Notes to the Financial Statements
June 30, 2017 and 2016
Note 1 - Organization and Summary of Significant Accounting Policies
a. Organization
The American Energy Group, Ltd. (the Company) was incorporated in the State of Nevada on July 21, 1987 as Dimension Industries, Inc. Since incorporation, the Company has had several name changes including DIM, Inc. and Belize-American Corp. Internationale with the name change to The American Energy Group, Ltd. effective November 18, 1994. The Company’s authorized common stock, par value $0.001 is 80,000,000 shares. The Company’s authorized preferred stock, par value $0.001, is 20,000,000 shares. There is no preferred stock issued and outstanding.
During the year ended June 30, 1995, the Company incorporated additional subsidiaries including American Energy-Deckers Prairie, Inc., The American Energy Operating Corp., Tomball American Energy, Inc., Cypress-American Energy, Inc., Dayton North Field-American Energy, Inc. and Nash Dome Field-American Energy, Inc. In addition, in May 1995, the Company acquired all of the issued and outstanding common stock of Hycarbex, Inc. (Hycarbex), a Texas corporation, in exchange for 120,000 shares of common stock of the Company, a 1% overriding royalty on the Pakistan Project (see Note 2) and a future $200,000 production payment if certain conditions are met. The acquisition was accounted for as a pooling-of-interests on the date of the acquisition. The fair value of the assets and liabilities assumed approximated the fair value of the 120,000 shares issued of $60,000 as of the date of the acquisition. Accordingly, book value of the assets and liabilities assumed was $60,000. In April 1995, the name of that company was changed to Hycarbex-American Energy, Inc. The Company and its subsidiaries were principally in the business of acquisition, exploration, development and production of oil and gas properties.
On June 28, 2002, the Company was placed into involuntary Chapter 7 bankruptcy by three creditors, including Georg von Canal, an officer and director who was then involved in litigation with the Company to invalidate an attempt to remove him from his management positions. The bankruptcy filing followed an unsuccessful effort by management to resolve both the litigation and the need for a substantial cash infusion through a stock sale to a German-based investor which would have simultaneously resulted in a restructure of management. Shortly after this bankruptcy filing, the secured creditor holding a first lien on the Company’s only producing oil and gas leases in Fort Bend County, Texas, sought permission from the bankruptcy court to foreclose on those assets. The Company responded by converting the Chapter 7 bankruptcy proceedings to a Chapter 11 reorganization proceeding. The Company obtained approval of a plan of reorganization in September 2002, but the secured creditor was nevertheless permitted to foreclose upon the Fort Bend County oil and gas leases. Subsequent to the approval of the foreclosure of the oil and gas producing properties, the Company abandoned the remaining oil and gas properties except for one lease in southeast Texas. For the year ended June 30, 2003, the Company recognized a loss of $13,040,120 on the foreclosure and abandonment of the oil and gas properties and the sale of the fixed assets.
On October 26, 2003, the Company sold its wholly-owned subsidiary, Hycarbex-American Energy, Inc., for an 18% overriding royalty interest in the Exploration License No. 2768-7 dated August 11, 2001, of the Yasin Exploration Block. During the year ended June 30, 2015, the Company was awarded 100% of the stock of Hycarbex in the final decision of the ICC Tribunal on April 15, 2015, voiding the previous sale of the Hycarbex subsidiary, more fully discussed in Note 9 to these financial statements.
On January 29, 2004, the Company was released from bankruptcy. Pursuant to the plan, all of the existing 66,318,037 shares of common stock and 41,499 shares of preferred stock were cancelled. The Company issued 18,898,518 new shares of common stock to creditors. Also, the Company adopted the provisions for fresh-start reporting. Accordingly, the accumulated deficit accumulated through January 29, 2004 has been eliminated. The Company is considered to have a fresh-start due to the cancellation of the prior shareholders’ common stock and the subsequent issuance of common stock to creditors, the new shareholders.
THE AMERICAN ENERGY GROUP, LTD
Notes to the Financial Statements
June 30, 2017 and 2016
Note 1 - Organization and Summary of Significant Accounting Policies
(continued)
a. Organization (continued)
On April 14, 2005, the Company’s wholly owned inactive subsidiary, The American Energy Operating Corp. (AEOC) filed for voluntary bankruptcy liquidation. On July 24, 2006, The American Energy Operating Corp. received a final decree from the United States Bankruptcy Court – Southern District of Texas that the Company’s estate had been fully administered and that the Chapter 7 was closed. The Company no longer has any subsidiaries.
