000 drawdown (“Second Drawdown”). In exchange for the Second Drawdown, the Company issued 500,000 shares of common stock at a purchase price of $0.40 per share and Warrants to purchase 500,000 shares of common stock at an exercise price of 120% of the purchase price, or $0.48 per share, pursuant to the Financing Agreement. The Warrants expire five years from the date of the investment.
In connection with the Financing Agreement, on October 3, 2011, the Company also entered into a Stock Cancellation Agreement (the “Cancellation Agreement”) with Joel Felix, pursuant to which the Company and Mr. Felix agreed to cancel 85,000,000 shares of common stock held by Mr. Felix as consideration for the Investor’s willingness to enter into and as a condition of the Financing Agreement.
On October 17, 2011, the Company canceled and retired 150,000 shares of Common Stock from an unrelated third party.
AMERICAN ENERGY DEVELOPMENT CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. COMMON STOCK (Continued)
On November 23, 2011, the Company issued 100,000 shares of its common stock to unrelated investors at $0.50 per share for a total of $50,000.
On February 3, 2012, the Company received an additional $50,000 drawdown (“Third Drawdown”). In exchange for the Third Drawdown, the Company issued 125,000 shares of common stock at a purchase price of $0.40 per share and Warrants to purchase 125,000 shares of common stock at an exercise price of 120% of the purchase price, or $0.48 per share, pursuant to the Financing Agreement. The Warrants expire five years from the date of the investment.
On March 12, 2012, the Company issued 12,500,000 shares of its common stock pursuant to a Purchase Agreement with Pepper Canister Nominees Limited to acquire all of the issued and outstanding shares of Reservoir Resources Limited, which through its wholly-owned subsidiary, owns an oil and gas exploration and development license in the United Kingdom. See Note 4.
On March 20, 2012, the Company received an additional $1,000,000 drawdown (“Fourth Drawdown”). In exchange for the Fourth Drawdown, the Company issued 1,282,052 shares of common stock at a purchase price of $0.78 per share and Warrants to purchase 1,282,052 shares of common stock at an exercise price of 120% of the purchase price, or $0.94 per share, pursuant to the Financing Agreement. The Warrants expire five years from the date of the investment.
On March 22, 2012, a stockholder and officer of the Company forgave $7,614 of accrued interest due to him in relation to his advances to the Company and contributed the same amount to capital.
On March 30, 2012, the Company received an additional $120,000 drawdown (“Fifth Drawdown”). In exchange for the Fifth Drawdown, the Company issued 162,163 shares of common stock at a purchase price of $0.74 per share and Warrants to purchase 162,163 shares of common stock at an exercise price of 120% of the purchase price, or $0.89 per share, pursuant to the Financing Agreement. The Warrants expire five years from the date of the investment.
On June 15, 2012, the Company issued 476,191 common shares valued at $200,000 as partial consideration for the White-tail Prospect. See Note 4.
On September 19, 2012, the Company issued 75,000 common shares valued at $25,000 to a consultant for services performed.
On September 19, 2012, the Company issued 93,750 common shares valued at $28,125 to a board member as consideration for his services.
On October 31, 2012, the Company received an additional $30,000 drawdown (“Sixth Drawdown”). In exchange for the Sixth Drawdown, the Company issued 75,000 shares of common stock at a purchase price of $0.40 per share and Warrants to purchase 75,000 shares of common stock at an exercise price of 120% of the purchase price, or $0.48 per share, pursuant to the Financing Agreement. The Warrants expire five years from the date of the investment.
On November 29, 2012, the Company issued 300,000 common shares valued at $51,000 to a consultant for services performed.
On December 20, 2012, the Company issued 35,192 common shares valued at $4,223 pursuant to an agreement whereby the third party would be issued additional shares if the company issued additional shares for less than $0.30 per share.
AMERICAN ENERGY DEVELOPMENT CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. WARRANTS
Warrant Activity
As described in Note 7, the Company issued a convertible note with detachable warrants. A summary of warrant activity for the period from June 30, 2011 through June 30, 2013 is presented below:
Shares Reserved for Future Issuance
The Company has reserved shares for future issuance upon conversion of warrants as follows:
9. PROVISION FOR INCOME TAXES
Deferred income taxes are reported using the liability method. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
As of June 30, 2013, the Company had federal net operating loss carryforwards of ($2,050,000), which can be used to offset future federal income tax. The federal and state net operating loss carryforwards expire at various dates through 2033. Deferred tax assets resulting from the net operating losses are reduced by a valuation allowance, when, in the opinion of management, utilization is not reasonably assured.
