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| AVNU.OB > SEC Filings for AVNU.OB > Form 10-Q/A on 6-Jun-2008 | All Recent SEC Filings |
6-Jun-2008
Quarterly Report
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements as of December 31, 2007 and related notes included in this report. This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The statements contained in this report that are not historic in nature, particularly those that utilize terminology such as "may," "will," "should," "expects," "anticipates," "estimates," "believes," or "plans" or comparable terminology are forward-looking statements based on current expectations and assumptions.
Various risks and uncertainties could cause actual results to differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from expectations include, but are not limited to, those set forth under the section "Risk Factors" set forth in this report.
The forward-looking events discussed in this annual report, the documents to which we refer you and other statements made from time to time by us or our representatives, may not occur, and actual events and results may differ materially and are subject to risks, uncertainties and assumptions about us. For these statements, we claim the protection of the "bespeaks caution" doctrine. All forward-looking statements in this document are based on information currently available to us as of the date of this report, and we assume no obligation to update any forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.
Overview
We were incorporated in Delaware on February 2, 1999 under the name I.T. Technology Inc. In January 2003, we changed our corporate name to Avenue Group, Inc. We are engaged in oil and gas exploration and development through our wholly-owned operating subsidiary, Avenue Energy, Inc. and our wholly-owned Israel subsidiary, Avenue Energy Israel LTD. ("AEI"). Avenue Energy Inc owns 100% of Avenue Appalachia, Inc. ("AAI") which has a 10% General Partner Interest and a 31.8% Limited Partner interest in Avenue Appalachia 2006 LP ("2006 LP"). Avenue Energy Israel LTD owns 100% of the Heletz-Kokhav license and 50% of the Iris License in Israel, 2 petroleum exploration licenses in Israel.
From inception until November 2002, our primary business was in the technology sector via our investments in VideoDome Inc and Stampville.com Inc. VideoDome has since been sold to ROO Group Inc. (OTCBB:RGRP) ("ROO") and Stampville.com Inc.'s operations are inactive.
During 2002, we determined to broaden our strategic focus and pursue a broader range of potential growth and investment strategies. As part of our shift to a broader strategic focus, in November 2002 we began to pursue acquisitions of and investments in oil and gas exploration and production property.
Our strategy is to acquire a portfolio of oil and gas assets. This includes the generation and acquisition of low risk drilling opportunities in the US and to acquire entry-level high impact oil and gas reserves abroad.
Our business activities during 2007 were principally devoted to our oil and gas operations in Israel and in the West Virginia area of the Appalachian Basin. In 2007 we refocused our efforts seeking lower risk oil and Gas exploration and production opportunities in the US and Israel.
In September, 2007 the Petroleum Commissioner of Israel (the "IPC") formally issued to AEI 100% of the Heletz-Kokhav license covering a large part of the Heletz Field. In February, 2008, the Petroleum Commissioner of Israel issued to AEI 50% of the Iris license covering the remaining part of the Heletz Field. Lapidoth-Heletz LP, a Limited Partnership listed on the Tel Aviv stock exchange, was issued the other 50% of the Iris License. According to the terms of the Licenses, Avenue agreed to a work program over the next 3 years that will consist of field studies, well workovers, shooting seismic and the drilling of a new well. Failure by Avenue in implementing the work program may cause Avenue to lose its interest in the licenses. Avenue may request the conversion of the License to a 30 year production Lease in the event of a substantial increase in daily production that occurs as a result of the work program. Avenue estimates the work program expenditures at approximately $4,500,000.
On January 16, 2008, Avenue Group, Inc. (the "Company") and Avenue Energy Israel ("AEI") entered into a non-binding Letter of Intent (the "LOI") with TomCo Energy Plc ("TomCo") pursuant to which TomCo agreed acquire a 50% interest in the Heletz-Kokhav License and a 25% interest in the Iris License (the "Licenses") which was awarded to AEI by the Israel Petroleum Commission.
The closing of the transaction contemplated by the agreement is subject to the satisfaction of certain conditions, including without limitation, obtaining any necessary consents or approvals from the IPC and/or any other Isreali governmental authority, and the payment of the security deposit by TomCo to the Company.
Upon closing, TomCo shall earn a 50% net working interest (after deduction of certain expenses and royalties), by assuming 100% of the costs associated with implementing the 3 year work program up to $4.5 million. In addition, at closing TomCo will pay the Company $1million and an additional equivalent of $500,000 restricted shares of TomCo. The agreement also sets forth certain payments to be made by TomCo which are contingent upon the successful conversion by the Company of the License into a production lease and recoverable reserves being certified at 10 million barrels or more as verified by an independent geologist.
On March 17, 2008, the Company borrowed $250,000 from TomCo. The loan is payable upon demand and accrued interest at a rate if 2% per annum. The loan is also offset against Tomco's commitment as part of the agreement.
On April 3, 2008, the Company and Tomco, completed the agreement.
In 2008, Management intends to focus our activities on re-developing the Heletz field. This includes restarting the 6 wells that were shut in by Lapidoth as of May, 2007, reviewing plugged wells that are candidates for workovers and collecting and reviewing field and production data for additional upside opportunities.
Results of Operations
For the three months ended March 31 2008 compared to three months ended March 31, 2007
During 2007, our activity was principally devoted to oil and gas activities in the State of Israel arising out of the granting of the Heletz Field Licenses by the Israel Petroleum Commission.
We generated $3,722 in revenue for the three months ended March 31, 2008, as compared to $14,938 for the three months ended March 31, 2007. The decrease in revenue is primarily due a reduction of JKK's production from the Karakilise lease.