These financial statements do not include the consolidation of its recently re-acquired wholly owned subsidiary, Hycarbex American Energy, Inc as the Company had not yet received full access to the historical financial records, nor full control of its operations, as of June 30, 2015.
b. Accounting Methods
The Company’s financial statements are prepared using the accrual method of accounting. The Company has elected a June 30 year-end.
c. Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
d. Property and Equipment and Depreciation
Property and equipment are stated at cost. Depreciation on drilling and related equipment, vehicles and office equipment is provided using the straight-line method over expected useful lives of five to ten years. For the years ended June 30, 2017 and 2016, the Company incurred total depreciation of $509 and $801, respectively.
e. Basic Loss Per Share of Common Stock
|
|
For the Year
|
|
|
For the Year
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Loss (numerator)
|
|
$
|
(1,113,027
|
)
|
|
$
|
(3,468,720
|
)
|
|
|
|
|
|
|
|
|
|
Shares (denominator)
|
|
|
67,331,791
|
|
|
|
62,002,533
|
|
|
|
|
|
|
|
|
|
|
Per Share Amount
|
|
$
|
(0.02
|
)
|
|
$
|
(0.06
|
)
|
The basic loss per share of common stock is based on the weighted average number of shares issued and outstanding during the period of the financial statements. Stock warrants convertible into 11,193,334 and 11,193,334 shares of common stock for the years ended June 30, 2017 and 2016, respectively, are not included in the basic calculation because their inclusion would be antidilutive, thereby reducing the net loss per common share.
f. Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
THE AMERICAN ENERGY GROUP, LTD
Notes to the Financial Statements
June 30, 2017 and 2016
Note 1 - Organization and Summary of Significant Accounting Policies
(continued)
g. Long Lived Assets
All long-lived assets are evaluated for impairment per FASB ASC 360 whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. During the third quarter the Company was made aware that Heritage Oil and Gas Limited (Heritage), the operator of both the Zamzama North Exploration and the Sanjawi Exploration Licenses, was given a Notice of Termination (Sanjawi Petroleum Concession Agreement – notice dated February 12, 2016) and a Notice of Breach (Zamzama North Petroleum Concession Agreement – notice dated February 22, 2016) by the Director General of Petroleum Concessions of the Government of Pakistan. Heritage has acknowledged and accepted the notice of termination in regard to the Sanjawi Petroleum Concession Agreement. Although Heritage has refuted the basis of the claim of breach in regard to the Zamzama North Petroleum Concession Agreement asserting that all reasonable efforts have been made to fulfill its work commitments and financial obligations under this agreement but was prevented from doing so for reasons outside its control, the Company has determined that it is reasonably possible that the working interest investment in the Zamzama North Block will also not be recovered. As a result, the Company recorded an impairment loss in the amount of $1,583,914 in relation to these oil and gas interests.
h. Oil and Gas Sales Receivable and Revenue Recognition
Prior to the year ended June 30, 2015, the Company recognized revenue in accordance with SEC SAB 104 which stipulates that pervasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collection is reasonably assured. Prior to the year ended June 30, 2015, our revenue was derived exclusively from an overriding royalty interest. The Company recognized royalty revenues when production had occurred and royalties were due and payable under its contract with Hycarbex (Note 9 – Other Contingencies). During the year ended June 30, 2015, the Company was awarded 100% of the stock of our previously wholly owned Hycarbex subsidiary. Our prior oil and gas receivable earned through our ownership of the 18% overriding royalty interest in the Yasin Concession was due from Hycarbex and was not collected prior to our successful litigation results and being awarded 100% of the actual stock of the Hycarbex entity. Future oil and gas revenues will continue to be recorded in accordance with SEC SAB 104, upon obtaining full control of the entity.
i. Concentrations
The Company’s revenue and receivable is derived solely from its overriding royalty interest in the Yasin Concession which is located in the country of Pakistan.
j. Equity Securities
Equity securities issued for services rendered have been accounted for at the fair market value of the securities on the date of issuance.
k. Income Taxes
The Company accounts for corporate income taxes in accordance with FASB ASC 740-10 “Income Taxes”. FASB ASC 740-10 requires an asset and liability approach for financial accounting and reporting for income tax purposes.
