NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)
|
1.
|
ORGANIZATION AND BASIS OF PRESENTATION
|
Alamo Energy Corp. is an early stage oil and gas company focused on exploration and production of oil and natural gas.
Alamo Energy Corp. (the Company) was incorporated as Alamo Oil Limited, a UK corporation (Alamo Oil) on September 1, 2009. On November 18, 2009 (the Closing Date), Alamo Oil completed an Asset Purchase and Sale Agreement (the Asset Purchase Agreement) with Green Irons Holdings Corporation (Green Irons). Following the closing of the Asset Purchase Agreement and pursuant to the Plan of Merger (the Merger), the assets of Alamo Oil were acquired by Green Irons and a wholly-owned subsidiary of Green Irons was then merged with Green Irons, and Green Irons changed its name to Alamo Energy Corp. For accounting purposes, the Asset Purchase was treated as a reverse merger and a recapitalization of Alamo Oil. Effective November 19, 2009, the Company effectuated a thirty-for-one split (the Stock Split) of the authorized number of shares of its common stock and all of its then-issued and outstanding common stock, par value $0.001 per share.
On April 12, 2011, the Company acquired 100% of the membership interest of three (3) affiliated entities, KYTX Oil and Gas, LLC, KYTX Pipeline, LLC, and KYTX Drilling, LLC from their sole member. As a result, the each of the entities became wholly owned subsidiaries to further exploit the oil and gas properties held by KYTX Oil and Gas, LLC and to utilize the related well equipment and gathering assets held by KYTX Pipeline, LLC and KYTX Drilling, LLC, respectively.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Alamo Energy Corp and our wholly-owned subsidiaries from the date of acquisition. All intercompany transactions have been eliminated.
Exploration Stage
The Company has not produced significant revenues from its principal business and is in the exploration stage company as defined by ASC 915,
Development Stage Entities
.
As of October 31, 2012, the Company owns a 100% working interest in certain oil and gas leases in Knox County, Kentucky, a 20% working interest in certain oil and gas leases in Brown County, Texas, a 50% working interest in certain leases in Ritchie County, West Virginia, and farm-in and participation rights agreements in onshore oil and gas properties in the UK.
The Company’s success will depend in large part on its ability to obtain and develop oil and gas interests within the United States and other countries. There can be no assurance that oil and gas properties obtained by the Company will contain reserves or that properties with reserves will be profitable to extract. The Company will be subject to local and national laws and regulations which could impact our ability to execute our business plan. As discussed in Note 4, the accompanying financial statements have been prepared assuming the Company will continue as a going concern.
ALAMO ENERGY CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)
1.
ORGANIZATION AND BASIS OF PRESENTATION
(Continued)
Basis of Presentation
The unaudited consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Item 10, Article 8, of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material changes in the information disclosed in the notes to the financial statements included in the Company’s annual report on Form 10-K for the year ended April 30, 2012. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended October 31, 2012, are not necessarily indicative of the results that may be expected for any other interim period or the entire year. For further information, these unaudited financial statements and the related notes should be read in conjunction with our audited financial statements for the year ended April 30, 2012, included in the Company’s annual report on Form 10-K.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual amounts could materially differ from those estimates.
Revenue Recognition
Working interest, royalty and net profit interests are recognized as revenue when oil and gas are sold. The Company records the sale of its interests in prospects generally as a reduction to the cost pool without gain or loss recognition unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to a cost center. A significant alteration would typically involve a sale of 25% or more of the proved reserves related to a single full cost pool. All terms of the sale are to be finalized and price readily determinable.
Stock Based Compensation
Stock based compensation is recorded in accordance with ASC 718,
Compensation – Stock Compensation
. ASC 718 establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. ASC 718 requires a public entity to measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period).
Reclassifications
Certain amounts in the 2011 financial statements have been reclassified for comparative purposes to conform to the current year presentation.
ALAMO ENERGY CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share is computed in the same way as basic earnings (loss) 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 and if the additional common shares were dilutive.
Recent Accounting Pronouncements
In September 2011, the FASB issued Accounting Standards Update No. 2011-08,
Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment
(ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for us in fiscal 2013. The Company’s adoption of ASU 2011-08 is not currently expected to have an effect on our consolidated financial statements.
