Attached files
| file | filename |
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| EXCEL - IDEA: XBRL DOCUMENT - ALLIED RESOURCES INC | Financial_Report.xls |
| EX-31 - ALLIED CERTIFICATION - ALLIED RESOURCES INC | exhibit31.htm |
| EX-32 - ALLIED CERTIFICATION - ALLIED RESOURCES INC | exhibit32.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
quarterly period ended September 30, 2014.
o
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: 000-29321
ALLIED RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Nevada
000-31390
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
1403 East 900 South, Salt Lake City, Utah 84105
(Address of principal executive offices) (Zip Code)
(801) 582-9609
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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. Yes þ No o
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). Yes þ No o
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 o Accelerated filer o Non-accelerated filer o Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date. The number of shares outstanding of the issuer’s common stock, $0.001 par value (the only
class of voting stock), at November 14, 2014, was 5,653,011.
TABLE OF CONTENTS
PART 1- FINANCIAL INFORMATION
Item1.
3
Balance Sheets as of
4
September 30, 2014 (Unaudited) and December 31, 2013 (audited)
Unaudited Condensed Statements of Operations for the
5
three and nine month periods ended September 30, 2014 and September 30, 2013
Unaudited Condensed Statements of Cash Flows for the
6
nine month periods ended September 30, 2014 and September 30, 2013
Condensed Notes to Unaudited Financial Statements
7
Management's Discussion and Analysis of Financial Condition and Results of
8
Operations
Quantitative and Qualitative Disclosures about Market Risk
15
Controls and Procedures
16
PART II-OTHER INFORMATION
Legal Proceedings
17
Risk Factors
17
Unregistered Sales of Equity Securities and Use of Proceeds
20
Defaults Upon Senior Securities
20
Mine Safety Disclosures
20
Other Information
21
Exhibits
21
22
23
2
PART I – FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
As used herein, the terms “Allied,” “we,” “our,” “us,” “it,” and “its” refer to Allied Resources, Inc., a
Nevada corporation, unless otherwise indicated. In the opinion of management, the accompanying
unaudited financial statements included in this Form 10-Q reflect all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the results of operations for the periods
presented. The results of operations for the periods presented are not necessarily indicative of the results
to be expected for the full year.
3
ALLIED RESOURCES, INC.
BALANCE SHEETS
September 30,
December 31,
2014
2013
ASSETS
(Unaudited)
(Audited)
Current assets:
Cash
$
1,357,913
1,390,041
Accounts receivable
85,595
41,800
Total current assets
1,443,508
1,431,841
Oil and gas properties (proven), net (successful
efforts method)
628,575
665,560
Deposits
704,701
704,701
Total assets
$
2,776,784
2,802,102
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
24,793
12,857
Total current liabilities
24,793
12,857
Asset retirement obligation
220,908
213,001
Total liabilities
245,701
225,858
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value; 50,000,000 shares
authorized, 5,653,011 issued and outstanding
5,653
5,653
Additional paid-in capital
9,916,458
9,916,458
Accumulated deficit
(7,391,028)
(7,345,867)
Total stockholders' equity
2,531,083
2,576,244
Total liabilities and stockholders' equity
$
2,776,784
2,802,102
The accompanying notes are an integral part of these financial statements
4
ALLIED RESOURCES, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended
Nine Months Ended
September 30,
September 30,
2014
2013
2014
2013
Oil and gas revenues
$
158,417
231,715
424,862
482,494
Operating expenses:
Production costs
89,340
99,981
269,809
255,276
Depletion and amortization
12,514
26,681
36,985
49,941
General and administrative expenses
49,690
48,667
164,882
178,671
151,544
175,329
471,676
483,888
Income (loss) from operations
6,873
56,386
(46,814)
(1,394)
Interest income
571
620
1,653
2,742
Income (loss) before provision for
income taxes
7,444
57,006
(45,161)
1,348
Provision for income taxes
-
-
-
-
Net income (loss)
$
7,444
57,006
(45,161)
1,348
Income (loss) per common share -
basic and diluted
$
-
0.01
(0.01)
-
Weighted average common shares -
Basic
5,653,000
5,653,000
5,653,000
5,653,000
Diluted
5,675,000
5,664,000
5,653,000
5,669,000
The accompanying notes are an integral part of these financial statements
5
ALLIED RESOURCES, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2014 and 2013
2014
2013
Cash flows from operating activities:
Net income (loss)
$
(45,161)
1,348
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depletion and amortization
36,985
49,941
Stock option compensation expense
-
19,315
Accretion expense
7,907
7,534
Increase in:
Accounts receivable
(43,795)
(24,683)
Increase (decrease) in:
Accounts payable
11,936
(15,664)
Net cash provided by (used in) operating activities
(32,128)
37,791
Cash flows from investing activities:
-
-
Cash flows from financing activities:
-
-
Net increase (decrease) in cash
(32,128)
37,791
Cash, beginning of period
1,390,041
1,323,032
Cash, end of period
$
1,357,913
1,360,823
The accompanying notes are an integral part of these financial statements
6
ALLIED RESOURCES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2014
Note 1 – Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared by management in
accordance with the instructions in Form 10-Q and, therefore, do not include all information and
footnotes required by generally accepted accounting principles and should, therefore, be read in
conjunction with Allied’s Form 10-K for the year ended December 31, 2013, filed with the Securities and
Exchange Commission. These statements do include all normal recurring adjustments which Allied
believes necessary for a fair presentation of the statements. The interim operations are not necessarily
indicative of the results to be expected for the full year ended December 31, 2014.
