ITEM 1: BUSINESS
ORGANIZATION
Royal Energy Resources, Inc. (“RER” or the “Company”) was originally organized in Delaware on March 22, 1999, with the name Webmarketing, Inc. (“Webmarketing”). On July 7, 2004, the Company revived its charter and changed its name from Webmarketing to World Marketing, Inc.
On November 5, 2007, the Company filed its Definitive Information Statement on Schedule 14C to report the following corporate actions:
1.
To approve an amendment to the Company’s Articles of Incorporation to increase the Company’s authorized capital to 110,000,000 shares comprising 100,000,000 shares of common stock par value $0.00001 per share and 10,000,000 shares of preferred stock par value $0.00001 per share;
2.
To specifically delineate the rights of the holders of common stock $0.00001 par value with respect to dividends, liquidation and voting rights;
3.
To confirm the right of the Company’s board of directors to designate and issue from time to time, in one or more series, shares of preferred stock par value $0.00001 per share subject to such designations and powers, preferences and rights, and qualifications, limitations and restrictions thereof hereinafter adopted by the Company’s board of directors;
4.
To specifically delineate the right of the Company’s board of directors to issue shares of common and preferred stock for such consideration as may be determined by the Company’s board of directors (but not less than par value) and to issue rights or options to acquire such shares on terms and conditions to be determined by the Company’s board of directors; and
5.
To change the name of the Company to Royal Energy Resources, Inc.
The foregoing became effective on December 12, 2007, upon filing the amendment with the Delaware Secretary of State.
RER was organized in 1999 and attempted to start a web-based marketing business for health-care products. The health-care products business had no revenue and was discontinued in 2001 and the Company remained inactive until July 22, 2005 when it commenced its real estate business. Accordingly, the current development stage has a commencement date of July 22, 2005 and all prior losses of $28,995 have been transferred to accumulated deficit.
BUSINESS
As a result of the current real estate market, the Company expects to concentrate the majority of its resources in energy projects.
ENERGY AND MINING
MINING
The Company is currently pursuing gold, silver, copper and rare earth metals mining concessions in Romania, Bulgaria and Canada and mining leases in the United States. If successful, the Company plans to concentrate its efforts to develop these properties.
LEASES
The Company has been the successful bidder in United States Government auctions to purchase certain oil and gas lease rights. The oil and gas leases currently comprise approximately 3,400 and 6,000 acres in Weston, Goshen, Niobrara, Converse, Campbell, Freemont, Laramie, Sublette and Platt Counties, Wyoming as of August 31, 2010 and 2009, respectively. In addition, the Company holds the lease for uranium rights on approximately 1,000 and 3,500 acres in Wyoming as of August 31, 2010 and 2009, respectively.
The Company is generally negotiating with energy and mining companies to develop the potential resources that may be contained in the properties and will typically either farm-out or sell the lease and retain an over-riding royalty interest on any potential future production. As of August 31, 2010, the Company had completed five transactions: 308 acres in Natrona County with Bill Barrett Corporation of Colorado; 75 acres in Weston County, Wyoming with Orion Energy; 360 acres in Goshen and Platt Counties, Wyoming with Carpenter and Sons; 80 acres in Niobrara County to Black Diamond Minerals, LLC; and 1,989 acres in Laramie County, Wyoming to Cirque Resources LP. In June 2010, the Company sold its over-riding royalty interest in the Cirque Resources transaction for $22,300, net of commission.
OIL AND GAS DRILLING PROSPECTS
During 2008, the Company prepaid $119,011 as estimated drilling and completion costs for a 25% working interest in three wells in Washington County, Oklahoma. Two of the wells were completed in September and October 2008 and the third well was abandoned in 2010. During 2009, the Company advanced an additional $42,000, net, to apply toward workover of three additional wells. These workovers proved unsuccessful and the wells were all abandoned.
REAL ESTATE
Our primary objective was to acquire, make necessary renovations and resell both residential and commercial real estate. It was anticipated that we might lease some of the properties while they were being held for sale. We completed the acquisition of our first property on August 25, 2005, a condominium located in Brooklyn, New York, in exchange for $25,000 in cash and 1,900,000 shares of our common stock which was valued at $190,000. We received a deed to the property and there was no mortgage on the property nor are there any liens on the property.
In March 2008, the Company entered into a rescission agreement to return the real estate that it previously held to the individual who originally transferred the property in exchange for 1,900,000 shares of the Company’s common stock. The original value of the real estate was $215,000 and upon the rescission was valued at $200,000. The Company has recorded a loss of $15,000 on this transaction during this period, upon transferring the real estate to the original seller and canceling the 1,900,000 shares.
As a result of the current real estate environment in the United States, we are currently limiting any potential acquisitions to Eastern European countries. The real estate will be sold directly by us to the extent deemed practical. If necessary, broker services will be used to expedite a given sale.
OTHER
Mr. Roth, our President, Chief Executive Officer and Chief Financial Officer, is our sole active employee. Mrs. Taub, our Secretary and Treasurer, will not be active in our day-to-day operations.
RER does not have any plans or arrangements to merge with another company or otherwise engage in a transaction that would change the control of RER.
The mailing address of our principal executive office is 543 Bedford Avenue, #176, Brooklyn, New York 11211 and our telephone number is 800-620-3029.
FINANCIAL POSITION AND FUTURE FINANCING NEEDS
We are a development stage company. We have not previously been in the energy business, or in the business of acquiring, renovating and selling or leasing real estate.
We have not established sources of revenues sufficient to fund the development of business, projected operating expenses and commitments for our fiscal year ending August 31, 2011. We have been in the development stage since our inception, March 22, 1999, have accumulated a net loss of $2,905,850 through August 31, 2010, and incurred a loss of $501,055 for the year then ended.
RER was organized in 1999 and attempted to start a web-based marketing business for health-care products. The health-care products business had no revenue and was discontinued in 2001 and the Company remained inactive until July 22, 2005 when it commenced its real estate business. Accordingly, the current development stage has a commencement date of July 22, 2005 and all prior losses of $28,995 have been transferred to accumulated deficit.
The Company sold its common stock in private transactions which raised $120,500 in 2006, $80,070 in 2007, $413,172 in 2008 and $3,600 in 2009. The Company plans to make sales of its common stock in private transactions or to borrow funds as needed to raise sufficient capital to fund the development of business, projected operating expenses and commitments. However, there can be no assurance that we will be able to obtain sufficient funding to develop our current business plan.
COMPETITION
ENERGY AND MINING
The Company expects to concentrate the majority of its resources in oil and gas and mining by acquiring leasehold interests and either selling or farming them out to other companies for development, while retaining an over-riding royalty interest. The Company has elected to participate in the development of certain properties in Oklahoma. The Company is much smaller than most participants in this industry and has limited expertise in operating energy and mining businesses.
REAL ESTATE
The first competitive consideration is to locate real estate for purchase that is within the Company’s pricing limitations and is considered to be priced right for the market in that particular area. The competition for real estate is intense, and includes firms as small as one person working out of their home to multi-national conglomerates.
Once a property is acquired, the first task is to complete necessary repairs and renovations. When the property is available for sale, the major risk factor is to conclude a profitable sale. In this regard, a problem with some properties is the individuals who agree to a purchase contract may not be qualified to receive mortgage financing. The time period of removing the property from the market and then discovering that the purchaser is not mortgage qualified is costly in terms of reduced profits when a sale is concluded.
The profit potential to the Company is wholly dependent upon the ability of its officers and employees to purchase property and resell it at a price level which will provide profits to the Company. There is no assurance that these objectives will be realized. It is reasonable to assume that any property acquired and prepared for resale will eventually be sold. However, it may be that an eventual resale will be at a loss.
Because of the nature of this business there are no statistics that indicate the number of investors in the business or the financial extent of their activities. The Company will basically be in the same competitive position as any other investor seeking to purchase real estate in our anticipated price range. The Company rescinded the purchase of the real estate property it had during the quarter ended May 31, 2008 and currently is limiting any potential real estate acquisitions to Eastern European countries, due to the current real estate environment in the United States.