The tax provision (benefit) for the year-ended June 30, 2017 and the year ended June 30, 2016 consisted of the following:
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total tax provision (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
THE AMERICAN ENERGY GROUP, LTD
Notes to the Financial Statements
June 30, 2017 and 2016
Note 1 - Organization and Summary of Significant Accounting Policies
(continued)
k. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of net operating losses and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Net operating loss carryovers of the Company will begin expiring in the year ended June 30, 2019. The Company’s total deferred tax liabilities, deferred tax assets, and deferred tax asset valuation allowances at June 30, 2017 and June 30, 2016 are as follows:
|
|
2017
|
|
|
2016
|
|
Net Operating Losses:
|
|
|
|
|
|
|
Federal
|
|
$
|
(57,077,133
|
)
|
|
$
|
(55,964,106
|
)
|
State
|
|
|
-
|
|
|
|
-
|
|
Total net operating losses
|
|
$
|
(57,077,133
|
)
|
|
$
|
(55,964,106
|
)
|
|
|
|
|
|
|
|
|
|
Deferred Tax Provision:
|
|
|
|
|
|
|
|
|
Total tax provision (benefit)
|
|
|
(19,406,225
|
)
|
|
|
(19,027,796
|
)
|
Less valuation allowance
|
|
|
19,406,225
|
|
|
|
19,027,796
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The reconciliation of income tax computed at statutory rates of income tax benefits is as follows:
|
|
2017
|
|
|
2016
|
|
Expense (benefit) at federal statutory rate
|
|
$
|
(378,429
|
)
|
|
$
|
(1,179,365
|
)
|
State tax effects
|
|
|
-
|
|
|
|
-
|
|
Non deductible expenses
|
|
|
-
|
|
|
|
-
|
|
Deferred tax asset valuation allowance
|
|
|
378,429
|
|
|
|
1,179,365
|
|
Income tax provision (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
The Financial Accounting Standards Board (FASB) has issued FASB ASC 740-10 (Prior authoritative literature: Financial Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (FIN 48)). FASB ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with prior literature FASB Statement No. 109, Accounting for Income Taxes. This standard requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. As a result of the implementation of this standard, the Company performed a review of its material tax positions in accordance with recognition and measurement standards established by FASB ASC 740-10.
At the adoption date of July 1, 2007, the Company had no unrecognized tax benefit which would affect the effective tax rate if recognized.
The Company includes interest and penalties arising from the underpayment of income taxes in the statements of operations in the provision for income taxes. As of June 30, 2017, the Company had no accrued interest or penalties.
The tax years that remain subject to examination by major taxing jurisdictions are those for the years ended June 30, 2017, 2016, 2015 and 2014.
THE AMERICAN ENERGY GROUP, LTD
Notes to the Financial Statements
June 30, 2017 and 2016
Note 1 - Organization and Summary of Significant Accounting Policies
(continued)
l. Fair Value of Financial Instruments (continued)
On January 1, 2008, the Company adopted FASB ASC 820-10-50, “
Fair Value Measurements.
This guidance defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:
|
·
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
·
|
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
|
·
|
Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement.
|
The carrying amounts reported in the balance sheets for the cash and cash equivalents, receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The carrying value of the promissory notes approximates fair value because negotiated terms and conditions are consistent with current market rates as of June 30, 2017.
m. Concentration of Credit Risk
Financial instruments which subject the Company to concentrations of credit risk include cash and cash equivalents. The Company maintains its cash and cash equivalents with major financial institutions selected based on management’s assessment of the banks’ financial stability. Balances occasionally exceed the $250,000 federal deposit insurance limit. The Company has not experienced any losses on deposits.
n. Restoration, Removal and Environmental Liabilities
The Company is subject to extensive federal, state and local environmental laws and regulations. These laws regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefit are expensed.
Liabilities for expenditures of a noncapital nature are recorded when environmental assessments and/or remediation is probable, and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments for the liability or component are fixed or reliably determinable. As of June 30, 2017, the Company believes it has no such liabilities.
o. New Accounting Pronouncements
Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, the FASB Accounting Standards Codification™ ("ASC") is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company. We have reviewed the FASB issued Accounting Standards Update ("ASU") accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation's reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.