Note 2 – Additional Footnotes Included By Reference
There has been no material change in the information disclosed in the notes to the financial statements
included in Allied’s Form 10-K for the year ended December 31, 2013, filed with the Securities and
Exchange Commission. Therefore, those footnotes are included herein by reference.
Note 3 – Subsequent Events
Allied evaluated its September 30, 2014, financial statements for subsequent events through the date the
financial statements were issued. Allied is not aware of any subsequent events which would require
recognition or disclosure in the financial statements.
7
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other
parts of this quarterly report contain forward-looking statements that involve risks and uncertainties.
Forward-looking statements can also be identified by words such as “anticipates,” “expects,” “believes,”
“plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future
performance and our actual results may differ significantly from the results discussed in the forward-
looking statements. Factors that might cause such differences include but are not limited to those
discussed in the subsection entitled Forward-Looking Statements and Factors That May Affect Future
Results and Financial Condition below. The following discussion should be read in conjunction with our
financial statements and notes thereto included in this report. Our fiscal year end is December 31. All
information presented herein is based on the three and nine month periods ended September 30, 2014 and
September 30, 2013.
ALLIED
Allied is an independent oil and natural gas producer involved in the exploration, development,
production and sale of oil and gas derived from properties located in Calhoun and Ritchie Counties, West
Virginia, and Goliad, Edwards and Jackson Counties, Texas.
Discussion and Analysis
General
Allied seeks to acquire additional oil and gas producing properties and to implement improved production
practices on existing wells to increase production and expand reserves where practicable. Allied believes
that it can achieve production growth while expanding reserves through improved exploitation of its
existing inventory of wells by disposing of non-productive wells and enhancing producing wells. An
evaluation for this objective of our existing portfolio of oil and gas properties is constantly under
consideration. Allied also intends to expand non-operated interests and explore opportunities for
operating interests in additional oil or gas producing properties.
Recovery from producing wells is consistently evaluated to consider cost-efficient work-over methods
designed to improve the performance of the wells. When considering the drilling of new wells, we
conduct a geological review of the prospective area, in cooperation with the responsible independent
operator, to determine the potential for oil and gas. Our own consultants then review available
geophysical data (generally seismic and gravity data) and opine as to the prospect for success. In the event
that our evaluation of available geophysical data indicates that the target has significant accumulations of
oil and gas, we then consider the economic feasibility of drilling. The presence of oil and gas for any
specific target cannot guarantee economic recovery. Production depends on many factors including
drilling and completion costs, the distance to pipelines and pipeline pressure, current energy prices,
accessibility to the site, and whether the project is developmental or solely a wildcat prospect.
Allied is prone to significant risks and uncertainties certain of which can have an immediate impact on
its efforts to realize positive net cash flow and deter future prospects of production growth. Historically,
Allied has not been able to generate sufficient cash flow from operations to sustain operations and fund
necessary exploration or development costs. Therefore, there can be no assurance that the wells currently
producing will provide sufficient cash flows to sustain operations. Should Allied be unable to generate
sufficient cash flow from existing properties, it may have to sell properties or interests in such properties,
or seek debt or equity financing to maintain operations.
8
Allied’s financial condition, results of operations and the carrying value of its oil and natural gas
properties depends primarily upon the prices it receives for oil and natural gas production and the quantity
of that production. Oil and natural gas prices historically have been volatile and are likely to continue to
be volatile in the future. Price volatility can have an immediate effect on Allied’s available cash flow
which can in turn impact the availability of net cash flow for future capital expenditures. A drop in oil and
natural gas prices can also incur a write down of the carrying value of our properties as can a decrease in
production. Allied’s future success will depend on oil and natural gas prices and production quantities.
Since production leads to the depletion of oil and gas reserves, Allied’s ability to develop or acquire
additional economically recoverable oil and gas reserves is vital. Unless Allied can secure additional
reserves of oil and gas, current production will continue to decline, which decline is likely to lead to
further reductions in revenue.
