UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2012

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

 

Commission File Number 0-22723

 

AMERICAN PETRO-HUNTER INC.

(Exact name of registrant as specified in its charter)

 

Nevada			90-0552874
(State or Other Jurisdiction of			(I.R.S. Employer
Incorporation or Organization)			Identification Number)
17470 North Pacesetter Way Scottsdale, AZ  85255
(Address of principal executive offices) (Zip Code)
	(480) 305-2052
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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. x Yes   ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x 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.

 

¨

Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer  (Do not check if smaller  reporting company)

x

Smaller Reporting  company

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class		Outstanding at August 2, 2012
Common stock, $.001 par value		47,470,406

 

 

AMERICAN PETRO HUNTER INC.

FORM 10-Q

 

June 30, 2012

 

INDEX

 

	PAGE
PART I—FINANCIAL INFORMATION
Item 1.  Financial Statements	3
Condensed Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011	4
Condensed Statements of Operations for the three month and six month periods ended June 30, 2012 and 2011 (Unaudited)	5
Condensed Statements of Stockholders’ Equity (Deficit) as of June 30, 2012 and December 31, 2011 and 2010 (Unaudited)	6
Condensed Statements of Cash Flows for the six month period ended June 30, 2012 and 2011 (Unaudited)	7
Notes to Condensed Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.  Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.  Controls and Procedures	23
PART II—OTHER INFORMATION
Item 1.  Legal Proceedings	23
Item 1A.  Risk Factors	23
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.  Defaults Upon Senior Securities	23
Item 4.  Mine Safety Disclosures	23
Item 5.  Other Information	23
Item 6.  Exhibits	24
Signatures	25

 

 

FORWARD-LOOKING STATEMENTS

 

This Report on Form 10-Q contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward-looking statements included in this report. Such statements may be identified by the use of forward-looking terminology such as “may,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms, variations of such terms, or the negative of such terms. Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. Such statements address future events and conditions concerning, among others, capital expenditures, earnings, litigation, regulatory matters, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic conditions, changes in consumer demand, legislative, regulatory and competitive developments in markets in which we operate, results of litigation, and other circumstances affecting anticipated revenues and costs, and the risk factors set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed on March 29, 2012.

 

As used in this Form 10-Q, “we,” “us” and “our” refer to American Petro-Hunter Inc., which is also sometimes referred to as the “Company.”

 

YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS

 

The forward-looking statements made in this report on Form 10-Q relate only to events or information as of the date on which the statements are made in this report on Form 10-Q. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this report and the documents that we reference in this report, including documents referenced by incorporation, completely and with the understanding that our actual future results may be materially different from what we expect or hope.

 

 

Item 1. Financial Statements.

 

American Petro-Hunter, Inc.

Condensed Balance Sheets

 

		(Unaudited)
		June 30,				December 31,
		2012				2011
Assets
Current assets:
Cash		$	5,784			$	2,609
Accounts receivable			20,374				46,417
Prepaid expenses			4,289				79,464
Total current assets			30,447				128,490
Investments in mineral properties, net of accumulated
amortization of $129,782 and $135,987, respectively			1,787,132				1,965,577
Total assets		$	1,817,579			$	2,094,067
Liabilities and Stockholders' (Deficit)
Current liabilities:
Accounts payable and other liabilities		$	414,135			$	565,552
Short term note from officer			39,200				-
Note payable and accrued interest			-				202,484
Convertible debenture, net of discount of $0 and $212,070			-				2,164,205
Convertible debenture			633,306				633,306
Accrued interest on convertible debenture			-				456,638
Royalty interest payable			-				113,164
Loan guarantee			-				94,860
Total current liabilities			1,086,641				4,230,209
Stockholders' equity (deficit):
Common stock, $0.001 par value, 200,000,000 shares authorized,
47,470,406 and 32,867,028 shares issued and outstanding as
of June 30, 2012 and December 31, 2011, respectively			47,471				32,867
Common stock to be issued; 567,500 and 0 shares as of
June 30, 2012 and December 31, 2011			567				-
Additional paid-in capital			12,102,719				8,313,575
Accumulated comprehensive gain (loss)			-				(8,114	)
Accumulated deficit			(11,419,819	)			(10,474,470	)
Total stockholders' (deficit)			730,938				(2,136,142	)
Total liabilities and stockholders' equity (deficit)		$	1,817,579			$	2,094,067

 

 

The accompanying notes are an integral part of these financial statements.

 

 

American Petro-Hunter, Inc.

Condensed Statements of Operations

 

		For the three months ended								For the six months ended
		June 30,								June 30,
		2012				2011				2012				2011
Revenue		$	72,954			$	74,533			$	187,677			$	120,202
Cost of Goods Sold
Production and amortization			47,567				61,490				120,220				87,341
Gross profit			25,387				13,043				67,457				32,861
General and administrative			151,305				184,402				257,096				287,054
Executive compensation			76,000				372,000				361,000				438,000
Impairment expense			-				-				256,737				-
Total expenses			227,305				556,402				874,833				725,054
Net loss before other income (expense)			(201,918	)			(543,359	)			(807,376	)			(692,193	)
Other income (expense):
Gain on forgiveness of debt			235,985				-				322,731				-
Interest expense			(75,115	)			(372,133	)			(460,704	)			(783,360	)
Total other income (expense)			160,870				(372,133	)			(137,973	)			(783,360	)
Net loss before income taxes			(41,048	)			(915,492	)			(945,349	)			(1,475,553	)
Provision for income taxes			-				-				-				-
Net loss			(41,048	)			(915,492	)			(945,349	)			(1,475,553	)
Other comprehensive income (expense)			-				-				8,114				-
Comprehensive loss		$	(41,048	)		$	(915,492	)		$	(937,235	)		$	(1,475,553	)
Weighted average common shares
outstanding - basic and fully diluted			46,656,635				27,407,776				40,196,644				27,100,618
Net (loss) per share -
basic and fully diluted		$	(0.001	)		$	(0.033	)		$	(0.024	)		$	(0.054	)

 

 

The accompanying notes are an integral part of these financial statements.

 

 

American Petro-Hunter, Inc.

Condensed Statement of Stockholder's Equity (Deficit)

 

																										Total
		Common Stock								Additional				Stock								Accumulated				Stockholder’s
										Paid-in				owed but				Accumulated				Comprehensive				Equity
		Shares				Amount				Capital				not issued				Deficit				(Loss)				(deficit)
Balance at December 31, 2010			27,060,561				27,061				6,348,559				543				(7,740,391	)			(8,114	)			(1,372,342	)
Shares issued that were owed			542,856				543				-				(543	)			-				-				-
Shares issued for compensation			600,000				600				305,400				-				-				-				306,000
Shares issued for services			100,000				100				50,900				-				-				-				51,000
Shares issued for cash			200,000				200				49,800				-				-				-				50,000
Convertible debenture converted to stock			4,363,611				4,363				1,086,539				-				-				-				1,090,902
Beneficial conversion feature issued on convertible debenture			-				-				472,377				-				-				-				472,377
Net loss			-				-				-				-				(2,734,079	)			-				(2,734,079	)
Balance at December 31, 2011			32,867,028				32,867				8,313,575				-				(10,474,470	)			(8,114	)			(2,136,142	)
Shares issued for compensation			900,000				900				188,100				-				-				-				189,000
Shares issued in exchange for accts pay.			200,000				200				238,702				567				-				-				239,469
Convertible debenture converted to stock			12,652,869				12,653				3,150,565				-				-				-				3,163,218
Shares issued in exchange for notes pay.			850,509				851				211,777				-				-				-				212,628
Net Loss			-				-				-				-				(945,349	)			8,114				(937,235	)
Balance at June 30, 2012			47,470,406				47,471				12,102,719				567				(11,419,819	)			-				730,938

 

 

The accompanying notes are an integral part of these financial statements.

