UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number: 000-50906
AMERICAN EAGLE ENERGY CORPORATION
(Exact name of registrant as specified in
its charter)
Nevada
|
|
20-0237026
|
(State or other jurisdiction
of incorporation or organization)
|
|
(I.R.S. Employer Identification
No.)
|
2549 West Main Street, Suite 202, Littleton, Colorado
|
|
80120
|
|
(Address of principal executive offices)
|
|
(Zip Code)
|
|
(303) 798-5235
|
(Registrant’s telephone number, including area code)
|
Indicate by check mark whether the registrant: (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes
x
No
¨
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
(Check one):
Large accelerated filer
¨
|
Accelerated filer
¨
|
|
|
Non-accelerated filer
¨
|
Smaller reporting company
x
|
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes
¨
No
x
Indicate the number of shares outstanding of each of the issuer’s
classes of common equity, as of the latest practicable date:
45,842,778 shares of common stock issued and outstanding at
May 15, 2012.
INDEX
A Note About Forward Looking Statements
|
1
|
|
|
PART I - FINANCIAL INFORMATION
|
|
|
|
Item 1 – Condensed Consolidated Financial Statements (Unaudited)
|
2
|
|
|
Condensed Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011
|
F-2
|
|
|
Condensed Consolidated Statements of Comprehensive Income for the Three-Month Periods Ended March 31, 2012 and 2011 (Unaudited)
|
F-3
|
|
|
Condensed Consolidated Statements of Stockholders’ Equity for the Three-Month Period Ended March 31, 2012) and the Year Ended
December 31, 2011 (Unaudited)
|
F-5
|
|
|
Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2012 and 2011 (Unaudited)
|
F-6
|
|
|
Notes to the Condensed Consolidated Financial Statements (Unaudited)
|
F-7
|
|
|
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
3
|
|
|
Item 4 - Controls and Procedures
|
14
|
|
|
PART II - OTHER INFORMATION
|
|
|
|
Item 6 – Exhibits
|
15
|
|
|
Signatures
|
19
|
A Note About Forward Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management’s
current expectations. These statements may be identified by their use of words like “plans,” “expect,”
“aim,” “believe,” “projects,” “anticipate,” “intend,” “estimate,”
“will,” “should,” “could” and other expressions that indicate future events and trends. All
statements that address expectations or projections about the future, including statements about our business strategy, expenditures,
and financial results, are forward-looking statements. We believe that the expectations reflected in such forward-looking
statements are accurate. However, we cannot assure you that such expectations will occur.
Actual results could differ materially from those in the forward-looking
statements due to a number of uncertainties including, but not limited to, those discussed in Management’s Discussion and
Analysis of Financial Condition and Results of Operations. Factors that could cause future results to differ from these
expectations include general economic conditions; further changes in our business direction or strategy; competitive factors; market
uncertainties; and an inability to attract, develop, or retain consulting or managerial agents or independent contractors. As
a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions
from and among reasonable alternatives requires the exercise of judgment. To the extent that the assumed events do not
occur, the outcome may vary substantially from anticipated or projected results, and accordingly, no opinion is expressed on the
achievability of those forward-looking statements. No assurance can be given that any of the assumptions relating to
the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such
forward-looking statements. You should not unduly rely on these forward-looking statements, which speak only as of the
date of this Quarterly Report. Except as required by law, we are not obligated to release publicly any revisions to
these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence
of unanticipated events.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
American Eagle Energy Corporation
Condensed
Consolidated Financial Statements
As of March 31, 2012, December
31, 2011 and
For the Three-Month Periods
Ended March 31, 2012 and 2011
American Eagle Energy Corporation
Index
to the Condensed Consolidated Financial Statements
As of March 31, 2012, December
31, 2011 and
For the Three-Month Periods
Ended March 31, 2012 and March 31, 2011
Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011(Unaudited)
|
F-2
|
|
|
Condensed Consolidated Statements of Income and Comprehensive Income for the Three-Month Periods Ended March 31, 2012 and 2011 (Unaudited)
|
F-3
|
|
|
Condensed Consolidated Statements of Stockholders’ Equity for the Three-Month Period Ended March 31, 2012) and the Year Ended December 31, 2011 (Unaudited)
|
F-5
|
|
|
Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2012 and 2011 (Unaudited)
|
F-6
|
|
|
Notes to the Consolidated Financial Statements (Unaudited)
|
F-7
|
American Eagle Energy Corporation
Condensed
Consolidated Balance Sheets
As of March 31, 2012 and December
31, 2011
|
|
March 31,
|
|
|
December 31
|
|
|
|
2012
|
|
|
2011
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
7,125,082
|
|
|
$
|
12,151,309
|
|
Trade receivables
|
|
|
3,925,224
|
|
|
|
3,105,079
|
|
Receivables from related parties
|
|
|
274,645
|
|
|
|
314,521
|
|
Prepaid expenses
|
|
|
89,197
|
|
|
|
45,690
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
11,414,148
|
|
|
|
15,616,599
|
|
|
|
|
|
|
|
|
|
|
Equipment and leasehold improvements, net of accumulated depreciation and amortization of $163,066 and $156,744, respectively
|
|
|
112,171
|
|
|
|
19,823
|
|
Oil and gas properties, under the full cost method – subject to amortization, net of accumulated depletion of $473,714 and $183,238, respectively
|
|
|
23,698,157
|
|
|
|
15,798,307
|
|
Oil and gas properties, under the full cost method – not subject to amortization
|
|
|
7,663,223
|
|
|
|
7,295,215
|
|
Marketable securities
|
|
|
1,086,882
|
|
|
|
1,107,721
|
|
Marketable securities of related party
|
|
|
250,228
|
|
|
|
146,713
|
|
Restricted cash
|
|
|
51,500
|
|
|
|
51,500
|
|
Deposits
|
|
|
5,345
|
|
|
|
5,345
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
44,281,654
|
|
|
$
|
40,041,223
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
11,529,320
|
|
|
$
|
6,002,204
|
|
Amounts due to working interest partners
|
|
|
2,233,267
|
|
|
|
2,233,267
|
|
Accrued income taxes
|
|
|
375,137
|
|
|
|
1,460,137
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
14,137,724
|
|
|
|
9,695,608
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligation
|
|
|
35,500
|
|
|
|
34,628
|
|
Deferred taxes
|
|
|
4,272,643
|
|
|
|
4,552,864
|
|
Total liabilities
|
|
|
18,445,867
|
|
|
|
14,283,100
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value, 194,444,444 shares authorized, 45,842,782 and 45,588,948 shares outstanding
|
|
|
45,843
|
|
|
|
45,589
|
|
Additional paid-in capital
|
|
|
26,258,359
|
|
|
|
25,948,311
|
|
Accumulated other comprehensive income
|
|
|
306,144
|
|
|
|
180,447
|
|
Accumulated deficit
|
|
|
(774,559
|
)
|
|
|
(416,224
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
25,835,787
|
|
|
|
25,758,123
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
44,281,654
|
|
|
$
|
40,041,223
|
|
The accompanying notes are an integral part
of the condensed consolidated financial statements.
American Eagle Energy Corporation
Condensed
Consolidated Statements of Income and Comprehensive Income
For the Three-Month Periods
Ended March 31, 2012 and 2011
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Oil and gas sales
|
|
$
|
1,225,579
|
|
|
$
|
39,103
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Oil and gas operating expenses
|
|
|
406,556
|
|
|
|
48,532
|
|
General and administrative expenses
|
|
|
1,178,692
|
|
|
|
555,982
|
|
Depreciation, depletion and amortization
|
|
|
296,797
|
|
|
|
15,559
|
|
Total operating expenses
|
|
|
1,882,045
|
|
|
|
620,073
|
|
|
|
|
|
|
|
|
|
|
Total operating loss
|
|
|
(656,466
|
)
|
|
|
(580,970
|
)
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3,403
|
|
|
|
1,368
|
|
Dividend income
|
|
|
17,281
|
|
|
|
15,056
|
|
Interest expense
|
|
|
(182
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loss before taxes
|
|
|
(635,964
|
)
|
|
|
(564,546
|
)
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit
|
|
|
277,629
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(358,335
|
)
|
|
$
|
(564,546
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
45,639,327
|
|
|
|
9,112,405
|
|
American Eagle Energy Corporation
Condensed
Consolidated Statements of Income and Comprehensive Income
For the Three-Month Periods
Ended March 31, 2012 and 2011
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(358,335
|
)
|
|
$
|
(564,546
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
Unrealized gains on securities, net of tax
|
|
|
125,697
|
|
|
|
74,193
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(232,638
|
)
|
|
$
|
(490,353
|
)
|
The accompanying notes are an integral part
of the condensed consolidated financial statements.
American Eagle Energy Corporation
Consolidated
Statements of Stockholders’ Equity
For the Three-Month Period Ended
March 31, 2012 and the Year Ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
9,112,405
|
|
|
$
|
9,112
|
|
|
$
|
9,231,199
|
|
|
$
|
415,463
|
|
|
$
|
(4,870,125
|
)
|
|
$
|
4,785,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued during acquisition
|
|
|
36,476,543
|
|
|
|
36,477
|
|
|
|
16,686,498
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,722,975
|
|
Stock
based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
30,614
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,614
|
|
Unrealized
loss on securities, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(235,016
|
)
|
|
|
-
|
|
|
|
(235,016
|
)
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,453,901
|
|
|
|
4,453,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
|
45,588,948
|
|
|
|
45,589
|
|
|
|
25,948,311
|
|
|
|
180,447
|
|
|
|
(416,224
|
)
|
|
|
25,758,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
165,677
|
|
|
|
-
|
|
|
|
-
|
|
|
|
165,677
|
|
Shares
issued in private placement
|
|
|
100,000
|
|
|
|
100
|
|
|
|
109,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
110,000
|
|
Shares issued from exercise
of stock options
|
|
|
153,834
|
|
|
|
154
|
|
|
|
34,471
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,625
|
|
Unrealized
gains on securities, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
125,697
|
|
|
|
-
|
|
|
|
125,697
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(358,335
|
)
|
|
|
(358,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2012
|
|
|
45,842,782
|
|
|
$
|
45,843
|
|
|
$
|
26,258,359
|
|
|
$
|
306,144
|
|
|
$
|
(774,559
|
)
|
|
$
|
25,835,787
|
|
The accompanying notes are an integral part
of the condensed consolidated financial statements.
