Attached files
file | filename |
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8-K/A - 8-K/A - American Standard Energy Corp. | v211466_8ka.htm |
EX-99.3 - EX-99.3 - American Standard Energy Corp. | v211466_ex99-3.htm |
EX-99.2 - EX-99.2 - American Standard Energy Corp. | v211466_ex99-2.htm |
Exhibit
99.1
Properties
Acquired From Geronimo Holding Corporation on December 1, 2010
Index
to Financial Statements
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Financial
Statements:
|
|
Statements
of Assets and Liabilities as of September 30, 2010
(unaudited) and as of December 31, 2009 (audited)
|
F-3
|
Statements
of Revenues and Expenses for the nine months ended September 30, 2010 and
2009 (unaudited) and for the year ended December 31, 2009
(audited)
|
F-4
|
Statements
of Cash Flows for the nine months ended September 30, 2010 and 2009
(unaudited) and for the year ended December 31, 2009
(audited)
|
F-5
|
Statements
of Net Investment for the nine months ended September 30, 2010 (unaudited)
and for the year ended December 31, 2009 (audited)
|
F-6
|
Notes
to Financial Statements
|
F-7
to F-14
|
Unaudited
Supplementary Information
|
F-15
to F-17
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
American
Standard Energy Corp.
Scottsdale,
Arizona
We have
audited the accompanying statement of assets and liabilities of the oil and gas
properties (the “Properties”), as defined in Note A, acquired by American
Standard Energy Corp. (the “Company”) from Geronimo Holding Corporation
(“Geronimo”) on December 1, 2010 as of December 31, 2009, and the related
statements of revenues and expenses, net investment, and cash flows for the year
then ended. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Properties are
not required to have, nor were we engaged to perform, an audit of the internal
control over financial reporting associated with the Properties. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of internal
control over financial reporting associated with the Properties. Accordingly, we
express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our
opinion, the accompanying financial statements referred to above present fairly,
in all material respects, the financial position of the Properties at December
31, 2009, and the results of their operations and cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ BDO
USA, LLP
Houston,
Texas
February
14, 2011
F-2
Properties
Acquired From Geronimo Holding Corporation on December 1, 2010
Statements
of Assets and Liabilities
September 30,
2010
|
December 31,
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Oil
and gas sales receivable
|
$ | 182,258 | $ | 47,154 | ||||
Total
current assets
|
182,258 | 47,154 | ||||||
Oil
and natural gas properties, at cost, successful efforts method
:
|
||||||||
Proved
properties
|
1,760,121 | 821,778 | ||||||
Drilling
in progress
|
542,739 | 18,732 | ||||||
Unproved
properties
|
- | 82,922 | ||||||
Accumulated depreciation,
depletion, and amortization
|
(617,904 | ) | (380,551 | ) | ||||
Total
oil and natural gas properties, net
|
1,684,956 | 542,881 | ||||||
|
||||||||
Total
assets
|
$ | 1,867,214 | $ | 590,035 | ||||
Liabilities
and Net Investment
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 9,870 | $ | 3,957 | ||||
Accrued
capital expenditures
|
335,156 | 55,018 | ||||||
Total
current liabilities
|
345,026 | 58,975 | ||||||
Asset
retirement obligations
|
9,061 | 4,820 | ||||||
Total
liabilities
|
354,087 | 63,795 | ||||||
Commitments
and contingencies (Note H)
|
||||||||
Net
investment
|
1,513,127 | 526,240 | ||||||
Total
liabilities and net investment
|
$ | 1,867,214 | $ | 590,035 |
The
accompanying notes are an integral part of these financial
statements.
