PINX:NAGP Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

¨ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

 

For the quarterly period ended: June 30, 2012

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

 

For the transition period from _________ to __________

 

Commission File Number: 000-54088

 

Native American Energy Group, Inc.

(Exact Name of registrant as specified in its charter)

 

Delaware   65-0777304
(State or other Jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification Number)

 

108-18 Queens Blvd., Suite 901

Forest Hills, NY 11375

(Address of principal executive offices)

 

(718) 408-2323

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes £   No £

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ¨   No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:

 

¨ Large Accelerated Filer ¨ Accelerated Filer
       
¨ Non-Accelerated Filer x Smaller Reporting Company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ¨   No ¨

 

As of August 14, 2012, there were 35,868,786 shares issued and outstanding of the registrant’s common stock.

 

 
 

 

NATIVE AMERICAN ENERGY GROUP, INC.

 

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2012

 

TABLE OF CONTENTS

 

  Page
PART I—FINANCIAL INFORMATION
   
Item 1.  Financial Statements. 1
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations. 19
   
Item 3.  Quantitative and Qualitative disclosures about Market Risk. 26
   
Item 4.  Controls and Procedures. 26
   
PART II—OTHER INFORMATION
   
Item 1.  Legal Proceedings. 28
   
Item1A.  Risk Factors. 28
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds. 28
   
Item 3.  Defaults Upon Senior Securities. 28
   
Item 4.  Mine Safety Disclosures. 29
   
Item 5.  Other Information. 29
   
Item 6.  Exhibits. 29
   
SIGNATURES 30
   
EXHIBITS 31

 

i
 

 

FORWARD-LOOKING STATEMENTS

 

Written forward–looking statements may appear in documents filed with the Securities and Exchange Commission (“SEC”), including this quarterly report on Form 10-Q, documents incorporated by reference, reports to stockholders and other communications.

 

Forward–looking statements appear in a number of places in this quarterly report on Form 10-Q and include but are not limited to management’s comments regarding business strategy, workover activities at our oil and gas properties, meeting our capital raising targets and following any use of proceeds plans, our ability to and methods by which we may raise additional capital, production and future operating results.

 

In this quarterly report on Form 10-Q, the use of words such as “anticipate,” “continue,” “estimate,” “expect,” “likely,” “may,” “project,” “should,” “believe” and similar expressions are intended to identify uncertainties.  While we believe that the expectations reflected in those forward–looking statements are reasonable, we cannot assure you that these expectations will prove to be correct.  Our actual results could differ materially from those anticipated in these forward–looking statements.  The differences between actual results and those predicted by the forward-looking statements could be material.  Forward-looking statements are based upon our expectations relating to, among other things:

 

  £ oil and natural gas prices and demand;
  £ our future financial position, including cash flow, debt levels and anticipated liquidity;
  £ the timing, effects and success of our acquisitions, dispositions and workover activities;
  £ uncertainties in the estimation of proved reserves and in the projection of future rates of production;
  £ timing, amount and marketability of production;
  £ our ability to find, acquire, market, develop and produce new properties;
  £ effectiveness of management strategies and decisions;
  £ the strength and financial resources of our competitors;
  £ climatic conditions;
  £ the receipt of governmental permits and other approvals relating to our operations;
  £ unanticipated recovery or production problems; and
  £ uncontrollable flows of oil, gas or well fluids.

 

Many of these factors are beyond our ability to control or predict.  These factors do not represent a complete list of the factors that may affect us.  We do not undertake to update our forward–looking statements.

 

ii
 

 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.

 

NATIVE AMERICAN ENERGY GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2012   2011 
   (unaudited)     
ASSETS          
Current assets:          
Cash  $967   $17,735 
Accounts receivable   -    15,213 
Prepaid expenses   -    34,923 
Total current assets   967    67,871 
           
Other property plant and equipment, net   539,217    617,457 
           
Other assets:          
Collateral on surety bonds   175,205    175,030 
Security deposits   52,500    52,093 
Total other assets   227,705    227,123 
           
Total assets  $767,889   $912,451 
           
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)          
Current liabilities:          
Accounts payable and accrued expenses  $1,972,864   $2,430,370 
Put liability   -    100,000 
Capital leases and notes payable, short term   124,884    524,252 
Notes payable, bridge, net of debt discounts   750,000    680,755 
Loans payable, net of debt discounts   1,307,493    1,265,819 
Total current liabilities   4,155,241    5,001,196 
           
Long term debt:          
Notes payable   13,063    14,841 
           
Total liabilities   4,168,304    5,016,037 
           
Commitments and contingencies   -    - 
           
Stockholders' equity (deficit):          
Preferred stock, par value $0.0001; 21,000,000 and 1,000,000 shares authorized as of June 30, 2012 and December 31, 2011, respectively          
Series A Convertible Preferred stock, par value $0.0001; 1,000,000 shares designated, 500,000 shares issued and outstanding as of June 30, 2012 and December 31, 2011   50    50 
Series B Callable Preferred stock, par value $0.0001; 5,750,000 shares designated, -0- shares issued and outstanding   -    - 
Common stock, par value $0.001; 1,000,000,000 shares authorized, 35,564,786 and 35,128,580 shares issued as of June 30, 2012 and December 31, 2011, respectively; 35,564,786 and 33,389,830 shares outstanding as of June 30, 2012 and December 31, 2011, respectively   35,565    33,390 
Additional paid in capital   26,005,051    23,137,767 
Common stock subscription   21,000    - 
Deficit accumulated during development stage   (29,462,081)   (27,274,793)
Total stockholders' equity (deficit)   (3,400,415)   (4,103,586)
           
Total liabilities and stockholders' equity (deficit)  $767,889   $912,451 

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

1
 

 

NATIVE AMERICAN ENERGY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(a development stage company)

 

                   From January 18, 
                   2005 
                   (date of inception) 
   Three months ended June 30,   Six months ended June 30,   through 
   2012   2011   2012   2011   June 30, 2012 
REVENUE  $-   $-   $-   $-   $- 
                          
Operating expenses:                         
Selling, general and administrative   300,753    1,077,729    734,576    1,280,020    18,299,496 
Impairment of undeveloped properties   -    24,121    -    28,773    5,410,802 
Impairment of acquired licenses   -    -    -    -    2,500,000 
Loss on repossession of fixed assets   -    -    -    -    56,622 
Litigation settlement   -    100,313    1,757,182    100,313    2,173,620 
Depreciation and amortization   38,450    31,084    78,240    61,919    461,971 
Total operating expenses   339,203    1,233,247    2,569,998    1,471,025    28,902,511 
                          
Loss from operations   (339,203)   (1,233,247)   (2,569,998)   (1,471,025)   (28,902,511)
                          
Other income (expense):                         
Interest income   87    86    174    151    26,627 
Gain on settlement of debt   653,220    4,794    653,220    4,794    715,222 
Other income   6,016    21,818    17,588    21,818    311,552 
Interest expense   (58,526)   (20,883)   (288,273)   (35,980)   (1,612,972)
                          
Income (loss) before provision for income taxes   261,595    (1,227,432)   (2,187,288)   (1,480,242)   (29,462,081)
                          
