UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q/A

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                                      to                                                    

 

Commission File Number:  000-50906

 

 

AMERICAN EAGLE ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

 

Nevada		20-0237026
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

 

2549 West Main Street, Suite 202, Littleton, Colorado		80120
(Address of principal executive offices)		(Zip Code)

 

(303) 798-5235

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

(Check one):

 

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 Yes o 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 August 17, 2012.

  

Explanatory Note

 

The purpose of this Amendment No. 1 to American Eagle Energy Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012, filed with the Securities and Exchange Commission on August 20, 2012 (the “Form 10-Q”), is to correct an accidental omission in Note 6, to revise proceeds from the conveyance of working interests in the condensed, consolidated statement of cash flows and related notes, and to furnish Exhibit 101 to the Form 10-Q in accordance with Rule 405 of Regulation S-T.  Exhibit 101 to this Report provides the consolidated financial statements and related notes from the Form 10-Q formatted in XBRL (eXtensible Business Reporting Language).

 

No other changes have been made to the Form 10-Q.  This Amendment No. 1 to the Form 10-Q speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date.

 

Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

American Eagle Energy Corporation

 

Condensed Consolidated Financial Statements

 

As of June 30, 2012, December 31, 2011 and

For the Three-Month and Six-Month Periods Ended June 30, 2012 and 2011

 

American Eagle Energy Corporation

 

Index to the Condensed Consolidated Financial Statements

 

As of June 30, 2012, December 31, 2011 and

For the Three-Month and Six-Month Periods Ended June 30, 2012 and 2011

 

Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 (Unaudited)	F-2
Condensed Consolidated Statements of Income and Comprehensive Income for the Three-Month and Six-Month Periods Ended June 30, 2012 and 2011 (Unaudited)	F-3
Condensed Consolidated Statements of Stockholders’ Equity for the Six-Month Period Ended June 30, 2012 and the Year Ended December 31, 2011 (Unaudited)	F-5
Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2012 and 2011 (Unaudited)	F-6
Notes to the Consolidated Financial Statements (Unaudited)	F-7

 

 

American Eagle Energy Corporation

 

Condensed Consolidated Balance Sheets

 

As of June 30, 2012 and December 31, 2011

 

		June 30,				December 31,
		2012				2011
Current assets:
Cash		$	10,084,292			$	12,151,309
Trade receivables			12,063,519				3,105,079
Receivables from related parties			-				314,521
Prepaid expenses			60,872				45,690
Total current assets			22,208,683				15,616,599
Equipment and leasehold improvements, net of accumulated depreciation and amortization of $173,872 and $156,744, respectively			109,610				19,823
Oil and gas properties, under the full cost method – subject to amortization, net of accumulated depletion of $733,307 and $183,238, respectively			23,572,737				15,798,307
Oil and gas properties, under the full cost method – not subject to amortization			9,667,990				7,295,215
Marketable securities			1,126,324				1,254,434
Restricted cash			101,500				51,500
Deposits			5,345				5,345
Total assets		$	56,792,189			$	40,041,223
Current liabilities:
Accounts payable		$	15,791,115			$	6,002,204
Amounts due to working interest partners			10,694,454				2,233,267
Accrued income taxes			204,637				1,460,137
Total current liabilities			26,690,206				9,695,608
Asset retirement obligations			251,811				34,628
Deferred taxes			4,288,786				4,552,864
Total liabilities			31,230,803				14,283,100
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock, $.001 par value, 194,444,444 shares authorized, 45,842,782 and 45,588,948 shares outstanding, respectively			45,843				45,589
Additional paid-in capital			26,446,455				25,948,311
Accumulated other comprehensive income (loss)			(9,200	)			180,447
Accumulated deficit			(921,712	)			(416,224	)
Total stockholders’ equity			25,561,386				25,758,123
Total liabilities and stockholders’ equity		$	56,792,189			$	40,041,223

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

American Eagle Energy Corporation

 

Condensed Consolidated Statements of Income and Comprehensive Income

 

For the Three-Month and Six-Month Periods Ended June 30, 2012 and 2011

 

