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.
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:
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·
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variations in our operating results;
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·
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changes in expectations of our future financial performance, including financial estimates by securities analysts and investors;
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·
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changes in operating and stock price performance of other companies in our industry;
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·
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additions or departures of key personnel; and
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·
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future sales of our common stock.
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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.
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.
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Crude Oil
(Bbls)
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PROVED DEVELOPED AND UNDEVELOPED RESERVES:
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June 30, 2012
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36,833
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Revision of previous estimates
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Purchase of reserves
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Extensions, discoveries, and other additions
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19,070
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Sale of reserves
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Production
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(3,505
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)
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June 30, 2012
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52,398
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PROVED DEVELOPED RESERVES
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June 30, 2012
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52,398
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Standardized Measure
The standardized measure of discounted future net cash flows relating to proved oil reserves is as follows:
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Years Ended June 30,
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2013
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Future cash inflows
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$
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1,219,300
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Future production costs
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(591,100
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)
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Future development costs
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(10,900
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)
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Future income tax expense
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-
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Future net cash flows
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617,300
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10% annual discount for estimated timing of cash flows
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(211,600
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)
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Standardized measure of discounted future net cash flow related to proved reserves
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$
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405,700
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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
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Years Ended June 30,
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2013
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Balance, beginning of period
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$
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1,131,050
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Sales of oil, net
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(209,700
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)
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Net change in prices and production costs
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(67,550
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)
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Net change in future development costs
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-
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Extensions and discoveries
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-
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Revisions of previous quantity estimates
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(448,100
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)
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Previously estimated development costs incurred
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-
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Net change in income taxes
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-
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Accretion of discount
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-
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Purchase of minerals in place
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-
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Sales of reserves
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|
-
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|
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Balance, end of period
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|
$
|
405,700
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The standardized measure of discounted future net cash flows as of June 30, 2013 was calculated using the following Average Fiscal-Year prices:
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2013
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Average crude oil price per barrel
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$
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87.52
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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.
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Crude Oil
(Bbls)
|
|
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Production by State:
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|
|
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Michigan
|
|
|
3,505
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|
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Total Production
|
|
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3,505
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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.
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July 1, 2012 through June 30, 2013
|
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|
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Oil
|
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Gas
|
|
|
|
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Gross
|
|
Net
|
|
Gross
|
|
Net
|
|
|
|
Michigan
|
1
|
|
0.44
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross and net productive wells
|
1
|
|
0.44
|
|
-
|
|
-
|
|
Gross and Net Developed Acreage.
|
|
|
July 1, 2012 through June 30, 2013
|
|
|
|
|
Oil
|
|
Gas
|
|
|
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
|
|
|
Michigan
|
160
|
|
42
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross and net developed acreage
|
160
|
|
42
|
|
-
|
|
-
|
|
Gross and Net Undeveloped Acreage.
|
|
|
July 1, 2012 through June 30, 2013
|
|
|
|
|
Oil
|
|
Gas
|
|
|
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
|
|
|
Michigan
|
1,183
|
|
308
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross and net undeveloped acreage
|
1,183
|
|
308
|
|
-
|
|
-
|
|
