UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10Q-SB/A
--------------------------
Quarterly Report Pursuant to Section 13 or 15 (D)
of the Securities Act of 1934 for the
quarterly period ended: June 30, 2005
Commission File number: 000-49950
---------------------------
American Petroleum Group, Inc.
(Exact name of small business issuer as specified in its charter)
Nevada
(State or other jurisdiction of Incorporation or organization)
98-0232018
(IRS Employee Identification No.)
1400 N. Gannon Drive
2nd Floor
Hoffman Estates, IL 60194
(847) 805-0125
(Address of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $0.001 par value 17,145,500
(Class) (Outstanding as of November 14, 2005)
American Capital Alliance, Inc.
Form 10Q-SB/A
Index
Part I - FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited) 3
Condensed Balance Sheets 3
Condensed Statements of Operation 4
Condensed Statements of Cash Flows 5
Condensed Statements of Stockholder's Equity 6
Notes on Condensed Financial Information 7
Item 2 Management's Discussion and Analysis or Plan of Operation 18
Item 3 Control and Procedures 27
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 28
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission Of Matters To A Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8 -K 29
Signatures 30
Certifications 31
2
Part I: Financial Information
Item 1. Financial Statements
AN PETROLEUM GROUP, INC. AND SUBSIDIARY
Interim Balance Sheets
June 30, 2005 and December 31, 2004
--------------------------------------------------------------------------------
(Unaudited) (Audited)
June 30, December 31,
2005 2004
------------------------------
ASSETS
Current Assets
Cash and cash equivalents - $ 801
Trade accounts receivable, net of allowance of $22,700
for doubtful accounts 275,783 291,846
Prepaid assets 15,750 -
Advances to others 366,042 100,000
Inventory 259,020 254,944
--------------------------
Total Current Assets 916,595 647,591
Equipment
Equipment 6,068 6,068
Less accumulated depreciation 3,023 2,023
--------------------------
3,045 4,045
--------------------------
TOTAL ASSETS $ 919,640 $ 651,636
==========================
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current Liabilities
Book overdraft $ 47,502 $ 5,523
Trade accounts payable 605,914 629,825
Accrued interest 36,804 32,000
Accrued professional fees - 45,000
Accrued expenses 36,814 11,187
Loans payable to officers/stockholders 1,320,750 713,269
--------------------------
Total Current Liabilities 2,047,784 1,436,804
Notes Payable to Stockholders 927,500 500,000
Commitments and Contingences (Notes B, F, G, I, K and L)
Stockholders' Equity (Deficit)
Preferred stock; 5,000,000 shares; 0 shares
and 2,527,500 issued and outstanding in 2005 and - 25,275
2004, respectively
Common stock, $0.001 par value; 100,000,000 shares
authorized; 12,162,000 and 3,635,000 shares issued and
outstanding in 2005 and 2004, respectively 12,162 3,635
Additional paid-in capital 15,755,869 11,523,540
Retained deficit (17,823,675) (12,837,618)
--------------------------
(2,055,644) (1,285,168)
--------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 919,640 $ 651,636
==========================
The accompanying notes are an integral part of these consolidated financial
statements.
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Interim Statements of Operations
Three and Six Month Periods Ended June 30, 2005 and 2004
-----------------------------------------------------------------------------------------------------------
Three months ended Six months ended
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
-------------------------- ---------------------------
Net sales $ 380,147 $ -- $ 765,048 $ --
Cost of goods sold 264,518 -- 545,113 --
--------------------------- ---------------------------
Gross Profit 115,629 -- 219,935 --
Expenses
Acquisition expense -- -- -- 10,000
Professional fees 20,600 31,000 93,247 63,215
Management fees -- -- -- --
Office expenses 11,239 5,233 48,579 5,583
Compensation expenses 735,000 6,700 1,425,000 6,700
Payroll and payroll taxes 324,177 -- 590,610 --
Licenses and insurance 16,444 -- 29,398 --
Bad debts -- --
Outside sales 40,039 -- 76,339 --
Rent and taxes 3,000 -- 7,000 --
Repairs and maintenance 23,808 -- 24,403 --
Utilities 10,152 -- 19,887 --
Vehicles 693 -- 1,386 --
Telephone 7,694 -- 14,945 --
Plant equipment 3,227 -- 5,970 --
Depreciation 500 -- 1,000 --
Advertising and promotion 8,495 50,250 8,890 50,250
Travel and entertainment 19,258 2,329 35,404 6,306
Financing Expense -- -- 2,782,500 --
Other 6,655 5,860 11,761 9,143
--------------------------- ---------------------------
Total Expenses 1,230,981 101,372 5,176,319 151,197
--------------------------- ---------------------------
Loss Before Other Items (1,115,352) (101,372) (4,956,384) (151,197)
Other Income (Expense)
Interest expense (25,412) (975) (35,829) (975)
Other income 750 -- 6,156 --
--------------------------- ---------------------------
Total Other Income ( Expense) (24,662) (975) (29,673) (975)
--------------------------- ---------------------------
NET LOSS $ (1,140,014) $ (102,347) $ (4,986,057) $ (152,172)
--------------------------- ---------------------------
Loss per share 0.109 0.004 0.477 0.006
=========================== ===========================
Weighted average number of shares outstanding 10,442,500 1,221,028 10,442,500 1,273,333
=========================== ===========================
The accompanying notes are an integral part of these consolidated financial
statements.