F-3
Properties
Acquired From Geronimo Holding Corporation on December 1, 2010
Statements
of Revenues and Expenses
Nine Months Ended
September 30,
|
Year Ended
December 31,
|
|||||||||||
2010
|
2009
|
2009
|
||||||||||
(Unaudited)
|
(Audited)
|
|||||||||||
Oil
and natural gas revenues
|
$ | 444,977 | $ | 49,377 | $ | 120,662 | ||||||
Operating
costs and expenses:
|
||||||||||||
Oil
and natural gas production
|
86,924 | 10,335 | 24,371 | |||||||||
Depreciation,
depletion and amortization
|
190,800 | 45,678 | 127,293 | |||||||||
Impairment
of oil and natural gas properties
|
46,553 | - | 253,258 | |||||||||
Accretion of asset retirement
obligations
|
188 | - | - | |||||||||
General and
administrative
|
49,060 | 15,988 | 21,768 | |||||||||
Total
operating costs and expenses
|
373,525 | 72,001 | 426,690 | |||||||||
Net
income (loss)
|
$ | 71,452 | $ | (22,624 | ) | $ | (306,028 | ) | ||||
Pro
forma for change for tax status (Unaudited) see Note E:
|
||||||||||||
Income (loss) before
taxes
|
$ | 71,452 | $ | (22,624 | ) | $ | (306,028 | ) | ||||
Pro forma income
taxes
|
- | - | - | |||||||||
Pro forma net income
(loss)
|
$ | 71,452 | $ | (22,624 | ) | $ | (306,028 | ) |
The
accompanying notes are an integral part of these financial
statements.
F-4
Properties
Acquired From Geronimo Holding Corporation on December 1, 2010
Statements
of Cash Flows
Nine
Months Ended
September
30,
|
Year
Ended
December
31,
|
|||||||||||
2010
|
2009
|
2009
|
||||||||||
(Unaudited)
|
(Audited)
|
|||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
Net
income (loss)
|
$ | 71,452 | $ | (22,624 | ) | $ | (306,028 | ) | ||||
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating activities:
|
||||||||||||
Depreciation,
depletion and amortization
|
190,800 | 45,678 | 127,293 | |||||||||
Impairment
of oil and natural gas properties
|
46,553 | - | 253,258 | |||||||||
Accretion
of asset retirement obligations
|
188 | - | - | |||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Oil
and gas sales receivable
|
(135,104 | ) | (35,658 | ) | (47,154 | ) | ||||||
Accounts
payable
|
5,913 | 2,031 | 3,957 | |||||||||
Net
cash provided by (used in) operating activities
|
179,802 | (10,573 | ) | 31,326 | ||||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
Oil
and natural gas property additions
|
(1,095,237 | ) | (676,211 | ) | (863,594 | ) | ||||||
Net
cash used in investing activities
|
(1,095,237 | ) | (676,211 | ) | (863,594 | ) | ||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
Transfers
from Geronimo, net
|
915,435 | 686,784 | 832,268 | |||||||||
Net
cash provided by financing activities
|
915,435 | 686,784 | 832,268 | |||||||||
Net
change in cash and cash equivalents
|
- | - | - | |||||||||
Cash
and cash equivalents at beginning of period
|
- | - | - | |||||||||
Cash
and cash equivalents at end of period
|
$ | - | $ | - | $ | - | ||||||
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
||||||||||||
Accrued
capital expenditures
|
$ | 280,138 | $ | 31,844 | $ | 55,018 | ||||||
Asset
retirement costs and obligation
|
$ | 4,053 | $ | 4,101 | $ | 4,820 |
The
accompanying notes are an integral part of these financial
statements.
F-5
Properties
Acquired From Geronimo Holding Corporation on December 1, 2010
Statements
of Net Investment
Year
Ended December 31, 2009 and Nine Months Ended September 30, 2010
Balance
as of January 1, 2009
|
$ | - | ||
Transfers from Geronimo,
net
|
832,268 | |||
Net loss
|
(306,028 | ) | ||
Balance
as of December 31, 2009 (audited)
|
526,240 | |||
Transfers from Geronimo,
net
|
915,435 | |||
Net income
|
71,452 | |||
Balance
as of September 30, 2010 (unaudited)
|
$ | 1,513,127 |
The
accompanying notes are an integral part of these financial
statements.
F-6
Properties
Acquired From Geronimo Holding Corporation on December 1, 2010
Notes
to Financial Statements
Note
A. Organization and Basis of Presentation
As more
fully described in a Form 8-K filed October 4, 2010, we, formerly known as
Uncle Al’s Famous Hot Dogs & Grille, Inc. (the “Company”), acquired American
Standard Energy Corp., a Nevada Corporation (“ASEC”), an oil exploration
and production company, in accordance with a Share Exchange Agreement dated
October 1, 2010.
