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| AVNU.OB > SEC Filings for AVNU.OB > Form 10-Q on 20-May-2009 | All Recent SEC Filings |
20-May-2009
Quarterly Report
This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue," or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. The following Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company should be read in conjunction with the Consolidated Financial Statements and notes related thereto included in this Quarterly Report on Form 10-Q. Important factors currently known to Management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing for materials, and competition.
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. We own 100% of Avenue Energy Israel LTD ("AEI") which in turn owns 75% of the Heletz-Kokhav license and 75% of the Iris License in Israel, two petroleum exploration licenses in the State of Israel. Our wholly-owned operating subsidiary, Avenue Energy, Inc, owns 100% of Avenue Appalachia, Inc., a Delaware company, which has a 10% General Partner interest and a 31.8% Limited Partner interest in Avenue Appalachia 2006 LP, a partnership formed in 2006.
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 acquisition of entry-level high impact oil and gas reserves abroad.
During the three months ended March 31, 2009, our activities were principally devoted to our oil and gas operations in Israel and the pursuit to acquire oil and gas exploration and production property in the US and abroad.
During the year ended December 31, 2008 the Company emerged from Development Stage status. Prior to 2008 the Company was a Development Stage Company as defined in FASB Statement 7 (FAS 7) and followed the reporting and disclosure requirements of FAS 7. Beginning with its fourth quarter ending December 31, 2008, the Company began generating significant revenues from operations and ceased being a development stage Company.
Recent Developments
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.
On June 12, 2008, oil production was restarted from the Heletz-Kokhav license in the Heletz field. As of March 31 2009, two wells were producing around 33 bopd ("Barrels of Oil Per Day") in aggregate.
TomCo Agreement
On April 1, 2008, the Company completed an agreement with TomCo. The closing of the transaction contemplated by the agreement was subject to the satisfaction of certain conditions, including without limitation, obtaining any necessary consents or approvals from the IPC and/or any other Israeli governmental authority, and the payment of certain milestone payments by TomCo to the Company.
On January 1, 2009 TomCo failed to meet the Company's cash call. Despite repeated attempts by the Company notifying TomCo of its obligations, to date, TomCo has not advanced any further cash towards fulfilling their commitment. On February 11, 2009, TomCo announced that it had suspended its securities from trading on the AIM market pending clarification of its financial position. On February 24, 2009, the Company served TomCo notice that it was in breach of the agreement. On April 12, 2009, the Company served TomCo notice that the agreement has been terminated and that as according to the terms of the agreement, TomCo does not retain any interest in the Company's licenses or in AEI.
As of March 31, 2009 TomCo had advanced the Company a total of $1,202,121 (including the $75,000 security deposit) that was expended towards the work program. TomCo also advanced a transaction fee of $1,000,000 and $500,000 of common stock (equivalent to 12,618,615 common stocks). As of March 31, 2009, the Company recorded a valuation allowance of $500,000 associated with the TomCo stock received.
Heletz License Pooling Agreement
On March 3, 2009, the Company announced that Avenue Energy Israel ("AEI'') entered into a Joint Operating Agreement ("JOA") with Lapidoth-Heletz LP ("L-H'') to pool their interests in the Heletz-Kokhav and Iris licenses covering the Heletz Field in southern Israel . Under the agreement, AEI is contributed its 100% interest in the Heletz-Kokhav license and its 50% interest in the Iris License and L-H contributed its 50% interest in the Iris License into a pooling arrangement whereby AEI will retain a 75% interest and L-H a 25% interest in the combined licenses.
Additional terms of the agreement call for:
AEI to act as operator.
AEI to cover 100% of the costs associated with the Government Approved Work Program ("GAWP").
AEI is to retain 100% of the production from the Heletz 1, Heletz 25, Heletz 37, Kokhav 24, Kokhav 27 and Kokhav 29 wells and L-H retaining 100% of the production from the Heletz 40 well.
Lapidoth shall be designated as the preferred contractor under the terms and provisions of the JOA.
AEI shall pay the first $1.3 million of associated capital expenditures of the licenses following the fulfillment of the license requirements as delineated in the GAWP.
We continue to focus our activities on re-developing the Heletz field. This includes repairing wells, 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, 2009 compared to three months ended March 31, 2008.
During the three months ended March 31, 2009, our activity was principally devoted to oil and gas activities in the State of Israel arising out of the granting of the Heletz Field license by the Israel Petroleum Commission and to the pursuit of acquiring oil and gas exploration and production properties in the U.S. and abroad.