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Interim Statements of Cash Flows
Six Month Periods Ended June 30, 2005 and 2004
-----------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
June 30, June 30,
2005 2004
---------------------------
Cash flows from operating activities:
Net loss $ (4,986,057) $(152,172)
Compensation, consulting, financing and termination
expenses in exchange for shares 1,425,000 -
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debts - -
Depreciation 500 -
(Increase) decrease in operating assets:
Trade accounts receivable 16,063 -
Advances to others (266,042) -
Inventory (4,076) -
Acquisition deposits - (56,000)
Prepaid assets (15,750)
Increase (decrease) in operating liabilities:
Book overdraft 41,979 -
Trade accounts payable (23,799) 9,007
Proceeds for additional paid-in-capital
and stock shares issued - 74,950
Accrued expenses 30,431 -
---------------------------
Net cash used in operating activities (3,781,751) (124,215)
---------------------------
Cash flows from investing activities:
Acquisition of new subsidiary - -
Purchases of equipment - -
---------------------------
Net cash provided by (used in) investing activities - -
---------------------------
Cash flows from financing activities:
Issuance of common stock 8,527 -
Increase in additional paid-in capital 2,762,717 -
Retirement of preferred stock (25,275) -
Proceeds from loans payable 1,034,981 91,000
---------------------------
Net cash provided by financing activities 3,780,950 91,000
---------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (801) (33,215)
Cash and cash equivalents, beginning of year 801 35,432
---------------------------
Cash and cash equivalents, end of year $ - $ 2,217
===========================
The accompanying notes are an integral part of these consolidated financial
statements.
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Interim Statements of Stockholders' Equity (Deficit) Three Month and Six Month
Periods Ended June 30, 2005 and Year Ended December 31, 2004
------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional Retained
---------------------------------------------------- Paid-In Earnings
(Audited) Number Par Value Number Par Value Capital (Deficit) Total
------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 - $ - 1,415,000 $ 1,415 $ 9,328,585 $ (9,662,160) $ (332,160)
Net loss - - - - - (3,175,458) (3,175,458)
Stock shares issued 2,527,500 25,275 2,598,700 2,599 2,194,576 - 2,222,450
Retired common shares - - (273,700) (274) 274 - -
------------------------------------------------------------------------------------------------------
(Audited)
Balance at December 31, 2004 2,527,500 25,275 3,740,000 3,740 11,523,435 (12,837,618) (1,285,168)
Net loss - - - - - (3,846,043) (3,846,043)
Stock shares issued 1,150,000 11,500 4,983,000 4,983 3,893,348 - 3,909,831
Retired common shares - - - - - - -
------------------------------------------------------------------------------------------------------
(Unaudited)
Balance at March 31, 2005 3,677,500 36,775 8,723,000 $ 8,723 $ 15,416,783 $ (16,683,661) $(1,221,380)
Net loss (1,140,014) (1,140,014)
Stock shares issued - - 3,438,750 3,439 339,086 - 342,525
Retired preferred shares (3,677,500)(36,775) - - - (36,775)
(Unaudited)
------------------------------------------------------------------------------------------------------
Balance at June 30, 2005 - - 12,161,750 12,162 15,755,869 (17,823,675) (2,055,644)
======================================================================================================
Item 2. Management's Discussion and Analysis and Plan of Operations.
FORWARD LOOKING STATEMENTS
The following discussion should be read in conjunction with our audited
financial statements and notes thereto included herein. In connection with, and
because we desire to take advantage of, the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, we caution readers regarding
certain forward looking statements in the following discussion and elsewhere in
this report and in any other statement made by, or on our behalf, whether or not
in future filings with the Securities and Exchange Commission. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can affect actual results and could cause
actual results to differ materially from those expressed in any forward-looking
statements made by, or on our behalf. We disclaim any obligation to update
forward-looking statements.
OVERVIEW
History and Organization
American Petroleum Group, Inc., formerly American Capital Alliance, Inc.,
formerly Prelude Ventures, Inc. (the "Company") was incorporated under the laws
of the State of Nevada on May 24, 2000. Prior to its acquisition of American
Petroleum Products, Inc., formally Alliance Petroleum Products, Inc., the
Company had limited business operations and was considered a development stage
enterprise. The activities during that period principally have been limited to
organizational matters, and examining business and financing opportunities for
the Company.
Prior Business Matters and Failed Business Acquisitions.
On March 9, 2001, we acquired a 20-year mining lease from Steve Sutherland, the
owner of 24 unpatented lode-mining claims, sometimes referred to as the Medicine
Project, located in Elko County, Nevada. The lease was terminated at some point.
During the nine months ended December 31, 2003, management of the Company
terminated the mining lease. As the Company terminated the lease, it is required
to pay all federal and state mining claim maintenance fees for the current year.
The Company is required to perform reclamation work on the property as required
by federal state and local law for disturbances resulting from the Company's
activities on the property. In the opinion of management, there will be no
continuing liability. Please see the Company's Schedule 14C Information
Statement as filed with the Securities and Exchange Commission on February 13,
2004 and mailed or furnished to Shareholders on February 17, 2004, and
incorporated herein by reference, for additional details on this matter.
4
On April 1, 2003, the Company entered into an agreement to acquire 100% of the
issued and outstanding shares of Pascal Energy, Inc., a Canadian corporation, by
the issuance of 5,000,000 common shares, restricted under Rule 144 of the
Securities Act of 1933 and at a later date, issue 5,000,000 common shares,
restricted under Rule 144 subject to the Company paying not less than $1,000,000
accumulated dividends to its shareholders of record. Pascal Energy, Inc.'s
business has to provide servicing for the oil and gas industry.
The Company determined that the transaction could not be completed due to the
inability to complete a comprehensive due diligence. The shares of common stock
previously transferred in anticipation of the completion of the transaction were
returned to the treasury of the Company and canceled.
