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SurgePays, Inc. - Quarter Report: 2011 January (Form 10-Q)


U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: January 31, 2011

File No. 000-52522

North American Energy Resources, Inc.
(Name of small business issuer in our charter)

Nevada
 
98-0550352
(State or other jurisdiction of
 
(IRS Employer
incorporation or organization)
 
Identification No.)

228 Saint Charles Ave., Suite 724, New Orleans, LA  70130
(Address of principal executive offices) (Zip Code)

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

Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ Nox

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

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission ("Commission"). While these statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto, contained in North American Energy Resources, Inc.’s Form 10-K dated April 30, 2010.

 
 

 

TABLE OF CONTENTS

       
Page
         
PART I – FINANCIAL INFORMATION (Unaudited)
   
         
Item 1:
 
Condensed Consolidated Financial Statements
 
3
         
Item 2:
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
17
         
Item 3:
 
Quantitative and Qualitative Disclosures About Market Risk
 
21
         
Item 4T:
 
Controls and Procedures
 
21
         
PART II - OTHER INFORMATION
 
22
         
Item 1:
 
Legal Proceedings
  22
         
Item 1A:
 
Risk Factors
  22
         
Item 2:
 
Unregistered Sales of Equity Securities and Use of Proceeds
  22
         
Item 3:
 
Defaults upon Senior Securities
  22
         
Item 4:
 
Submission of Matters to a Vote of Security Holders
  22
         
Item 5:
 
Other Information
  22
         
Item 6:
  
Exhibits
  
22

 
2

 

PART I - FINANCIAL INFORMATION
ITEM 1:  FINANCIAL STATEMENTS

NORTH AMERICAN ENERGY RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
Balance Sheets
January 31, 2011 (Unaudited) and April 30, 2010

   
January 31,
   
April 30,
 
   
2011
   
2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 886     $ 3,026  
Accounts receivable, net of allowance of $10,000 at 4/30/10
    5,000       13,150  
Prepaid expenses
    12,223       250,733  
Total current assets
    18,109       266,909  
Properties and equipment, at cost:
               
Proved oil and natural gas properties and equipment
    2,358       68,424  
Accumulated depreciation and amortization
    (52 )     (16,174 )
Total properties and equipment
    2,306       52,250  
Deposits and other assets
    -       5,864  
Total assets
  $ 20,415     $ 325,023  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Current liabilities:
               
Accounts payable
               
Trade
  $ 25,321     $ 13,554  
Oil and gas proceeds due others
    368       4,990  
Related parties
    21,906       -  
Advances received from joint interest participants
    -       33,056  
Accrued expenses
    473       -  
Accrued interest - related parties
    -       49,618  
Convertible notes payable - principally related parties
    38,678       510,476  
Total current liabilities
    86,746       611,694  
Commitments and contingencies
               
                 
Stockholders' deficit:
               
Preferred stock:  $0.001 par value; 100,000,000 shares authorized; no shares issued and outstanding
    -       -  
Common stock: $0.001 par value; 100,000,000 shares authorized; 21,554,945 and 17,375,539 shares issued and outstanding at January 31, 2011 and April 30, 2010, respectively
    21,555       17,376  
Additional paid in capital
    2,838,197       2,219,708  
Prepaid officer compensation
    -       (12,129 )
Other comprehensive loss
    -       (1,000 )
Deficit accumulated during the exploration stage
    (2,926,083 )     (2,510,626 )
Total stockholders' deficit
    (66,331 )     (286,671 )
Total liabilities and stockholders' deficit
  $ 20,415     $ 325,023  

See accompanying notes to financial statements

 
3

 

NORTH AMERICAN ENERGY RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
Statements of Condensed Consolidated Operations
For the three months ended January 31, 2011 and 2010
(Unaudited)

   
2011
   
2010
 
             
Oil and natural gas sales
  $ 322     $ 2,263  
Total revenues
    322       2,263  
Costs and expenses
               
Oil and natural gas production taxes
    23       163  
Oil and natural gas production expenses
    171       2,138  
Depreciation and amortization
    52       1,620  
Non-cash compensation
    53,500       152,076  
General and administrative expense, net of operator's overhead fees
    23,672       2,656  
      77,418       158,653  
Loss from operations
    (77,096 )     (156,390 )
Other income (expense):
               
Interest income
    -       300  
Interest expense
    (5,500 )     (12,036 )
Total other income (expense)
    (5,500 )     (11,736 )
Net loss
    (82,596 )     (168,126 )
Other comprehensive loss
               
Unrealized loss on available for sale securities
    -       -  
Net comprehensive loss
  $ (82,596 )   $ (168,126 )
                 
Net loss per common share, basic and diluted
  $ (0.00 )   $ (0.01 )
                 
Weighted average common shares outstanding
    20,029,232       16,055,539  

See accompanying notes to condensed consolidated financial statements.
 