THE AMERICAN ENERGY GROUP, LTD
Notes to the Financial Statements
June 30, 2017 and 2016
Note 2 – Oil and Gas Properties
The Company owns an interest in two oil and gas leases located in Southeast Texas. The Company is exploring various opportunities to realize value from these interests, including potential farmout or sale. The Company intends to adopt the full cost method of accounting for oil and gas properties in the event that the Company develops their interests in these leases. As of June 30, 2015, the Company does not have any proved reserves as defined under FASB ASC 932-235-50 (formerly SFAS No. 69) and has not incurred any costs associated with the development of these oil and gas properties and had not received any oil and gas revenue from these leases. The carrying value of these leases is $0.
Subsequent to the year ended June 30, 2015, the Company was awarded 100% of the stock of its previously wholly owned subsidiary, Hycarbex American Energy, Inc. Prior to the year ended June 30, 2015, the Company held an 18% gross royalty interest in the Yasin Concession in Pakistan, which was received in exchange for the original sale of Hycarbex.. Revenues to have been derived from this interest were overriding in nature and there were no future financial obligations or commitments required of the Company to secure this royalty interest.
The Company has not yet received full access to the historical financial and property records of Hycarbex since receiving the judgment award of the ICC subsequent to the year ended June 30, 2015,
and as a result the Company has been unable to consolidate the accounting of Hycarbex into these financial statements Oil and Gas properties currently determined to be owned by Hycarbex include working interests in five (5) large exploration blocks within Pakistan. These interests include: Block No. 2768-7 (Yasin), 673 square miles; Block No. 2667-8 (Zamzama North), 474 square miles; Block No. 3068-2 (Sanjawi), 871 square miles; Block No. 2466-8 (Karachi), 851 square miles; and Block No. 3371-13 (Peshawar), 960 square miles. Hycarbex is the registered owner of a 75% working interest in the Yasin Exploration Block, 95% working interest in the Karachi and Peshawar Exploration Blocks, 20% working interest in Zamzama North and Sanjawi Exploration Blocks, of which 10% is carried as to exploration costs with back-in rights to acquire an additional 10% working interest upon commercial discovery.
Note 3 – Notes Payable – Related Party
During the years ended June 30, 2017 and 2016, the Company borrowed $255,000 and $650,000, respectively, from a current shareholder. Interest on these notes accrues at 5% and is payable in full at maturity. The notes mature in February of 2020. The Company has accrued interest expense of $81,414 and $62,366 during the years ended June 30, 2017 and June 30, 2016, respectively, on these notes. The oil and gas properties in Southeast Texas serve as collateral on these notes.
In addition during the year ended June 30, 2017, the Company borrowed $17,000 from an individual investor. Interest on these notes accrues at 2.50% and is payable in full at maturity. The notes mature in April of 2019. The Company has accrued interest expense of $103 during the year ended June 30, 2017 on these notes.
Note 4 – Lease Commitments
During the year ended June 30, 2015, the Company entered into a lease for office space with an original lease term of 5 years.
During the year ended June 30, 2016, the Company terminated the lease and vacated the lease space.
During the years ended June 30, 2017 and 2016, the Company incurred net rental expense of $0 and $6,753, respectively.
Note 5 – Common Stock
During July 2015, the Company issued 549,584 shares of common stock for cash in the amount of $86,500.
THE AMERICAN ENERGY GROUP, LTD
Notes to the Financial Statements
June 30, 2017 and 2016
Note 5 – Common Stock (continued)
During August 2015, the Company issued 2,000,000 shares of common stock for services in the amount of $300,000.
During January 2016, the Company issued 999,333 shares of common stock for services in the amount of $144,903.
During February 2016, the Company issued 1,100,000 shares of common stock for cash in the amount of $110,000.
During April 2016, the Company issued 400,000 shares of common stock for cash in the amount of $60,000.
During May 2016, the Company issued 1,000,000 shares of common stock for legal services in the amount of $200,000.
During July, 2016, the Company issued 516,667 shares of common stock for cash at $0.12 per share.
During August, 2016, the Company issued 600,000 shares of common stock at $.10 per share.
During August, 2016, the Company also cancelled 1,088,193 shares previously issued in exchange for services in 2011.
During December, 2016, the Company issued 428,571 shares of common stock for cash at $0.07 per share.