		For the Three-Month Period								For the Six-Month Period
		Ended June 30,								Ended June 30,
		2012				2011				2012				2011
Oil and gas sales		$	1,690,673			$	13,702			$	2,916,252			$	52,805
Operating expenses:
Oil and gas operating expenses			694,954				67,508				1,101,510				115,691
General and administrative			867,008				438,436				2,045,700				994,767
Depreciation, amortization and depletion expense			270,400				13,558				567,197				29,117
Total operating expenses			1,832,362				519,502				3,714,407				1,139,575
Total operating loss			(141,689	)			(505,800	)			(798,155	)			(1,086,770	)
Interest income			1,468				1,662				4,871				3,030
Dividend income			11,449				19,476				28,730				34,532
Interest expense			(521	)			-				(703	)			-
Gain on the sale of oil and gas properties, subject to amortization, net of costs			-				3,402,000				-				3,402,000
Income (loss) before taxes			(129,293	)			2,917,338				(765,257	)			2,352,792
Income tax benefit (expense)			(17,860	)			(4,429	)			259,769				(4,429	)
Net income (loss)		$	(147,153	)		$	2,912,909			$	(505,488	)		$	2,348,363
Net income (loss) per common share:
Basic		$	(0.00	)		$	0.32			$	(0.01	)		$	0.26
Diluted		$	(0.00	)		$	0.30			$	(0.01	)		$	0.24
Weighted average number of shares outstanding -
Basic			45,842,782				9,112,405				45,741,054				9,112,405
Diluted			45,842,782				9,820,460				45,741,054				9,796,757

 

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 and Six-Month Periods Ended June 30, 2012 and 2011

 

		For the Three-Month Period								For the Six-Month Period
		Ended June 30,								Ended June 30,
		2012				2011				2012				2011
Net income (loss)		$	(147,153	)		$	2,912,909			$	(505,488	)		$	2,348,363
Other comprehensive loss, net of tax:
Unrealized foreign exchange losses			(34,217	)			-				(34,217	)			-
Unrealized losses on securities			(168,385	)			(64,722	)			(87,627	)			(17,054	)
Total other comprehensive loss, net of tax			(202,602	)			(64,722	)			(121,844	)			(17,054	)
Comprehensive income (loss)		$	(349,755	)		$	2,848,187			$	(627,332	)		$	2,331,309

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

American Eagle Energy Corporation

 

Condensed Consolidated Statements of Stockholders’ Equity

 

For the Six-Month Period Ended June 30, 2012 and the Year Ended December 31, 2011

  

														Accumulated
										Additional				Other								Total
		Common Stock								Paid-In				Comprehensive				Accumulated				Stockholders
		Shares				Amount				Capital				Income				Deficit				Equity
Balance, December 31, 2010			9,112,405			$	9,112			$	9,231,199			$	415,463			$	(4,870,125	)		$	4,785,649
Shares issued during acquisition			36,476,543				36,477				16,686,498				-				-				16,722,975
Stock based compensation			-				-				30,614				-				-				30,614
Unrealized loss on securities			-				-				-				(235,016	)			-				(235,016	)
Net income			-				-				-				-				4,453,901				4,453,901
Balance, December 31, 2011			45,588,948				45,589				25,948,311				180,447				(416,224	)			25,758,123
Stock based compensation			-				-				353,773				-				-				353,773
Shares issued in private placement			100,000				100				109,900				-				-				110,000
Shares issued from exercise of stock options			153,834				154				34,471				-				-				34,625
Unrealized loss on securities			-				-				-				(189,647	)			-				(189,647	)
Net loss			-				-				-				-				(505,488	)			(505,488	)
Balance, June 30, 2012			45,842,782			$	45,843			$	26,446,455			$	(9,200	)		$	(921,712	)		$	25,561,386

 

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 Six-Month Periods Ended June 30, 2012 and 2011

 