Provision for income taxes (benefit)   -    -    -    -    - 
                          
NET INCOME (LOSS)  $261,595   $(1,227,432)  $(2,187,288)  $(1,480,242)  $(29,462,081)
                          
Net Income (loss) per common share, basic  $0.01   $(0.04)  $(0.06)  $(0.05)     
                          
Net Income (loss) per common share, diluted  $0.01   $(0.04)  $(0.06)  $(0.05)     
                          
Weighted average number of outstanding shares, basic and fully diluted   35,690,888    29,779,546    35,473,878    28,463,047      
                          
Weighted average number of outstanding shares, diluted   36,538,888    29,779,546    35,473,878    28,463,047      

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

2
 

 

NATIVE AMERICAN ENERGY GROUP, INC

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)

(a development stage company)

FROM JANUARY 1, 2012 THROUGH JUNE 30, 2012

(unaudited)

  

                       Common   Deficit     
   Preferred stock   Common stock   Additional   Stock   Accumulated during     
   Shares   Amount   Shares   Amount   Paid in Capital   Subscription   Development Stage   Total 
Balance, December 31, 2011   500,000   $50    33,389,830   $33,390   $23,137,767   $-   $(27,274,793)  $(4,103,586)
Sale of common stock   -    -    1,267,800    1,268    315,682    -    -    316,950 
Common stock issued for services   -    -    180,000    180    104,820    -    -    105,000 
Common stock issued in settlement of litigation   -    -    2,345,506    2,345    789,871    -    -    792,216 
Common stock issued in settlement of debt   -    -    281,650    282    173,608    -    -    173,890 
Net common stock returned and canceled in connection with amendment to licensing agreement   -    -    (1,900,000)   (1,900)   1,900    -    -    - 
Common stock subscription   -    -    -    -    -    21,000    -    21,000 
Expiry of put agreement   -    -    -    -    100,000    -    -    100,000 
Fair value of warrant obligation to be issued in settlement of obligation   -    -    -    -    1,381,403    -    -    1,381,403 
Net loss   -    -    -    -    -    -    (2,187,288)   (2,187,288)
Balance, June 30, 2012   500,000   $50    35,564,786   $35,565   $26,005,051   $21,000   $(29,462,081)  $(3,400,415)

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

3
 

 

NATIVE AMERICAN ENERGY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

           From January 18, 2005 
   Six months ended June 30,   (date of inception) through 
   2012   2011   June 30, 2012 
CASH FLOWS FROM OPERATING ACTIVITIES:               
Net loss  $(2,187,288)  $(1,480,242)  $(29,462,081)
Adjustments to reconcile net loss to net cash used in operating activities:               
Depreciation and amortization   78,240    61,919    597,557 
Impairment losses   -    28,773    7,829,119 
Losses on repossession of fixed assets   -    -    56,622 
Equity based compensation   139,923    987,892    12,360,124 
Gain on settlement of debt   (663,220)   (4,794)   (725,222)
Common stock issued in connection with debt   -    -    374,769 
Common stock issued in settlement of litigation   375,779    -    375,779 
Fair value of warrants to be issued in settlement of litigation   1,381,403    -    1,381,403 
Fair value of warrants issued in connection with debt   185,306    -    261,095 
Preferred stock issued for services   -    -    400,000 
(Increase) decrease in:               
Accounts receivable   15,213         - 
Licensing   (407)   -    (30,407)
Guarantee fees   -    -    (4,357)
Surety bond   (175)   (151)   (170,848)
Deposits   -    107,997    (52,093)
Increase (decrease) in:               
Accounts payable and accrued expenses   346,041    41,287    3,110,496 
Net cash (used in) operating activities   (329,185)   (257,319)   (3,698,044)
                
CASH FLOWS FROM INVESTING ACTIVITIES:               
Investment in oil and gas properties   -    -    (1,986,949)
Purchase of property and equipment   -    (9,946)   (2,784,883)
Net cash (used in) investing activities   -    (9,946)   (4,771,832)
                
CASH FLOWS FROM FINANCING ACTIVITIES:               
Proceeds from sale of common stock and subscriptions   337,950    205,000    1,616,175 
Proceeds from sale of royalty interest   -    -    2,923,570 
Proceeds from loans payable   14,000    204,500    2,680,591 
Proceeds from notes payable   -    -    951,964 
Contributions by major shareholders   -    -    1,315,963 
Payments of capital leases   -    -    (497,102)
Payments on loans payable   (38,387)   (115,350)   (433,812)
Payments of notes payable   (1,146)   (3,000)   (86,506)
Net cash provided by financing activities   312,417    291,150    8,470,843 
                
Net (decrease) increase in cash and cash equivalents   (16,768)   23,885    967 
Cash and cash equivalents, beginning of the period   17,735    5,828    - 
                
Cash and cash equivalents, end of period  $967   $29,713   $967 
                
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:               
Cash paid during period for interest  $-   $-   $- 
Cash paid during period for taxes  $-   $-   $800 
                
NON CASH INVESTING AND FINANCING ACTIVITIES:               
Common stock issued for services rendered  $105,000   $2,899,500   $12,300,026 
Common stock issued for licensing  $-   $-   $2,000,002 
Common stock issued for conversion of debt  $173,890   $1,500   $1,700,148 
Preferred stock issued for services rendered  $-   $-   $400,000 

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

4
 

 

NATIVE AMERICAN ENERGY GROUP, INC.

(a development stage company)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

 

A summary of the significant accounting policies applied in the presentation of the accompanying financial statements follows:

 

Business and Basis of Presentation

 

Native American Energy Group, Inc., formerly Flight Management International, Inc. (the “Company”), was incorporated under the laws of the state of Delaware on November 1, 1996.  The Company leases and, using enhanced oil recovery capabilities, revitalizes abandoned oil fields which were previously developed and capped.  The oil and natural gas fields are owned by individual land owners and located on Native and non-Native American lands in the state of Montana and Alaska.

 

The consolidated financial statements include the accounts of the Company, including our wholly owned subsidiary, NAEG Alaska Corporation (“NAEG Alaska”), a Delaware corporation incorporated in 2005 that was formerly known as Fowler Oil & Gas Corporation; and its wholly owned subsidiary, NAEG CBM Operations LLC (“NAEG Operations”), an Alaskan limited liability company formed in August 2006 that was formerly known as Fowler Oil & Gas Alaska, LLC. All significant intercompany balances and transactions have been eliminated in consolidation.

 

To implement its current business plan, significant additional financing will be required and the Company will need to be successful in its efforts to identify, acquire and develop oil and gas reserves that are economically recoverable.

 

The Company is in the development stage as defined by Accounting Standards Codification subtopic 915-10 Development Stage Entities (“ASC 915-10”) with its efforts principally devoted to developing oil and gas reserves.  To date, the Company, has not generated sales revenues, has incurred expenses, and has sustained losses.  Consequently, its operations are subject to all the risks inherent in the establishment of a new business enterprise.  For the period from inception through June 30, 2012, the Company has accumulated losses of $29,462,081.