During February, 2017, the Company entered into a stock purchase agreement with an individual investor to acquire 1,714,286 shares of common stock for a total of $120,000 ($0.07 per share). As of March 31, 2017 the Company received $70,000 in relation to this stock purchase agreement. The remaining balance of $50,000 was received in April, 2017.
During June, 2017, the Company issued 1,428,571 shares of common stock for cash at $0.07 per share.
Note 6 – Common Stock Warrants
Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB ASC 480-10 “Share Based Payment” using the modified-prospective-transition method. Under this transition method, total compensation cost recognized in the statement of operations for the years ended June 30, 2007 and 2006 includes compensation costs for all share-based payments granted prior to, but not yet vested as of January 1,
2006, based on the grant date fair value estimated in accordance with the original
provisions of FASB ASC
480-10, and compensation costs for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of FASB ASC 480-10. The Company estimates the fair value of each stock award at the grant date by using the Black-Scholes option pricing model.
During the year ended June 30, 2017, the Company extended 5,333,334 warrants in connection with the financing addressed in Note 5. The warrants can be purchased at $0.10 per share. The Company reported a $258,183 loss on extinguishment of debt related to the extension of these warrant issuances. The expense of these warrants was calculated using the Black-Scholes option pricing model using the following assumptions:
Dividend yield
|
|
|
0
|
|
Expected volatility
|
|
|
1.20
|
%
|
Risk free interest
|
|
|
0.50
|
%
|
Expected life
|
|
3.5 years
|
|
A summary of the status of the Company’s stock warrants as of June 30, 2017 and 2016 is presented below:
THE AMERICAN ENERGY GROUP, LTD
Notes to the Financial Statements
June 30, 2017 and 2016
Note 6 - Common Stock Warrants (continued)
|
|
|
|
|
|
|
|
Weighted Ave.
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Exercisable, June 30, 2015
|
|
|
10,193,334
|
|
|
$
|
0.10-1.50
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,000,000
|
|
|
$
|
0.20-0.20
|
|
|
$
|
0.20
|
|
Expired/Canceled
|
|
|
(2,000,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Exercisable, June 30, 2016
|
|
|
11,193,334
|
|
|
$
|
0.10-1.50
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Exercisable, June 30, 2017
|
|
|
11,193,334
|
|
|
$
|
0.10–1.50
|
|
|
$
|
0.14
|
|
A summary of outstanding stock warrants at June 30, 2017 follows:
Number of
|
|
|
|
|
Remaining
|
|
|
|
|
|
Weighted
|
|
Common Stock
|
|
|
|
|
Contracted
|
|
|
Exercise
|
|
|
Ave Exer.
|
|
Equivalents
|
|
|
Expir. Date
|
|
Life (Years)
|
|
|
Price
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
August, 2016
|
|
|
.250
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
210,000
|
|
|
August, 2016
|
|
|
.250
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
2,333,334
|
|
|
February 2020
|
|
|
2.750
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
1,500,000
|
|
|
February 2020
|
|
|
2.750
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
2,600,000
|
|
|
May 2018
|
|
|
1.000
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
2,000,000
|
|
|
February 2020
|
|
|
2.750
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
1,000,000
|
|
|
February 2020
|
|
|
2.750
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
500,000
|
|
|
February 2020
|
|
|
2.750
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
1,000,000
|
|
|
February 2020
|
|
|
2.750
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
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Note 7 – Investment in Oil and Gas Working Interest – Related Party
On October 29, 2009, the Company executed an agreement to acquire from Hycarbex – American Energy, Inc. (Hycarbex), a related party, a two and one half percent (2-1/2%) working interest in each of the 2,258 square kilometer Sanjawi Block No. 3068-2, Zone II, Baluchistan Province, Pakistan, and 1,229 square kilometer Zamzama North Block No. 2667-8, Zone III, Sindh Province, Pakistan. In exchange for the working interest, the Company issued (1) 2,000,000 shares of common stock to Hycarbex, (2) 100,000 warrants with a three year duration to purchase an additional 100,000 shares at $1.75 per share and (3) $100,000 in cash. The Company has the option to convert the two and one half percent working interests described above to a one and one half percent gross royalty working interest at any time. During the third quarter the Company was made aware that Heritage Oil and Gas Limited (Heritage), the operator of both the Zamzama North Exploration and the Sanjawi Exploration Licenses, was given a Notice of Termination (Sanjawi Petroleum Concession Agreement – notice dated February 12, 2016) and a Notice of Breach (Zamzama North Petroleum Concession Agreement – notice dated February 22, 2016) by the Director General of Petroleum Concessions of the Government of Pakistan. Heritage has acknowledged and accepted the notice of termination in regards to the Sanjawi Petroleum Concession Agreement. Although Heritage has refuted the basis of the claim of breach in regards to the Zamzama North Petroleum Concession Agreement asserting that all reasonable efforts have been made to fulfill its work commitments and financial obligations under this agreement but was prevented from doing so for reasons outside its control, the Company has determined that it is reasonably possible that the working interest investment in the Zamzama North Block will also not be recovered. As a result the Company recorded an impairment loss in the amount of $1,583,914 in relation to these oil and gas interests. As of June 30, 2017 and 2016, the Company has capitalized $0 related to these working interests.