"TSG" Acquisition
On October 9, 2003, the Company acquired an option for $500,000 to purchase the
assets and certain liabilities of Tri-State Stores, Inc., an Illinois
Corporation ("Tri-State"), GMG Partners LLC, an Illinois Limited Liability
Company ("GMG"), and SASCO Springfield Auto Supply Company, a Delaware
Corporation ("SASCO"). Tri-State, GMG and SASCO are collectively referred to
herein as "TSG." Upon exercise of the option, the Company was to pay $3,000,000
and assume certain liabilities, not exceeding $700,000. TSG is involved in the
automotive after market. During the first quarter of 2004, the Company elected
not to continue to pursue this acquisition and let the option lapse.
Motor Parts Waterhouse, Inc.
The Company issued 5,000,000 shares of common stock for an option to acquire all
the outstanding stock of Motor Parts Warehouse, Inc. ("MPW"), of St. Louis,
Missouri. In order to exercise the option, the Company must issue an additional
5,000,000 shares of common stock to the shareholders of MPW and pay $2,200,000.
This MPW option cannot be exercised until after the refinancing of the TSG debt
of approximately $3,000,000. MPW is also an auto parts distributor. As a result
of the financing not being completed, the Company elected not to continue to
pursue this acquisition and let the option lapse.
Alliance Petroleum Products Company
On October 9, 2003, the Company also entered into a Stock Purchase Agreement
("Alliance Agreement") with Alliance Petroleum Products Company ("Alliance"), an
Illinois Corporation, and a Rider to the Alliance Agreement ("Rider"). Alliance
is in the business of blending and bottling motor oil and anti-freeze. Under the
Alliance Agreement, the Company issued 5,000,000 shares of common stock for 100%
of the issued and outstanding shares of the common stock of Alliance (757,864
common shares). An additional 5,000,000 shares of common stock of the Company is
to be issued to Worldlink International Network, Inc. upon 24 months from the
date hereof. Under the terms of the Rider, the Company is required to provide
funding of at least $3,500,000 to pay Harris Bank, a secured creditor of
Alliance. The shareholders of Alliance have the option to have the 757,864
issued and outstanding shares of common stock of Alliance returned and the
Alliance Agreement rescinded if they choose if the Company did not arrange the
funding within 150 days from the date of the execution of the Alliance
Agreement.
5
Since the expiration of the option period has expired, the principals
of the transactions have verbally agreed to extend the option period pending
completion of the financing. This was a material contingency to the transactions
and as a result has to be resolved prior to recognition of a business
combination. On June 24, 2004 (effective date July 1, 2004) the Company
("Prelude") now known as American Petroleum Group, Inc., ("AMPE") and Alliance
Petroleum Products Company ("Alliance"), entered into an Amendment to the
original Alliance Agreement, dated October 9, 2003 whereby all previous
conditions and contingencies were deemed to have been completed or waived and
the agreement amended as follows;
o 5,000,000 shares of AMAI voting capital stock are to be issued to
the shareholders of Alliance in the same proportions as the first
5,000,000 shares were issued to them pursuant to the exchange of
securities contemplated in the Agreement and Plan of Reorganization
upon the execution of this Amendment. The exchange of securities
also includes, 1,000,000 shares of preferred shares, with the
necessary Certificate of Designation, to allow conversion at the
rate of 1 share of preferred to ten (10) shares of common, and to
permit the preferred shareholders to vote their shares, at any time
after issuance, and after they have been converted, the shares be
issued to the shareholders of American in the same proportions as
the first 5,000,000 shares were issued to them pursuant to the
Agreement and Plan of Reorganization.
o All the shares to the Alliance shareholders are no longer subject to
a two-year restriction prior to sale or transfer, but are now only
subject to those transfer restrictions under Rule 144 of the
Securities Laws.
o AMAI assumes all payment obligations and all other agreements of
Alliance as set forth in the including four "Promissory Notes"; and
AMAI assumes all payment obligations and all other agreements of
Alliance to the Harris Bank.
It is the opinion of current management that the terms of the amendment as
contained above, are unenforceable against the Company. It is the belief and
opinion of current management that the former control person(s) of the Company
attempted to bind the Company for debts due and owing from a transaction the
Company was not a party to, did not hold any assets from or any obligation to
repay and monies lent against assets. This is better described as the
"threatened Litigation from Harris Bank" as set forth in Part II, Item 1.
Litigation
The Company
The operations of Alliance have been consolidated with the results of AMAI since
July 1, 2004. American Petroleum Group, Inc. which was formerly American Capital
Alliance, Inc. (the "Company") is a Chicago based holding company with an agenda
to acquire, merge, and manage various business opportunities.
6
The company, via its subsidiary (American Petroleum Products Company, or APPC),
is in the manufacturing and distribution of petroleum and related products for
the automotive industry. Specifically, APPC is in the business of blending,
bottling, and distributing private label motor oil, transmission fluid, and
related products for the automotive aftermarket. These products are sold, both
direct and through distributors, to retail outlets that include oil change
shops, automotive aftermarket chains, gas stations, department stores, and
convenience stores. Although most products are sold in 12-quart cases, some
products are sold in bulk. APPC sells to a wide variety of customers with a low
dependence on any one customer (the largest customer makes up less than 10% of
sales year to date).
In order to make finished motor oil, blenders and bottlers like APPC purchase
base oils and blend them with V.I. Improver and/or Additive Packages to create
motor oil, which is then sold either Bulk or Bottled. While there are several
major companies with huge markets, this is a highly fragmented market, with many
smaller players, especially in the private label market. Other major costs
include bottles, caps, labels, corrugated, labor, and transportation costs.
The U.S. market for aftermarket motor oil is approximately $11.3B annually,
making APPC a very small, regional player. Most retail outlets for motor oil
carry a major brand and a lesser-known, lower-priced brand. APPC primarily
competes with those other, lesser-known brands, which consist of other
regional/national motor oil blenders and bottlers.