 

Interim Financial Statements

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2012 are not necessarily indicative of the results that may be expected for the full fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K filed with the SEC on April 16, 2012.

 

Estimates

 

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures.  Accordingly, actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

 

5
 

 

NATIVE AMERICAN ENERGY GROUP, INC.

(a development stage company)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

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

 

The Company follows 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 the Company’s reserves.  The Company capitalizes 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.

 

6
 

 

NATIVE AMERICAN ENERGY GROUP, INC.

(a development stage company)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

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.  The Company has assesses 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.  The Company did not have any hedging activities during the years ended December 31, 2011 and 2010.  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.

 

Intangible assets

 

The Company accounts for and reports acquired goodwill and other intangible assets under Accounting Standards Codification subtopic 305-10, Intangibles, Goodwill and Other (“ASC 305-10”). In accordance with ASC 305-10, the Company tests its intangible assets for impairment on an annual basis and when there is reason to suspect that their values have been diminished or impaired. Any write-downs will be included in results from operations.

 

Asset Retirement Obligations

 

The Company accounts for reclamation costs under the provisions of Accounting Standards Codification subtopic 410-20, Asset Retirement and Environmental Obligations, Asset Retirement Obligations (“ASC 410-20”).  ASC 410-20 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.

 

7
 

 

NATIVE AMERICAN ENERGY GROUP, INC.

(a development stage company)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

The Company is 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.

 

Comprehensive Income

 

The Company does not have any items of comprehensive income in any of the periods presented.

 

Revenue Recognition

 

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

 

Other Income

 

During the six months ended June 30, 2012, we received proceeds from the sale of oil from one well on our sites in the amount of $11,572, which is included as Other Income on the Statement of Operations.

 

Stock-Based Payments

 

The Company follows the Accounting Standards Codification subtopic 718-10, Compensation (“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.  The Company implemented AC 718-10 on January 1, 2006 using the modified prospective method.

 

As of June 30, 2012, there were no outstanding employee stock options.

 

Fair Values

 

The Company follows the Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”).  ASC 820-10 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure.  ASC 820-10 delays, until the first quarter of fiscal year 2009, the effective date for ASC 820-10 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  The adoption of ASC 820-10 did not have a material impact on the Company’s financial position or operations.

 

Advertising Costs

 

The Company expenses advertising costs as incurred.  Advertising expenses were $-0- for the three and six months ended June 30, 2012 and June 30, 2011 and from January 18, 2005 (date of inception) through June 30, 2012.

 

Income Taxes

 

The Company follows Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”), which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns.  Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  Temporary differences between taxable income reported for financial reporting purposes and income tax purposes consist primarily of stock compensation accounting versus tax differences.

 

8
 

 

NATIVE AMERICAN ENERGY GROUP, INC.

(a development stage company)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

Net Loss per Share

 

The Company follows Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”), which specifies the computation, presentation and disclosure requirements of earnings per share information.  Basic earnings per share have been calculated based upon the weighted average number of common shares outstanding.  The Company’s common stock equivalents, represented by convertible preferred stock and warrants, were not considered, as including such would be anti-dilutive for the three and six months ended June 30, 2012 and for the three and six months ended June 30, 2011.

 

Reliance on Key Personnel and Consultants

 

The Company has five full-time employees who are executive officers and no part-time employees.  The Company’s officers do not receive any payroll and their assistance is now being provided on an expense reimbursement basis.  This situation will remain constant until such time as the Company has sufficient capital to afford to pay salaries.  Additionally, there are outside consultants performing various specialized services.  The Company is heavily dependent on the continued active participation of these current executive officers, employees and key consultants.  The loss of any of the senior management or key consultants could significantly and negatively impact the business of the Company until adequate replacements can be identified and put in place.

 

Concentrations of Credit Risk

 

The Company’s cash is exposed to a concentration of credit risk.  Effective December 31, 2010 and extending through December 31, 2012, all non-interest-bearing transaction accounts are fully insured by the Federal Deposit Insurance Corporation (FDIC), regardless of the balance of the account.  Generally, the Company’s cash and cash equivalents in interest-bearing accounts may exceed FDIC insurance limits.  The financial stability of these institutions is periodically reviewed by senior management.

 

Reclassification

 

Certain reclassifications have been made in prior year’s financial statements to conform to classifications used in the current year.

 

Recent 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 the Company’s consolidated financial position, results of operations or cash flows.

 

NOTE 2 – GOING CONCERN MATTERS

 

The Company has incurred a net loss of $2,187,288 and $1,480,242 for the six months ended June 30, 2012 and June 30, 2011, respectively.  The Company has incurred significant losses and had an accumulated deficit of $29,462,081 at June 30, 2012.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

There can be no assurance that sufficient funds will be generated during the next 12 months or thereafter from the Company’s current operations, or those funds will be available from external sources, such as debt or equity financings or other potential sources.  The lack of additional capital could force the Company to curtail or cease operations and would, therefore, have a material adverse effect on its business.  Furthermore, there can be no assurance that any such required funds, if available, will be available on attractive terms or that they will not have a significant dilutive effect on the Company’s existing stockholders.

 

9
 

 

NATIVE AMERICAN ENERGY GROUP, INC.

(a development stage company)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

The accompanying financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

 

NOTE 3 – OIL AND GAS PROPERTIES, UNEVALUATED

 

Unevaluated and Unproved properties are comprised of acquired leases on Native American tribal lands and non-native lands in the states of Montana and Alaska.  All properties are in development stage with unproven and unevaluated reserves.

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment are comprised of the following:

 

   June 30,   December 31, 
   2012   2011 
Field equipment  $1,116,585   $1,116,585 
Office equipment   40,283    40,283 
Furniture and fixtures   31,704    31,704 
Transportation equipment   54,250    54,250 
Leasehold improvements   39,806    39,806 
Total   1,282,628    1,282,628 
Less accumulated depreciation   (743,411)   (665,171)
Net  $539,217   $617,457 

 

Depreciation is recorded ratably over the estimated useful lives of five to ten years.  Depreciation expense was $38,450 and $31,084 for the three months ended June 30, 2012 and 2011, respectively; $78,240 and $61,919 for the six months ended June 30, 2012 and 2011, respectively; and $461,971 from January 18, 2005 (date of inception) through June 30, 2012, respectively.

 

In October 2011, we acquired a vehicle for a down payment of $12,000 towards the total purchase price of $29,500.  For credit purposes only, the vehicle's title and related loan were issued in the name of our president.  Upon settlement of the outstanding loan, the vehicle's ownership will be transferred to our name. For accounting purposes, the vehicle and related loan are recorded as part of our financial statements as assets and obligations, respectively.

 

NOTE 5 – SURETY BONDS

 

The Company has an aggregate of $175,205 and $175,030, as of June 30, 2012 and December 31, 2011, respectively, deposited in a financial institution as collateral for posted surety bonds with various governmental agencies as assurance for possible well-site reclamation, if required.  The Company is 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.

 

10
 

 

NATIVE AMERICAN ENERGY GROUP, INC.