THE AMERICAN ENERGY GROUP, LTD
Notes to the Financial Statements
June 30, 2017 and 2016
Note 8 – Subsequent Events
Subsequent to June 30, 2017, the Company issued an additional 714,286 common shares at $0.07 for a total of $50,000.
Note 9 – Other Contingencies
Litigation
In December 2011, we initiated civil legal proceedings against Hycarbex and others in the High Court of Islamabad, Pakistan. Our pleadings with respect to the 2.5% carried working interest positions in the Sanjawi and Zamzama North concessions sought a registration of those interests with the Government of Pakistan and simultaneously sought the imposition of an injunction preventing the transfer of the working interest in those concessions until the registration can be effected, thereby protecting our interests. In our pleadings with respect to the Yasin concession and the right to receive 18% of the gross production revenues, our pleadings sought a referral to arbitration based upon ownership of, in effect, a 25% carried working interest to which is attributed 18% of gross production revenues and the right to receive pertinent records and data, the appointment of a receiver to both protect and cause disbursement of the 18% of gross revenues since the inception of production in April 2011, and the imposition of an injunction against the transfer of the working interest in the Yasin concession. The Court immediately issued two injunction orders preserving the status quo as to the Company’s interests in each of the Yasin, Sanjawi and Zamzama North petroleum concessions.
On March 27, 2012, the Islamabad High Court issued its final order (later clarified as to certain arbitration procedures by a clarification Order dated April 4, 2012). The Court directed the parties to proceed to arbitration in London, UK under the ICC Rules of Arbitration and further reaffirmed the continuation of the pending temporary injunctions against Hycarbex’s potential transfer of interests in the concessions prior to final resolution in the arbitration forum. Our application for the appointment of a receiver was neither granted nor denied, but was instead deferred by the Court to the arbitration forum. Hycarbex appealed the March 27, 2012 Order asserting that litigation should not have been initiated by American Energy without first going to arbitration, asserting that our claims to 18% of gross production revenues were premature (despite already having made some payments toward that production interest) because a “commercial discovery” had not yet been declared, and asserting that the injunctions had the effect of enjoining all of the working interest, not just a portion. American Energy countered with an appeal that the Court should reconsider the application for a receiver due to an existing arbitration rule which would prevent the arbitration forum from granting interim relief of that type, irrespective of the merits of such an application. The appeals have become moot by virtue of the ICC Partial Final Award described below.
On April 10, 2012, pursuant to the terms of the March 27, 2012, Islamabad High Court Order, we filed our claim with the International Chamber of Commerce (“ICC”) International Court of Arbitration. In this claim, we are seeking an order which voids,
ab initio
, the original 2003 Stock Purchase Agreement under which Hycarbex’s parent company acquired the stock of Hycarbex (and thus the underlying Yasin concession owned by Hycarbex) and in conjunction therewith, seeks the recovery of any financial dividends or advances which may have been made by Hycarbex to its shareholders based upon our assertions in the claim that Hydro Tur, Ltd., the original purchaser of the Hycarbex stock under the 2003 Stock Purchase Agreement, fraudulently misrepresented to American Energy that “no current or past shareholders, officers and/or directors of American Energy or Hycarbex have any interest, direct or indirect, in the ownership of Hydro Tur, Ltd.”