American Eagle Energy Corporation
Condensed
Consolidated Statements of Cash Flows
For the Three-Month Periods
Ended March 31, 2012 and 2011
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(358,335
|
)
|
|
$
|
(564,546
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
165,677
|
|
|
|
-
|
|
Depreciation, depletion and amortization
|
|
|
296,797
|
|
|
|
15,559
|
|
Accretion of discount on asset retirement obligation
|
|
|
872
|
|
|
|
349
|
|
Provision for deferred income taxes
|
|
|
(280,221
|
)
|
|
|
-
|
|
Foreign currency translation losses
|
|
|
43,021
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in prepaid expenses
|
|
|
(43,507
|
)
|
|
|
16,439
|
|
(Increase) decrease in trade receivables
|
|
|
(820,144
|
)
|
|
|
111,896
|
|
Increase in accounts payable
|
|
|
5,527,116
|
|
|
|
568,753
|
|
Decrease in income taxes payable
|
|
|
(1,085,000
|
)
|
|
|
-
|
|
Decrease in receivables from related parties
|
|
|
39,876
|
|
|
|
594,658
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
3,486,152
|
|
|
|
743,108
|
|
|
|
|
|
|
|
|
|
|
Cash flows used for investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to oil and gas properties
|
|
|
(8,558,334
|
)
|
|
|
(851,673
|
)
|
Additions to office equipment and leasehold improvements
|
|
|
(98,670
|
)
|
|
|
(287
|
)
|
Proceeds from sale of office equipment
|
|
|
-
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(8,657,004
|
)
|
|
|
(851,260
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows provided by financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of stock to a director
|
|
|
110,000
|
|
|
|
-
|
|
Proceeds from the exercise of stock options
|
|
|
34,625
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
144,625
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(5,026,227
|
)
|
|
|
(108,152
|
)
|
|
|
|
|
|
|
|
|
|
Cash - beginning of period
|
|
|
12,151,309
|
|
|
|
2,400,362
|
|
|
|
|
|
|
|
|
|
|
Cash - end of period
|
|
$
|
7,125,082
|
|
|
$
|
2,292,210
|
|
The accompanying notes are an integral part
of the condensed consolidated financial statements.
American Eagle Energy Corporation
Notes
to the Condensed Consolidated Financial Statements
As of March 31, 2012, December 31, 2011 and
For the Three-Month
Periods Ended March 31, 2012 and 2011
|
1.
|
Description of Business
|
American Eagle Energy Corporation (the “Company”)
was incorporated in the state of Nevada in March 2003 under the name Golden Hope Resources. In July 2005, the Company changed its
name to Eternal Energy Corp. In December 2011, the Company changed its name to American Eagle Energy Corporation, in connection
with its acquisition of, and merger with, American Eagle Energy Inc. (“AEE Inc.”). See Note 3.
The Company engages in the acquisition, exploration,
development and producing of oil and gas properties. At March 31, 2012, the Company had entered into participation agreements related
to oil and gas exploration projects in the Spyglass Property and West Spyglass Prospect, located in Divide County, North Dakota,
and Sheridan County, Montana and the Hardy Property, located in southeastern Saskatchewan, Canada. In addition, the Company owns
working interests in mineral leases located in Richland, Roosevelt and Toole Counties in Montana.
|
2.
|
Summary of Significant Accounting Policies
|
Basis of Presentation
The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, American Eagle Energy Inc., EERG Energy ULC (Canadian) and
AEE Canada Inc. (Canadian). All material intercompany accounts, transactions and profits have been eliminated.
These consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United States for interim financial information and
with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 8 of SEC Regulation S-X.
The principles for interim financial information do not require the inclusion of all the information and footnotes required by
generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read
in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The consolidated financial
statements included herein are unaudited; however, in the opinion of management, they contain all normal recurring adjustments
necessary for a fair statement of the condensed results for the interim periods. Operating results for the three-month period ended
March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
In December 2011, the Company announced a 1.0-for-4.5
reverse stock split. As a result, all share and per share information included in these consolidated financial statements has been
presented on a post-reverse-split basis.
Certain amounts presented in the prior year financial
statements have been renamed or reclassified in order to conform to the current period presentation. Such reclassifications had
no effect on net loss.
Concentration of Credit Risk
At March 31, 2012, the Company had $6,877,069 on deposit
that exceeded the United States (FDIC) federally insurance limit of $250,000 per bank.
Foreign Currency Adjustments
The functional currency of the Company’s Canadian
subsidiaries is the US Dollar. All transactions are translated using historical exchange rates. Gains and losses resulting from
foreign currency transactions are included in the Company’s results of operations. The Company’s wholly-owned subsidiary,
EERG Energy ULC, which holds title to the Company’s Canadian assets and operates the Hardy Property wells, routinely, conducts
transactions denominated in Canadian Dollars. The Company recognized exchange losses totaling $45,020 and $6,947 for the three-month
periods ended March 31, 2012 and 2011, respectively.
Restricted Cash
At March 31, 2012 and December 31, 2011, the Company
had $51,500 of restricted cash. The restricted cash consists of cash bonds required by the State of North Dakota in order to pursue
future drilling in the state. The cash is held in custody by the issuing bank in the form of certificates of deposit and is restricted
as to withdrawal or use. Interest income earned from the certificates of deposit is paid to the Company upon maturation of the
certificates of deposit. The certificates of deposit have six-month terms. However, it is the Company’s intention to renew
the certificates of deposit upon maturation and to leave the cash bond in place for the foreseeable future. Accordingly, the restricted
cash has been classified as a non-current asset.
Receivables
At March 31, 2012, the Company
has determined that all receivable balances are fully collectible and, accordingly, no allowance for doubtful accounts has been
recorded.
Stock-Based Compensation
The Company measures compensation cost for all stock-based
awards at fair value on the date of grant and recognizes compensation expense in its statements of operations over the service
period that the awards are expected to vest. The Company has elected to recognize compensation cost for all options with graded
vesting on a straight-line basis over the vesting period of the entire option. The Company recognized stock-based compensation
expense of $165,677 and $0 for the three-month periods ended March 31, 2012 and 2011, respectively.
Fair Value of Financial Instruments
Fair value is the price that would be received from
the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. Hierarchy Levels 1,
2 or 3 are terms for the priority of inputs to valuation techniques used to measure fair value. Hierarchy Level 1 inputs are quoted
prices in active markets for identical assets or liabilities. Hierarchy Level 2 inputs are inputs other than quoted prices included
within Level 1 that are directly or indirectly observable for the asset or liability. Hierarchy Level 3 inputs are inputs that
are not observable in the market.
The fair value measurements of the Company’s
financial instruments at March 31, 2012 and December 31, 2011 were as follows:
March 31, 2012
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash & equivalents
|
|
$
|
7,125,082
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,125,082
|
|
Marketable securities
|
|
|
1,086,882
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,086,882
|
|
Marketable securities – related party
|
|
|
-
|
|
|
|
250,228
|
|
|
|
-
|
|
|
|
250,228
|
|
Restricted cash
|
|
|
51,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51,500
|
|
|
|
$
|
8,263,464
|
|
|
$
|
250,228
|
|
|
$
|
-
|
|
|
$
|
8,513,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & equivalents
|
|
$
|
12,151,309
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12,151,309
|
|
Marketable securities
|
|
|
1,107,721
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,107,721
|
|
Marketable securities - related party
|
|
|
-
|
|
|
|
146,713
|
|
|
|
-
|
|
|
|
146,713
|
|
Restricted cash
|
|
|
51,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51,500
|
|
|
|
$
|
13,310,530
|
|
|
$
|
146,713
|
|
|
$
|
-
|
|
|
$
|
13,457,243
|
|
The Company
uses level 2 inputs to determine the fair value of its marketable securities - related party, which consists of common stock and
warrants in an entity which is traded on the Canadian National Stock Exchange. The warrants are valued using the Black Scholes
Option Pricing Model which includes a calculation of historical volatility of the stock.
Basic and Diluted Loss Per Share
Basic loss per common share is computed by dividing
net earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted
earnings per common share is computed in the same way as basic earnings per common share except that the denominator is increased
to include the number of additional common shares that would be outstanding if all potential common shares had been issued that
were dilutive. Diluted loss per common share for the three-month periods ended March 31, 2012 and 2011 is computed in the same
way as basic loss per common share, as the inclusion of additional common shares that would be outstanding if all potential common
shares had been issued would be anti-dilutive. See Note 9 for the calculation of basic and diluted weighted average common shares
outstanding for the three-month periods ended March 31, 2012 and 2011.
|
3.
|
Acquisition of American Eagle Energy Inc.
|
On December 20, 2011, the Company finalized its merger
transaction with AEE Inc. Prior to the transaction, AEE Inc. operated as a publicly traded company with oil and gas holdings in
North Dakota, Texas and southeastern Saskatchewan, Canada and was a working interest partner to the Company with respect to its
Hardy Property and certain proved oil and gas properties and unproven oil and gas prospects located in North Dakota. The Company
acquired AEE Inc. in order to leverage the two companies’ respective oil and gas holdings.
Pursuant to the terms of the Merger Agreement, the
Company issued 36,476,543 shares of its common stock to acquire 100% of the then-outstanding shares of AEE Inc.’s common
stock, which resulted in AEE Inc. becoming a wholly owned subsidiary of the Company. Immediately subsequent to the transaction,
legacy AEE Inc. stockholders owned approximately 80% of the shares of the Company’s outstanding common stock, exclusive of
outstanding options to purchase shares of the Company’s common stock and shares of AEE Inc.’s common stock. The shares
of common stock that were issued in connection with the Company’s acquisition of AEE Inc. were registered with the SEC on
November 11, 2011.
