Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of small business issuer’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.[X]
Indicate
by check mark whether the small business issuer is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes
[ ] No [X]
State
Issuer’s revenues for its most recent fiscal
year. $1,581,661
As of
March 15, 2008, the aggregate market value of our common stock, $0.001 par
value, held by non-affiliates was approximately $7,181,809, based on 19,410,295
non-affiliate shares outstanding at $0.37 per share, which was the last reported
sales price of the Company’s common stock on the Pink Sheets for such
date). (See definition of affiliate in Rule 12b-2 of the Exchange
Act.)
As of
March 15, 2008, there were 19,767,055 shares of our common stock issued and
outstanding.
Transitional
Small Business Disclosure Format (check one): Yes
[ ] No [X]
-1-
TABLE
OF CONTENTS
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PART
I
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Page
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Item
1.
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Item
2.
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Item
3
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Item
4.
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PART
II
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Item
5.
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Item
6.
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Item
7.
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Item
8.
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Item
8A. (T)
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Item
8B.
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PART
III
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Item
9.
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Item
10.
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Item
11.
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Item
12.
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Item
13.
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Item
14.
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SIGNATURES
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-2-
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
In
addition to historical information, this Annual Report contains statements that
plan for or anticipate the future, including without limitation statements under
the captions “Description of Business,” “Risk Factors” and “Management’s
Discussion and Analysis or Plan of Operation.” These forward-looking
statements include statements about our future business plans and strategies,
future actions, future performance, costs and expenses, interest rates, outcome
of contingencies, financial condition, results of operations, liquidity,
objectives of management, and other such matters, as well as certain projections
and business trends, and most other statements that are not historical in
nature, that are “forward-looking”.
Because
we are a “penny stock”, you cannot rely on the Private Securities Litigation
Reform Act of 1995. Forward-looking information may be included in this Annual
Report or may be incorporated by reference from other documents we have filed
with the Securities and Exchange Commission (the “SEC”). You can
identify these forward-looking statements by the use of words such as “may,”
“will,” “could,” “should,” “project,” “believe,” “anticipate,” “expect,” “plan,”
“estimate,” “forecast,” “potential,” “intend,” “continue” and variations of
these words or comparable words. Forward-looking statements do not
guarantee future performance, and because forward-looking statements involve
future risks and uncertainties, there are factors that could cause actual
results to differ materially from those expressed or implied. These
risks and uncertainties include, without limitation, those described under “RISK
FACTORS” in Item 1 of this Annual Report and those detailed from time to time in
our filings with the SEC.
We have
based the forward-looking statements relating to our operations on management’s
current expectations, estimates, and projections about us and the industry in
which we operate. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that we cannot
predict. In particular, we have based many of these forward-looking
statements on assumptions about future events that may prove to be
inaccurate. Because forward-looking statements involve future risks
and uncertainties, there are factors that could cause actual results to differ
materially from those anticipated by these forward-looking statements. For
example, a few of the uncertainties that could affect the accuracy of
forward-looking statements include:
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·
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Changes
in general economic and business conditions affecting
us;
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·
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Changes
in the assumptions used in making forward-looking
statements;
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|
·
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Legal
or policy developments that diminish our
appeal;
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|
·
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Changes
in our business strategies;
|
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·
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Our
limited operating history;
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|
·
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The
degree and nature of our
competition;
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|
·
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Our
ability to employ and retain qualified employees;
and
|
|
·
|
The
other factors referenced in this Annual Report, including without
limitation, under the captions “Description of Business,” “Risk Factors”
and “Management’s Discussion and Analysis or Plan of
Operation.”
|
These
risks are not exhaustive. Other sections of this Annual Report include
additional factors which could adversely impact our business and financial
performance. Moreover, we operate in a competitive and changing
environment. New risk factors emerge from time to time and it is not
possible for our management to predict all risk factors, nor can we assess the
impact of all factors on our business or to the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements. Given these risks and
uncertainties, we caution you not to place undue reliance on forward-looking
statements as a prediction of actual results. All forward-looking
statements are made only as of the date of this Annual Report. Except
for our ongoing obligation to disclose material information as required by
federal securities laws, we do not intend to update you concerning any future
revisions to any forward-looking statements to reflect events or circumstances
occurring after the date of this Annual Report. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information or future events.
-3-
PART I
|
Item
1.
|
Description
of Business
|
American
Energy Production, Inc. (“American Energy”, “the Company”, “we”, “us”, “our”
“its”) is a publicly traded oil and gas company that is engaged primarily in the
acquiring, developing, producing, exploring and selling of oil and natural gas.