ASEC was
incorporated on April 2, 2010 for the purposes of acquiring certain oil and gas
properties from Geronimo Holding Corporation (“Geronimo”), XOG
Operating, LLC (“XOG”) and CLW South Texas, LP (“CLW”) (collectively, the
"XOG Group"). Randall Capps is the sole owner of XOG and Geronimo,
and the majority owner of CLW. On May 1, 2010, the XOG Group contributed certain
oil and natural gas properties to ASEC in return for 80% of the common stock of
ASEC. This acquisition was a transaction under common control and accordingly,
the Company recognized the assets and liabilities acquired from the XOG Group at
their historical carrying values and no goodwill or other intangible assets were
recognized.
On
October 1, 2010, the Company acquired 100% of the outstanding shares of common
stock of ASEC and received additional consideration of $25,000 from the ASEC
shareholders. In exchange for the ASEC stock and the additional
consideration, the XOG Group was issued 21,999,997 shares of the
Company’s common stock representing approximately 86.1% of the Company’s
common stock on a fully diluted basis. As a result, the XOG Group acquired
control of the Company and the transaction was accounted for as a reverse merger
with the XOG Group as the accounting acquirer of the Company. Accordingly, as a
result of the reverse merger, the financial statements of ASEC became the
historical financial statements of the Company. In connection with
the Share Exchange Agreement, the Company changed its name to American Standard
Energy Corp.
On December 1, 2010,
the Company
entered into a Purchase of Partial Leaseholds Agreement (the “Agreement”)
with Geronimo. Pursuant to the Agreement, the Company purchased certain mineral
rights leaseholds held on properties in North Dakota (the “Properties”). In
consideration for the mineral rights the Company paid Geronimo $500,000 cash and
issued 1,200,000 shares of the Company’s common stock. The
acquisition of the Properties from Geronimo was a transaction under common
control and accordingly, the Company recorded the assets and liabilities
acquired from Geronimo at their historical carrying values and no goodwill or
other intangible assets were recognized. The activities of the
Properties prior to January 1, 2009 were de minimis and accordingly, are not
presented in these financial statements.
The
accompanying financial statements of the Properties have been prepared in
accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”) on a “carve-out” basis from the books and records of
Geronimo using historical results of operations, assets and liabilities
attributable to the Properties, and allocations of general and administrative
expenses from the XOG Group, as the Properties do not constitute a separate
legal entity.
Accordingly,
the accompanying financial statements of the Properties may not be indicative of
future performance and may not reflect what the results of operations, financial
position and cash flows would have been had the Properties operated as a
separate entity during all of the periods presented. To the extent that an
asset, liability, revenue or expense is directly associated with the Properties,
it is reflected in the accompanying financial statements.
F-7
The XOG Group provided certain
corporate functions on behalf of the Properties and costs associated with these
functions were allocated to the Properties. These functions included executive
management, oil and gas property management, information technology, tax,
insurance, accounting, legal and treasury services. The costs of such services
were allocated to the Properties based on the most relevant allocation method to
the service provided, primarily based on relative net book value of assets.
Management believes such allocations are reasonable; however, they may not be
indicative of the actual expense that would have been incurred had the
Properties been operating as an independent company for all of the periods
presented. The charges for these functions are included primarily in general and
administrative expenses.
Note
B. Summary of Significant Accounting Policies
Use of Estimates in the
Preparation of Financial Statements
Preparation of financial
statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from these estimates. Such estimates
include the following:
Depreciation, depletion and amortization of oil and natural gas
properties are determined using estimates of proved oil and natural gas
reserves. There are numerous uncertainties inherent in the estimation of
quantities of proved reserves and in the projection of future rates of
production and the timing of development expenditures.
Impairment evaluation of proved and unproved oil
and natural gas properties is subject to numerous
uncertainties including, among others, estimates of future recoverable
reserves, future
prices, operating and development
costs, and estimated cash flows.
Other significant estimates
include, but are not limited to, the asset retirement costs and obligations and accrued revenues and
expenses.
Oil
and Gas Sales Receivable
Oil and
natural gas is sold to purchasers generally on an unsecured basis. Allowances
for doubtful accounts are determined based on management's assessment of the
creditworthiness of the purchaser. Receivables are considered past due if full
payment is not received by the contractual due date. Past due accounts will be
generally written off against the allowance for doubtful accounts only after all
collection attempts have been exhausted.