Despite the fact the AEE Inc.’s legacy stockholders
held approximately 80% of the Company’s outstanding shares immediately following the merger, other factors present in the
structure of the transaction resulted in the Company being determined to be the legal and acquiring entity. Accordingly, the Company’s
historical financial statements have been prepared to give effect to the merger and to represent the historical operations of the
Company through the merger date and the consolidated results of operations for the period from the merger date through December
31, 2011. The merger was structured to qualify as a “tax-free” transaction pursuant to Internal Revenue Service regulations.
The following table summarizes the consideration
paid by the Company to acquire AEE Inc. and the net assets acquired:
Consideration given:
|
|
|
|
|
|
|
|
36,476,543 shares of the Company’s common stock
|
|
$
|
16,722,975
|
|
Identifiable assets acquired and liabilities assumed:
|
|
|
|
|
|
|
|
Financial assets acquired
|
|
$
|
6,032,799
|
|
Oil and gas properties acquired (amortizable)
|
|
|
12,781,348
|
|
Oil and gas properties acquired (non-amortizable)
|
|
|
7,290,500
|
|
Financial liabilities assumed
|
|
|
(9,381,672
|
)
|
Net assets acquired
|
|
$
|
16,722,975
|
|
The amounts presented above are
based on estimated fair market values and are subject to change as additional information becomes available. Because the common
stock of both companies is very thinly traded, the Company estimated the fair market value of the shares issued based on an independent
valuation.
The financial assets acquired included
cash and cash equivalents of $5,598,916, trade and other receivables totaling $351,558, prepaid expenses totaling $7,468, marketable
securities of a related party totaling $73,357 and restricted cash totaling $1,500.
The financial liabilities assumed
consisted of trade payables and accrued liabilities totaling $3,300,491, amounts due to the Company totaling $251,081 and long-term
asset retirement obligations totaling $17,314 and current income taxes payable totaling $975,000. In addition, the Company recorded
a deferred tax liability in the amount of $4,837,786, which represents the future tax effects of the fair market value adjustments
applied to the assets of AEE Inc. upon acquisition.
Supplemental Pro Forma
Information (Unaudited)
Had the merger transaction occurred
effective January 1, 2011, the Company’s consolidated financial statements for the three-month period ended March 31, 2011
would have been as follows (unaudited):
|
|
Revenue
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
2011 supplemental pro forma information
|
|
$
|
75,143
|
|
|
$
|
(
961,059
|
)
|
The following assumptions were
used to prepare the supplemental pro forma financial information presented above:
|
·
|
No adjustments were made to reflect economies of scale or other potential cost savings that may have been achieved had the
merger occurred on January 1, 2011.
|
|
·
|
No adjustments were made relative to alternative financing strategies that may have been implemented on a combined entity basis.
|
|
·
|
The estimated fair market value of AEE Inc.’s oil and gas properties, subject to amortization,
is based on the net present value of future cash flows from proven reserves as of December 31, 2011, as calculated by an independent,
third-party engineering firm.
|
|
·
|
The estimated fair market values of AEE Inc.’s oil and gas properties, not subject to amortization,
were determined based on
prevailing
lease prices associated with acreage located in close
proximity to the acquired properties and/or the Company’s recent acreage purchase transactions as of or near to December
20, 2011.
|
Available-for-sale marketable securities at March
31, 2012 and December 31, 2011 consist of the following:
|
|
|
|
|
Gains in
|
|
|
Losses in
|
|
|
|
|
|
|
Accumulated
|
|
|
Accumulated
|
|
|
|
Estimated
|
|
|
Other
|
|
|
Other
|
|
|
|
Fair
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
Value
|
|
|
Income
|
|
|
Income
|
|
March 31, 2012
|
|
|
|
|
|
|
|
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
1,086,882
|
|
|
$
|
211,909
|
|
|
$
|
-
|
|
Common stock and warrants - related party
|
|
|
250,228
|
|
|
|
152,138
|
|
|
|
-
|
|
Total available-for-sale marketable securities
|
|
$
|
1,337,110
|
|
|
$
|
364,047
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
1,107,721
|
|
|
$
|
232,748
|
|
|
$
|
-
|
|
Common stock and warrants - related party
|
|
|
146,713
|
|
|
|
48,623
|
|
|
|
-
|
|
Total available-for-sale marketable securities
|
|
$
|
1,254,434
|
|
|
$
|
281,371
|
|
|
$
|
-
|
|
The fair value of substantially all securities is
determined by quoted market prices. The estimated fair value of securities for which there are no quoted market prices is based
on similar types of securities that are traded in the market. Warrants to purchase common stock are valued using the Black-Scholes
Option Pricing Model, with the following assumptions;
Risk-free interest rate
|
|
|
0.21
|
%
|
Expected volatility of common stock
|
|
|
223
|
%
|
Dividend yield
|
|
$
|
0.00
|
|
Expected life of warrants
|
|
|
0.5 years
|
|
There were no sales of marketable securities for the
years ended December 31, 2011 or 2010.
|
5.
|
Equipment and Leasehold Improvements
|
The following is a summary of equipment and improvements,
at cost, as of March 31, 2012 and December 31, 2011:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2012
|
|
Office equipment
|
|
$
|
129,700
|
|
|
$
|
129,057
|
|
Computer equipment
|
|
|
98,027
|
|
|
|
|
|
Leasehold improvements
|
|
|
47,510
|
|
|
|
47,510
|
|
|
|
|
|
|
|
|
|
|
Total equipment and improvements
|
|
|
275,237
|
|
|
|
176,567
|
|
Less: accumulated depreciation and amortization
|
|
|
(163,066
|
)
|
|
|
(156,744
|
)
|
Equipment and improvements, net
|
|
$
|
112,171
|
|
|
$
|
19,823
|
|
Depreciation and amortization expense for the three-month
periods ended March 31, 2012 and 2011 was $6,322 and $2,526, respectively.
|
6.
|
Oil and Gas Properties
|
As of March 31, 2012 and December 31, 2011, net costs
included in the Company’s full-cost pool cost centers are as follows:
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
|
Amortizable
|
|
|
Non-Amortizable
|
|
|
Amortizable
|
|
|
Non-Amortizable
|
|
United States
|
|
$
|
12,100,424
|
|
|
$
|
7,663,223
|
|
|
$
|
6,816,654
|
|
|
$
|
7,295,215
|
|
Canada
|
|
|
11,597,733
|
|
|
|
-
|
|
|
|
8,981,653
|
|
|
|
-
|
|
Total
|
|
$
|
23,698,157
|
|
|
$
|
7,663,223
|
|
|
$
|
15,798,307
|
|
|
$
|
7,295,215
|
|
Hardy Property
As of March 31, 2012, the Company owns a 50% working
interest in approximately 4,300 net acres held by 6 leases, each of which is scheduled to expire on April 1, 2014.
The net capitalized cost of the Hardy Property as
of March 31, 2012 and December 31, 2011 is summarized below:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Acquisition costs
|
|
$
|
7,012,338
|
|
|
$
|
7,012,338
|
|
Development costs
|
|
|
4,958,852
|
|
|
|
2,152,553
|
|
|
|
|
11,971,190
|
|
|
|
9,164,891
|
|
Cumulative depletion
|
|
|
(373,457
|
)
|
|
|
(183,238
|
)
|
Net capitalized cost
|
|
$
|
11,597,733
|
|
|
$
|
8,981,653
|
|
The Company recognized depletion expense totaling
$190,218 and $13,033 for the three-month periods ended March 31, 2012 and 2011, respectively, relative to the Hardy Property.
Spyglass Property
As of March 31, 2012, the Company owns a consolidated
50% working interest in approximately 11,521 net acres within the Spyglass Property, which is held by approximately 438 leases,
with expiration dates ranging from August 2012 to February 2017.
Benrude Property
As of March 31, 2012, the Company owns a 100% working
interest in approximately 743 net acres located in Roosevelt County, Montana. The acreage is held by 32 leases, with expiration
dates ranging from December 2012 to July 2015. The Company is planning to conduct a 3-D seismic study of the Benrude Property during
2012, the results of which will be used to determine the Company’s strategy for pursuing the proved reserves assigned to
the Benrude Property.
Exploratory
Prospects
As of March 31, 2012, the Company has entered into
participation agreements in a number of exploratory oil and gas prospects, all which are located within the continental United
States. Unproven exploratory prospects are excluded from the amortizable cost pools. Each prospect’s costs are transferred
into the amortization base on an ongoing basis as the prospect is evaluated and proved reserves are established or impairment is
determined. The Company paid certain amounts upon execution of the agreements and is obligated to share in the drilling costs of
certain exploratory wells being drilled in the prospects. The capitalized costs of the exploratory prospects are not subject to
amortization because, to date, no proved reserves have been assigned to the individual prospects. The nature of the capitalized
costs of the unproven prospects is as follows:
|
|
YTD
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
Through
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs
|
|
$
|
368,008
|
|
|
$
|
9,442,209
|
|
|
$
|
2,362,741
|
|
|
$
|
12,172,958
|
|
Exploration costs
|
|
|
-
|
|
|
|
520,967
|
|
|
|
206,203
|
|
|
|
727,170
|
|
Reclassifications to the amortizable pool
|
|
|
-
|
|
|
|
(758,723
|
)
|
|
|
-
|
|
|
|
(758,723
|
)
|
Impairments and sales
|
|
|
-
|
|
|
|
(2,499,605
|
)
|
|
|
(1,978,577
|
)
|
|
|
(4,478,182
|
)
|
Total capitalized costs of
exploratory prospects
|
|
$
|
368,008
|
|
|
$
|
6,704,848
|
|
|
$
|
590,367
|
|
|
$
|
7,663,223
|
|
Glacier Prospect
As of March 31, 2012, the Company owns an undivided
33% working interest in approximately 25,000 net acres located in Toole County, Montana. The acreage is held by approximately 400
leases, with expiration dates ranging from May 2012 to June 2015.