The net loss for the three months ended March 31, 2008 was $382,926 compared to a net loss of $176,332 for the three months ended March 31, 2007. During the three months ended March 31, 2008 period, selling, general and administrative expense increased by $195,412, primarily due to an increase in consulting fees as the Company expands it operation in Israel.
Liquidity and Capital Resources
We have generated losses from inception and anticipate that we will continue to incur significant losses until, at the earliest, we can generate sufficient revenue to offset the substantial up-front capital expenditures and operating cost associated with establishing, attracting and retaining a significant business base. We have a net loss of $382,926 and $176,332 and a negative cash flow from operations of $195,117 and $192,208 for the three months ended March 31, 2008 and 2007, respectively. We have an accumulated deficit of $34,624,048 and $34,241,122 as of March 31, 2008 and December 31, 2007, respectively. We cannot offer any assurance that we will be able to generate significant revenue or achieve profitable operations.
The capital requirements relating to implementation of our business plan will be significant. As of March 31, 2008, we had cash of $36,190 and a working capital deficit of $939,568 as compared to $9,918 in cash and working capital of $555,397 as of December 31, 2007. Much of our working capital during 2007 to date has been generated through the sale of shares of ROO and Langley Park.
Our cash and cash equivalents increased by $26,272 from $9,918 as of December 31, 2007 to $36,190 as of March 31, 2008. The increase in cash and cash equivalents was Company receiving a $250,000 note payable.
During the next twelve months, our business plan contemplates that we further develop our oil and gas activities. To date we have been dependent on the proceeds of private placements of our debt and equity securities and other financings in order to implement our operations.
Management plans to rely on the proceeds from farm-outs, new debt or equity financing to finance its ongoing operations. We anticipate requiring significant additional capital in order to fund Avenue Energy's anticipated oil and gas related
We review the status of our oil and gas property periodically to determine if an impairment of our property is necessary. We follow the guidance in paragraphs 28 and 31 of FASB Statement 19, Financial Accounting and Reporting by Oil and Gas Producing Companies, requiring periodic assessments for impairment of unproved properties and exploratory well cost when reserves are not found. In the impairment test we compare the expected undiscounted future net revenue on a field-by-field basis with the related net capitalized cost at the end of each period. Should the net capitalized cost exceed the undiscounted future net revenue of a property, we write down the cost of the property to fair value, which we determine using estimates of discounted future net revenue. We provide an impairment allowance on a property-by-property basis when we determine that unproved property will not be developed.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expense during the reporting periods. We make critical estimation judgments in the below areas. Actual results could differ materially from the estimates in the following areas:
The carrying amount of our oil and gas property and impairment losses related to the property.
Estimates related to the above items are critical because the items are substantial assets or expense and their measurement requires complex, subjective reasoning. Should future events occur in different ways than the assumptions about those events we used in developing the estimates, we will have to modify our estimates to conform to such future information. Such modifications could be material.
We utilized the following material assumptions in making the above estimates:
In 2005, we recorded an impairment loss of $1,563,343 as a result of our review of our remaining property in Turkey. In 2004, we had recorded an impairment losses of $2,128,126 in connection with licenses that had either lapsed or been relinquished. Based on production and other data available at December 31, 2004, we had concluded that the December 31, 2004, carrying amount of our oil property, after the impairment losses, was properly stated. However, with the production and other data obtained during 2005, we concluded in 2005 that we needed to record an additional impairment loss.
The above estimates involve the following uncertainties:
The remaining carrying value of the oil and gas property has uncertainty in that it is dependent on the results of our future exploration and development of the property. The variability in potential future earnings and cash flow of the property is quite wide and cannot be predicted.
The facts and circumstances underlying our critical estimates of do not compare to those associated with past estimates because we had taken impairment charges on our Turkish oil and gas property prior to the 2005 charges. The charges prior to 2005 were made based on significantly different facts and circumstances than the 2005 charge.
We have changed assumptions and estimates in the past when facts and circumstances have called for such changes such as the recording of the 2005 and 2004 impairment charges on our Turkish oil and gas property discussed above. During 2005 prior to recording the charge the facts and circumstances had caused us to conclude that we had no impairment. At the time we recorded the charge the facts and circumstances had changed as reported above, such that we recorded the charge as reported above. Additional details of the 2005 impairment charge are discussed in Results of Operations, above, and in financial statement Note 4.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". The objective of SFAS 157 is to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. The provisions of SFAS No. 157 are effective for fair value measurements made in fiscal years beginning after November 15, 2007. The adoption of this statement is not expected to have a material effect on the Company's future reported financial position or results of operations.
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115". This statement permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS No. 159 apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" applies to all entities with available-for-sale and trading securities. SFAS No. 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provision of SFAS No. 157, "Fair Value Measurements". The adoption of this statement is not expected to have a material effect on the Company's financial statements.
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51". This statement improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require; the ownership interests in subsidiaries held by parties other than the parent and the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income, changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value, entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 affects those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The adoption of this statement is not expected to have a material effect on the Company's financial statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161). This statement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity's derivative instruments and hedging activities and their effects on the entity's financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) as well as related hedged items, bifurcated derivatives, and nonderivative instruments that are designated and qualify as hedging instruments. Entities with instruments subject to SFAS 161 must provide more robust qualitative disclosures and expanded quantitative disclosures. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. We are currently evaluating the disclosure implications of this statement. The adoption of this statement is not expected to have a material effect on the Company's financial statements.
ITEM 3.
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