We generated $1,249 in net revenues for the three months ended March 31, 2009, versus $3,722 in net revenues for the three months ended March 31, 2008. The decrease in revenue is primarily due a reduction of production from West Virginia.
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. As of March 31, 2009, we have a net loss of $339,266 and $382,926 and a cash flow from operations of $31,764 and $(295,117) for the three months ended March 31, 2009 and 2008, respectively. We have an accumulated deficit of $38,150,243 and $37,810,977 as of March 31, 2009 and December 31, 2008, 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, 2009, we had cash of $125,849 and a working capital deficit of $3,654,578 as compared to $85,085 in cash and working capital of $3,343,749 as of December 31, 2008.
Our cash and cash equivalents increased by $40,764 from $85,085 as of December 31, 2008 to $125,849 as of March 31, 2009. The increase was a result of the Company's $100,000 performance bond being released. Subsequent to March 31, 2009 the Company posted a new performance bond in the amount of $75,000.
During the next nine months, our business plan contemplates that we further develop our oil and gas activities. To date we have been dependent on the proceeds of the production from the Heletz field and other financings in order to implement our operations.
We plan to rely on the proceeds from farm-outs, new debt or equity financing to finance our ongoing operations. We anticipate requiring significant additional capital in order to fund our anticipated oil and gas related activities in the State of Israel and in Appalachia, the acquisition and exploration of oil and gas leases and licenses located elsewhere and to fund corporate overhead expenditures. We intend to continue to seek additional capital in order to meet our cash flow and working capital requirements. We anticipate that we will need additional capital to fund our anticipated operations for the next 12 months, depending on revenues from operations. We do not have any contracts or commitments for financing at this time. There is no assurance that we will be successful in achieving any such financing or raising sufficient capital to fund our operations and pursue further development. There can be no assurance that any such financing will be available to us on commercially reasonable terms, if at all. If we are not successful in sourcing significant additional capital in the near future, we will be required to significantly curtail or cease ongoing operations and consider alternatives that would have a material adverse affect on our business, results of operations and financial condition. In such event we may need to relinquish most, if not all of our ongoing oil and gas rights and licenses.
Going Concern
The accompanying unaudited consolidated financial statements have been prepared assuming the Company is a going concern, which assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has suffered a loss from operations, and the Company lacks sufficient liquidity to continue its operations. Management's 2009 forecast indicates positive trends from revenues, but it may not result in an increase in operating income, net income, among others and positive cash flows.
These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amount of liabilities that might be necessary should the Company be unable to continue in existence.
Continuation of the Company as a going concern is dependent upon achieving profitable operations. Management's plans to achieve profitability include developing new areas of oil and gas exploration and implementing certain cost reduction initiatives as necessary. There can be no assurance that the Company will generate enough cash from such revenues, or that cost reduction initiatives will be successful to meet anticipated cash requirements.
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.
Use of Estimates
Our preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 revenue and expense. Actual results could differ from those estimates.
Inventory
Inventory at March 31, 2009 and December 31, 2008 consists of oil in tanks. The Company values inventory at the lower of cost or market. At March 31, 2009 and December 31, 2008 the Company valued its inventory at fair market value.
Oil and Gas Property
We follow the successful-efforts method of accounting for oil and gas property. Under this method of accounting, we capitalize all property acquisition cost and cost of exploratory and development wells when incurred, pending determination of whether the well has found proved reserves. We charge all geological and geophysical cost, cost of carrying and retaining undeveloped property and dry hole and bottom hole contributions to expense when incurred. If an exploratory well does not find proved reserves, we charge to expense the cost of drilling and equipping the well, as well as cost of service wells drilled in connection with the development. We include exploratory dry hole cost in cash flow from investing activity within the cash flow statement. If determination of proved reserves is not made within a year of completing the well, we charge cost of the well to expense.
We apply the provisions of FASB Statement 143, Accounting for Asset Retirement Obligations, which provides guidance on accounting for dismantlement and abandonment cost. We have not established any proved reserves on our property. Accordingly, we have no basis for computing DD&A. Alternatively, 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 property and exploratory well cost when reserves are not found.
Impairment of Long-Lived Assets
We account for impairment and disposal of long-lived assets in accordance with FASB Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which requires impairment losses to be recorded on assets to be held and used by us when indicators of impairment are present and the undiscounted cash flow estimated to be generated by those assets are less than the carrying amount of the assets. When an impairment loss is required for assets we will hold and use, we adjust the related assets to their estimated fair value. Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than a forced or liquidation sale.