(a development stage company)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

NOTE 6 – SECURITY DEPOSITS

 

The Company had an aggregate of $50,000 as of June 30, 2012 and December 31, 2011 deposited in two financial institutions as collateral for posted surety bonds with various governmental agencies in Alaska and Montana as assurance for possible well-site reclamation, if required.  The Company is obligated to maintain a surety bond in conjunction with certain drilling permits.  In March 2011, the Company cancelled one of its oil and gas surety bonds in the amount $100,000 issued to the Alaska Oil & Gas Conservation Commission (“AOGCC”) for its Kircher Unit state drilling permit in Alaska. As a result of the bond termination, the financial institution returned the $100,000 cash collateral to the Company. In the event that the Company re-applies for the state drilling permit with the AOGCC, it will be required to re-post a bond in the amount of $100,000.  During the year ended December 31, 2011, the Company forfeited an $8,590 deposit held as security for its corporate office lease in New York.

 

NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses are comprised of the following:

 

   June 30,   December 31, 
   2012   2011 
Accounts payable and accrued expenses  $1,684,432   $2,192,317 
Accrued interest   288,432    238,053 
   $1,972,864   $2,430,370 

 

During the six months ended June 30, 2012, the Company issued an aggregate of 281,650 shares of its common stock in settlement of $50,000 of notes payable and $387,100 of accounts payable and accrued interest recognizing a gain on settlement of debt of $253,220.

 

NOTE 8 – PUT LIABILITY

 

On June 28, 2011, the Company offered to certain purchasers of the Company’s common stock the right to rescind their previous common stock acquisitions and receive in exchange for any shares relinquished to the Company a payment equal to their original purchase price plus interest at the applicable statutory rate in the state they reside.  The Company made the rescission offer as it believes that the prior issuances of common stock to such purchasers may have been brokered by unregistered persons and thus may have been made in violation of the Securities Act of 1933, as amended (the “Securities Act”).  The common stock subject to the rescission offers total 2,732,500 common shares and were sold in 2010 and 2011 at prices ranging from $0.08 to $0.10 per share.  The rescission offer expired at 5:00 pm (EDT) on August 1, 2011.

 

On August 1, 2011, we received one acceptance of the rescission offer in the amount of 1,125,000 shares for the return of $100,000.  Accordingly, the Company reclassified $100,000 from equity to a put liability as of June 30, 2011.

 

During the six months ended June 30, 2012, the right or rescission as described above expired, accordingly, and the Company reclassified $100,000 from put liability to equity.

 

11
 

 

NATIVE AMERICAN ENERGY GROUP, INC.

(a development stage company)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

NOTE 9 – CAPITAL LEASES AND NOTES PAYABLE

 

Notes payable are comprised of the following:

 

   June 30,
2012
   December 31,
2011
 
Note payable, due in monthly installments of $589 including interest of 24.9% due to mature in December 2015, secured by equipment  $16,658   $17,804 
Note payable, due in monthly installments of $369 including interest of 2.9%, due to mature in April 2013, secured by related equipment. Currently in default  $14,788   $14,788 
Note payable, due in monthly installments of $1,022 including interest of 18.89%, due to mature in July 2013, secured by related equipment. Currently in default  $37,001   $37,001 
Note payable, due in March 2012 at 0% interest., currently in default   69,500    469,500 
Sub-total   137,947    539,093 
Less current portion   124,884    524,252 
Long term portion  $13,063   $14,841 

 

During the year ended December 31, 2011, the Company was notified by the lender that it will not be held responsible for an installment loan previously in default of $10,109 including accrued interest of $6,703 Accordingly, the Company recorded a gain on settlement of debt of $16,812.

 

During the six months ended June 30, 2012, the Company amended a previously acquired licensing agreement with no remaining carrying value, whereby the remaining debt obligation was reduced from $469,500 to $69,500. Accordingly, the Company recognized a gain on settlement of debt of $400,000 to current period operations.

 

NOTE 10 – LOANS PAYABLE

 

Loans payable are comprised of the following:

 

   June 30,
2012
   December 31,
2011
 
Loan payable, - bearing 7.5% per annum with no specific due date, guaranteed by Company officers. Currently in default.  $130,000   $130,000 
Loan payable, bearing 6.25% per annum, secured by certain oil and gas properties; due February 29, 2012, net of debt discount of $-0- and $83,432, respectively. Currently in default   593,000    509,568 
Loan payable, bearing 12% per annum through February 29, 2012; 15% thereafter, secured by certain oil and gas properties; due April 29, 2012, net of debt discount of $7,886 and $32,632, respectively.   130,000    97,368 
Various loans payable, with interest rates from 4% to 20% per annum, unsecured, currently in default ($114,461 and $103,133 related party loans, respectively), net of debt discount of $-0- and $69,245, respectively.   454,493    428,883 
Total   1,307,493    1,265,819 
Less current portion   1,307,493    1,265,819 
Long term portion  $-   $- 

 

12
 

 

NATIVE AMERICAN ENERGY GROUP, INC.

(a development stage company)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

In connection with the issuance of debt on November 8, 2011, the Company issued an aggregate of 593,000 warrants to purchase the Company's common stock at $0.001 per share for five years from the date of issuance. The aggregate fair value of $157,130 was determined using the Black Scholes option pricing model based on the following assumptions: dividend yield: 0%; volatility: 369.88% to 375.20% and risk free rate of 0.96%. The determined fair value of the issued warrants are amortized ratably over the term of the loan.

 

In connection with the issuance of debt on December 12, 2011, the Company issued an aggregate of 55,000 warrants to purchase the Company's common stock at $0.001 per share for five years from date of issuance and 75,000 shares of the Company's common stock. The aggregate fair value of the warrants of $15,300 was determined using the Black Scholes option pricing model based on the following assumptions: dividend yield: 0%; volatility: 364.69% to 366.74% and risk free rate of 0.96%. The total determined fair value of the issued warrants and common stock of $37,800 is amortized ratably over the term of the loan.

 

During the six months ended June 30, 2012, the Company issued 92,390 shares of its common stock in settlement of $50,000 notes payable and related accrued interest recognizing a gain on settlement of debt of $36,956.

 

NOTE 11 – NOTES PAYABLE-BRIDGE

 

On July 25, 2011, the Company began conducting a private placement of up to $600,000 of Bridge Units (the “Units”) at a price of $25,000 per Unit to accredited investors only (the “Offering”); provided, however, that up to an additional six Units may be offered to fill over-allotments.  Each Unit consists of (1) a $25,000 promissory note (each, a “Bridge Note,” as more fully described below), unless extended pursuant to the Bridge Note, and (2) 50,000 shares of the Company’s common stock.

 

The Bridge Notes are secured by a first lien on certain oil and gas leases and related equipment and were initially due the earlier of (i) November 30, 2011 (subsequently extended to January 31, 2012 with the payment of accrued interest) or (ii) within two business days following the close of any debt or equity financing totaling $3,000,000 or more.  The interest rate(s) is at 6.25% per annum through September 30, 2011; 8.25% per annum from October 1, 2011 through November 30, 2011; and 12.25% per annum thereafter (default interest).  Interest is payable at the end of each period and payable monthly thereafter.  During the year ended December 31, 2011, the Company issued an aggregate of $750,000 Units.

