For the Three-Month and Nine-Month
Periods Ended September 30, 2012 and 2011
The accompanying notes are an integral part
of the condensed consolidated financial statements.
The accompanying notes are an integral part
of the condensed consolidated financial statements.
The accompanying notes are an integral part
of the condensed consolidated financial statements.
The accompanying notes are an integral part
of the condensed consolidated financial statements.
The accompanying notes are an integral part
of the condensed consolidated financial statements.
Notes to the Condensed Consolidated
Financial Statements
As of September 30, 2012, December
31, 2011 and
For the Three-Month and Nine-Month
Periods Ended September 30, 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, Golden Hope Resources
changed its name to Eternal Energy Corp. (“Eternal Energy”). In December 2011, the Eternal Energy name was changed
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 production of oil and gas properties. At September 30, 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 and Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned first- and second-tier subsidiaries, AEE 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 and nine-month
periods ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December
31, 2012.
In December 2011, the Company declared 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.
American Eagle Energy Corporation
Notes to the Condensed Consolidated
Financial Statements
As of September 30, 2012, December
31, 2011 and
For the Three-Month and Nine-Month
Periods Ended September 30, 2012 and 2011
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 September 30, 2012, the Company had
cash on deposit that exceeded the United States (FDIC) federally insured limit of $250,000 per bank.
Foreign Currency Adjustments
The functional currency of the Company’s wholly-owned
first-tier subsidiaries, EERG Energy ULC and AEE Canada, Inc., is the Canadian Dollar. EERG Energy ULC’s and AEE Canada,
Inc.’s asset and liability account balances are translated into US Dollars at the exchange rate in effect as of the balance
sheet dates. Gains and losses realized upon the settlement of foreign currency transactions are included in the Company’s
results of operations. The Company recognized exchange gains (losses) totaling ($65,133) and $7,906 for the three-month and nine-month
periods ended September 30, 2012, respectively, and gains (losses) totaling $2,213 and ($26,371) for the three-month and nine-month
periods ended September 30, 2011, respectively.
Restricted Cash
At September 30, 2012 and December 31, 2011, the Company
had $101,500 and $51,500 of restricted cash, respectively. 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
The Company’s accounts receivable consist mainly
of receivables from oil and gas purchasers and from joint interest owners on properties the Company operates. For receivables from
joint interest owners, the Company typically has the ability to withhold future revenue disbursements to recover non-payment of
joint interest billings. Receivables are evaluated for collectability based on the financial strength of the individual customers
or joint interest partners, as well as projected future production of the associated wells. At September 30, 2012, the Company
has determined that all receivable balances are fully collectible and, accordingly, no allowance for doubtful accounts has been
recorded.
American Eagle Energy Corporation
Notes to the Condensed Consolidated
Financial Statements
As of September 30, 2012, December
31, 2011 and
For the Three-Month and Nine-Month
Periods Ended September 30, 2012 and 2011
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 $207,800 and $561,573, for the three-month and nine-month periods ended September 30, 2012. The Company did not recognize
any stock-based compensation expense for the three-month and nine-month periods ended September 30, 2011.
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 of the Company’s financial instruments,
measured on a recurring basis at September 30, 2012 and December 31, 2011, were as follows:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
1,292,364
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,292,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
1,181,077
|
|
|
|
73,357
|
|
|
|
-
|
|
|
|
1,254,434
|
|
The Company
uses Level 2 inputs to determine the fair value of certain warrants to purchase shares of common stock of an entity that 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 Earnings (Loss) Per Share
Basic earnings (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 period ended September 30, 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 and nine-month periods ended September 30, 2012 and 2011.
American Eagle Energy Corporation
Notes to the Condensed Consolidated
Financial Statements
As of September 30, 2012, December
31, 2011 and
For the Three-Month and Nine-Month
Periods Ended September 30, 2012 and 2011
Income Taxes
The Company follows the liability method of accounting
for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax benefits and
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax balances. Deferred income tax assets and liabilities are measured using enacted or substantially enacted tax
rates expected to apply to the taxable income in the years in which those differences are expected to be recovered or settled.