 
4

 
 
NORTH AMERICAN ENERGY RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
Statements of Condensed Consolidated Operations
For the nine months ended January 31, 2011 and 2010
and the period from inception (August 18, 2006) through January 31, 2011
(Unaudited)

               
Inception
 
               
(August 18, 2006)
 
               
through
 
               
January 31,
 
   
2011
   
2010
   
2011
 
                   
Oil and natural gas sales
  $ 4,366     $ 5,851     $ 43,381  
Pipeline fees
    -       -       2,450  
Total revenues
    4,366       5,851       45,831  
Costs and expenses
                       
Oil and natural gas production taxes
    312       421       3,122  
Oil and natural gas production expenses
    8,568       11,105       106,871  
Depreciation and amortization
    1,530       4,860       16,116  
Asset impairment
    46,894       108,000       910,714  
Non-cash compensation
    266,254       394,728       1,413,791  
Bad debt expense
    7,828       10,000       93,828  
General and administrative expense, net of operator's overhead fees
    51,757       89,142       340,584  
      383,143       618,256       2,885,026  
Loss from operations
    (378,777 )     (612,405 )     (2,839,195 )
Other income (expense):
                       
Other income
    -       -       320  
Interest income
    -       900       900  
Interest expense
    (36,680 )     (36,190 )     (88,108 )
Total other income (expense)
    (36,680 )     (35,290 )     (86,888 )
Net loss
    (415,457 )     (647,695 )     (2,926,083 )
Other comprehensive loss
                       
Unrealized loss on available for sale securities
    -       -       (1,000 )
Net comprehensive loss
  $ (415,457 )   $ (647,695 )   $ (2,927,083 )
                         
Net loss per common share, basic and diluted
  $ (0.02 )   $ (0.04 )        
                         
Weighted average common shares outstanding
    18,260,104       15,530,956          

See accompanying notes to condensed consolidated financial statements.
 
 
5

 

NORTH AMERICAN ENERGY RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Deficit
For the period from inception (August 18, 2006) through January 31, 2011
(Unaudited)

                         
Intrinsic
 
                   
Additional
   
Value of
 
       
Common stock
   
Paid in
   
Common
 
   
Date
 
Shares
   
Amount
   
Capital
   
Stock Options
 
                             
BALANCE August 18, 2006
        -     $ -     $ -     $ -  
Common stock issued for net assets
 
9/1/2006
    11,264,485       11,265       88,735       -  
Common stock issued for cash
 
9/7/2006
    1,126,448       1,126       8,874       -  
Common stock issued for cash
 
9/11/2006
    1,126,448       1,126       8,874       -  
Net loss
        -       -               -  
BALANCE April 30, 2007
        13,517,381       13,517       106,483       -  
Net loss
        -       -               -  
BALANCE April 30, 2008
        13,517,381       13,517       106,483       -  
Acquisition of North American Energy Resources, Inc.
 
7/28/2008
    177,000       177       119,653       -  
Conversion of note payable and accrued
                                   
interest for common stock
 
7/31/2008
    153,000       153       35,377       -  
Common stock options granted for:
                                   
350,000 shares at $1.00 per share
 
8/1/2008
    -       -       178,000       (178,000 )
50,000 shares at $1.25 per share
 
8/1/2008
    -       -       27,096       (27,096 )
Exercise common stock options:
                                   
for $1.25 per share
 
9/22/2008
    100       -       6,250       -  
for $1.00 per share
 
9/22/2008
    1,000       1       49,999       -  
for $1.25 per share
 
10/13/2008
    100       -       6,250       -  
for $1.00 per share
 
10/13/2008
    70       -       3,500       -  
Accounts payable paid with common stock
 
10/14/2008
    90       -       9,016       -  
Amortize intrinsic value of options
 
10/31/2008
    -       -       -       17,091  
Cancel common stock options
 
11/5/2008
    -       -       (188,005 )     188,005  
Common stock issued for compensation
 
11/7/2008
    100       -       6,250       -  
Common stock issued for accounts payable
 
11/7/2008
    60       -       3,000       -  
Common stock issued for consulting service
 
11/12/2008
    3,000       3       310,497       -  
Common stock issued for accounts payable
 
11/17/2008
    400       1       24,999       -  
Capital contribution by shareholder in cash
 
11/30/2008
    -       -       50,000       -  
Common stock issued for:
                                   