 

In connection with the issuance of the Units, the Company issued an aggregate of 1,500,000 shares of its common stock.  The fair value of the common stock of $440,938 was recorded as a debt discount and amortized ratably to current period interest expense. During the year ended December 31, 2011, the Company has amortized $371,693 to interest expense.

 

During the months of August and September 2011, the Company entered into non-exclusive placement agent agreements (each, a “Placement Agent Agreement”) with the following broker-dealers registered with the SEC and who are members of the Financial Industry Regulatory Authority (“FINRA”): Beige Securities, LLC; ViewTrade Securities, Inc.; McNicoll, Lewis & Vlak LLC; Park City Capital, Inc.; and I-Bankers Securities, Inc. Aegis Capital Corporation and Halcyon Cabot Partners Ltd.  Each Placement Agent Agreement provides that the respective placement agent will receive (1) a placement agent fee equal to 5% of the gross proceeds from sales of Units by such placement agent; and (2) a five-year warrant to purchase that certain number of shares of our common stock equal to 10% of the common stock sold in the offering by such placement agent exercisable at $0.60 per share.  The term of each Placement Agent Agreement is coterminous with the term of the offering. During the year ended December 31, 2011, the Company charged the fair value of the warrants of $37,498 to current period operations. The estimated fair value of the issued warrants were determined using the Black Scholes option pricing model based on the following assumptions: dividend yield: 0%; volatility: 371.27% and risk free rate of 0.96%.

 

13
 

 

NATIVE AMERICAN ENERGY GROUP, INC.

(a development stage company)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 NOTE 12 – STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

Amendments to Certificate of Incorporation; Designations of Preferred Stock

 

On May 8, 2012, the Company filed with the Delaware Secretary of State a Certificate of Amendment to its Certificate of Incorporation establishing a class of blank check preferred stock comprised of 20,000,000 shares, in addition to its 1,000,000,000 authorized common stock and 1,000,000 authorized Series A Convertible Preferred Stock (the “Series A”).

 

On May 9, 2012, the Company filed a Certificate of Designations designating 5,750,000 of the newly created blank check preferred as Series B Callable Preferred Stock (the “Series B”) and setting forth the rights, powers, designations and preferences of the Series B.

 

On May 10, 2012, the Company filed a Certificate of Amendment to its Certificate of Designations for the Series A dated September 22, 2009.

 

The Series A

 

The general attributes of the Series A is as follows:

 

Rank. The Series A ranks junior to the Senior B and pari passu with our common stock for liquidation and dividend rights.

 

Dividends.  Holders of the Series A shall be entitled to receive cumulative dividends quarterly at the rate of 13% per annum of (as adjusted for subdivisions, combinations, stock dividends, recapitalizations and the like, the “Original Issue Price”) for the first year following the original date of issuance of such share of Series B, and at the rate of 15% per annum of the Original Issue Price for each subsequent year until such share of Series B is redeemed.  No dividends or other distributions shall be made or declared, in cash or in kind, to holders of the Series A or our common stockholders unless and until a dividend of like amount is first paid in full to holders of the Series B.

 

Voting Rights. Holders of Series A Convertible Preferred Stock will have the right to that number of votes determined by multiplying the number of shares issuable upon conversion of the Series A Convertible Preferred Stock by 1,000.

 

Conversion.  Holders of Series A Convertible Preferred Stock will have the right to convert the Series A Convertible Preferred Stock at the option of the holder, at any time, into same number of common shares, subject to certain fundamental transaction adjustments.

 

The Series B

 

The general attributes of the Series B is as follows:

 

Rank. The Series B ranks senior to the Senior A and our common stock for liquidation and dividend rights.

 

Dividends.  Holders of the Series B shall be entitled to receive dividends when and if declared by the Board of Directors.  Notwithstanding the forgoing, no dividends or other distributions shall be made or declared, in cash or in kind, to holders of the Series A or to our common unless and until a dividend of like amount is first paid in full to holders of the Series B.

 

14
 

 

NATIVE AMERICAN ENERGY GROUP, INC.

(a development stage company)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

Redemption. The Series B shall not be redeemable by the Company prior to one year after the original date of issuance of each shares, after which time such share may be redeemed by the Company at any time at a redemption price of $1.00 plus all unpaid dividends thereon.

 

Common stock

 

The Company is authorized to issue 1,000,000,000 shares of its $0.001 par value common stock.  As of June 30, 2012 there were 35,564,786 shares issued and outstanding.

 

During the six months ended June 30, 2012, the Company issued an aggregate of 180,000 shares for services rendered valued at $105,000.

 

During the six months ended June 30, 2012, the Company received and cancelled a net of 1,900,000 shares of common stock in connection with an amendment of a previously acquired license agreement.

 

NOTE 13 – COMMITMENTS AND OBLIGATIONS

 

Overriding Royalty Interests

 

On April 11, 2005, the principal stockholders of the Company formed NAEG Founders Holding Corporation (formerly NAEG Founders Corporation) for the purpose of selling a 5% overriding royalty interest in the Company’s future oil and gas production.  The Company sold a 5% overriding royalty interest on future potential oil and gas production from oil and gas properties held and operated by the Company.  During the years ended December 31, 2007 and 2008, the Company received payments of $1,715,000 and $1,208,570, respectively, and was recorded as additional paid in capital in each respectively year.

 

Mineral Royalty Payments and Oil & Gas Lease Payments

 

The Company is obligated to pay royalties to the lessors of its oil fields under the oil and gas leases with payments ranging from 16.67% to 20% of any production revenue.  The Company is obligated for a minimum of $3.00 per acre per year in lease rental payments in Montana.  The Company has fully paid-up several leases in advance or the leases are held by production or an extension provided by such Lessors and is therefore not at this time required to make any yearly lease rental payments.

 

Consulting agreements

 

The Company has consulting agreements with outside contractors.  The Agreements are generally month-to-month.

 

Litigation

 

High Capital Funding, LLC.  vs.  Native American Energy Group, Inc. - Cause No. DV-12-30

 

On May 25, 2012, High Capital Funding LLC (“High Capital or Plaintiff”), filed a Complaint for Foreclosure in the Fifteenth Judicial District Court of the State of Montana, Roosevelt County, against the Company alleging that the Company is in default for nonpayment of monies owed under various loans made to the Company from the period beginning July 25, 2012 to December 12, 2012 (“the Loans”) during the Company’s field operations in Montana related to its five-well Workover and Enhanced Oil Recovery Program. In the Complaint, Plaintiff sought a judgment against the Company for the unpaid principal and interest owed under such loans.

 

15
 

 

NATIVE AMERICAN ENERGY GROUP, INC.

(a development stage company)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

On June 27, 2012, the Company filed a motion to dismiss Plaintiff’s complaint on the grounds that Plaintiff’s complaint failed to state a claim upon which relief can be granted (the “Motion”).  On July 11, 2012, the Honorable Judge David Cybulski issued an order denying the Motion and allowed the Company 20 additional days to file its answer to the Complaint.