The Company traditionally has acquired oil and gas companies that have the
potential for increased oil and natural gas production utilizing new
technologies, well workovers and fracture stimulation systems. Additionally, the
Company has expanded its scope of business to include the drilling of new wells
with its own equipment through its wholly-owned subsidiary
companies. The Company website is www.americanenergyproduction.com.
The
Company’s wholly-owned subsidiaries are primarily involved in three areas of oil
and gas operations.
1.
Leasing programs.
2.
Production acquisitions
3.
Drilling and producing with proven and emerging technologies.
The
Company believes that for the foreseeable future, the world will be highly
dependent on oil and natural gas. Currently, alternative fuels are far more
expensive than fossil fuels and because of the politically unstable conditions
of many of the energy producing regions of the world. As a result,
the Company believes that oil and natural gas will remain a key yet volatile
component of the world energy future and furthermore, with the ever increasing
world demand for energy, the domestic production of oil and gas will play an
even greater role in America’s future then it already has to date.
History
of Company Development
The
Company was f/k/a Communicate Now.com, Inc. and was incorporated on January 31,
2000 under the laws of the State of Delaware. On July 15, 2002, the Company
changed its corporate name to American Energy Production, Inc.
On
February 20, 2003, upon the acquisition of certain oil and gas assets, the
Company entered into a new development stage. Activities during the development
stage include acquisition of assets, obtaining geological reports, developing an
implementation plan to extract oil and gas, completing initial sales of oil and
seeking capital.
On
January 12, 2004, the Company filed a Form N-54A with the Securities and
Exchange Commission (“SEC”) to be regulated as a BDC under the Investment
Company Act of 1940, as amended (“Act”).
In May
2006, the SEC Staff issued a comment letter to the Company (the “Comment
Letter”) raising a number of questions relating to the Company’s BDC operations.
In response to the Comment Letter, the Company undertook a review of its
compliance with the 1940 Act and subsequently determined that it was not in
compliance with several important provisions of the 1940 Act. Accordingly, and
after careful consideration of the 1940 Act requirements applicable to BDCs, the
Board determined that continuation as a BDC was not in the best interests of the
Company and its shareholders.
-4-
On March
13, 2007, at a Special Meeting of Shareholders, the Shareholders approved and
authorized the Board to withdraw the Company’s election to be treated as a BDC
under the 1940 Act and the election of three directors to the
Board. On April 3, 2007, the Company filed a Form N-54C to withdraw
its election to be regulated as a BDC and as of that date, is no longer a BDC
under the 1940 Act. The Company is no longer a BDC with
unconsolidated majority-owned portfolio companies but rather be an oil and gas
operating company with consolidated subsidiaries. The results of operations for
April 1, 2007 through April 3, 2007 were not material and therefore, the Company
will utilize April 1, 2007 as the inception date for the new development
stage.
At a
meeting held on May 16, 2007, the Board of Directors reviewed the Company’s
current business and financial performance, the recent trading range of its
Common Stock and inability to obtain additional capital from the investment
community with 494,170,082 shares of Common Stock issued and outstanding and
500,000,000 shares of Common Stock authorized. As a result, the Board determined
that a reverse stock split was desirable and in the best interest of the
Company. On July 5, 2007, the Company filed a Definitive 14A Proxy
Statement with the SEC giving notice of a special shareholders meeting to be
held on August 17, 2007 for the purpose of approving a one-for-twenty five
reverse stock split. On September 14, 2007, the Company announced
that all of the required steps had been completed for the one-for-twenty five
reverse stock split of its common stock. In connection with the reverse stock
split, the Company was assigned a new stock symbol. The Company's shares were
previously quoted on the OTC Bulletin Board under the stock symbol AMEP and are
now reported on the OTC Bulletin Board under the new stock symbol AENP. The new
stock symbol and the reverse stock split were effective at the beginning of
trading on September 14, 2007.
On March
20, 2008, the Company submitted an offer of settlement to the SEC staff,
pursuant to which it would consent, without admitting or denying the findings,
to the entry of an order by the SEC instituting public administrative and
cease-and-desist proceedings and imposing sanctions (the “Order”).
In
summary, the Order finds that since electing to be regulated as a business
development company (“BDC”) in January 2004, the Company has, among other
things, issued senior securities without the required asset coverage, issued
warrants without approval of its shareholders, issued prohibited non-voting
stock, issued securities for services, failed to make and keep required
records, and
failed to establish a majority of non-interested directors on its board of
directors. As a result, the Company violated certain provisions of the
Investment Act of 1940 (the “1940 Act”). In addition, the Company failed to
obtain a fidelity bond and implement a compliance program as required under the
1940 Act. Finally, the Company failed to comply with certain provisions for
exemption from registration under the 1933 Act as related to Rule 609 of
Regulation E because it did not file required offering status reports in
connection with a securities offering commenced in January 2004.