Because no proved reserves have yet been identified,
the Glacier Prospect has been assigned to the full-cost pool that is not subject to amortization. Management is currently in the
process of developing its exploration strategy relative to the Glacier Prospect. The Company is evaluating the results of nearby
wells drilled by other companies in order to make a determination on the future of the Glacier Prospect. The Glacier Prospect is
evaluated for impairment during each reporting period. There were no impairments evident as of March 31, 2012.
Sidney North Prospect
As of March 31, 2012, the Company owns a 100% working
interest in oil and gas leases on approximately 399 net acres located in Richland County, Montana (the “Sidney North Prospect”).
The acreage is held by approximately 14 leases, with expiration dates ranging from July 2013 to October 2015. The Company’s
management is currently evaluating this prospect. No formal determination of the ultimate viability of this prospect is expected
during the next twelve months. Management has reviewed the carrying value of this property and determined that no impairment exists
as of March 31, 2012.
West Spyglass Prospect
As of March 31, 2012, the Company owns a 25% working
interest in approximately 10,593 net acres located within the West Spyglass Prospect. The net acres are held by 283 leases, with
expiration dates ranging from April 2012 to February 2017. The Company’s management is currently evaluating this prospect.
No formal determination of the ultimate viability of this prospect is expected during the next twelve months. Management has reviewed
the carrying value of this property and determined that no impairment exists as of March 31, 2012.
Exploratory Prospect Cost Summary
The following table summarizes the costs of the Company’s
aggregate exploratory activities for all unproven prospects for the three-month period ended March 31, 2012 and the year ended
December 31, 2011:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Balance at the beginning of the period
|
|
$
|
7,295,215
|
|
|
$
|
590,368
|
|
Additions to exploratory costs
|
|
|
368,008
|
|
|
|
11,407,645
|
|
Disposals
|
|
|
-
|
|
|
|
(2,499,605
|
)
|
Reassignments to the amortizable pool
|
|
|
-
|
|
|
|
(2,203,193
|
)
|
Balance at the end of the period
|
|
$
|
7,663,223
|
|
|
$
|
7,295,215
|
|
|
7.
|
Asset Retirement Obligations
|
The Company has recorded estimated asset retirement
obligations for the future plugging and abandonment of wells within the Hardy Property. As of March 31, 2012 and December 31, 2011,
the consolidated discounted value of the Hardy Property asset retirement obligations was $35,500 and $34,628, respectively.
The Company recognized accretion expense of $872 and
$349 for the three-month periods ended March 31, 2012 and 2011 associated with the Hardy Property asset retirement obligations.
The projected plugging dates for the Hardy 7-9 and Hardy 4-16 wells are December 2020 and June 2036, respectively.
|
8.
|
Commitments and Contingencies
|
Drilling Obligations
The Company has the option to participate in the drilling
of future exploratory wells related to its working interest in the Spyglass Property, should any such wells be proposed by the
other working interest owners. As of March 31, 2012, the Company has elected to participate in 28 wells located within the Spyglass
Property. As such, the Company is currently obligated to fund its non-operating working interest portion of the drilling and future
operations costs of these wells. The Company’s working interests in the Spyglass wells range from 0.03% to 35.49%. Additional
wells could be proposed in the future, at which time the Company may or may not elect to participate in such additional wells.
The Company intends to drill and operate a series
of horizontal and/or vertical wells to be located within the Spyglass Property and has contracted for the use of a drilling rig
for the foreseeable future. The Company is obligated to pay all costs related to the use of the drilling rig in connection with
the drilling of four wells, one of which is currently being completed, one that is currently being drilled and two wells that are
waiting to be drilled.
Employment Agreement
In January 2012, the Company amended its three-year
employment agreements with its President and Chief Operating Officer and entered into new, two-year employment agreements with
its Chief Financial Officer. In addition to employment benefits commensurate with their positions, the President, Chief Operating
Officer and Chief Financial Officer will receive annual compensation totaling $204,000, $204,000 and $150,000, respectively. The
employment agreements contain certain buy-out provisions should the Company experience a change of control prior to the expiration
of their respective terms.
Lease Obligation
The Company currently leases office space pursuant
to the terms of a three-year lease agreement. The original lease agreement was scheduled to expire on December 31, 2011. In September
2011, the Company amended the original lease agreement and extended the term of the lease through December 31, 2014. Future lease
payments related to the Company’s office and equipment leases as of March 31, 2012 are as follows:
|
|
Amount
|
|
2012 (remainder)
|
|
$
|
45,700
|
|
2013
|
|
|
64,140
|
|
2014
|
|
|
67,347
|
|
2015
|
|
|
-
|
|
2016
|
|
|
-
|
|
Total
|
|
$
|
177,187
|
|
Rent expense for the three-month
periods ended March 31, 2012 and 2011 totaled $24,838 and $19,418, respectively.
Because the Company recognized net losses for three-month
periods ended March 31, 2012 and 2011, diluted loss per common share for the periods is computed in the same way as basic loss
per common share, as the inclusion of additional common shares that would be outstanding if all potential common shares had been
issued would be anti-dilutive. The following is a reconciliation of the number of shares used in the calculation of basic and diluted
loss per share for the three-month periods ended March 31, 2012 and 2011:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
(358,335
|
)
|
|
$
|
(564,546
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
45,639,327
|
|
|
|
9,112,405
|
|
Incremental shares from the assumed exercise of dilutive stock options
|
|
|
-
|
|
|
|
-
|
|
Diluted common shares outstanding
|
|
|
45,639,327
|
|
|
|
9,112,405
|
|
|
|
|
|
|
|
|
|
|
Earnings per share – basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.06
|
)
|
Reverse Stock Split
In December
2011, the Company declared a 1.0-for-4.5 reverse stock split. All historical share and per share information presented below has
been restated and presented on a post-reverse-split basis.
Stock Issuances
In January
2011, the Company issued 100,000 shares of its common stock to one of its directors in exchange for cash consideration totaling
$110,000.
In March
2011, the Company issued 153,834 shares of its common stock to one of its directors in connection with the exercise of stock options.
Cash consideration received upon the exercise of the stock options totaled $36,425.
Stock Options
In January 2012, the Company granted 175,000 options
to purchase shares of its common stock to certain employees. The stock options were valued using the Black-Scholes option pricing
model and had a fair market value of $1,325,414 at the time of grant. The assumptions used in the Black-Scholes option pricing
model for the stock options granted in January 2012 were as follows:
Risk-free interest rate
|
|
|
0.28
|
%
|
Expected volatility of common stock
|
|
|
101
|
%
|
Dividend yield
|
|
$
|
0.00
|
|
Expected life of options
|
|
|
5 years
|
|
Weighted average fair market value of options granted
|
|
$
|
0.79
|
|
A summary of stock option activity for the three-month
period ended March 31, 2012 and the year ended December 31, 2011 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Exercise
|
|
|
Contract
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
820,444
|
|
|
$
|
0.23
|
|
|
|
3.8 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
975,000
|
|
|
|
1.18
|
|
|
|
5.0 years
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2011
|
|
|
1,795,444
|
|
|
$
|
0.74
|
|
|
|
4.0 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
175,000
|
|
|
|
1.18
|
|
|
|
5.0 years
|
|
Options exercised
|
|
|
(153,834
|
)
|
|
|
0.05
|
|
|
|
3.8 years
|
|
Options expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2012
|
|
|
1,816,610
|
|
|
$
|
0.74
|
|
|
|
3.7 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2012
|
|
|
666,610
|
|
|
$
|
0.23
|
|
|
|
2.5 years
|
|
Options outstanding
as of March 31, 2012 and December 31, 2011 that have an exercise price that is lower than the prevailing market price were deemed
to have an intrinsic value of $0.73 and $1.08 per share, resulting in an aggregate intrinsic value of $486,625 and $886,080, respectively.
The Company
recognized stock-based compensation expense of $165,677 and $0 for the three-month periods ended March 31, 2012 and 2011, respectively,
related to stock options that were granted during December 2011 and January 2012.
Shares Reserved for Future Issuance
As of March 31, 2012 and December 31, 2011, the Company
had reserved 1,816,610 and 1,795,444 shares, respectively, for future issuance upon exercise of outstanding options.
|
11.
|
Related Party Transactions
|
Passport Energy Ltd. is a working interest partner
with the Company in the Hardy 4-16 and Hardy 14-17 wells. As of March 31, 2012, the Company had received a drilling advance from
Passport in the amount of $766,035 and had billed Passport $314,521 related to its working interest in the Hardy Property.
The Company routinely obtains legal services from
a firm for whom one of its directors serves as a principal. Fees paid to this firm totaled $5,206 and $1,365 for the three-month
periods ended March 31, 2012 and 2011, respectively.
Prior to its acquisition by the Company, AEE Inc.
entered into an agreement with Synergy Energy Resources LLC (“Synergy”) for it to provide monthly geological consulting
services to AEE Inc. One of the Company’s current directors and one current officer own material ownership interests in Synergy.
The Company purchased $42,000 and $0 of consulting fees from Synergy during the three-month period ended December 31, 2012 and
2011, respectively
In April 2012, we entered into a Carry Agreement
with a third-party working interest partner, pursuant to which (i) that partner agreed to fund 100% of our working interest share
of the drilling and completion costs of up to six new oil and gas wells within our Spyglass Property and (ii) we will convey, for
a limited duration, 50% of our working interest in the pre-payout revenues of each carried well to that partner. If payout has
not occurred within two years of the commencement date for such well, then the temporary assignment is to increase to 100% for
years three through payout. Once payout has occurred (112% of the costs on a well-by-well basis), our respective working interests
in the revenues from each carried well will revert to our original working interests in each such well. The Carry Agreement relieves
us of approximately $12 million in what our working interest share of the drilling and completion costs of such six wells would
have been. We expect that it will significantly strengthen our working capital position and allow us to pursue our short-term drilling
program vigorously.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING PRESENTATION OF OUR MANAGEMENT'S DISCUSSION AND
ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS
REPORT.