The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes
the date of enactment or substantive enactment. U.S. deferred tax liabilities are not recognized on profits that are expected to
be permanently reinvested in Canada and, thus, are not considered to be available for distribution to the parent company. Net operating
loss carry forwards and other deferred tax assets are reviewed annually for recoverability and, if necessary, are recorded net
of a valuation allowance.
The Company recognized income tax
benefits totaling $386,160 and $645,929 for the three-month and nine-month periods ending September 30, 2012. Included in
these figures is the effect of a true-up adjustment related to the finalization of the Company’s 2011 federal and state
tax returns, totaling $588,771. The true-up adjustment primarily relates to the treatment afforded to U.S. tax benefits
associated with foreign tax payments.
|
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.
American Eagle Energy Corporation
Notes to the Condensed Consolidated
Financial Statements
As of September 30, 2012, December
31, 2011 and
For the Three-Month and Nine-Month
Periods Ended September 30, 2012 and 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. Specific factors that
led to this conclusion included the fact that the majority of the merged company’s officers and Board of Directors membership
consists of legacy Eternal Energy officers and directors. In addition, there is no single stockholder or organized group of stockholders
of the former AEE Inc. that holds the largest minority voting interest in the merged company. Rather, the individual who owns the
largest number of shares of the merged company’s voting stock is a legacy Eternal Energy stockholder and was a member of
the Eternal Energy’s senior management and is a member of the merged company’s senior management team.
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 was 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.
American Eagle Energy Corporation
Notes to the Condensed Consolidated
Financial Statements
As of September 30, 2012, December
31, 2011 and
For the Three-Month and Nine-Month
Periods Ended September 30, 2012 and 2011
The financial liabilities assumed
consisted of trade payables and accrued liabilities totaling $3,300,491, amounts due to the Company totaling $251,081, 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)
The following pro forma financial
information for the three-month and nine-month periods ended September 30, 2012 is presented as if the merger transaction had occurred
on January 1, 2011 (unaudited):
|
|
Revenue
|
|
|
Net Earnings (Loss)
|
|
For the three-months ended September 30, 2011
|
|
$
|
264,758
|
|
|
$
|
(395,699
|
)
|
|
|
|
|
|
|
|
|
|
For the nine-months ended September 30, 2011
|
|
$
|
364,041
|
|
|
$
|
3,212,455
|
|
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 September
30, 2012 and December 31, 2011 consist of the following:
American Eagle Energy Corporation
Notes to the Condensed Consolidated
Financial Statements
As of September 30, 2012, December
31, 2011 and
For the Three-Month and Nine-Month
Periods Ended September 30, 2012 and 2011
|
|
|
|
|
Gains in
|
|
|
Losses in
|
|
|
|
|
|
|
Accumulated
|
|
|
Accumulated
|
|
|
|
Estimated
|
|
|
Other
|
|
|
Other
|
|
|
|
Fair
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
Value
|
|
|
Income
|
|
|
Income
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
1,292,364
|
|
|
$
|
275,392
|
|
|
$
|
(7,392
|
)
|
Total available-for-sale marketable securities
|
|
$
|
1,292,364
|
|
|
$
|
275,392
|
|
|
$
|
(7,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and warrants
|
|
$
|
1,254,434
|
|
|
$
|
281,371
|
|
|
$
|
-
|
|
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.