GOVERNMENTAL REGULATIONS, APPROVAL, COMPLIANCE
ENERGY AND MINING
If we elect to participate directly in development of oil and gas properties, our operations are or will be subject to various types of regulation at the federal, state and local levels. Such regulations includes requiring permits for the drilling of wells; maintaining bonding requirements in order to drill or operate wells; implementing spill prevention plans; submitting notification and receiving permits relating to the presence, use and release of certain materials incidental to oil and gas operations; and regulating the location of wells, the method of drilling and casing wells, the use, transportation, storage and disposal of fluids and materials used in connection with drilling and production activities, surface usage and the restoration of properties upon which wells have been drilled, the plugging and abandoning of wells and the transporting of production. Our operations are or will be also subject to various conservation matters, including the regulation of the size of drilling and spacing units or pro-ration units, the number of wells which may be drilled in a unit, and the unitization or pooling of oil and gas properties. In this regard, some states allow the forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases, which may make it more difficult to develop oil and gas properties. In addition, state conservation laws establish maximum rates of production from oil and gas wells, generally limit the venting or flaring of gas, and impose certain requirements regarding the ratable purchase of production. The effect of these regulations is to limit the amounts of oil and gas we may be able to produce from our wells and to limit the number of wells or the locations at which we may be able to drill.
Our business is affected by numerous laws and regulations, including energy, environmental, conservation, tax and other laws and regulations relating to the oil and gas industry. We plan to develop internal procedures and policies to ensure that our operations are conducted in full and substantial environmental regulatory compliance.
Failure to comply with any laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of injunctive relief or both. Moreover, changes in any of these laws and regulations could have a material adverse effect on business. In view of the many uncertainties with respect to current and future laws and regulations, including their applicability to us, we cannot predict the overall effect of such laws and regulations on our future operations.
We believe that our operations comply in all material respects with applicable laws and regulations and that the existence and enforcement of such laws and regulations have no more restrictive an effect on our operations than on other similar companies in the energy industry. We do not anticipate any material capital expenditures to comply with federal and state environmental requirements.
ENVIRONMENTAL
ENERGY AND MINING
Operations on properties in which we have an interest are subject to extensive federal, state and local environmental laws that regulate the discharge or disposal of materials or substances into the environment and otherwise are intended to protect the environment. Numerous governmental agencies issue rules and regulations to implement and enforce such laws, which are often difficult and costly to comply with and which carry substantial administrative, civil and criminal penalties and in some cases injunctive relief for failure to comply.
Some laws, rules and regulations relating to the protection of the environment may, in certain circumstances, impose “strict liability” for environmental contamination. These laws render a person or company liable for environmental and natural resource damages, cleanup costs and, in the case of oil spills in certain states, consequential damages without regard to negligence or fault. Other laws, rules and regulations may require the rate of oil and gas production to be below the economically optimal rate or may even prohibit exploration or production activities in environmentally sensitive areas. In addition, state laws often require some form of remedial action, such as closure of inactive pits and plugging of abandoned wells, to prevent pollution from former or suspended operations.
Legislation has been proposed in the past and continues to be evaluated in Congress from time to time that would reclassify certain oil and gas exploration and production wastes as “hazardous wastes.” This reclassification would make these wastes subject to much more stringent storage, treatment, disposal and clean-up requirements, which could have a significant adverse impact on operating costs. Initiatives to further regulate the disposal of oil and gas wastes are also proposed in certain states from time to time and may include initiatives at the county, municipal and local government levels. These various initiatives could have a similar adverse impact on operating costs.
The regulatory burden of environmental laws and regulations increases our cost and risk of doing business and consequently affects our profitability. The federal Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, also known as the “Superfund” law, imposes liability, without regard to fault, on certain classes of persons with respect to the release of a “hazardous substance” into the environment. These persons include the current or prior owner or operator of the disposal site or sites where the release occurred and companies that transported, disposed or arranged for the transport or disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for the federal or state government to pursue such claims.
It is also not uncommon for neighboring landowners and other third parties to file claims for personal injury or property or natural resource damages allegedly caused by the hazardous substances released into the environment. Under CERCLA, certain oil and gas materials and products are, by definition, excluded from the term “hazardous substances.” At least two federal courts have held that certain wastes associated with the production of crude oil may be classified as hazardous substances under CERCLA. Similarly, under the federal Resource, Conservation and Recovery Act, or RCRA, which governs the generation, treatment, storage and disposal of “solid wastes” and “hazardous wastes,” certain oil and gas materials and wastes are exempt from the definition of “hazardous wastes.” This exemption continues to be subject to judicial interpretation and increasingly stringent state interpretation. During the normal course of operations on properties in which we have an interest, exempt and non-exempt wastes, including hazardous wastes, that are subject to RCRA and comparable state statutes and implementing regulations are generated or have been generated in the past. The federal Environmental Protection Agency and various state agencies continue to promulgate regulations that limit the disposal and permitting options for certain hazardous and non-hazardous wastes.
We plan to establish guidelines and management systems to ensure compliance with environmental laws, rules and regulations if we participate directly in the development of oil and gas resources. The existence of these controls cannot, however, guarantee total compliance with environmental laws, rules and regulations. We will rely on the operator of the properties in which we have an interest to be in substantial compliance with applicable laws, rules and regulations relating to the control of air emissions at all facilities on those properties. Although we plan to maintain insurance against some, but not all, of the risks described above, including insuring the costs of clean-up operations, public liability and physical damage, there is no assurance that our insurance will be adequate to cover all such costs, that the insurance will continue to be available in the future or that the insurance will be available at premium levels that justify our purchase. The occurrence of a significant event not fully insured or indemnified against could have a material adverse effect on our financial condition and operations. Compliance with environmental requirements, including financial assurance requirements and the costs associated with the cleanup of any spill, could have a material adverse effect on our capital expenditures, earnings or competitive position. We do believe, however, that our operators are in substantial compliance with current applicable environmental laws and regulations. Nevertheless, changes in environmental laws have the potential to adversely affect operations. At this time, we have no plans to make any material capital expenditures for environmental control facilities.
EMPLOYEES
It is anticipated that the only active employee of this business in the near future will be its President. All other operative functions, such as repairs and/or renovations to the real estate or acquiring energy investments will be handled by the President or independent contractors and consultants.
ITEM 1A:
ITEM 1A: RISK FACTORS
Not applicable.
ITEM 2:
ITEM 2: PROPERTIES
OIL AND GAS
The Company’s oil and gas business includes direct participation in oil and gas prospects and buying and selling both oil and gas and uranium leases, as discussed below. During 2008 we prepaid the estimated drilling and completion costs for a 25% interest in three properties in Washington County, Oklahoma and prepaid the estimated workover cost of three additional properties in 2009. One of the wells was completed in September 2008 and a second well was completed in October 2008. The third well was abandoned. The work on the workover wells was completed during 2010 without obtaining commercial production. Effective October 1, 2010, the Company's interest in the two producing wells were sold. The Company recorded an impairment to its proven reserves to reduce it to the amount received and has reclassified this balance to accounts receivable at August 31, 2010.
The Company has a balance of $28,583 prepaid as of August 31, 2010 and will either participate in other prospects or attempt to obtain a refund of the balance.
Proved Reserves and Estimated Future Net Revenue
The SEC defines proved oil and gas reserves as the estimated quantities of crude oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e. prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions.
The process of estimating oil and natural gas reserves is complex and requires significant judgment. Our policies regarding booking reserves require proved reserves to be in compliance with the SEC definitions and guidance. With the sale of our only producing reserves effective October 1, 2010, we have no proved reserves at August 31, 2010. We have only nominal reserves at August 31, 2009 and have internally prepared our reserve estimates as of that date.
The following table sets forth our estimated proved reserves and the related estimated pre-tax future net revenues, pre-tax 10% present value and after-tax standardized measure of discounted future net cash flows as of August 31, 2010 and 2009. These estimates correspond with the method used in presenting the “Supplemental Information on Oil and Gas Operations” in Note 10 to our financial statements included herein. No value has been assigned to proved undeveloped reserves.
(1)
Gas reserves are converted to barrels of oil equivalent (“BOE”) at the rate of six MCF per BBL of oil, based upon the approximate relative energy content of natural gas and oil, which rate is not necessarily indicative of the relationship of gas and oil prices.
(2)
Estimated pre-tax future net revenue represents estimated future revenue to be generated from the production of proved reserves, net of estimated production and development costs and site restoration and abandonment charges. The amounts shown do not give effect to depreciation, depletion and amortization, or to non-property related expenses such as debt service and income tax expense.
These amounts were calculated using prices and costs in effect for each individual property as of August 31, 2009. These prices were not changed except where different prices were fixed and determinable from applicable contracts. These assumptions yield average prices over the life of our properties of $58.55 per BBL of oil and $1.98 per MCF of natural gas at August 31, 2009.
