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NAGP > SEC Filings for NAGP > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for NATIVE AMERICAN ENERGY GROUP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for NATIVE AMERICAN ENERGY GROUP, INC.


14-Nov-2012

Quarterly Report


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

The following discussion should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and the Notes thereto that are included elsewhere in this report.

Our Management's Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking. Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national, and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Commission.

Although the forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

As used in this Quarterly Report, the terms "we," "us," and "our," mean Native American Energy Group, Inc. unless otherwise indicated.

General Information

Our business address is 108-18 Queens Blvd, Forest Hills, New York 11375. Our Internet website address is www.nativeamericanenergy.com. Any information accessible through our website is not a part of this Quarterly Report.

Overview

We are an energy resource development and management company. We have three principal projects: (i) development of oil and gas interests in the Williston Basin; (ii) development of coal-bed methane natural gas (CBM) in the Cook Inlet Basin in Alaska; and (iii) planned implementation of vertical-axis wind turbine power generation technology for the production of clean, cost-efficient green energy throughout the United States, including Alaska and all U.S. Indian reservations.

Since 2005, we have primarily been involved in the acquisition and management of Native American land and fee land acreage in Montana and Alaska and the exploration for, and development of, proven oil and natural gas properties which our management believes have potential for improved production rates and resulting income by application of both conventional and non-conventional resource recovery improvement and enhancement techniques, including horizontal drilling and high-pressure lateral jetting.

Due to our limited financial and organizational resources, however, we have amended our Technology License & Distribution Agreement (the "TLDA") with Windaus Energy, Inc. ("Windaus") and are currently focusing on completing the work-overs and enhanced oil recovery operations on five wells in the Williston Basin in Montana.

Results of Operations for the Three Months Ended September 30, 2012 as compared to the Three Months Ended September 30, 2011:

Revenues

We have not generated any revenues for the three months ended September 30, 2012 and 2011.

Operating Expenses

Selling, General, and Administrative

Selling, general, and administrative expenses decreased from $1,651,996 for the three months ended September 30, 2011 to $352,240 for the three months ended September 30, 2012. The decrease of $1,299,756, or 79%, is primarily attributable to a decrease in equity-based compensation issued to consultants and service providers.

Litigation Settlement

During the three months ended September 30, 2011, we incurred litigation cost as described in our accompanying financial statements. As such, we incurred a $73,562 charge in the three months ended September 30, 2011 comprised of accrual of expected costs. During the three months ended September 30, 2012 with the final settlement in the first quarter, we did not have any incurred costs.

Depreciation and Amortization

Depreciation and amortization increased from $32,480 for the three months ended September 30, 2011 to $37,757 for the three months ended September 30, 2012. The increase of $5,277 is attributable to additional equipment added in the latter part of 2011.

Total Operating Expenses

Total operating expenses decreased to $389,997 for the three months ended September 30, 2012 from $1,758,038 for the three months ended September 30, 2011. The decrease of $1,368,041 is primarily attributable to the decrease in equity based compensation issued to consultants and services providers.

Loss on change in fair value of derivative liabilities

During the three months ended September 30, 2012, we issued convertible debentures with an embedded derivative, all requiring us to fair value the derivatives each reporting period and mark to market as a non cash adjustment to our current period operations. This resulted in a net loss of $18,922 for the three months ended September 30, 2012, $-0- for the same period, last year.

Other Income

Other income decreased to $-0- for the three months ended September 30, 2012 from $33,313 for the three months ended September 30, 2011. Income of $33,313 for the three months ended September 30, 2011 was from the sale of oil collected as a byproduct of well testing.

Interest Expenses, net

Interest expense, net for the three months ended September 30, 2012, decreased by $197,203 to $91,204 from $288,408 for the three months ended September 30, 2011. The primary reason for the decrease was due to issuance of common shares in connection with debt charged to interest during the three months ended September 30, 2011.

Net Income (Loss)

Net Loss for the three months ended September 30, 2012 decreased to $500,035 from a net loss of $2,013,045 for the three months ended September 30, 2011. The increase of $1,513,010 is primarily attributable to the factors described above.

Results of Operations for the Nine Months Ended September 30, 2012 as compared to the Nine Months Ended September 30, 2011:

Revenues

We have not generated any revenues for the nine months ended September 30, 2012 and 2011.

Operating Expenses

Selling, General, and Administrative

Selling, general, and administrative expenses decreased from $2,932,016 for the nine months ended September 30, 2011 to $1,086,816 for the nine months ended September 30, 2012. The decrease of $1,845,200, or 63%, is primarily attributable to a decrease in equity-based compensation issued to consultants and service providers.