 

 

American Petro-Hunter, Inc.

Condensed Statement of Cash Flows

 

		For the six months ended
		June 30,
		2012				2011
Cash flows from operating activities
Net (loss)		$	(945,349	)		$	(1,475,553	)
Adjustments to reconcile net (loss) to net cash used in operating activities:
Shares issued for compensation			189,000				357,000
Amortization of discount			212,070				444,993
Impairment expense			256,737				-
Amortization of mineral properties			60,808				37,135
Gain on forgiveness of debt			(322,731	)			-
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable			26,043				(6,637	)
(Increase) decrease in prepaid expenses			39,812				4,257
Increase (decrease) in accounts payable and accrued liabilities			246,238				7,320
Increase (decrease) in accrued interest			142,447				250,618
Net cash used by operating activities			(94,925	)			(380,867	)
Cash flows from investing activities
Proceeds from sale of mineral properties			106,000				-
Acquisition of mineral properties			(245,100	)			(804,000	)
Net cash used by investing activities			(139,100	)			(804,000	)
Cash flows from financing activities
Short-term note from officer			39,200				-
Proceeds from convertible debenture			198,000				1,232,188
Net cash provided by financing activities			237,200				1,232,188
Net increase (decrease) in cash			3,175				47,321
Cash - beginning			2,609				3,225
Cash - ending		$	5,784			$	50,546
Supplemental disclosures:
Interest paid		$	43,750			$	68,250
Income taxes paid		$	-			$	-
Non-cash transactions:
Shares issued for compensation		$	189,000			$	357,000
Accounts payable converted to stock		$	239,469			$	-
Note payable and accrued interest converted to stock		$	3,375,846			$	-

 

 

The accompanying notes are an integral part of these financial statements.

 

 

American Petro-Hunter Inc.

Notes to Condensed Financial Statements

June 30, 2012

 

1.

Nature and Continuance of Operations

American Petro-Hunter Inc. (the “Company”) was incorporated in the State of Nevada on January 24, 1996 as Wolf Exploration Inc. On March 17, 1997, Wolf Exploration Inc. changed its name to Wolf Industries Inc.; on November 21, 2000, they changed its name to Travelport Systems Inc., and on August 17, 2001, changed its name to American Petro-Hunter Inc.

 

The Company is evaluating the acquisition of certain natural resource projects with the intent of developing such projects. The Company focus is currently in locating and assessing potential acquisition targets, including real property, oil and gas companies.

 

Going Concern

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has limited assets and requires additional funds to maintain its operations. Management’s plan in this regard is to raise equity financing as required. There can be no assurance that sufficient funding will be obtained. The foregoing matters raise substantial doubt about the Company’s ability to continue as a going concern. The condensed financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence.

 

2.

Significant Accounting Policies

The following is a summary of significant accounting policies used in the preparation of these financial statements.

 

Principles of accounting

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).

 

Income taxes

The Company accounts for income taxes under FASB Codification Topic 740-10-25 (“ASC 740-10-5”).  Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. See footnote 8 for further details.

 

Revenue Recognition

It is our policy that revenues will be recognized in accordance with ASC subtopic 605-10. Under ASC 605-10, product revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed and determinable and collectability is reasonably assured.

 

Use of estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amount 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.

 

Cash Equivalents

The Company maintains cash balances in interest and non-interest bearing accounts. For the purpose of these financial statements, all highly liquid cash and investments with a maturity of three months or less are considered to be cash equivalents.

 

 

Net loss per share

In accordance with ASC subtopic 260-10, the basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted loss per common share is computed similar to basic loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. For the year ended December 31, 2011 and the six months ended June 30, 2012, the denominator in the diluted EPS computation is the same as the denominator for basic EPS due to the anti-dilutive effect of the warrants and stock options on the Company’s net loss.

 

Financial instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, notes payable and loan guarantee. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, or credit risks arising from these financial instruments. The fair values of these financial instruments approximate their carrying values because of their relatively short-term maturities. See Note 5 for further details.

 

Fair Value of Financial Instruments

The Company has financial instruments whereby the fair value of the financial instruments could be different from that recorded on a historical basis in the accompanying balance sheets. The Company's financial instruments consist of cash, accounts receivable, accounts payable, and notes payable. The carrying amounts of the Company's financial instruments approximate their fair values as of December 31, 2011 and June 30, 2012 due to their short-term nature. See Note 5 for further details.

 

Reclassifications

Certain reclassifications have been made to the prior years’ financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.

 

Oil and Gas Properties

We follow the successful efforts method of accounting for oil and gas exploration and production activities. All costs for development wells, related plant and equipment, proved mineral interests in oil and gas properties are capitalized. Costs of exploratory wells are capitalized pending determination of whether the wells found proved reserves. Cost of wells that are assigned proved reserves remain capitalized. All other exploratory wells and costs are expensed.

 

Depreciation, depletion and amortization of all capitalized costs of proved oil and gas producing properties are expensed using the straight-line method over the life of each well. Period valuation provisions for impairment of capitalized costs of unproved mineral interests are expensed. The costs of unproved properties are excluded from amortization until the properties are evaluated.

 

Unproved properties are assessed periodically individually when drilling and flow testing results indicate whether there is an economic resource or not. All capitalized costs associated with properties that have been determined to be a “dry-hole” are impaired when that determination is made. Proved properties are assessed periodically for impairment on an individual basis. Events that can trigger the test for possible impairment include significant decreases in the market value of a property, significant change in the extent or manner of use or change in property and the expectation that a property will be sold or otherwise disposed of significantly sooner than the previously estimated useful life. The assessment is done by comparing each property’s carrying value to their associated estimated undiscounted future net cash flows. Impaired properties are written down to their estimated fair values. The resulting impairment would be expensed to operations as impairment expense in the period in which it was determined that the impairment was indicated and calculated.

 

3.

Recent Accounting Pronouncements

Recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company's present or future financial statements

 

 

International Financial Reporting Standards

In November 2008, the Securities and Exchange Commission (“SEC”) issued for comment a proposed roadmap regarding potential use of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. Under the proposed roadmap, the Company would be required to prepare financial statements in accordance with IFRS in fiscal year 2014, including comparative information also prepared under IFRS for fiscal 2013 and 2012. The Company is currently assessing the potential impact of IFRS on its financial statements and will continue to follow the proposed roadmap for future developments.

 

4.