Given that the product is somewhat of a commodity, APPC competes largely by
managing a competitive cost structure so that it can pass through competitive
pricing and by carefully managing customer relationships. By giving our
customers fair prices and providing excellent quality and service, APPC has
maintained relatively long term relations with its customer base and has had
success winning new customers.
Motor oil with for late model year automobiles normally utilize the latest
formulae established by the American Petroleum Institute and the Society of
Automotive Engineers. The "standard" for current model year automobiles is
referred to as "SM," which recently replaced "SL." Only SM and SL motor oil can
currently receive the API "starburst" certification seal, and APPC must annually
renew its API license in order to use the "starburst" seal on its labels. Motor
oil can also be made without the API starburst and sold as oil with technology
prior to SM or SL. This API-certified oil must include what is referred to as
"Group 2 Base Oils" as the foundation for the oil, as well as an additive
package that includes the most recently approved chemical blend. APPC, like
other motor oil blenders, must purchase Group 2 base oils from select,
API-approved suppliers in order to make API-certified premium motor oil. APPC
primarily purchases Group 2 base oils from Motiva (Port Arthur, Texas) and from
Evergreen Oil (Irvine, California). Shortages of Group 2 base oils have caused
price increases in recent months, but APPC has been able to pass these increases
on to the customer.
Oilmatic Systems LLC
On December 3, 2004, the Registrant entered into a Letter of Intent, dated
December 1, 2004, with Oilmatic Systems LLC of East Orange, New Jersey, whereby
the Registrant would purchase Oilmatic Systems LLC and/or Oilmatic
International, Inc., for shares of common stock of the Registrant.
7
As part of the transaction, Michael Allora, President of Oilmatic would have
assumed, after the closing of the transaction, the position of President and
Chief Operating Officer of American Petroleum as well as Oilmatic. Mr. Allora
has extensive experience in the delivery of bulk liquids and related products to
businesses, retail and wholesale, in the restaurant field.
Oilmatic is a food service distribution company that supplies a closed loop Bulk
Cooking Oil Supply and Management system. Its patented state of the art handheld
Dipstick(R) design dispenses and removes cooking oil with the simple push of a
button at the deep fryers. The system also consists of separate fresh oil and
waste oil tanks. A key switch allows management to control unnecessary oil fills
and disposals. This system completely eliminates the practice of employees
manually removing hot used oil which significantly reduces slips, falls and
burns, as well as the hard labor of unloading and retrieving heavy boxes of oil.
Additionally, the system eliminates hazardous grease spills both inside and
outside of the store that cause grease fires and grease trap build-ups that
pollute our environment.
Effective May 20, 2005, Management no longer felt that the mutual goals of both
parties were attainable and therefore the transaction with Oilmatic was
cancelled between the Parties.
The Registrant had advanced Oilmatic Systems LLC $300,000 under the Letter of
Intent. Pursuant to the Letter of Intent, if the transaction did not close, the
amount would be a loan to Oilmatic Systems LLC, to be repayable on the ninth
month anniversary of the date of the loan, together with interest at the
floating prime rate.
Subsequent Transactions
Triton Petroleum, LLC
On July 1, 2005, American Petroleum Group, Inc., the Registrant, entered into an
Asset Purchase Agreement with TRITON PETROLEUM, LLC, an Illinois Limited
Liability Corporation ("Triton") whereby the Registrant purchased all the assets
and operations of Triton, as follows:
On the Payment Date, which shall be the one year anniversary of the
effectiveness of the Agreement, that being July 1, 2006, the Registrant shall
pay to the Sellers the Purchase Price equal to THREE AND ONE HALF (3.5) times
the net earnings of the assets and operations formerly owned by Triton.
The Purchase Price is to be paid as:
(a) TWENTY-FIVE PERCENT (25%) in cash on the payment date, and
(b) with the balance of SEVENTY-FIVE PERCENT, payable over the following two
years, in cash and stock, as agreed to by the parties.
8
In addition, current loans to Triton, totaling approximately THREE HUNDRED
THOUSAND DOLLARS ($300,000), due and owing to the members of Triton, shall be
paid over the twelve months from the Closing date to the Payment Date.
Some of the members of Triton, which sold the Assets to the Registrant, are
Officers/Directors, employees or former Directors of the Registrant. The sellers
are as follows:
Keystone Capital Resources LLC
Controlled by our former Interim President, James W. Zimbler
Rick Carter
Former Director
Christopher Hanson
Employee of our subsidiary, American Petroleum Products Corp.
Richard Steifel
President of our subsidiary, American Petroleum Products Corp.
George L. Riggs, III
Former Director and Chief Financial Officer
Michael S. Krome
Currently a Director and General Counsel
Robert Nelson - no relation to Registrant prior to transaction.
The assets purchased include the right to the name, Triton Petroleum, all
operations and assets, including any leases, or sub-leases.
Triton purchases used oil from various consolidators of used petroleum such as
gear oil, machine oils, etc. that have never been burnt before. It then
transports the un-combusted, but unrefined oils back to its reclamation facility
for refining. After a very detailed reclamation process, all impurities and
contaminants are extrapolated out of the oil, through Triton's centrifuge
operation, thus leaving it with a valuable renewable petroleum base oil. This
base oil can be blended with new crude and other chemical components and bottled
in our Bedford Park, Illinois facility. Using the renewable oils from Triton
Petroleum will drastically reduce American Petroleum Products Company's (APPC)
cost of base oil by 35%, and management feels that the acquisition of the assets
of Triton petroleum, making APPC its only customer, will be an advantage with
respect to earnings.