In
determining the Order, the SEC considered remedial acts promptly undertaken by
the Company and cooperation afforded the SEC staff. The Order would
require:
|
·
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The
Company cease and desist from committing or causing any violations and any
future violations of the 1940 Act. The 1940 Act is only available to BDC
companies and does not apply to the Company in its current structure as an
oil and gas operating company.
|
|
·
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The
Regulation E exemption of the Company is permanently suspended. Regulation
E is only available to BDC companies and does not apply to the Company in
its current structure as an oil and gas operating
company.
|
The
Company has reached an agreement in principle with the staff of the SEC
regarding its offer of settlement, subject to approval by the Commission.
Although the ultimate outcome of the settlement negotiations cannot be predicted
with certainty, under the settlement as currently proposed, the Company would
not incur any fines or other penalties, and no action would be taken against any
individuals.
-5-
Our
Strategy
Management
believes that:
|
·
|
Natural
gas is an environmentally friendly fuel that will be increasingly valued
in the United States;
|
|
·
|
There
are a number of natural gas and/or oil and development projects that we
are pursuing which will require significant capitalization to complete,
explore and develop;
|
|
·
|
We
have the ability to assemble the technical and commercial and resources
needed to pursue these potential projects;
and
|
|
·
|
Our
successful development of one or more large potential natural gas or oil
projects will create substantial shareholder
value.
|
The
principal elements of our strategy to maximize shareholder value
are:
Generate growth through
drilling. We expect to generate long-term reserve and
production growth predominantly through our drilling activities. We
anticipate the substantial majority of our future capital expenditures will be
directed toward the drilling of wells, although we expect to continue to acquire
additional leasehold interests. Initially, we anticipate reserve
growth will be our primary focus with a more balanced reserve and production
growth profile as we continue to execute our growth strategy.
Manage costs by maximizing
operational control. We seek to exert control over our
exploration, exploitation and development activities. As the operator
of our projects, we have greater control over the amount and timing of the
expenditures associated with those activities. As we manage our
growth, we are focused on reducing lease operating expenses, general and
administrative costs, and finding and development costs on a per mcfe
basis. As of December 31, 2007, we operated 100% of our wells,
although we may not be able to be operator of all our future
projects.
Pursue complementary leasehold
interest and property acquisitions. We intend to attempt to
supplement our drilling strategy with complementary leasehold interest and
property acquisitions.
Current
Natural Gas and Oil Projects
We are in
the process of building our portfolio of exploration and exploitation projects
targeting both oil and natural gas. We believe that there is
potential for commercial development in areas where historical drilling attempts
resulted in indications of oil and gas but ultimate development was not pursued,
and we intend to continue to focus our activities in areas having this
profile. We believe that the application of advanced drilling,
completion and stimulation technologies combined with a strong commodity pricing
environment could make development of our project areas economically
viable.
Through
Production Resources, Inc. (“PRI”), our wholly owned subsidiary, we own leases
covering approximately 1,600 gross acres of land in Medina County, Texas. The
leases have 175 gross wells drilled to a shallow saturated sand called the
Olmos. There is an additional zone similar to the Olmos called the
Escondido that has been commercially productive in this area but it has not been
tested on these leases. Additional wells can be drilled on these leases to the
Olmos formation under the current spacing rules. This is a heavy oil field has
had produced for a number of years. Initially the field had enough pressure to
flow but over time pumping and advanced recovery methods were necessary.
Previously, the field had been ignored for a number of years due to the high
operating costs, low oil prices and low daily production.
-6-
Additionally,
through Bend Arch Petroleum, Inc. (“Bend Arch”), our wholly owned subsidiary, we
own leases covering approximately 6,200 gross acres of land primarily in the
counties of Palo Pinto, Eastland and Comanche, Texas. The leases have
45 gross wells drilled to the shallower Bend Conglomerate and the deeper Strawn
formation. Most of these wells need to be re-worked and
re-stimulated to achieve maximum productive potential.