Investments in Mineral Properties

During the six months ended June 30, 2012, the Company made two investments totaling $245,100. During the year ended December 31, 2011, the Company made six investments totaling $1,374,730. Prior to 2011, the Company made seventeen investments totaling $2,505,103. Several of those investments produced “dry holes” and were therefore fully impaired. During the six months ended June 30, 2012, impairment expense relating to these “dry holes” was $0. During the year ended December 31, 2011, 2010, and 2009, impairment expense related to these “dry holes” was $80,000, 765.229, and 765,229, respectively. In addition, during the six months ended June 30, 2012, an investment was impaired by $256,737 to bring the total capitalized costs in line with its market value. During the year ended December 31, 2011, an investment was impaired by $93,879 to bring the total capitalized costs in line with its market value for total impairment expense for 2011 of $173,879. As of June 30, 2012, the Company has investments, value at cost of $1,916,915; $1,071,215 in proved wells and $845,700 in unproved wells. As of December 31, 2011, the Company has investments, valued at cost, of $2,101,564; $1,365,714 in proved wells and $735,850 in unproved wells. Capitalized costs of proved properties are amortized and expensed using the straight-line method over the estimated useful life of each well. Unproved properties are excluded from amortization. Amortization expense for the six months ended June 30, 2012 and year ended December 31, 2011 was $60,808 and $119,415, respectively. A summary of investments follows:

 

S&W Oil & Gas, LLC - Poston Prospect

On May 4, 2009, the Company entered into a binding Letter of Intent (“LOI”) with S&W Oil & Gas, LLC (“S&W”) to participate in the drilling for oil in the Poston Prospect #1 Lutters in Southwest Trego County, Kansas (the “Poston Prospect”).  Pursuant to the LOI, the Company paid S&W $64,500 in exchange for a 25% working interest in the 81.5% net revenue interest in the Poston Prospect. During the year ended December 31, 2009, an additional $44,624 was paid for completion of the oil well and for the purchase of necessary equipment.   During the year ended December 31, 2010, the Company paid an additional $106,167 for drilling and completion costs of a second well on this property. Amortization expense was $22,568 and 16,572 on this prospect for the years ended December 31, 2011 and 2010, respectively. During the year ended December 31, 2011, an impairment charge of $93,879 was taken on this property to bring the net book value in-line with its market value. During the three months ended March 31, 2012, 75% of the property was sold for $65,000, which matched its book value.

 

S&W Oil & Gas, LLC – Rooney Prospect

On June 19, 2009, the Company entered into a binding LOI with S&W to participate in the drilling for oil and natural gas in the Rooney Prospect located in southwestern Ford County, Kansas.  Pursuant to the LOI, the Company paid S&W a total of $113,333 for land acquisition and leasing costs, $216,697 for the 3D seismic shoot costs, and $392,231 for completion of the oil well and the purchase of necessary equipment in exchange for a 50% working interest in the 81.5 net revenue interest of the project. During the year ended December 31, 2010, this prospect was determined to be a “dry hole” and an impairment charge of $642,260 was taken on this property to bring the total capitalized costs in-line with its market value. The property was sold for $80,000 on October 15, 2010.

 

Shelor 23-3 Prospect

During the year ended December 31, 2009, the Company entered into an agreement with S&W to participate in the drilling for oil. Pursuant to the agreement, the Company paid S&W $116,900 for a 50% working interest in the project. During the year ended December 31, 2010, the well was determined to be a “dry hole” and the full $116,900 was written off to impairment expense.

 

Oklahoma prospects

During the year ended December 31, 2010, the Company entered into an agreement with Bay Petroleum to purchased working interests in several properties in Oklahoma and advanced funds for lease purchases. During the year ended December 31, 2010, the Company paid Bay Petroleum $697,600 in exchange for 25% to 50% working interest in the net revenue of several properties in the project. $1,374,730 of additional properties were purchased during the year ending December 31, 2011. During the year ended December 31, 2011, one well was determined to be a “dry hole” and its full $80,000 cost was written off to impairment expense. During the six months ended June 30, 2012, the Company purchased additional properties for $245,100. As of June 30, 2012 and December 31, 2011, amortization expense was $129,782 and $96,847, respectively, relating to these wells. As of December 31, 2010, these prospects are unproved wells and were not being amortized.

 

 

5.

Fair Value Measurements

The Company adopted ASC Topic 820-10 at the beginning of 2009 to measure the fair value of certain of its financial assets required to be measured on a recurring basis. The adoption of ASC Topic 820-10 did not impact the Company’s financial condition or results of operations. ASC Topic 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  ASC Topic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability. The three levels of the fair value hierarchy under ASC Topic 820-10 are described below:

 

Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.

 

Level 2 – Valuations based on quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

 

Level 3 – Valuations based on inputs that are supportable by little or no market activity and that are significant to the fair value of the asset or liability.

 

The Company has no level 3 assets or liabilities and therefore no reconciliation has been presented for the change in level 3 assets.

 

The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis as of June 30, 2012:

 

		Level 1				Level 2				Level 3				Fair Value
Cash		$	5,784			$	-			$	-			$	5,784
Accounts & other receivables			-				20,374				-				20,374
Prepaid expenses			-				4,289				-				4,289
Accounts payable			-				414,135				-				414,135
Notes payable – related party			-				39,200				-				39,200
Convertible debentures, net of disc.			-				633,306				-				633,306

 

The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis as of December 31, 2011:

 

		Level 1				Level 2				Level 3				Fair Value
Cash		$	2,609			$	-			$	-			$	2,609
Accounts & other receivables			-				46,417				-				46,417
Prepaid expenses			-				79,464				-				79,464
Accounts payable			-				565,552				-				565,552
Notes payable			-				202,484				-				202,484
Convertible debentures, net of disc.			-				2,797,511				-				2,797,511
Accrued interest			-				456,638				-				456,638
Royalty interest payable			-				113,164				-				113,164
Loan Guarantee			-				94,860				-				94,860

 

 

6.

Debt and Debt Guarantee

 

Notes Payable

As of December 31, 2011 and 2010, the Company has a note payable of $25,000 bearing interest at 12% per annum collateralized by a general security arrangement over all of the Company’s assets. The note was payable in full on May 18, 2007 and is therefore in default as of December 31, 2011 and 2010. During the three months ended March 31, 2012 and year ended December 31, 2011, the Company accrued interest expense of $1,244 and $5,082, respectively. As of December 31, 2011, the balance of the note payable, including accrued interest, is $45,575. On March 26, 2012, $46,819, the note balance and accrued interest, was converted to 187,277shares of common stock at a fair market value of $0.25 per share. As of June 30, 2012, there is no remaining balance on the note.

 

During the year ended December 31, 2011, the Company received $71,000 for a demand note bearing interest at 24% per annum. During the six months ended June 30, 2012 and the year ended December 31, 2011, the Company accrued interest expense of $6,211 and $5,929, respectively. As of December 31, 2011, the balance of the note payable, including accrued interest, is $76,929. On April 30, 2012, $83,140, the note balance and accrued interest, was converted to 332,561 shares of common stock at a fair market value of $0.25 per share. As of June 30, 2012, there is no remaining balance on the note.

 

During the year ended December 31, 2011, the Company acquired mineral properties in exchange for a $300,000 note payable. A down payment of $50,000 was paid and the remainder of $250,000 was paid in three payments starting in October of 2011. This note was paid in full during the year ended December 31, 2011.