West Virginia Well Information
Allied owns varying interests in a total of 145 wells in West Virginia on several leases held by an
independent operator. Some leases contain multiple wells. All the wells in which we have an interest are
situated on developed acreage spread over 3,400 acres in Ritchie and Calhoun Counties. Depth of the
producing intervals varies from 1,730 ft to 5,472 ft. Many of our wells are situated on the same leases and
as such share production equipment in order to minimize lease operating costs.
Our working interest is defined as interest in oil and gas that includes responsibility for all drilling,
developing, and operating costs varying from 18.75% to 75%. Our net revenue interest is defined as that
portion of oil and gas production revenue after deduction of royalties, varying from 15.00% to 65.625%.
Texas Well Information
Allied owns varying interests in a total of 10 wells in Texas on four leases held by independent operators.
All the wells in which we have an interest are situated on developed acreage spread over 2,510 acres in
Goliad, Edwards and Jackson Counties. Depth of the producing intervals varies from 7,600 ft to 9,600 ft.
Our working interest is defined as interest in oil and gas that includes responsibility for all drilling,
developing, and operating costs varying from 3.73% to 21%. Our net revenue interest is defined as that
portion of oil and gas production revenue after deduction of royalties, varying from 3.9388% to 12.75%.
Exploration, Development and Operations
Allied intends to purchase non-operated oil and gas producing properties, acquire oil and gas leases that it
can operate and implement improved production efficiencies on existing wells. Our criteria for purchasing
oil and gas producing properties is defined by short term returns on investment, long term growth in
revenue, and development potential, while our criteria for acquiring oil and gas leases is predicated on a
proven record of historical production and our own capacity to operate any given field. The recent fall in
oil prices has increased the number of opportunities available to us but our relatively limited cash position
and the low prices currently paid for natural gas continues to sway us away from prospective drilling
activity. We do however continue to seek out prospective oil producing properties that meet our
acquisition criteria for a price that is consistent with competing forecasts for energy prices going forward
into a traditionally volatile market.
9
We are further considering future prospects for exploration of the virtually untapped Marcellus and Utica
shale formations that underlie Allied’s oil and gas interests in West Virginia, particularly in Ritchie
County. The Marcellus and Utica shale structures have formed under much of Pennsylvania, Ohio, New
York, West Virginia and adjacent states to become a prospectively major reservoir for natural gas
recovery. Drilling by other operators in Ritchie County has indicated successful rates of recovery and our
own open-hole well logs indicate the presence of potentially productive Marcellus shale at a depth of
6,000 feet. However, since exploration of the Marcellus and Utica shale in our area is relatively recent no
natural gas reserves underlying our interests have been determined. Our future plans for exploring these
shale formations are further tempered by the high risk/reward ratio of exploratory drilling in the near term
based on anticipated pricing for natural gas over the next five years.
Results of Operations
During the period from January 1, 2014 through September 30, 2014, Allied was engaged in evaluating
operated and non-operated acquisition opportunities in New Mexico and Texas, examining the operating
efficiencies of existing wells, and overseeing the operation of its oil and gas assets by independent
operators. The operation and maintenance of Allied’s oil and gas operations is wholly dependent on the
services provided by five different independent operators. While the services provided by these operators
have proven adequate, the fact that Allied is dependent on the operations of third parties to maintain its
operations and produce revenue does impact its own ability to realize a net profit.
For the nine months ended September 30, 2014, Allied realized a net loss due primarily to an increase in
production expenses, the decline in energy prices and depletion over that period. Allied believes that the
immediate key to its ability to return to profitability is that energy prices rise and production increases.
Should oil and gas prices rise, production increase and expenses remain relatively consistent, Allied
believes that it will be able to return to net profits in future periods.
NINE MONTHS ENDED SEPTEMBER 30
2014
2013
CHANGE # CHANGE %
AVERAGE DAILY PRODUCTION
Oil (bbls/day)
8
7
1
14%
Natural gas (mcf/day)
267
257
10
4%
Barrels of oil equivalent (boe/day)
53
50
3
5%
PROFITABILITY
Petroleum and natural gas revenue
$
424,862 $
482,494
(57,632)
-12%
Net Revenue
424,862
482,494
(57,632)
-12%
Production and operating costs
269,809
255,276
14,533
6%
Field netback
155,053
227,218
(72,165)
-32%
G&A
164,882
178,671
(13,789)
-8%
Net cash flow from operations
(9,829)
48,547
(58,376)
-120%
Depletion, depreciation and other charges
36,985
49,941
(12,956)
-26%
Future income taxes
-
-
-
0%
Net loss from operations
$
(46,814) $
(1,394)
(45,420)
-3,258%
PROFITABILITY PER BOE
Oil and gas revenue (average selling price)
29.64
35.47
(5.83)
-16%
Production and operating costs
18.82
18.76
.06
0%
Field netback ($/boe)
10.82
16.70
(5.88)
-35%
Net loss ($/boe)
(3.27)
(0.10)
(3.17)
-3,088%
Cash flow from operations ($/boe)
(0.69)
3.57
(4.26)
-119%
10
Revenue
Revenue for the three month period ended September 30, 2014, decreased to $158,417 from $231,715 for
the comparable period ended September 30, 2013, a decrease of 32%. The decrease in revenue over the
comparable three month periods can be attributed to decreases in energy prices paid over the period.