The present value of after-tax future net revenues discounted at 10% per annum (“standardized measure”) was $38,865 at August 31, 2009. The standardized measure did not include discounted future income taxes since the net operating loss carryforward exceeded the future net revenues. The present value of our pre-tax future net revenue (“pre-tax 10% present value”) was therefore also $38,865. We believe the pre-tax 10% present value assists in both the determination of future cash flows of the current reserves as well as in making relative value comparisons among peer companies. The after-tax standardized measure is dependent on the unique tax situation of each individual company, while the pre-tax 10% present value is based on prices and discount factors, which are more consistent from company to company. We also understand that securities analysts use the pre-tax 10% present value measure in similar ways.
(3)
See Note 10 to the financial statements included in Item 8.
No estimates of our proved reserves have previously been filed with or included in reports to any federal governmental authority except for our Form 10-K filings for August 31, 2009 and 2008, which was our initial reserve filing.
The prices used in calculating the estimated future net revenues attributable to proved reserves do not necessarily reflect market prices for oil and gas production subsequent to August 31, 2009. There can be no assurance that all of the proved reserves will be produced and sold within the periods indicated, that the assumed prices will be realized or that existing contracts will be honored or judicially enforced.
Drilling Activities
The following table summarizes the results of our development drilling activity for the years ended August 31, 2010, 2009 and 2008. There was no activity in prior years and the Company has not had any exploratory drilling activity.
Development Well Activity
(1)
Gross wells are the sum of all wells in which we own an interest.
(2)
Net wells are gross wells multiplied by our fractional working interests therein.
Both wells drilling at August 31, 2008, were completed as productive oil wells in September and October 2008.
The initial properties in which the Company participated involved the well bore only and did not include any acreage. The Company has the right to participate in additional wells in this prospect.
Operation of Properties
Currently, the Company does not have the infrastructure necessary to operate oil and gas properties and relies on other companies to provide operations.
Title to Properties
Title to properties is subject to contractual arrangements customary in the oil and gas industry, liens for current taxes not yet due and, in some instances, other encumbrances. We believe that such burdens do not materially detract from the value of such properties or from the respective interests therein or materially interfere with their use in the operation of the business.
As is customary in the industry, other than a preliminary review of local records, little investigation of record title is made at the time of acquisitions of undeveloped properties. Investigations, which generally include a title opinion of outside counsel, are made prior to the consummation of an acquisition of producing properties and before commencement of drilling operations on undeveloped properties.
UNDEVLOPED LEASEHOLD NOT BEING AMORTIZED
These leases are separate from those included above and are being held primarily for resale while retaining an over-riding royalty interest. As of August 31, 2010, and 2009, we own oil and gas leases comprising approximately 3,400 and 6,000 acres in Wyoming, respectively. In addition, we hold the lease for uranium rights on approximately 1,000 and 3,500 acres in Wyoming as of August 31, 2010 and 2009, respectively.
REAL ESTATE
On August 25, 2005, we acquired our first real estate property, a residential condominium located in Brooklyn, New York, in exchange for $25,000 in cash and 1,900,000 shares of our common stock which was valued at $190,000.
In March 2008, the Company entered into a rescission agreement to return the real estate that it previously held to the individual from whom we originally acquired the property in exchange for 1,900,000 shares of the Company’s common stock. The original value of the real estate was $215,000 and upon the rescission was valued at $200,000. The Company has recorded a loss of $15,000 on this transaction during the period.
OTHER
The Company began leasing its corporate office effective September 1, 2008, for a period of two years at a monthly rental of $600. The Company elected to terminate the lease on October 31, 2009.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
There are no pending or threatened lawsuits against us.
ITEM 4:
ITEM 4: [REMOVED AND RESERVED]
PART II
ITEM 5:
ITEM 5:
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) MARKET INFORMATION
Our $0.00001 par value per share common stock is traded in the over-the-counter market and is quoted on the National Association of Securities Dealers (“NASD”) Over-The Counter Bulletin Board (“OTCBB”) under the symbol “ROYE.OB.” Until we began trading on September 5, 2007, there was no public market for our common stock. Previously we traded under the symbol WRLM.OB.
The following table sets forth the quarterly high and low daily close for our common stock as reported by the OTCBB for the two years ended August 31, 2010 and 2009. The bids reflect inter dealer prices without adjustments for retail mark-ups, mark-downs or commissions and may not represent actual transactions.
The OTCBB is a quotation service sponsored by the NASD that displays real-time quotes and volume information in over-the-counter (“OTC”) equity securities. The OTCBB does not impose listing standards or requirements, does not provide automatic trade executions and does not maintain relationships with quoted issuers. A company traded on the OTCBB may face loss of market makers and lack of readily available bid and ask prices for its stock and may experience a greater spread between the bid and ask price of its stock and a general loss of liquidity with its stock. In addition, certain investors have policies against purchasing or holding OTC securities. Both trading volume and the market value of our securities have been, and will continue to be, materially affected by the trading on the OTCBB.
PENNY STOCK CONSIDERATIONS
Our shares will be “penny stocks” as that term is generally defined in the Securities Exchange Act of 1934 to mean equity securities with a price of less than $5.00. Our shares thus will be subject to rules that impose sales practice and disclosure requirements on broker-dealers who engage in certain transactions involving a penny stock.
Under the penny stock regulations, a broker-dealer selling a penny stock to anyone other than an established customer or accredited investor must make a special suitability determination regarding the purchaser and must receive the purchaser’s written consent to the transaction prior to the sale, unless the broker-dealer is otherwise exempt. Generally, an individual with a net worth in excess of $1,000,000, or annual income exceeding $100,000 individually or $300,000 together with his or her spouse, is considered an accredited investor. In addition, under the penny stock regulations the broker-dealer is required to:
·
Deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the Securities and Exchange Commission relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt;
·
Disclose commissions payable to the broker-dealer and our registered representatives and current bid and offer quotations for the securities;
·
Send monthly statements disclosing recent price information pertaining to the penny stock held in a customer’s account, the account’s value and information regarding the limited market in penny stocks; and
·
Make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction, prior to conducting any penny stock transaction in the customer’s account.
Because of these regulations, broker-dealers may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling shareholders or other holders to sell their shares in the secondary market and have the effect of reducing the level of trading activity in the secondary market. These additional sales practice and disclosure requirements could impede the sale of our securities, if our securities become publicly traded. In addition, the liquidity for our securities may be decrease, with a corresponding decrease in the price of our securities. Our shares in all probability will be subject to such penny stock rules and our shareholders will, in all likelihood, find it difficult to sell their securities.
RECENT SALES OF UNREGISTERED SECURITIES
During the quarter ended August 31, 2010, we did not sell any shares of our common stock for cash and issued 1,500,000 shares pursuant to a consulting contract valued at $30,000 and issued 700,000 shares of our common stock valued at $14,000 for a debt extension fee. In addition, we issued 13,000,000 shares of our common stock pursuant to stock subscription agreements in the amount of $225,000 to our chief executive officer.
These shares were sold pursuant to an exemption from registration under Section 4(2) promulgated under the Securities Act of 1933, as amended.
(b) HOLDERS
There are 98 shareholders of record of the Company’s common stock at October 31, 2010.
(c) DIVIDENDS
The Company has not paid dividends to date and has no plans to do so in the foreseeable future.
(d)
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table summarizes certain information as of August 31, 2009, with respect to compensation plans (including individual compensation arrangements) under which our common stock is authorized for issuance:
The Royal Energy Resources, Inc. 2008 Stock Option Plan (“Plan”) was filed on June 27, 2008 and reserves 4,000,000 shares for Awards under the Plan, of which up to 3,000,000 may be designated as Incentive Stock Options. The Company’s Compensation Committee is designated to administer the Plan at the direction of the Board of Directors.
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
Not applicable.
ITEM 7:
ITEM 7:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This statement contains forward-looking statements within the meaning of the Securities Act. Discussions containing such forward-looking statements may be found throughout this statement. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, the matters set forth in this statement.
Oil and gas sales
The Company had $8,394 and $4,310 in oil and gas sales in 2010 and 2009, respectively, from the initial production from two wells completed at the beginning of 2009. These wells were sold effective October 1, 2010.
Costs and expenses
Costs and expenses consist of the following for the years ended August 31, 2010 and 2009.
Lease operating expense, production taxes and depreciation, depletion and amortization relate to the oil and gas revenue which commenced in 2009.
The asset impairment arose as a result of a ceiling test limitation on the proved oil and gas reserves. The reserve calculation at August 31, 2009 was lower than the calculation at August 31, 2008, primarily due to a decline in price from $117.00 per barrel to $58.55 per barrel at August 31, 2009. The proven reserves were sold effective October 1, 2010 and the properties carrying value was reduced to the proceeds, which was reclassified to accounts receivable at August 31, 2010.