Compensation
 
12/9/2008
    338       -       5,000       -  
Accounts payable
 
12/9/2008
    300       -       1,200       -  
Accounts payable
 
12/9/2008
    400       -       6,000       -  
Compensation
 
1/5/2009
    500       1       4,999       -  
Accounts payable
 
1/5/2009
    800       1       3,199       -  
Accounts payable
 
1/5/2009
    400       1       3,999       -  
Accounts payable
 
1/19/2009
    4,000       4       14,996       -  
Compensation
 
1/26/2009
    1,500       2       4,998       -  
Accounts payable
 
2/24/2009
    6,000       6       9,761       -  
Compensation
 
2/24/2009
    1,000       1       1,999       -  
Compensation
 
3/4/2009
    4,000       4       4,996       -  
Compensation
 
4/6/2009
    4,000       4       5,996       -  
Officer compensation
 
4/21/2009
    160,000       160       145,440       -  
Net loss
        -       -       -       -  
BALANCE April 30, 2009
        14,035,539     $ 14,036       960,948       -  

(Continued)
See accompanying notes to consolidated financial statements.
 
 
6

 
 
NORTH AMERICAN ENERGY RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Deficit, continued
For the period from inception (August 18, 2006) through January 31, 2011
(Unaudited)

               
Deficit
       
         
Accumulated
   
Accumulated
       
   
Prepaid
   
Other
   
During the
       
   
Officer
   
Comprehensive
   
Development
       
   
Compensation
   
Loss
   
Stage
   
Total
 
                         
BALANCE August 18, 2006
  $ -     $ -     $ -     $ -  
Common stock issued for net assets
    -       -       -       100,000  
Common stock issued for cash
    -       -       -       10,000  
Common stock issued for cash
    -       -       -       10,000  
Net loss
    -       -       (5,379 )     (5,379 )
BALANCE April 30, 2007
    -       -       (5,379 )     114,621  
Net loss
    -       -       (24,805 )     (24,805 )
BALANCE April 30, 2008
    -       -       (30,184 )     89,816  
Acquisition of North American Energy Resources, Inc.
    -       -       -       119,830  
Conversion of note payable and accrued interest for common stock
    -       -       -       35,530  
Common stock options granted for:
                               
350,000 shares at $1.00 per share
    -       -       -       -  
50,000 shares at $1.25 per share
    -       -       -       -  
Exercise common stock options:
                               
for $1.25 per share
    -       -       -       6,250  
for $1.00 per share
    -       -       -       50,000  
for $1.25 per share
    -       -       -       6,250  
for $1.00 per share
    -       -       -       3,500  
Accounts payable paid with common stock
    -       -       -       9,016  
Amortize intrinsic value of options
    -       -       -       17,091  
Cancel common stock options
    -       -       -       -  
Common stock issued for compensation
    -       -       -       6,250  
Common stock issued for accounts payable
    -       -       -       3,000  
Common stock issued for consulting service
    -       -       -       310,500  
Common stock issued for accounts payable
    -       -       -       25,000  
Capital contribution by shareholder in cash
    -       -       -       50,000  
Common stock issued for:
                               
Compensation
    -       -       -       5,000  
Accounts payable
    -       -       -       1,200  
Accounts payable
    -       -       -       6,000  
Compensation
    -       -       -       5,000  
Accounts payable
    -       -       -       3,200  
Accounts payable
    -       -       -       4,000  
Accounts payable
    -       -       -       15,000  
Compensation
    -       -       -       5,000  
Accounts payable
    -       -       -       9,767  
Compensation
    -       -       -       2,000  
Compensation
    -       -       -       5,000  
Compensation
    -       -       -       6,000  
Officer compensation
    (84,933 )     -       -       60,667  
Net loss
    -       -       (1,097,468 )     (1,097,468 )
BALANCE April 30, 2009
    (84,933 )     -       (1,127,652 )   $ (237,601 )

(Continued)
See accompanying notes to consolidated financial statements.
 
 
7

 
 
NORTH AMERICAN ENERGY RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Deficit, continued
For the period from inception (August 18, 2006) through January 31, 2011
(Unaudited)

                          
Intrinsic
 
                   
Additional
   
Value of
 
       
Common stock
   
Paid in
   
Common
 
   
Date
 
Shares
   
Amount
   
Capital
   
Stock Options
 
                             
BALANCE April 30, 2009
        14,035,539     $ 14,036     $ 960,948     $ -  
Common stock issued for:
                                   
consulting agreement
 
5/1/2009
    400,000       400       419,600       -  
consulting agreement
 
5/1/2009
    200,000       200       209,800       -  
oil and gas non-producing property
 
6/9/2009
    700,000       700       125,300       -  
accounts payable
 
7/27/2009
    10,000       10       4,990       -  
consulting agreement
 
7/27/2009
    30,000       30       14,970       -  
consulting agreement
 
7/27/2009
    30,000       30       14,970       -  
oil and gas producing property
 