Oil
and Natural Gas Properties
The
accompanying financial statements utilize the successful efforts method of
accounting for the Properties. Under this method, all costs associated with
productive wells and nonproductive development wells are capitalized, while
nonproductive exploration costs are expensed. Capitalized acquisition costs
relating to proved properties are depleted using the unit-of-production method
based on total proved reserves. The depletion of capitalized exploratory
drilling and development costs is based on the unit-of-production method using
proved developed reserves on a field basis.
Proceeds from the sale of
individual properties and the capitalized costs of individual properties sold or
abandoned are credited and charged, respectively, to accumulated
depletion. Generally, no gain or loss is recognized until the entire
amortization base is sold. However, a gain or loss is recognized from the sale
of less than an entire amortization base if the disposition is significant
enough to materially impact the depletion rate of the remaining properties in
the amortization base. Ordinary maintenance and repair costs are expensed as
incurred.
F-8
Costs of significant
nonproducing properties, wells in the process of being drilled and development
projects are excluded from depletion until such time as the related project
is developed and proved reserves are established or impairment is determined.
These unproved oil and natural gas properties are periodically assessed for
impairment by considering future drilling plans, the results of exploration
activities, commodity price outlooks, planned future sales or expiration of all
or a portion of such projects. Amounts capitalized to oil and natural gas
properties excluded from depletion at September 30, 2010 and December 31, 2009
were $542,739 and $101,654,
respectively.
Management
reviews its long-lived assets to be held and used, including proved oil and
natural gas properties, whenever events or circumstances indicate that the
carrying value of those assets may not be recoverable. An impairment loss is
indicated if the sum of the expected undiscounted future cash flows is less than
the carrying amount of the assets. In this circumstance, an impairment loss is
recognized for the amount by which the carrying amount of the asset exceeds the
estimated fair value of the asset.
Management
reviews its oil and natural gas properties for impairment by amortization base
or by individual well for those wells not constituting part of an amortization
base. For each property determined to be impaired, an impairment loss equal to
the difference between the carrying value of the properties and the estimated
fair value (discounted future cash flows) of the properties is recognized at
that time. Estimating future cash flows involves the use of judgments, including
estimation of the proved and unproved oil and natural gas reserve quantities,
timing of development and production, expected future commodity prices, capital
expenditures and production costs.
Environmental
The Properties are subject to
extensive federal, state and local environmental laws and regulations. These
laws, which are often changing, regulate the discharge of materials into the
environment and may require the removal or mitigation of the environmental
effects of the disposal or release of petroleum or chemical substances at
various sites. Environmental expenditures are expensed. Expenditures that relate
to an existing condition caused by past operations and that have no future
economic benefits are expensed. Liabilities for expenditures of a noncapital
nature are recorded when environmental assessment and/or remediation is probable
and the costs can be reasonably estimated. Such liabilities are generally
undiscounted unless the timing of cash payments is fixed and readily
determinable.
Oil and Natural Gas Sales and
Imbalances
Oil and natural gas revenues
are recorded at the time of delivery of such products to pipelines for the
account of the purchaser or at the time of physical transfer of such products to
the purchaser. The accompanying financial statement utilize the sales method of
accounting for oil and natural gas sales, recognizing revenues based on the
Properties share of actual proceeds from the oil and natural gas sold to
purchasers. Oil and natural gas imbalances are generated on properties for which
two or more owners have the right to take production "in-kind" and, in doing so;
take more or less than their respective entitled percentage. For the nine months
ended September 30, 2010 and the year ended December 31,
2009, there were no significant oil and natural
gas imbalances
related to the Properties.
Asset Retirement Obligations
The fair value of a liability
for an asset retirement obligation is recorded in the period in which it is
incurred with a corresponding increase in the carrying amount of the related oil
and gas properties. Subsequently, the asset retirement cost included in the
carrying amount is allocated to expense through depreciation, depletion and
amortization. Changes in the liability due to passage of time are recognized as
an increase in the carrying amount of the liability and as corresponding
accretion expense.
F-9
General and Administrative
Expense
The
accompanying financial statements include an allocated portion of the actual
costs incurred by the XOG Group for general and administrative (“G&A”)
expenses. These allocated costs are intended to provide the reader with a
reasonable approximation of what historical administrative costs would have been
for these assets and operations in the event those assets had existed on a
stand-alone basis.
Any
future G&A expenses may not necessarily correlate to, nor reflect directly
or indirectly, the cost relationships presented herein. A wide range of formulas
for G&A allocation were considered.