 

During the year ended December 31, 2011, the Company received $79,980 for a demand note bearing interest at 6% per annum. During the six months ended June 30, 2012 and the year ended December 31, 2011, the Company accrued interest expense of $2,688 and $0, respectively. As of December 31, 2011, the balance of the note payable is $79,980. On April 30, 2012, $82,668, the note balance and accrued interest, was converted to 330,671 shares of common stock at a fair market value of $0.25 per share. As of June 30, 2012, there is no remaining balance on the note.

 

Notes Payable – Related Party

During the six months ended June 30, 2012, the Company was loaned $39,200 from an officer. The loan is unsecured, bears no interest, and is due on demand. The balance of the loan as of June 30, 2012 was $39,200.

 

Convertible Debentures - 2009

In August and September of 2009, the company received $1,000,000 from an investor to issue a convertible debenture, bearing interest at a rate of 18% per annum paid monthly on any unpaid principal balance to the investor, secured by the assets of the Company. $500,000 of the debenture was due on August 13, 2010 and the other $500,000 was due on September 15, 2010. During the year ended December 31, 2010, the Company amended the promissory note to extend the repayment date of the first to August 13, 2011 and the second to September 15, 2011. On August 13, 2011, the Company entered into a second amendment to extend the repayment date of the first note to August 13, 2012 and the second note to September 15, 2012. The debenture calls for monthly interest payments to the investor until the debenture is fully paid. The holder of the convertible debenture has the right to convert any portion of the unpaid principal and/or accrued interest at any time at the lower of $0.35 per share or a 25% discount to the average closing price of the five proceeding days. With the debentures, the Company issued 2,857,142 warrants to purchase common shares of the Company for $0.50 per share. The warrants had a term of two years and expired during 2011. Interest payments continue to be made. During the year ended December 31, 2010, the Company and Holder agreed to reduce the initial conversion price from the lower of $0.35 per share or a 25% discount to the average closing price of the five proceeding days to the lower of $0.25 per share or a 25% discount to the average closing price of the five proceeding days. At the time of this adjustment the 25% discount to the average closing price of the five proceeding days was $0.25.

 

 

The warrants issued and beneficial conversion feature associated with the above convertible debentures were valued using the black-scholes option pricing model and bifurcated out of the debenture proceeds and recorded as additional paid in capital in the amount of $581,626. A discount on the convertible debenture was recorded in the same amount and was amortized into interest expense over the original life of the debenture using the interest method. As of December 31, 2010, all of the discount had been amortized into interest expense.

 

In March of 2010, $350,000 of the debenture balance was converted at a conversion rate of $0.35 per share to 1,000,000 shares of stock. As of June 30, 2012 and December 31, 2011, the balance due on the convertible debentures was $633,306 and $633,306, respectively.

 

Convertible Debentures - 2010

During the year ended December 31, 2010, the company received $1,462,774 from an investor to issue a convertible debenture, bearing interest at a rate of 24% per annum. The note was due May 17, 2011. The holder of the convertible debenture had the right to convert any portion of the unpaid principal and/or accrued interest at any time at the conversion price of $0.90, which was the market value at the time.

 

In November of 2010, the Company amended the agreement to reduce the conversion price applicable to the conversion from $0.90 per share to $0.25 per share. The amendment made no other changes to the terms of the original debenture. The Company determined and recorded a beneficial conversion feature in relation to this amendment. The beneficial conversion feature was valued at $515,271 and recorded as additional paid in capital. A discount on the convertible debenture was recorded in the same amount and will be amortized into interest expense over the remaining life of the debenture using the interest method. For the three months ended March 31, 2012 and the year ended December 31, 2011, $202,517 and $386,453, respectively, was amortized into interest expense in relation to these discounts.

 

During the year ended December 31, 2011, the Company received additional funds of $1,700,918. The beneficial conversion feature was valued at $472,377 and recorded as additional paid in capital. A discount on the convertible debenture was recorded in the same amount and will be amortized into interest expense over the remaining life of the debenture using the interest method. For the year ended December 31, 2011, $260,306 was amortized into interest expense in relation to these discounts.

 

The total amount of discounts amortized into interest expense during the year ended December 31, 2010 and 2011 was $512,839 and $646,760, respectively, and $212,070 during the six months ended June 30, 2012.

 

In May of 2011, the Company amended the agreement to increase the credit line from $1,500,000 to $1,800,000. In July of 2011, the Company amended the agreement to increase the credit line from $1,800,000 to $2,000,000 in exchange for a 3% royalty interest in the proceeds of the Company’s working interests in mineral properties. In August of 2011, the Company amended the agreement to extend the repayment date for all advances before September 30, 2010 to November 17, 2012; and all other advances after September 30, 2010 to be due one year from the date of advance. Additionally the credit line was increased from $2,000,000 to $3,000,000 in exchange for an additional 3% royalty interest.

 

The 6% royalty interest given in the amendments was valued at the present value of estimated future payments over the life of the wells. $113,164 was recorded as a royalty interest payable and corresponding prepaid financing charges. The prepaid expense will be amortized over the extension period of the loans. For the six months ended June 30, 2012 and the year ended December 31, 2011, $42,437 and $35,364 was amortized into interest expense in relation to this prepaid, respectively. At December 31, 2011, $4,418 royalties were paid and earned. As of December 31, 2011, $77,800 remains in prepaid expenses. During the six months ended June 30, 2012, the royalty interest was terminated. The remaining prepaid and the related royalty interest payable was written off for a total gain on forgiveness of debt of $77,800 for the six month period ended June 30, 2012.

 

In December of 2011, $1,090,902 of the debenture balance was converted into 4,363,611 shares of common stock at a conversion rate of $0.25 per share.

 

 

During the six months ended June 30, 2012, the Company received additional funds under this debenture of $198,000.

 

In March of 2012, $2,731,822 of the debenture balance was converted into 10,927,289 shares of common stock at a conversion rate of $0.25 per share.

 

On April 30, 2012, $431,395 of the remaining debenture balance plus interest was converted into 1,725,580 shares of common stock at a conversion rate of $0.25 per share.

 

As of June 30, 2012 and December 31, 2011, the balance due on the convertible debentures, net of the discount of $0 and $212,070, was $0 and $2,164,205, respectively.

 

The debenture also had provisions for the payment of a finder’s fee related to the proceeds. A total of $158,185 had been accrued throughout the life of the debenture as additional funds were received. During the six months ended June 30, 2012, the total amount was forgiven resulting in a gain on forgiveness of debt of $158,185.

 

Loan Guarantee

In 2004, the Company received a demand for payment from Canadian Western Bank (“CWB”) pursuant to a guarantee provided by the Company in favor of Calgary Chemical, a former subsidiary. The Company divested itself of Calgary Chemical in 1998 under an agreement with a former president and purchaser. The agreements included an indemnity guarantee from the purchaser of Calgary Chemical, whereby the purchaser would indemnify and save harmless the Company from any and all liability, loss, damage or expenses. Upon receipt of the demand, the Company accrued the amount of the claim since in the opinion of legal counsel it is more likely than not that CWB would prevail in this action. No interest expense has been accrued on this balance. During the three months ended March 31, 2012, the Company determined, due to the age of the loan guarantee and the appropriate statute of limitations, that the loan guarantee was invalid. The Company wrote off the loan guarantee as well as the other comprehensive loss related to the foreign currency adjustments made on the loan and realized a gain on forgiveness of debt of $86,746.