There were various accounting updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on our condensed consolidated financial position, results of operations or cash flows.
3.
CONCENTRATION OF CREDIT RISK AND ECONOMIC DEPENDENCY
The Company collects its receivables on its working interests in oil and gas properties from the well operators. As such, the Company generally has relatively few customers. These receivables are unsecured and the Company performs ongoing credit evaluations of the well operators’ financial condition whenever necessary. At October 31, 2012, the Company had three (3) customers that accounted for 100% of its outstanding receivables and correspondingly, its oil and gas sales. Bad debt expense is recognized on an account-by-account review after all means of collection have been exhausted and recovery is not probable. There has been no bad debt expense for the period ended October 31, 2012.
The Company receives certain well drilling and pipeline transportation services from its subsidiaries.
4.
GOING CONCERN
The Company is in the exploration stage, has minimal revenues and has incurred losses from operations of $6,007,554 since inception. Due to the Company’s sustained losses, additional debt and equity financing will be required by the Company to fund its activities and to support operations. There is no assurance that the Company will be able to obtain additional financing. Furthermore, the Company's existence is dependent upon management's ability to develop profitable operations. These factors, among others, raise substantial doubt that the Company will be able to continue as a going concern.
Management is currently devoting substantially all of its efforts to exploit its existing oil and gas properties and recover as much of the resources available. The Company also continues to search for additional productive properties. There can be no assurance that the Company's efforts will be successful, or that those efforts will translate in a beneficial manner to the Company. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
ALAMO ENERGY CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)
5.
OIL AND GAS PROPERTIES
The following table presents information regarding the Company’s net costs incurred in the purchase of proved and unproved properties and in exploration and development activities:
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Property acquisition costs:
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October 31,
2012
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|
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April 30,
2012
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|
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Proved
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$
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1,983,105
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$
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1,983,105
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|
|
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Unproved
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2,993,305
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|
|
|
2,993,305
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|
|
|
Exploration costs
|
|
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42,628
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|
|
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42,628
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|
|
|
Development costs
|
|
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312,741
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|
|
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286,225
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|
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Totals
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$
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5,331,779
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|
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$
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5,305,263
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On October 28, 2011, the Company sold its 75% working interest in proved properties located in Frio County, Texas for $160,000. Since this transaction did not result in a significant alteration to the Company’s cost pool, this amount reduced the Company’s proved property pool and accordingly, no gain or loss was recorded.
As October 31, 2012 and April 30, 2011, the Company’s unproved properties consist of leasehold acquisition and exploration costs in the following geographical areas:
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October 31, 2012
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April 30, 2012
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Kentucky
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$
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2,489,026
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$
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2,489,026
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West Virginia
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332,625
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332,625
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|
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Tennesee
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97,500
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97,500
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Texas
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74,154
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74,154
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|
|
|
|
|
|
|
|
|
|
|
|
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Totals
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$
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2,993,305
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|
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$
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2,993,305
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The following table sets forth a summary of oil and gas property costs not being amortized as of October 31, 2012, by the year in which such costs were incurred:
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Costs Incurred During Periods Ended
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Balance
10/31/12
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4/30/12
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4/30/11
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Prior
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Acquisition costs
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$
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2,660,680
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|
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$
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168,336
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|
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$
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2,188,976
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|
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$
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303,368
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|
|
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Exploration costs
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|
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332,625
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|
|
|
-
|
|
|
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332,625
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|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
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$
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2,993,305
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|
|
$
|
168,336
|
|
|
$
|
2,521,601
|
|
|
$
|
303,368
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|
ALAMO ENERGY CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)
5.
OIL AND GAS PROPERTIES
(Continued)
The Company believes that the majority of its unproved costs will become subject to depletion within the next five to ten years, by proving up reserves relating to the acreage through exploration and development activities, by impairing the acreage that will expire before the Company explore or develop it further, or by making decisions that further exploration and development activity will not occur.
6.