		2012				2011
Cash flows provided by operating activities:
Net income (loss)		$	(505,488	)		$	2,348,363
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Non-cash transactions:
Stock-based compensation			353,773				-
Depreciation, depletion and amortization			567,197				29,117
Accretion of discount on asset retirement obligation			6,205				707
Provision for deferred income taxes			(264,078	)			-
Foreign currency transaction gains			(10,236	)			-
Gain on the sale of oil and gas properties, subject to amortization, net of costs			-				(3,402,000	)
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses			(15,182	)			24,072
(Increase) decrease in trade receivables			(8,643,919	)			182,352
Increase in amounts due from American Eagle Energy Inc. (pre-merger)			-				(387,957	)
Increase in accounts payable			9,788,911				1,973,531
Increase in drilling pre-payments collected			8,461,187				788,748
Decrease in income taxes payable			(1,255,500	)			-
Net cash provided by operating activities			8,482,870				1,556,933
Cash flows provided by (used for) investing activities:
Proceeds from the sale of oil and gas properties			227,661				3,456,960
Proceeds from the conveyance of working interests			3,789,989				-
Proceeds from the sale of equipment			-				700
Additions to oil and gas properties			(14,503,946	)			(1,990,753	)
Additions to office equipment and leasehold improvements			(106,915	)			(1,010	)
Purchase of certificates of deposit			(50,000	)			-
Purchase of marketable securities			(51,301	)			-
Net cash provided by (used for) investing activities			(10,694,512	)			1,465,897
Cash flows provided by financing activities:
Proceeds from sale of stock to a director			110,000				-
Proceeds from the exercise of stock options			34,625				-
Net cash provided by financing activities			144,625				-
Net increase (decrease) in cash			(2,067,017	)			3,022,830
Cash - beginning of period			12,151,309				2,400,362
Cash - end of period		$	10,084,292			$	5,423,192

 

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 June 30, 2012, December 31, 2011 and

For the Three-Month and Six-Month Periods Ended June 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, 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 June 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 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 and six-month periods ended June 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 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.

 

 

American Eagle Energy Corporation

 

Notes to the Condensed Consolidated Financial Statements

 

As of June 30, 2012, December 31, 2011 and

For the Three-Month and Six-Month Periods Ended June 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 June 30, 2012, the Company had $9,325,522 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 gains totaling $118,059 and $73,039 for the three-month and six-month periods ended June 30, 2012, respectively, and losses totaling ($21,637) and $(28,584) for the three-month and six-month periods ended June 30, 2011, respectively.

 

Restricted Cash

 

At June 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 receivables 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 June 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 June 30, 2012, December 31, 2011 and

For the Three-Month and Six-Month Periods Ended June 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 $188,096 and $353,773, for the three-month and six-month periods ended June 30, 2012. The Company did not recognize any stock-based compensation expense for the three-month and six-month periods ended June 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 June 30, 2012 and December 31, 2011, were as follows:

 

		Level 1				Level 2				Level 3				Total
June 30, 2012
Marketable securities		$	1,126,324			$	-			$	-			$	1,126,324
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.

 

 

American Eagle Energy Corporation

 

Notes to the Condensed Consolidated Financial Statements

 

As of June 30, 2012, December 31, 2011 and

For the Three-Month and Six-Month Periods Ended June 30, 2012 and 2011

 

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 and six-month periods ended June 30, 2012 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 six-month periods ended June 30, 2012 and 2011.

 

3.

Acquisition of American Eagle Energy Inc.

 

On December 20, 2011, the Company finalized its merger transaction with AEE Inc. Prior to the transaction, AEE Inc. operated as a publicly traded company with oil and gas holdings in North Dakota, Texas and southeastern Saskatchewan, Canada and was a working interest partner to the Company with respect to its Hardy Property and certain proved oil and gas properties and unproven oil and gas prospects located in North Dakota. The Company acquired AEE Inc. in order to leverage the two companies’ respective oil and gas holdings.

 

Pursuant to the terms of the Merger Agreement, the Company issued 36,476,543 shares of its common stock to acquire 100% of the then-outstanding shares of AEE Inc.’s common stock, which resulted in AEE Inc. becoming a wholly owned subsidiary of the Company. Immediately subsequent to the transaction, legacy AEE Inc. stockholders owned approximately 80% of the shares of the Company’s outstanding common stock, exclusive of outstanding options to purchase shares of the Company’s common stock and shares of AEE Inc.’s common stock. The shares of common stock that were issued in connection with the Company’s acquisition of AEE Inc. were registered with the SEC on November 11, 2011.

 

Despite the fact the AEE Inc.’s legacy stockholders held approximately 80% of the Company’s outstanding shares immediately following the merger, other factors present in the structure of the transaction resulted in the Company being determined to be the legal and acquiring entity. 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 Corp. 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 Corp.’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.