Revenue for the nine month period ended September 30, 2014, decreased to $424,862 from $482,494 for
the comparable period ended September 30, 2013, a decrease of 12%. The decrease in revenue over the
comparable nine month periods can also be attributed to decreases in energy prices paid over the period.
Allied believes that revenue will increase over near term future periods subject to the volatility associated
with energy pricing.
Net Income/Losses
Net income for the three month period ended September 30, 2014, decreased to $7,444 as compared to net
income of $57,006 for the three month period ended September 30, 2013, a decrease of 87%. The
decrease in net income over the comparable three month periods can be attributed to the decrease in oil
and gas revenues and the increase in general and administrative expenses offset by the decrease in
production costs and depletion.
Net losses for the nine month period ended September 30, 2014, were $45,161 as compared to net income
of $1,348 for the nine month period ended September 30, 2013. The transition in net losses from net
income over the comparable nine month periods can also be attributed to the decrease in oil and gas
revenues and the increase in production costs offset by decreases in general and administrative expenses
and depletion.
Allied expects to return to net income in future periods as revenues are expected to increase with higher
pricing for natural gas products, and increased productivity in the field while operating expenses are
expected to remain relatively consistent.
Operating Expenses
General and administrative expenses for the three month period ended September 30, 2014, increased to
$49,690 from $48,667 for the comparable three month period ended September 30, 2013, an increase of
2%. The increase in general administrative expenses over the comparable three month periods can be
attributed to personnel costs.
General and administrative expenses for the nine month period ended September 30, 2014, decreased to
$164,882 from $178,671 for the comparable nine month period ended September 30, 2013, a decrease of
8%. The decrease in general and administrative expenses over the comparable nine month periods can be
attributed to operating efficiencies.
Allied expects that general and administrative expenses will remain relatively consistent in future periods.
Depletion expenses for the three month periods ended September 30, 2014, and September 30, 2013 were
$12,514 and $26,681 respectively, a decrease of 53%. Depletion expenses for the nine month periods
ended September 30, 2014 and September 30, 2013 were $36,985 and $49,941, a decrease of 26%.
Depletion expenses are expected to continue to decrease in relation to the value attributed to aging oil and
gas assets.
11
Production costs for the three month periods ended September 30, 2014, and September 30, 2013 were
$89,340 and $99,981 respectively, a decrease of 11%. Production costs for the nine month periods ended
September 30, 2014 and September 30, 2013 were $269,809 and $255,276 respectively, an increase of
6%. Production costs include the cost of maintaining the wells, severance taxes, miscellaneous expenses
for soap, solvent, gasoline or electricity and expenses such as those incurred in swabbing, dozer work or
rig time. The decrease in production costs over the three month comparable periods can be attributed to a
decrease in expenses in work over costs while the overall increase in production costs over the
comparable nine month periods can be attributed to the increase in production and work over costs
associated with producing wells. Allied expects that production costs will continue to increase over future
periods as existing wells age and require more vigorous maintenance.
Income Tax Expense
As of December 31, 2013, Allied has net operating loss (NOL) carry forwards of approximately
$2,155,000. Should substantial changes in our ownership occur there would be an annual limitation of the
amount of NOL carry forward which could be utilized. The ultimate realization of these carry forwards is
due, in part, on the tax law in effect at the time and future events, which cannot be determined. During the
year ended December 31, 2013 a valuation allowance was recorded against this net operating loss carried
forward.
Capital Expenditures
Allied made no capital expenditures on property or equipment for the nine months ended September 30,
2014 or 2013.
Liquidity and Capital Resources
Allied had a working capital surplus of $1,418,715 as of September 30, 2014, funding its cash needs since
inception with revenues generated from operations, debt instruments and private equity placements.
Existing working capital and anticipated cash flow are expected to be sufficient to fund operations over
the next twelve months.
Current assets as of September 30, 2014 were $1,443,508 which consisted of $1,357,913 in cash and
$85,595 in accounts receivable. Total assets were $2,776,784 which consisted of current assets, proven oil
and gas properties of $628,575 and deposits of $704,701.
Current liabilities as of September 30, 2014 were $24,793 which consisted of accounts payable. Total
liabilities were $245,701 which consisted of current liabilities and an asset retirement obligation of
$220,908.
Stockholders’ equity as of September 30, 2014 was $2,531,083.