APPC has purchased this kind of oil in the past from various supplies, including
Triton Petroleum, but owning the supplier creates a vertical integrated supply
chain and giving AMPE a price advantage over its competitors in this highly
competitive commodity market.
9
PLAN OF OPERATIONS
We were a startup, development stage Company prior to the acquisition of
American Petroleum Products Company ("APPC") and did not realize any revenues
from our business operations until that time. However at time of acquiring APPC
its sales volume was at a point below its break even point and therefore was
losing money. Management of the Company feels that APPC is operating at a small
percentage of its capacity with its major constraint on increasing volume being
that of financing raw materials for manufacturing and some other limited
variable manufacturing costs. In addition, it is currently not generating
profits of sufficient amount to support the other operations of the parent
Company. Accordingly, we must raise money from sources other than the operations
of this business. Our only other source of cash at this time is investments by
others in our Company. We must raise cash to complete the acquisitions and stay
in business.
In order to raise capital for operations of the parent Company and to complete
the Oilmatic transaction, the Company entered into a transaction with Cornell
Capital Partners LP and Highgate House Funds, Ltd., dated March 8, 2005, whereby
the Company entered into a Convertible debenture for a total amount of $500,000
at 7% interest. The Note is convertible into shares of common stock at a
conversion price of $0.85 per share, at the option of the Lender. At the same
time the Company entered into with Cornell Capital Partners LP a total Standby
Equity Distribution Agreement for up to $10,000,000 equity line. Pursuant to the
Standby Equity Distribution Agreement we are to file a registration statement
180 days after execution.
We must also obtain additional financing to either purchase our operating assets
or obtain working capital for leasing arrangements
To meet our need for cash, we are attempting to raise debt and equity financing
to complete the acquisitions described in this document and fund the Company's
on-going operations. There is no assurance that we will be able to raise these
funds and stay in business. If we do not raise the funds required to complete
any of the acquisitions, we will have to find alternate sources such as a
secondary public offering, private placement of securities, or loans from
officers or others. If we need additional cash and can not raise it, we will
either have to suspend operations until we do raise the cash or cease operations
entirely
Limited Operating History.
The only historical financial information about our Company on which to base an
evaluation of our performance is the last six months after the acquisition of
APPC which was generating losses at the time of acquisition. We cannot guarantee
we will be successful in our business operations. Our business is subject to the
risks inherent in the establishment of a new business enterprise, including
limited capital resources and the ability to find and finance suitable
acquisition candidates. We are seeking equity and debt financing to provide the
capital required to fund additional proposed acquisitions and our on-going
operations.
10
We have no assurance that future financing will be available to the Company on
acceptable terms. If financing is not available on satisfactory terms, we may be
unable to continue, develop or expand our operations. Equity financing could
result in additional dilution to shareholders.
Liquidity, Capital Resources and Operations
Since the Company's inception, the Company has raised funds from
officer/stockholder advances, from private sales of its common shares and
approximately $500,000 from sale of borrowed stock contributed by the Company's
promoters. This money has been utilized for start-up costs and operating
capital.
In this regard, the Company's plan of operations for the next 12 months is to
pursue profitable business acquisitions, and obtain financing to increase the
sale volume of APPC. Product research and development is expected to be minimal
during the period. Additionally, the Company does not expect any change in
number of employees other than through acquisitions.
Results of Operations:
Three Months Ended June 30, 2005 v. Three Months Ended June 30, 2004
For the Quarter Ending June 30, 2005 v. June 30, 2004, the Company had $380,147
in sales, and cost of revenues and other expenses of $1,255,643, including
$735,000 in compensation expense related to the issuance of stock for services
rendered. This is in comparison to $-0- in sales and cost of revenues and
expenses of $102,347.
Six Months Ended June 30, 2005 v. Six Months Ended June 30, 2004
For the Six months ending June 30, 2005 v. June 30, 2004, the Company had
$765,048 in sales, and cost of revenues and other expenses of $5,205,992,
including $1,425,000 in compensation expense related to the issuance of stock
for services rendered and $2,782,500 in financing expense related to the
issuance of stock in relation to financing activities. This is in comparison to
$-0- in sales and cost of revenues and expenses of $152,172.
Liquidity and Financial Resources:
During the six months ended June 30, 2005, net cash used by operating activities
was $3,781,751. The Company incurred a net loss of $1,140,013 for the three
months ended June30, 2005; the company still has a net operating loss even if
the stock compensation expense of $735,000 had not been incurred. Additionally
at June 30, 2005, current liabilities and long-term liabilities exceed current
assets by approximately $2,058,689; these factors raise substantial doubt about
the Company's ability to continue as a going concern. The Company anticipates
that in order to fulfill its plan of operation including payment of certain past
liabilities of the company, it will need to seek financing from outside sources.
The company is currently pursuing private debt and equity sources. It is the
intention of the Company's management to also improve profitability by
significantly reducing operating expenses and to increase revenues
significantly, through growth and acquisitions. The Company is actively in
discussion with one or more potential acquisition or merger candidates. There is
no assurance that the company will be successful in raising the necessary funds
nor there a guarantee that the Company can successfully execute any acquisition
or merger transaction with any company or individual or if such transaction is
effected, that the Company will be able to operate such company profitably or
successfully.
11
Administrative expenses for the three months ended June 30, 2005, including
stock compensation expense were $1,230,980, resulting in losses from operations
of $1,115,352. Included in these amounts are expenses for stock compensation of
$735,000. The increases in the remainder of Administrative expensed are due to
the start up of the operations due to increases in personnel, professional,
professional fees, and a generally higher level of fixed administrative
expenses. It is anticipated by the Registrant that General and Administrative
costs will remain relatively the same, while Revenues and Gross profit will
increase as a result of the business derived from APPC.