In June 2012, the Company exercised warrants to purchase
1,000,000 shares of common stock of Passport Energy Ltd. at an exercise price of approximately $0.05 per share. Cash consideration
paid to exercise the warrants totaled $51,301. There were no sales of marketable securities during the nine-month periods ended
September 30, 2012 and 2011.
|
5.
|
Equipment and Leasehold Improvements
|
The following is a summary of equipment and improvements
as of September 30, 2012 and December 31, 2011:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Office furniture and equipment
|
|
$
|
200,464
|
|
|
$
|
129,057
|
|
Computer equipment
|
|
|
141,029
|
|
|
|
-
|
|
Leasehold improvements
|
|
|
62,780
|
|
|
|
47,510
|
|
|
|
|
|
|
|
|
|
|
Total equipment and improvements
|
|
|
404,273
|
|
|
|
176,567
|
|
Less: accumulated depreciation and amortization
|
|
|
(190,371
|
)
|
|
|
(156,744
|
)
|
Equipment and improvements, net
|
|
$
|
213,902
|
|
|
$
|
19,823
|
|
American Eagle Energy Corporation
Notes to the Condensed Consolidated
Financial Statements
As of September 30, 2012, December
31, 2011 and
For the Three-Month and Nine-Month
Periods Ended September 30, 2012 and 2011
Depreciation and amortization expense for the three-month
and nine-month periods ended September 30, 2012 was $16,410 and $33,627, respectively, and $1,796 and $6,201 for the three-month
and nine-month periods ended September 30, 2011, respectively.
|
6.
|
Oil and Gas Properties
|
As of September 30, 2012 and December 31, 2011, net
costs included in the Company’s full-cost pool cost centers are as follows:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
Amortizable
|
|
|
Non-Amortizable
|
|
|
Amortizable
|
|
|
Non-Amortizable
|
|
United States
|
|
$
|
13,634,094
|
|
|
$
|
9,688,641
|
|
|
$
|
6,816,654
|
|
|
$
|
7,295,215
|
|
Canada
|
|
|
13,520,013
|
|
|
|
-
|
|
|
|
8,981,653
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,154,107
|
|
|
$
|
9,688,641
|
|
|
$
|
15,798,307
|
|
|
$
|
7,295,215
|
|
Hardy Property
As of September 30, 2012, the Company owns a 50%
working interest in approximately 4,300 net acres held by six leases, each of which is scheduled to expire on April 1, 2014.
Spyglass Property
As of September 30, 2012, the Company owns a consolidated
50% working interest in approximately 12,285 net acres within the Spyglass Property, which is held by approximately 466 leases,
with expiration dates ranging from November 2012 to August 2017.
Benrude Property
As of September 30, 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 conducted a 3-D seismic study of the Benrude Property during 2012, the
results of which are currently being evaluated and will be used to determine the Company’s strategy for pursuing the proved
reserves assigned to the Benrude Property.
Exploratory
Prospects
As of September 30, 2012, the Company has entered
into participation agreements in a number of exploratory oil and gas prospects, all of 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:
American Eagle Energy Corporation
Notes to the Condensed Consolidated
Financial Statements
As of September 30, 2012, December
31, 2011 and
For the Three-Month and Nine-Month
Periods Ended September 30, 2012 and 2011
|
|
YTD
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
Through
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs
|
|
$
|
2,871,991
|
|
|
$
|
9,442,209
|
|
|
$
|
2,362,741
|
|
|
$
|
14,676,941
|
|
Exploration costs
|
|
|
-
|
|
|
|
520,967
|
|
|
|
206,203
|
|
|
|
727,170
|
|
Reclassifications to the amortizable pool
|
|
|
-
|
|
|
|
(758,723
|
)
|
|
|
-
|
|
|
|
(758,723
|
)
|
Impairments and sales
|
|
|
(478,565
|
)
|
|
|
(2,499,605
|
)
|
|
|
(1,978,577
|
)
|
|
|
(4,956,747
|
)
|
Total capitalized costs of exploratory prospects
|
|
$
|
2,393,426
|
|
|
$
|
6,704,848
|
|
|
$
|
590,367
|
|
|
$
|
9,688,641
|
|
Glacier Prospect
As of September 30, 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 June 2013 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 September 30, 2012.