AMERICAN ENERGY DEVELOPMENT CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. PROVISION FOR INCOME TAXES (Continued)
A summary of the Company’s deferred tax assets as of June 30, 2013 are as follows:
During the year ended June 30, 2013, the Company’s valuation allowance increased by approximately $99,714.
10. RELATED PARTY TRANSACTIONS
From the Company’s inception (March 10, 2010) through June 30, 2013, the Company utilized office space of an officer and stockholder at no charge. The Company treated the usage of the office space as additional paid-in capital and charged the estimated fair value rent of $300 per month to operations. For the year ended June 30, 2013 and 2012 rent expense was $3,600 and $3,600, respectively.
In connection with the Financing Agreement, on October 3, 2011, the Company also entered into the Cancellation Agreement with Joel Felix, pursuant to which the Company and Mr. Felix agreed to cancel 85,000,000 shares of common stock held by Mr. Felix as consideration for the Investor’s willingness to enter into and as a condition of the Financing Agreement.
On March 31, 2010, the Company issued a promissory note to a stockholder and officer of the Company in exchange for a loan of $30,000 with interest that accrued at the rate of 10% per annum. On March 22, 2012, the Company repaid the loan and the stockholder and officer of the Company forgave the accrued interest due to him on this promissory note and contributed the same amount to capital.
On December 2, 2011, the Company issued a promissory note to a stockholder and officer of the Company in the amount of $109,962. The promissory note, which was due on June 2, 2012, including interest at the annual rate of 5% was repaid on March 22, 2012. On this date, the stockholder and officer of the Company forgave the accrued interest due to him on this promissory note and contributed the same amount to capital.
On December 23, 2011, a stockholder and officer of the Company provided an advance to fund operations. The advance was unsecured, non-interest bearing and due on demand. On March 22, 2012 the Company repaid the amount due of $13,488.
AMERICAN ENERGY DEVELOPMENT CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (Unaudited)
Company Reserve Estimates. The Company's proved reserve information as of June 30, 2013 was estimated by NSAI, independent petroleum engineers. In accordance with SEC guidelines, NSAI’s estimates of future net revenues from our properties, and the PV-10 and standardized measure thereof, were determined to be economically producible under existing economic conditions, which requires the use of the 12-month average price for each product, calculated as the unweighted arithmetic average of the first-day-of-the-month price for the period July 1, 2012 through June 30, 2013, except where such guidelines permit alternate treatment, including the use of fixed and determinable contractual price escalations.
The technical persons at NSAI are responsible for preparing the reserves estimates presented herein and meets the requirements regarding qualifications, independence, objectivity, and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Joel Felix, our officer and director, acted as the liaison with the technical persons at NSAI.
Reserve Technologies. Proved oil and gas reserves are those quantities of oil and 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 the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. If deterministic methods are used, reasonable certainty means a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate. To achieve reasonable certainty, NSAI employed technologies that have been demonstrated to yield results with consistency and repeatability. The technologies and economic data used in the estimation of our proved reserves include, but are not limited to, well logs, geologic maps and available down well and production data, seismic data, well test data.
Oil and Gas Reserve Information. The following reserve quantities and future net cash flow information for our proved reserves located in the State of Michigan in the United States have been estimated as of June 30, 2013. The determination of oil and gas reserves is based on estimates, which are highly complex and interpretive. The estimates are subject to continuing change as additional information becomes available.
The information required by Items 1204 to 1208 of Regulation S-K are provided as follows:
AMERICAN ENERGY DEVELOPMENT CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Supplemental Oil and Gas Reserve Information (Continued)
The standardized measure of discounted future net cash flows is provided using the 12-month unweighted arithmetic average and were held constant throughout the life of the properties. The oil price used as of June 30, 2013 was $87.52 per bbl of oil. Future production costs are based on year-end costs and include severance and ad valorem taxes. Each property that is leased by us is also charged with field-level overhead in the reserve calculation. The present value of future cash inflows is based on a 10% discount rate.
Standardized Measure of Future Net Cash Flows:
Changes in the Standard Measure of Discounted Cash Flows:
AMERICAN ENERGY DEVELOPMENT CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Supplemental Oil and Gas Reserve Information (Continued)
Production. For the year ended June 30, 2013, we only had oil production from our interest in the Brown 2-12 well located in Ingham County, Michigan. The Company produced approximately 3,505 barrels on a net basis.