 

 

American Eagle Energy Corporation

 

Notes to the Condensed Consolidated Financial Statements

 

As of June 30, 2012, December 31, 2011 and

For the Three-Month and Six-Month Periods Ended June 30, 2012 and 2011

 

The following table summarizes the consideration paid by the Company to acquire AEE Inc. and the net assets acquired:

 

Consideration given:
36,476,543 shares of the Company’s common stock		$	16,722,975
Identifiable assets acquired and liabilities assumed:
Financial assets acquired		$	6,032,799
Oil and gas properties acquired (amortizable)			12,781,348
Oil and gas properties acquired (non-amortizable)			7,290,500
Financial liabilities assumed			(9,381,672	)
Net assets acquired		$	16,722,975

 

The amounts presented above are based on estimated fair market values and are subject to change as additional information becomes available. Because the common stock of both companies is very thinly traded, the Company estimated the fair market value of the shares issued based on an independent valuation.

 

The financial assets acquired included cash and cash equivalents of $5,598,916, trade and other receivables totaling $351,558, prepaid expenses totaling $7,468, marketable securities of a related party totaling $73,357 and restricted cash totaling $1,500.

 

The financial liabilities assumed consisted of trade payables and accrued liabilities totaling $3,300,491, amounts due to the Company totaling $251,081 and long-term asset retirement obligations totaling $17,314 and current income taxes payable totaling $975,000. In addition, the Company recorded a deferred tax liability in the amount of $4,837,786, which represents the future tax effects of the fair market value adjustments applied to the assets of AEE Inc. upon acquisition.

 

Supplemental Pro Forma Information (Unaudited)

 

The following pro forma financial information for the three-month and six-month periods ended June 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 June 30, 2011		$	24,139			$	4,569,213
For the six-months ended June 30, 2011		$	99,282			$	3,608,154

 

 

American Eagle Energy Corporation

 

Notes to the Condensed Consolidated Financial Statements

 

As of June 30, 2012, December 31, 2011 and

For the Three-Month and Six-Month Periods Ended June 30, 2012 and 2011

 

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.

 

4.

Marketable Securities

 

Available-for-sale marketable securities at June 30, 2012 and December 31, 2011 consist of the following:

 

						Gains in				Losses in
						Accumulated				Accumulated
		Estimated				Other				Other
		Fair				Comprehensive				Comprehensive
		Value				Income				Income
June 30, 2012
Noncurrent assets:
Common stock		$	1,126,324			$	101,962			$	-
Total available-for-sale marketable securities		$	1,126,324			$	101,962			$	-
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			$	-

 

 

American Eagle Energy Corporation

 

Notes to the Condensed Consolidated Financial Statements

 

As of June 30, 2012, December 31, 2011 and

For the Three-Month and Six-Month Periods Ended June 30, 2012 and 2011

 

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 six-month periods ended June 30, 2012 and 2011.

 

5.

Equipment and Leasehold Improvements

 

The following is a summary of equipment and improvements as of June 30, 2012 and December 31, 2011:

 

		June 30,				December 31,
		2012				2011
Office equipment		$	129,701			$	129,057
Computer equipment			103,906				-
Leasehold improvements			49,875				47,510
Total equipment and improvements			283,482				176,567
Less: accumulated depreciation and amortization			(173,872	)			(156,744	)
Equipment and improvements, net		$	109,610			$	19,823

 

Depreciation and amortization expense for the three-month and six-month periods ended June 30, 2012 was $10,805 and $17,217, respectively, and $1,879 and $11,801 for the three-month and six-month periods ended June 30, 2011, respectively.

 

 

American Eagle Energy Corporation

 

Notes to the Condensed Consolidated Financial Statements

 

As of June 30, 2012, December 31, 2011 and

For the Three-Month and Six-Month Periods Ended June 30, 2012 and 2011

 

6.

Oil and Gas Properties

 

As of June 30, 2012 and December 31, 2011, net costs included in the Company’s full-cost pool cost centers are as follows:

 

		June 30, 2012								December 31, 2011
		Amortizable				Non-Amortizable				Amortizable				Non-Amortizable
United States		$	11,160,024			$	9,667,990			$	6,816,654			$	7,295,215
Canada			12,412,713				-				8,981,653				-
Total		$	23,572,737			$	9,667,990			$	15,798,307			$	7,295,215

 

Hardy Property

 

As of June 30, 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.