9/25/2009
    350,000       350       192,150       -  
consulting contract
 
9/25/2009
    300,000       300       182,700       -  
cash
 
2/23/2010
    200,000       200       5,800       -  
consulting agreement
 
2/24/2010
    400,000       400       31,600       -  
consulting agreement - director fees
 
2/24/2010
    450,000       450       35,550       -  
consulting agreement - director fees
 
2/24/2010
    150,000       150       11,850       -  
officer compensation - director fees
 
2/24/2010
    120,000       120       9,480       -  
Other comprehensive loss on available-for-
           -       -                  
sale securities
        -       -       -       -  
Amortize officer compensation
        -       -       -       -  
Net loss
        -       -       -       -  
BALANCE April 30, 2010
        17,375,539       17,376       2,219,708       -  
Recission of available-for-sale securities transaction
        -       -       -       -  
Amortize officer compensation
        -       -       -       -  
Convertible note payable forgiven by related party
 
12/3/2010
    -       -       57,920       -  
Common stock issued for:
                                   
Consulting agreement
 
12/2/2010
    850,000       850       7,650       -  
Conversion of convertible notes payable
 
12/5/2010
    3,329,406       3,329       552,919       -  
Net loss
        -       -       -       -  
BALANCE January 31, 2011
        21,554,945     $ 21,555     $ 2,838,197     $ -  

(Continued)
See accompanying notes to consolidated financial statements.

 
8

 

NORTH AMERICAN ENERGY RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Deficit, continued
For the period from inception (August 18, 2006) through January 31, 2011
(Unaudited)

               
Deficit
       
         
Accumulated
   
Accumulated
       
   
Prepaid
   
Other
   
During the
       
   
Officer
   
Comprehensive
   
Development
       
   
Compensation
   
Loss
   
Stage
   
Total
 
                         
BALANCE April 30, 2009
  $ (84,933 )   $ -     $ (1,127,652 )   $ (237,601 )
Common stock issued for:
                               
consulting agreement
    -       -       -       420,000  
consulting agreement
    -       -       -       210,000  
oil and gas non-producing property
    -       -       -       126,000  
accounts payable
    -       -       -       5,000  
consulting agreement
    -       -       -       15,000  
                                 
consulting agreement
    -       -       -       15,000  
oil and gas producing property
    -       -       -       192,500  
consulting contract
    -       -       -       183,000  
cash
    -       -       -       6,000  
consulting agreement
    -       -       -       32,000  
consulting agreement - director fees
    -       -       -       36,000  
consulting agreement - director fees
    -       -       -       12,000  
officer compensation - director fees
    -       -       -       9,600  
Other comprehensive loss on available-for-
                               
sale securities
    -       (1,000 )     -       (1,000 )
Amortize officer compensation
    72,804       -       -       72,804  
Net loss
    -       -       (1,382,974 )     (1,382,974 )
BALANCE April 30, 2010
    (12,129 )     (1,000 )     (2,510,626 )     (286,671 )
Recission of available-for-sale securities transaction
    -       1,000       -       1,000  
Amortize officer compensation
    12,129       -       -       12,129  
Convertible note payable forgiven by related party
    -       -       -       57,920  
Common stock issued for:
                               
Consulting agreement
    -       -       -       8,500  
Conversion of convertible notes payable
    -       -       -       556,248  
Net loss
    -       -       (415,457 )     (415,457 )
BALANCE January 31, 2011
  $ -     $ -     $ (2,926,083 )   $ (66,331 )

See accompanying notes to consolidated financial statements.

 
9

 

NORTH AMERICAN ENERGY RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
Statements of Condensed Consolidated Cash Flows
For the nine months ended January 31, 2011 and 2010
and the period from inception (August 18, 2006) through January 31, 2011
(Unaudited)

               
Inception
 
               
(August 18, 2006)
 
               
through
 
               
January 31,
 
   
2011
   
2010
   
2011
 
                   
Operating activities
                 
Net loss
  $ (415,457 )   $ (647,695 )   $ (2,926,083 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Depreciation and amortization
    1,530       4,860       16,116  
Non-cash compensation
    266,254       394,728       1,413,791  
Bad debt expense
    7,828       10,000       99,243  
Asset impairment
    46,894       108,000       910,714  
Changes in operating assets and liabilities:
                       
Accounts receivable
    321       (17,406 )     (96,057 )
Interest accrued on loan to related party
    -       (900 )     (900 )
Prepaid expenses and other assets
    5,982       (864 )     510  
Accounts payable
    41,060       59,476       315,114  
Accrued interest - related parties
    36,680       36,190       86,578  
Accrued expenses
    9       -       9  
Related party advances for working capital
    -       16,100       2,000  
Oil and gas proceeds due others
    (4,622 )     -       368  
Advances from joint interest owners
    (1,226 )     10,133       (9,643 )
Net cash from (used in) operating activities
    (14,747 )     (27,378 )     (188,240 )
Investing activities
                       