Inflation
The amounts presented in the financial statements do not provide for the effect
of inflation on the Company's operations or its financial position. Amounts
shown for machinery, equipment and leasehold improvements and for costs and
expenses reflect historical cost and do not necessarily represent replacement
cost. The net operating losses shown would be greater than reported if the
effects of inflation were reflected either by charging operations with amounts
that represent replacement costs or by using other inflation adjustments.
Provision for Income Taxes
The company has determined that it will more likely than not use any tax net
operating loss carry forward in the current tax year and has taken and therefore
has a valuation amount equal to 100% of any asset.
Contingencies
Harris Bank
In conjunction with the Bank attempting to collect their debt against
certain parties, the bank is requesting that the Company become a party to any
forbearance as to collection of the debt, such as becoming a guarantor or buying
life insurance for the original makers of the debt. The basis of their claims is
that the company is using facilities that secure the original borrowings. It is
the opinion of management and counsel of the company that there is no basis and
claims or commitments since Alliance or the Company was not a borrower or a
guarantor on the debt (management of Alliance are guarantors of the original
debt). The Company has a tentative agreement to resolve al potential claims with
the bank and is attempting to secure financing to purchase the operating assets
being utilized in the operations at fair value.
12
Compensation for Utilizing Operation Assets
No rent or compensation of any type has been paid to the entities that
claim to have legal title to the operating assets of Alliance. Management has
taken the position that since there was no contract or agreement to purchase or
for the payment of rentals for these assets, therefore nothing is owed. The
consolidated operations for the period since Alliance was acquired do not
contain any provision for compensation for use of the facilities; The owner (and
former president of the Company and major shareholder) of the entity that owns
the real estate had previously had Alliance recorded $15,000 in rent a month
with a corresponding increase to an amount payable to this entity; This is a
contingency relating to the business combination that could potentially result
in an adjustment of the purchase price of Alliance or additional charges to
operations.
Amendment of Alliance Petroleum Products Company Agreement
On June 24, 2004 the Company amended the original agreement removing the
contingencies contained in the original document, the most significant being of
refinancing certain debt owed Harris Bank. As part of this amendment the
document stated Alliance assumed assumes all payment obligations and all other
agreements of Alliance to the Harris Bank, and all payment obligations and all
other agreements of Alliance as set forth in the following four "Promissory
Notes".:
o Alliance is to pay $200,000 to Richard Stiefel after all amounts have
been paid to Jesse Fuller and American Group Financial (owned by Jesse
Fuller) and funding has been received from Cornell Capital
Corporation. The note is non-interest bearing. Jesse Fuller was the
former president and a director of the Company and a major
shareholder. Richard Stiefel is an officer in Alliance and former
shareholder, and currently is an officer/director/ shareholder of the
Company. ----It is the position of the Company that since the funding
from Cornell Capital Corporation was not completed and it is unlikely
to be completed that there is no basis for this liability.
o Alliance promises to pay American Group Financial, Inc. and/or Jesse
Fuller $407,368.09 and any additional sums that AGF or Jessee Fuller
owes to Harris Bank. Jessee Fuller is the owner of AGF, the former
president of the Company, former director and still a major
shareholder. The note accrues interest at 5% per annum. The note due
December 1, 2004. Management of the Company's position is that there
was not consideration for the note and that Alliance was never a party
on any debt obligations to Harris Bank.
o Alliance is to pay $200,000 to Virginia Gefvert after all amounts have
been paid to Jesse Fuller and American Group Financial (owned by Jesse
Fuller) and funding has been received from Cornell Capital
Corporation. The note is non-interest bearing. Jesse Fuller was the
former president and a director of the Company, and a major
shareholder. Virginia Gefvert was a former shareholder of Alliance. It
is the position of the Company that since the funding from Cornell
Capital Corporation was not completed and it is unlikely to be
completed that there is no basis for this liability.
o Alliance is to pay $200,000 to American Group Financial, Inc. after
all amounts have been paid to Jessee Fuller and American Group
Financial (owned by Jesse Fuller) and funding has been received from
Cornell Capital Corporation. The note is non-interest bearing. Jesse
Fuller was the former president and a director of the Company, and a
major shareholder. Virginia Gefvert was a former shareholder of
Alliance. It is the position of the Company that since the funding
from Cornell Capital Corporation was not completed and it is unlikely
to be completed that there is no basis for this liability.
13
Much of the information included in filing includes or is based upon estimates,
projections or other "forward looking statements". Such forward-looking
statements include any projections or estimates made by us and our management in
connection with our business operations. While these forward-looking statements,
and any assumptions upon which they are based, are made in good faith and
reflect our current judgment regarding the direction of our business, actual
results will almost always vary, sometimes materially, from any estimates,
predictions, projections, assumptions or other future performance suggested
herein.
Such estimates, projections or other "forward-looking statements" involve
various risks and uncertainties as outlined above. We caution the reader that
important factors in some cases have affected and, in the future, could
materially affect actual results and cause actual results to differ materially
from the results expressed in any such estimates, projections or other
"forward-looking statements".
Our common shares are considered speculative during our search for a new
business opportunity. Prospective investors should consider carefully the risk
factors set out below.
Government Regulation
To the best of our knowledge, we are not currently subject to direct
federal, state or local regulation in the United States, other than regulations
applicable to businesses generally.
Key personnel
All of our present officers or directors are key to our continuing
operations, we rely upon the continued service and performance of these officers
and directors, and our future success depends on the retention of these people,
whose knowledge of our business and whose technical expertise would be difficult
to replace. At this time, none of the officers or directors is bound by
employment agreements, and as a result, any of them could leave with little or
no prior notice.