Net cash used in operating activities for the nine month period ended September 30, 2014 was $32,128 as
compared to net cash provided by operating activities of $37,791 for the nine month period ended
September 30, 2013. Net cash used in operating activities in the current period can be attributed primarily
to a number of items that are book expense items which do not affect the total amount relative to actual
cash used including depletion and amortization, and accretion expense. Balance sheet accounts that
actually affect cash, but are not income statement related items that are added or deducted to arrive at net
cash used in operations, include accounts receivable and accounts payable. Allied expects to transition to
cash flow provided by operations in future periods as net losses are expected to decrease in the near term
with an increase in energy prices.
12
Cash flow used in investing activities for the nine month periods ended September 30, 2014 and
September 30, 2013 was nil. Allied expects to use cash flow in investing activities over future periods as
it continues to evaluate existing wells, identify exploration opportunities and considers additional
acquisitions which activities will require investment.
Cash flow from financing activities for the nine month periods ended September 30, 2014 and September
30, 2013 was nil. Allied does not expect to realize cash flow from financing activities in the near term.
Allied has adopted a stock option plan pursuant to which it can grant up to 750,000 options to purchase
shares of its common stock to employees, directors, officers, consultants or advisors on the terms and
conditions set forth therein. As of September 30, 2014, 600,000 options with an exercise price of $0.35
had been granted, all of which have vested.
Allied has no lines of credit or other bank financing arrangements in place.
Allied had no commitments for future capital expenditures that were material at September 30, 2014.
Allied has no defined benefit plan or contractual commitment with any of its officers or directors except
each members participation in our stock option plan and an executive agreement with its sole executive
officer that provides for a monthly fee and participation in our stock option plan.
Allied has no current plans for the purchase or sale of any plant or equipment.
Allied has no current plans to make any changes in the number of employees.
Allied does not expect to pay cash dividends in the foreseeable future.
Off Balance Sheet Arrangements
As of September 30, 2014, Allied has no significant 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 stockholders.
Forward Looking Statements and Factors That May Affect Future Results and Financial Condition
The statements contained in the section titled Management’s Discussion and Analysis of Financial
Condition and Results of Operations, with the exception of historical facts, are forward looking
statements within the meaning of Section 27A of the Securities Act. We are ineligible to rely on the safe-
harbor provision of the Private Litigation Reform Act of 1995 for forward looking statements made in
this current report. Forward looking statements reflect our current expectations and beliefs regarding our
future results of operations, performance, and achievements. These statements are subject to risks and
uncertainties and are based upon assumptions and beliefs that may or may not materialize. These
statements include, but are not limited to, statements concerning:
13
§ our anticipated financial performance and business plan;
§ uncertainties related to production volumes of oil and gas;
§ the sufficiency of existing capital resources;
§ uncertainties related to future oil and gas prices;
§ uncertainties related the quantity of our reserves of oil and gas;
§ the volatility of the stock market and;
§ general economic conditions.
We wish to caution readers that our operating results are subject to various risks and uncertainties that
could cause our actual results to differ materially from those discussed or anticipated including the factors
set forth in the section entitled “Risk Factors” included elsewhere in this report. We also wish to advise
readers not to place any undue reliance on the forward looking statements contained in this report, which
reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update
or revise these forward looking statements to reflect new events or circumstances or any changes in our
beliefs or expectations, other than is required by law.
Critical Accounting Policies and Estimates
Accounting for Oil and Gas Property Costs. Allied (i) follows the successful efforts method of accounting
for the costs of its oil and gas properties, (ii) amortizes such costs using the units of production method
and (iii) evaluates its proven properties for impairment whenever events or changes in circumstances
indicate that their net book value may not be recoverable. Adverse changes in conditions (primarily gas
price declines) could result in permanent write-downs in the carrying value of oil and gas properties as
well as non-cash charges to operations that would not affect cash flows.
Estimates of Proved Oil and Gas Reserves. An independent petroleum engineer annually estimates
Allied’s proven reserves. Reserve engineering is a subjective process that is dependent upon the quality of
available data and the interpretation thereof. In addition, subsequent physical and economic factors such
as the results of drilling, testing, production and product prices may justify revision of such estimates.
Therefore, actual quantities, production timing, and the value of reserves may differ substantially from
estimates. A reduction in proved reserves would result in an increase in depreciation, depletion and
amortization expense.
Estimates of Asset Retirement Obligations. In accordance with ASC 410, Allied makes estimates of
future costs and the timing thereof in connection with recording its future obligations to plug and abandon
wells. Estimated abandonment dates will be revised in the future based on changes to related economic
lives, which vary with product prices and production costs. Estimated plugging costs may also be adjusted
to reflect changing industry experience. Increases in operating costs and decreases in product prices
would increase the estimated amount of the obligation and increase depreciation, depletion and
amortization expense. Cash flows would not be affected until costs to plug and abandon were actually
incurred.