Payments for oil and natural gas properties and equipment
    (4,893 )     (95 )     (166,311 )
Cash received in excess of cash paid in reverse acquisition of North American Energy Resources, Inc.
    -       -       119,830  
Loan to related party
    -       -       (19,993 )
Proceeds from sale of oil and gas properties
    -       -       7,500  
Payments for pipeline
    -       -       (7,500 )
Net cash used in investing activities
    (4,893 )     (95 )     (66,474 )
Financing activities
                       
Loan proceeds
    17,500       -       66,250  
Shareholder contribution
    -       -       50,000  
Loans from related parties
    -       -       113,350  
Sale of common stock
    -       -       26,000  
Net cash provided by financing activities
    17,500       -       255,600  
Net increase in cash and cash equivalents
    (2,140 )     (27,473 )     886  
Cash and cash equivalents, beginning of period
    3,026       27,966       -  
Cash and cash equivalents, end of period
  $ 886     $ 493     $ 886  

(Continued)
See accompanying notes to condensed consolidated financial statements.

 
10

 

NORTH AMERICAN ENERGY RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
Statements of Condensed Consolidated Cash Flows, Continued
For the nine months ended January 31, 2011 and 2010
and the period from inception (August 18, 2006) through January 31, 2011
(Unaudited)

               
Inception
 
               
(August 18, 2006)
 
               
through
 
               
January 31,
 
   
2011
   
2010
   
2011
 
Supplemental cash flow information
                 
Cash paid for interest and income taxes:
                 
Interest
  $ -     $ -     $ 1,094  
Income taxes
    -       -       -  
Non-cash investing and financing activities:
                       
Common stock issued for:
                       
Notes receivable
  $ -     $ -     $ 76,000  
Oil and gas properties
    -       -       303,670  
Interest in pipeline
    -       -       100,000  
Loans to shareholders assumed
    -       -       (371,000 )
Advance from joint interest participant assumed
    -       -       (8,670 )
    $ -     $ -     $ 100,000  
Acquisition of North American Energy Resources, Inc. in reverse acquisition:
                       
Assets acquired, other than cash
  $ -     $ -     $ -  
Liabilities assumed
    -       -       (30,170 )
      -       -       (30,170 )
Common stock issued
    -       -       150,000  
Cash received in excess of cash paid
  $ -     $ -     $ 119,830  
                         
Exchange of joint interest receivable for oil and natural gas properties
  $ -       15,752     $ 53,068  
Convertible note payable and accrued interest exchanged for 1,000 shares of North American Exploration, Inc. common stock
    -       -       35,530  
Common stock options granted
    -       -       205,096  
Common stock options cancelled
    -       -       188,005  
Common stock issued for:
                       
Convertible notes payable
    556,248       -       556,248  
Consulting agreements
    -       813,000       902,600  
Unevaluated oil and natural gas properties
    -       126,000       126,000  
Proven oil and natural gas properties
    -       192,500       192,500  
Accounts payable
    -       5,000       106,183  
Chief executive officer compensation
    -       -       155,200  
Credit balance transferred from accounts receivable to accounts payable
    -       1,068       1,068  
Accounts receivable applied as payment on note payable to related party
    -       4,572       4,572  
Option exercises paid by reducing note payable related party
    -       -       75,250  
Advance from shareholder converted to note
    -       -       2,000  
Participant advance converted to accounts payable
    -       -       31,829  
Accounts payable converted to convertible note payable
    38,678       -       38,678  
Covertible note payable and accrued interest forgiven by related party
    57,920       -       57,920  

See accompanying notes to condensed consolidated financial statements.

 
11

 

NORTH AMERICAN ENERGY RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements

NOTE 1:
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization
 
The consolidated financial statements include the accounts of North American Energy Resources, Inc. (“NAER”) and its wholly owned subsidiary, North American Exploration, Inc. (“NAE”) (collectively the “Company”).

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

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

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations for interim reporting.  The Company believes that the disclosures contained herein are adequate to make the information presented not misleading.  However, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report for the year ended April 30, 2010, which is included in the Company’s Form 10-K dated April 30, 2010.  The financial data for the interim periods presented may not necessarily reflect the results to be anticipated for the complete year.