 

Spyglass Property

 

As of June 30, 2012, the Company owns a consolidated 50% working interest in approximately 11,883 net acres within the Spyglass Property, which is held by approximately 429 leases, with expiration dates ranging from August 2012 to February 2017.

 

Benrude Property

 

As of June 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 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 June 30, 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:

 

 

American Eagle Energy Corporation

 

Notes to the Condensed Consolidated Financial Statements

 

As of June 30, 2012, December 31, 2011 and

For the Three-Month and Six-Month Periods Ended June 30, 2012 and 2011

 

		YTD								Aggregate
		June 30,								Through
		2012				2011				2010				Total
Acquisition costs		$	2,600,436			$	9,442,209			$	2,362,741			$	14,405,386
Exploration costs			-				520,967				206,203				727,170
Reclassifications to the amortizable pool			-				(758,723	)			-				(758,723	)
Impairments and sales			(227,661	)			(2,499,605	)			(1,978,577	)			(4,705,843	)
Total capitalized costs of exploratory prospects		$	2,372,775			$	6,704,848			$	590,367			$	9,667,990

 

Glacier Prospect

 

As of June 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 June 30, 2012.

 

Sidney North Prospect

 

As of June 30, 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 June 30, 2012.

 

West Spyglass Prospect

 

As of June 30, 2012, the Company owns a 25% working interest in approximately 12,032 net acres located within the West Spyglass Prospect. The net acres are held by 288 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 June 30, 2012.

 

 

American Eagle Energy Corporation

 

Notes to the Condensed Consolidated Financial Statements

 

As of June 30, 2012, December 31, 2011 and

For the Three-Month and Six-Month Periods Ended June 30, 2012 and 2011

 

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 June 30, 2012 and the year ended December 31, 2011:

 

		June 30,				December 31,
		2012				2011
Balance at the beginning of the period		$	7,295,215			$	590,368
Additions to exploratory costs			2,600,436				11,407,645
Disposals			(227,661	)			(2,499,605	)
Reassignments to the amortizable pool			-				(2,203,193	)
Balance at the end of the period		$	9,667,990			$	7,295,215

 

7.

Asset Retirement Obligations

 

The Company has recorded estimated asset retirement obligations for the future plugging and abandonment of wells that it operates within the Hardy and Spyglass Properties. As of June 30, 2012 and December 31, 2011, the discounted value of the asset retirement obligations was $251,811 and $34,628, respectively.

 

The Company recognized accretion expense of $5,333 and $6,205 for the three-month and six-month periods ended June 30, 2012, respectively, and $358 and $707 for the three-month and six-month periods ended June 30, 2011, associated with its asset retirement obligations. The projected plugging dates for the Company’s existing operated wells range from December 2020 to June 2036.

 

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 June 30, 2012, the Company has elected to participate in 34 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.

 

 

American Eagle Energy Corporation

 

Notes to the Condensed Consolidated Financial Statements

 

As of June 30, 2012, December 31, 2011 and

For the Three-Month and Six-Month Periods Ended June 30, 2012 and 2011

 

During the six-month period ended June 30, 2012, the Company drilled and completed three 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 7 wells, 1 of which is currently being completed, 1 of which is currently being drilled and 5 wells that are waiting to be spud.

 

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 agreement 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. 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 June 30, 2012 are as follows:

 

		Amount
2012 (remainder)		$	51,617
2013			105,880
2014			111,174
Total		$	268,671

 

Rent expense for the three-month and six-month periods ended June 30, 2012 totaled $18,053 and $42,891, respectively, and $19,418 and $36,960 for the three-month and six-month periods ended June 30, 2011, respectively.

 

9.