A Note About Forward-Looking Statements
This Quarterly Report on Form 10-Q contains
“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are based
on current management’s expectations. These statements may be identified by their use of words like “plans,”
“expect,” “aim,” “believe,” “projects,” “anticipate,” “intend,”
“estimate,” “will,” “should,” “could,” and other expressions that indicate future
events and trends. All statements that address expectations or projections about the future, including statements about our business
strategy, expenditures, and financial results are forward-looking statements. We believe that the expectations reflected in such
forward-looking statements are accurate. However, we cannot assure you that such expectations will occur.
Actual results could differ materially from
those in the forward-looking statements due to a number of uncertainties, including, but not limited to, those discussed in this
section. Factors that could cause future results to differ from these expectations include general economic conditions, further
changes in our business direction or strategy, competitive factors, oil and gas exploration uncertainties, and an inability to
attract, develop, or retain technical, consulting, or managerial agents or independent contractors. As a result, the identification
and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable
alternatives requires the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially
from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking
statements. No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following
information are accurate, and we assume no obligation to update any such forward-looking statements. You should not unduly rely
on these forward-looking statements, which speak only as of the date of this Quarterly Report, except as required by law; we are
not obligated to release publicly any revisions to these forward-looking statements to reflect events or circumstances occurring
after the date of this Quarterly Report or to reflect the occurrence of unanticipated events.
Industry Outlook
The petroleum industry is highly competitive
and subject to significant volatility due to numerous market forces. Crude oil and natural gas prices are affected by market fundamentals
such as weather, inventory levels, competing fuel prices, overall demand, and the availability of supply.
Worldwide oil prices reached historical
highs during the last half of 2008, before tumbling amid worldwide economic crisis. Oil prices stabilized during 2009 and remained
stable throughout 2010. Since December 31, 2010, oil prices increased rapidly, topping $100 per barrel in mid-March 2011 and again
in March 2012.
Oil prices cannot be predicted with any
certainty and have significantly affected profitability and returns for upstream producers. Historically, crude oil prices have
averaged approximately $84 per barrel over the past five years, per the New York Mercantile Exchange (“NYMEX”). However,
during that time, oil prices have experienced wide fluctuations in prices, ranging from $37 per barrel to $145 per barrel, with
the median price of $82 per barrel. Oil prices averaged approximately $103 and $94 during the three-month periods ended March 31,
2012 and 2011, respectively.
While local supply/demand fundamentals are
a decisive factor affecting domestic natural gas prices over the long term, day-to-day prices may be more volatile in the futures
markets, such as on the NYMEX and other exchanges, making it difficult to forecast prices with any degree of confidence.
Company Overview
The address of our principal executive office
is 2549 W. Main Street, Suite 202, Littleton, Colorado, 80120. Our telephone number is 303-798-5235.
Our common stock is quoted on the OTC Bulletin
Board and the OTC Markets Group Inc.’s OTCQB under the symbol “AMZG.”
Our Company was incorporated in the State
of Nevada under the name “Golden Hope Resources Corp.” on July 25, 2003 and is engaged in the acquisition, exploration,
and development of natural resource properties of merit. On November 7, 2005, we filed documents with the Nevada Secretary of State
to change our name to “Eternal Energy Corp.” by way of a merger with our wholly-owned subsidiary, Eternal Energy Corp.,
which was formed solely to facilitate the name change. In December 2011, we again filed documents with the Nevada Secretary of
state to change our name to “American Eagle Energy Corporation” in conjunction with our acquisition of, and merger
with, American Eagle Energy Inc. (“AEE Inc.”).
Since our inception, we have entered into
participation agreements related to oil and gas exploration projects throughout the continental United States, including Colorado,
Montana, Nevada, North Dakota, Texas, and Utah, as well as in the province of Saskatchewan, Canada, and areas located in the North
Sea. As of March 31, 2012, we are actively engaged in exploration activities within the Spyglass Property, located in Divide County,
North Dakota, within the Benrude Property, located in Roosevelt County, Montana and within the Hardy Property, located in southeastern
Saskatchewan, Canada. In addition, we own undeveloped acreage interests in the Glacier Prospect, located in Toole County, Montana,
the Sidney North Prospect, located in Richland County, Montana and the West Spyglass Prospect, located in an area adjacent to our
Spyglass Property in Divide County, North Dakota and Sheridan County, Montana.
Our current operations consist of nine full-time
employees and one paid consultant, who provides land management services on a contract basis.
Oil & Gas Wells
As of March 31, 2012, the Company has elected to participate
in the drilling of 28 wells within the Spyglass Property. The Company’s consolidated working interests in these wells ranges
from 0.03% to 35.49%. The Spyglass Property is evaluated for impairment annually. There were no impairments evident as of March
31, 2012.
A summary of the Company’s working
interest in the Spyglass wells and the status of each well as of March 31, 2012 is as follows:
Well
Name
|
|
Operator
|
|
Working
Interest
|
|
|
Actual
or
Anticipated
Spud Date
|
|
Current
Status
|
|
Aarestad 4-34H-160N-97W
|
|
North Plains Energy,
LLC
|
|
0.63
|
%
|
|
November 1, 2010
|
|
Producing
|
|
Adams 2-18H
|
|
SM Energy Company
|
|
18.52
|
%
|
|
April 20, 2012
|
|
Waiting to spud
|
|
Bagley 4-30H-163N-100W
|
|
SM Energy Company
|
|
3.87
|
%
|
|
April 3, 2011
|
|
Producing
|
|
Blazer 2-11-163N-98W
|
|
Samson Resources Company
|
|
0.94
|
%
|
|
February 12, 2011
|
|
Producing
|
|
Christianson 15-12
|
|
American Eagle Energy
Corporation
|
|
35.49
|
%
|
|
January 11, 2012
|
|
Completing
|
|
Cody 16-11
|
|
American Eagle Energy
Corporation
|
|
31.20
|
%
|
|
March 22, 2012
|
|
Drilling
|
|
Coplan
|
|
American Eagle Energy
Corporation
|
|
12.86
|
%
|
|
April 25, 2012
|
|
Waiting to spud
|
|
Denali 13-21-163N-98W
|
|
Samson Resources Company
|
|
0.03
|
%
|
|
December 23, 2010
|
|
Producing
|
|
Gerhardsen 1-10H-160N-97W
|
|
Continental Resources,
Inc.
|
|
2.37
|
%
|
|
January 12, 2011
|
|
Producing
|
|
Gulbranson 2-11H-
|
|
SM Energy Company
|
|
11.34
|
%
|
|
May 25, 2012
|
|
Waiting to spud
|
|
Well Name
|
|
Operator
|
|
Working
Interest
|
|
|
Actual or
Anticipated
Spud Date
|
|
Current
Status
|
|
Jurasin 32-29
|
|
Crescent Point Energy Corp.
|
|
0.61
|
%
|
|
October 15, 2011
|
|
Shut-in
|
|
Lancaster 2-1-162N-101W
|
|
Crescent Point Energy Corp.
|
|
6.23
|
%
|
|
July 1, 2011
|
|
Completing
|
|
Legaard 4-25H-163N-101W
|
|
SM Energy Company
|
|
3.69
|
%
|
|
July 19, 2011
|
|
Producing
|
|
Montclair 1-12
|
|
Samson Resources Company
|
|
1.60
|
%
|
|
November 7, 2011
|
|
Producing
|
|
Mustang 7-6-163N-98W
|
|
Samson Resources Company
|
|
0.32
|
%
|
|
April 25, 2011
|
|
Producing
|
|
Nielsen 1-12H-160N-97W
|
|
Continental Resources, Inc.
|
|
0.46
|
%
|
|
December 21, 2010
|
|
Producing
|
|
Nomad 6-7-163N-99W
|
|
Samson Resources Company
|
|
14.47
|
%
|
|
October 26, 2011
|
|
Producing
|
|
Olson 15-22
|
|
Baytex Energy USA
|
|
0.78
|
%
|
|
August 11, 2011
|
|
Producing
|
|
Reistad 1-1-162N-102W
|
|
Murex Petroleum Corporation
|
|
8.62
|
%
|
|
February 28, 2011
|
|
Waiting on completion
|
|
Ridgeway 25-36-163N-101W
|
|
Crescent Point Energy Corp.
|
|
1.88
|
%
|
|
August 15, 2011
|
|
Shut-in
|
|
Riede 4-14H-163N-100W
|
|
SM Energy Company
|
|
0.34
|
%
|
|
January 30, 2011
|
|
Producing
|
|
Thomte 8-5-163N-99W
|
|
Samson Resources Company
|
|
3.18
|
%
|
|
August 22, 2011
|
|
Producing
|
|
Titan 36-25
|
|
Samson Resources Company
|
|
0.81
|
%
|
|
October 8, 2011
|
|
Producing
|
|
Well Name
|
|
Operator
|
|
Working
Interest
|
|
|
Actual or
Anticipated
Spud Date
|
|
Current
Status
|
|
Torgeson 1-15H-163N-100W
|
|
SM Energy Company
|
|
4.38
|
%
|
|
March 6, 2011
|
|
Producing
|
|
Wolter 1-28H-163N-100W
|
|
SM Energy Company
|
|
1.30
|
%
|
|
November 27, 2010
|
|
Producing
|
|
Wolter 13-9H-163N-100W
|
|
SM Energy Company
|
|
5.92
|
%
|
|
June 26, 2011
|
|
Producing
|
|
Wolter 15-8
|
|
SM Energy Company
|
|
1.54
|
%
|
|
November 20, 2011
|
|
Producing
|
|
Yukon 12-1-163N-98W
|
|
Samson Resources Company
|
|
1.25
|
%
|
|
February 28, 2011
|
|
Producing
|
|
Well Summary
The following tables
summarize the Company’s wells and drilling activity for the three-month period ended March 31, 2012 and the year ended December
31, 2011:
|
|
Three-Months Ended
|
|
|
Year Ended
|
|
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
U.S.
|
|
|
|
Canada
|
|
|
|
U.S.
|
|
|
|
Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross exploratory wells:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Purchased / acquired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Drilled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Abandoned
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
End of period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross development wells:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
21.00
|
|
|
|
2.00
|
|
|
|
-
|
|
|
|
1.00
|
|
Purchased / acquired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Drilled
|
|
|
-
|
|
|
|
-
|
|
|
|
21.00
|
|
|
|
1.00
|
|
Abandoned
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
End of period
|
|
|
21.00
|
|
|
|
2.00
|
|
|
|
21.00
|
|
|
|
2.00
|
|
|
|
Three-Months Ended
|
|
|
Year Ended
|
|
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
|
U.S.
|
|
|
Canada
|
|
|
U.S.
|
|
|
Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net exploratory wells:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Purchased / acquired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Drilled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Abandoned
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
End of period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net development wells:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
0.50
|
|
|
|
1.75
|
|
|
|
-
|
|
|
|
1.00
|
|
Purchased / acquired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Drilled
|
|
|
-
|
|
|
|
-
|
|
|
|
0.50
|
|
|
|
0.75
|
|
Abandoned
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
End of period
|
|
|
0.50
|
|
|
|
1.75
|
|
|
|
0.50
|
|
|
|
1.75
|
|
The Company did not drill any dry exploratory or developmental
wells during the three-month period ended March 31, 2012 or the year ended December 31, 2011.