In the
view of management of the Properties, the most accurate and transparent method
of allocating G&A expenses is based on the historical cost basis of the
Properties divided by the cost basis of the total oil and gas assets of the XOG
Group. Using this method, G&A expense allocated to the Properties
for the nine month periods ended September 30, 2010 and 2009, and the year ended
December 31, 2009, was approximately $49,060, $15,988 and $21,768,
respectively.
Income
Taxes
Prior to
the acquisition of the Properties by the Company on December 1, 2010, the
Properties were part of Geronimo, a pass-through entity for federal income tax
purposes with taxes being the responsibility of Geronimo’s owner. As
a result, the historical financial statements of the Properties do not present
any income tax expense, benefits, liabilities or
assets.
Pro forma
income taxes in the accompanying statements of operations for all periods
presented reflect income tax expense or benefit resulting from income or
losses before taxes as if the Properties had been included in a taxable C
corporation for federal income tax purposes. Additionally, pro forma
deferred tax assets and liabilities presented in Note E as of September 30, 2010
reflect the tax provision as if the Properties had been included in a taxable C
corporation for federal income tax purposes.
Uncertain
tax positions were evaluated for recognition and measurement in the pro forma
income taxes and pro forma deferred taxes in the accompanying financial
statements. To recognize a tax position, management determines whether it is
more likely than not that the tax position will be sustained upon examination,
including resolution of any related appeals or litigation, based on the
technical merits of the position. A tax position that meets the more likely than
not threshold is measured to determine the amount of benefit to be recognized in
the consolidated financial statements. The amount of tax benefit recognized with
respect to any tax position is measured as the largest amount of benefit that is
greater than 50 percent likely of being realized upon settlement. The Properties
had no uncertain tax positions that required recognition in the accompanying pro
forma income tax information included in the accompanying financial statements.
Any interest or penalties would be recognized as a component of income tax
expense.
Fair
Value of Financial Instruments
The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between two willing parties. The carrying
amount of oil and gas sales receivable, accounts payable, and accrued capital
expenditures approximates fair value because of the short maturity of these
instruments.
F-10
Interim
Financial Statements
The
financial statements of the Properties as of and for the nine months ended
September 30, 2010 and 2009 are unaudited. In the opinion of Company management,
such financial statements include the adjustments and accruals which are
necessary for a fair presentation of the results for the interim periods. These
interim results are not necessarily indicative of results for a full
year.
Recent
Accounting
Pronouncements
Oil and
Natural Gas. In September
2009, the FASB issued an update to the Oil and Gas Topic, which makes a
technical correction regarding the accounting and disclosures for natural gas
balancing arrangements. The topic amends prior guidance because the SEC staff
has not taken a position on whether the entitlements method or sales method is
preferable for natural gas-balancing arrangements that do not meet the
definition of a derivative. With the entitlements method, sales revenue is
recognized to the extent of each well partner's proportionate share of natural
gas sold regardless of which partner sold the natural gas. Under the sales
method, sales revenue is recognized for all natural gas sold by a partner even
if the partner's ownership is less than 100 % of the natural gas sold.
The Oil and Gas Topic update
included an instruction that public companies must account for all significant
natural gas imbalances consistently using one accounting method. Both the method
and any significant amount of imbalances in units and value should be disclosed
in regulatory filings. The accompanying financial statements account for all
natural gas imbalances under the sales
method and make all required disclosures. As of September 30, 2010 and December
31, 2009,
there were no
significant oil and natural gas imbalances related to the
Properties.
Reserve
Estimation. In January 2010,
the FASB issued an update to the Oil and Gas Topic, which aligns the oil and
natural gas reserve estimation and disclosure requirements with the requirements
in the SEC's final rule, Modernization
of the Oil and Gas Reporting Requirements (the "Final Rule"). The Final
Rule was issued on December 31, 2008. The Final Rule is intended to provide
investors with a more meaningful and comprehensive understanding of oil and
natural gas reserves, which should help investors evaluate the relative value of
oil and natural gas companies.
The Final Rule permits the
use of new technologies to determine proved reserves estimates if those
technologies have been demonstrated empirically to lead to reliable conclusions
about reserve volume estimates. The Final Rule also allows,
but does not require, companies to disclose their probable and possible reserves
to investors in documents filed with the SEC. In addition, the new disclosure
requirements require companies to: (i) report the independence and
qualifications of its reserves preparer or auditor; (ii) file reports when
a third party is relied upon to prepare reserves estimates or conduct a reserves
audit; and (iii) report oil and natural gas reserves using an average price
based upon the prior 12-month period rather than a year-end price. The Final
Rule became effective for fiscal years ending on or after December 31,
2009.