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

 
12

 

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

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

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

At January 31, 2011 and April 30, 2010 the Company had a working capital deficit of $68,637 and $344,785, respectively.  The Company has an accumulated deficit of $2,926,083  which includes a loss of $415,457 during the nine months ended January 31, 2011, which includes stock compensation in the amount of $266,254.  By December 5, 2010, the Company had exchanged 3,329,406 shares of common stock for convertible notes payable principal of $474,358 and $81,890 in accrued interest.  In January 2011, the Company exchanged $38,678 in accounts payable for a convertible note payable due in January 2012 with interest accruing at 4% per annum.  The note is convertible into common stock at $0.10 per share.

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

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

Fiscal year
2011 refers to periods ending during the fiscal year ending April 30, 2011 and 2010 refers to periods ended during the fiscal year ended April 30, 2010.

 
13

 

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

Recent adopted and pending accounting pronouncements
 Below is a listing of the most recent accounting standards and their effect on the Company, as issued by the Financial Accounting Standards Board ("FASB") in the form of Accounting Standards Updates ("ASU").  We have evaluated all recent accounting pronouncements through February 21, 2011 and find none that would have a material impact on the financial statements of the Company.
 
NOTE 2:
RELATED PARTY TRANSACTIONS

The Company previously sold its gas pursuant to a contract with a gathering system principally owned by a related party.  The Company received a price equal to 70% of the posted price, which is the same rate charged to third parties.  The related party retained the other 30% of the posted price for gathering fees and marketing fees.  The gathering system has been shut-in due to low gas prices since February 2009.  The Company sold all of its interest in these gas wells effective October 1, 2010.

Convertible notes payable includes convertible notes payable to shareholders and others in the total amount of $510,476 at April 30, 2010.  Convertible notes payable with a balance of $474,358 in principal and $81,890 in accrued interest were converted into 3,329,406 common shares in December 2010.  A convertible note payable with a principal balance of $53,618 and accrued interest of $4,302 was forgiven and the balance was recorded as a contribution to capital.

Accounts payable - related parties includes the following expense reimbursements due to related parties at January 31, 2011 (none at April 30, 2010).  Expense reimbursements include D&O insurance of $12,233, rent of $6,962, office expenses of $836 and travel expenses of $1,875.

       
Clinton W. Coldren, Chief Executive Officer
  $ 21,081  
Alan G. Massara, Chief Financial Officer
    825  
    $ 21,906  

NOTE 3:
STOCKHOLDER’S EQUITY

PREFERRED STOCK

The Company has 100,000,000 shares of its $0.001 par value preferred stock authorized.  At January 31, 2011 and April 30, 2010, the Company had no shares issued and outstanding.

 
14

 

COMMON STOCK

The Company has 100,000,000 shares of its $0.001 par value common stock authorized.  At January 31, 2011 and April 30, 2010 the Company has 21,554,945 shares and 17,375,539 shares issued and outstanding, respectively.

WARRANTS

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

a)    Each Warrant shall entitle the owner to purchase one share of common stock of the Company.  The warrants will contain price protection should shares be used for an acquisition at a price lower than the conversion price in force.  The anti dilution provision will not apply to financings done below the strike price.
b)    The Executive Team is granted three Warrant Certificates as follows:
 
1.
Certificate #1 for 10,000,000 warrants with a strike price of $0.025 per share must be exercised within one year of the date Executive Team begins collecting salaries from the Company,
 
2.
Certificate #2 for 10,000,000 warrants with a strike price of $0.04 per share and a Term of 5 years from the vesting date, and
 
3.
Certificate #3 for 10,000,000 warrants with a strike price of $0.055 per share and a Term of 5 years from the vesting date.
c)    Other warrant terms are as follows:
 
1.
Certificate #1 vests immediately, Certificate #2 shall vest upon execution of Certificate #1 and Certificate #3 shall vest upon execution of Certificate #1.
 
2.
All Warrants may vest early if the Company has revenue of $12,500,000 total for two consecutive quarters and records a pre-tax net profit for the two quarters and other conditions including change in control, termination, etc.
 
3.
The Warrant Certificates may be allocated among the Executive Team as they so determine.
 
4.
The Warrants shall be registered in the first registration statement the Company files, subject to legal counsel approval.

COMMON STOCK OPTIONS

The North American Energy Resources, Inc. 2008 Stock Option Plan ("Plan") was filed on September 11, 2008 and reserves 2,500,000 shares for awards under the Plan.  The Company's Board of Directors is designated to administer the Plan and may form a Compensation Committee for this purpose.  The Plan terminates on July 23, 2013.

Options granted under the Plan may be either "incentive stock options" intended to qualify as such under the Internal Revenue Code, or "non-qualified stock options."  Options outstanding under the Plan have a maximum term of up to ten years, as designated in the option agreements.  No options are outstanding at January 31, 2011.  At January 31, 2011, there are 1,242,333 shares available for grant.

