Attached files
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EX-31 - Royal Energy Resources, Inc. | v190592_ex31.htm |
EX-32 - Royal Energy Resources, Inc. | v190592_ex32.htm |
U.S.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended: May 31, 2010
File No.
000-52547
Royal Energy
Resources,
Inc.
(Name of
small business issuer in our charter)
Delaware
|
11-3480036
|
|
(State
or other jurisdiction of
|
(IRS
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
543 Bedford
Avenue,
#176, Brooklyn,
NY 11211
(Address
of principal executive offices) (Zip Code)
Registrant's
telephone number: 800-620-3029
Indicate
by check mark whether the registrant: (1) 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
x 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 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, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting
company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes ¨ No x
State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 39,713,731 shares of common stock outstanding
as of July 7, 2010.
The
accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial reporting
and pursuant to the rules and regulations of the Securities and Exchange
Commission ("Commission"). While these statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for fair
presentation of the results of the interim period, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the financial statements and footnotes thereto, contained in the Company’s Form
10-K dated August 31, 2009.
TABLE OF
CONTENTS
Page
|
||
PART
I – FINANCIAL INFORMATION
|
||
Item
1:
|
Condensed
Unaudited Financial Statements
|
3
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
|
|
Item
3:
|
Quantitative
and Qualitative Disclosures About Market Risk
|
24
|
Controls
and Procedures
|
24
|
|
PART
II - OTHER INFORMATION
|
25
|
|
Legal
Proceedings
|
25
|
|
Item
1A:
|
Risk
Factors
|
25
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
25
|
|
Defaults
upon Senior Securities
|
25
|
|
Submission
of Matters to a Vote of Security Holders
|
25
|
|
Other
Information
|
25
|
|
Exhibits
|
25
|
2
ROYAL
ENERGY RESOURCES, INC.
(A
Development Stage Company)
Condensed
Balance Sheets
May
31, 2010 (unaudited) and August 31, 2009
May
31,
|
August
31,
|
|||||||
2010
|
2009
|
|||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 5 | $ | 18,680 | ||||
Accounts
receivable
|
4,990 | 908 | ||||||
Prepaid
expenses
|
- | 30,000 | ||||||
Total
current assets
|
4,995 | 49,588 | ||||||
Oil
and gas properties, on full cost method:
|
||||||||
Proved
properties
|
56,335 | 50,335 | ||||||
Unproved
properties not being amortized
|
4,878 | 15,152 | ||||||
61,213 | 65,487 | |||||||
Accumulated
depreciation, depletion and amortization
|
(12,182 | ) | (11,469 | ) | ||||
49,031 | 54,018 | |||||||
Other
assets
|
||||||||
Prepaid
drilling costs
|
32,558 | 50,343 | ||||||
Investment
in uranium properties
|
4,329 | 4,329 | ||||||
Deposits
|
1,040 | 1,040 | ||||||
Total
other assets
|
37,927 | 55,712 | ||||||
Total
assets
|
$ | 91,953 | $ | 159,318 | ||||
Liabilities
and Stockholders' Equity (Deficit)
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 42,239 | $ | 30,198 | ||||
Convertible
note payable
|
80,000 | 80,000 | ||||||
Accrued
interest
|
14,000 | - | ||||||
Convertible
debenture
|
4,530 | - | ||||||
Total
current liabilities
|
140,769 | 110,198 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders'
equity (deficit)
|
||||||||
Preferred
stock: $0.00001 par value; authorized 10,000,000 shares; 100,000 shares
issued and outstanding
|
1 | 1 | ||||||
Common
stock: $0.00001 par value; authorized 100,000,000 shares; 24,513,731 and
22,388,731 shares issued and outstanding at May 31, 2010 and August 31,
2009, respectively
|
245 | 224 | ||||||
Additional
paid-in capital
|
2,999,045 | 2,879,466 | ||||||
Deferred
option and stock compensation
|
(27,045 | ) | (273,807 | ) | ||||
Common
stock subscription receivable
|
(197,797 | ) | (151,969 | ) | ||||
Accumulated
deficit
|
(28,995 | ) | (28,995 | ) | ||||
Deficit
accumulated during the development stage
|
(2,794,270 | ) | (2,375,800 | ) | ||||
Total
stockholders' equity (deficit)
|
(48,816 | ) | 49,120 | |||||
Total
liabilities and stockholders' equity (deficit)
|
$ | 91,953 | $ | 159,318 |
See
accompanying notes to condensed financial statements.
3
ROYAL
ENERGY RESOURCES, INC.
(A
Development Stage Company)
Condensed
Statements of Operations
Three
Months Ended May 31, 2010 and 2009
(Unaudited)
Three
Months Ended
|
||||||||
May
31,
|
||||||||
2010
|
2009
|
|||||||
Oil
and gas production
|
$ | 3,221 | $ | 1,810 | ||||
Total
revenues
|
3,221 | 1,810 | ||||||
Costs
and expenses:
|
||||||||
Lease
operating expense
|
2,739 | 899 | ||||||
Production
taxes
|
232 | 130 | ||||||
Depreciation,
depletion and amortization
|
336 | 594 | ||||||
Asset
impairment
|
18,676 | - | ||||||
Non-cash
compensation
|
24,628 | 235,995 | ||||||
Other
selling, general and administrative expense
|
8,421 | 48,125 | ||||||
Total
costs and expenses
|
55,032 | 285,743 | ||||||
Loss
from operations
|
(51,811 | ) | (283,933 | ) | ||||
Other
expenses (income):
|
||||||||
Loss
on comodities trading
|
- | (2,568 | ) | |||||
Interest
income
|
- | - | ||||||
Interest
income - related party
|
(1,449 | ) | (1,263 | ) | ||||
Interest
expense
|
18,755 | 3,500 | ||||||
17,306 | (331 | ) | ||||||
Loss
before income taxes
|
(69,117 | ) | (283,602 | ) | ||||
Provision
for income taxes
|
- | - | ||||||
Net
loss
|
$ | (69,117 | ) | $ | (283,602 | ) | ||
Net
loss per share, basic and diluted
|
$ | (0.00 | ) | $ | (0.01 | ) | ||
Weighted
average shares outstanding, basic and diluted
|
24,193,079 | 19,136,296 |
See
accompanying notes to condensed financial statements.
4
ROYAL
ENERGY RESOURCES, INC.