Impairment of undeveloped properties

Impairment of undeveloped properties decreased to $0 for the nine months ended September 30, 2012 from $28,773 for the nine months ended September 30, 2011. This decrease is attributed to our current progress with our unevaluated and our undeveloped properties not requiring impairment.

Litigation Settlement

During the nine months ended September 30, 2012, we concluded litigation as described in our accompanying financial statements. As such, we incurred a $1,757,182 charge in the nine months ended September 30, 2012 comprised of additional shares of our common stock and an obligation to issue warrants based on certain conditions occurring. During the nine months ended September 30, 2011, we incurred costs of $173,875.

Depreciation and Amortization

Depreciation and amortization increased from $94,399 for the nine months ended September 30, 2011 to $115,997 for the nine months ended September 30, 2012. The increase of $21,598 is attributable to additional equipment added in the latter part of 2011.

Total Operating Expenses

Total operating expenses decreased to $2,959,995 for the nine months ended September 30, 2012 from $3,229,063 for the nine months ended September 30, 2011. The decrease of $269,068 is primarily attributable to the settlement of litigation as described above net with decrease in equity based compensation issued to consultants and services providers.

Gain on settlement of debt

During the nine months ended September 30, 2012, we amended our previously acquired and expensed licensing agreement, reducing our remaining debt obligation from $469,500 to $69,500 realizing a gain from debt cancelation. In addition, we settled accounts payable, debt and related accrued interest by issuance of our common stock realizing a gain of $253,220 compared to the same period last year of $4,794 gain realized.

Loss on change in fair value of derivative liabilities

During the nine months ended September 30, 2012, we issued convertible debentures with an embedded derivative, all requiring us to fair value the derivatives each reporting period and mark to market as a non cash adjustment to our current period operations. This resulted in a net loss of $18,922 for the nine months ended September 30, 2012, $-0- for the same period, last year.

Other Income

Other income decreased to $17,588 for the nine months ended September 30, 2012 from $55,131 for the nine months ended September 30, 2011. Income of $11,572 and $55,131 was from the sale of oil collected as a byproduct of well testing for the nine month periods ended September 30, 2012 and 2011, respectively.

Interest Expenses, net

Interest expense, net for the nine months ended September 30, 2012, increased by $55,067 to $379,216 from $324,149 for the nine months ended September 30, 2011. The primary reason for the increase in interest expense was due to additional debt issuing common shares and warrants in connection with our bridge financing charged to period interest of $185,306.

Net (Loss)

Net loss for the nine months ended September 30, 2012 decreased to $2,687,325 from a net loss of $3,493,287 for the nine months ended September 30, 2011. The decrease of $805,962 is primarily attributable to the factors described above.

Liquidity and Capital Resources

We have generated minimal revenues between inception and the date of this report. We have continued to incur expenses and have limited sources of liquidity. Our limited financial resources have had an adverse impact on our liquidity, activities, and operations. These limitations have also adversely affected our ability to obtain certain projects and pursue additional business ventures. We may have to borrow money from stockholders or issue debt or equity securities in order to fund expenditures for exploration and development and general administration or enter into a strategic arrangement with a third party. There can be no assurance that additional funds will be available to us on favorable terms or at all.

As of September 30, 2012, we had a working capital deficit of $4,050,235. For the nine months ended September 30, 2012, we generated a net cash flow deficit from operating activities of $461,002, consisting primarily of year-to-date losses of $2,687,325. Non-cash adjustments included $115,998 in depreciation and amortization charges, as well as common stock and warrants issued in connection with debt of $185,306, common stock and a warrant issuance obligation in connection with the settlement of ligation of $1,757,182 and $291,748 for equity-based compensation, loss on change in fair value of derivative liability of $18,922 and non cash interest paid of $40,858, offset gains on settlement of debt of $663,220. Additionally, we had a net decrease in current assets of $64,544 and a net increase in current liabilities of $412,499. Cash used in investing activity was $-0-. Cash provided by financing activities for the nine months ended September 30, 2012 totaled $443,845, consisting of proceeds from the sale of our common stock and proceeds from loans and notes payable, net with repayments on notes and loans payable.

Our liquidity needs consist of our working capital requirements, indebtedness payments, and property development expenditures. Historically, we have financed our operations through the sale of equity and debt securities exempt from the registration requirements of the Securities Act, as well as borrowings from various credit sources; and we have adjusted our operations and development to our level of capitalization.

We expect that potential financing sources will primarily be obtained through the private placement of our securities, including, without limitation, the issuance of notes payable and other debt, the terms, and conditions of which will depend upon the transaction size, market conditions and other factors.