Sidney North Prospect
As of September 30, 2012, the Company owns a 100%
working interest in oil and gas leases on approximately 405 net acres located in Richland County, Montana (the “Sidney North
Prospect”). The acreage is held by approximately 15 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 September 30, 2012.
West Spyglass Prospect
As of September 30, 2012, the Company owns a 25% working
interest in approximately 11,025 net acres located within the West Spyglass Prospect. The net acres are held by 311 leases, with
expiration dates ranging from February 2013 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 September 30, 2012.
American Eagle Energy Corporation
Notes to the Condensed Consolidated
Financial Statements
As of September 30, 2012, December
31, 2011 and
For the Three-Month and Nine-Month
Periods Ended September 30, 2012 and 2011
Archer Prospect
As of September 30, 2012, the Company owns a 100%
working interest in approximately 5,902 net acres located in eastern Sheridan County and Daniels County, Montana. The net acres
are held by 62 leases, with expiration dates ranging from January 2015 to December 2016. 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 September 30,
2012.
Exploratory Prospect Cost Summary
The following table summarizes the costs of the Company’s
aggregate exploratory activities for all unproven prospects for the nine-month period ended September 30, 2012 and the year ended
December 31, 2011:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Balance at the beginning of the period
|
|
$
|
7,295,215
|
|
|
$
|
590,368
|
|
Additions to exploratory costs
|
|
|
2,871,991
|
|
|
|
11,407,645
|
|
Disposals
|
|
|
(478,565
|
)
|
|
|
(2,499,605
|
)
|
Reassignments to the amortizable pool
|
|
|
-
|
|
|
|
(2,203,193
|
)
|
Balance at the end of the period
|
|
$
|
9,688,641
|
|
|
$
|
7,295,215
|
|
|
7.
|
Asset Retirement Obligations
|
The Company has recorded estimated asset retirement
obligations for the future plugging and abandonment of operated and non-operated wells that are located within the Hardy and Spyglass
Properties. As of September 30, 2012 and December 31, 2011, the discounted value of the asset retirement obligations was $353,180
and $34,628, respectively. The projected plugging dates for the Company’s existing operated wells range from December 2020
to June 2036.
American Eagle Energy Corporation
Notes to the Condensed Consolidated
Financial Statements
As of September 30, 2012, December
31, 2011 and
For the Three-Month and Nine-Month
Periods Ended September 30, 2012 and 2011
|
8.
|
Commitments and Contingencies
|
Drilling Obligations
The Company has the option to participate in the drilling
of future, non-operated 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 September 30, 2012, the Company has elected to participate in 31 non-operated 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 22.87%. Additional wells could be proposed in the future, at which time the Company may or may not elect to participate
in such wells.
During the nine-month period ended September 30, 2012,
the Company drilled and completed five oil wells within the Spyglass Property. The Company intends to drill and operate additional
horizontal and/or vertical wells within the Spyglass Property over the next year 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 the wells, subject to the terms of the Carry Agreement, as described in Note 10.
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. Effective
July 1, 2012, the Company amended the lease-agreement to include additional square footage. Future lease payments related to the
Company’s office and equipment leases as of September 30, 2012 are as follows:
|
|
Amount
|
|
2012 (remainder)
|
|
$
|
25,808
|
|
2013
|
|
|
105,880
|
|
2014
|
|
|
111,174
|
|
Total
|
|
$
|
242,862
|
|
Rent expense for the three-month
and nine-month periods ended September 30, 2012 totaled $33,736 and $76,627, respectively, and $19,017 and $55,977 for the three-month
and nine-month periods ended September 30, 2011, respectively.