(A
Development Stage Company)
Condensed
Statements of Operations
Nine
Months Ended May 31, 2010 and 2009 and
from
inception (July 22, 2005) through May 31, 2010
(Unaudited)
Inception
|
||||||||||||
(July 22, 2005)
|
||||||||||||
Nine Months Ended
|
Through
|
|||||||||||
May 31,
|
May 31,
|
|||||||||||
2010
|
2009
|
2010
|
||||||||||
Oil
and gas production
|
$ | 6,372 | $ | 2,499 | $ | 10,682 | ||||||
Total
revenues
|
6,372 | 2,499 | 10,682 | |||||||||
Costs
and expenses:
|
||||||||||||
Lease
operating expense
|
6,000 | 3,649 | 11,711 | |||||||||
Production
taxes
|
459 | 180 | 769 | |||||||||
Depreciation,
depletion and amortization
|
713 | 783 | 1,907 | |||||||||
Asset
impairment
|
18,676 | - | 55,606 | |||||||||
Non-cash
compensation
|
298,262 | 1,137,072 | 2,075,670 | |||||||||
Other
selling, general and administrative expense
|
78,705 | 173,913 | 574,135 | |||||||||
Total
costs and expenses
|
402,815 | 1,315,597 | 2,719,798 | |||||||||
Loss
from operations
|
(396,443 | ) | (1,313,098 | ) | (2,709,116 | ) | ||||||
Other
expenses (income):
|
||||||||||||
Loss
on disposition by rescission agreement of condominium
|
- | - | 15,000 | |||||||||
Loss
on comodities trading
|
719 | 25,168 | 36,557 | |||||||||
Interest
income
|
- | (2,853 | ) | (4,414 | ) | |||||||
Interest
income - related party
|
(4,197 | ) | (2,518 | ) | (11,644 | ) | ||||||
Interest
expense
|
25,505 | 11,875 | 49,655 | |||||||||
22,027 | 31,672 | 85,154 | ||||||||||
Loss
before income taxes
|
(418,470 | ) | (1,344,770 | ) | (2,794,270 | ) | ||||||
Provision
for income taxes
|
- | - | - | |||||||||
Net
loss
|
$ | (418,470 | ) | $ | (1,344,770 | ) | $ | (2,794,270 | ) | |||
Net
loss per share, basic and diluted
|
$ | (0.02 | ) | $ | (0.07 | ) | ||||||
Weighted
average shares outstanding, basic and diluted
|
23,372,064 | 18,707,475 |
See
accompanying notes to condensed financial statements.
5
ROYAL
ENERGY RESOURCES, INC.
(A
Development Stage Company)
Condensed
Statements of Stockholders' Equity (Deficit)
Inception
of Development Stage, July 22, 2005, through May 31, 2010
Additional
|
||||||||||||||||||||
Preferred
stock
|
Common
stock
|
Paid-in
|
||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
||||||||||||||||
Inception,
July 22, 2005
|
- | - | 5,930,300 | 59 | 22,426 | |||||||||||||||
Sale
of common stock for cash
|
- | - | 320,000 | 3 | 31,997 | |||||||||||||||
Common
stock issued for real estate investment
|
- | - | 1,900,000 | 19 | 189,981 | |||||||||||||||
Contribution
to capital
|
- | - | - | - | 6,560 | |||||||||||||||
Net
loss
|
- | - | - | - | - | |||||||||||||||
Balance
August 31, 2005
|
- | - | 8,150,300 | 81 | 250,964 | |||||||||||||||
Sale
of common stock for cash
|
- | - | 1,086,667 | 12 | 120,488 | |||||||||||||||
Net
loss
|
- | - | - | - | - | |||||||||||||||
Balance,
August 31, 2006
|
- | - | 9,236,967 | 93 | 371,452 | |||||||||||||||
Sale
of common stock
|
- | - | 4,670,060 | 46 | 161,614 | |||||||||||||||
Net
loss
|
- | - | - | - | - | |||||||||||||||
Balance,
August 31, 2007
|
- | - | 13,907,027 | 139 | 533,066 | |||||||||||||||
Sale
of preferred stock
|
100,000 | 1 | - | - | 999 | |||||||||||||||
Sale
of common stock
|
- | - | 2,295,704 | 23 | 413,149 | |||||||||||||||
Common
stock issued for consulting contracts
|
- | - | 2,965,000 | 30 | 977,745 | |||||||||||||||
Cash
portion of consulting contracts
|
- | - | - | - | - | |||||||||||||||
Rescission
of real estate purchase
|
- | - | (1,900,000 | ) | (19 | ) | (199,981 | ) | ||||||||||||
Amortization
of prepaid consulting contracts:
|
||||||||||||||||||||
Non-cash
portion
|
- | - | - | - | - | |||||||||||||||
Cash
portion
|
- | - | - | - | - | |||||||||||||||
Stock
subscription receivable:
|
||||||||||||||||||||
Payments
received
|
- | - | - | - | - | |||||||||||||||
Interest
accrued
|
- | - | - | - | - | |||||||||||||||
Net
loss
|
- | - | - | - | - | |||||||||||||||
Balance,
August 31, 2008
|
100,000 | 1 | 17,267,731 | 173 | 1,724,978 | |||||||||||||||
Sale
of common stock for cash
|
- | - | 20,000 | - | 3,600 | |||||||||||||||
Common
stock issued for consulting contracts
|
- | - | 3,551,000 | 36 | 887,403 | |||||||||||||||
Cash
portion of consulting contracts
|
- | - | - | - | - | |||||||||||||||
Amortization
of prepaid consulting contracts:
|
||||||||||||||||||||
Non-cash
portion
|
- | - | - | - | - | |||||||||||||||
Cash
portion
|
- | - | - | - | - | |||||||||||||||
Stock
subscription receivable:
|
||||||||||||||||||||
Sold
|
- | - | 1,550,000 | 15 | 263,485 | |||||||||||||||
Payments
received
|
- | - | - | - | - | |||||||||||||||
Interest
accrued
|
- | - | - | - | - | |||||||||||||||
Net
loss
|
- | - | - | - | - | |||||||||||||||
Balance,
August 31, 2009
|
100,000 | 1 | 22,388,731 | 224 | 2,879,466 | |||||||||||||||
Common
stock issued for consulting contracts
|
- | - | 1,025,000 | 10 | 51,490 | |||||||||||||||
Amortization
of prepaid consulting contracts
|
- | - | - | - | - | |||||||||||||||
Stock
issued for drilling agreement
|
- | - | 100,000 | 1 | 5,999 | |||||||||||||||
Intrinsic
value of beneficial conversion feature of convertible
debenture
|
- | - | - | - | 2,100 | |||||||||||||||
Stock
subscription receivable:
|
||||||||||||||||||||
Sold
|
- | - | 1,000,000 | 10 | 59,990 | |||||||||||||||
Payments
received
|
- | - | - | - | - | |||||||||||||||
Interest
accrued
|
- | - | - | - | - | |||||||||||||||
Net
loss
|
- | - | - | - | - | |||||||||||||||
Balance,
May 31, 2010
|
100,000 | $ | 1 | 24,513,731 | $ | 245 | $ | 2,999,045 |
(Continued)
See
accompanying notes to condensed financial statements.
6
ROYAL
ENERGY RESOURCES, INC.