Acquisition of AEE Inc.
In December 2011, we finalized our merger
with AEE Inc., at which time we formed a wholly-owned subsidiary into which AEE Inc. was merged. On December 20, 2011, the trading
of the common stock of the combined company commenced.
Results of Operations for the Three-Month Period Ended March
31, 2012 vs. 2011
The consolidated results of operations for
the three-month period ended March 31, 2012 include the results of operations of both American Eagle Energy Corporation and AEE
Inc. and their respective subsidiaries. For financial reporting purposes, the consolidated results of operations for AEE Inc. for
the period January 1, 2011 through December 20, 2011, the date of our merger, are excluded from our reportable 2011 results of
operations due to accounting rules applicable to business combinations. However, for analysis purposes only, the following discussion
includes references, where appropriate, to pro forma amounts, which represent the combined results of operations for the three-month
period ended March 31, 2011.
We recognized a net loss of $358,335 for
the three-month period ended March 31, 2012, compared to a net loss of $564,546 for the three-month period ended March 31, 2011.
Our basic and diluted loss per share for the three-month period ended March 31, 2012 was ($0.01), compared to ($0.06) for the three-month
period ended March 31, 2011. The 2011 earnings per share figures have been adjusted to reflect the effects of the 1.0-to-4.5 reverse
stock split that occurred in December 2011. A discussion of the key components of our statements of operations and material fluctuations
for the three-month periods ended March 31, 2012 and 2011 is provided below.
Revenues associated with the sale of oil
and gas totaled $1,225,579 for the three-month period ended March 31, 2012, compared to $39,103 for the three-month period ended
March 31, 2011. Oil sales consist of our working interests in sales from our Hardy wells (Canadian), which we operate, as well
as sales from various US wells in which we own non-operating, working interests. A comparison of the 2012 and 2011 oil sales is
as follows:
|
·
|
Sales from our Hardy 4-16 well totaled $534,078 for the three-month
period ended March 31, 2012. The Hardy 4-16 well was drilled and cased in May 2011 and put on production in September 2011. Accordingly,
we did not recognize any oil sales from the Hardy 4-16 well during the three-month period ended March 31, 2011.
|
|
·
|
Sales from our Hardy 7-9 well totaled $89,788 and $39,103 for the
three-month periods ended March 31, 2012 and 2011, respectively. Due to various mechanical issues, the Hardy 7-9 well produced
on and off during 2011. In January 2011, the well encountered mechanical problems and was taken off of production due to a parted
rod string. The well was repaired and returned to production in March 2011. The well went off of production in mid-April due to
mechanical issues. The well bore was repaired in May 2011; but, the well remained shut-in through June 30, 2011 due to inclement
weather conditions and widespread flooding in the area. The Hardy 7-9 was returned to production in July 2011 and produced oil
during five of the last six months of 2011 and the first three months of 2012.
|
|
·
|
Beginning in April 2011, we began recognizing revenues from our various
working interests in a number of non-operated wells located within the Spyglass Property. Revenues related to Spyglass non-operated
wells totaled $601,713 for the three-month period ended March 31, 2012. No such revenue was recognized during the three-month period
ended March 31, 2011. The majority of our 2012 Spyglass oil sales is attributable to the Wolter 13-9 ($251,866), the Legaard 4-25
($154,594), the Torgeson 1-15 ($102,459), the Bagley 4-30 ($44,190) and the Gerhardsen 1-10 ($29,271). The Wolter 13-9, Legaard
4-25, Torgeson 1-15 and Bagley 4-30 wells are operated by SM Energy Company. The Gerhadsen 1-10 well is operated by Continental
Resources, Inc.
|
|
·
|
On a pro forma basis, oil and gas sales for the three-month period
ended March 31, 2011 would have totaled $75,143.
|
Oil and gas operating expenses totaled $406,556
for the three-month period ended March 31, 2012 compared to $48,532 for the same period in 2011. Oil sales consist of our working
interests in sales from our Hardy wells (Canadian), which we operate, as well as sales from various US wells in which we own non-operating,
working interests. A comparison of the 2012 and 2011 oil and gas operating expense is as follows:
|
·
|
Lease operating expenses associated with our Hardy 4-16 well totaled
$149,086 for the three-month period ended March 31, 2012. Because the well had not yet been completed at the time, we did not recognize any lease operating expenses for the Hardy 4-16 for the three-month period ended March 31, 2011.
|
|
·
|
Lease operating expenses associated with our Hardy 7-9 well totaled
$151,852 and $48,532 for the three-month periods ended March 31, 2012 and 2011, respectively. The Hardy 7-9 well operated sporadically
throughout 2011 due to various mechanical issues (which resulted in the increased level of expenditures) and weather related conditions.
|
|
·
|
Lease operating expenses associated with our non-operating working
interests in the various Spyglass wells totaled $105,618 and $0 for the three-month periods ended March 31, 2012 and 2011, respectively.
None of the Spyglass wells produced during the three-month period ended March 31, 2011.
|
|
·
|
On a pro forma basis, oil and gas operating expenses would have totaled
$95,167 for the three-month period ended March 31, 2011.
|
General and administrative expenses totaled
$1,178,692 for the three-month period ended March 31, 2012, compared to $555,982 for the three-month period ended March 31, 2011.
While the merger with AEE Inc. has led to increases in our general and administrative costs, such increases are primarily limited
to payroll and employee benefit related expenses, as well as increased professional fees, such as legal, accounting and consulting
fees. A discussion of the key components of our general and administrative expenses for the three-month periods ended March 31,
2012 and 2011 is as follows:
|
·
|
Salaries and related payroll expenses totaled $317,591 for the three-month
period ended March 31, 2012, compared to $46,193 for the same period in 2011. We employed 9 full-time employees during the first
quarter of 2012, compared to two full-time employees during the first quarter of 2011. Pro-forma payroll expense for the three-month
period ended March 31, 2011 would have been $87,262.
|
|
·
|
We incurred legal fees totaling $122,101 during the three-month period
ended March 31, 2012, compared to $236,817 for the same period in 2011. The majority of our 2011 legal fees related to the then-proposed
merger with AEE Inc., which closed in December 2011. Pro-forma legal fees for the three-month period ended March 31, 2011 would
have been $403,669.
|
|
·
|
We incurred consulting fees totaling $97,382 during the three-month
period ended March 31, 2012, compared to $133,910 for the same period in 2011. Included in the 2011 consulting fees were costs
associated with obtaining a fairness opinion related to our then-proposed merger with AEE Inc., totaling $126,051. Pro-forma consulting
fees for the three-month period ended March 31, 2011 would have been $146,876.
|
|
·
|
During the three-month period ended March 31, 2012, we paid consulting
fees to a related party (Synergy Resources LLC) totaling $42,000. We incurred no such costs during the same period in 2011. Our
consulting arrangement with Synergy Resources is a legacy arrangement from AEE Inc., which was entered into prior the merger of
the two companies. Pro-forma consulting fees paid to Synergy Resources for the three-month period ended March 31, 2011 totaled
$30,000.
|
|
·
|
We incurred accounting fees totaling $54,495 during the three-month
period ended March 31, 2012, compared to $46,002 for the same period in 2011. Pro-forma accounting fees for the three-month period
ended March 31, 2012 would have been $100,199.
|
|
·
|
In December 2011, we granted 975,000 stock options to members of our
management and operational teams, as well as two directors and one independent contractor. During the three-month period ended
March 31, 2012, we granted 375,000 stock options to a director and other employees. As a result, we recognized stock-based compensation
expense of $165,677 for the three-month period ended March 31, 2012. We did not recognize any stock-based compensation expense
during the three-month period ended March 31, 2011, as all outstanding options during that period had fully vested previously.
|
|
·
|
We incurred insurance expenses totaling $108,304 during the three-month
period ended March 31, 2012, compared to $29,261 for the same period in 2011. The increase is primarily due to obtaining tail coverage
for our Directors & Officers insurance for the three-year period prior to the merger with AEE Inc., as well as obtaining well
insurance for the wells that we are operating or anticipate drilling in the coming year.
|
|
·
|
The majority of our transactions related to our Hardy Property are
transacted in Canadian Dollars. During the three-month periods ended March 31, 2012 and 2011, we recognized foreign exchange losses
totaling $45,020 and $6,947, respectively, relating to currency fluctuations between the US Dollar and the Canadian Dollar.
|
|
·
|
We incurred travel and entertainment related expenses totaling $42,335
during the three-month period ended March 31, 2012, compared to $4,069 for the same period in 2011. During March 2012, our Chairman
and President traveled to various financial centers within the US to raise public awareness of our Company. Pro-forma travel and
entertainment expenses for the three-month period ended March 31, 2011 would have been $13,727.
|
|
·
|
We incurred computer related expenses totaling $51,838 for the three-month
period ended March 31, 2012, compared to $4,205 for the same period in 2011. The increase is largely due to various computer software
licenses that were obtained, as well as access to various oil and gas production and investor relations information services.
|
|
·
|
We incurred land management fees totaling $46,397 for the three-month
period ended March 31, 2012, compared to $17,364 for the same period in 2011. Pro-forma land management fees for the three-month
period ended March 31, 2011 would have been $54,771.
|
|
·
|
On a pro-forma basis, aggregate general and administrative expenses
would have been $927,347 for the three-month period ended March 31, 2011.
|
Depletion expense related to our Canadian
oil and gas properties totaled $190,218 for the three-month period ended March 31, 2012, compared to $104,350 for the same period
in 2011. Depletion expense related to our US oil and gas properties totaled $100,257 for the three-month period ended March 31,
2012. We did not recognize any US depletion expense during the three-month period ended March 31, 2011, as none of our non-operated
wells were producing materially at that time.