Fair
Value. In January 2010,
the FASB issued an update to the Fair Value Topic, which enhances the usefulness
of fair value measurements. The amended guidance requires both the
disaggregation of information in certain existing disclosures, as well as the
inclusion of
more robust disclosures about valuation techniques and inputs to recurring and
nonrecurring fair value measurements. The amended guidance is
effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disaggregation
requirement for the reconciliation disclosure of Level 3 measurements,
which is effective for fiscal years beginning after December 15, 2010 and
for interim periods within those years. This guidance was adopted
effective January 1, 2010, and did not have a
significant impact on accompanying financial statements.
F-11
Note C. Asset
Retirement Obligations
The asset retirement obligations
represent the estimated present value of applicable costs to
plug, abandon
and remediate the developed properties
included in the Properties at the end of their
productive lives, in accordance with applicable state laws. There are no assets that are legally
restricted for purposes of settling asset retirement obligations of the
Properties.
The following table
summarizes the
Properties’
asset retirement obligation activity for the nine months ended September
30, 2010 and the year ended December 31, 2009:
2010
|
2009
|
|||||||
Balance,
beginning of period
|
$ | 4,820 | $ | - | ||||
Liabilities
incurred from new wells
|
4,053 | 4,820 | ||||||
Accretion
expense
|
188 | - | ||||||
Balance,
end of period
|
$ | 9,061 | $ | 4,820 |
Assets and Liabilities
Measured at Fair Value on a Nonrecurring Basis
Certain of the Properties’
assets and
liabilities are reported at fair value on a nonrecurring basis. The following methods and
assumptions were used to estimate the fair values:
Impairments
of Long-Lived
Assets —Long-lived assets to be held
and used, including proved oil and natural gas properties, are reviewed
whenever events or circumstances indicate that the carrying value of those
assets may not be recoverable. An impairment loss is indicated if the sum of the
expected undiscounted future net cash flows is less than the carrying amount of
the assets. In this circumstance, an impairment loss is recognized for the
amount by which the carrying amount of the asset exceeds the estimated fair
value of the asset.
Oil and natural gas
properties are reviewed by amortization base or by individual well for those
wells not constituting part of an amortization base. For each property
determined to be impaired, an impairment loss equal to the difference between
the carrying value of the properties and the estimated fair value (discounted
future cash flows) of the properties is recognized at that time. Estimating
future cash flows involves the use of judgments, including estimation of the
proved and unproved oil and natural gas reserve quantities, timing of
development and production, expected future commodity prices, capital
expenditures and production costs.
Proved oil and natural gas
properties that are sensitive to oil and natural gas prices are periodically
reviewed for impairment. Impairments related to the Properties were recorded in
the amounts of $46,553 and $253,258 for the nine
months ended September 30, 2010 and the year ended December 31, 2009,
respectively.
Asset
Retirement Obligations (“ARO”) —The fair value of AROs
are estimated
based on
discounted cash flow projections using numerous estimates, assumptions and
judgments regarding such factors as the existence of a legal obligation for an
ARO; amounts and timing of settlements; the credit-adjusted risk-free rate to be
used; and inflation rates. See Note C for a summary of changes in AROs for
all periods presented.
Note E. Income
Taxes
Prior to
its acquisition by ASEC on December 1, 2010, the Properties were owned by
Geronimo, a pass-through entity for income tax purposes whose taxes were the
responsibility of the entity’s owner. As a result, the historical
financial statements of the Properties do not present any tax expenses or
benefits, liabilities or assets.
F-12
Pro forma
income taxes have been presented in the statements of operations for all periods
presented to reflect income tax expense or benefit resulting from income or
losses before taxes, as if the Properties had been included in a C corporation
for federal income tax purposes. Pro forma income tax (expense)
benefit, as if the Properties had been a taxable entity, for the nine months
ended September 30, 2010 and 2009 and for the year ended December 31, 2009, was
zero for all periods due to a valuation allowance recorded against the deferred
tax assets.