(A
Development Stage Company)
Condensed
Statements of Stockholders' Equity (Deficit), continued
Inception
of Development Stage, July 22, 2005, through May 31, 2010
Deficit
|
||||||||||||||||||||
Accumulated
|
||||||||||||||||||||
During
|
||||||||||||||||||||
Subscription
|
Deferred
|
Accumulated
|
Development
|
|||||||||||||||||
Receivable
|
Expenses
|
Deficit
|
Stage
|
Total
|
||||||||||||||||
Inception,
July 22, 2005
|
- | - | (28,995 | ) | - | (6,510 | ) | |||||||||||||
Sale
of common stock for cash
|
- | - | - | - | 32,000 | |||||||||||||||
Common
stock issued for real estate investment
|
- | - | - | - | 190,000 | |||||||||||||||
Contribution
to capital
|
- | - | - | - | 6,560 | |||||||||||||||
Net
loss
|
- | - | - | (7,739 | ) | (7,739 | ) | |||||||||||||
Balance
August 31, 2005
|
- | - | (28,995 | ) | (7,739 | ) | 214,311 | |||||||||||||
Sale
of common stock for cash
|
- | - | - | - | 120,500 | |||||||||||||||
Net
loss
|
- | - | - | (80,825 | ) | (80,825 | ) | |||||||||||||
Balance,
August 31, 2006
|
- | - | (28,995 | ) | (88,564 | ) | 253,986 | |||||||||||||
Sale
of common stock
|
(81,590 | ) | - | - | - | 80,070 | ||||||||||||||
Net
loss
|
- | - | - | (95,813 | ) | (95,813 | ) | |||||||||||||
Balance,
August 31, 2007
|
(81,590 | ) | - | (28,995 | ) | (184,377 | ) | 238,243 | ||||||||||||
Sale
of preferred stock
|
- | - | - | - | 1,000 | |||||||||||||||
Sale
of common stock
|
- | - | - | - | 413,172 | |||||||||||||||
Common
stock issued for consulting contracts
|
- | (977,775 | ) | - | - | - | ||||||||||||||
Cash
portion of consulting contracts
|
- | (85,000 | ) | - | - | (85,000 | ) | |||||||||||||
Rescission
of real estate purchase consulting contracts:
|
- | - | - | - | (200,000 | ) | ||||||||||||||
Non-cash
portion
|
- | 338,547 | - | - | 338,547 | |||||||||||||||
Cash
portion
|
- | 43,529 | - | - | 43,529 | |||||||||||||||
Stock
subscription receivable:
|
||||||||||||||||||||
Payments
received
|
13,400 | - | - | - | 13,400 | |||||||||||||||
Interest
accrued
|
(3,902 | ) | - | - | - | (3,902 | ) | |||||||||||||
Net
loss
|
- | - | - | (467,712 | ) | (467,712 | ) | |||||||||||||
Balance,
August 31, 2008
|
(72,092 | ) | (680,699 | ) | (28,995 | ) | (652,089 | ) | 291,277 | |||||||||||
Sale
of common stock for cash
|
- | - | - | - | 3,600 | |||||||||||||||
Common
stock issued for consulting contracts
|
- | (887,440 | ) | - | - | - | ||||||||||||||
Cash
portion of consulting contracts
|
- | (40,900 | ) | - | - | (40,900 | ) | |||||||||||||
Amortization
of prepaid consulting contracts:
|
||||||||||||||||||||
Non-cash
portion
|
- | 1,252,861 | - | - | 1,252,861 | |||||||||||||||
Cash
portion
|
- | 82,371 | - | - | 82,371 | |||||||||||||||
Stock
subscription receivable:
|
||||||||||||||||||||
Sold
|
(77,332 | ) | - | - | - | 186,168 | ||||||||||||||
Payments
received
|
1,000 | 1,000 | ||||||||||||||||||
Interest
accrued
|
(3,545 | ) | (3,545 | ) | ||||||||||||||||
Net
loss
|
- | - | - | (1,723,711 | ) | (1,723,711 | ) | |||||||||||||
Balance,
August 31, 2009
|
(151,969 | ) | (273,807 | ) | (28,995 | ) | (2,375,800 | ) | 49,120 | |||||||||||
Common
stock issued for consulting contracts
|
- | (51,500 | ) | - | - | - | ||||||||||||||
Amortization
of prepaid consulting contracts
|
- | 298,262 | - | - | 298,262 | |||||||||||||||
Stock
issued for drilling agreement
|
- | - | - | - | 6,000 | |||||||||||||||
Intrinsic
value of beneficial conversion feature of convertible
debenture
|
- | - | - | - | 2,100 | |||||||||||||||
Stock
subscription receivable:
|
||||||||||||||||||||
Sold
|
(60,000 | ) | - | - | - | - | ||||||||||||||
Payments
received
|
18,369 | - | - | - | 18,369 | |||||||||||||||
Interest
accrued
|
(4,197 | ) | - | - | - | (4,197 | ) | |||||||||||||
Net
loss
|
- | - | - | (418,470 | ) | (418,470 | ) | |||||||||||||
Balance,
May 31, 2010
|
$ | (197,797 | ) | $ | (27,045 | ) | $ | (28,995 | ) | $ | (2,794,270 | ) | $ | (48,816 | ) |
See
accompanying notes to condensed financial statements.
7
ROYAL
ENERGY RESOURCES, INC.