If we are unable to hire and retain technical, sales and marketing and
operations personnel, any business we acquire could be materially adversely
affected. It is likely that we will have to hire a significant number of
additional personnel in the future if we identify and complete the acquisition
of a business opportunity, or if we enter into a business combination.
Competition for qualified individuals is likely to be intense, and we may not be
able to attract, assimilate, or retain additional highly qualified personnel in
the future. The failure to attract, integrate, motivate and retain these
employees could harm our business.
14
Limited Operating History. Need for Additional Capital
There is limited financial information about our Company on which to
base an evaluation of our performance. We were a development stage Company prior
to the acquisition of APPC and have not generated any substantial revenues from
operations. We cannot guarantee we will be successful in our business
operations. Our business is subject to the risks inherent in the establishment
of a new business enterprise, including limited capital resources and the
ability to find and finance suitable acquisition candidates. We are seeking
equity and debt financing to provide the capital required to fund the proposed
acquisitions and our on-going operations.
We have no assurance that future financing will be available to the
Company on acceptable terms. If financing is not available on satisfactory
terms, we may be unable to continue, develop or expand our operations. Equity
financing could result in additional dilution to shareholders.
We have not conducted or received results of market research indicating
that there is a demand for the acquisition of a business opportunity or business
combination as contemplated by our company. Even if there is demand for the
acquisition of a business opportunity or combination as contemplated, there is
no assurance we will successfully complete such an acquisition or combination.
Regulation
Although we will be subject to regulation under the Securities Exchange
Act of 1934, management believes that we will not be subject to regulation under
the Investment Company Act of 1940, insofar as we will not be engaged in the
business of investing or trading in securities. In the event that we engage in
business combinations which result in us holding passive investment interests in
a number of entities, we could be subject to regulation under the Investment
Company Act of 1940, meaning that we would be required to register as an
Investment company and could be expected to incur significant registration and
compliance costs. We have obtained no formal determination from the Securities
and Exchange Commission as to the status of our company under the Investment
Company Act of 1940 and, consequently, any violation of such act would subject
us to material adverse consequences.
Uncertain Ability to Manage Growth
Our ability to achieve any planned growth upon the acquisition of a
suitable business opportunity or business combination will be dependent upon a
number of factors including, but not limited to, our ability to hire, train and
assimilate management and other employees and the adequacy of our financial
resources. In addition, there can be no assurance that we will be able to manage
successfully any business opportunity or business combination. Failure to manage
anticipated growth effectively and efficiently could have a materially adverse
effect on our business.
15
"Penny Stock" Rules May Restrict the Market for the Company's Shares
Our common shares are subject to rules promulgated by the Securities
and Exchange Commission relating to "penny stocks," which apply to companies
whose shares are not traded on a national stock exchange or on the NASDAQ
system, trade at less than $5.00 per share, or who do not meet certain other
financial requirements specified by the Securities and Exchange Commission.
These rules require brokers who sell "penny stocks" to persons other than
established customers and "accredited investors" to complete certain
documentation, make suitable inquiries of investors, and provide investors with
certain information concerning the risks of trading in the such penny stocks.
These rules may discourage or restrict the ability of brokers to sell our common
shares and may affect the secondary market for our common shares. These rules
could also hamper our ability to raise funds in the primary market for our
common shares.
Possible Volatility of Share Prices
Our common shares are currently publicly traded on the Over-the-Counter
Bulletin Board service of the National Association of Securities Dealers, Inc.
The trading price of our common shares has been subject to wide fluctuations.
Trading prices of our common shares may fluctuate in response to a number of
factors, many of which will be beyond our control. The stock market has
generally experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of companies with no
current business operation. There can be no assurance that trading prices and
price earnings ratios previously experienced by our common shares will be
matched or maintained. These broad market and industry factors may adversely
affect the market price of our common shares, regardless of our operating
performance.
In the past, following periods of volatility in the market price of a
company's securities, securities class-action litigation has often been
instituted. Such litigation, if instituted, could result in substantial costs
for us and a diversion of management's attention and resources.
Indemnification of Directors, Officers and Others
Our by-laws contain provisions with respect to the indemnification of
our officers and directors against all expenses (including, without limitation,
attorneys' fees, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact that the person is one of our officers or directors) incurred by an officer
or director in defending any such proceeding to the maximum extent permitted by
Nevada law.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
our company under Nevada law or otherwise, we have been advised the opinion of
the Securities and Exchange Commission is that such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
16
Anti-Takeover Provisions
We do not currently have a shareholder rights plan or any anti-takeover
provisions in our By-laws. Without any anti-takeover provisions, there is no
deterrent for a take-over of our company, which may result in a change in our
management and directors.
Reports to Security Holders
Under the securities laws of Nevada, we are not required to deliver an
annual report to our shareholders but we intend to send an annual report to our
shareholders.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
Item 3. Controls And Procedures
The registrant's new Principal executive financial officer, based on
his evaluation of the registrant's disclosure controls and procedures (as
defined in Rules 13a-14 (c) of the Securities Exchange Act of 1934) as of June
30, 2005 has concluded that the registrants' disclosure controls and procedures
are adequate and effective to ensure that material information relating to the
registrants and their consolidated subsidiaries is recorded, processed,
summarized and reported within the time periods specified by the SEC's rules and
forms, particularly during the period in which this quarterly report has been
prepared.
The registrant's principal executive officers and principal financial
officer have concluded that there were no significant changes in the
registrant's internal controls or in other factors that could significantly
affect these controls subsequent to June 30, 2005 the date of their most recent
evaluation of such controls, and that there was no significant deficiencies or
material weaknesses in the registrant's internal controls.
Part II. Other Information
Item 1. Legal Proceedings.
We know of no material, active or pending legal proceedings against us, nor are
we involved as a plaintiff in any material proceedings or pending litigation.