Non-cash compensation includes $326,498 and $1,252,861 in 2010 and 2009, respectively, in compensation to consultants pursuant to consulting agreements. The agreements cover periods ranging from 3 months to 16.5 months and the related fair value of the shares and options are being amortized over the life of the agreements. In addition, in 2009, non-cash compensation also includes $186,000 in officer compensation which is the difference between the stock sales price for stock subscriptions and the stock trading price on the date of the sale. There was no difference for the stock subscription sales in 2010.
Other selling, general and administrative expense decreased from $200,395 in 2009 to $109,804 in 2010. The majority of the decrease is due to a decrease of $72,249 in cash consulting fees.
Other expense (income):
Other expense (income) consists of the following for the years ended August 31, 2010 and 2009.
In 2009, the Company realized a loss of $35,838 from commodities trading activities. 2009 was the initial year in which the Company participated in commodities trading. An additional loss of $719 was realized in 2010 when the account was closed.
Interest expense increased in 2010 from 2009, primarily due to the 2010 amount of $30,968 including $14,000 from the issue of common stock to extend a past due loan.
Interest income was accrued on the stock subscription receivables (related parties) in 2010 and 2009. Other interest income received increased primarily from having higher cash balances during a portion of 2009.
GOING CONCERN FACTORS-LIQUIDITY
We are a development stage company. We have not previously been in the energy business or in the business of acquiring, renovating and selling or leasing real estate.
We have not established sources of revenues sufficient to fund the development of business, projected operating expenses and commitments for our fiscal year ending August 31, 2010. The Company, has accumulated a net loss of $2,905,850 through August 31, 2010, ($28,995 in an earlier development stage business and $2,876,855 in the current development stage) and incurred losses of $501,055 for the year then ended.
RER was organized in 1999 and attempted to start a web-based marketing business for health-care products. The health-care products business had no revenue and was discontinued in 2001 and the Company remained inactive until July 22, 2005 when it commenced its real estate business. Accordingly, the current development stage has a commencement date of July 22, 2005 and all prior losses of $28,995 have been transferred to accumulated deficit.
The Company sold its common stock in private transactions which raised $120,500 in 2006, $80,070 in 2007, $413,172 in 2008 and $3,600 in 2009. The Company plans to make sales of its common stock in private transactions or to borrow funds as needed to raise sufficient capital to fund the development of business, projected operating expenses and commitments. However, there can be no assurance that we will be able to obtain sufficient funding to develop our current business plan.
NEW ACCOUNTING STANDARDS
There are several new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) which are not yet effective. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company’s financial position or operating results. See Note 1 to the financial statements.
CRITICAL ACCOUNTING POLICIES
The SEC issued Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure about Critical Accounting Policies” (“FRR 60”), suggesting companies provide additional disclosure and commentary on their most critical accounting policies. In FRR 60, the SEC defined the most critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition our most critical accounting policies are discussed below. The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results we report in our financial statements.
REVENUE RECOGNITION - We have derived our revenue from sale of mineral interests and in the future will predominately derive our revenue from the sale of produced crude oil and natural gas. Revenue is recorded in the month the product is delivered to the purchaser. We receive payment from one to three months after delivery. At the end of each month, we estimate the amount of production delivered to purchasers and the price we will receive. Variances between our estimated revenue and actual payment are recorded in the month the payment is received; however, the differences should be insignificant.
FULL COST METHOD OF ACCOUNTING - We account for our oil and natural gas operations using the full cost method of accounting. Under this method, all costs associated with property acquisition, exploration and development of oil and gas reserves are capitalized. Costs capitalized include acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and cost of drilling and equipping productive and non-productive wells. Drilling costs include directly related overhead costs. All of our properties are currently located within the continental United States.
OIL AND NATURAL GAS RESERVE QUANTITIES - Reserve quantities and the related estimates of future net cash flows affect our periodic calculations of depletion and impairment of our oil and natural gas properties. Proved oil and natural gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future periods from known reservoirs under existing economic and operating conditions. Reserve quantities and future cash flows included in this Annual Report are prepared in accordance with guidelines established by the SEC and FASB. The accuracy of our reserve estimates is a function of:
·
The quality and quantity of available data;
·
The accuracy of various mandated economic assumptions; and
·
The judgments of the person preparing the estimates.
Our proved reserve information for 2009, included in this Annual Report, is based on estimates prepared by the operator of the properties and has not been prepared by an independent petroleum engineer. Because these estimates depend on many assumptions, all of which may differ substantially from actual results, reserve estimates may be different from the quantities of oil and natural gas that are ultimately recovered. We will make changes to depletion rates and impairment calculations in the same period that changes in reserve estimates are made.
All capitalized costs of oil and gas properties, including estimated future costs to develop proved reserves and estimated future costs of site restoration, are amortized on the unit-of-production method using our estimate of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined.
IMPAIRMENT OF OIL AND NATURAL GAS PROPERTIES - We review the value of our oil and natural gas properties whenever management judges that events and circumstances indicate that the recorded carrying value of properties may not be recoverable. We provide for impairments on undeveloped property when we determine that the property will not be developed or a permanent impairment in value has occurred. Under the full cost method the net book value of oil and natural gas properties, less related deferred income taxes, may not exceed the estimated after-tax future net revenues from proved oil and natural gas properties, discounted at 10% (the “Ceiling Limitation”). In arriving at estimated future net revenues, estimated lease operating expenses, development costs, and certain production-related taxes are deducted. In calculating future net revenues, prices and costs in effect at the time of the calculation are held constant indefinitely, except for changes that are fixed and determinable by existing contracts. The net book value is compared to the ceiling limitation on a quarterly and yearly basis. The excess, if any, of the net book value above the ceiling limitation is charged to expense in the period in which it occurs and is not subsequently reinstated.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any material off-balance sheet arrangements.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
Not applicable.
ITEM 7A:
ITEM 7A:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of Royal Energy Resources, Inc. (a development stage company) together with the report thereon of Paritz & Company, P.A. for the years ended August 31, 2010 and 2009 and the period from inception (July 22, 2005) through August 31, 2010, is set forth as follows:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Royal Energy Resources, Inc.
(formerly World Marketing, Inc.)
(a development stage company)
We have audited the accompanying balance sheet of Royal Energy Resources, Inc (formerly World Marketing, Inc.) (a development stage company) as of August 31, 2010 and 2009 and the related statements of operations and cash flows for the years ended August 31, 2010 and 2009 and the period from inception (July 22, 2005) through August 31, 2010 and the statement of stockholders’ equity for the period from inception (July 22, 2005) through August 31, 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Royal Energy Resources, Inc.., (formerly World Marketing, Inc.) (a development stage company) as of August 31, 2010 and 2009, and the results of its operations and its cash flows for the years ended August 31, 2010 and 2009 and the period from inception (July 22, 2005) through August 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
The financial statements referred to above have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company is in the development stage, and has no established source of revenue and is dependent on its ability to raise capital from shareholders or other sources to sustain operations. These factors along with other matters as set forth in Note 1, raise substantial doubt that the Company will be able to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Paritz & Company, P.A.
Hackensack, New Jersey
December 7, 2010
ROYAL ENERGY RESOURCES, INC.
(A Development Stage Company)
Balance Sheets
August 31, 2010 and 2009
See accompanying notes to financial statements.
ROYAL ENERGY RESOURCES, INC.
(A Development Stage Company)
Statements of Operations
Years Ended August 31, 2010 and 2009 and
from inception (July 22, 2005) through August 31, 2010
See accompanying notes to financial statements.
ROYAL ENERGY RESOURCES, INC.
(A Development Stage Company)
Statements of Stockholders' Equity
Inception of Development Stage, July 22, 2005, through August 31, 2010
(Continued)
See accompanying notes to financial statements.
ROYAL ENERGY RESOURCES, INC.
(A Development Stage Company)
Statements of Stockholders' Equity, continued
Inception of Development Stage, July 22, 2005, through August 31, 2010
See accompanying notes to financial statements.
ROYAL ENERGY RESOURCES, INC.
(A Development Stage Company)
Statements of Stockholders' Equity
Inception of Development Stage, July 22, 2005, through August 31, 2010
(Continued)
See accompanying notes to financial statements.
ROYAL ENERGY RESOURCES, INC.
(A Development Stage Company)
Statements of Stockholders' Equity, continued
Inception of Development Stage, July 22, 2005, through August 31, 2010
See accompanying notes to financial statements.
ROYAL ENERGY RESOURCES, INC.
