| • FORM 10-Q • EXHIBIT 31.1 • EXHIBIT 31.2 • EXHIBIT 32.1 • EXHIBIT 32.2 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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)
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):
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
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
American Eagle Energy Corporation
Condensed Consolidated Balance Sheets
As of March 31, 2012 and December 31, 2011
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
American Eagle Energy Corporation
Condensed Consolidated Statements of Income and Comprehensive Income
For the Three-Month Periods Ended March 31, 2012 and 2011
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
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
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
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.
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:
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.
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:
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):
The following assumptions were used to prepare the supplemental pro forma financial information presented above:
Available-for-sale marketable securities at March 31, 2012 and December 31, 2011 consist of the following:
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;
There were no sales of marketable securities for the years ended December 31, 2011 or 2010.
The following is a summary of equipment and improvements, at cost, as of March 31, 2012 and December 31, 2011:
Depreciation and amortization expense for the three-month periods ended March 31, 2012 and 2011 was $6,322 and $2,526, respectively.
As of March 31, 2012 and December 31, 2011, net costs included in the Company’s full-cost pool cost centers are as follows:
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:
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:
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:
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.
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:
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:
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:
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:
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.
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 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:
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:
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:
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:
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.
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.
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