Critical Accounting Policies
In Note 1 to the audited financial statements for the years ended December 31, 2013 and 2012, included
in our Form 10-K, Allied discusses those accounting policies that are considered to be significant in
determining the results of operations and its financial position. Allied believes that the accounting
principles utilized by it conform to accounting principles generally accepted in the United States.
The preparation of financial statements requires Allied’s management to make significant estimates and
14
judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature,
these judgments are subject to an inherent degree of uncertainty. On an on-going basis, Allied evaluates
estimates. Allied bases its estimates on historical experience and other facts and circumstances that are
believed to be reasonable, and the results form the basis for making judgments about the carrying value of
assets and liabilities. The actual results may differ from these estimates under different assumptions or
conditions.
Recent Accounting Pronouncements
In June 2014, the FASB released ASU 2014-10 - Accounting Standards Update 2014-10, Topic 915:
Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest
Entities Guidance in Topic 810, Consolidation. The amendments in this update eliminate the concept of a
development stage entity (DSE) from US GAAP. This change rescinds financial reporting requirements
that have historically applied by DSEs such as labeling financial statements as those of a DSE, providing
inception to date information in the statements of income, cash-flows and shareholder equity and certain
specific disclosures. This ASU has had no impact to the presentation of Allied’s financial statements.
In May 2014, the FASB released ASU 2014-9 - Accounting Standards Update 2014-9, Topic 606: Revenue
from Contracts with Customers that outlines a single comprehensive model for entities to use in accounting
for revenue arising from contracts with customers and supersedes most current revenue recognition
guidance, including industry-specific guidance. The guidance is based on the principle that an entity
should recognize revenue to depict the transfer of goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. The guidance also requires additional disclosure about the nature, amount, timing and
uncertainty of revenue and cash flows arising from customer contracts, including significant judgments
and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the
option of using either a full retrospective or a modified retrospective approach for the adoption of the new
standard. This guidance becomes effective for annual reporting periods beginning after December 15,
2016 and early adoption is not permitted. Allied is currently assessing the impact that this standard will
have on its financial statements.
Other pronouncements issued by the FASB or other authoritative accounting standards groups with future
effective dates are either not applicable or are not expected to be significant to the financial statements of
Allied.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not required.
15
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this report on Form 10-Q, an evaluation was carried out by Allied’s
management, with the participation of the chief executive officer and chief financial officer, of the
effectiveness of Allied’s disclosure controls and procedures (as defined in Rules 13a-15(e) of the
Securities Exchange Act of 1934 (“Exchange Act”)). Disclosure controls and procedures are designed to
ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified in the Commission’s
rules and forms and that such information is accumulated and communicated to management, including
the chief executive officer and chief financial officer, to allow timely decisions regarding required
disclosures.
Based on that evaluation, Allied’s management concluded, as of the end of the period covered by this
report, that Allied’s disclosure controls and procedures were effective in recording, processing,
summarizing, and reporting information required to be disclosed, within the time periods specified in the
Commission’s rules and forms, and that such information was accumulated and communicated to
management, including the chief executive officer and chief financial officer, to allow timely decisions
regarding required disclosures.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) of
the Exchange Act) during the period ended September 30, 2014, that materially affected, or are
reasonably likely to materially affect, Allied’s internal control over financial reporting.
16
PART II – OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
None.
ITEM 1A.
RISK FACTORS
Our future operating results are highly uncertain. Before deciding to invest in us or to maintain or increase
your investment, you should carefully consider the risks described below, in addition to the other
information contained in this quarterly report. If any of these risks actually occur, our business, financial
condition or results of operations could be seriously harmed. In that event, the market price for our
common stock could decline and you might lose all or part of your investment.
Risks Related to Allied’s Business
We have a history of significant operating losses, which losses may reoccur in the future.
Since our inception in 1979, our expenses have often exceeded our income, resulting in losses and an
accumulated deficit of $7,345,867 at December 31, 2013, which had increased to $7,391,028 at
September 30, 2014. We recorded a net loss of $45,161 for the nine month period ended September 30,
2014 and may continue to realize future net losses if revenues do not increase. Our expectation of
profitability depends on higher energy prices and increased production through exploration, development
or acquisition. Allied’s success in this continued endeavor can in no way be assured.
Oil and natural gas prices are volatile. Any substantial decrease in prices would adversely affect our
financial results.