(A
Development Stage Company)
Condensed
Statements of Cash Flows
Nine
Months Ended May 31, 2010 and 2009, and
from
inception (July 22, 2005) through May 31, 2010
(Unaudited)
From inception
|
||||||||||||
July 22, 2005
|
||||||||||||
through
|
||||||||||||
Nine months ended May 31,
|
May 31,
|
|||||||||||
2010
|
2009
|
2010
|
||||||||||
Cash
flows from operating activities
|
||||||||||||
Net
loss
|
$ | (418,470 | ) | $ | (1,061,169 | ) | $ | (2,794,270 | ) | |||
Adjustment
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
Depreciation
and depletion
|
713 | 189 | 1,907 | |||||||||
Value
of common shares issued for services
|
298,262 | 917,094 | 2,075,670 | |||||||||
Intrinsic
value of beneficial conversion feature of convertible
debenture
|
630 | - | 630 | |||||||||
Loss
on rescission of condominium purchase
|
- | - | 15,000 | |||||||||
Interest
accrued on stock subscription
|
(4,197 | ) | (1,674 | ) | (11,644 | ) | ||||||
Asset
impairment
|
18,676 | - | 55,606 | |||||||||
Change
in other assets and liablities:
|
||||||||||||
Accounts
receivable
|
(4,082 | ) | (26,267 | ) | (4,990 | ) | ||||||
Prepaid
expenses and other assets
|
47,785 | 2,151 | 7,873 | |||||||||
Accounts
payable
|
18,041 | (12,700 | ) | (7,234 | ) | |||||||
Accrued
expenses
|
14,000 | - | 14,000 | |||||||||
Net
cash used in operations
|
(28,642 | ) | (182,376 | ) | (647,452 | ) | ||||||
Cash
flows from investing activities
|
||||||||||||
Investment
in real estate
|
- | - | (11,000 | ) | ||||||||
Oil
and gas property expenditures
|
(8,402 | ) | (1,941 | ) | (147,174 | ) | ||||||
Proceeds
from sale of undeveloped leasehold
|
- | 30,267 | 47,975 | |||||||||
Investment
in uranium properties
|
- | (950 | ) | (5,673 | ) | |||||||
Net
cash provided by (used in) investing activities
|
(8,402 | ) | 27,376 | (115,872 | ) | |||||||
Cash
flows from financing activities
|
||||||||||||
Proceeds
of stockholder loans
|
- | - | 50 | |||||||||
Proceeds
from subscription receivable
|
18,369 | 1,000 | 32,769 | |||||||||
Loan
proceeds (repayment)
|
- | (40,000 | ) | 80,000 | ||||||||
Proceeds
from sale of common stock
|
- | 3,600 | 649,510 | |||||||||
Proceeds
from sale of preferred stock
|
- | - | 1,000 | |||||||||
Net
cash provided by (used in) financing activities
|
18,369 | (35,400 | ) | 763,329 | ||||||||
Net
increase (decrease) in cash and cash equivalents
|
(18,675 | ) | (190,400 | ) | 5 | |||||||
Cash and cash
equivalents, beginning of period
|
18,680 | 343,739 | - | |||||||||
Cash and cash
equivalents, end of period
|
$ | 5 | $ | 153,339 | $ | 5 | ||||||
Supplemental
cash flow information
|
||||||||||||
Cash
paid for interest
|
$ | 6,750 | $ | 4,500 | $ | 30,900 | ||||||
Cash
paid for income taxes
|
- | - | - | |||||||||
Non-cash
investing and financing activities:
|
||||||||||||
Issuance
of common stock for real estate
|
$ | - | $ | - | $ | 190,000 | ||||||
Contribution
of stockholder loan to capital
|
- | - | 6,560 | |||||||||
Disposition
of real estate per stock rescission agreement
|
- | - | 200,000 | |||||||||
Common
stock issued for drilling participation agreement
|
6,000 | - | 6,000 |
See
accompanying notes to condensed financial statements.
8
ROYAL
ENERGY RESOURCES, INC.
(A
Development Stage Company)
NOTES TO
FINANCIAL STATEMENTS
May 31,
2010
(Unaudited)
1
|
ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Basis of presentation
These
financial statements include the accounts of Royal Energy Resources, Inc.
(“RER”) (formerly known as World Marketing, Inc. ("WMI"). RER is a development
stage enterprise within the meaning of the Financial Accounting Standards Board
("FASB") Accounting Standards Codification ("ASC") Topic 915, "Development Stage
Entities."
RER was
organized in 1999 and attempted to start a web-based marketing business for
health-care products. The health-care products business had no
revenue and was discontinued in 2001 and the Company remained inactive until
July 22, 2005 when it commenced its real estate
business. Accordingly, the current development stage has a
commencement date of July 22, 2005 and all prior losses of $28,995 have been
transferred to accumulated deficit.
The
condensed financial statements included in this report have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission for interim reporting and include all adjustments (consisting only of
normal recurring adjustments) that are, in the opinion of management,
necessary for a fair presentation. These condensed financial statements have not
been audited.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and
regulations for interim reporting. The Company believes that the disclosures
contained herein are adequate to make the information presented not misleading.
However, these condensed financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report for the year ended August 31, 2009.
In
preparing the accompanying unaudited condensed consolidated financial
statements, the Company has reviewed, as determined necessary by the Company's
management, events that have occurred after May 31, 2010, up until the issuance
of the financial statements, which occurred on July 14, 2010.
9
Organization
and nature of business
RER is a
Delaware corporation which was incorporated on March 22, 1999, under the name
Webmarketing, Inc. ("Webmarketing"). On July 7, 2004, the Company revived its
charter and changed its name from Webmarketing to World Marketing,
Inc. In December 2007 the Company changed its name to Royal Energy
Resources, Inc.
Commencing
at the end of August 2006, the Company began acquiring oil and gas and uranium
leases and has since resold some of its leases and retained an overriding
royalty interest. During the last half of fiscal 2008, the Company
invested in three oil & gas drilling prospects in Washington County,
Oklahoma, and has advanced additional funds to participate in three
re-works. Two wells began initial sales in November
2008. Two other wells have been determined to be commercially
uneconomical and the related costs have been included in the full cost
pool. The Company recorded an asset impairment of $18,676 as a result
of a ceiling test limitation.
On July
22, 2005, the Company began selling its common stock to obtain the funds
necessary to begin implementation of its new business plan. The primary
objective of the new business plan was to acquire, make necessary renovations
and resell both residential and commercial real estate. The Company expected to
acquire real estate using cash, mortgage financing or its common stock, or any
combination thereof, and anticipated that the majority of the properties
acquired would be in the New York City area. The Company rescinded the purchase
of the real estate property it had previously acquired during the quarter ended
May 31, 2008 and currently is limiting any potential real estate acquisitions to
Eastern European countries, due to the current real estate environment in the
United States.
Webmarketing
attempted to establish a web-based marketing business for health care products
from its inception in 1999 until 2001. However, the Company did not establish
any revenues and discontinued these operations in 2001.
Going
Concern
The
Company has not established sources of revenues sufficient to fund the
development of business, projected operating expenses and commitments for the
next twelve months. The Company, which has been in the development stage since
its inception, March 22, 1999, has accumulated a net loss of $2,823,265 ($28,995
in a prior development stage) through May 31, 2010, and incurred losses of
$418,470 for the nine months then ended. The Company's convertible
note payable in the amount of $80,000 is currently past due.
RER was
organized in 1999 and attempted to start a web-based marketing business for
health-care products. The health-care products business had no
revenue and was discontinued in 2001 and the Company remained inactive until
July 22, 2005 when it commenced its real estate
business. Accordingly, the current development stage has a
commencement date of July 22, 2005 and all prior losses of $28,995 have been
transferred to accumulated deficit.
10
In March
2006, the Company sold 650,000 shares of its common stock for $65,000 to provide
a portion of the cash required to purchase its first real estate
investment. Subsequently, the Company continued to sell its
common stock to raise capital to continue operations. During 2008,
the Company revised its business plan, rescinded its real estate purchase and
began investing in energy leases and oil and gas drilling
prospects. The Company borrowed $140,000 ($80,000 balance at May 31,
2010) with a note payable and raised $413,172 from the sale of its common stock
during fiscal 2008. However, while energy prices have improved the
energy business has a high degree of risk and there can be no assurance that the
Company will be able to obtain sufficient funding to develop the Company's
current business plan.
Cash
and cash equivalents
The
Company considers all cash on hand, cash in banks and all highly liquid debt
instruments purchased with a maturity of three months or less to be cash and
cash equivalents.
Revenue
recognition
Revenue
from the sale of oil and gas leases is recognized in accordance with the
provisions of full cost accounting.
