Surgepays, Inc. annual report, FY2013

Business context and reporting period

Filing identity mismatch: The supplied filing is for North American Energy Resources, Inc. (OTCQB: NAEY), not Surgepays, Inc. It is a Form 10-K for the fiscal year ended April 30, 2013—not a 2012 Q4 filing. Financial amounts below are in dollars unless noted.

NAEY describes itself as a development-stage oil and gas company focused on acquiring producing properties. At year-end, it held a 7.5% net interest in one non-operated gas well on 160 gross leased acres in Texas County, Oklahoma. It reported no drilling or property acquisition, exploration, or development spending in fiscal 2013.

Financial performance and liquidity

Gas sales fell to $1,451 from $2,094; production declined to 671 Mcf from 751 Mcf, while average realized gas price fell to $2.16/Mcf from $2.79/Mcf. The filing reports no meaningful consolidated margin measure; operating costs and expenses were $37,912, including $36,624 of general and administrative expense.

At April 30, 2013, current assets were $726 and current liabilities were $833,797, a working-capital deficit of $833,071. Total assets were $2,794 versus total liabilities of $833,797, producing a stockholders’ deficit of $831,003. Current liabilities included $464,992 owed under the CEO’s convertible note, $38,678 of other convertible notes, and $260,316 of accrued expenses. The CEO note bears 8% interest and was extended to October 31, 2013; the other note bears 4% and was also due October 31, 2013.

Net cash provided by financing was $73,741, principally from $72,182 of officer/shareholder loans. The company had no investing cash flow in either year. Proved gas reserves were 8,610 Mcf, all proved developed producing; the standardized measure of discounted future net cash flows was $2,120, down from $4,671.

Material changes versus the prior year

• Net loss narrowed by $593,161, primarily as general and administrative expense fell to $36,624 from $652,759. Fiscal 2012 expenses included substantial acquisition due-diligence and financing costs.
• Revenue decreased about 31%, reflecting lower gas volume and price. The standardized measure of discounted reserve cash flows fell about 55%, and proved gas reserves declined from 12,679 Mcf to 8,610 Mcf, including a negative estimate revision of 3,398 Mcf.
• Operating cash use decreased, but the company continued to rely on related-party borrowing; the CEO loan balance increased from $392,810 to $464,992.

Outlook, risks, and unusual items

Management said current revenues and cash flows were insufficient to fund operations and planned to seek an acquisition and raise capital through equity and/or borrowing. It gave no specific acquisition, financing, revenue, or earnings guidance and cautioned that funding may not be available. The auditor’s report and management disclosures state that substantial doubt exists about the company’s ability to continue as a going concern; the financial statements include no adjustments for that uncertainty.

Key risks include minimal cash, liabilities greatly exceeding current assets, dependence on future financing and related-party support, a small operating base, volatile oil and gas prices, and regulatory and environmental exposure. Management reported no pending or threatened lawsuits, no material off-balance-sheet arrangements, and no impairment charge in fiscal 2013 or 2012. The auditor issued an unqualified opinion while emphasizing the going-concern uncertainty. Management reported disclosure controls and internal control over financial reporting were effective.

Potential dilution is notable: executive warrants cover up to 30 million shares at stated exercise prices of $0.025, $0.04, and $0.055, subject to vesting and other terms; a director also held a warrant for 500,000 shares at $0.18. The company had 21,554,945 common shares outstanding at April 30, 2013.

Important facts for investors to verify

• Confirm the issuer and period: this filing identifies NAEY and fiscal 2013, despite the request metadata identifying Surgepays and 2012 Q4.
• Verify the status, maturity, interest accrual, conversion terms, and repayment prospects of the CEO loan and other related-party liabilities.
• Assess whether the company obtained financing after the filing and whether it can meet obligations due October 31, 2013.
• Review the independent reserve report and assumptions behind the reported 8,610 Mcf of proved reserves and $2,120 standardized measure.
• Confirm the current status, vesting, registration, and potential share dilution from executive and director warrants.
• Evaluate whether any acquisition was identified or completed and whether subsequent events changed the going-concern assessment.