Allied’s future financial condition, results of operations and the carrying value of our oil and natural gas
properties depend primarily upon the prices we receive for oil and natural gas production. Oil and natural
gas prices historically have been volatile and are likely to continue to be volatile in the future. Allied’s
cash flow from operations is highly dependent on the prices we receive for oil and natural gas. This price
volatility also affects the amount of Allied’s cash flow available for capital expenditures and our ability to
borrow money or raise additional capital. The prices for oil and natural gas are subject to a variety of
additional factors that are beyond our control. These factors include:
§ the level of consumer demand for oil and natural gas;
§ the domestic and foreign supply of oil and natural gas;
§ the ability of the members of the Organization of Petroleum Exporting Countries to agree to and
maintain oil price and production controls;
§ the price of foreign oil and natural gas;
§ domestic governmental regulations and taxes;
§ the price and availability of alternative fuel sources;
§ weather conditions;
§ market uncertainty;
§ political conditions or hostilities in energy producing regions, including the Middle East; and
§ worldwide economic conditions.
17
These factors and the volatility of the energy markets generally make it extremely difficult to predict
future oil and natural gas price movements with any certainty. Declines in oil and natural gas prices
would not only reduce revenue, but could reduce the amount of oil and natural gas that Allied can
produce economically and, as a result, could have a material adverse effect on our financial condition,
results of operations and reserves. Should the oil and natural gas industry experience significant price
declines, Allied may, among other things, be unable to meet our financial obligations or make planned
expenditures.
Allied’s future performance depends on its ability to find or acquire additional oil or natural gas
reserves.
Unless Allied successfully replaces the reserves that it produces, defined reserves will decline, resulting in
a decrease in oil and natural gas production, that will produce lower revenues, in turn decreasing cash
flows from operations. Allied has historically obtained the majority of its reserves through acquisition.
The business of exploring for, developing or acquiring reserves is capital intensive. Allied may not be
able to obtain the necessary capital to acquire additional oil or natural gas reserves if cash flows from
operations are reduced, and access to external sources of capital is unavailable. Should Allied not make
significant capital expenditures to increase reserves it will not be able to maintain current production rates
and expenses will continue to exceed revenue.
Climate change legislation or regulations restricting emissions of “greenhouse gases” could result in
increased operating costs and reduced demand for the oil and natural gas that we produce.
On December 15, 2009, the U.S. Environmental Protection Agency (“EPA”) officially published its
findings that emissions of carbon dioxide, methane and other “greenhouse gases” present an
endangerment to human health and the environment because emissions of such gases are contributing to
warming of the Earth’s atmosphere and other climatic changes. These findings by the EPA allow the
agency to proceed with the adoption and implementation of regulations that would restrict emissions of
greenhouse gases under existing provisions of the federal Clean Air Act. In late September 2009, the EPA
had proposed two sets of regulations in anticipation of finalizing its findings that would require a
reduction in emissions of greenhouse gases from motor vehicles and that could also lead to the imposition
of greenhouse gas emission limitations in Clean Air Act permits for certain stationary sources. In
addition, on September 22, 2009, the EPA issued a final rule requiring the reporting of greenhouse gas
emissions from specified large greenhouse gas emission sources in the United States beginning in 2011
for emissions occurring in 2010. The adoption and implementation of any regulations over greenhouse
gases could require us to incur costs to reduce emissions of greenhouse gases associated with our
operations or could adversely affect demand for the oil and natural gas that we produce.
18
On June 26, 2009, the U.S. House of Representatives passed the “American Clean Energy and Security
Act of 2009,” or “ACESA,” which would establish an economy-wide cap-and-trade program to reduce
U.S. emissions of greenhouse gases including carbon dioxide and methane. ACESA would require a 17%
reduction in greenhouse gas emissions from 2005 levels by 2020 and just over an 80% reduction of such
emissions by 2050. Under this legislation, the EPA would issue a capped and steadily declining number
of tradable emissions allowances to certain major sources of greenhouse gas emissions so that such
sources could continue to emit greenhouse gases into the atmosphere. These allowances would be
expected to escalate significantly in cost over time. The net effect of ACESA will be to impose increasing
costs on the combustion of carbon-based fuels such as oil, refined petroleum products, and natural gas.
The U.S. Senate has begun work on its own legislation for restricting domestic greenhouse gas emissions
and the President Obama Administration has indicated its support of legislation to reduce greenhouse gas
emissions through an emission allowance system. Although it is not possible at this time to predict when
the Senate may act on climate change legislation or how any bill passed by the Senate would be
reconciled with ACESA, any future federal laws or implementing regulations that may be adopted to
address greenhouse gas emissions could adversely affect demand for the oil and natural gas that we
produce.
The results of our operations are wholly dependent on the production and maintenance efforts of
independent operators.
The operation and maintenance of our oil and natural gas operations is wholly dependent on independent
local operators. While the services provided by operators of our properties in the past have proven
adequate for the successful operation of our oil and natural gas wells, the fact that we are dependent on
operations of third parties to produce revenue from our assets could restrict our ability to continue
generating a net profit on operations.
Risks Related to the Company’s Stock
The market for our stock is limited and our stock price may be volatile.