 

On August 13, 2012, the Company filed its “Answer and Counterclaim” in which the Company asserted various defenses to Plaintiff’s claims for relief as well as counterclaims against the Plaintiff for: Breach of Contract, Unjust Enrichment, Breach of Duty of Good Faith and Fair Dealing, Promissory Estoppel, Negligent Misrepresentation, and Constructive Fraud. In its Answer and Counterclaim, the Company is ultimately seeking damages to be proven at trial which include, but are not limited to: lost revenue from oil production continuing to accrue since September 2011 as a result of Plaintiff’s negligent and untimely remittance of loan proceeds as agreed to by both parties; recovery of various shares of the Company’s restricted common stock and five-year exercise warrants for the purchase of the Company’s restricted common stock; and specific performance by the Plaintiff of its obligations under the Loans. On the same date, the Company also filed an “Application for Preliminary Injunction and Temporary Restraining Order” (the “Application”). In its Application, the Company is seeking relief including, but not limited to, an injunction preventing Plaintiff from transferring common shares or exercising warrants issued as partial consideration for such loans agreements.

 

The Company intends to vigorously defend against all allegations asserted against it as well as pursuing its own claims against the Plaintiff.

 

Other than the litigation disclosed above, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of the Company or any of its subsidiaries, threatened against or affecting the Company, its common stock, any of its subsidiaries or the Company’s or the Company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

NOTE 14 – RELATED PARTY TRANSACTIONS

 

From January 18, 2005 (date of inception) through June 30, 2012, our principal stockholders have contributed an aggregate of $1,315,963 in working capital with the funds thereof reflected as additional paid in capital in the Company’s financial statements.

 

In conjunction with the reverse acquisition in 2009, the Company issued an aggregate of 10,000,000 shares of common stock and 500,000 shares of convertible preferred stock to two officers of Native American Energy Group, Inc.

 

As of June 30, 2012, Joseph D’Arrigo had a loan outstanding to the Company of $20,050, and Raj Nanvaan had a loan outstanding of $71,793. These loans are included in our loans payable and were made interest free. There is no benefit to either Mr. D’Arrigo or Mr. Nanvaan directly or indirectly from providing such loans.

 

In October 2011, the Company acquired a vehicle for a down payment of $12,000 towards the total purchase price of $29,500.  For credit purposes only, the vehicle's title and related loan were issued in the name of our president.  Upon settlement of the outstanding loan, the vehicle's ownership will be transferred to our name. For accounting purposes, the vehicle and related loan are recorded as part of our financial statements as assets and obligations, respectively.

 

16
 

 

NATIVE AMERICAN ENERGY GROUP, INC.

(a development stage company)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

In addition to being officers and directors of Native American Energy Group, Inc., Joseph D’Arrigo, our President, Chief Executive Officer and Chairman, and Raj Nanvaan, our Chief Financial Officer, Chief Operations Officer, Vice President, Treasurer and Director, are directors and minority shareholders of NAEG Founders Holding Corporation, a private New York corporation, that Messrs. D’Arrigo and Nanvaan formed to hold (i) Mr. D’Arrigo’s 2.5% Overriding Royalty interest in our future oil & gas production and (ii) Mr. Nanvaan’s 2.5% Overriding Royalty interest in our future oil & gas production. After the transfer of such interests to NAEG Founders Holding Corporation, Messrs. D’Arrigo and Nanvaan each had a remaining 0.5% Overriding Royalty interest in our future oil & gas production, which they voluntarily cancelled for no consideration. As the result of the assignment of the interests of both Messrs. D’Arrigo and Nanvaan to NAEG Founders Holding Corporation by way of a board resolution, NAEG Founders Holding Corporation held a total 5% Overriding Royalty Interest in the future oil & gas production from leasehold interests. As background, Messrs. D’Arrigo and Nanvaan had each been granted their respective 3% Overriding Royalty Interest in our future oil & gas production in exchange for the assignment of their respective interests in a drilling project associated with another company called Rockwell Petroleum. The project was called the Jones Draw Field. Such rights were acquired by them before our organization while working with other oil & gas companies as tribal liaisons. To date, Messrs. D’Arrigo and Nanvaan have not received any compensation or dividend distributions from NAEG Founders Holdings Corporation because such company has not had any commercial production to date.

 

In connection with the execution of a capital lease obligation in March of 2006 regarding our workover rig, Messrs. D’Arrigo and Nanvaan and their respective relatives provided real estate collateral pledges and personal guarantees to the financial institution in exchange for an obligation fee of $325,000, of which $75,000 was payable to Joseph D’Arrigo, $150,000 was payable to Raj Nanvaan and the balance payable to the parents of Raj Nanvaan.  The guarantee fees were being amortized ratably over the term of such lease, which was due to expire in 2014. On March 24, 2010, the capital lease obligation was converted to equity. As part of this conversion and settlement, the lien placed on Mr. Nanvaan’s home was lifted by the finance company.

 

NOTE 15 -STOCK OPTIONS AND WARRANTS

 

Stock Options

 

As of June 30, 2012 and December 31, 2011, there were no outstanding options.

 

Warrants

 

The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company’s common stock at June 30, 2012:

  

    Warrants Outstanding   Warrants Exercisable 
        Weighted             
        Average   Weighted       Weighted 
        Remaining   Average       Average 
Exercise   Number   Contractual   Exercise   Number   Exercise 
Price   Outstanding   Life (Years)   Price   Exercisable   Price 
$0.001    648,000    4.40   $0.001    648,000   $0.001 
 0.60    150,000    4.42    0.60    150,000    0.60 
 0.70    2,345,506    1.98    0.70    2,345,506    0.70 
      3,143,506    2.30   $0.55    3,143,506   $0.55 

 

17
 

 

NATIVE AMERICAN ENERGY GROUP, INC.

(a development stage company)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

Transactions involving the Company’s warrant issuance are summarized as follows:

 

       Average 
   Number of   Price 
   Shares   Per Share 
Warrants outstanding at December 31, 2010   -   $- 
Granted   798,000    0.11 
Exercised   -    - 
Cancelled or expired   -    - 
Warrants outstanding at December 31, 2011   798,000    0.11 
Granted   2,345,506    0.70 
Exercised   -    - 
Cancelled or expired   -    - 
Warrants outstanding at June 30, 2012   3,143,506   $0.55 

 

As per the Settlement Agreement entered into on January 27, 2012 and as previously reported in the 8-K filing with the Securities and Exchange Commission on January 31, 2012, on June 21, 2012, the Company issued an aggregate of 2,345,506 warrants to purchase the Company's common stock exercisable at $0.70 per share for two years from the date of issuance within 30 calendar days of the removal of the global lock by DTC. The Global Lock was removed by DTC on June 21, 2012. The Company recorded the estimated fair value of $1,381,403 as a charge to current period operations. The estimated fair value was determined using the Black Scholes option pricing method with the following assumptions: Dividend yield- 0%, risk free rate-0.12%, volatility- 431.55%, expected life-contract life.

 

NOTE 16 - SUBSEQUENT EVENTS

 

Recent Sales of Unregistered Securities

 

In July 2012, we issued and sold 84,000 shares of our common stock to four investors at a per share purchase price of $0.25 for proceeds of $21,000 as per stock subscriptions received in June 2012.