 

Interest expense

Interest expense related to all of the above items for the six months ended June 30, 2012 and 2011, was $460,704 and $783,360, respectively.

 

7.

Stockholders’ Equity Transactions

 

Common Stock

As of December 31, 2009, the Company had 23,748,561 shares of common stock issued and outstanding and 1,830,825 shares owed but not issued.

 

During the year ended December 31, 2010, the Company issued 1,830,825 shares of common stock that was owed but not issued as of December 31, 2009.

 

During the year ended December 31, 2010, the Company issued 250,000 shares to Directors in lieu of executive compensation. The shares were valued at $170,000 which was market value on the day of the grant.

 

During the year ended December 31, 2010, the Company issued 231,175 shares of common stock in an exercise of 231,175 warrants at a price of $0.15 for total proceeds of $34,676.

 

During the year ended December 31, 2010, the Company issued 1,000,000 shares of common stock in conversion of $350,000 of convertible debt at $0.35 per shares. See Note 6 for further details.

 

During the year ended December 31, 2010, the Company received $155,000 for the purchase of 442,857 shares of common stock and 442,857 warrants with an exercise price of $0.50. As of December 31, 2010, these shares had not been issued and were shown as common stock owed but not issued. The shares were issued in 2011.

 

During the year ended December 31, 2010, the Company received $15,000 for the exercise of 100,000 warrants to purchase 100,000 shares of common stock. As of December 31, 2010, these shares had not been issued and were shown as common stock owed but not issued. The shares were issued in 2011.

 

 

As of December 31, 2010, the Company had 27,060,561 shares of common stock issued and outstanding and 542,856 shares owed but not issued.

 

During the year ending December 31, 2011, the Company issued 542,856 shares of common stock that were owed but not issued as of December 31, 2010.

 

During the year ended December 31, 2011, the Company issued 600,000 shares to Directors in lieu of executive compensation. The shares were valued at $306,000 which was market value on the day of the grant.

 

During the year ended December 31, 2011, the Company issued 100,000 shares of common stock for services. The shares were valued at $51,000, which was market value on the day of the grant.

 

During the year ended December 31, 2011, the Company issued 200,000 units of equity for cash in the amount of $50,000. Each unit contained one share of common stock and one warrant for a share of common stock at an exercise price of $0.40. The warrants have a term of two years.

 

During the year ended December 31, 2011, the Company issued 4,363,611 shares of common stock in conversion of $1,090,902 of convertible debt at 0.25 per shares. See Note 6 for further details.

 

As of December 31, 2011, the Company had 32,867,028 shares outstanding and no shares owed but not issued.

 

In January of 2012, the Company issued 900,000 shares of common stock in lieu of executive compensation. The shares were valued at $189,000, which was market value on the day of the grant.

 

In March of 2012, the Company issued 200,000 shares in relation to the conversion of $40.000 of accounts payable balances.

 

In March of 2012, the Company issued 10,927,289 shares of common stock in conversion of $2,731,822 of convertible debt and accrued interest at $0.25 per share. See Note 6 for further details.

 

In March of 2012, the Company issued 187,277 shares of common stock in exchange for note payable at $0.25 per share. See Note 6 for further details.

 

On April 30, 2012, the Company issued 663,232 shares of common stock in conversion of $165,808 of note payables and related accrued interest at $0.25 per share. See Note 6 for further details.

 

On April 30, 2012, the Company issued 1,725,580 shares of common stock in conversion of $431,395 of convertible debt and related accrued interest at $0.25 per share. See Note 6 for further details.

On June 18, 2012, the Company agreed to issue 567,500 shares of common stock in relation to the conversion of $199.470 of accounts payable balances. As of June 30, 2012, these shares had not been issued and are therefore shown on these financial statements as common stock to be issued.

 

As of June 30, 2012 there are 47,470,406 shares of common stock issued and outstanding and 567,500 shares of common stock owed but not issued.

 

Warrants

As of December 31, 2009, there were 331,175 and 2,857,142 warrants outstanding at an exercise price of $0.15 and $0.50, respectively.

 

During the year ended December 31, 2009, the Company issued 2,857,142 warrants with a convertible debenture. These warrants have 2 year terms expiring in August and September of 2011 and an exercise price of $0.50. See Note 6 for further details. During the year ended December 31, 2011, these warrants expired.

 

During the year ended December 31, 2010, a total of 331,175 warrants were exercised into common shares of the Company at a price of $0.15 per share to a total of $49,676.

 

 

During the year ended December 31, 2010, the Company issued 442,857 warrants with an exercise price of $0.50 in relation to a stock sale. During the year ended December 31, 2011, these warrants expired.

 

During the year ended December 31, 2011, the Company issued 200,000 warrants in relation to a stock sale as described above. The warrants have a $0.40 exercise price and a two year life. The warrants expire on November 7, 2013.

 

No warrants were issued or exercised in the six months ended June 30, 2012.

 

As of June 30, 2012, there are 200,000 warrants outstanding at an exercise price of $0.40. The warrants expire on November 7, 2013.

 

8.

Income Taxes

The Company follows ASC subtopic 740-10 (formerly Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes”) for recording the provision for income taxes. ASC 740-10 requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.

 

Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.

 

The Company’s effective income tax rate is higher than would be expected if the federal statutory rate were applied to income before tax, primarily because of expenses deductible for financial reporting purposes that are not deductible for tax purposes during the year ended December 31, 2011 and 2010. The Company’s operations for the year ended December 31, 2011 and the six months ended June 30, 2012 resulted in losses. Accordingly, no provisions for current income taxes have been reflected in the accompanying statements of operations.

 

As of December 31, 2011 and 2010, the Company has total losses of approximately $10,500,000 and $7,750,000, respectively, since inception which may or may not be used to reduce future income taxes payable. Current Federal Tax Law limits the amount of loss available to offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount of these losses available to offset future taxable income may be limited. The Company has not filed income tax returns which may also limit its ability to claim past net operating losses. A valuation allowance has been recorded to reduce the net benefit recorded in the financial statements related to this deferred asset to $0. The valuation allowance is deemed necessary as a result of the uncertainty associated with the ultimate realization of these deferred tax assets. Accordingly, no provisions for deferred income taxes have been reflected in the accompanying statements of operations.

 

9.

Related Party Transactions

During the six months ended June 30, 2012 and the year ended December 31, 2011, the Company granted 900,000 and 600,000 shares , respectively, to directors and officers in lieu of executive compensation.

 

During the period from August to December of 2011, the Company reimbursed an officer $1,800 per month for a residential lease in Wichita, Kansas. The Company also reimbursed the officer approximately $8,700 in connection with meals and groceries during the same period and $12,667 during the six months ended June 30, 2012.

 

During the six months ended June 30, 2012, an officer/director loaned the company $39,200 for the purchase of mineral properties.

 

 

10.

Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

 

In July of 2012, the Company entered into the following agreements:

 

Notes Amendment

On July 3, 2012, American Petro-Hunter Inc. (the “Company”) entered into a Third Amendment to Promissory Notes (the “Notes Amendment”) with an accredited investor (the “Holder”) to amend those certain Secured Convertible Promissory Notes issued by Holder to the Company, dated August 13, 2009, as amended (the “First Note”), and September 15, 2009, as amended (the “Second Note” and together with the First Note, the “Notes”).

 

The Notes Amendment terminates the security interest and royalty interest Holder had in certain assets of the Company. The Notes Amendment also revises the repayment terms of the Notes, such that all amounts owed under the Notes will be due and payable in two equal installments if the Company is successful in obtaining other debt financing, but in no event later than December 31, 2014, and the interest rate on the Notes will be reduced to ten percent (10%) upon the Company announcing the receipt of the first $1,000,000 in debt financing.

 

Lien Termination

On July 3, 2012, the Company and Maxum Overseas Fund, a foreign institutional investor (“Maxum”), agreed to enter into a Lien Termination Agreement (the “Lien Termination”), whereby Maxum agreed to terminate its security interest in certain assets of the Company in exchange for the grant by the Company of certain anti-dilution protections with respect to the shares issued upon conversion of Maxum’s promissory notes (the “Maxum Conversion Shares”). The anti-dilution protections provide that in the event the Company issues warrants to a third party with an exercise price less than the conversion price of the Maxum Conversion Shares, then Maxum will be issued additional shares of common stock in accordance with a specific formula outlined in the Lien Termination agreement.

 

Royalty Termination

On July 3, 2012, the Company and Centennial Petroleum Partners, LLC (“CPP”), agreed to enter into a Royalty Termination Agreement (the “Royalty Termination”), whereby CPP agreed to terminate its royalty interest in certain assets of the Company in exchange for the grant by the Company of certain anti-dilution protections with respect to the shares issued upon conversion of CPP’s promissory note (the “CPP Conversion Shares”). The anti-dilution protections provide that in the event the Company issues warrants to a third party with an exercise price less than the conversion price of the CPP Conversion Shares, then CPP will be issued additional shares of common stock in accordance with a specific formula outlined in the Royalty Termination agreement.

 

The Royalty Termination is attached to this report as Exhibit 10.3 and the terms and conditions are incorporated herein. The foregoing statements are not intended to be a complete description of all terms and conditions.

 

Debt Financing

On July 3, 2012, the Company entered into a Purchase Agreement with ASYM Energy Opportunities LLC (“ASYM”), pursuant to which ASYM agreed to provide up to $10,000,000 in debt financing to the Company (the “Purchase Agreement”), the first $1,000,000 tranche of which was funded with respect to $300,000 on the July 6, 2012. The remaining $700,000 of the initial $1,000,000 tranche will be funded only upon the satisfaction of certain conditions, including completion of due diligence by ASYM, satisfaction by the Company of certain financial tests, and the availability of funds of ASYM. Additionally, subject to such conditions and certain others, the Company shall be entitled to draw the remaining $9,000,000 in financing in tranches of $1,000,000. In connection with the financing, ASYM will receive a $100,000 one time administrative fee, due upon the closing of the second $1,000,000 in financing.

 

Pursuant to the Purchase Agreement, ASYM is to receive a first priority security interest in all of the Company’s right, title and interest in and to all properties and assets of the Company pursuant to the terms of a First Lien Security Agreement and the Mortgage, Deed of Trust, Assignment of Production, Security Agreement, Fixture Filing and Financing Statement (the “Mortgage”). In connection with the grant of the security interest, the Company entered into a Deposit Account Control (Default) Agreement with ASYM to perfect ASYM’s security interest in certain bank accounts maintained by the Company.

 

 

Each senior secured promissory note (the “Note”) evidencing each tranche of financing will bear interest at the rate of fifteen percent (15%) per annum and mature on June 30, 2015, at an amount equal to 110% of the principal amount. Additionally, each Note is subject to early repayment in the event the Company does not meet certain financial covenants.

 

In connection with each tranche of funding, the Company will issue ASYM a warrant equal to 83% of the tranche amount, divided by the warrant exercise price per share (the “Exercise Price”). The Exercise Price shall be equal to the lesser of (i) $0.20, (ii) eighty five percent (85%) of the volume weighted average price per share of the Company’s common stock for the fifteen days preceding the issuance of any tranche, or (iii) the trailing ninety (90) net average daily oil production multiplied by $40,000, the product of which is reduced by the Company’s total debt and any obligations or liabilities (the “Net Asset Value”), thereafter divided by the Company’s fully diluted number of common shares outstanding. In no case, however, shall the Net Asset Value be less than $500,000. The warrants will have a term of five years from the date of issuance. The shares of stock issuable upon exercise of the warrants are entitled to demand registration rights.

 

In connection with the Purchase Agreement, the Company is engaging ASYM Management LLC ("ASYM Management") as a consultant with respect to management, financial, strategic and operational issues, pursuant to the terms of a Management Services Agreement (the "Services Agreement"). The Services Agreement shall expire only upon the sale, liquidation or dissolution of the Company or termination by ASYM Management for convenience. Pursuant to the terms of the Services Agreement, ASYM Management will receive a management fee equal to $12,000 per month, plus two percent (2%) of any amounts undrawn by the Company pursuant to the Purchase Agreement. In addition, the Company will issue ASYM Management a warrant equal to 17% of the tranche amount divided by the Exercise Price of the warrant

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion should be read in conjunction with our financial statements and notes thereto included elsewhere in this quarterly report. 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 based upon estimates, forecasts, 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 us, or on our behalf. We disclaim any obligation to update forward-looking statements.

 

Background

 

We are an oil and natural gas exploration and production (E&P) company with current projects in Kansas and Oklahoma.  As of August 10, 2012, we have two producing wells in Kansas and six producing wells in Oklahoma.  We also have rights for the exploration and production of oil and gas on an aggregate of approximately 6,230 gross acres in those states.  This includes our core assets with rights to explore on 2,000 gross acres in Oklahoma in the North Oklahoma Mississippi Project and in 5,000 gross acres in south-central Oklahoma (the “South Oklahoma Project”).  

 

Typically, our interest in a well arises from a contract with another entity pursuant to which we provide financial support for certain costs incurred in the exploration and development of a project, which may include land costs, seismic or other exploration, and test drilling.  In exchange, we typically receive an interest in the proceeds from the project’s production.

 

We were formed on January 24, 1996 pursuant to the laws of the State of Nevada under the name Wolf Exploration, Inc.  In August 2001, we changed our name to American Petro-Hunter Inc. and began focusing our business on the exploration and eventual exploitation of oil and gas.

 

Credit Facility

 

On July 9, 2012, we announced that the Company entered into a three-year credit facility with ASYM Energy Partners LLC and its affiliates (“ASYM”), a private investment firm focused on the energy industry. The credit facility, in the amount of $10 million, is secured by all of the Company’s assets. Proceeds from the loan will be utilized to fund the development drilling of oil properties located in central Oklahoma as well as acquisitions, repayment of certain accounts payable, and working capital.