(A Development Stage Company)
Statements of Cash Flows
Years Ended August 31, 2010 and 2009, and
the period from inception (July 22, 2005) through August 31, 2010
(Continued)
See accompanying notes to financial statements.
ROYAL ENERGY RESOURCES, INC.
(A Development Stage Company)
Statements of Cash Flows, Continued
Years Ended August 31, 2010 and 2009, and
the period from inception (July 22, 2005) through August 31, 2010
See accompanying notes to financial statements.
ROYAL ENERGY RESOURCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
These financial statements include the accounts of Royal Energy Resources, Inc. (“RER”) (formerly known as World Marketing, Inc. ("WMI"). RER is a development stage enterprise within the meaning of Financial Accounting Standards Board Topic 915.
RER was organized in 1999 and attempted to start a web-based marketing business for health-care products. The health-care products business had no revenue and was discontinued in 2001 and the Company remained inactive until July 22, 2005 when it commenced its real estate business. Accordingly, the current development stage has a commencement date of July 22, 2005 and all prior losses of $28,995 have been transferred to accumulated deficit.
In preparing the accompanying financial statements, the Company has reviewed, as determined necessary by the Company's management, events that have occurred after August 31, 2009, up until the issuance of the financial statements, which occurred on November 27, 2009.
Organization and nature of business
RER is a Delaware corporation which was incorporated on March 22, 1999, under the name Webmarketing, Inc. ("Webmarketing"). On July 7, 2004, the Company revived its charter and changed its name from Webmarketing to World Marketing, Inc. In December 2007 the Company changed its name to Royal Energy Resources, Inc.
Commencing at the end of August 2006, the Company began acquiring oil and gas and uranium leases and has since resold some of its leases and retained an overriding royalty interest. During 2008 the Company prepaid the estimated drilling and completion costs for interests in three oil & gas drilling prospects in Washington County, Oklahoma. Two of the wells were completed in September and October 2008 and the third well was abandoned after testing in 2010. During 2009, the Company advanced another $42,000, net, to apply toward workover of three additional wells. All workover attempts were abandoned in 2010. Effective October 1, 2010, the Company sold its interest in its remaining proved reserves.
On July 22, 2005, the Company began selling its common stock to obtain the funds necessary to begin implementation of its new business plan. The primary objective of the new business plan was to acquire, make necessary renovations and resell both residential and commercial real estate. The Company expected to acquire real estate using cash, mortgage financing or its common stock, or any combination thereof, and anticipated that the majority of the properties acquired would be in the New York City area. The real estate would be sold directly by the Company to the extent deemed practical. If necessary, broker services will be used to expedite a given sale. The Company rescinded the purchase of the real estate property it had during the quarter ended May 31, 2008 and currently is limiting any potential real estate acquisitions to Eastern European countries, due to the current real estate environment in the United States.
Webmarketing attempted to establish a web-based marketing business for health care products from its inception in 1999 until 2001. However, the Company did not establish any revenues and discontinued these operations in 2001.
Going Concern
The Company has not established sources of revenues sufficient to fund the development of business, projected operating expenses and commitments for fiscal year 2011. The Company, has accumulated a net loss of $2,905,850 through August 31, 2010, ($28,995 in an earlier development stage business and $2,876,855 in the current development stage) and incurred losses of $501,055 for the year then ended.
RER was organized in 1999 and attempted to start a web-based marketing business for health-care products. The health-care products business had no revenue and was discontinued in 2001 and the Company remained inactive until July 22, 2005 when it commenced its real estate business. Accordingly, the current development stage has a commencement date of July 22, 2005 and all prior losses of $28,995 have been transferred to accumulated deficit.
In March 2006, the Company sold 650,000 shares of its common stock for $65,000 to provide a portion of the cash required to purchase its first real estate investment. Subsequently, the Company continued to sell its common stock to raise capital to continue operations. In the previous fiscal year, the Company revised its business plan, rescinded its real estate purchase and began investing in energy leases and oil and gas drilling prospects. However, the energy business has a high degree of risk and there can be no assurance that the Company will be able to obtain sufficient funding to develop the Company's current business plan.
Cash and cash equivalents
The Company considers all cash on hand, cash in banks and all highly liquid debt instruments purchased with a maturity of three months or less to be cash and cash equivalents.
Revenue recognition
Revenue from the sale of oil and gas leases is recognized in accordance with the full cost method of accounting.
Oil and gas production income will be recognized when the product is delivered to the purchaser. We will receive payment from one to three months after delivery. At the end of each month, we will estimate the amount of production delivered to purchasers and the price we will receive. Variances between our estimated revenue and actual payment are recorded in the month the payment is received; however, differences should be insignificant.
Revenue from real estate sales is recognized when the related property is subject to a binding contract and all significant obligations have been satisfied.
Stock option plans
The compensation cost relating to share-based payment transactions (including the cost of all employee stock options) is required to be recognized in the financial statements. That cost will be measured based on the estimated fair value of the equity or liability instruments issued. The accounting literature covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models may not necessarily provide a reliable single measure of the fair value of its options. However, the Black-Scholes option valuation model provides the best available estimate for this purpose.
During fiscal 2008, the Company granted options to acquire 1,000,000 shares of its common stock that were fair valued under the Black Scholes model in the amount of $328,975. This amount was amortized over the twelve month option period.
Property and equipment
The Company follows the full cost method of accounting for oil and natural gas operations. Under this method all productive and nonproductive costs incurred in connection with the acquisition, exploration and development of oil and natural gas reserves are capitalized. No gains or losses are recognized upon the sale or other disposition of oil and natural gas properties except in transactions that would significantly alter the relationship between capitalized costs and proved reserves. The costs of unevaluated oil and natural gas properties are excluded from the amortizable base until the time that either proven reserves are found or it has determined that such properties are impaired. The Company had $6,350 and $15,152 in capitalized costs relating to unevaluated properties and leases at August 31, 2010 and 2009, respectively. As properties are evaluated, the related costs would be transferred to proven oil and natural gas properties using full cost accounting. All capitalized costs for proved properties were included in the amortization base as of August 31, 2010 and 2009. However, since production had not commenced until after August 31, 2008, no amortization was recorded in 2008.
Under the full cost method the net book value of oil and natural gas properties, less related deferred income taxes, may not exceed the estimated after-tax future net revenues from proved oil and natural gas properties, discounted at 10% (the “Ceiling Limitation”). In arriving at estimated future net revenues, estimated lease operating expenses, development costs, and certain production-related taxes are deducted. In calculating future net revenues, prices and costs in effect at the time of the calculation are held constant indefinitely, except for changes that are fixed and determinable by existing contracts. The net book value is compared to the ceiling limitation on a quarterly and yearly basis. The excess, if any, of the net book value above the ceiling limitation is charged to expense in the period in which it occurs and is not subsequently reinstated. Reserve estimates used in determining estimated future net revenues have been prepared by the Company with the assistance of the operator of the properties. In 2010 and 2009, the Company recognized an impairment due to the ceiling test limitations of $38,224 and $36,930, respectively.
The Company assesses the recoverability of the carrying value of its non-oil and gas long-lived assets when events occur that indicate an impairment in value may exist. An impairment loss is indicated if the sum of the expected undiscounted future net cash flows is less than the carrying amount of the assets. If this occurs, an impairment loss is recognized for the amount by which the carrying amount of the assets exceeds the estimated fair value of the asset. No impairments of other assets were recorded in 2010 or 2009.
Depreciation and amortization
All capitalized costs of oil and natural gas properties and equipment, including the estimated future costs to develop proved reserves, are amortized using the unit-of-production method based on total proved reserves. Depreciation of other equipment is computed on the straight line method over the estimated useful lives of the assets, which range from three to twenty-five years.
Natural gas sales and gas imbalances
The Company follows the entitlement method of accounting for natural gas sales, recognizing as revenues only its net interest share of all production sold. Any amount attributable to the sale of production in excess of or less than the Company’s net interest is recorded as a gas balancing asset or liability. At August 31, 2010 and 2009, there were no natural gas imbalances.
Investments in real estate
Costs associated with the acquisition, development and construction of real estate properties are capitalized when incurred. The carrying value of the properties will be reviewed, at least annually, for impairment. In the event the property is leased, depreciation will be recorded based upon a thirty-year life. The Company rescinded the purchase of the real estate property it had during the quarter ended May 31, 2008.
