UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10 – Q





QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF


THE SECURITIES EXCHANGE ACT OF 1934.





For the quarterly period ended March 31, 2010





333-52812


(Commission File Number)





American Energy Production, Inc.


(Exact name of registrant as specified in its charter)





Delaware

74-2945581(State or other jurisdiction of incorporation)

(IRS Employer Identification Number)


6073 Hwy 281 South, Mineral Wells, TX 76067


(Address of principal executive offices including zip code)





(940) 445-0698


(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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____





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


Large accelerated filer [ ]                                        Accelerated filer [ ]


Non-accelerated filer [ ]                                          Smaller reporting company [X]


(Do not check if a smaller reporting company)





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ____ No X





As of June 25, 2010, the registrant had 62,616,748 common shares outstanding and issuable of its $0.0001 par value common stock, including 23,350,677 classified as issuable.


-1-





American Energy Production, Inc. and Subsidiaries


Form 10-Q Index


March 31, 2010




PagePart I-Financial Information
3Item 1. Financial Statements
3Consolidated Balance Sheets at March 31, 2010 (Unaudited) andDecember 31, 2009
3Consolidated Statements of Operations for the Three MonthsEnded March 31, 2010 and 2009 (Unaudited)
4Consolidated Statements of Cash Flows for the Three MonthsEnded March 31, 2010 and 2009 (Unaudited)
5Notes to Consolidated Financial Statements (Unaudited)
6Item 2. Management's Discussion and Analysis of FinancialCondition and Results of Operations
18Item 4T. Controls and Procedures
22Part II-Other InformationItem 6. Exhibits
24Signatures
25








-2-





PART I


FINANCIAL INFORMATION


Item 1-Consolidated Financial Statements (Unaudited)





American Energy Production, Inc. and Subsidiaries


Consolidated Balance Sheets





ASSETS3/31/2010


12/31/2009(Unaudited)Current AssetsCash

$
24,053


$
47,284Accounts receivable


-



32,523Other receivable


36,800



-Due from related party


37,755



-Trading securities


66,015



-Available-for-sale marketable equity securities


318,864



-Total Current Assets


483,487



79,807Oil and Gas Properties and Equipment, net


3,390,803



3,773,071Total Assets

$
3,874,290


$
3,852,878LIABILITIESCurrent LiabilitiesAccounts payable

$
94,964


$
109,542Bank account deficit


-



682Other current liabilities


3,549



12,481Due to related parties


308,146



291,449Notes payable


75,487



134,171Accrued interest payable


-



900Accrued payroll taxes and penalties


11,495



12,148Total Current Liabilities


493,641



561,373Long-Term LiabilitiesAsset retirement obligations


151,660



532,046Total Long-Term Liabilities


151,660



532,046Total Liabilities

$
645,301


$
1,093,419Commitments and Contingencies (Note 11)STOCKHOLDERS' EQUITYConvertible preferred stock, Series A, $0.0001 par value,5,000,000 shares authorized, no shares issued and outstanding

$
-


$
-Common stock, $0.0001 par value, 500,000,000 shares authorized,39,266,071 shares outstanding, respectively


3,927



3,927Common stock issuable, $0.0001 par value, 23,350,677 sharesissuable and outstanding, respectively


2,335



2,335Additional paid in capital


30,856,699



30,860,716Accumulated deficit


(26,689,636
)


(27,232,519
)Accumulated other comprehensive loss


(69,336
)


-4,103,989



3,634,459Less:  Subscription Receivable


(875,000
)


(875,000
)Total Stockholders' Equity


3,228,989



2,759,459Total Liabilities and Stockholders' Equity

$
3,874,290


$
3,852,878





See accompanying notes to unaudited consolidated financial statements. 
 -3-


American Energy Production, Inc. and Subsidiaries


Consolidated Statements of Operations


(Unaudited)





Three Months EndedMarch 31,2010


2009Revenues:Oil and natural gas sales, net

$
254,286


$
230,936Operating ExpensesCompensation


62,493



57,078Consulting


20,965



1,500Depreciation, depletion and accretion


84,821



134,415Rent


1,000



1,740General and administrative


29,312



27,445Production


272,367



290,656Professional


33,401



29,290Research and development


5,997



-Business taxes


23,903



30,057Total Operating Expenses


534,259



572,181Operating Loss


(279,973
)


(341,245
)Other Income (Expense)Other income


664



100Interest expense


(639
)


(42,161
)Payroll tax expense and penalties


-



(1,501
)Realized loss on trading securities


(4,109
)


-Unrealized gain on trading securities


33



-Gain on sale of subsidiary


826,907



-Total Other Income (Expense)


822,856



(43,562
)Net Income (Loss)

$
542,883


$
(384,807
)Comprehensive Income (Loss)Unrealized loss on available for sale securities - net


(69,336
)


-Total Comprehensive Income (Loss)

$
473,547


$
(384,807
)Basic and Diluted earnings per share:Net income (loss) - basic and diluted earnings per share

