Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Safe Harbor - The following is a discussion of our financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with our audited financial statements for the year ended December 31, 2005 and the notes thereto included elsewhere in this Form 10-Q.
Some of the statements under "Description of Business," "Risk Factors," "Management's Discussion and Analysis or Plan of Operation," and elsewhere in this Report and in the Company's periodic filings with the Securities and Exchange Commission constitute forward-looking statements. These statements involve known and unknown risks, significant uncertainties and other factors what may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward- looking statements. Such factors include, among other things, those listed under "Risk Factors" and elsewhere in this Report.
In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "intends," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology.
The forward-looking statements herein are based on current expectations that involve a number of risks and uncertainties. Such forward-looking statements are based on assumptions that the Company will obtain or have access to adequate financing for each successive phase of its growth, that there will be no material adverse competitive or technological change in condition of the Company's business, that the Company's President and other significant employees will remain employed as such by the Company, and that there will be no material adverse change in the Company's operations, business or governmental regulation affecting the Company. The foregoing assumptions are based on judgments with respect to, among other things, further economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the Company's control.
Although management believes that the expectations reflected in the forward-looking statements are reasonable, management cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither management nor any other persons assumes responsibility for the accuracy and completeness of such statements.
Table of Contents GENERAL American Energy Production, Inc. ("American Energy", "the Company", "we", "us", "our") is a publicly traded business development company (see below) that is engaged primarily in the investment in other companies that acquire, develop, produce, explore and sell oil and gas. The Company anticipates that its investees will be able to sell all oil that it can produce to petroleum refiners and marketers under the terms of short-term purchase contracts and at prices in accordance with arrangements that are customary in the oil industry. Our capital is generally used by our portfolio companies to finance growth and working capital.
Prior to becoming a business development company effective in January 2004, the Company was engaged directly in the above activities since February 20, 2003, when it acquired certain oil assets and began its new development stage - (See below). Prior to that, the Company was previously known as Communicate Now.com, Inc. and was incorporated on January 31, 2000 under the laws of the State of Delaware. On July 15, 2002, the Company changed its corporate name to American Energy Production, Inc.
On February 20, 2003, upon the acquisition of certain oil and gas assets, the Company entered into a new development stage. Activities during the development stage include acquisition of assets, obtaining geological reports, developing an implementation plan to extract oil and gas, completing initial sales of oil and seeking capital.
On January 12, 2004, the Company filed a Form N-54 with the Securities and Exchange Commission ("SEC") to be regulated as a Business Development Company ("BDC") pursuant to the provisions of section 54(a) of the Investment Company Act of 1940 (the ("Act")), to be subject to the provisions of section 55 through 65 of the Act. The Company has determined that its operating model best approximates that of an investment company and intends to make investments into developing businesses in the oil and gas and other industries. Additionally, the Board of Directors determined that it was necessary to raise additional capital to carry out the company's business plan and the Company filed a Form 1-E pursuant to the Securities Act of 1933 notifying the SEC of the Company's intent to sell up to $4,000,000 of the Company's common stock at prices between $0.01 and $0.10 per share, or 40,000,000 and 400,000,000 shares, respectively. On January 29, 2004, the 1-E filing notification with the SEC became effective. The Company is presently registered as an Investment Company under the Act.
As a BDC, the Company will be structured in a manner more consistent with its current business strategy. As a result, the Company is positioned to raise capital in a more efficient manner and to develop and expand its business interests. The Company believes that potential acquisitions, in total, will enhance value to stockholders through capital appreciation and payments of dividends to the Company by its investee companies.
BDC regulation was created in 1980 by Congress to encourage the flow of public equity capital to small businesses in the United States. BDC's, like all mutual funds and closed-end funds, are regulated by the Investment Company Act of 1940. BDC's report to stockholders like traditional operating companies and file regular quarterly and annual reports with the Securities and Exchange Commission. BDC's are required to make available significant managerial assistance to their portfolio companies.
OVERVIEW OF COMPANY.