Oil and natural gas reserve estimates
In 2009, the Company prepared its oil and natural gas reserves with the assistance of the operator of the properties. Proved reserves, estimated future net revenues and the present value of our reserves are estimated based upon a combination of historical data and estimates of future activity. Consistent with SEC requirements, we have based our present value of proved reserves on spot prices on the date of the estimate. The reserve estimates are used in calculating depletion, depreciation and amortization and in the assessment of the Company’s Ceiling Limitation. Significant assumptions are required in the valuation of proved oil and natural gas reserves which, as described herein, may affect the amount at which oil and natural gas properties are recorded. Actual results could differ materially from these estimates. The Company had no proved reserves at August 31, 2010.
Income taxes
Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes. Deferred taxes are provided on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, and tax carry forwards. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Earnings (loss) per common share
The Company is required to report both basic earnings per share, which is based on the weighted-average number of common shares outstanding, and diluted earnings per share, which is based on the weighted-average number of common shares outstanding plus all potential dilutive shares outstanding. At August 31, 2010 and 2009, there were no potentially dilutive common stock equivalents. Accordingly, basic and diluted earnings (loss) per share are the same for each of the periods presented.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Credit risk
In 2010 and 2009, the Company had cash deposits in certain banks that at times may have exceeded the maximum insured by the Federal Deposit Insurance Corporation. The Company monitors the financial condition of the banks and has experienced no losses on these accounts.
Contingencies
Certain conditions may exist as of the date financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. Company management and its legal counsel assess such contingencies related to legal proceeding that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probably that a liability has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or if probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable would be disclosed.
Asset retirement obligations
The fair value of a liability for an asset retirement obligation is required to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, and that the associated retirement costs be capitalized as part of the carrying amount of the long-lived asset. The Company determines its asset retirement obligation by calculating the present value of the estimated cash flows related to the liability. Periodic accretion of the discount of the estimated liability would be recorded in the statement of operations. At August 31, 2010 and 2009, the Company has estimated that its share of the salvage value of lease equipment would exceed its share of the cost of plugging and abandoning its producing properties.
Fair value determination
Financial instruments consist of cash, marketable securities, promissory notes receivable, accounts payable, accrued expenses and short-term borrowings. The carrying amount of these financial instruments approximates fair value due to their short-term nature or the current rates at which the Company could borrow funds with similar remaining maturities.
Recent accounting pronouncements
Below is a listing of the most recent accounting standards and their effect on the Company.
In January 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-06 (ASU 2010-06), Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This amendment to Topic 820 has improved disclosures about fair value measurements on the basis of input received from the users of financial statements. This is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted. The Company adopted the provisions of ASU 2010-06 on February 28, 2010,and it did not have a material effect on the financial position, results of operations or cash flows of the Company.
In January 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-03 (ASU 2010-03), Extractive Activities-Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosures. This amendment to Topic 932 has improved the reserve estimation and disclosure requirements by (1) updating the reserve estimation requirements for changes in practice and technology that have occurred over the last several decades and (2) expanding the disclosure requirements for equity method investments. This is effective for annual reporting periods ending on or after December 31, 2009. However, an entity that becomes subject to the disclosures because of the change to the definition oil- and gas- producing activities may elect to provide those disclosures in annual periods beginning after December 31, 2009. Early adoption is not permitted. The Company adopted the provisions of ASU 2010-03 on August 31, 2010 which did not have a material effect on the financial position, results of operations or cash flows of the Company.
Fiscal years
The year ended August 31, 2010 is referred to herein as 2010, the year ended August 31, 2009 is referred to herein as 2009 and the year ended August 31, 2008 is referred to herein as 2008.
INVESTMENTS IN REAL ESTATE
On August 25, 2005, the Company acquired its first real estate property, a condominium, in exchange for $25,000 in cash and 1,900,000 shares of its common stock which was valued at $190,000.
The real estate was appraised at $240,000 shortly after the purchase.
In March 2008, the Company entered into a rescission agreement to return the real estate that it previously held to the individual who originally contributed the property in exchange for 1,900,000 shares of the Company’s common stock. The original value of the real estate was $215,000 and upon the rescission was valued at $200,000. The Company has recorded a loss of $15,000 on this transaction during the period.
INVESTMENT IN ENERGY PROPERTIES
UNDEVELOPED LEASEHOLD NOT BEING AMORTIZED
The Company has been the successful bidder in United States Government auctions to purchase certain oil and gas lease rights. The oil and gas leases currently comprise approximately 3,400 and 6,000 acres in Weston, Goshen, Niobrara, Converse, Campbell, Freemont, Laramie, Sublette and Platt Counties, Wyoming as of August 31, 2010 and 2009, respectively. In addition, the Company holds the lease for uranium rights on approximately 1,000 and 3,500 acres in Wyoming as of August 31, 2010 and 2009, respectively.
The Company is negotiating with energy companies to develop the potential resources that may be contained in these properties. The Company has entered into agreements and then sold, by assignment, the rights, title and interest in certain of these leases and retained an over-riding royalty interest. Revenue from these transactions is recorded in accordance with the requirements for full cost accounting.
OIL AND GAS PRODUCING PROPERTIES
During fiscal 2008, the Company prepaid $119,153 as estimated drilling and completion costs for a 25% working interest in three wells in Washington County, Oklahoma. Two of the wells were completed in September and October 2008 and the third well was abandoned in 2010. During 2009, the Company advanced an additional $42,000, net, to apply toward workover of three additional wells. All workover attempts were unsuccessful and the properties were abandoned in 2010. All proven reserves were sold effective October 1, 2010 and the net proceeds was included in accounts receivable at August 31, 2010. The cost in excess of proceeds of $19,308 was included in asset impairment at August 31, 2010.
Oil and gas property costs are as follows at August 31, 2010 and 2009:
The oil and gas wells were not completed until the beginning of 2009. Prepaid drilling costs includes $28,583 and $50,343 in prepaid costs at August 31, 2010 and 2009, respectively.
CONVERTIBLE NOTES PAYABLE
The Company has a loan with an individual in the original amount of $140,000, with interest payable monthly at 15% and which was extended to January 1, 2010 and revised to be convertible into common stock at a conversion price to be reasonably agreed upon by the parties. The loan is currently past due and has a balance of $80,000 at August 31, 2010. The loan was paid in full in September 2010 with 21,000,000 shares of the Company's common stock.
On April 13, 2010, the Company issued a convertible debenture in the amount of $6,000. The debenture bears interest at the rate of $10% per annum, is due on September 13, 2010, is convertible into the Company's common stock at a conversion rate of 65% of the lowest closing bid price of the common stock during the immediately preceding 30 trading days and there is no pre-payment penalty. Accordingly, at issuance, $2,100 of the proceeds was assigned to the conversion feature. The discount was amortized over the five-month term of the note.
The debenture was repaid in September 2010.
INCOME TAXES
RER has not recorded a deferred tax benefit or expense for all prior periods through August 31, 2010, as all net deferred benefits have a full valuation allowance.
Actual income tax expense applicable to earnings before discontinued operations and income taxes is reconciled with the “normally expected” Federal income tax for the year ended August 31, 2010 and 2009 as follows:
RER has available unused net operating loss carryforwards of approximately $2,907,000 which will expire in various periods from 2019 to 2029, some of which may be limited as to the amount available on an annual basis.
The Company’s income tax provision was computed based on the federal statutory rate and the average state rates, net of the related federal benefit. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
STOCKHOLDERS’ EQUITY
Common stock
In November 2007, the Company amended its charter to authorize issuance of up to 100,000,000 shares of common stock with a par value of $.00001. The amendment became effective on December 12, 2007, upon filing with the Delaware secretary of state. At August 31, 2010 and 2009, 39,713,731 and 22,388,731 shares were issued and outstanding, respectively.
Series A preferred stock
In November 2007, the Company amended its charter to authorize issuance of up to 10,000,000 shares of its $0.00001 preferred stock. The amendment became effective on December 12, 2007, upon filing with the Delaware secretary of state. In December 2007 the Company issued 100,000 shares of its Series A preferred stock to its President and Chief Executive Officer for $1,000. The certificate of designation of the Series A preferred stock provides: the holders of Series A preferred stock shall be entitled to receive dividends when, as and if declared by the board of directors of the Company; participates with common stock upon liquidation; convertible into one share of common stock; and has voting rights such that the Series A preferred stock shall have an aggregate voting right for 54% of the total shares entitled to vote.
Stock option plan
The Royal Energy Resources, Inc. 2008 Stock Option Plan (“Plan”) was filed on June 27, 2008 and reserves 4,000,000 shares for Awards under the Plan, of which up to 3,000,000 may be designated as Incentive Stock Options. The Company’s Compensation Committee is designated to administer the Plan at the direction of the Board of Directors. No options are outstanding under the Plan at August 31, 2010.