American Eagle Energy Corporation
Notes to the Condensed Consolidated
Financial Statements
As of September 30, 2012, December
31, 2011 and
For the Three-Month and Nine-Month
Periods Ended September 30, 2012 and 2011
|
9.
|
Earnings (Loss) Per Share
|
Because the Company recognized a net loss for three-month
period ended September 30, 2011, diluted loss per common share for the period 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 and nine-month periods ended September 30, 2012 and 2011:
|
|
For the Three-Month Period
|
|
|
For the Nine-Month Period
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Net income (loss)
|
|
$
|
892,194
|
|
|
$
|
(229,505
|
)
|
|
$
|
386,706
|
|
|
$
|
2,118,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
45,842,782
|
|
|
|
9,112,405
|
|
|
|
45,775,211
|
|
|
|
9,112,405
|
|
Incremental shares from the assumed exercise of dilutive stock options
|
|
|
392,251
|
|
|
|
-
|
|
|
|
705,201
|
|
|
|
677,457
|
|
Diluted common shares outstanding
|
|
|
46,235,033
|
|
|
|
9,112,405
|
|
|
|
46,480,412
|
|
|
|
9,789,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share – basic
|
|
$
|
0.02
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.01
|
|
|
$
|
0.23
|
|
Earnings (loss) per share – diluted
|
|
$
|
0.02
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.01
|
|
|
$
|
0.22
|
|
On April 16, 2012,
the Company entered into a Carry Agreement with a third-party working interest partner, pursuant to which (i) that partner agreed
to fund 100% of the Company’s working interest share of the drilling and completion costs of up to six new oil and gas wells
within our Spyglass Property and (ii) the Company will convey, for a limited duration, 50% of its 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), the respective working interests in the revenues from each carried well will revert to the original working
interests in each such well.
As of the date
of closing, the Company had incurred drilling costs associated with the first two wells to be covered under the Carry Agreement
totaling $3,789,989. Upon execution of the Carry Agreement, these costs were removed from the Company’s books and an offsetting
receivable was created. Pursuant to accounting rules, the assignment of a portion of the Company’s working interests in certain
existing and future wells under the Carry Agreement has been treated as a conveyance of the working interests. The Company has
disclosed the transfer of the drilling costs to the financing partner as a source of cash from investing activities on its consolidated
statement of cash flows for the nine-month period ended September 30, 2012.
American Eagle Energy Corporation
Notes to the Condensed Consolidated
Financial Statements
As of September 30, 2012, December
31, 2011 and
For the Three-Month and Nine-Month
Periods Ended September 30, 2012 and 2011
Effective July
15, 2012, the Company amended the Carry Agreement with the third-party to include an additional four oil and gas wells. The Amended
Carry Agreement relieves the Company of approximately $25.2 million of actual and estimated future drilling costs associated with
the ten carried wells. The Company expects that the Carry Agreement will significantly strengthen its working capital position
and allow it to pursue its short-term drilling program vigorously.
As of September
30, 2012, the Company has received $20,398,515 of funding under the Carry Agreement, as amended. Proceeds received pursuant to
the terms of the Carry Agreement, subsequent to the closing, are applied against the drilling and completion costs to which they
relate. Additions to oil and gas properties that occurred subsequent to the closing of the Carry Agreement are presented net of
proceeds received under the Carry Agreement on the consolidated statement of cash flows. Funds received pursuant to the Carry Agreement,
prior to the incurrence of related drilling costs, are presented as amounts due to working interest partners on the consolidated
balance sheet.
As of September
30, 2012, the Company has recorded liabilities payable to its Carry Agreement partner in the amount of $9,898,992 relating to monies
advanced to the Company in connection with the drilling of four future wells, for which drilling has not yet commenced.
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 $34,625.
Stock Options
In January 2012, the Company granted 390,000 options
to purchase shares of its common stock to certain employees. The options have an exercise price of ranging from $0.92 to $1.18
per share. The stock options were valued using the Black-Scholes Option Pricing Model and had an aggregate fair market value of
$391,962 at the time of grant.