Revenue Recognition
We recognize oil and gas sales when our purchaser accepts delivery at the transfer point. At that time, title passes to the purchaser, the purchaser assumes the risks and rewards of ownership and we are able to determine the collectability of the sales.
We translate assets and liabilities of our Australian and Israeli subsidiaries at the exchange rate prevailing at December 31, 2008 and 2007, and related revenue and expense at average exchange rates in effect during the period. We record resulting translation adjustments as a component of accumulated other comprehensive income (loss) in stockholders' deficit.
Recent Accounting Pronouncements
On January 1, 2008, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements. In February 2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position, "FSP FAS 157-2--Effective Date of FASB Statement No. 157" ("FSP 157-2"), which delays the effective date of SFAS 157 for one year for certain nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Excluded from the scope of SFAS 157 are certain leasing transactions accounted for under SFAS No. 13, "Accounting for Leases." The exclusion does not apply to fair value measurements of assets and liabilities recorded as a result of a lease transaction but measured pursuant to other pronouncements within the scope of SFAS 157. The Company does not expect that the adoption of the provisions of FSP 157-2 will have a material impact on its financial position, cash flows or results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities ("SFAS 161"). This statement requires companies to provide enhanced disclosures about (a) how and why they use derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect a company's financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will adopt the new disclosure requirements on or before the required effective date and thus will provide additional disclosures in its financial statements when adopted.
In April 2008, FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3) was issued. This standard amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company does not expect that the adoption of this provision will have a material impact on its financial position, cash flows or results of operations.
In May 2008, the FASB issued FAS No. 162, The Hierarchy of Generally Accepted Accounting Principles" which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This statement is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, " The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles". The Company does not expect that the adoption of this pronouncement will have a significant impact on its financial condition, results of operations and cash flows.
In May 2008, the Financial Accounting Standards Board ("FASB") issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts-and interpretation of FASB Statement No. 60". SFAS No. 163 clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement of premium revenue and claims liabilities. This statement also requires expanded disclosures about financial guarantee insurance contracts. SFAS No. 163 is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those years. SFAS No. 163 has no effect on the Company's financial position, statements of operations, or cash flows at this time.
In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the computation of earnings per share under the two-class method as described in
In December 2008, the FASB issued FASB Staff Position (FSP) FAS 140-4 and FIN
46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of
Financial Assets and Interests in Variable Interest Entities. The document
increases disclosure requirements for public companies and is effective for
reporting periods (interim and annual) that end after December 15, 2008. This
FSP amends FASB Statement No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, to require public entities
to provide additional disclosures about transfers of financial assets. It also
amends FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities, to require public enterprises, including sponsors
that have a variable interest in a variable interest entity, to provide
additional disclosures about their involvement with variable interest entities.
The Company does not expect that the adoption of this pronouncement will have a
significant impact on its financial condition, results of operations and cash
flows.
In April 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies ("FSP FAS 141(R)-1"). This pronouncement amends SFAS No. 141-R to clarify the initial and subsequent recognition, subsequent accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FSP SFAS No. 141(R)-1 requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value, as determined in accordance with SFAS No. 157, if the acquisition-date fair value can be reasonably estimated. If the acquisition-date fair value of an asset or liability cannot be reasonably estimated, the asset or liability would be measured at the amount that would be recognized in accordance with FASB Statement No. 5, "Accounting for Contingencies" (SFAS No. 5), and FASB Interpretation No. 14, "Reasonable Estimation of the Amount of a Loss." FSP SFAS No. 141(R)-1 became effective for the Registrants as of January 1, 2009. As the provisions of FSP FAS 141(R)-1 are applied prospectively to business combinations with an acquisition date on or after the guidance became effective, the impact to the Registrants cannot be determined until the transactions occur. No such transactions occurred during the first quarter of 2009.
In April 2009, the FASB issued FSP FAS No. 107-1 and Accounting Principles Board ("APB") 28-1, Interim Disclosures about Fair Value of Financial Instruments, which amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, ("SFAS No. 107") and APB Opinion No. 28, "Interim Financial Reporting," respectively, to require disclosures about fair value of financial instruments in interim financial statements, in addition to the annual financial statements as already required by SFAS No. 107. FSP FAS 107-1 and APB 28-1 will be required for interim periods ending after June 15, 2009. As FSP FAS 107-1 and APB 28-1 provide only disclosure requirements, the application of this standard will not have a material impact on the Company's results of operations, cash flows or financial position.
All new accounting pronouncements issued but not yet effective have been deemed to not be applicable, hence the adoption of these new standards is not expected to have a material impact on the consolidated financial statements.
ITEM 3.
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