Oil and
gas production income will be recognized when the product is delivered to the
purchaser. We will receive payment from one to three months after
delivery. At the end of each month, we will estimate the amount of
production delivered to purchasers and the price we will
receive. Variances between our estimated revenue and actual payment
are recorded in the month the payment is received; however, differences should
be insignificant.
Revenue
from real estate sales is recognized when the related property is subject to a
binding contract and all significant obligations have been
satisfied.
Stock
option plans
The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. The Company, during the
three months ended May 31, 2008 granted options to acquire 1,000,000 shares of
its common stock that were fair valued under the Black Scholes model in the
amount of $328,975. This amount was amortized over the twelve month
option period and the option expired. No options are currently
outstanding.
11
Property
and equipment
The
Company follows the full cost method of accounting for oil and natural gas
operations. Under this method all productive and nonproductive costs
incurred in connection with the acquisition, exploration and development of oil
and natural gas reserves are capitalized. No gains or losses are
recognized upon the sale or other disposition of oil and natural gas properties
except in transactions that would significantly alter the relationship between
capitalized costs and proved reserves. The costs of unevaluated oil
and natural gas properties are excluded from the amortizable base until the time
that either proven reserves are found or it has determined that such properties
are impaired. The Company had $4,878 and $15,152 at May 31, 2010 and
August 31, 2009, respectively in unproved property costs that have not been
evaluated and are not being amortized. As properties are evaluated,
the related costs would be transferred to proven oil and natural gas properties
using full cost accounting. At May 31, 2010, the Company transferred
$18,676 in unproved property costs to the full cost pool when it was determined
the properties were not capable of commercial production. In
addition, the Company recorded an asset impairment of $18,676 due to a ceiling
test limitation. Amortization in the amount of $336 and $594 was
recorded during the three months ended May 31, 2010 and 2009 and $713 and $783
in the nine months ended May 31, 2010 and 2009, respectively.
Under the
full cost method the net book value of oil and natural gas properties, less
related deferred income taxes, may not exceed the estimated after-tax future net
revenues from proved oil and natural gas properties, discounted at 10% (the
“Ceiling Limitation”). In arriving at estimated future net revenues,
estimated lease operating expenses, development costs, and certain
production-related taxes are deducted. In calculating future net
revenues, prices and costs in effect at the time of the calculation are held
constant indefinitely, except for changes that are fixed and determinable by
existing contracts. The net book value is compared to the ceiling
limitation on a quarterly and yearly basis. The excess, if any, of
the net book value above the ceiling limitation is charged to expense in the
period in which it occurs and is not subsequently reinstated. Reserve
estimates used in determining estimated future net revenues have been prepared
by a consultant to the Company.
The
Company assesses the recoverability of the carrying value of its non-oil and gas
long-lived assets when events occur that indicate an impairment in value may
exist. An impairment loss is indicated if the sum of the expected
undiscounted future net cash flows is less than the carrying amount of the
assets. If this occurs, an impairment loss is recognized for the
amount by which the carrying amount of the assets exceeds the estimated fair
value of the asset. No impairments of non-oil and gas long-lived
assets have been recorded as of May 31, 2010.
Depreciation
and amortization
All
capitalized costs of oil and natural gas properties and equipment, including the
estimated future costs to develop proved reserves, are amortized using the
unit-of-production method based on total proved
reserves. Depreciation of other equipment is computed on the straight
line method over the estimated useful lives of the assets, which range from
three to twenty-five years.
Natural
gas sales and gas imbalances
The
Company follows the entitlement method of accounting for natural gas sales,
recognizing as revenues only its net interest share of all production
sold. Any amount attributable to the sale of production in excess of
or less than the Company’s net interest is recorded as a gas balancing asset or
liability. At May 31, 2010 and August 31, 2009, there had been no
natural gas sales and there were no natural gas imbalances.
12
Investments
in real estate
Costs
associated with the acquisition, development and construction of real estate
properties are capitalized when incurred. The carrying value of the properties
will be reviewed, at least annually, for impairment. In the event the property
is leased, depreciation will be recorded based upon a thirty-year
life. The Company rescinded the purchase of the real estate property
it had during the quarter ended May 31, 2008.
Oil
and natural gas reserve estimates
The
Company prepares its oil and natural gas reserves with the assistance of a
consultant. Proved reserves, estimated future net revenues and the
present value of our reserves are estimated based upon a combination of
historical data and estimates of future activity. Consistent with SEC
requirements, we have based our present value of proved reserves on spot prices
on the date of the estimate as of August 31, 2009. The reserve
estimates are used in calculating depletion, depreciation and amortization and
in the assessment of the Company’s Ceiling Limitation. Significant
assumptions are required in the valuation of proved oil and natural gas reserves
which, as described herein, may affect the amount at which oil and natural gas
properties are recorded. Actual results could differ materially from
these estimates.
Deferred
income taxes
Deferred
income taxes are provided for temporary differences between financial and tax
reporting in accordance with the liability method. A valuation
allowance is recorded to reduce the carrying amounts of deferred tax assets
unless management believes it is more likely than not that such asset will be
realized.
Earnings
(loss) per common share
RER is
required to report both basic earnings per share, which is based on the
weighted-average number of common shares outstanding, and diluted earnings per
share, which is based on the weighted-average number of common shares
outstanding plus all potential dilutive shares outstanding. At May 31, 2010 and
2009, there were no common stock equivalents. Accordingly, basic and diluted
earnings per share are the same for all periods presented.
Use
of estimates in the preparation of financial statements
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
13
Credit
risk
The
Company had cash deposits in certain banks that at times exceeded the maximum
insured by the Federal Deposit Insurance Corporation. The Company
monitors the financial condition of the banks and has experienced no losses on
these accounts.
Contingencies
Certain
conditions may exist as of the date financial statements are issued, which may
result in a loss to the Company, but which will only be resolved when one or
more future events occur or fail to occur. Company management and its
legal counsel assess such contingencies related to legal proceeding that are
pending against the Company or unasserted claims that may result in such
proceedings, the Company’s legal counsel evaluates the perceived merits of any
legal proceedings or unasserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought therein. If the
assessment of a contingency indicates that it is probable that a liability has
been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial
statements. If the assessment indicates that a potentially material
loss contingency is not probable but is reasonably possible, or if probable but
cannot be estimated, then the nature of the contingent liability, together with
an estimate of the range of possible loss if determinable would be
disclosed. There are no contingencies of which the Company is aware
at May 31, 2010.
Asset
retirement obligations
The fair
value of a liability for an asset retirement obligation is required to be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made, and that the associated retirement costs be capitalized
as part of the carrying amount of the long-lived asset. The Company
determines its asset retirement obligation by calculating the present value of
the estimated cash flows related to the liability. Periodic accretion
of the discount of the estimated liability would be recorded in the statement of
operations. At May 31, 2010 and August 31, 2009, the Company has
estimated that its share of the salvage value of lease equipment would exceed
its share of the cost of plugging and abandoning its producing
properties.