American Eagle Energy Corporation
Notes to the Condensed Consolidated
Financial Statements
As of September 30, 2012, December
31, 2011 and
For the Three-Month and Nine-Month
Periods Ended September 30, 2012 and 2011
In August 2012, the Company granted 140,000
options to purchase shares of its common stock to certain non-officer employees and a full-time consultant. The options have an
exercise price of $1.18 per share. The stock options were valued using the Black-Scholes Option Pricing Model and had an aggregate
fair market value of $114,090 at the time of grant.
In September 2012, the Company granted 100,000 options
to purchase shares of its common stock to a non-officer employee. The options have an exercise price of $1.18 per share. The stock
options were valued using the Black-Scholes Option Pricing Model and had an aggregate fair market value of $114,090 at the time
of grant.
The assumptions used in the Black-Scholes Option Pricing
Model for the stock options granted in 2012 were as follows:
Risk-free interest rate
|
|
|
0.22% to 0.92%
|
Expected volatility of common stock
|
|
|
84% to 196%
|
Dividend yield
|
|
$ 0.00
|
|
Expected life of options
|
|
|
5 years
|
|
Weighted average fair market value of options granted
|
|
$ 0.94
|
|
As of the date of merger, AEE Inc. had 1,732,990 options
to purchase shares of AEE Inc.’s common stock. The options were originally issued in December 2010 and had a five-year life.
In April 2012, these options were exchanged for options to purchase shares of the Company’s common stock at a price of $0.74
per share. The options are scheduled to expire in December 2015.
A summary of stock option activity for the nine-month
period ended September 30, 2012 and the year ended December 31, 2011 is presented below:
American Eagle Energy Corporation
Notes to the Condensed Consolidated
Financial Statements
As of September 30, 2012, December
31, 2011 and
For the Three-Month and Nine-Month
Periods Ended September 30, 2012 and 2011
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Exercise
|
|
|
Contract
|
|
|
|
Options
|
|
|
Price ($)
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AEE Inc. options converted
|
|
|
1,732,990
|
|
|
|
0.74
|
|
|
|
3.2 years
|
|
Options granted
|
|
|
630,000
|
|
|
|
1.18
|
|
|
|
4.8 years
|
|
Options exercised
|
|
|
(153,834
|
)
|
|
|
0.05
|
|
|
|
3.8 years
|
|
Options expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2012
|
|
|
4,004,600
|
|
|
$
|
0.82
|
|
|
|
3.5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2012
|
|
|
2,399,600
|
|
|
$
|
0.60
|
|
|
|
2.9 years
|
|
Options outstanding
as of September 30, 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 $0.51 and $1.08 per share, resulting in an aggregate intrinsic value of $343,305 and $886,080,
respectively.
The Company
recognized stock-based compensation expense of $207,800 and $561,563 for the three-month and nine-month periods ended September
30, 2012, respectively, related to stock options that were granted during 2011 and 2012. The Company did not recognize any stock-based
compensation expense for the three-month and nine-month periods ended September 30, 2011 as all options outstanding during that
period had fully vested previously.
Shares Reserved for Future Issuance
As of September 30, 2012 and December 31, 2011, the
Company had reserved 4,004,600 and 1,795,444 shares, respectively, for future issuance upon exercise of outstanding options.
American Eagle Energy Corporation
Notes to the Condensed Consolidated
Financial Statements
As of September 30, 2012, December
31, 2011 and
For the Three-Month and Nine-Month
Periods Ended September 30, 2012 and 2011
|
12.
|
Related Party Transactions
|
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 $19,918 and $12,893 for the nine-month
periods ended September 30, 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 $112,800 and $0 of consulting fees from Synergy during the nine-month periods ended September 30, 2012 and
2011, respectively.
On October 15, 2012, the Company, along with its
working interest partner, acquired mineral rights associated with 3,472 net acres located in Divide County, North Dakota. The Company’s
share of the acquired acreage is 1,129 net acres. Consideration paid in connection with the acquisition totaled $7,121,966, of
which the Company paid $2,433,307.