$
542,883


$
(384,807
)Weighted average shares outstanding:Weighted average shares for basic earnings per share


62,616,748



20,360,389Effect of dilutive stock options


6,682,446



-Weighted average shares for dilutive earnings per share


69,299,194



20,360,389Earnings Per Share:Basic

$
0.01


$
(0.02
)Diluted

$
0.01


$
(0.02
)





See accompanying notes to unaudited consolidated financial statements 
 -4-


American Energy Production, Inc. and Subsidiaries


Consolidated Statements of Cash Flows


(Unaudited)





Three Months EndedMarch 31,2010


2009Cash Flows From Operating Activities:Net income (loss)

$
542,883


$
(384,807
)Adjustments to reconcile net income (net loss) to net cash used in operating activities:Depreciation expense


64,075



109,798Depletion expense


16,198



18,894Accretion expense


4,548



5,723Realized loss on trading securities


4,109



-Unrealized gain on trading securities


(33
)


-Gain on sale of subsidiary


(826,907
)


-Changes in operating assets and liabilities:Accounts receivable


(12,082
)


(19,369
)Other current assets


-



145Trading securities


(137,219
)


-Other assets


-



(536
)Accounts payable


(14,578
)


20,853Bank account deficit


(682
)


-Other current liabilities


(8,265
)


492Due from related party


(37,755
)


-Due to related party


16,697



187,473Accrued interest payable


(900
)


41,569Accrued payroll taxes payable


1,129



153Net Cash Used In Operating Activities


(388,782
)


(19,612
)Cash Flows From Investing Activities:Investment in oil and gas properties and equipment


(56,279
)


-Cash proceeds from sale of subsidiary, net of cash sold


413,386



-Sale of trading securities


67,128



-Increase in development program costs


-



(6,037
)Net Cash Provided By (Used In) Investing Activities


424,235



(6,037
)Cash Flows From Financing Activities:Proceeds from sale of common stock


-



1,500Repayment of notes payable


(58,684
)


(1,214
)Net Cash (Used In ) Provided By Financing Activities


(58,684
)


286Net Decrease in Cash


(23,231
)


(25,363
)Cash at Beginning of Period


47,284



88,937Cash at End of Period

$
24,053


$
63,574Supplemental disclosure of cash flow informationIncome taxes paid

$
-


$
-Cash interest paid

$
-


$
-Supplemental disclosure of  non-cash investing and financing activitiesUnrealized loss on available-for-sale securities

$
69,336


$
-Sale of Production Resources, Inc.:Net assets disposed from sale, net of cash sold

$
23,093


$
-Other receivable received from sale

$
36,800


$
-


See accompanying notes to unaudited consolidated financial statements 
 -5-
 American Energy Production, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 March 31, 2010
 (Unaudited)


1.           BASIS AND PRESENTATION





The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q of Regulation S-K.  They do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements at December 31, 2009 included in the Company's Form 10-K (“2009 10-K”) filed with the Securities and Exchange Commission (“SEC”) on May 14, 2010. The interim unaudited consolidated financial statements should be read in conjunction with those consolidated financial statements included in the 2009 10-K.




In the opinion of Management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made.  Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.






2.  HISTORY AND NATURE OF OPERATIONS





American Energy Production, Inc. (“American Energy”, (“AENP”), “the Company”, “we”, “us”, “our” “its”) is a publicly traded energy company that is engaged primarily in the acquiring, developing, producing, exploring and selling of oil and natural gas.  Additionally, the Company is a partner, under an operating agreement in the exploration, evaluation, development and mining of gold and other minerals.  The Company traditionally has acquired oil and gas companies that have the potential for increased oil and natural gas production utilizing new technologies, well workovers and fracture stimulation systems. Additionally, the Company has expanded its scope of business to include the drilling of new wells with its own equipment through its wholly-owned subsidiary companies.




The Company’s wholly-owned subsidiaries are primarily involved in three areas of oil and gas operations.




1. Leasing programs.




2. Production acquisitions.




3. Drilling and producing with proven and emerging technologies.




The Company believes that for the foreseeable future, the world will be highly dependent on oil and natural gas. Currently, alternative fuels are far more expensive than fossil fuels and because of the politically unstable conditions of many of the energy producing regions of the world.  As a result, the Company believes that oil and natural gas will remain a key yet volatile component of the world energy future and furthermore, with the ever increasing world demand for energy, the domestic production of oil and gas will play an even greater role in America’s future then it already has to date.