 
15

 

NOTE 4: 
PREPAID EXPENSES
 
The Company recorded prepaid expenses from the issue of its common stock for consulting services.  The cost, based on the trading price of the stock at the time of the transaction, is amortized to expense over the term of the contracts.  The unamortized balances at January 31, 2011 and April 30, 2010 are as follows:

   
January 31,
   
April 30,
 
   
2011
   
2009
 
Current asset
           
Stockholder relations firm
  $ -     $ 168,000  
Consulting firm assisting with listing common stock on the Frankfort Exchange
    -       68,625  
Administrative management
    500       9,500  
Other prepaid expense
    11,723       4,608  
    $ 12,223     $ 250,733  
Component of stockholders' deficit
               
Chief executive officer compensation
  $ -     $ 12,129  

Other prepaid expense at January 31, 2011 is for D&O insurance for the year ended January 13, 2012.

NOTE 5: 
CONVERTIBLE NOTES PAYABLE

Activity in convertible notes payable was as follows:

         
Accrued
 
   
Principal
   
Interest
 
             
Balance, April 30, 2010
  $ 510,476     $ 49,618  
Additions before conversion
    17,500       36,574  
Convertible note forgiven
    (53,618 )     (4,302 )
Conversion of convertible notes and accrued interest
    (474,358 )     (81,890 )
Sub-total
    -       -  
Exchange of accounts payable for convertible note
    38,678       -  
Interest accrued
    -       106  
Balance, January 31, 2011
  $ 38,678     $ 106  

 
16

 

ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This statement contains forward-looking statements within the meaning of the Securities Act.  Discussions containing such forward-looking statements may be found throughout this statement.  Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including the matters set forth in this statement.

COMPARISON OF THREE MONTHS ENDED JANUARY 31, 2011 AND 2010

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

   
2011
   
2010
 
             
Oil production
  $ -     $ 2,263  
Gas production
    322       -  
Total revenue
  $ 322     $ 2,263  

Gas production included 118 MCF sold in 2011.  Oil revenues included 33 net barrels sold in 2010.  As a result of continuing high operating costs, the Company sold all of its producing oil properties and its non-producing gas properties effective October 1, 2010 and acquired one new gas property in a different geographic area.

Costs and expenses during the three months ended January 31, 2011 and 2010 were as follows:

   
2011
   
2010
 
             
Oil and natural gas production taxes
  $ 23     $ 163  
Oil and natural gas production expenses
    171       2,138  
Depreciation and amortization
    52       1,620  
Non-cash compensation
    53,500       152,076  
Other general and administrative expense, net of operator's overhead fee
    23,672       2,656  
Total
  $ 77,418     $ 158,653  

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

Non-cash compensation declined primarily due to completion of the amortization of higher cost consulting agreements which began in the earlier year.

 
17

 

Other general and administrative expense, net of operator's overhead fee increased in the 2011 period primarily due to new costs associated with the expanding staff and the new office location.  Rent increased $6,962; travel and entertainment increased $1,875; and other costs associated with maintaining a separate office also increased.

Other income (expense) during the three months ended January 31, 2011 and 2010 is as follows:

   
2011
   
2010
 
             
Interest income
  $ -     $ 300  
Interest expense
    (5,500 )     (12,036 )
Total
  $ (5,500 )   $ (11,736 )

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

COMPARISON OF NINE MONTHS ENDED JANUARY 31, 2011 AND 2010

Revenues during the nine months ended January 31, 2011 and 2010 were as follows:

   
2011
   
2010
 
             
Oil production
  $ 4,044     $ 5,851  
Gas production
    322       -  
Total revenue
  $ 4,366     $ 5,851  

Oil revenues included 64 net barrels sold in 2011 and 99 net barrels sold in 2010.  Due to low prices, the Company shut-in its Washington County, Oklahoma gas production during January 2009.  The Company's oil prices per barrel averaged $63.52 during 2011 and $59.06 during 2010.  The Company sold all of its producing oil properties and its non-producing gas properties in Washington County, Oklahoma effective October 1, 2010.  The Company acquired a producing gas well which produced 118 net MCF and averaged $2.73/MCF.

 
18

 

Costs and expenses during the nine months ended January 31, 2011 and 2010 were as follows:

   
2011
   
2010
 
             
Oil and natural gas production taxes
  $ 312     $ 421  
Oil and natural gas production expenses
    8,568       11,105  
Depreciation and amortization
    1,530       4,860  
Asset impairment
    46,894       108,000  
Non-cash compensation
    266,254       394,728  
Bad debt expense
    7,828       10,000  
Other general and administrative expense, net of operator's overhead fee
    51,757       89,142  
Total
  $ 383,143     $ 618,256  

The Company recorded asset impairment charges in 2011 and 2010.  The charge in 2011 was as a result of the sale of its remaining shut-in gas properties and its producing oil properties in Washington County, Oklahoma during October 2010.  The 2010 impairment was a result of an acquisition made with common stock being recorded higher than the value of the discounted reserves at the time of the acquisition.