Natural
Gas and Oil Reserves
The
following tables present information as of December 31, 2007 with respect to our
estimated proved reserves.
|
Net
Proved Reserve Summary and PV-10 Forecast from December 31,
2007
|
||||||||||||||||
|
Reserve
Categories
|
Oil
(BBL)
|
Gas
(MCF)
|
Cash
Flow
($)
|
PV-10
($)
(c)
|
||||||||||||
|
PDP
(b)
|
6,934,193 | 1,574,830 | $ | 479,330,566 | $ | 435,755,060 | ||||||||||
|
Total Proved
(a)
|
6,934,193 | 1,574,830 | $ | 479,330,566 | $ | 435,755,060 | ||||||||||
|
(a)
|
Proved
reserves are those quantities of gas that, by analysis of geological and
engineering data, can be estimated with reasonable certainty to be
commercially recoverable from known reservoirs and under current economic
conditions, operating methods and government
regulations.
|
|
(b)
|
PDP
is developed reserves that are expected to be recovered from existing
wells.
|
|
(c)
|
PV-10
represents the present value, discounted at 10% per annum, of estimated
future net revenue before income tax of our estimated proved
reserves. The estimated future net revenues were determined by
using reserve quantities of proved reserves and the periods in which they
are expected to be developed and produced based on economic conditions
prevailing at December 31, 2007. PV-10 is a non-GAAP financial
measure because it excludes income tax effects. Management
believes that the presentation of the non-GAAP financial measure of PV-10
provides useful information to investors because it is widely used by
professional analysts and sophisticated investors in evaluating oil and
natural gas companies. PV-10 is not a measure of financial or
operating performance under GAAP. PV-10 should not be
considered as an alternative to the standardized measure as defined under
GAAP. We have included a reconciliation of PV-10 to the most
directly comparable GAAP measure — standardized measure of discounted
future net cash flow — in the following
table:
|
|
December 31,
|
||||
|
St Standardized
measure of discounted future net cash flows (d)
|
$ | 435,755,060 | ||
|
A Add:
Present value of future income tax discounted at 10%
|
||||
|
P PV-10
|
$ | 435,735,060 | ||
-7-
|
(d)
|
The
standardized measure represents the present value of estimated future cash
inflows from proved oil and natural gas reserves, less future development,
abandonment, production and income tax expenses, discounted at 10% per
annum to reflect timing of future cash flows and using the same pricing
assumptions as were used to calculate PV-10. Standardized
measure differs from PV-10 because standardized measure includes the
effect of future income taxes.
|
Acreage
The
following table sets forth as of December 31, 2007 the gross and net acres of
both developed and undeveloped oil and gas leases that we
hold. “Gross” acres are the total number of acres in which we own a
working interest. “Net” acres refer to gross acres multiplied by our
fractional working interest. Acreage numbers do not include our
options to acquire additional leaseholds which have not been
exercised.
|
December 31, 2007
|
||||||||||||||||||||
|
Developed(a)
|
Undeveloped(b)
|
Total
|
||||||||||||||||||
|
Play/Trend
|
Gross
|
Net
|
Gross
|
Net
|
Gross
|
Net
|
||||||||||||||
|
Texas
|
7,811
|
7,394
|
-
|
-
|
7,811
|
7,394
|
||||||||||||||
|
(a)
|
Developed
refers to acres that are allocated or assignable to producing wells or
wells capable of production. Developed acreage includes acreage
having wells shut-in awaiting the addition of
infrastructure.
|
|
(b)
|
Undeveloped
refers to lease acreage on which wells have not been developed or
completed to a point that would permit the production of commercial
quantities of oil or natural gas regardless of whether such acreage
contains proved reserves.
|
Production
and Price Information
The
following tables summarize sales volumes, sales prices, and production cost
information for the periods indicated:
|
Year
Ended December 31,
|
||||
|
|
||||
|
Production
|
||||
|
Oil
(bbls)
|
14,144 | |||
|
Natural
gas (mcf)
|
81,928 | |||
|
Natural
gas equivalent (mcfe)
|
13,655 | |||
|
Total
equivalent (bbls)
|
27,799 | |||
|
Oil and natural gas
sales
|
||||
|
Oil
sales
|
$ | 972,254 | ||
|
Natural
gas sales
|
07,664 | |||
|
Total
|
$ | 1,579,918 | ||
|
Average sales price
|
||||
|
Oil
($ per bbl)
|
$ | 68.74 | ||
|
Natural
gas ($ per mcf)
|
7.42 | |||
|
Natural
gas equivalent ($ per mcfe)
|
44.52 | |||
|
|
||||
|
Average production
cost
|
||||
|
Total
equivalent ($ bbls)
|
$ | 83.88 | ||
-8-
(A)
Excludes $1,743 of oil and gas royalty income included in Total Revenue for
consolidated financial statements.
The
following table sets forth information at December 31, 2007, relating to the
productive wells in which we owned a working interest as of that
date. Productive wells consist of producing wells and wells capable
of production, including natural gas wells awaiting pipeline connections to
commence deliveries and oil wells awaiting connection to production
facilities. Gross wells are the total number of productive wells in
which we have an interest, and net wells are the sum of our fractional working
interests owned in gross wells.
|
December 31, 2007
|