Since its inception, the Company has suffered recurring losses from operations and has been dependent on existing stockholders and new investors to provide the cash resources to sustain its operations. As reflected in the accompanying financial statements, the Company has a net loss of $56,800 and net cash used in operations of $74,484 for the three months ended March 31, 2006. Additionally, the Company has a working capital deficiency of $460,420 as of March 31, 2006 and is also in default on certain notes to banks and is in the development stage with no revenues as a BDC. The ability of the Company to continue as a going concern is dependent on the Company's ability to further implement its business plan, raise capital, and generate revenues. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
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-------------------------------------------------------------------------------- Table of Contents The Company's long-term viability as a going concern is dependent on certain key factors, as follows: - The Company's ability to continue to obtain sources of outside financing to support near term operations and to allow the Company to continue to make investments - The Company's ability to increase profitability and sustain a cash flow level that will ensure support for continuing operations.
In accordance with BDC regulations, our majority-owned portfolio companies are not consolidated and accordingly, their financial information is not included in our accompanying audited Financial Statements. However, a significant portion of the proceeds received by the Company from the issuance of convertible debentures and the sale of common stock has been utilized as advances for our investees. The following represents unaudited supplemental information for the three months ended March 31, 2006 for our majority-owned portfolio companies.
Bend Arch Production Petroleum, Oil America AMEP Strategic Description Resources, Inc. Inc. Group Investments Revenue $ 67,172 $ 391,328 $ - $ - Expenses 85,972 740,737 12,440 - Operating Loss (18,800 ) (349,409 ) (12,440 ) - Other Income - - - - Net Loss $ (18,800 ) $ (349,409 ) $ (12,440 ) $ -
The above unaudited supplemental information does not include all the information and footnotes necessary for a comprehensive presentation of financial position and results of operations for our majority-owned investees.
RECENT DEVELOPMENTS
On July 24, 2005, the Company filed a Form 1-E pursuant to the Securities Act of 1933 notifying the SEC of the Company's intent to sell up to $5,000,000 of the Company's common stock at prices between $0.015 and $0.10 per share, or 50,000,000 and 333,333,333 shares, respectively. As a registered Investment Company under the Act, the Company is authorized to issue up to $5,000,000 in "free-trading" stock at prices ranging from $0.0015 to $0.10 per share.
As a result of the July 2005 1-E filing discussed above, through December 31, 2005, the Company has received $2,434,553 of proceeds from the offering, net of $193,967 of expenses, through the sale of 131,930,758 shares of the Company's $0.001 par value common stock.
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-------------------------------------------------------------------------------- Table of Contents In March 2006, the Board of Directors met and discussed the Company's status as a BDC. When the Company elected to become a BDC, it was its intention to provide debt and equity capital to companies that it believed presented opportunities for superior performance through liquidity events, recapitalizations, internal growth, product or geographic expansion, the completion of complementary add-on acquisitions, or industry consolidations. The Company generally expected to invest in emerging and development-stage companies which otherwise lacked the necessary capital and depth of management to expand their businesses. The Board of Directors is currently reviewing the Company's compliance with the 1940 Act, in order to determine if it is in compliance with several important provisions of the 1940 Act, including the capital structure requirements. There is a risk that the SEC could take enforcement action against the Company if the SEC determines that the Company has not been operating in compliance with the 1940 Act.
The Company's significant compliance costs as a BDC, in terms of both time and dollars, have operated as a drag on the Company's resources and in many respects have diverted the effective utilization of capital previously raised by the Company to effectuate its overall investment business plan. Further, since the Company commenced operating as a BDC, the business, regulatory and financial climates have changed, making operations as a BDC more challenging and difficult.