SENIOR CONVERTIBLE PROMISSORY NOTES
In connection with the Asset Purchase Agreement on November 18, 2009, the Company entered into a Note and Warrant Purchase Agreement (First Financing Agreement) with Eurasian Capital Partners Limited (Eurasian) pursuant to which Eurasian agreed to lend up to $2,000,000 to the Company in multiple installments in exchange for senior secured convertible promissory notes that mature November 18, 2012, together with interest at 8% per annum, convertible at any time at the option of the holder, with a conversion price of $0.50 per share (the Conversion Feature) and five-year warrants to acquire shares of common stock at an exercise price of $1.00 per share (the Warrants) in the amount of each installment.
As of October 31, 2012, the Company had issued all $2,000,000 in senior convertible promissory notes along with 2,000,000 in warrants pursuant to the First Financing Agreement.
On April 12, 2011, the Company entered into an additional Note and Warrant Purchase Agreement (Second Financing Agreement) with Eurasian pursuant to which Eurasian agreed to lend up to $2,400,000 to the Company in multiple installments in exchange for senior secured convertible promissory notes that mature April 12, 2014, together with interest at 8% per annum, convertible at any time at the option of the holder, with a conversion price of $1.00 per share (the Conversion Feature) and five-year warrants to acquire shares of common stock at an exercise price of $1.25 per share (the Warrants) in the amount of each installment.
As of October 31, 2012, the Company had issued $860,000 in senior convertible promissory notes along with 860,000 in warrants pursuant the Second Financing Agreement.
On August 1, 2011, the Company closed a Securities Purchase Agreement with the purchasers identified therein (each a “Purchaser” and, collectively, the “Purchasers”) providing for the issuance and sale by the Registrant to the Purchasers of an aggregate principal value of approximately $1,310,621 of 5% original issue discount convertible debentures (the “Debentures”) and three series of warrants, the Series A Warrants, the Series B Warrants and the Series C Warrants, to purchase an aggregate of 2,621,241 shares of the Registrant’s Common Stock (collectively, the “Warrants” and the shares issuable upon exercise of the Warrants, collectively, the “Warrant Shares”), in exchange for the aggregate purchase price of approximately $1,114,000.
On August 1, 2012, the Company issued 16,724,329 shares to the Purchasers in exchange for all of the outstanding Discount Debentures and Series Warrants held by the Purchasers. The number of shares issued in exchange for the Discount Debentures was calculated by dividing the applicable principal and interest due on the Discount Debentures by the conversion rate of $0.07 per share. The number of shares issued in exchange for the Series Warrants was equal to the number of shares underlying the Series A Warrants. Following such consummation, the Discount Debentures and the Series Warrants are no longer outstanding, and the Company extinguished $1,076,613 in principal and accrued and unpaid interest due under the Discount Debentures and 1,344,150 shares of common stock underlying the Series Warrants.
ALAMO ENERGY CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)
6.
SENIOR CONVERTIBLE PROMISSORY NOTES
(Continued)
On August 1, 2012, the Company issued an aggregate of 523,483 shares of the Purchasers holding only Series A Warrants in exchange for the Series A Warrants held by those Purchasers. The number of shares issued in exchange for the Series A Warrants was equal to the number of shares underlying the Series A Warrants. Following such consummation, the Series A Warrants are no longer outstanding, and the Company extinguished 523,483 shares of common stock underlying the Series A Warrants.
During the prior year, certain Purchasers of the Company’s Debentures converted their outstanding balances of approximately $247,300 into 494,600 shares of the Company’s common stock.
On November 18, 2012, the $2,000,000 of notes issued pursuant to the First Financing Agreement became due and unless the Company can renegotiate these debt obligations, these notes will be in default. Pursuant to the terms of the notes, the non-payment of principal and unpaid accrued interest constitutes an event of default and, as a result, the holder of the notes may accelerate payment of all amounts outstanding under the notes by giving written notice. If the holder of the notes were to declare the notes due and payable, the Company presently does not have the ability to pay these notes.
7.