Non-cash compensation in 2011 and 2010 represents the current period charge for stock which has been issued for consulting contracts.  The higher cost contracts have been expiring in 2011, resulting in a reduction in non-cash compensation.

Other general and administrative expense, net of operator's overhead fee declined from $89,142 to $51,757.  The majority of the decline is due to lower legal costs of $34,161 and lower accounting and auditing costs.  A new office was established in New Orleans to accommodate the new Executive Team.  The related costs are expected to cause these expenses to increase in the future.

Other income (expense) during the nine months ended January 31, 2011 and 2010 is as follows:

   
2011
   
2010
 
             
Interest income
  $ -     $ 900  
Interest expense
    (36,680 )     (36,190 )
Total
  $ (36,680 )   $ (35,290 )

The weighted average interest bearing debt was approximately the same in both periods.  In December 2010, common stock was issued to retire the convertible notes payable outstanding at that time.

 
19

 

LIQUIDITY, CAPITAL RESOURCES AND PLAN OF OPERATIONS

At January 31, 2011, we had $886 in cash and a working capital deficit of $68,637.  Comparatively, we had cash of $3,026 and a working capital deficit of $344,785 at April 30, 2010.  The principal element of the change in working capital was a decrease in prepaid consulting contracts and other prepaid expenses of $238,510, a net decrease in convertible notes payable and related accrued interest of $521,416 and other losses incurred during the period which increased current liabilities.

We estimate that our total planned cash expenditures over the next twelve months will be approximately $100,000 for basic corporate overhead, assuming no increased operations.  We expect to utilize excess funds, when available, to acquire additional acreage for future drilling operations and plan to issue our common stock for certain services when possible.

The Company will plan to meet its capital requirements for the next year with private placements of its common stock or advances from related parties.

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

CASH FROM OPERATING ACTIVITIES

Cash used in operating activities was $14,747 for the nine-month period ended January 31, 2011 and cash used in operations was $27,378 for the comparable 2010 period.  There has been only nominal activity with a significant portion of the operating loss being paid with common stock.

CASH USED IN FINANCING ACTIVITIES

We incurred capital costs of $4,893 and $95 in the nine months ended January 31, 2011 and 2010, respectively.

CASH FROM FINANCING ACTIVITIES

We received loan proceeds of $17,500 during the nine months ended January 31, 2011 and had no activity during the nine months ended January 31, 2010.

GOING CONCERN

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

OFF-BALANCE SHEET ARRANGEMENTS

None.

 
20

 

ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4T: 
CONTROLS AND PROCEDURES
 
(a) Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 240.13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) as of January 31, 2011.  Based on that review and evaluation, which included inquiries made to certain other consultants of the Company, the CEO and CFO concluded that the Company’s current disclosure controls and procedures, as designed and implemented, is effective in ensuring that information relating to the Company required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including insuring that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.  The CEO and CFO feel that a weakness due to a lack of segregation of duties, due to the Company's small size, is mitigated by a third party consultant which the Company has engaged to assist the Company in preparing its financial statements and its filings with the SEC.

(b)  Changes in Internal Controls

There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation described above, including any corrective actions with regard to significant deficiencies and material weaknesses.

 
21

 

PART II - OTHER INFORMATION

ITEM 1: 
LEGAL PROCEEDINGS

None

ITEM 1A: 
RISK FACTORS

Not applicable.

ITEM 2:
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended January 31, 2011, the Company issued 3,329,406 common shares for convertible notes payable and accrued interest of $556,248 and issued 850,000 common shares for a consulting agreement valued at $8,500.

The shares were sold pursuant to an exemption from registration under Section 4(2) promulgated under the Securities Act of 1933, as amended.

ITEM 3: 
DEFAULTS UPON SENIOR SECURITIES.

None
 
ITEM 4:
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
None
 
ITEM 5:
OTHER INFORMATION.

None

ITEM 6: 
EXHIBITS

Exhibit 31.1
 
Certification pursuant to 18 U.S.C. Section 1350 Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer
     
Exhibit 31.1
 
Certification pursuant to 18 U.S.C. Section 1350 Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer
     
Exhibit 32.1
 
Certification pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer
     
Exhibit 32.1
  
Certification pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer

 
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SIGNATURE

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

   
NORTH AMERICAN ENERGY RESOURCES, INC.
     
Date:  March 14, 2011
   
     
 
By: /s/ 
Alan G. Massara
   
President and Chief Financial Officer

 
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