 

In July 2012, we issued 200,000 shares of our common stock to a consultant for services to be provided.

 

Each of the above issuances was made pursuant to an exemption from registration in reliance upon Section 4(2) of the Securities Act.

 

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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.

 

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

 

Revenues

 

We did not generated any revenues for the three months ended June 30, 2012 and 2011, respectively.

 

Operating Expenses

 

Selling, General, and Administrative

 

Selling, general and administrative expenses decreased from $1,077,729 for the three months ended June 30, 2011 to $300,753 for the three months ended June 30, 2012.  The decrease of $776,976, or 72%, is primarily attributable to an decrease in equity-based compensation issued to consultants and service providers.

 

Impairment of undeveloped properties

 

Impairment of undeveloped properties decreased to $0 for the three months ended June 30, 2012 from $24,121 for the three months ended June 30, 2011.  This decrease is attributed to our current progress with our unevaluated and undeveloped properties not requiring impairment.

 

Litigation Settlement

 

During the three months ended June 30, 2011, we incurred litigation cost as described in our accompanying financial statements. As such, we incurred a $100,313 charge in the three months ended June 30, 2011 comprised of accrual of expected costs. During the three months ended June 30, 2012 with the final settlement in the previous quarter, we did not have any incurred costs.

 

Depreciation and Amortization

 

Depreciation and amortization increased from $31,084 for the three months ended June 30, 2011 to $38,450 for the three months ended June 30, 2012.  The increase of $7,366 is attributable to additional equipment added in the latter part of 2011.

 

Total Operating Expenses

 

Total operating expenses decreased to $339,203 for the three months ended June 30, 2012 from $1,233,247 for the three months ended June 30, 2011.  The decrease of $894,044 is primarily attributable to the decrease in equity- based compensation issued to consultants and services providers.

 

Gain on settlement of debt

 

During the three months ended June 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 cancellation. 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 a gain realized of $4,794 in the same three month period last year.

 

Other Income

 

Other income decreased to $6,016 for the three months ended June 30, 2012 from $21,818 for the three months ended June 30, 2011.  Income of $11,572 and $21,818 for the three months ended June 30, 2012 and 2011, respectively, was from the sale of oil collected as a byproduct of well testing.

 

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Interest Expenses, net

 

Interest expense, net for the three months ended June 30, 2012, increased by $37,643 to $58,526 from $20,883 for the three months ended June 30, 2011.  The primary reason for the increase in interest expense was due to increased debt as compared to prior year.

 

Net Income (Loss)

 

Net income (loss) for the three months ended June 30, 2012 increased to a net income of $261,595 from a net loss of $1,227,432 for the three months ended June 30, 2011.  The increase of $1,489,027 is primarily attributable to the factors described above.

 

Results of Operations for the Six Months Ended June 30, 2012 as compared to the Six Months Ended June 30, 2011:

 

Revenues

 

We did not generate any revenues for the six months ended June 30, 2012 and 2011, respectively

 

Operating Expenses

 

Selling, General, and Administrative

 

Selling, general and administrative expenses decreased from $1,380,333 for the six months ended June 30, 2011 to $734,576 for the six months ended June 30, 2012.  The decrease of $645,757, or 47%, 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 six months ended June 30, 2012 from $28,773 for the six months ended June 30, 2011.  This decrease is attributed to our current progress with our unevaluated and undeveloped properties not requiring impairment.

 

Litigation Settlement

 

During the six months ended June 30, 2012, we concluded litigation as described in our accompanying financial statements. As such, we incurred a $1,757,182 non-cash charge in the six months ended June 30, 2012 comprised of additional shares of our common stock and an obligation to issue warrants based on certain conditions occurring. During the six months ended June 30, 2011, we incurred costs of $100,313.

 

Depreciation and Amortization

 

Depreciation and amortization increased from $61,919 for the six months ended June 30, 2011 to $78,240 for the six months ended June 30, 2012.  The increase of $16,321 is attributable to additional equipment added in the latter part of 2011.

 

Total Operating Expenses

 

Total operating expenses increased to $2,569,998 for the six months ended June 30, 2012 from $1,471,025 for the six months ended June 30, 2011.  The increase of $1,993,017 is primarily attributable to the settlement of litigation as described above and the increase in equity-based compensation issued to consultants and services providers.

 

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Gain on settlement of debt

 

During the six months ended June 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 cancellation. 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 a gain realized of $4,794 in the same six month period last year of $4,794 gain realized.

 

Other Income

 

Other income decreased to $17,588 for the six months ended June 30, 2012 from $21,818 for the six months ended June 30, 2011.  Income of $11,572 and $21,818 was from the sale of oil collected as a byproduct of well testing for the six month periods ended June 30, 2012 and 2011, respectively.

 

Interest Expenses, net

 

Interest expense, net for the six months ended June 30, 2012, increased by $252,293 to $288,293 from $35,980 for the six months ended June 30, 2011.  The primary reason for the increase in interest expense was due to issuing common shares and warrants in connection with our bridge financing charged to period interest of $185,306.

 

Net (Loss)

 

Net loss for the six months ended June 30, 2012 increased to $2,187,288 from a net loss of $1,480,242 for the six months ended June 30, 2011.  The increase of $707,046 is primarily attributable to the factors described above.

 

Liquidity and Capital Resources

 

We have generated minimal revenues between June 30, 2012 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 June 30, 2012, we had a working capital deficit of $4,154,274.  For the six months ended June 30, 2012, we generated a net cash flow deficit from operating activities of $329,185, consisting primarily of year-to-date losses of $2,187,288.  Non-cash adjustments included $78,240 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 $139,923 for equity-based compensation, offset gains on settlement of debt of $663,220.  Additionally, we had a net decrease in current assets of $14,631 and a net increase in current liabilities of $346,041.  Cash used in investing activity was $-0-.  Cash provided by financing activities for the six months ended June 30, 2012 totaled $312,417, 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.

 

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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 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 and 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.

 

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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.

 

As of June 30, 2012, there were no outstanding employee stock 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.

 

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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 June 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.

 

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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.

 

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.

 

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

ITEM 4 – CONTROLS AND PROCEDURES

 

a) Evaluation of disclosure controls and procedures.

 

Our management is responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2012.  Based on this evaluation, and because of our limited resources and limited number of employees, our management concluded that our disclosure controls and procedures were ineffective as of June 30, 2012 due to a material weakness in internal control over financial reporting, which we view as an integral part of our disclosure controls and procedures.

 

b) Management’s Quarterly Report on Internal Control over Financial Reporting

 

Our management is also responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f).  Our internal control system is a process designed by, or under the supervision of, our principal executive and principal financial officer, or persons performing similar functions, and effected by our board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

 

26
 

 

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with the authorization of our management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.

 

Because of our inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2012.  As a result of its assessment, management identified a material weakness in our internal control over financial reporting.  Based on the weakness described below, management concluded that our internal control over financial reporting was not effective as of June 30, 2012.