WARRANTS
A summary of warrant activity for the period ended October 31, 2012 is presented below:
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Number of
Warrants
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Weighted
Average
Exercise
Price
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Weighted
Average
Remaining
Contract Term
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Outstanding May 1, 2011
|
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2,460,000
|
|
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$
|
1.05
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3.5 years
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|
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Issued
|
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3,021,241
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$
|
1.14
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2.4 years
|
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Exercised
|
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(1,677,091)
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|
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-
|
|
|
|
|
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Outstanding, October 31, 2012
|
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3,804,150
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|
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$
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1.10
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2.9 years
|
|
|
|
Exercisable, October 31, 2012
|
|
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3,804,150
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|
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$
|
1.10
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2.9 years
|
|
|
|
|
|
|
|
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|
|
|
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The assumptions used in the Black-Scholes option pricing model for the Warrants and Conversion Features of the convertible notes were as follows:
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|
|
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|
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Risk-free interest rate
|
0.25% to 0.41%
|
|
|
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Expected volatility of common stock
|
100.0%
|
|
|
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Dividend yield
|
0.00%
|
|
|
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Expected life of warrants and conversion feature
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5 years
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|
|
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Weighted average warrants and conversion feature
|
$0.65 - $1.34
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The Company has reserved shares for future issuance upon conversion of convertible notes payable and warrants as follows:
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Conversion of notes payable
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5,676,021
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|
|
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Warrants
|
6,120,877
|
|
|
|
Reserved shares at October 31, 2012
|
11,796,898
|
|
ALAMO ENERGY CORP.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)
On December 21, 2011, the Company’s Board of Directors approved the Alamo Energy Corp. 2011 Stock Option Plan (the “Plan”). The Plan permits flexibility in types of awards, and specific terms of awards, which will allow future awards to be based on then-current objectives for aligning compensation with increasing long-term shareholder value.
The Board of Directors, acting as a compensation committee (the “Committee”) will generally administer the Plan. The Committee will have full power and authority to determine when and to whom awards will be granted, including the type, amount, form of payment and other terms and conditions of each award, consistent with the provisions of the Plan. In addition, the Committee has the authority to interpret the Plan and the awards granted under the Plan, and establish rules and regulations for the administration of the Plan.
Awards under the Plan may be granted to any person who is (i) an employee of the Registrant, (ii) a non-employee member of the Board of Directors or the board of directors of any subsidiary, or (iii) a consultant who provides services to the Company; provided that stock appreciation rights and non-qualified stock options shall be granted only to persons as to which the Company is the “service recipient,” as such term is defined in Section 409A of the Internal Revenue Code.
The Plan will terminate on December 21, 2021, unless all shares available for issuance have been issued, the Plan is earlier terminated by the Board or the Committee, or the Plan is extended by an amendment approved by the Company’s shareholders. No awards may be made after the termination date. However, unless otherwise expressly provided in an applicable award agreement, any award granted under the Plan prior to
the termination date may extend beyond the end of such period through the award’s normal expiration date.
The aggregate number of shares of the common stock authorized for issuance as awards under the Plan is 7,500,000. The maximum aggregate number of shares of common stock subject to stock options, stock appreciation rights, restricted stock or stock unit awards which may be granted to any one participant in any one year under the Plan is 1,000,000.
9.
COMMON STOCK
On October 3, 2012, the Company issued 25,000 of common stock to an officer of the Company for services performed per the employment agreement dated May 1, 2011. The 25,000 common shares were valued at $500 or $0.02 per share, based upon the quoted market price of the Company’s stock on the date of issuance.
On October 3, 2012, the Company issued 15,000 shares of common stock to an employee of the Company per the employment agreement dated May 1, 2011. The 15,000 shares were valued at $300 or $0.02 per share; based upon the quoted market price of the Company’s stock on the date of issuance.
On October 3, 2012, the Company issued 135,317 shares of common stock to consultants for service performed per the Independent Contractors’ Agreement dated May 1, 2011. The 135,317 common shares were valued at $2,706, or $0.02 per share based upon the quoted market price of the Company’s stock on the date issuance.
10.
SUBSEQUENT EVENTS
On November 18, 2012, the $2,000,000 of Senior Convertible Promissory notes issued pursuant to the Company’s First Financial Agreement became due and are in default. The Company is currently negotiating to extend the terms as discussed in Note 6.
On December 7, 2012, the Company cancelled 1,900,000 shares of its common stock that it had previously issued for services.