 

As part of the transaction, ASYM will advise the Company in the areas of operational, technical, engineering and financial matters. The Company is now in the process of utilizing the credit facility to initially fund the development of the Company’s North and South Oklahoma oil focused horizontal drilling program, primarily targeting the Mississippi Lime and the Woodford Shale. The credit facility will also allow the Company to participate for its full working interest participation and accelerate production, as well as allow the Company to consider project acquisitions that would include existing production and leases.

 

Producing Properties

 

North Oklahoma Project (North Oklahoma Woodford  “Yale” and North Oklahoma Mississippi  “Ripley” Projects) - On April 21, 2010, we entered into an operating agreement with Bay Petroleum Corp. (“Bay”) to participate in the drilling for oil in northern Oklahoma (the “Prospect”).  Pursuant to such operating agreement, we agreed to pay to Bay $52,125 for all costs in connection with the acquisition and operation of the Prospect, up to the drilling of an initial test well, in exchange for a 25% working interest and 80% net revenue interest in the Prospect. We are also responsible for 25% of all expenditures in connection with the development and operation of the Prospect for drilling.

 

On June 1, 2010, we announced that the No. 1 well had been put into production.  The current daily rates are at the four to six barrels per day level, with water in the 100 barrel range or approximately 8% oil cut.

 

On January 4, 2011, we announced plans to drill the NOS227 Well as a direct offset to the NOJ26 Well.  On March 15, 2011, we announced that the well had reached a total depth of 3,820 feet and was to be completed as an oil well. After testing and a large, multi-stage surge frack, the well did not respond favorably as we believe we fracked into a fault containing considerable water. The future of the well is being analyzed and plans to attempt additional work are being discussed.

 

 

On June 29, 2011, we announced that NOS122, a re-entry project where the well bore and casing was opened and cleaned, had begun commercial production.  Inaugural loads of oil began shipping in July and current production at the NOS122 is six barrels per day. As a frack is required to maximize the oil production, engineering has deemed it to be risky to do so in a 30 year old well bore. It has been decided to drill an 80 acre offset with a new well bore and undertake the frack test in the new well.  This well is planned for the third quarter of 2012. The well has been designated NOS222. We estimate that our expenses associated with drilling and completing NOS222 will be approximately $290,000. The well has been scheduled to drill in June 2012.

 

On March 25, 2011, we announced that we had acquired a varied working interest in an additional 2,000 acres located in Payne County in northern Oklahoma, near the Company’s Yale Prospect. The project has been named “North Oklahoma Mississippi Lime Project”. On May 16, 2011, we announced that drilling operations had commenced at the Company’s first horizontal well, NOM1H. The Company owns a 25% Working Interest in the lease. On June 29, 2011, we announced that NOM1H had begun commercial production. On June 30, 2012, the well had cumulatively produced 8,356 barrels of oil and 25,763 mcf of gas. During the quarter, the well produced 1,340 barrels at a daily average of 15 barrels per day.

 

On July 18, 2011, we announced drilling plans for a total of 11 horizontal wells at the North Oklahoma Project. As of August 2012, there are nine locations left to drill on the acreage. The current drilling schedule, which includes direct offsets, involves drilling one horizontal well approximately every 90 days. Our experience has shown that the time to drill, complete, implement large frack, recover the fluids and begin oil sales involves a minimum of 90 days. The next well planned is a direct offset to the NOM-1H and is expected to cost $320,000 for our working interest share of the drilling and completion costs.

 

On July 27, 2011 we announced the NOW2H, an 80 acre offset to NOM1H.  On September 6, 2011, we announced the spud of the NOW2H well.  Following a successful drilling of 800 feet of horizontal lateral, excellent oil and gas shows warranted the well to be completed.  Two productive zones are present in the well. On November 7, 2011, the well commenced commercial oil and gas production. On March 26, 2012, we announced that after undergoing a second frack and the installation of a submersible pump, the well was producing at a daily rate of 30 barrels per day. Since that time the well has declined, and as of June 30, 2012 had produced a cumulative total of 1,337 barrels of oil and 4,482 mcf of gas. For the quarter, the well produced 583 barrels at an average of 6.5 barrels per day.

 

On January 9, 2012, we announced plans to drill a third horizontal well at the North Oklahoma Project, NOM3H, on the same section of land as our two previously completed producing wells, NOM1H and NOW2H. On February 6, 2012, we announced that we had drilled a total of 1,988 feet in the horizontal well segment penetrating into the 100 plus foot thick Mississippi pay zone. The well underwent a frack and the installation of a submersible pump. The NOM3H began commercial oil and gas production on March 7, 2012. As of June 30^th, the well had cumulatively produced 5,756 barrels of oil and 15,970 mcf of gas. During the quarter, the well produced 3,303 barrels of oil at an average daily rate of 37 barrels per day.

 

In April 2012, we sold our interest in the NOJ26 well on the North Oklahoma Project, yielding net proceeds of $41,000, which was used as partial funding for the SOM-1H horizontal well on our South Oklahoma Project.

 

South Oklahoma Project - On July 20, 2011, we announced the acquisition of a forty percent (40%) working interest in the South Oklahoma Project on 3,000 acres of land in south-central Oklahoma.  Our engineers have identified five key areas which, if developed on 160 acre spacing, could allow future development of 18 additional locations for horizontal Mississippi lime oil and gas wells.

 

On April 2, 2012, we announced the spud of the first well on the South Oklahoma Project, designated SOM-1H. The well contains a 2,500 foot lateral penetration. On May 2, 2012, we announced the well had reached a total depth of 2,500 feet and following a frack, on July 10, 2012, the well began commercial production. Currently, the well is undergoing a period of production testing to determine a stable rate of both oil and gas production.

 

 

The South Oklahoma Project covers Mississippi lime targets which, through sub-surface geological mapping and engineering, show targets analogous to the recently discovered oil and gas reservoir now being exploited at the North Oklahoma Project, which would offer considerable drilling opportunities. We have plans to develop three additional wells on the South Oklahoma Project during 2012.

 

Poston Oil Project - On May 4, 2009, we entered into a binding Letter of Intent with S&W Oil & Gas, LLC (“S&W”) to acquire a 25% working interest and 81.5% net revenue interest on all commercial production in the 750-acre Poston Prospect #1 Lutters oilfield in Southwest Trego County, Kansas. On June 16, 2009, the #1 Lutters Well was completed at a total depth of 4,400 feet, encountering both oil and gas over a 46 foot interval.  Oil production on the #1 Lutters Well began on June 18, 2009, with current production of five to six barrels per day.  On July 1, 2010 we announced completion of the #3 Lutters Well and on July 14, 2010, we announced that the #3 Lutters Well had begun production.  The current daily rate of the #3 Lutters Well is five to six barrels per day. Collectively, ten to twelve barrels per day are going into the tanks for sale. In June 2012, the Poston Prospect sold two loads (320 barrels) at an average for the 30 day period of 10.66 barrels per day.

 

On February 23, 2012, due to an increase in costs of water haulage for disposal that was affecting the net revenue to the lease and a desire to focus on the planned wells and development of our Oklahoma leases, we sold 75% of our 25% working interest in the Poston Prospect for $65,000.