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that, there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.  As a result of our assessment, management identified the following material weaknesses in internal control over financial reporting as of June 30, 2012:

 

  ¨ While there were internal controls and procedures in place that relate to financial reporting and the prevention and detection of material misstatements, these controls did not meet the required documentation and effectiveness requirements under the Sarbanes-Oxley Act (“SOX”), and therefore, management could not certify that these controls were correctly implemented.  As a result, it was management’s opinion that the lack of documentation warranted a material weakness in the financial reporting process.

 

  ¨ Our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Financial Officer, as appropriate to allow timely decisions. Inadequate controls include the lack of procedures used for identifying, determining, and calculating required disclosures and other supplementary information requirements.

 

  ¨ There is lack of segregation of duties in financial reporting, as our financial reporting and all accounting functions are performed by our Chief Financial Officer who also serves as our Chief Operations Officer.  This weakness is due to our lack of working capital to hire additional staff during the period covered by this report.  We intend to hire additional accounting personnel to assist with financial reporting as soon as our finances will allow.

 

This Quarterly Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.

 

 c) Changes in internal control over financial reporting.

 

There were no significant changes in our internal control over financial reporting that occurred during the three months ended June 30, 2012 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1 – LEGAL PROCEEDINGS

 

The information required by Item 1 is included in “Notes to the Consolidated Financial Statements—Note 13 – Commitments and Obligation—Litigation.”

 

ITEM 1A – RISK FACTORS

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On January 27, 2012, we (i) agreed to issue to the Plaintiffs the Settlement Shares; and (ii) further agreed that within 30 calendar days of the removal of the DTC Global Lock, we will issue each Plaintiff an individual two-year warrant for the purchase of a number of shares of the Company's common stock equal to the number of Settlement Shares received by that individual Plaintiff, with an exercise price of $0.70 per share, in exchange for the dismissal of the litigation described under “Notes to the Consolidated Financial Statements—Note 13 – Commitments and Obligation—Litigation.”

 

In January and February 2012, we issued and sold to three investors an aggregate of 232,000 shares of our common stock at a per share purchase price of $0.25 per share for proceeds of $58,000, and 60,000 shares of common stock to one entity for services provided, valued at $30,000.

 

In March 2012, we issued and sold to 12 investors an aggregate of 360,000 shares of our common stock at a per share purchase price of $0.25 per share for proceeds of $90,000.

 

In April 2012, we issued and sold 675,800 shares of our common stock to 13 investors at a per share purchase price of $0.25 for proceeds of $168,950 and 60,000 shares of common stock to one entity for services provided, valued at $30,000.

 

On May 3, 2012, we issued 60,000 shares to a law firm for legal services provided, valued at $38,400.

 

Each of the above issuances was made pursuant to an exemption from registration in reliance upon Section 4(2) of the Securities Act.

 

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

 
As of August 14, 2012, we were in default with respect to secured debt totaling an aggregate of $1,797,158 along with other loans payable totaling an aggregate of $143,069.
The secured debt includes three secured loans made to the Company by High Capital Funding LLC (“Lender or Plaintiff”) from August 2011 to December 2011 during our field operations related to our five-well Workover and Enhanced Oil Recovery Program in Montana (“Bridge Loans and Secured Loans”). On May 25, 2012, Lender filed a Complaint for Foreclosure against the Company alleging that the Company is in default for nonpayment of monies owed under the Bridge Loans and Secured Loans.

 

On August 13, 2012, the Company filed its “Answer and Counterclaim” in which the Company asserted various defenses to Plaintiff’s claims for relief as well as counterclaims against the Plaintiff for; Breach of Contract, Unjust Enrichment, Breach of Duty of Good Faith and Fair Dealing, Promissory Estoppel, Negligent Misrepresentation and Constructive Fraud.

 

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While the Company intends to vigorously defend against all allegations including the default allegation related to such loans, including pursuing its own claims against the Plaintiff, there can be no assurance that we will prevail in this matter and in such event, be able to cure or be given the opportunity to cure the default. Failure to do so may result in the Company having to foreclose on any collateral securing the debt such as the leases in Montana which could have a material adverse impact on the Company.

 

ITEM 4 – MINE SAFETY DISCLOSURES

 

Not applicable.

  

ITEM 5 – OTHER INFORMATION

 

On May 25, 2012, High Capital Funding LLC (“High Capital or Plaintiff”), filed a Complaint for Foreclosure in the Fifteenth Judicial District Court of the State of Montana, Roosevelt County, against the Company alleging that the Company is in default for nonpayment of monies owed under various loans made to the Company from the period beginning July 25, 2012 to December 12, 2012 (“the Loans”) during the Company’s field operations in Montana related to its five-well Workover and Enhanced Oil Recovery Program. In the Complaint, Plaintiff sought a judgment against the Company for the unpaid principal and interest owed under such loans.

 

On August 13, 2012, the Company filed its “Answer and Counterclaim” in which the Company asserted various defenses to Plaintiff’s claims for relief as well as counterclaims against the Plaintiff for; Breach of Contract, Unjust Enrichment, Breach of Duty of Good Faith and Fair Dealing, Promissory Estoppel, Negligent Misrepresentation, and Constructive Fraud. In its Answer and Counterclaim, the Company is ultimately seeking damages to be proven at trial which include, but are not limited to: lost revenue from oil production continuing to accrue since September 2011 as a result of Plaintiff’s negligent and untimely remittance of loan proceeds as agreed to by both parties; recovery of various shares of the Company’s restricted common stock and five-year exercise warrants for the purchase of the Company’s restricted common stock; and specific performance by the Plaintiff of its obligations under the Loans. On the same date, the Company also filed an “Application for Preliminary Injunction and Temporary Restraining Order” (the “Application”). In its Application, the Company is seeking relief including, but not limited to, an injunction preventing Plaintiff from transferring common shares or exercising warrants issued as partial consideration for such loans agreements.

 

Additional information is included in “Notes to the Consolidated Financial Statements—Note 13 – Commitments and Obligation—Litigation.”

 

ITEM 6 – EXHIBITS

 

The information required by this Item is set forth on the Exhibit Index at the end of this Quarterly Report on Form 10-Q.

 

29
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

  

DATED: August 14, 2012 NATIVE AMERICAN ENERGY GROUP, INC.
     
  By: /s/ Joseph G. D’Arrigo
  Name: Joseph G. D’Arrigo
  Title: Chief Executive Officer
  (Principal Executive Officer)
     
  By: /s/ Raj S. Nanvaan
  Name: Raj S. Nanvaan
  Title: Chief Financial Officer
  (Principal Financial Officer and Principal Accounting Officer)

 

30
 

 

EXHIBIT INDEX

 

Exhibit
Number
  Description
     
31.1   Certification by the Chief Executive Officer of Registrant pursuant to the Securities Exchange Act of 1934, Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2   Certification by the Chief Financial Officer of Registrant pursuant to the Securities Exchange Act of 1934, Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1   Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101.INS*  XBRL Instance Document

101.SCH* XBRL Taxonomy Extension Schema Document

101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB* XBRL Taxonomy Extension Label Linkbase Document.

101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF* XBRL Taxonomy Extension Definition Linkbase Document.

 

*

Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

31

PINX:NAGP Native American Energy Group Inc Quarterly Report 10-Q Filling

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