Note 9– Other Contingencies (continued)
Litigation (continued)
In February, 2013, we filed an Application For Interim Relief with the ICC which was heard by the tribunal on June 13, 2013. By Order dated September 25, 2013, the ICC granted all requests made by the Company against Hycarbex American Energy, Inc. (“Hycarbex”), Hycarbex Asia Pte, Ltd. (“Hycarbex Asia”) and Hydro Tur, Ltd. (“Hydro Tur”) in its Application For Interim Relief filed with the ICC in February, 2013 and presented to the ICC in a hearing conducted June 13, 2013. By Order dated September 25, 2013, the ICC granted to the Company all requested relief and therein ordered Hycarbex, Hycarbex Asia and Hydro Tur to do the following within fourteen (14) days of the Order: (1) to produce to the Company the records of production and sales from the Yasin petroleum concession in Pakistan for the period August 2011 through the date of the Order and to continue to do so pending further order, (2) to pay to the Company 18% of all sales proceeds of hydrocarbons received by such parties between August 2011 through December 2012, (3) to pay to the Company 18% of all sales proceeds of hydrocarbons received by such parties between December 2012 and the date of the Order, and (4) to direct the purchaser of the hydrocarbons to pay direct to the Company 18% of all future sale proceeds during the pendency of the arbitration proceedings. The ICC further ordered that in the event that Hycarbex, Hycarbex Asia and Hydro Tur fail to produce to the Company the production and sales records for the period August 2011 through December 2012 within the fourteen (14) days following the Order, that such parties are ordered to pay to the Company $1,436,138 as an approximate interim amount pending the determination of actual sale proceeds from the actual records. The ICC further ordered that in the event that Hycarbex, Hycarbex Asia and Hydro Tur fail to produce to the Company the production and sales records for the period December 2012 through the date of the Order and continue to do so, that the arbitration tribunal will consider an application from the Company for a further Order as to an approximate interim monetary amount pending the determination of actual sales proceeds for such period. Subsequent to this ICC Order, Hycarbex produced certain sales records and other records of Hycarbex but Hycarbex and Hycarbex Asia failed to pay the ordered monetary sum. Hycarbex and Hycarbex Asia also requested a modification of the Order granting interim relief. The Order was not suspended by the ICC while this request was under consideration. By communication from the ICC dated February 4, 2014, the modification requested by Hycarbex and Hycarbex Asia was denied by the arbitration tribunal. The Liquidators for Hycarbex Asia appointed in 2013 in the pending insolvency proceedings for Hycarbex Asia in Singapore replaced their legal counsel and then requested a stay of the arbitration proceedings on February 12, 2014 from the English High Court of Justice, Chancery Division. However, this request for stay of the arbitration proceedings was promptly denied by the English Court and Hycarbex Asia was directed by the Court to pay to the Company costs of £40,000, which have been paid.
On February 17, 2014, the arbitration proceedings commenced before the 3-arbitrator tribunal with the first order of business being consideration of another request to the arbitration tribunal by the Liquidators of Hycarbex Asia for suspension of the proceeding or, in the alternative, a postponement to permit newly appointed legal counsel to prepare a proper defense to the Company’s claims in arbitration. A complete suspension was rejected by the Tribunal. The Liquidators voluntarily offered to pay interim costs of $50,000 toward the actual costs determined by the Tribunal as caused by the request. We opposed the postponement and indicated that any consideration of same must be conditioned upon protection of the disputed assets and adequate measures to assure payment to us of the monies due to us under the September 25, 2013 Order granting interim relief. The tribunal adjourned the final hearing on the merits until June 16, 2014, based upon Hycarbex Asia’s assertion that the change of counsel was necessitated by a conflict arising out of a divergence of the respective interests of Hycarbex Asia and the other Defendants. We were awarded the $50,000 in inconvenience costs offered by Hycarbex Asia, which have been paid, and given the opportunity to request an increase in that sum based upon actual costs incurred. The Tribunal further issued an interim Order dated February 25, 2014, requiring Hycarbex to produce to us all records of production from August 2011 forward, including any production which occurs after the date of the Order. The Order further required Hycarbex to produce any future notices of regulatory action or default received from the Government of Pakistan. The Order further ordered that the parties prepare a joint letter to Sui Southern Gas Company Limited (the purchaser of the gas from the Haseeb #1 Well) withdrawing Hycarbex’s October 8, 2013 instruction letter to Sui Southern Gas Company and further ordered that the joint letter direct Sui Southern Gas Company Limited to pay 18% of the gross production proceeds directly to the Company going forward. The Order further directed that the joint letter be submitted to Sui Southern Gas Company Limited within 7 days after agreement is reached on the form of the letter. The Company and Hycarbex Asia reached agreement as to the form of the letter during the second week of May, 2014, and the joint letter was submitted to Sui Southern Gas Company Limited. The Order further authorized our use of any documents and transcripts from the arbitration proceedings in any ancillary proceeding initiated by the Company in Pakistan.