Recent
accounting pronouncements
Below is
a listing of the most recent accounting standards and their effect on the
Company, as issued by the Financial Accounting Standards Board ("FASB") in the
form of Accounting Standards Updates ("ASU"). We have evaluated all
recent accounting pronouncements through July 13, 200 and find none that would
have a material impact on the financial statements of the Company, except for
those detailed below.
In April
2010, the FASB issued ASU 2010-14, "Accounting for Extractive Activities — Oil
& Gas." ASU 2010-14 amends paragraph 932-10-S99-1 due to SEC
Release No. 33-8995, "Modernization of Oil and Gas Reporting." The
amendments to the guidance on oil and gas accounting are effective August 31,
2010, and are not expected to have a significant impact on the Company's
financial position.
14
In
February 2010, the FASB issued Accounting Standards Update 2010-09 (ASU
2010-09), "Subsequent Events (Topic 855)." The amendments remove the
requirements for an SEC filer to disclose a date, in both issued and revised
financial statements, through which subsequent events have been
reviewed. Revised financial statements include financial statements
revised as a result of either correction of an error or retrospective
application of U.S. GAAP. ASU 2010-09 is effective for interim or
annual financial periods ending after June 15, 2010. The Company does
not expect the provisions of ASU 2010-09 to have a material effect on the
financial position, results of operations or cash flows of the
Company.
In January 2010, the FASB
issued ASU 2010-03, Extractive
Activities—Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and
Disclosures. This amendment to Topic 932 has improved the
reserve estimation and disclosure requirements by (1) updating the reserve
estimation requirements for changes in practice and technology that have
occurred over the last several decades and (2) expanding the disclosure
requirements for equity method investments. This is effective for
annual reporting periods ending on or after December 31,
2009. However, an entity that becomes subject to the disclosures
because of the change to the definition oil- and gas- producing activities may
elect to provide those disclosures in annual periods beginning after December
31, 2009. Early
adoption is not permitted. The Company does not expect the
provisions of ASU 2010-09 to have a material effect on the financial position,
results of operations or cash flows of the Company.
Fair
value determination
Financial
instruments consist of cash, marketable securities, promissory notes receivable,
accounts payable, accrued expenses and short-term borrowings. The carrying
amount of these financial instruments approximates fair value due to their
short-term nature or the current rates at which the Company could borrow funds
with similar remaining maturities.
2
|
INVESTMENT
IN ENERGY PROPERTIES
|
UNDEVELOPED
LEASEHOLD NOT BEING AMORTIZED
The
Company has been the successful bidder in United States Government auctions to
purchase certain oil and gas lease rights. The oil and gas leases
currently comprise approximately 6,000 acres in Crook, Banner, Weston, Goshen,
Niobrara, Converse, Campbell, Freemont, Laramie, Sublette and Platt Counties,
Wyoming as of May 31, 2010 and August 31, 2009, respectively. In
addition, the Company holds the lease for uranium rights on approximately 3,500
acres in Wyoming as of May 31, 2010 and August 31, 2009,
respectively.
The
Company is negotiating with energy companies to develop the potential resources
that may be contained in these properties. The Company has entered
into agreements and then sold, by assignment, the rights, title and interest in
certain of these leases and retained an over-riding royalty
interest. Revenue from these transactions is accounted for using the
full cost method of accounting.
15
OIL
AND GAS PRODUCING PROPERTIES
During
fiscal 2008, the Company prepaid $119,153 as estimated drilling and completion
costs for a 25% working interest in three wells in Washington County,
Oklahoma. Two of the wells began initial sales in November 2008 and
the third well was determined to not have commercially economic production and
the related costs were transferred to the full cost pool. The Company
recorded an asset impairment during the quarter ended May 31, 2010, of $18,676
due to a ceiling test limitation.
Prepaid
drilling cost includes a balance of $32,558 and $50,343 in prepaid costs for the
initial three wells in Washington County, Oklahoma and three additional wells to
be re-worked as of May 31, 2010 and August
31, 2009, respectively.
3
|
CONVERTIBLE
NOTE PAYABLE
|
The
Company has a loan with an individual in the original amount of $140,000, with
interest payable monthly at 15% and which has been extended to January 1, 2010
and revised to be convertible into common stock at a conversion price to be
reasonably agreed upon by the parties. The loan is currently past due
and has a balance of $80,000 at May 31, 2010.
4
|
CONVERTIBLE
DEBENTURE
|
On April
13, 2010, the Company issued a convertible debenture in the amount of
$6,000. The debenture bears interest at the rate of $10% per annum,
is due on September 13, 2010, is convertible into the Company's common stock at
a conversion rate of 65% of the lowest closing bid price of the common stock
during the immediately preceding 30 trading days and there is no pre-payment
penalty. Accordingly, at issuance, $2,100 of the proceeds was
assigned to the conversion feature. The discount is being amortized
over the five-month term of the note.
Face
amount of the debenture
|
$ | 6,000 | ||
Unamortized
balance of the intrinsic value of the conversion feature
|
(1,470 | ) | ||
Carrying
value of the debenture
|
$ | 4,530 |
During
the period ended May 31, 2010, $630 of the proceeds assigned to the conversion
feature was included in interest expense and added back to the debenture
carrying value.
16
5
|
INCOME
TAXES
|
RER has
not recorded a deferred tax benefit or expense for all prior periods through
November 30, 2009, as all net deferred benefits have a full valuation
allowance.
Actual
income tax expense applicable to earnings before discontinued operations and
income taxes is reconciled with the “normally expected” Federal income tax for
the nine months ended May 31, 2010 and 2009 as follows:
2010
|
2009
|
|||||||
"Normally
expected" income tax benefit
|
$ | 142,300 | $ | 457,200 | ||||
State
income taxes net of federal benefit
|
16,700 | 53,800 | ||||||
Valuation
allowance
|
(159,000 | ) | (511,000 | ) | ||||
Actual
income tax expense
|
$ | - | $ | - |
RER has
available unused net operating loss carryforwards of approximately $2,817,000
which will expire in various periods from 2019 to 2030, some of which may be
limited as to the amount available on an annual basis.
6
|
STOCKHOLDERS’
EQUITY
|
In
November 2007, the Company amended its charter to authorize issuance of up to
100,000,000 shares of common stock with a par value of $.00001. At
May 31, 2010 and August 31, 2009, 24,513,731 and 22,388,731 shares were issued
and outstanding, respectively.
At this
same time, the Company was authorized to issue 10,000,000 shares of its $0.00001
preferred stock. In December 2007 the Company issued 100,000 shares
of its preferred stock for $1,000 to the Company's chief executive
officer.