At the time of this report, the Board of Directors has not completed its review of the Company's compliance with the 1940 Act.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The methods, estimates and judgment we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. The Securities and Exchange Commission has defined the most critical accounting policies as the ones that are most important to the portrayal of our financial condition and results, and require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based upon this definition, our most critical estimates include going concern, the valuation of stock based compensation, the allocation of the purchase price to certain oil and gas related assets acquired, depreciable and depletable useful lives of property and equipment, the evaluation of whether our assets are impaired, the valuation of our investments, the valuation allowance for deferred tax assets and the estimate of reserves of oil and gas that are used to develop projected income whereby an appropriate discount rate has been used. We also have other key accounting estimates and policies, but we believe that these other policies either do not generally require us to make estimates and judgments that are as difficult or as subjective, or it is less likely that they would have a material impact on our reported results of operations for a given period. For additional information see Note 3 "Summary of Significant Accounting Policies" in the notes to our unaudited financial statements contained in our interim report on Form 10-Q for the three months ended march 31, 2006. Although we believe that our estimates and assumptions are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates.
GOING CONCERN
The independent registered public accounting firms' reports to our financial statements at December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003, include an explanatory paragraph in addition to their audit opinion stating that our recurring losses from operations, net cash used in operations, stockholders' (deficiency) equity, working capital deficiency, being in default on certain notes payable to banks and being in the development stage with no revenues as a business development company raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments to reflect the possible effects on recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern.
Table of Contents VALUATION OF NON-CASH ISSUANCES OF COMMON STOCK The Company issued common stock to several parties in non-cash transactions during 2005. For the majority of these issuances, valuation was determined based upon the stock closing price on the date of grant.
ALLOCATION OF THE PURCHASE PRICE TO CERTAIN OIL AND GAS RELATED ASSETS ACQUIRED
On February 20, 2003 (the "Acquisition Date"), the Company acquired from a certain related party assignor, who is the of the Company's president and previous sole director, an interest in certain oil and gas leases, oil and gas wells located on those leases, surface and underground equipment, pipelines and other property and fixtures in or on the leases, rights of way, leases, contracts and agreements for pipeline compressor stations or boosters utilized in the operations of the facilities by the assignors. The Company accounted for the purchase as an asset acquisition at its fair market value of $2,000,000 under the purchase method of accounting pursuant to Statement of Financial Accounting Standards No. 141 "Business Combinations". Accordingly, the purchase price was allocated to the various assets and the results of any operations relating to the acquired assets are included in the Company's financial statements from the Acquisition Date.
DEPRECIABLE AND DEPLETABLE USEFUL LIVES OF PROPERTY AND EQUIPMENT
Prior to electing BDC status and transferring oil and gas assets to investees, the Company used the successful efforts method of accounting for acquisition, exploration, development and production of oil and gas properties, whereby only the direct costs of acquiring or drilling successful (proved reserves) were capitalized. Costs of acquisition, development, and exploration activities that are not known to have resulted in the discovery of reserves (unproved) were charged to operations. All capitalized costs of oil and gas properties were depleted using the units-of-production method based on total proved reserves. The capitalized cost of support equipment and fixtures were depreciated over their estimated useful life once they were placed into service.
EVALUATION OF ASSET IMPAIRMENT
We account for the impairment of long-lived assets including proved properties in accordance with Financial Accounting Standards, SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. Recoverability of the asset is measured by comparison of its carrying amount to the undiscounted cash flow that the asset or asset group is expected to generate. If such assets or asset groups are considered to be impaired, the loss recognized is the amount by which the carrying amount of the property if any, exceeds its fair market value. Based on our impairment analysis, no impairment charge has been recorded for the three months ended March 31, 2006.
VALUATION OF INVESTMENTS
Investments in securities of unaffiliated issuers represent holdings of less than 5% of the issuer's voting common stock. Investments in and advances to affiliates are presented as (i) majority-owned, if holdings, directly or indirectly, represent over 50% of the issuer's voting common stock, (ii) controlled companies if the holdings, directly or indirectly, represent over 25% and up to 50% of the issuer's voting common stock and (iii) other affiliates if the holdings, directly or indirectly, represent 5% to 25% of the issuer's voting common stock. Investments - other than securities represent all investments other than in securities of the issuer.