Drilling Activity. During the year ended June 30, 2013, we had no further drilling activity. One of the wells in the Dansville Prospect, the Brown 2-12, has been drilled and was put into production in the prior year. We also own a working interest in a three well developmental drilling project in Pottawatomie County, Oklahoma, known as the Magnolia Prospect. However, this prospect has been fully impaired for in the prior year due to lack of adequate production.
Delivery Commitments. We are not obligated to provide a fixed and determinable quantity of oil or gas in the near future under existing contracts or agreements in Michigan.
Gross and Net Productive Wells for the year ended June 30, 2013:
Gross and Net Developed Acreage for year ended June 30, 2013:
Gross and Net Undeveloped Acreage for year ended June 30, 2013:
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There have been no changes in or disagreements with our accountants since our formation required to be disclosed pursuant to Item 304 of Regulation S-K.
Item 9A.
Item 9A. Controls and Procedures.
Evaluation of disclosure controls and procedures.
We maintain controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosures. Based upon their evaluation of those controls and procedures performed as of the end of the period covered by this report, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective due to our over reliance on consultants in our accounting and financial statement closing processes.
Management’s annual report on internal control over financial reporting.
Our Chief Executive Officer and our Chief Financial Officer are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our 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 and includes those policies and procedures that:
·
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
·
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and
·
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, our internal control over financial reporting 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.
Our Chief Executive Officer and our Chief Financial Officer assessed the effectiveness of our internal control over financial reporting as of June 30, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework.
Based on our assessment, our Chief Executive Officer and our Chief Financial Officer believe that, as of June 30, 2013, our internal control over financial reporting is not effective based on those criteria, due to the following:
·
lack of proper segregation of functions, duties and responsibilities with respect to our cash and control over the disbursements related thereto due to our very limited staff, including our accounting personnel; and
·
deficiencies in the staffing of our financial accounting department. The number of qualified accounting personnel with experience in public company SEC reporting and GAAP is limited. This weakness does not enable us to maintain adequate controls over our financial accounting and reporting processes regarding the accounting for non-routine and non-systematic transactions. There is a risk that a material misstatement of the financial statements could be caused, or at least not be detected in a timely manner, by this shortage of qualified resources.
In light of this conclusion and as part of the preparation of this report, we have applied compensating procedures and processes as necessary to ensure the reliability of our financial reporting. Accordingly, management believes, based on its knowledge, that (1) this report does not contain any untrue statement of a material fact or omit to state a material face necessary to make the statements made not misleading with respect to the period covered by this report, and (2) the financial statements, and other financial information included in this report, fairly present in all material respects our financial condition, results of operations and cash flows for the years and periods then ended.
This 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 the rules of the SEC that permit us to provide only management’s report in this report.
Changes in internal control over financial reporting.
There were no significant changes in our internal control over financial reporting during the fourth quarter of the year ended June 30, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
Executive Officers and Directors. Our directors and principal executive officers are as specified on the following table:
Biographical resumes of each officer and director are set forth below.
Herold Ribsskog. Mr. Ribsskog has been our director since June 15, 2011 and Chief Executive Officer and President since July 8, 2011. Mr. Ribsskog has over 25 years in the oil and gas industry working with several of the world’s leading industry players such as Shell, Mobil, Amoco and Talisman Energy where he has undertaken project planning, development and management on large oil and gas developments in the Norwegian North Sea. Mr. Ribbskog has a B.Sc. degree in Cybernetics Engineering from the University of Kongsberg, Norway. Mr. Ribsskog is not a director of any other reporting company.
Joel Felix. Mr. Felix has been our Chief Financial Officer, Treasurer, Secretary, and a director since our inception. Mr. Felix has been involved in a broad spectrum of technology, real estate investments and development activities. From 1995 to 1998, Mr. Felix was a founding member of Earthlink Network, which provided a platform for internet connectivity, during the early development of the Internet. In 1998, Mr. Felix joined Network Solutions, the domain name registrar, where he increased sales 285% in 12 months. Network Solutions was acquired by Verisign in 1999, which provided an exit for Mr. Felix and the seed capital for ongoing real estate and investment activities. Over the last ten years, Mr. Felix has been involved in private equity and has participated in numerous ventures. Mr. Felix is also a founding member of Ienture Group. Ienture Group specializes in the acquisition and development of both single and multi-tenant retail, office, hotel and mixed-use projects. As founder and managing partner, Mr. Felix is responsible for all investments and operations. Mr. Felix is not a director of any other reporting company.