The pro forma provision for income
taxes for the nine months ended September 30, 2010 included the following
components:
Current
|
$ | - | ||
Deferred
|
- | |||
Total
provision for income taxes
|
$ | - |
The
following reconciles the pro forma provision for income taxes with the pro forma
provision which would result from application of the statutory federal tax rate
to pre-tax financial income:
Income
before taxes
|
$ | 71,452 | ||
Statutory
rate
|
34 | % | ||
Expected
tax expense at federal statutory rate
|
$ | 24,294 | ||
Increase
(decrease) resulting from:
|
||||
State
income taxes, net of federal income tax effect
|
2,830 | |||
Change
in valuation allowance
|
(27,124 | ) | ||
Pro
forma provision for income taxes
|
$ | - | ||
Effective
tax rate
|
0 | % |
Components
of the Properties’ pro forma net deferred taxes as of September 30, 2010 were as
follows:
Deferred
Tax Assets
|
||||
Net
operating loss carry forward
|
$ | 437,000 | ||
Valuation
allowance
|
(94,000 | ) | ||
343,000 | ||||
Deferred
tax liabilities:
|
||||
Differences
between book and tax basis of property
|
(343,000 | ) | ||
Net
pro forma deferred taxes
|
$ | - |
Management assesses both
positive and negative evidence to determine whether it is more likely than not
that deferred tax assets can be realized prior to their expiration. Management
monitors entity-specific, oil and natural gas industry and worldwide economic
factors and assesses the likelihood that the Properties’ net operating
losses and other
deferred tax attributes in the United States, state, and local tax jurisdictions
will be utilized prior to their expiration. At
September
30, 2010,
a valuation
allowance of $94,000 would have been required against the pro forma deferred tax
assets. No net operating losses from the Properties will be available to ASEC
after the acquisition.
F-13
F.
Major Customers
The Properties are located in
North Dakota. At December 31, 2009,
approximately 90% of its oil and natural gas revenues were derived from two
third party operators. Management believes
the loss of
its major
customers would
not have a material adverse effect as the oil and natural
gas
production can
be easily sold to other purchasers.
Note G. Related
Party Transactions
XOG
Operating, LLC. The Properties are
operated by third party operators. Prior to the acquisition of the
Properties by the Company, certain administrative functions associated with the
Properties were performed by the XOG Group.
Overriding
Royalty and
Royalty
Interests. In some instances, the
XOG Group may hold overriding royalty and royalty interests (“ORRI”) in certain
oil and natural gas properties acquired by ASEC. All revenues and expenses
presented herein are net of any effects of such ORRIs.
Note
H. Commitments and Contingencies
During
2010, Geronimo entered into various contractual agreements with third party
operators for the drilling and completion of certain of the
Properties. At September 30, 2010, the outstanding balance of such
commitments related to such drilling and completion was approximately
$271,000.
F-14
Properties
Acquired From Geronimo Holding Corporation on December 1, 2010
Unaudited Supplementary
Information
Costs
incurred for oil and natural gas producing activities during the year ended
December 31, 2009 was as follows:
Unproved
property acquisition costs
|
$ | 233,449 | ||
Exploration
|
689,983 | |||
Development
|
- | |||
Total
costs incurred for oil and natural gas properties
|
$ | 923,432 |
Reserve Quantity
Information
The following information
represents estimates of the Properties’
proved reserves as of December 31, 2009. The proved reserves as
of December 31, 2009 have been prepared and presented under new SEC rules. These
new rules are effective for fiscal years ending on or after December 31,
2009, and require SEC reporting companies to prepare their reserves estimates
using revised reserve definitions and revised pricing based on a 12-month
unweighted average of the first-day-of-the-month pricing. The previous rules
required that reserve estimates be calculated using last-day-of-the-period pricing.
The crude oil and natural
pricing that was used for estimates of our reserves as of December 31, 2009
was based on an unweighted average twelve month posted price as adjusted for
location, grade and quality, of $51.02 per Bbl of oil and $3.66 per Btu of
natural gas. The Properties had de minimis proved reserves as of December 31,
2008.
The SEC has released only limited
interpretive guidance regarding reporting of reserve estimates under the new
rules and may not issue further interpretive guidance on the new rules.
Accordingly, while the estimates of the Properties' proved reserves and related
estimated discounted future net cash flows at December 31, 2009 included in
this report have been prepared based on what we and our independent
reserve engineer
believe to be reasonable interpretations of the new SEC rules, those estimates
could differ materially from any estimates prepared applying more specific SEC
interpretive guidance.