Note 9– Other Contingencies (continued)
Litigation (continued)
In August, 2014, we initiated separate legal actions in Pakistan for an injunction against Sui Southern Gas Company Limited (“Sui Southern”) and Hycarbex-American Energy, Inc. (“Hycarbex”), respectively, in furtherance of the prior interim orders of the Arbitration Tribunal. The new action filed in the Sindh, Karachi High Court named as defendants Sui Southern, Hycarbex, its parent company, Hycarbex Asia Pte. Ltd. (“Hycarbex Asia”) and two additional pro forma defendants and requests an injunction against Sui Southern against payment to Hycarbex of 18% of the total proceeds of gas sales. The requested injunction was granted to us by the Karachi Court, but later vacated as premature as it pertains to the third party gas gatherer. However, we also filed in the Islamabad Court an action against Hycarbex, Hycarbex Asia and Hydro Tur as defendants and obtained injunctive relief against Hycarbex from interference with the Arbitration Tribunal-ordered notifications to Sui Southern to pay us directly our 18% of production, and injunctive relief requiring Hycarbex to escrow the 18% of production which would have been payable to the Company. On April 15, 2015, the ICC Arbitration Tribunal rendered its Partial Final Award in the pending arbitration proceedings which declares that the November 9, 2003 Stock Purchase Agreement between the Company, Hycarbex and Hydro-Tur, which was amended on February 16, 2004, and December 15, 2009, is void ab initio and of no legal effect on account of the fraud and misrepresentations of Hycarbex, Hydro-Tur and Hycarbex-Asia and that the Company is thus the 100% owner of the common stock of Hycarbex relating back to the original Stock Purchase Agreement date of November 9, 2003. In connection with its findings, the ICC Arbitration Tribunal ordered that the register of shareholders for Hycarbex be corrected to reflect the Company as the owner of 100% of the common stock, that Hycarbex and Hycarbex-Asia take any and all steps necessary to effect the rectification of the register of shareholders of Hycarbex to reflect the Company as the owner of 100% of the common stock, and that Hycarbex and Hycarbex-Asia bear all costs of the arbitration proceedings, including the Company’s legal costs, which costs and fees are to be fixed by the ICC Arbitration Tribunal in a subsequent award after submission of the total costs and fees by AEGG. The ICC Arbitration Tribunal dismissed Hydro-Tur’s application for costs. The April 15 Award makes moot certain of the pending actions in Pakistan due to the recovery of ownership of 100% of the stock of Hycarbex.
The Company has affected the shareholder and management registration changes ordered by the ICC and has caused Hycarbex to open a new office in Islamabad, Pakistan for Hycarbex's future operations. The new management of Hycarbex has also assumed control of Hycarbex's Pakistan personnel. Finally, the new management of Hycarbex has begun its efforts to assume complete control of the Pakistan-based assets, including review and appraisement of each asset, interfacing with the local oil and gas regulatory authorities with jurisdiction over those assets to assure regulatory compliance, and continuation of legal proceedings where necessary to enforce its rights. The assumption of complete control of the Hycarbex Pakistan-based assets is expected to take several months and is not expected to be completed until calendar 2017.
Note 10 – Going Concern
The Company’s financial statements have been prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. Accordingly, the financial statements do not include any adjustments related to the recoverability of assets or classification of liabilities that might be necessary should the Company be unable to continue as a going concern. At June 30, 2017, the Company’s current liabilities exceeded its current assets, it has recorded negative cash flows from operations. The preceding circumstances combine to raise substantial doubt about the Company’s ability to continue as a going concern. Management expects to continue to be successful in future capital raises, if necessary, to continue operations.
The Company has evaluated subsequent events from the balance sheet date through the date the financial statements were issued and determined there were no additional items to report.