Going Concern and Recent Events

While we have raised capital to meet our working capital and financing needs in the past, additional financing is required within the next three months in order to meet our current and projected cash flow deficits from operations and development. Our registered independent certified public accountants have stated in their report dated April 16, 2012 that we have incurred operating losses in the last year, and that we are dependent upon management's ability to develop profitable operations and raise additional capital. These factors, among others, may raise substantial doubt about our ability to continue as a going concern.

We also are unable to determine whether we will generate sufficient cash flow from our future oil and gas operations to fund our future operations. Although we expect cash flow from future operations to rise as we are able to improve our operations, and that the number of projects we successfully develop will grow, we will continue to focus, in the near term, on raising additional capital, likely through the private placement of our equity securities or other debt securities.

We need to raise capital to fund the development of future wells. There can be no assurance that additional funding will be available on favorable terms, if at all. To the extent that additional capital is raised through the sale of equity or equity-related securities, the issuance of such securities would result in dilution of the existing stockholders' shares. If adequate funds are not available within the next 12 months, we may be required to curtail our operations significantly, or to obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain of our assets that we would not otherwise relinquish.

Our long term viability depends on our ability to obtain adequate sources of debt or equity financing to meet current commitments and fund the continuation of our business operations, and to ultimately achieve enough profits and cash flow from operations to sustain our business.

Impact of Default

As we disclosed in our financial statements, certain notes, loan payables, and operating lease obligations are currently in default.

Notes and loans payable are being resolved through debt-to-equity conversion agreements. We plan to resolve our operating lease obligations through revenues from the future commencement of production or proceeds of additional equity financing or debt financing.

Default on lease obligations could result in the impairment of our ability to conduct executive and administrative functions, which would be the case if we lost our executive office space in New York. Further, the loss of any of our oil and gas leases would likely result in the curtailment of our potential oil and gas production revenues.

Material Commitments

Due to amending our technology license agreement with Windaus Energy, Inc. ("Windaus") on April 25, 2012, pursuant to which we reduced the licensed territory, relinquished our manufacturing rights, the license fee under the Agreement was adjusted as follows: (i) decrease the amount of shares from 2,000,000 shares to 100,000 shares (95% less), with Windaus returning 2,000,000 shares to NAGP in exchange for NAGP issuing 100,000 shares to Windaus Global Energy, Inc.; and (ii) decrease the cash portion of the fee $500,000 to $100,000, of which $30,500 had already been paid as of the date of the Second Amendment leaving a balance of $69,500 owed to Windaus.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Critical Accounting Policies

Financial Reporting Release No. 60, published by the Securities and Exchange Commission ("SEC"), recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements in management's discussion and analysis of financial condition and results of operations. Policies determined to be critical are those policies that have the most significant impact on our condensed consolidated financial statements and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. There can be no assurance that actual results will not differ from those estimates.

The accounting policies identified as critical are as follows:

Stock-Based Payments

We follow ASC 718-10, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro-forma disclosure is no longer an alternative. This statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in ASC 718-10. We implemented AC 718-10 on January 1, 2006 using the modified prospective method.

During the nine months ended September 30, 2012, the Company issued an aggregate of 11,000,000 employee and non employee options.

Revenue Recognition

Revenues from the sale of petroleum and natural gas are recorded when title passes from us to our petroleum or natural gas purchaser and collectability is reasonably assured.

Property and Equipment

Property and equipment is recorded at cost. Depreciation of assets is provided by use of a straight line method over the estimated useful lives of the related assets. Expenditures for replacements, renewals, and betterments are capitalized. Maintenance and repairs are charged to operations as incurred.

Undeveloped Oil and Gas Properties

Acquisition, exploration, and development of oil and gas activities are capitalized when costs are recoverable and directly result in an identifiable future benefit, following the full cost method of accounting. Improvements that increase capacity or extend the useful lives of assets are capitalized. Maintenance and turnaround costs are expensed as incurred.

Undeveloped oil and gas properties are assessed, at minimum annually or as economic events dictate, for potential impairment. Impairment is assessed by comparing the estimated net undiscounted future cash flows to the carrying value of the asset. If required, the impairment recorded is the amount by which the carrying value of the asset exceeds its fair value.

Capitalized costs are depleted and depreciated on the unit-of-production method based on the estimated gross proved reserves once determined by the independent petroleum engineers. Depletion and depreciation is calculated using the capitalized costs, including estimated asset retirement costs, plus the estimated future costs to be incurred in developing proved reserves, net of estimated salvage value.