 

Customers

 

Our crude oil production is sold to N.C.R.A. in MacPherson Kansas and Sunoco in Oklahoma which are the buyers which then send oil to refineries. We receive Kansas common pricing and Oklahoma spot prices for our oil.

 

We have begun commercial sales of natural gas at our Yale Prospect and South Oklahoma Project through our connection to nearby pipeline infrastructure.  We sell natural gas through such pipeline to DCP Midstream, LP  of Tulsa, Oklahoma and receive a premium to the NYMEX spot natural gas prices due to the higher BTU content of the gas produced.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”) requires management of our Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

 

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. GAAP. We believe certain critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements. A description of our critical accounting policies is set forth in our Annual Report on Form 10-K for the year ended December 31, 2011. As of, and for the three months ended June 30, 2012, there have been no material changes or updates to our critical accounting policies.  

 

Results of Operations

 

The following discussion of the financial condition, results of operations, cash flows, and changes in our financial position should be read in conjunction with our audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

The financial statements mentioned above have been prepared in conformity with U.S. GAAP and are stated in United States dollars.

 

 

Comparison of six month periods ended June 30, 2012 and June 30, 2011

 

For the six month periods ended June 30, 2012 and June 30, 2011, we incurred a comprehensive loss of $937,235 and $1,475,553, respectively.  The decrease was largely attributed to gain on forgiveness of debt and reduced interest expense.

 

General and administration expenses for the six month period ended June 30, 2012 amounted to $257,096 compared to $287,054 in the same period of 2011.  Executive compensation for the six month period ended June 30, 2012 was $361,000 compared to $438,000, in the same period of 2011.

 

For the six month period ended June 30, 2012, we used net cash of $94,925 in operations. Net cash used in operating activities decreased from $380,867 in the six month period ended June 30, 2011.

 

We had a gain on forgiveness of debt of $322,731 during the six month period ended June 30, 2012 as compared to no such gain or loss during the six month period ended June 30, 2011.

 

Comparison of three month periods ended June 30, 2012 and June 30, 2011

 

For the three month periods ended June 30, 2012 and June 30, 2011, we incurred a comprehensive loss of $41,048 and $915,492, respectively. The decrease was largely attributed to gain on forgiveness of debt and reduced interest expense and executive compensation expense.

 

General and administration expenses for the three month period ended June 30, 2012 amounted to $151,305 compared to $184,402 in the same period of 2011. Executive compensation for the three month period ended June 30, 2012 was $76,000 compared to $372,000, in the same period of 2011.

 

Liquidity and Capital Resources

 

As of June 30, 2012, we had cash of $5,784 and working capital deficiency of $1,056,194. During the three month period ended June 30, 2012, we funded our operations from revenue received, $41,000 received from the sale of our interest in the NOJ26 well, and proceeds of private sales of equity and notes. During the six month period ended June 30, 2012, we raised $198,000 from the issuance of convertible debentures and 39,200 from a short-term note from one of our officers.

 

On June 18, 2012, we agreed to exchange an aggregate of approximately $233,000 in outstanding indebtedness owed by the Company to certain individuals, for an aggregate of 537,500 shares of our common stock, in connection with the debt financing from ASYM Energy Opportunities LLC (“ASYM”).

 

Subsequent to the three month period ended June 30, 2012, we entered into a Purchase Agreement with ASYM, pursuant to which ASYM agreed to provide up to $10,000,000 in debt financing to the Company (the “Purchase Agreement”), the first $1,000,000 tranche of which was funded with respect to $300,000 on July 6, 2012. The remaining $700,000 of the initial $1,000,000 tranche will be funded only upon the satisfaction of certain conditions, including completion of due diligence by ASYM, satisfaction by the Company of certain financial tests, and the availability of funds of ASYM. Additionally, subject to such conditions and certain others, the Company shall be entitled to draw the remaining $9,000,000 in financing in tranches of $1,000,000. In connection with the financing, ASYM will receive a $100,000 one time administrative fee, due upon the closing of the second $1,000,000 in financing.

 

Our current cash requirements are significant due to planned exploration and development of current projects. We anticipate drilling eight additional wells in Kansas and Oklahoma in the next twelve months which will cost approximately $2,200,000 and which will include six horizontal wells in Oklahoma. Changes in our operating plans, increased expenses, acquisitions, or other events may cause us to seek even greater equity or debt financing in the future.

 

We expect to continue to primarily use debt and equity financing to fund our operations for the next twelve months, and specifically we expect to rely upon the Purchase Agreement with ASYM to provide such financing for our drilling and general working capital needs. Additional funding pursuant to the Purchase Agreement is subject to the satisfaction of certain conditions by the Company. However, if the Company is able to meet such conditions, we expect that the Purchase Agreement will provide us with the working capital necessary to meet our capital needs and carry out our business plan over the next twelve months.

 

Off-Balance Sheet Arrangements

 

There are no off-balance sheet arrangements.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Our management with the participation and under the supervision of our Principal Executive Officer and Principal Financial Officer reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined by Rule 13a-15(e) or 15d-15(e)) of the Exchange Act Rule 13a-15 as of the end of the period covered by this report. Based upon their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures are effective and sufficient to ensure that we record, process, summarize, and report information required to be disclosed in the reports we filed under the Exchange Act within the time periods specified in the Securities and Exchange Commission’s rules and regulations, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

None.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information.

 

Agreement to Convert Outstanding Indebtedness

On June 18, 2012, we agreed to exchange an aggregate of approximately $233,000 in outstanding indebtedness owed by the Company to certain individuals, for an aggregate of 567,500 shares of our common stock, pursuant to an Account Payable Agreement, in connection with the debt financing from ASYM. 333,000 of such shares are to be issued in exchange for amounts owed to Robert McIntosh, an officer and director of the Company, 150,000 of such shares are to be issued in exchange for amounts owed to Dan Holladay, an officer and director of the Company, and 18,000 of such shares are to be issued in exchange for amounts owed to John J. Lennon, a former officer and director of the Company.

 

 

Item 6. Exhibits.

 

Exhibit Number		Name
3.1		Articles of Incorporation, and all amendments thereto
3.2(1)		Bylaws
10.1(2)		Notes Amendment
10.2(2)		Lien Termination
10.3(2)		Royalty Termination
10.4(2)		Purchase Agreement
10.5(2)		Form of Warrant
10.6(2)		Form of Senior Secured Promissory Note
10.7(2)		First Lien Security Agreement
10.8(2)		Management Services Agreement
10.9(2)		Mortgage
10.10(2)		Deposit Account Control (Default) Agreement
10.11		Accounts Payable Agreement
31		Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer and Principal Financial Officer)
32		Section 1350 Certifications
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase
101.DEF*		XBRL Taxonomy Extension Definition Linkbase
101.LAB*		XBRL Taxonomy Extension Label Linkbase
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase

 

Footnotes to Exhibits Index

(1) Incorporated by reference to Form 10-SB12G dated June 19, 1997.

(2) Incorporated by reference to the Current Report on Form 8-K, filed July 9, 2012.

 

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

 

 

SIGNATURES

 

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

 

	AMERICAN PETRO-HUNTER INC.
Date: August 14, 2012	By:	/s/ Robert B  McIntosh
		Robert B. McIntosh, President, Chief Executive Officer and Chief Financial Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)