All directors hold office until the completion of their term of office, which is not longer than one year, or until their successors have been elected. All officers are appointed annually by the Board of Directors and, subject to employment agreements, serve at the discretion of the board.
There are no orders, judgments, or decrees of any governmental agency or administrator, or of any court of competent jurisdiction, revoking or suspending for cause any license, permit or other authority to engage in the securities business or in the sale of a particular security or temporarily or permanently restraining any of our officers or directors from engaging in or continuing any conduct, practice or employment in connection with the purchase or sale of securities, or convicting such person of any felony or misdemeanor involving a security, or any aspect of the securities business or of theft or of any felony. Nor are any of the officers or directors of any corporation or entity affiliated with us so enjoined.
There are no family relationships among our directors or among our executive officers.
Corporate Governance.
Committees. Our Board of Directors does not currently have a compensation committee or nominating and corporate governance committee because, due to the Board of Director’s composition and our relatively limited operations, the Board of Directors believes it is able to effectively manage the issues normally considered by such committees. Our Board of Directors may undertake a review of the need for these committees in the future.
Audit Committee and Financial Expert. Presently, the Board of Directors acts as the audit committee. The Board of Directors does not have an audit committee financial expert. The Board of Directors has not yet recruited an audit committee financial expert to join the board of directors because we have only recently commenced a significant level of financial operations.
Code of Ethics. We do not currently have a Code of Ethics that applies to all employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.
Director Independence. No members of our Board of Directors are independent using the definition of independence under the rules of the SEC.
Item 11.
Item 11. Executive Compensation.
Summary Compensation Table. The following table set forth below summarizes the annual and long-term compensation for services in all capacities to us payable to our principal executive officers during the years ended June 30, 2013 and 2012.
Employment Contracts and Termination of Employment. On July 8, 2011, we entered into an executive employment agreement with Herold Ribsskog (“Ribsskog Agreement”). Under the terms of the Ribsskog Agreement, Mr. Ribsskog has agreed to serve as our President and Chief Executive Officer for an initial term of two years with an additional one year extension. The Ribsskog Agreement provides for an initial base salary of $5,000 per month for an initial 3 month period, and following the initial 3 month period, Mr. Ribsskog’s base salary will increase to $7,000 per month, with an additional $1,000 increase after the last day of each of the Company’s fiscal quarters during the first fiscal year of the Ribsskog Employment Agreement. Mr. Ribsskog is also eligible to participate in benefit and incentive programs we may offer.
On July 8, 2011, we entered into an executive employment agreement with Joel Felix (“Felix Agreement”). Under the terms of the Felix Agreement, Mr. Felix has agreed to serve as our Chief Financial Officer and Secretary for an initial term of two years with an additional one year extension. The Felix Agreement provides for an initial base salary of $3,500 per month for an initial 3 month period, and following the initial 3 month period, Mr. Felix’s base salary will increase to $4,000 per month, with an additional $500 increase after the last day of each of the Company’s fiscal quarters during the first fiscal year of the Felix Employment Agreement. Mr. Felix is also eligible to participate in benefit and incentive programs we may offer. On May 1, 2012, we entered into an amendment to the Felix Agreement pursuant to which the Felix Agreement was amended to increase Felix’s monthly base salary to $8,000 per month.
Outstanding Equity Awards. As of June 30, 2013, the following named executive officers had the following unexercised options, stock that has not vested, and equity incentive plan awards:
Stock Options/SAR Grants. No grants of stock options or stock appreciation rights were made during the fiscal year ended June 30, 2013.
Long-Term Incentive Plans. There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. We do not have any material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers.
Director Compensation. Our directors received the following compensation for their service as directors during the fiscal year ended June 30, 2013:
(1) On December 6, 2012, Kevin Goldrick resigned as a director of the Company.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information regarding the beneficial ownership of our common stock as of October 17, 2013, by each person or entity known by us to be the beneficial owner of more than 5% of the outstanding shares of common stock, each of our directors and named executive officers, and all of our directors and executive officers as a group.