Earnings (Loss) Per Share

 

Because the Company recognized a net loss for three-month and six-month periods ended June 30, 2012, 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 and six-month periods ended June 30, 2012 and 2011:

 

 

American Eagle Energy Corporation

 

Notes to the Condensed Consolidated Financial Statements

 

As of June 30, 2012, December 31, 2011 and

For the Three-Month and Six-Month Periods Ended June 30, 2012 and 2011

 

		For the Three-Month Period								For the Six-Month Period
		Ended June 30,								Ended June 30,
		2012				2011				2012				2011
Net income (loss)		$	(147,153	)		$	2,912,909			$	(505,488	)		$	2,348,363
Weighted average number of common shares outstanding			45,842,782				9,112,405				45,741,054				9,112,405
Incremental shares from the assumed exercise of dilutive stock options			-				708,055				-				684,352
Diluted common shares outstanding			45,842,782				9,820,460				45,741,054				9,796,757
Earnings (loss) per share – basic		$	(0.00	)		$	0.32			$	(0.01	)		$	0.26
Earnings (loss) per share – diluted		$	(0.00	)		$	0.30			$	(0.01	)		$	0.24

 

10.

Carry Agreement

 

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. The Carry Agreement relieves the Company of approximately $12 million in what the working interest share of the drilling and completion costs of such six wells would have been. The Company expects that it will significantly strengthen its working capital position and allow it to pursue our short-term drilling program vigorously.

 

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 six-month period ended June 30, 2012.

 

As of June 30, 2012, the Company has received $6,778,134 of funding under the Carry Agreement. 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.

 

 

American Eagle Energy Corporation

 

Notes to the Condensed Consolidated Financial Statements

 

As of June 30, 2012, December 31, 2011 and

For the Three-Month and Six-Month Periods Ended June 30, 2012 and 2011

 

11.

Equity Transactions

 

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 stock options were valued using the Black-Scholes option pricing model and had a fair market value of $391,962 at the time of grant. The assumptions used in the Black-Scholes option pricing model for the stock options granted in January 2012 were as follows:

 

Risk-free interest rate			0.28	%
Expected volatility of common stock			101	%
Dividend yield		$	0.00
Expected life of options			5 years
Weighted average fair market value of options granted		$	0.79

 

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 six-month period ended June 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 June 30, 2012, December 31, 2011 and

For the Three-Month and Six-Month Periods Ended June 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				3.5 years
Options granted			390,000				1.18				4.6 years
Options exercised			(153,834	)			0.05				3.8 years
Options expired			-				-				-
Options forfeited			-				-				-
Outstanding at June 30, 2012			3,764,600			$	0.77				3.6 years
Exercisable at June 30, 2012			2,399,600			$	0.58				3.1 years

 

Options outstanding as of June 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 $0.70 and $1.08 per share, resulting in an aggregate intrinsic value of $316,640 and $886,080, respectively.

 

The Company recognized stock-based compensation expense of $188,096 and $353,773 for the three-month and six-month periods ended June 30, 2012, respectively, related to stock options that were granted during December 2011 and January 2012. The Company did not recognize any stock-based compensation expense for the three-month and six-month periods ended June 30, 2011 as all options outstanding during that period had fully vested previously.

 

Shares Reserved for Future Issuance

 

As of June 30, 2012 and December 31, 2011, the Company had reserved 3,764,600 and 1,795,444 shares, respectively, for future issuance upon exercise of outstanding options.

 

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 $10,367 and $6,618 for the six-month periods ended June 30, 2012 and 2011, respectively.

 

 

American Eagle Energy Corporation

 

Notes to the Condensed Consolidated Financial Statements

 

As of June 30, 2012, December 31, 2011 and

For the Three-Month and Six-Month Periods Ended June 30, 2012 and 2011

 

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 $84,000 and $68,000 of consulting fees from Synergy during the six-month periods ended June 30, 2012 and 2011, respectively

 

13.

Subsequent Events

 

Effective July 15, 2012, the Company amended the Carry Agreement (described in Note 10) with the third-party to include an additional four oil and gas wells. The amendment relieves the Company of approximately $8 million of estimated future drilling related costs associated with the additional four wells.

 

 

 

 

PART II – OTHER INFORMATION

 

ITEM 6. EXHIBITS.

 

Exhibit		Description of Exhibit
31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy  Extension Schema document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy  Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy  Extension Presentation Linkbase Document

 

* Filed herewith.

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

AMERICAN EAGLE ENERGY CORPORATION
(Registrant)
September 13, 2012	/s/ Bradley M. Colby
	Bradley M. Colby
	President and Chief Executive Officer