During
the past two years, the Company entered into various consulting and financial
services agreements as well as a new loan agreement. Included in these
agreements was the payment of $125,900 in cash, which has been paid. In
addition, an aggregate of 7,541,000 shares of the Company’s common stock were
issued along with the granting of options to purchase 1,000,000 shares of the
Company’s common stock. The agreements cover periods ranging from 1 to
16.5 months and the related fair value of the shares and options as well as the
cash component, are being amortized over the life of the agreements. The
Company has determined the total cost of the agreements is approximately
$2,042,615. As of May 31, 2010, the un-amortized portion of these
agreements amounts to $27,045 and is included as a reduction of stockholders
equity in the accompanying financial statements.
During
February 2010, we issued 100,000 shares of our common stock, valued at $6,000,
for the right of first refusal to acquire a 25% participation interest in the
next 25 wells to be drilled by North American Energy Resources, Inc. in
Washington County, Oklahoma. The cost was added to the full cost
pool.
17
During
February 2010, we issued 525,000 shares of our common stock valued at $31,500
and during April 2010, we issued 500,000 shares of our common stock valued at
$20,000 for consulting agreements, the cost of which is being amortized over the
lives of the agreements.
7
|
RELATED
PARTY TRANSACTIONS
|
Stock subscription receivable
- On August 16, 2007, the President and Chief Executive Officer of the Company
purchased 4,100,000 shares of the Company’s $0.00001 par value common shares for
$0.02 per share. The Company received a cash payment of $410 and a
note receivable in the amount of $81,590 for this purchase. The note
bears interest at 5% per annum and payments of principal and interest are due on
August 15, 2012. At May 31, 2010 the Company is owed
$60,065, including accrued interest for this note.
On July
14, 2009, the President and Chief Executive Officer of the Company purchased
950,000 shares of the Company's $0.00001 par value common shares for $0.05 per
share. The Company received a cash payment of $105 and a note
receivable in the amount of $47,395 for this purchase. The note bears
interest at 2% per annum and payments of principal and interest are due on July
14, 2014. At May 31, 2010 the Company is owed $47,395, including
accrued interest for this note.
On July
28, 2009, the Secretary and Treasurer of the Company purchased 600,000 shares of
the Company's $0.00001 par value common shares for $0.05 per
share. The Company received a cash payment of $63 and a note
receivable in the amount of $29,937 for this purchase. The note bears
interest at 2% per annum and payments of principal and interest are due on July
28, 2014. At May 31, 2010 the Company is owed $30,440, including
accrued interest for this note.
On
November 24, 2009, the President and Chief Executive Officer of the Company
purchased 1,000,000 shares of the Company's $0.00001 par value common shares for
$0.06 per share. The Company received a cash payment of $103 and a
note receivable in the amount of $59,897 for this purchase. The note
bears interest at 2% per annum and payments of principal and interest are due on
November 24, 2014. At May 31, 2010 the Company is owed
$59,897, including accrued interest for this note.
Reimbursements - The Company's
Chief Executive Officer received $9,210 and $21,083 during the nine months ended
May 31, 2010 and 2009, respectively, as reimbursements for travel and office
expenses.
18
8
|
SUBSEQUENT
EVENTS
|
On June
1, 2010, the Company's CEO acquired 7,000,000 shares of the Company's $0.00001
par value common stock for cash in the amount of $70 and a promissory note in
the amount of $104,930 bearing interest at 2% per annum and due on June 1,
2015.
On June
2, 2010, the Board of Directors of the Company approved issuing 700,000 shares
of the Company's $0.00001 par value common stock to the holder of the
convertible note payable with an unpaid balance of $80,000 at May 31, 2010, as
additional consideration for the past due note. The Company's common
stock was valued at $14,000 based on the closing price on that
date. This amount was accrued at May 31, 2010 as interest
expense.
On June
2, 2010, the Company entered into an agreement with a consultant for services to
be provided in Romania and Hungry in energy resources and mining and for
assistance in raising funds. The agreement provides for cash
compensation in the amount of $36,000 and 1,500,000 shares of the Company's
$0.00001 par value common stock for services to be provided between June 2, 2010
and December 28, 2010.
On
June 24, 2010, the Company's CEO acquired 6,000,000 shares of the Company's
$0.00001 par value common stock for cash in the amount of $60 and a promissory
note in the amount of $119,940 bearing interest at 2% per annum and due on June
23, 2015.
19
ITEM
2: MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This
statement contains forward-looking statements within the meaning of the
Securities Act. Discussions containing such forward-looking
statements may be found throughout this statement. Actual events or
results may differ materially from those discussed in the forward-looking
statements as a result of various factors, including the matters set forth in
this statement.
At the
present time we have only nominal overhead costs. Our officers do not
receive any payroll and our administrative assistance is now being provided on a
reimbursement basis. This situation will remain constant until such
time as we have sufficient capital to afford to pay salaries.
The
Company was the successful bidder in United States Government auctions to
purchase certain oil and gas lease rights. The oil and gas leases
currently represent approximately 6,000 acres of property located in Crook,
Banner, Weston, Goshen, Niobrara, Converse, Campbell, Freemont, Laramie,
Sublette and Platt County Wyoming. The Company also holds leases for
the uranium rights on approximately 3,500 acres in Wyoming. The
Company is negotiating with energy companies to develop the potential resources
that may be contained in these properties. The Company has completed
several transactions wherein the Company sold the lease rights and retained a
royalty interest. No exploration activities have yet taken
place. The Company has received proceeds of $47,975 from these
transactions.
During
fiscal 2008, we prepaid $119,153 as estimated drilling and completion costs for
a 25% working interest in three wells in Washington County,
Oklahoma. Two of the wells began initial sales in November 2008. The
third well was determined to not have commercially economic production and the
related costs were expensed as an asset impairment at May 31,
2010. An additional net $36,700 has been advanced to participate in
three additional workover prospects.
During
February 2010, we issued 100,000 shares of our common stock, valued at $6,000,
for the right of first refusal to acquire a 25% participation interest in the
next 25 wells to be drilled by North American Energy Resources, Inc. in
Washington County, Oklahoma.
We have
had only nominal revenues since inception. Our auditors have
expressed substantial doubt about our ability to continue as a going
concern. Our current assets at May 31, 2010 consist of our cash
balance of $5 and accounts receivable of $4,990. Our convertible note
payable has a balance of $80,000 which is past due at May 31,
2010. We expect to convert at least a portion of this balance to
common stock before the end of the fiscal year. Our ability to
continue as a going concern is contingent upon our ability to raise funds
through private placements of our common stock and obtaining loans until we
establish sufficient business to support our operating costs.
We
anticipate requiring substantial capital for investments in energy leases and
oil and gas drilling prospects and our operating costs have increased for
consultants finding prospects. There can be no assurance that we will
be able to continue to find sufficient funding to support our current business
plan.
20
COMPARISON
OF THREE MONTHS ENDED MAY 31, 2010 AND 2009
Revenues - We had revenue from
oil and gas production of $3,221 and $1,810 during the three months ended May
31, 2010 and 2009, respectively. Our revenue is all from oil
production for which prices have improved during the past twelve
months. The Company had initial production during the first quarter
of the 2009 period and were shut-in completing production facilities during the
second quarter. The wells were put back on line during the third
quarter of 2009. During the 2010 quarter, the Company the wells
produced for the full period.