The Properties proved oil and natural gas
reserves are in
the Bakken Shale formation located primarily in North Dakota. The estimates of the proved
reserves at December 31, 2009 are based on reports prepared by an
independent petroleum engineer. Proved reserves were estimated in accordance
with the guidelines established by the SEC and the FASB.
Oil and natural gas reserve
quantity estimates are subject to numerous uncertainties inherent in the
estimation of quantities of proved reserves and in the projection of future
rates of production and the timing of development expenditures. The accuracy of
such estimates is a function of the quality of available data and of engineering
and geological interpretation and judgment.
Results of subsequent
drilling, testing and production may cause either upward or downward revision of
previous estimates. Further, the volumes considered to be commercially
recoverable fluctuate with changes in prices and operating costs. Reserve estimates are
inherently imprecise and estimates of new discoveries are more imprecise than
those of currently producing oil and natural gas properties. Accordingly, these
estimates are expected to change as additional information becomes available in
the future.
F-15
Properties
Acquired From Geronimo Holding Corporation on December 1, 2010
Unaudited Supplementary
Information (Continued)
The
following table provides a rollforward of the total net proved reserves for the
year ended December 31, 2009, as well as disclosure of proved developed and
proved undeveloped reserves at December 31, 2009. Oil volumes are expressed
in Bbls and natural gas volumes are expressed in Mcf.
Oil
(Bbls)
|
Natural
Gas
(Mcf)
|
Total
(Boe)
|
||||||||||
Total
Proved Reserves:
|
||||||||||||
Balance,
January 1, 2009
|
- | - | - | |||||||||
Discoveries
|
12,166 | 4,016 | 12,835 | |||||||||
Production
|
(1,871 | ) | (485 | ) | (1,951 | ) | ||||||
Balance,
December 31, 2009
|
10,295 | 3,531 | 10,884 | |||||||||
Proved
developed reserves
|
10,295 | 3,531 | 10,884 | |||||||||
Proved
undeveloped reserves
|
- | - | - | |||||||||
Total
proven reserves
|
10,295 | 3,531 | 10,884 |
Standardized Measure of
Discounted Future Net Cash Flows
The standardized measure of
discounted future net cash flows is computed by applying at December 31,
2009 the 12-month unweighted average of the first-day-of-the-month pricing for oil and natural
gas (with consideration of price changes only to the extent provided by
contractual arrangements) to the estimated future production of proved oil and
natural gas reserves less estimated future expenditures (based on year-end
costs) to be incurred in developing and producing the proved reserves,
discounted using a rate of 10% per year to reflect the estimated timing of the
future cash flows.
Future income taxes are
calculated by comparing undiscounted future cash flows to the tax basis of oil
and natural gas properties plus available carry forwards and credits and
applying the current tax rates to the difference.
Discounted future cash flow
estimates like those shown herein are not intended to represent estimates of the
fair value of oil and natural gas properties. Estimates of fair value would also
consider probable and possible reserves, anticipated future oil and natural gas
prices, interest rates, changes in development and production costs and risks
associated with future production. Because of these and other considerations,
any estimate of fair value is necessarily subjective and
imprecise.
F-16
Properties
Acquired From Geronimo Holding Corporation on December 1, 2010
Unaudited Supplementary
Information (Continued)
The
following table provides the standardized measure of discounted future net cash
flows at December 31, 2009:
Future
Production Revenues
|
$ | 538,176 | ||
Future
Costs:
|
||||
Production
|
(134,405 | ) | ||
Development
|
- | |||
Income
taxes
|
(33,605 | ) | ||
10%
annual discount factor
|
(148,021 | ) | ||
Standardized
measure of discounted net cash flows
|
$ | 222,145 |
Changes in
Standardized Measure of Discounted Future Net Cash Flows
The
following table provides a rollforward of the standardized measure of discounted
future net cash flows for the year ended December 31, 2009:
Increase
(decrease):
|
||||
Extension
and discoveries
|
$ | 352,041 | ||
Oil
and gas sales, net of production costs
|
(96,291 | ) | ||
Changes
in income taxes
|
(33,605 | ) | ||
Net
increase
|
222,145 | |||
Standardized
measure of discounted future net cash flows:
|
||||
Beginning
of year
|
- | |||
End
of year
|
$ | 222,145 |
F-17