We routinely receive dividends from our
equity investment in shares of Crescent Point Energy Corp.’s common stock. Dividend income totaled $17,281 for the three-month
period ended March 31, 2012, compared to $15,056 for the same period in 2011.
We recognized an estimated income tax benefit
in the amount of $277,629 for the three-month period ended March 31, 2012 relating to the our net losses for the period and the
effect of such losses on our deferred tax liabilities. We did not recognize any income tax expense or benefit during the three-month
period ended March 31, 2011, as we had no such deferred tax liabilities at that time. Our deferred tax liabilities relate primarily
to our merger with AEE Inc., which occurred in December 2011.
Liquidity and Capital Resources
As of March 31, 2012, our assets totaled
$44,281,654, which included, among other items, cash balances totaling $7,125,082, trade receivables totaling $3,925,224, amounts
due from our working interest partner, Passport Energy Ltd., totaling $274,645, and marketable securities valued at $1,337,110.
As of March 31, 2012, we had a working capital deficit of $2,723,576, exclusive of our marketable securities, which, due to their
nature, are presented as non-cash assets on our March 31, 2012 balance sheet.
In April 2012, we entered into a Carry Agreement
with a third-party working interest partner, pursuant to which (i) that partner agreed to fund 100% of our working interest share
of the drilling and completion costs of up to six new oil and gas wells within our Spyglass Property and (ii) we will convey, for
a limited duration, 50% of our working interest in the pre-payout revenues of each carried well to that partner. If payout has
not occurred within two years of the commencement date for such well, then the temporary assignment is to increase to 100% for
years three through payout. Once payout has occurred (112% of the costs on a well-by-well basis), our respective working interests
in the revenues from each carried well will revert to our original working interests in each such well. The Carry Agreement relieves
us of approximately $12 million in what our working interest share of the drilling and completion costs of such six wells would
have been. We expect that it will significantly strengthen our working capital position and allow us to pursue our short-term drilling
program vigorously.
Historically, we have successfully raised
additional operating capital through private equity funding sources and from the sale of various oil and gas prospects and properties.
However, no assurances can be given that we will be able to obtain sufficient operating capital through the sale of common stock
and/or borrowing or that the development and implementation of our business plan will generate sufficient future revenues to sustain
ongoing operations.
Litigation
As of March 31, 2012, we are not subject
to any known or threatened litigation.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
ITEM 4. CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation
of its management, including the Chief Executive Officer and the Principal Accounting Officer, evaluated the effectiveness of the
design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on that evaluation,
the Chief Executive Officer and the Principal Accounting Officer concluded that the Company’s disclosure controls and procedures
were effective as of March 31, 2012. There has been no change in the Company’s internal control over financial
reporting during the quarter ended March 31, 2012, that has materially affected, or is reasonably likely to materially affect,
the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 6. EXHIBITS.
Exhibit
|
|
Description of Exhibit
|
2.1
|
|
Agreement and Plan of Merger among Eternal Energy Corp., Eternal Sub Corp. and American Eagle Energy Inc., dated April 8, 2011. (Incorporated by reference to Exhibit 2.1 of our Registration Statement on Form S-4 filed May 4, 2011.)
|
2.1(a)
|
|
First Amendment to Agreement and Plan of Merger among Eternal Energy Corp., Eternal Sub Corp. and American Eagle Energy Inc., dated September 28, 2011. (Incorporated by reference to Exhibit 2.1(a) of our Current Report on Form 8-K filed September 28, 2011.)
|
3(i).1
|
|
Articles of Incorporation filed with the Nevada Secretary of State on July 25, 2003. (Incorporated by reference to Exhibit 3.1 of our Form 10-SB filed August 18, 2004.)
|
3(i).2
|
|
Certificate of Change filed with the Nevada Secretary of State effective November 7, 2005. (Incorporated by reference to Exhibit 3(i).2 of our Current Report on Form 8-K filed November 9, 2005.)
|
3(i).3
|
|
Articles of Merger filed with the Nevada Secretary of State effective November 7, 2005. (Incorporated by reference to Exhibit 3(i).3 of our Current Report on Form 8-K filed November 9, 2005.)
|
3(i).4
|
|
Articles of Merger filed with the Nevada Secretary of State effective November 30, 2011. (Incorporated by reference to Exhibit 3(i).4 of our Current Report on Form 8-K filed December 20, 2011.)
|
3(i).5
|
|
Articles of Merger filed with the Nevada Secretary of State effective November 30, 2011. (Incorporated by reference to Exhibit 3(i).5 of our Current Report on Form 8-K filed December 20, 2011.)
|
3(i).6
|
|
Certificate of Change filed with the Nevada Secretary of State effective November 30, 2011. (Incorporated by reference to Exhibit 3(i).6 of our Current Report on Form 8-K filed December 20, 2011.)
|
3(ii).1
|
|
Bylaws, adopted July 18, 2003. (Incorporated by reference to Exhibit 3.2 of our Form 10-SB filed August 18, 2004.)
|
3(ii).2
|
|
Amendment No. 1 to Bylaws, adopted November 4, 2005. (Incorporated by reference to Exhibit 3(ii) of our Current Report on Form 8-K filed November 9, 2005.)
|
3(ii).3
|
|
Amendment No. 2 to Bylaws, adopted February 22, 2011. (Incorporated by reference to Exhibit 3(ii).3 of our Current Report on Form 8-K filed February 23, 2011.)
|
4.1
|
|
American Eagle Energy Corporation 2012 Equity Incentive Plan. (Incorporated by reference to Exhibit 4.1 of our Registration Statement on Form S-8 filed February 28, 2012.)
|
4.2
|
|
Non-qualified Stock Option Agreement, dated as of October 30, 2009, by and between the Registrant and Bradley M. Colby. (Incorporated by reference to Exhibit 4.2 of our Registration Statement on Form S-8 filed February 28, 2012.)
|
4.3
|
|
Non-qualified Stock Option Agreement, dated as of October 30, 2009, by and between the Registrant and John Anderson. (Incorporated by reference to Exhibit 4.3 of our Registration Statement on Form S-8 filed February 28, 2012.)
|
4.4
|
|
Non-qualified Stock Option Agreement, dated as of October 30, 2009, by and between the Registrant and Paul E. Rumler. (Incorporated by reference to Exhibit 4.4 of our Registration Statement on Form S-8 filed February 28, 2012.)
|
4.5
|
|
Non-qualified Stock Option Agreement, dated as of December 30, 2010, by and between the Registrant and Bradley M. Colby. (Incorporated by reference to Exhibit 4.5 of our Registration Statement on Form S-8 filed February 28, 2012.)
|
4.6
|
|
Non-qualified Stock Option Agreement, dated as of December 30, 2010, by and between the Registrant and Thomas G. Lantz. (Incorporated by reference to Exhibit 4.6 of our Registration Statement on Form S-8 filed February 28, 2012.)
|
4.7
|
|
Reserved for future use.
|
4.8
|
|
Non-qualified Stock Option Agreement, dated as of December 30, 2010, by and between the Registrant and Richard Findley. (Incorporated by reference to Exhibit 4.8 of our Registration Statement on Form S-8 filed February 28, 2012.)
|
4.9
|
|
Non-qualified Stock Option Agreement, dated as of December 28, 2011, by and between the Registrant and Paul E. Rumler. (Incorporated by reference to Exhibit 4.9 of our Registration Statement on Form S-8 filed February 28, 2012.)
|
4.10
|
|
Non-qualified Stock Option Agreement, dated as of December 28, 2011, by and between the Registrant and John Anderson. (Incorporated by reference to Exhibit 4.10 of our Registration Statement on Form S-8 filed February 28, 2012.)
|
4.11
|
|
Reserved for future use.
|
4.12
|
|
Non-qualified Stock Option Agreement, dated as of December 28, 2011, by and between the Registrant and Kirk Stingley. (Incorporated by reference to Exhibit 4.12 of our Registration Statement on Form S-8 filed February 28, 2012.)
|
4.13
|
|
Reserved for future use.
|
4.14
|
|
Reserved for future use.
|
4.15
|
|
Reserved for future use.
|
4.16
|
|
Reserved for future use.
|
4.17
|
|
Reserved for future use.
|
4.18
|
|
Reserved for future use.
|
4.19
|
|
Non-qualified Stock Option Agreement, dated as of February 21, 2012, by and between the Registrant and Andrew P. Calerich. (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed February 21, 2012.)
|
4.20
|
|
Reserved for future use.
|
10.1
|
|
Agreement and Plan of Merger between Golden Hope Resources Corp. (renamed Eternal Energy Corp.) and Eternal Energy Corp., filed with the Nevada Secretary of State effective November 7, 2005. (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed November 9, 2005.)
|
10.2
|
|
Purchase and Sale Agreement by and between Eternal Energy Corp., PNP Petroleum I, LP., Cibolo Energy Operating, Inc. and Century Assets Corporation, dated June 25, 2010. (Incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q filed August 16, 2010.)
|
10.3
|
|
Purchase and Sale Agreement between Eternal Energy Corp. and American Eagle Energy Inc. dated June 18, 2010. (Incorporated by reference to Exhibit 10.3 of our Quarterly Report on Form 10-Q filed August 16, 2010.)
|
10.4
|
|
Reserved for future use.
|
10.5
|
|
Reserved for future use.
|
10.6
|
|
Letter Agreement by and between Eternal Energy Corp. and International Frontier Resources Corporation. (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed December 5, 2005.)
|
10.7
|
|
Reserved for future use.
|
10.8
|
|
Reserved for future use.
|
10.9
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|
Letter Agreement by and between Eternal Energy Corp. and International Frontier Resources Corporation Relating to Quad 41 and Quad 42 dated January 30, 2006. (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed February 3, 2006.)