Consulting and financial services agreements
During 2010 and 2009, the Company entered into various consulting and financial services agreements as well as a new loan agreement. The following table summarizes the agreements.
STOCK SUBSCRIPTION RECEIVABLE
The officers and directors of the Company have acquired common stock from the Company pursuant to note agreements, summarized as follows.
RELATED PARTY TRANSACTIONS
The President and Chief Executive Officer of the Company made loans and advances to the Company since its inception. During fiscal 2005, the total amount of $6,560 was contributed to the capital of the Company.
In December 2007 the Company issued 100,000 shares of its Series A preferred stock to its President and Chief Executive Officer for $1,000. The certificate of designation of the Series A preferred stock provides: the holders of Series A preferred stock shall be entitled to receive dividends when, as and if declared by the board of directors of the Company; participates with common stock upon liquidation; convertible into one share of common stock; and has voting rights such that the Series A preferred stock shall have an aggregate voting right for 54% of the total shares entitled to vote.
The President and Chief Executive Officer of the Company was paid approximately $20,000 and $31,000 for office and travel expense reimbursements during the years ended August 31, 2010 and 2009, respectively.
See Note 7 above regarding stock subscription receivables.
9 SUBSEQUENT EVENTS
During September 2010, the Company repaid its convertible note payable in the amount of $6,000 plus accrued interest.
During September 2010, the Company issued 21,000,000 shares of its common stock in complete satisfaction of its convertible note payable in the amount of $80,000.
Effective October 1, 2010, the Company sold its proven oil reserves after determining the operating costs were too high to generate any positive cash flow.
On November 30, 2010, the President and Chief Executive Officer of the Company acquired 12,000,000 shares of the Company's common stock in exchange for $120 in cash and a note for $59,880 with interest at 2%. The note is due November 29, 2015.
SUPPLEMENTARY OIL AND GAS RESERVE INFORMATION (UNAUDITED)
The Company has interest in proved oil and natural gas properties that are all located in Washington County, Oklahoma at August 31, 2010 and 2009. The Company sold its interest in the proved properties effective October 1, 2010, impaired the property cost in an amount equal to the loss on the properties and reclassified the remainder to accounts receivable.
The Company prepared its own year-end estimates of future net recoverable oil and natural gas reserves as of August 31, 2009. Effective August 31, 2010, the Company had no proved reserves as a result of the sale discussed above. Estimated proved net recoverable reserves as shown below include only those quantities that can be expected to be commercially recoverable at prices and costs in effect at the balance sheet dates existing under existing regulatory practices and with conventional equipment and operating methods.
Proved developed reserves represent only those reserves expected to be recovered through existing wells. Proved undeveloped reserves include those reserves expected to be recovered from new wells on un-drilled acreage or from existing wells on which a relatively major expenditure is required for re-completion. The Company has not calculated any proved undeveloped reserves.
Capitalized costs relating to oil and natural gas producing activities and related accumulated depreciation and amortization at August 31, 2010 and 2009 are included in Note 3.
Costs incurred in oil and natural gas producing activities for the year ended August 31, 2010 and 2009, are summarized as follows:
Net quantities of proved and proved developed reserves of oil and natural gas are summarized as follows (as a result of low gas prices, no value was assigned to gas reserves):
The following is a summary of a standardized measure of discounted net cash flows related to the Company’s proved oil and natural gas reserves. For these calculations, estimated future cash flows from estimated future production of proved reserves were computed using oil and natural gas spot prices as of the end of the period presented. Future development and production costs attributable to the proved reserves were estimated assuming that existing conditions would continue over the economic lives of the individual leases and costs were not escalated for the future. Estimated future income tax expenses were calculated by applying future statutory tax rates (based on the current tax law adjusted for permanent differences and tax credits) to the estimated future pretax net cash flows related to proved oil and natural gas reserves, less the tax basis of the properties involved.
The Company cautions against using this data to determine the fair value of its oil and natural gas properties. To obtain the best estimate of the fair value of the oil and natural gas properties, forecasts of future economic conditions, varying discount rates, and consideration of other than proved reserves would have to be incorporated into the calculation. In addition, there are significant uncertainties inherent in estimating quantities of proved reserves and in projection rates of production that impair the usefulness of the data.
The standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves at August 31, 2010 and 2009 is summarized as follows (none at August 31, 2010).
The following are the principal sources of changes in the standardized measure of discounted future net cash flows of the Company for the years ended August 31, 2010 and 2009.
Prices used in computing these calculations of future production of proved reserves were $58.55 per barrel (BBL) of oil and $1.98 per thousand cubic feet (MCF) of natural gas at August 31, 2009.
ITEM 9:
ITEM 9:
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9AT: CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that are filed under the Exchange Act is accumulated and communicated to management, including the principal executive officer, as appropriate to allow timely decisions regarding required disclosure. Under the supervision of and with the participation of management, including the principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of August 31, 2010, and, based on its evaluation, our principal executive officer and our principal financial officer have concluded that these controls and procedures are not effective due primarily to a lack of segregation of duties.
(b) Changes in Internal Controls
There were no changes in our internal control over financial reporting during the quarter ended August 31, 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(c) Management’s Annual Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the SEC, internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting is supported by written policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations which may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of August 31, 2010. In making this assessment, management used the framework set forth in the report entitled “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of August 31, 2010, due primarily to a lack of segregation of duties.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permits us to provide only management’s report in this annual report.
ITEM 9B:
ITEM 9B: OTHER INFORMATION
Pursuant to General Instruction B of Form 8-K, any reports previously or in the future submitted under Item 2.02 (Results of Operations and Financial Condition) are not deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 and the Company is not subject to the liabilities of that section, unless the Company specifically states that the information is to be considered “filed” under the Exchange Act or incorporates it by reference into a filing under the Securities Act or Exchange Act. If a report on Form 8-K contains disclosures under Item 2.02, whether or not the report contains disclosures regarding other items, all exhibits to such report relating to Item 2.02 will be deemed furnished, and not filed, unless the registrant specifies, under Item 9.01 (Financial Statements and Exhibits), which exhibits, or portions of exhibits, are intended to be deemed filed rather than furnished pursuant to this instruction. The Company is not incorporating, and will not incorporate, by reference these reports into a filing under the Securities Act of 1933, as amended, or the Exchange Act of 1934, as amended.
During September 2010, the Company issued 21,000,000 shares of its common stock in complete satisfaction of its convertible note payable in the amount of $80,000.
Effective October 1, 2010, the Company sold its proven oil reserves after determining the operating costs were too high to generate any positive cash flow.
PART III
ITEM 10:
ITEM 10:
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers and Directors
The following section sets forth the names, ages and current positions with the Company held by the Directors, Executive Officers and Significant Employees; together with the year such positions were assumed. Frimet Taub is the daughter of Jacob Roth. We are not aware of any arrangement or understanding between any Director or Executive Officer and any other person pursuant to which he was elected to his current position. Each Executive Officer will serve until he or she resigns or is removed or otherwise disqualified to serve, or until his or her successor is elected and qualified.
Each Director will serve until he or she resigns or is removed or otherwise disqualified to serve or until his or her successor is elected. The Company currently has two Directors. The Board of Directors does not expect to appoint additional Directors until a potential acquisition is identified.
DATE FIRST
NAME
AGE
POSITION
ELECTED/APPOINTED
Jacob Roth
President,
March 22, 1999
Chief Executive Officer,
Chief Financial Officer
and Director
Frimet Taub
Secretary, Treasurer
March 22, 1999
and Director
JACOB ROTH was named President, Chief Executive Officer, Chief Financial Officer and Director of RER on March 22, 1999. Previously, Mr. Roth was Chief Executive Officer of Virilitec Industries, Inc., a public company engaged in attempting to distribute a line of bioengineered virility nutritional supplements, from July 1, 2002, until December 1, 2003. Additionally, Mr. Roth was the President of JR Consulting, a public company engaged in consulting for other corporations, from 1982 until 1995. When not otherwise employed, Mr. Roth is a financial consultant to corporations.
FRIMET TAUB was named Secretary, Treasurer and Director of the Company on March 22, 1999. Mrs. Taub was a teacher at UTA in Brooklyn, New York from 1999 through 2002 and is not currently employed outside her home.
Audit Committee
The Board of Directors of the Company serves as the audit committee.