The number of shares beneficially owned by each 5% holder, director or executive officer is determined by the rules of the SEC, and the information does not necessarily indicate beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares over which the person or entity has sole or shared voting power or investment power and also any shares that the person or entity can acquire within 60 days of October 17, 2013 through the exercise of any stock option or other right. For purposes of computing the percentage of outstanding shares of common stock held by each person or entity, any shares that the person or entity has the right to acquire within 60 days after October 17, 2013 are deemed to be outstanding with respect to such person or entity but are not deemed to be outstanding for the purpose of computing the percentage of ownership of any other person or entity. Unless otherwise indicated, each person or entity has sole investment and voting power (or shares such power with his or her spouse) over the shares set forth in the following table. The inclusion in the table below of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of those shares.
(1)
Percentage of beneficial ownership of our common stock is based on 102,331,448 shares of common stock outstanding as of the date of the table.
(2)
Ivor Fitzpatrick, as the director of Pepper Canister Nominees Limited, has voting and dispositive powers over the securities beneficially owned by Pepper Canister Nominees Limited. This information is based on information provided by the shareholder. Such shareholder has not filed a Schedule 13D with the SEC disclosing it has greater than five percent ownership.
(3)
The information for such 5% shareholder is based on the list of record holders maintained by our stock transfer agent. Such shareholder has not filed a Schedule 13D with the SEC disclosing it has greater than five percent ownership.
Changes in Control. Our management is not aware of any arrangements which may result in “changes in control” as that term is defined by the provisions of Item 403(c) of Regulation S-K.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Related party transactions.
Joel Felix, our officer and director, provides approximately 200 square feet of office space at no charge. Our financial statements reflect the fair market value of that space which is approximately $300.00 per month. For the year ended June 30, 2012, rent expense was $3,600. Mr. Felix does not expect to be paid or reimbursed for providing office facilities.
In connection with the Financing Agreement, on October 3, 2011, we entered into the Cancellation Agreement with Joel Felix, pursuant to which the parties agreed to cancel 85,000,000 shares of common stock held by Mr. Felix as consideration for the Investor’s willingness to enter into and as a condition of the Financing Agreement.
On March 31, 2010, we issued a promissory note to a stockholder and officer of the Company in exchange for a loan of $30,000 with interest that accrued at the rate of 10% per annum. On March 22, 2012, the Company repaid the loan and the stockholder and officer of the Company forgave the accrued interest due to him on this promissory note and contributed the same amount to capital.
On December 2, 2011, we issued a promissory note to a stockholder and officer of the Company in the amount of $109,962. The promissory note, which was due on June 2, 2012, including interest at the annual rate of 5% was repaid on March 22, 2012. On this date, the stockholder and officer of the Company forgave the accrued interest due to him on this promissory note and contributed the same amount to capital.
On December 23, 2011, a stockholder and officer of the Company provided an advance to fund operations. The advance was unsecured, non-interest bearing and due on demand. On March 22, 2012 the Company repaid the amount due of $13,488.
There have been no other related party transactions, or any other transactions or relationships required to be disclosed pursuant to Item 404 of Regulation S-K.
Item 14.
Item 14. Principal Accounting Fees and Services.
Audit Fees. The aggregate fees billed for the fiscal years ended June 30, 2013 and 2012 for professional services rendered by the principal accountant for the audit of our annual financial statements and quarterly review of the financial statements included in our Form 10-K or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were $22,000 and $32,500, respectively.
Audit-Related Fees. For the fiscal years ended June 30, 2013 and 2012, there were no fees billed for services reasonably related to the performance of the audit or review of the financial statements outside of those fees disclosed above under “Audit Fees.”
Tax Fees. For the fiscal years ended June 30, 2013 and 2012, our accountants rendered services for tax compliance, tax advice, and tax planning work for which we paid $0 and $0, respectively.
All Other Fees. None.
Pre-Approval Policies and Procedures. Prior to engaging our accountants to perform a particular service, our Board of Directors obtains an estimate for the service to be performed. All of the services described above were approved by the Board of Directors in accordance with its procedures.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules.
(a)
Financial Statements.
Included in Item 8
(b)
Exhibits required by Item 601.
(1) Filed herewith.
(2) Pursuant to Rule 405(a)(2) of Regulation S-T, the Company will furnish the XBRL Interactive Data Files with detailed footnote tagging as Exhibit 101 in an amendment to this Form 10-K within the permitted 30-day grace period for the first quarterly period in which detailed footnote tagging is required after the filing date of this Form 10-K.
SIGNATURES
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.
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.