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-------------------------------------------------------------------------------- Table of Contents Investments in securities or other than securities of privately held entities are initially recorded at their original cost as of the date the Company obtained an enforceable right to demand the securities or other investment purchased and incurred an enforceable obligation to pay the investment price. As a BDC, for financial statement purposes, investments are recorded at their value in our financial statements. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value as determined in good faith by the board of directors. Effective June 15, 2004, the Company acquired a privately held oil company; effective April 1, 2004, the Company formed a new controlled entity to transfer its assets and certain liabilities into for purposes of holding this entity as an investment and effective November 2004, the Company acquired Oil America Group.
Because there is typically no readily available market value for the investments in our portfolio, we value substantially all of our investments at fair value as determined in good faith by our board of directors pursuant to a valuation policy and consistent valuation process. Due to the inherent uncertainty of these valuations, the estimates may differ significantly from the values that would have been used had a ready market for the investments existed and the differences may be material. Our valuation methodology includes the examination of, among other things, the underlying portfolio company performance, financial condition and market changing events that impact valuation. Realized gains (losses) from the sale of investments and unrealized gains (losses) from the valuation of investments are reflected in operations during the period incurred.
VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS
In assessing the recoverability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The valuation allowance at December 31, 2005 was $2,074,898 at December 31, 2005. Net operating loss carry-forwards aggregate approximately $6,102,639 and expire in the years through 2025.
As discussed previously, on February 20, 2003, upon the acquisition of certain oil and gas assets, the Company entered a new development stage. As a result of this change, and IRS Section 382 rules, the net operating loss carry-forwards from previous years to February 20, 2003 will not be allowable and are not included in the above disclosures.
ESTIMATE OF RESERVES OF OIL AND GAS
Prior to electing BDC status and transferring oil and gas assets to investees, the Company used the successful efforts method of accounting for acquisition, exploration, development and production of oil and gas properties, whereby only the direct costs of acquiring or drilling successful (proved reserves) are capitalized. Costs of acquisition, development, and exploration activities that are not known to have resulted in the discovery of reserves (unproved) are charged to operations. All capitalized costs of oil and gas properties were depleted using the units-of-production method based on total proved reserves.
On June 15, 2004, the Company assigned $2,074,498, or 100% of its oil and gas properties securing a $2,000,000 convertible debenture to a majority owned investee.
Table of Contents RESULTS OF OPERATIONS Results of Operations
Three months ended March 31, 2006 compared to March 31, 2005.
Three Months Ended March 31, 2006 2005
Operating Expenses Compensation 30,000 30,000 Consulting - 28,000 Depreciation 1,946 1,946 General and administrative 16,837 4,479 Professional 24,466 5,147 Total Operating Expenses 73,249 69,572
Loss from Operations (73,249 ) (69,572 )
Other Income (Expense) Other income 20,000 - Interest expense (2,050 ) (383,590 ) Payroll tax expense and penalties (1,501 ) (1,501 ) Total Other Income (Expense) 16,449 (385,091 )
Net Loss $ (56,800 ) $ (454,663 )
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-------------------------------------------------------------------------------- Table of Contents Revenue: There was no revenue for the three months ended March 31, 2006 or March 31, 2005, respectively.
Operating Expenses:
Operating expenses increased $3,677, or 5%, to $73,249 for 2006 from $69,572 for 2005. The increase was primarily the result of a $19,320 increase in professional and a $12,358 increase in general and administrative, offset by a $28,000 decrease in consulting. The increase in professional and general and administrative is directly related to the increased costs the Company has incurred as the result of being a BDC. The decrease in consulting was primarily that in 2005, stock was issued for services compared to none in 2006.
Other Income (Expense):
Other income (expense) increased $401,540 of income, or 104% to $16,449 of income for 2006 from $385,091 of expense for 2005. The increase was primarily from a $381,541 decrease in interest expense in 2006 as compared to 2005 due to a convertible debenture beneficial conversion feature recorded in 2005.
Liquidity and Capital Resources
Cash and cash equivalents were $198,775 at March 31, 2006 as compared to $471,339 at December 31, 2005, and working capital deficit was $460,420 at March 31, 2006 as compared to $207,486 at December 31, 2005. The decrease in cash was primarily from $425,500 of net advances to the Company's majority-owned investees, offset by $226,420 of cash proceeds from financing activities.