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10.10
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Amended and Restated Letter Agreement by and between Eternal Energy Corp. and International Frontier Resources Corporation Relating to Quad 14 dated January 30, 2006. (Incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed February 3, 2006.)
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10.11
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Amended and Restated Employment Agreement by and between the Registrant and Bradley M. Colby effective July 1, 2011.
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10.12
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Employment Agreement by and between the Registrant and Thomas G. Lantz, effective November 30, 2011.
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10.13
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Employment Agreement by and between the Registrant and Kirk Stingley, effective January 1, 2012.
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10.14
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Consulting Agreement by and between the Registrant and Richard Findley, effective November 30, 2011.
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10.15
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Reserved for future use.
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10.16
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Letter Agreement effective as of May 19, 2006, by and among Eternal Energy Corp., International Frontier Resources Corporation, Palace Exploration Company Limited, Oilexco Incorporated, and Challenger Minerals (North Sea) Limited. (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed May 23, 2006).
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10.17
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Letter Agreement dated October 15, 2006, by and among Eternal Energy Corp., Fairway Exploration, LLC, Prospector Oil, Inc., and 0770890 B.C. Ltd. (Incorporated by reference to Exhibit 10.17 of our Annual Report on Form 10-KSB filed April 16, 2007).
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10.18
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Letter Agreement dated October 26, 2006, by and among Eternal Energy Corp., Fairway Exploration, LLC, Prospector Oil, Inc., 0770890 B.C. Ltd., and Rover Resources Inc. (Incorporated by reference to Exhibit 10.18 of our Annual Report on Form 10-KSB filed April 16, 2007).
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10.19
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Letter Agreement dated February 28, 2007, by and among Eternal Energy Corp., Pebble Petroleum Inc., Emerald Bay Holdings Ltd., and Heartland Resources Inc. (Incorporated by reference to Exhibit 10.19 of our Annual Report on Form 10-KSB filed April 16, 2007).
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10.20
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Agreement To Terminate DGWS Option (Incorporated by reference to Exhibit 10.20 of our Quarterly Report on Form 10-Q filed May 15, 2009.
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10.21
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Employment Agreement by and between Eternal Energy Corp. and Craig Phelps dated August 1, 2007. (Incorporated by reference to Exhibit 10.21 of our Quarterly Report on Form 10-Q filed May 15, 2009).
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10.22
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Employment Agreement by and between Eternal Energy Corp. and Kirk A. Stingley dated June 2, 2008. (Incorporated by reference to Exhibit 10.22 of our Quarterly Report on Form 10-Q filed May 15, 2009).
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10.23
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Amended and Restated Employment Agreement by and between Eternal Energy Corp. and Bradley M. Colby dated November 1, 2009. (Incorporated by reference to Exhibit 10.23 of our Quarterly Report on Form 10-Q filed November 23, 2009).
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10.24
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First Amendment to the Amended and Restated Employment Agreement by and between Eternal Energy Corp. and Craig H. Phelps dated August 1, 2009. (Incorporated by reference to Exhibit 10.24 of our Quarterly Report on Form 10-Q filed November 23, 2009).
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10.25
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First Amendment to the Employment Agreement by and between Eternal Energy Corp. and Kirk A. Stingley dated October 30, 2009. (Incorporated by reference to Exhibit 10.25 of our Quarterly Report on Form 10-Q filed November 23, 2009).
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10.26
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Reserved for future use.
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10.27
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Lease Agreement dated January 1, 2009 by and between Eternal Energy Corp. and Oakley Ventures, LLC. (Incorporated by reference to Exhibit 10.27 of our Annual Report on Form 10-K filed March 23, 2010.)
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10.27a
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Lease Addendum, dated October 1, 2011 by and between Eternal Energy Corp. and Oakley Ventures, LLC, and Exhibit A thereto.
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10.28
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Purchase and Sale Agreement by and between Eternal Energy Corp. and Ryland Oil Corporation dated March 26, 2010. (Incorporated by reference to Exhibit 10.28 of our Current Report on Form 8-K filed March 29, 2010.)
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10.29
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Purchase of Royalty Agreement by and between Eternal Energy Corp. and Ryland Oil Corporation dated March 26, 2010. (Incorporated by reference to Exhibit 10.29 of our Current Report on Form 8-K filed March 29, 2010.)
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10.29a
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Amending Agreement to the Ryland / Eternal Royalty Purchase Agreement by and between Eternal Energy Corp. and Ryland Oil Corporation dated April 20, 2010. (Incorporated by reference to Exhibit 10.29a of our Current Report on Form 8-K filed March 29, 2010.)
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10.30
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Termination Agreement (of the US Pebble Acquisition Agreement) by and between Eternal Energy Corp., Fairway Exploration LLC, Prospector Oil, Inc. Pebble Petroleum Inc. and Rover Resources Inc. dated April 29, 2010. (Incorporated by reference to Exhibit 10.30 of our Quarterly Report on form 10-Q filed May 17, 2010.)
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10.31
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Termination Agreement (of the Canadian Pebble Acquisition Agreement) by and between Eternal Energy Corp., Fairway Exploration LLC, Prospector Oil, Inc. and Pebble Petroleum Inc. dated April 29, 2010. (Incorporated by reference to Exhibit 10.31 of our Quarterly Report on form 10-Q filed May 17, 2010.)
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10.32
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Termination Agreement (of the US Prospect Acquisition Agreement) by and between Eternal Energy Corp., Fairway Exploration LLC, Prospector Oil, Inc., Pebble Petroleum Inc., Rover Resources Inc., Steven Swanson, Richard L. Findley, Thomas G. Lantz and Ryland Oil Corporation dated May 11, 2010. (Incorporated by reference to Exhibit 10.33 of our Quarterly Report on Form 10-Q filed May 17, 2010.)
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10.33
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Termination Agreement (of the Canadian Prospect Acquisition Agreement) by and between Eternal Energy Corp., Fairway Exploration LLC, Prospector Oil, Inc., Pebble Petroleum Inc., Rover Resources Inc., Steven Swanson, Richard L. Findley, Thomas G. Lantz and Ryland Oil Corporation dated May 11, 2010. (Incorporated by reference to Exhibit 10.33 of our Quarterly Report on form 10-Q filed May 17, 2010.)
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10.34
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Termination of Management Services Agreement by and between Eternal Energy Corp., Ryland Oil Corporation and Brad Colby dated December 1, 2009. (Incorporated by reference to Exhibit 10.34 of our Quarterly Report on form 10-Q filed May 17, 2010.)
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10.35
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Amendment to the Consulting Agreement by and between Eternal Energy Corp., Rover Resources Inc., and Brad Colby dated April 1, 2010. (Incorporated by reference to Exhibit 10.35 of our Quarterly Report on form 10-Q filed May 17, 2010.)
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10.36
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Letter of Intent between Eternal Energy Corp. and American Eagle Energy Inc. dated February 22, 2011. (Incorporated by reference to Exhibit 10.36 of our Annual Report on Form 10-K filed March 23, 2011.)
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10.37
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Engagement Letter for Professional Services between Eternal Energy Corp. and C.K. Cooper & Company, dated February 25, 2011. (Incorporated by reference to Exhibit 10.37 of our Annual Report on Form 10-K filed March 23, 2011.)
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10.38
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Participation and Operating Agreement among Eternal Energy Corp., AEE Canada Inc. and Passport Energy Inc., dated April 15, 2011. (Incorporated by reference to Exhibit 10.38 of our Registration Statement on Form S-4 filed May 4, 2011.)
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10.38a
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Amendment to the participation and operating agreement among
Eerg
Energy
Ulc
,
Aee
Canada Inc and Passport Energy Inc., dated February 1, 2012
|
10.39^
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Purchase and Sale Agreement among Eternal Energy Corp., American Eagle Energy Inc. and NextEra Energy Gas Producing, LLC, dated May 17, 2011. (Incorporated by reference to Exhibit 10.39 of our Amended Quarterly Report on Form 10-Q/A filed October 11, 2011.)
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10.40^
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Purchase and Sale Agreement among Eternal Energy Corp., American Eagle Energy Inc. and NextEra Energy Gas Producing, LLC, dated May 17, 2011. (Incorporated by reference to Exhibit 10.40 of our Amended Quarterly Report on Form 10-Q/A filed October 11, 2011.)
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10.40a
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First Amendment to Purchase and Sale Agreement among Eternal Energy Corp., American Eagle Energy Inc. and NextEra Energy Gas Producing, LLC, dated June 14, 2011. (Incorporated by reference to Exhibit 10.40a of our Quarterly Report on Form 10-Q filed August 18, 2011.)
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10.40b
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Second Amendment to Purchase and Sale Agreement among Eternal Energy Corp., American Eagle Energy Inc. and NextEra Energy Gas Producing, LLC, dated July 25, 2011. (Incorporated by reference to Exhibit 10.40b of our Quarterly Report on Form 10-Q filed August 18, 2011.)
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10.41^
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Purchase and Sale Agreement among Eternal Energy Corp., American Eagle Energy Inc. and NextEra Energy Gas Producing,
LLC, dated November 15, 2011. (Incorporated by reference to Exhibit 10.41 of our Annual Report on Form 10-K filed
April 16, 2012.)
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21.1
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List of Subsidiaries. (Incorporated by reference to Exhibit 21.1 of our Annual Report on Form 10-K filed
April 16, 2012.)
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31.1*
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2*
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1*
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Certification of Chief Executive Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2*
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Certification of Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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|
^
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Portions omitted pursuant to a request for confidential
treatment.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN EAGLE ENERGY CORPORATION
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(Registrant)
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May 21, 2012
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/s/ Bradley M. Colby
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Bradley M. Colby
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President and Chief Executive Officer
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(Principal Executive, Financial and Accounting Officer)
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