Costs of acquiring and evaluating unproved properties and major development projects are excluded from the depletion and depreciation calculation if and until it is determined whether or not proved reserves can be assigned to such properties. Costs of unproved properties and major development projects are transferred to depletable costs based on the percentage of reserves assigned to each project over the expected total reserves when the project was initiated. These costs are assessed periodically to ascertain whether impairment has occurred.

Depletion and Amortization of Oil and Gas Properties

We follow the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of properties within a relatively large geopolitical cost center are capitalized when incurred and are amortized as mineral reserves in the cost center are produced, subject to a limitation that the capitalized costs not exceed the value of those reserves. All costs incurred in oil and gas producing activities are regarded as integral to the acquisition, discovery, and development of whatever reserves ultimately result from the efforts as a whole, and are thus associated with our reserves. We capitalize internal costs directly identified with performing or managing acquisition, exploration, and development activities. Unevaluated costs are excluded from the full cost pool and are periodically evaluated for impairment rather than amortized. Upon evaluation, costs associated with productive properties are transferred to the full cost pool and amortized. Gains or losses on the sale of oil and natural gas properties are generally included in the full cost pool unless the entire pool is sold.

Capitalized costs and estimated future development costs are amortized on a unit-of-production method based on proved reserves associated with the applicable cost center. We assess for impairment for oil and natural gas properties for the full cost pool quarterly using a ceiling test to determine if impairment is necessary. Specifically, the net unamortized costs for each full cost pool, less related deferred income taxes, should not exceed the following:
(a) the present value, discounted at 10%, of future net cash flows from estimated production of proved oil and gas reserves, plus (b) all costs being excluded from the amortization base, plus (c) the lower of cost or estimated fair value of unproved properties included in the amortization base, less (d) the income tax effects related to differences between the book and tax basis of the properties involved. The present value of future net revenues should be based on current prices, with consideration of price changes only to the extent provided by contractual arrangements, as of the latest balance sheet presented. The full cost ceiling test must take into account the prices of qualifying cash flow hedges in calculating the current price of the quantities of the future production of oil and gas reserves covered by the hedges as of the balance sheet date. In addition, the use of the hedge-adjusted price should be consistently applied in all reporting periods and the effects of using cash flow hedges in calculating the ceiling test, the portion of future oil and gas production being hedged, and the dollar amount that would have been charged to income had the effects of the cash flow hedges not been considered in calculating the ceiling limitation should be disclosed.

Any excess is charged to expense during the period that the excess occurs. We did not have any hedging activities during the quarter ended September 30, 2012. Application of the ceiling test is required for quarterly reporting purposes, and any write-downs cannot be reinstated even if the cost ceiling subsequently increases by year-end. Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in income.

Abandonment of properties is accounted for as adjustments of capitalized costs with no loss recognized.

During the year ended December 31, 2011, the Company management performed an evaluation of its unproved properties for purposes of determining the implied fair value of the assets at the end of each respective year. The test indicated that the recorded remaining book value of its unproved properties exceeded its fair value for the years ended December 31, 2011. As a result, upon completion of the assessment, management recorded a non-cash impairment charge of $690,552, net of tax, or $0.02 per share during the year ended December 31, 2011 to reduce the carrying value of the unproved properties to $-0-. Considerable management judgment is necessary to estimate the fair value. Accordingly, actual results could vary significantly from management's estimates.

Asset Retirement Obligations

We account for reclamation costs under the provisions of ASC 410-20, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Specifically, the statement requires that retirement obligations be recognized when they are incurred and displayed as liabilities with the initial measurement being at the present value of estimated third party costs. In addition, the asset retirement cost is capitalized as part of the assets' carrying value and subsequently allocated to expense over the assets' useful lives. There are no changes in the carrying amounts of the asset retirement obligations as no expenses have yet been incurred.

We are obligated to maintain a surety bond in conjunction with certain acquired leases. Our obligation for site reclamation does not become a liability until production begins.

Derivative Instruments and Fair Value of Financial Instruments

We have evaluated the application of Accounting Standards Codification 815-40, Derivatives and Hedging, Contracts in Entity's Own Equity ("ASC 815-40") to certain convertible debentures that contain exercise price adjustment features known as reset provisions. Based on the guidance in ASC 815-40, we have concluded these instruments are required to be accounted for as derivatives effective upon issuance.

We have recorded the fair value of the reset provisions of the convertible debentures and classified as derivative liabilities in our balance sheet at fair value with changes in the value of these derivatives reflected in the consolidated statements of operations as gain or loss on derivative liabilities. These derivative instruments are not designated as hedging instruments under ASC 815-10.

Recently Issued Accounting Pronouncements

There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries, and are not expected to a have a material impact on our financial position, results of operations or cash flows.

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