Operating Activities
Cash used in operating activities was $74,484 for the three months ended March 31, 2006 compared to cash used of $75,447 for the three months ended March 31, 2005, or a change of less than 1%.
Investing Activities
Cash used in investing activities was $424,500 for the three months ended March 31, 2006 compared to $129,806 for the three months ended March 31, 2005. The increase in cash used resulted entirely from an increase in advances made by the Company for its majority-owned investees.
Cash provided by financing activities was $226,420 for the three months ended March 31, 2006 compared to cash used of $4,500 for the three months ended March 31, 2005. The increase in cash provided resulted primarily from $193,920 of net proceeds from the issuance of common stock and $32, 500 of cash proceeds from the repayment of a subscription receivable.
Our principal uses of cash to date have been for operating activities and we have funded our operations previously primarily by incurring indebtedness in the form of convertible debentures and issuing common stock.
We have substantial debt obligations. These debt obligations pose a significant liquidity risk to our business and stockholders by requiring us to dedicate a substantial portion of our cash flow to principal and interest payments on our debt obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other corporate requirements. Additionally, these debt obligations may impede us from obtaining additional financing in the future for working capital, capital expenditures and other corporate requirements and may make us more vulnerable to a downturn in our business and limit our flexibility to plan for, or react to, changes in our business.
The following summarizes our debt obligations at March 31, 2006:
DEBT
Our debt at March 31, 2006 and 2005 consisted of the following:
Lease Payable 2006 2005 $21,238 computer equipment lease, bearing interest at 10% per annum $ 16,131 $ 18,153
On April 16, 2001, the Company leased computer equipment under a 36-month lease that was accounted for as a capital lease in the amount of $21,238 and at March 31, 2006, the balance of principal was $16,131. The amount is personally guaranteed by a former officer/director and a current officer/director of the Company. The lease was secured by all leased equipment and perfected by a financing statement; however, the Company liquidated the equipment and paid the office space lessor the $4,000 proceeds. As of December 31, 2005, the Company has recorded a total of $8,400 in accrued interest for this lease payable in the accompanying Balance Sheet.
In November 2003, a settlement was reached with the lessor to forgive the .
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imakmony2005
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AMERICAN ENERGY PRODUCTION INC: 10-Q, Sub-Doc 1, Page 1
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
Commission File #333-52812
AMERICAN ENERGY PRODUCTION, INC. (Exact name of small business issuer as specified in its charter)
DELAWARE (State or other jurisdiction of incorporation or organization)
74-2945581 (IRS Employer Identification Number)
6073 Hwy 281 South, Mineral Wells, TX 76067 (Address of principal executive offices)(Zip Code)
(210) 410-8158 (Registrant's telephone no., including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Company's common stock outstanding on May 15, 2006: 456,870,082. Additionally, 4,075,000 shares are issuable as of May 15, 2006.
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-------------------- One is never completely useless. One can always serve as a bad example. Posts: 2430 | From: CA | Registered: Jun 2005
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imakmony2005
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Got um thanks, THIS BABYS GONNA FLY.IMO
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one of the things they mention is that with the recent rain, they will be able to re-fracture some existing wells that they were unable to do previously because of a local drought.
IMO, this latest permit filed with the TRRC last Tuesday confirms that the company is keeping its word, and moving forward with well re-completions.
Also, with the prospects of the Hart#8 well coming online, and the "Phantom I" rig drilling 24/7 on the new Murphy #3 well, this stock has plenty of potential for upside in the coming weeks.
-------------------- One is never completely useless. One can always serve as a bad example. Posts: 2430 | From: CA | Registered: Jun 2005
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I also forgot to mention the Challenger 360 rig. Still no word on what AMEP plans to do with it.
-------------------- One is never completely useless. One can always serve as a bad example. Posts: 2430 | From: CA | Registered: Jun 2005
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Patience, Patience.....The whole market is in the red. I have 7 stocks all red today. Weather the storm it will go up, soon.
Posts: 95 | From: IRAQ | Registered: Apr 2006
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