Compliance with Section 16(a) Of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s executive officers, directors and persons who own more than ten percent of the Company’s common stock to file initial reports of ownership and changes in ownership with the SEC. Additionally, SEC regulations require that the Company identify any individuals for whom one of the referenced reports was not filed on a timely basis during the most recent fiscal year or prior fiscal years. To the Company’s knowledge, based solely on a review of reports furnished to it, all required reports have been filed when due.
Code of Ethics
The Company has not yet adopted a code of ethics to apply to its principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
Jacob Roth currently serves as President, Chief Executive Officer and Chief Financial Officer of the Company and Frimet Taub serves as Secretary and Treasurer of the Company. There are no other individuals involved in the management or administration of the Company. Neither Mr. Roth nor Mrs. Taub previously received any form of compensation, either direct or indirect, and no compensation is being accrued on the books of the Company.
In 2009, Mr. Roth acquired 950,000 shares of the Company's common stock for $47,500 ($0.05 per share) at a time when the closing price for the stock was $0.17 per share. The difference of $114,000 is included in non-cash compensation in the statement of operations.
In 2009, Mrs. Taub acquired 600,000 shares of the Company's common stock for $30,000 (0.05 per share) at a time when the closing price for the stock was $0.17 per share. The difference of $72,000 is included in non-cash compensation in the statement of operations.
ITEM 12:
ITEM 12:
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
(a)
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below lists the beneficial ownership of the Company’s voting securities by each person known to be the beneficial owner of more than 5% of such securities. As of December 14, 2010, there were 72,713,731 shares of the Company’s common stock issued and outstanding. To the best of our knowledge, the persons named have sole voting and investment power with respect to such shares, except as otherwise noted. There are not any pending or anticipated arrangements that may cause a change in control.
The information presented below regarding beneficial ownership of our voting securities has been presented in accordance with the rules of the Securities and Exchange Commission and is not necessarily indicative of ownership for any other purpose. Under these rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares the power to vote or direct the voting of the security or the power to dispose or direct the disposition of the security. A person is deemed to own beneficially any security as to which such person has the right to acquire sole or shared voting or investment power within 60 days through the conversion or exercise of any convertible security, warrant, option or other right. More than one person may be deemed to be a beneficial owner of the same securities. The percentage of beneficial ownership by any person as of a particular date is calculated by dividing the number of shares beneficially owned by such person, which includes the number of shares as to which such person has the right to acquire voting or investment power within 60 days, by the sum of the number of shares outstanding as of such date plus the number of shares as to which such person has the right to acquire voting or investment power within 60 days. Consequently, the denominator used for calculating such percentage may be different for each beneficial owner. We believe that the beneficial owners of our common stock listed below have sole voting and investment power with respect to the shares shown. There are currently no outstanding convertible securities, warrants, options or other rights.
**
The address for each of the named is in care of the Company at 543 Bedford Ave., #176, Brooklyn, New York 11211.
(b)
SECURITY OWNERSHIP OF MANAGEMENT
The following information lists, as to each class, equity securities beneficially owned by all officers and directors, and of the directors and officers of the issuer, as a group as of December 14, 2010.
**
The address for each of the named is in care of the Company at 543 Bedford Ave., #176, Brooklyn, New York 11211.
#
Convertible into one common share and has voting rights such that the Series A preferred stock shall have an aggregate voting right for 54% of the total shares entitled to vote.
Equity Compensation Plan Information
The Royal Energy Resources, Inc. 2008 Stock Option Plan (“Plan”) was filed on June 27, 2008 and reserves 4,000,000 shares for Awards under the Plan, of which up to 3,000,000 may be designated as Incentive Stock Options. The Company’s Compensation Committee is designated to administer the Plan at the direction of the Board of Directors.
ITEM 13:
ITEM 13:
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Jacob Roth is our only promoter. He has never received anything of value, tangible or intangible, directly or indirectly, from us, other than reimbursements of expenses incurred in the ordinary course of business.
Mr. Roth acquired 4,900,000 shares of our common stock for a total consideration of $490 ($.0001 per share) in March 1999. In August 2007, Mr. Roth acquired 4,100,000 shares of our common stock in exchange for $410 in cash and a note receivable in the amount of $81,590. The note bears interest at 5% per annum and payments of principal and interest are due on August 15, 2012. In July 2009, Mr. Roth acquired an additional 950,000 shares in exchange for cash of $105 and a note receivable in the amount of $47,395. This note bears interest at the rate of 2% per annum and is due July 14, 2014. In November 2009, Mr. Roth acquired 1,000,000 shares for cash of $103 and a note receivable of $59,897. The note bears interest at 2% per annum and is due November 24, 2014. In June 2010, Mr. Roth acquired an additional 6,000,000 shares in exchange for cash of $70 and a note receivable of $104,930. The note bears interest at 2% per annum and is due June 1, 2015. In June 2010, Mr. Roth acquired an additional 7,000,000 shares in exchange for cash of $60 and a note receivable of $119,940. The note bears interest at 2% per annum and is due June 23, 2015. All notes, including accrued interest, have a combined balance of $391,749 and $121,976 at August 31, 2010 and 2009, respectively. Mr. Roth made payments of $21,239 during 2010 in principal and interest payments.
In December 2007 the Company issued 100,000 shares of its Series A preferred stock to its President and Chief Executive Officer for $1,000. The certificate of designation of the Series A preferred stock provides: the holders of Series A preferred stock shall be entitled to receive dividends when, as and if declared by the board of directors of the Company; participates with common stock upon liquidation; convertible into one share of common stock; and has voting rights such that the Series A preferred stock shall have an aggregate voting right for 54% of the total shares entitled to vote.
Mrs. Taub is the daughter of Mr. Roth. Mrs. Taub acquired 250,000 shares of our common stock for a total consideration of $25 ($.0001 per share) in March 1999. In July 2009, Mrs. Taub acquired 600,000 shares of common stock in exchange for cash of $63 and a note receivable in the amount of $29,937. The note bears interest at 2% and is due July 28, 2014. The balance at August 31, 2010 and 2009, including accrued interest, is $30,591 and $29,993, respectively.
The President and Chief Executive Officer of the Company was paid approximately $20,000 and $31,000 for office and travel expense reimbursements during the years ended August 31, 2010 and 2009, respectively.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees - The aggregate fees billed as of October 31, 2010 and 2009 for professional services rendered by the Company’s accountant was approximately $15,885 for the audit of the Company’s annual financial statements and the quarterly reviews for the fiscal years ended August 31, 2010 and 2009.
Audit-Related Fees - None.
Tax Fees - None.
All Other Fees - Other than the services described above, no other fees were billed for services rendered by the principal accountant.
Audit Committee Policies and Procedures - Not applicable.
If greater than 50 percent, disclose the percentage of hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees - Not applicable.
PART IV
ITEM 15:
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
The following documents are filed as part of this report:
1.
Financial Statements - The following consolidated financial statements of Royal Energy Resources, Inc. are contained in Item 8 of this Form 10-K:
·
Report of Independent Registered Public Accountant
·
Balance Sheets at August 31, 2010 and 2009
·
Consolidated Statements of Operations - For the years ended August 31, 2010 and 2009 and from inception (July 22, 2005) through August 31,
·
Statements of Stockholders’ Equity - From inception (July 22, 2005) through August 31, 2010
·
Statements of Cash Flows - For the years ended August 31, 2010 and 2009 and from inception (July 22, 2005) through August 31,
·
Notes to the Financial Statements
2.
Financial Statement Schedules were omitted, as they are not required or are not applicable, or the required information is included in the Financial Statements.
3.
Exhibits - The following exhibits are filed with this report or are incorporated herein by reference to a prior filing, in accordance with Rule 12b-32 under the Securities Exchange Act of 1934.
Exhibit
Description
3.1
Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Form SB-2 Registration Statement dated May 19, 2006)
3.2
Amended and Restated By laws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Form SB-2 Registration Statement dated May 19, 2006)
10.1
Real estate purchase agreement from Mermelstein dated August 25, 2005 (incorporated by reference to Exhibit 10.1 to the Company's Form SB-2 A/4 Registration Statement dated May 19, 2006)
10.2
Amendment to agreement to purchase real estate dated February 28, 2006 (incorporated by reference to Exhibit 10.2 to the Company's Form SB-2 A/4 Registration Statement dated May 19, 2006)
10.3
Form of Non-Qualified Stock Option Agreement used by the Company in connection with the Company's 2008 Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Company's Form S-8 filed July 14, 2008)
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934
31.2
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
December 13, 2010
/s/ Jacob Roth
Jacob Roth, Director, President,
CEO and CFO
December 13, 2010
/s/ Frimet Taub
Frimet Taub, Director