Filing identity and reporting period
Material mismatch: The request identifies Surgepays, Inc. and 2010 Q3, but the supplied filing is for North American Energy Resources, Inc. and its subsidiary, for the quarter ended January 31, 2012 (and nine months ended January 31, 2012). The summary below reflects the supplied filing, not the requested company or period. The interim financial statements are unaudited.
North American Energy Resources describes itself as a development-stage oil and natural gas company. It had sold its prior producing oil and shut-in gas properties and reported revenue from an interest in one gas well.
Financial results and liquidity
| Metric | Three months ended Jan. 31 | Nine months ended Jan. 31 |
|---|---|---|
| Revenue | 2012: $326; 2011: $322 | 2012: $1,572; 2011: $4,366 |
| Net loss | 2012: $358,897; 2011: $82,596 | 2012: $590,939; 2011: $415,457 |
| Operating cash flow | Not separately presented | 2012: $(317,206); 2011: $(14,747) |
- For the nine months, general and administrative expense rose to $595,916 from $51,757, while reported total expenses rose to $596,868 from $383,143. The filing attributes the increase principally to acquisition due diligence and preliminary financing, rent, executive compensation, legal and professional costs, travel, and maintaining a separate office.
- At January 31, 2012, cash was $58,691, accounts receivable $150, current assets $58,841, and current liabilities $765,263; working capital deficit was $706,422. Total assets were $61,058 and stockholders’ deficit was $704,205.
- Nine-month financing provided $375,181, primarily from the CEO; cash increased by $57,975 from $716 at April 30, 2011. The filing reports no investing cash flow in the 2012 nine-month period.
- Current liabilities included a $375,181 convertible note payable to the CEO, $214,901 of accrued expenses, and $118,076 of trade payables. The CEO note bears 8% interest, has a one-year term, and is convertible at a price based on 130% of the specified 50-trading-day volume-weighted average price; the company cannot prepay it before maturity. Another $38,678 convertible note bears 4% interest.
- Production costs and revenue were both very small; the filing does not provide a meaningful consolidated margin measure. The company reported a cumulative development-stage deficit of $3,563,957.
Changes, outlook, and risks
Nine-month revenue declined from $4,366 to $1,572, principally reflecting the change in properties after the October 2010 sale of the earlier oil and gas assets. Quarterly revenue was nearly unchanged year over year, but quarterly net loss increased substantially, with general and administrative costs the main driver. The filing says the gas well generated a small profit, while prior oil production costs exceeded its revenue.
An asset purchase agreement expired in December 2011 without completion. Management said it would continue seeking acquisition opportunities, which would require additional debt and/or equity financing; the amount and timing were undetermined. Management cautioned that financing may be difficult and that a successful acquisition could materially change the capital structure. No quantified revenue or earnings guidance was provided.
The company stated that current cash flow was nominal and insufficient to cover expenses. It reported substantial doubt about its ability to continue as a going concern, dependent on obtaining financing and finding an acquisition candidate; the statements include no adjustments for the outcome of this uncertainty. The company reported no off-balance-sheet arrangements, legal proceedings, or defaults upon senior securities. Management said disclosure controls were effective and reported no significant changes in internal control during the quarter.
Potential dilution merits attention: the filing describes executive warrants for up to 30 million shares at stated exercise prices, alongside 21,554,945 common shares outstanding at January 31, 2012. The warrants’ vesting and exercise conditions are described in the filing.
Most important facts to verify
- Confirm issuer and period: the supplied document is North American Energy Resources’ January 31, 2012 Form 10-Q, not a Surgepays, Inc. 2010 Q3 filing.
- Assess the company’s ability to fund operations given the $706,422 working capital deficit, operating cash use, and explicit going-concern warning.
- Review the CEO bridge loan’s outstanding balance, conversion formula, maturity, and repayment terms, and clarify the reported maturity of the separate $38,678 note: the filing gives inconsistent dates in different sections.
- Verify whether any replacement acquisition was pursued after the December 2011 agreement expired, and what financing it would require.
- Review the terms, vesting, exercisability, and potential dilution from the executive warrants.