There are no proceedings in which any of our directors, officers or affiliates,
or any registered or beneficial shareholders are an adverse party or have a
material interest adverse to us.
17
There is a threatened action by the Harris Bank of Chicago, Illinois with
respect to a defaulted loan agreement. Harris Bank claims to have a lien on the
equipment used by the Registrant in its operations. The Registrant has had
contact with Harris Bank and is attempting to resolve the matter. The debt was
reduced from an original indebtedness of $2.35 million to a final reduced amount
of $1.4 million. Terms of the debt with Harris Bank of Chicago, Illinois include
a four-year term of repayment, with interest at 6% on a 20 year amortization
schedule, and a balloon payment at the end of the term. Upon the Company making
a down payment, the terms of the transaction will be finalized. In addition, we
have reached a tentative settlement with American Financial, the owner of the
real property where our subsidiary conducts operations. Both transactions are
waiting for the Company to make the initial payment to be executed and
completed.
The Company received a letter, dated February 28, 2005, from the Attorney for
Concentric Consumer Marketing, Inc., in connection with certain sums owed by
American Petroleum Products Corporation ("APPC"), a wholly owned subsidiary of
the Company, in the amount of $13,000 per month for the past four (4) months,
for services. There is no way to determine at this time the validity of the
claim, or any possible outcome or if the claim is material to the Company, or
even if litigation will be commenced against the Company and/or APPC. The
Company has reached a settlement with Concentric Consumer Marketing, Inc.
Item 2. Changes In Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters To A Vote Of Security Holders
None
Item 5. Other Information
On July 25, 205, we conducted a Rule 504, Regulating D offering of $1,000,000
worth of Convertible Debentures of our subsidiary American Petroleum Products
Company ("APPC"), to accredited investors in the State of Texas. Pursuant to the
Offering, APPC issued the convertible debentures, which were convertible into
shares of common stock. As part of the Offering, APPC is to be merged into the
Registrant. Upon conversion into shares and merger of APPC into the Registration
the offering shares are issuable as shares of American Petroleum Group, Inc. A
total of 2,500,000 shares of common stock were issued under the offering.
18
Effective August 1, 2005, the following Director resigned from the Board of
Directors and/or Principal Officers of the registrant.
James W. Zimbler Director and Interim President
William Bossung Director
The Directors resigning have stated in their resignation letters that their
resignation does not in any way imply or infer that there is any dispute or
disagreement relating to the Company's operations, policies or practices.
Each resigning Director has been provided a copy of his disclosure, no less that
the day the Registrant is filing the disclosure with the Commission. Each
Director will be given an opportunity to furnish the Registrant a letter or
response, that he agrees with the statements made by the Registrant in this
Section 5.02, and if not, stating the respects in which he does not agree.
The following individual has been appointed by to our Board of Directors,
effective August 1, 2005:
Name Age Position
-----------------------------------------
George Campbell 39 President and Chief Executive Officer
James Carroll 54 Director and Chief Accounting/Financial Officer
George Campbell, President and Chief Executive Officer
From 2001 until 2005 , Mr. Campbell was President of George Campbell Consulting,
where he was responsible for the entire operation. From 2000 until 2001, Mr.
Campbell was a Business Strategy Consultant for Scient Corp., where he was
responsible for providing clients with business advice as it related to internet
activities. From 1997 until 2000, Mr. Campbell was with Navistar International
Transportation Corp., where he had a variety of positions, most recently
Director of Strategic Planning for the Truck Group. He was responsible for
leading the leadership of the Truck Group through processes of reorganization
and strategy development.
Mr. Campbell comes to American Petroleum with a distinguished track record that
includes over 13 years of management experience in both start-up and large
company manufacturing. He spent 8 years with AlliedSignal and Navistar
International as a finance and strategy leader, where he led multiple
restructuring, cost, business development, and quality improvement efforts. Most
recently, Mr. Campbell's background includes extensive experience as a
consultant to both emerging growth and well established businesses the areas of
cost competitiveness and quality improvement. Mr. Campbell has been a business
consultant to both start ups and Fortune 1000 clients since 2000, with a focus
on strategic restructurings and quality improvements. Prior to that, Mr.
Campbell worked for both Navistar International and AlliedSignal in various
finance and strategy positions. He has an MBA from the University of Michigan
and a BA from the University of Wisconsin.
19
James J. Carroll, 54, Chief Financial Officer
James J. Carroll was appointed our Chief Financial Officer in March, 2005 and
was the founder of Kevney Consulting Group, Ltd (Kevney), and has been active in
Kevney since 2001. Kevney provides diversified financial and management services
to its clients, including merger and acquisition, reorganization and debt
financing consulting and interim chief financial officer services. Mr. Carroll
has over 30 years of financial experience, including 13 years in public
accounting with 5 years as a partner with a regional public accounting firm. He
also has over 15 years of experience in private industry, including positions as
COO and CFO for various manufacturing and distribution companies.
Item 6. Exhibits
a. Exhibits:
3.1 Articles of Incorporation of the Registrant, as amended*
3.2 By-laws of the Registrant, as amended*
31.1 Section 302 Certification of Chief Executive Officer (1)
31.2 Section 302 Certification of Chief Accounting/Financial Officer (1)
32.1 Section 906 Certification of Chief Executive Officer (1)
32.2 Section 906 Certification Chief Accounting/Financial Officer (1)
* Previously filed as an exhibit to the Company's Form 10-SB filed on June 26,
2001
(1) Filed herewith
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 14, 2005 American Petroleum Group, Inc.
--------/s/-------------
George Campbell, President and Chief
Executive Officer
--------/s/-------------
James Carroll, Chief Financial Officer