Costs and expenses - Our costs
and expenses were as follows for the three months ended May 31, 2010 and
2009.
2010
|
2009
|
|||||||
Lease
operating expense
|
$ | 2,739 | $ | 899 | ||||
Production
taxes
|
232 | 130 | ||||||
Depreciation,
depletion and amortization
|
336 | 594 | ||||||
Asset
impairment
|
18,676 | - | ||||||
Non-cash
compensation
|
24,628 | 235,995 | ||||||
Other
selling, general and administrative expense
|
8,421 | 48,125 | ||||||
$ | 55,032 | $ | 285,743 |
Asset
impairment expense is a result of an impairment due to a ceiling test limitation
as discussed above.
Non-cash
compensation amounted to $24,628 and $235,995 during the three months ended May
31, 2010 and 2009, respectively. Non-cash compensation is from the
amortization of the calculated value of common shares issued for consulting
agreements. (Note 6).
Other
selling, general and administrative expenses have decreased primarily as a
result of cost cutting measures put in place by the Company while they explore
money raising options.
Other expenses (income) -
consist of the following during the three months ended May 31, 2010 and
2009.
2010
|
2009
|
|||||||
Gain
on comodities trading
|
$ | - | $ | (2,568 | ) | |||
Interest
income - related party
|
(1,449 | ) | (1,263 | ) | ||||
Interest
expense
|
18,755 | 3,500 | ||||||
$ | 17,306 | $ | (331 | ) |
During
the three-month period in fiscal 2009, we recognized a gain of $2,568 from
commodities trading, recognized interest expense of $3,500 and recorded interest
income in the amount of $1,263 from related parties. During the same
period in 2010, we had closed the commodities trading account, had interest
expense of $18,755 and recorded interest income of $1,449 from a related
party. Interest expense included $14,000 in the 2010 period which was
paid in June 2010 with the issue of 700,000 shares of our common
stock.
21
COMPARISON
OF NINE MONTHS ENDED MAY 31, 2010 AND 2009
Revenues - We had revenue from
oil and gas production of $6,372 and $2,499 during the nine months ended May 31,
2010 and 2009, respectively. Our revenue is all from oil production
for which prices had improved during the past twelve months. The
Company had initial production during the first quarter of the 2009 period and
were shut-in completing production facilities during the second
quarter. During the 2010 period, the Company was shut-in for
approximately 1/2 of the second quarter for repairs which were delayed due to
the weather.
Costs and expenses - Our costs
and expenses were as follows for the nine months ended May 31, 2010 and
2009.
2010
|
2009
|
|||||||
Lease
operating expense
|
$ | 6,000 | $ | 3,649 | ||||
Production
taxes
|
459 | 180 | ||||||
Depreciation,
depletion and amortization
|
713 | 783 | ||||||
Asset
impairment
|
18,676 | - | ||||||
Non-cash
compensation
|
298,262 | 1,137,072 | ||||||
Other
selling, general and administrative expense
|
78,705 | 173,913 | ||||||
$ | 402,815 | $ | 1,315,597 |
Asset
impairment expense is a result of an impairment due to a ceiling test limitation
as discussed above.
Non-cash
compensation amounted to $298,262 and $1,137,072 during the nine months ended
May 31, 2010 and 2009, respectively. Non-cash compensation is from
the amortization of the calculated value of common shares issued for consulting
agreements. (Note 6).
Other
selling, general and administrative expenses have decreased primarily as a
result of cost cutting measures put in place by the Company while they explore
money raising options.
Other expenses (income) -
consist of the following during the nine months ended May 31, 2010
and 2009.
2010
|
2009
|
|||||||
Loss
on comodities trading
|
$ | 719 | $ | 25,168 | ||||
Interest
income
|
- | (2,853 | ) | |||||
Interest
income - related party
|
(4,197 | ) | (2,518 | ) | ||||
Interest
expense
|
25,505 | 11,875 | ||||||
$ | 22,027 | $ | 31,672 |
22
During
the nine-month period in fiscal 2009, we recognized a loss of $25,168 from
commodities trading, recognized interest expense of $11,875 and recorded
interest income in the amount of $2,853 from unrelated parties and $2,518 from
related parties. During the same period in 2010, we had closed the
commodities trading account in the first quarter and recognized a loss of $719,
had interest expense of $25,505 and recorded interest income of $4,197 from a
related party. Interest expense included $14,000 in the 2010 period
which was paid in June 2010 with the issue of 700,000 shares of our common
stock.
OFF-BALANCE
SHEET ARRANGEMENTS
23
ITEM
3:
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Not
applicable.
ITEM
4T:
|
CONTROLS
AND PROCEDURES
|
The
Company’s Chief Executive Officer and Chief Financial Officer have reviewed and
evaluated the effectiveness of the Company’s disclosure controls and procedures
(as defined in Rules 240.13a-15(e) and 15d-15(e) promulgated under the
Securities Exchange Act of 1934) as of May 31, 2010. Based on that
review and evaluation, which included inquiries made to certain consultants of
the Company, the CEO and CFO concluded that the Company’s current disclosure
controls and procedures, as designed and implemented, are not effective,
primarily due to a lack of segregation of duties, in ensuring that information
relating to the Company required to be disclosed in the reports the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms, including insuring that
such information is accumulated and communicated to the Company’s management,
including the CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure.
(b) Changes in
Internal Controls
There
have been no changes in internal controls over financial reporting or in other
factors that could significantly affect these controls that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting during the quarter ended May 31, 2010, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
24
PART
II - OTHER INFORMATION
ITEM
1:
|
LEGAL
PROCEEDINGS
|
None
ITEM
1A:
|
RISK
FACTORS
|
ITEM
2:
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
During
April 2010, the Company issued 500,000 shares of its common stock, valued at
$20,000, as consideration for a consulting agreement.
The
shares issued were sold pursuant to an exemption from registration under Section
4(2) promulgated under the Securities Act of 1933, as amended.
ITEM
3:
|
DEFAULTS
UPON SENIOR SECURITIES.
|
None
None
ITEM
5:
|
OTHER
INFORMATION.
|
None
ITEM
6:
|
EXHIBITS
|
|
Exhibit
31
|
Certification
pursuant to 18 U.S.C. Section 1350
|
|
Section
302 of the Sarbanes-Oxley Act of
2002
|
|
Exhibit
32
|
Certification
pursuant to 18 U.S.C. Section 1350
|
|
Section
906 of the Sarbanes-Oxley Act of
2002
|
25
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.
ROYAL
ENERGY RESOURCES, INC.
|
||
Date: July
14, 2010
|
||
By:
/s/
|
Jacob Roth
|
|
President,
Chief Executive Officer and
|
||
Chief
Financial Officer
|
26