The market for our common stock is limited due to low trading volumes and the small number of
brokerage firms acting as market makers. The average daily trading volume for our stock has varied
significantly from week to week and from month to month, and the trading volume often varies widely
from day to day. Due to these limitations there is volatility in the market price and tradability of our stock,
which may cause our shareholders difficulty in selling their shares in the market place.
Allied has not paid dividends to the shareholders of its common stock.
Allied has not paid any dividends to the shareholders of its common stock and has no intention of paying
dividends in the foreseeable future. Any future dividends would be at the discretion of our board of
directors and would depend on, among other things, future earnings, our operating and financial
condition, our capital requirements, and general business conditions.
19
Allied may require additional capital funding.
Allied may require additional funds, either through additional equity offerings or debt placements, in
order to expand our operations. Such additional capital may result in dilution to our current shareholders.
Further, our ability to meet short-term and long-term financial commitments will depend on future cash.
There can be no assurance that future income will generate sufficient funds to enable us to meet our
financial commitments.
If the market price of our common stock declines as our security holders sell their stock, selling
security holders or others may be encouraged to engage in short selling, depressing the market price.
The significant downward pressure on the price of the common stock as security holders sell material
amounts of common stock could encourage short sales by the selling security holders or others. Short
selling is the selling of a security that the seller does not own, or any sale that is completed by the delivery
of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower
amount than the price at which they sold it short. Significant short selling of Allied’s stock would create
an incentive for market participants to reduce the value of our common stock. If a significant market for
short selling in our common stock develops, the market price for our common stock could be significantly
depressed.
Allied’s common stock is currently deemed to be “penny stock”, which makes it more difficult for
investors to sell their shares.
Allied’s common stock is and will be subject to the “penny stock” rules adopted under section 15(g) of
the Exchange Act. The penny stock rules apply to companies whose common stock is not listed on the
NASDAQ Stock Market or other national securities exchange and trades at less than $5.00 per share or
that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for
three or more years). These rules require, among other things, that brokers who trade penny stock to
persons other than “established customers” complete certain documentation, make suitability inquiries of
investors and provide investors with certain information concerning trading in the security, including a
risk disclosure document and quote information under certain circumstances. Many brokers have decided
not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number
of broker-dealers willing to act as market makers in such securities is limited. If Allied remains subject to
the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for
Allied’s securities. If Allied’s securities are subject to the penny stock rules, investors will find it more
difficult to dispose of Allied’s securities.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3.
DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
20
ITEM 5.
OTHER INFORMATION
None.
ITEM 6.
Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits on page
22 of this Form 10-Q, and are incorporated herein by this reference.
21
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Allied Resources, Inc.
Date
/s/ Ruairidh Campbell
November 14, 2014
Ruairidh Campbell
Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and Director
22
INDEX TO EXHIBITS
Exhibit
Description
3.1*
Articles of Incorporation dated February 12, 2002 (incorporated by reference to the Form
10-SB/A filed on April 21, 2003).
3.2 *
Bylaws (incorporated by reference to the Form 10-SB/A filed on April 21, 2003).
10.1 *
Oil and Gas Well Operating Agreement between Allied and Allstate Energy Corporation
dated May 1, 1996 (incorporated by reference to the Form 10SB/A filed on April 21,
2003).
10.2 *
Amendments to Operating Agreements between Allied and Allstate Energy Corporation
dated May 10, 1996 (incorporated by reference to the Form 10SB/A filed on April 21,
2003).
10.3 *
Form Gas Purchase Agreement (incorporated by reference to the Form 10SB/A filed on
April 21, 2003).
10.4*
Consulting Agreement between Allied and Ruairidh Campbell dated July 1, 2008
(incorporated by reference to the Form 10-Q filed on November 14, 2008).
14 *
Code of Ethics adopted May 3, 2004 (incorporated by reference to the Form 10-KSB filed
on May 26, 2004).
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14 of the Securities and Exchange Act of 1934 as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (attached).
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (attached).
99.1 *
Allied Resources, Inc. 2008 Stock Option Plan (incorporated by reference to the Form 10-
Q filed on November 14, 2008).
99.2*
Reserve report from Sure Engineering, LLC (incorporated by reference to the Form 10-K
filed on April 15, 2013).
101. INS
XBRL Instance Document†
101. PRE
XBRL Taxonomy Extension Presentation Linkbase†
101. LAB
XBRL Taxonomy Extension Label Linkbase†
101. DEF
XBRL Taxonomy Extension Label Linkbase†
101. CAL
XBRL Taxonomy Extension Label Linkbase†
101. SCH
XBRL Taxonomy Extension Schema†
*
Incorporated by reference to previous filings of Allied.
†
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed
“furnished” and not “filed” or part of a registration statement or prospectus for purposes
of Section 11 or 12 of the Securities Act of 1933, or deemed “furnished” and not “filed”
for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise is
not subject to liability under these sections.
23