The Company determined in 2009 to diversify from only its oil and gas operations into a working gold mine operation.  On August 6, 2009, the Company announced that it has executed a non-binding Letter of Intent (“LOI”) for the acquisition of Dorado Gold, LLC and Master Petroleum, LLC, both California limited liability companies (together “Dorado”).  Dorado owns 100% of certain placer gold mining claims, land and equipment (the “Joint Properties”) 25 miles north of Weaverville, California.  Additionally, on the same date as the LOI was executed, AENP and Dorado executed a 120 day Operating Agreement to jointly participate in the exploration, evaluation, development and mining of gold and other minerals within the Joint Properties (“Gold Venture”).  AENP will bear 100% of all expenses during operations of the Gold Venture and AENP and Dorado will each receive fifty percent (50%) of product or revenues after expenses and AENP will manage the Gold Venture.  The acquisition of Dorado by AENP is subject to AENP’s sole evaluation of the results after the 120 day Gold Venture period is completed.




In December 2009, the Gold Venture was extended for one year through December 31, 2010.  As of the date of this report, no decision has been made by the Company in relation to the LOI and a definitive agreement.  The Company believes this working gold mining operation will be a hedge against inflation and will also help offset the depressed price of oil and natural gas until these commodities recover in the near future.


-6-
 American Energy Production, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 March 31, 2010
 (Unaudited)


3.  GOING CONCERN





As reflected in the accompanying unaudited consolidated financial statements, the Company had net income of $542,883 for the three months ended March 31, 2010 as compared to a net loss of $384,807 for the three months ended March 31, 2009.  However, the Company had an operating loss and the 2010 net income included a one-time $826,907 non-cash gain from the sale of Production Resources, Inc., a former wholly-owned subsidiary.  Without this one-time gain, the Company would have had a net loss of $284,024.  Additionally, at March 31, 2010, the Company has minimal cash and has a negative working capital balance of $10,154, which could have a material impact on the Company’s consolidated financial condition and operations. The ability of the Company to continue as a going concern is dependent on its ability to raise capital and generate sufficient revenues and cash flow from its business plan as an oil and gas operating company.  The unaudited consolidated financial statements included in this report do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.




Management believes it will have several options available to obtain financing from third parties in order to carry out the business plan of the Company.  However, as of the date of these unaudited consolidated financial statements, no agreement with any parties has been structured to provide the required funding.




The time required for us to become profitable is highly uncertain, and we cannot assure you that we will achieve or sustain profitability or generate sufficient cash flow from operations to meet our planned capital expenditures and working capital requirements. If required, our ability to obtain additional financing from other sources also depends on many factors beyond our control, including the state of the capital markets and the prospects for our business. The necessary additional financing may not be available to us or may be available only on terms that would result in further dilution to the current owners of our common stock.




4.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles of Consolidation





The accompanying consolidated financial statements include the general accounts of American Energy and its wholly-owned subsidiaries as of March 31, 2010 and all significant intercompany transactions, accounts and balances have been eliminated in consolidation.





Use of Estimates





When preparing financial statements in conformity with United States Generally Accepted Accounting Principles (“GAAP”), management must make estimates based on future events that affect the reported amounts of assets and liabilities and, the disclosure of contingent assets and liabilities as of the date of the financial statements, and revenues and expenses during the reporting period.  Actual results could differ from these estimates.  Significant estimates in the accompanying financial statements include valuation of oil and gas properties, valuation and depreciation periods of property and equipment, the evaluation of whether our assets are impaired, asset retirement obligations, valuation of non-cash stock based grants, valuation allowance for deferred tax assets, and the estimate of reserves of oil and gas that are used to develop projected income whereby an appropriate discount rate has been used.  We also have other key accounting estimates and policies, but we believe that these other policies either do not generally require us to make estimates and judgments that are as difficult or as subjective, or it is less likely that they would have a material impact on our reported results of operations for a given period.





Cash and Cash Equivalents





Cash and cash equivalents include all highly liquid investments with a maturity date of three months or less when purchased.





Accounts Receivable




Accountsreceivable result from the sale of the Company’s products and is reported at net of any allowance for doubtful accounts.  The Company estimates its allowance for doubtful accounts based on a specific identification basis and additional allowances as needed based upon historical collections experience.  Payment is due upon delivery of the product, unless other arrangements are made.  Management reviews the customer accounts on a routine basis to determine if an account should be charged off.  Payments from oil and natural gas sales are remitted by customers, to the operator, who is a related party and the operator then remits these payments to the Company. (See Note 12 – Related Party Transactions).





-7-


American Energy Production, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 March 31, 2010
 (Unaudited)





Investments





The Company invests in various marketable equity instruments and accounts for such investments in accordance with ASC 320 “Investments – Debt and Equity Securities”.




Certain securities that the Company may invest in may be determined to be non-marketable.  Non-marketable securities where the Company owns less than 20% of the investee are accounted for at cost pursuant to ASC topic 323-10 “Investments - Equity Method and Joint Ventures”.




Management determines the appropriate classification of its investments at the time of acquisition and reevaluates such determination at each balance sheet date. Trading securities that the Company may hold are treated in accordance with ASC 320 with any unrealized gains and losses included in earnings.  Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. Investments classified as held-to-maturity are carried at amortized cost. In determining realized gains and losses, the cost of the securities sold is based on the specific identification method.




The Company periodically reviews its investments in marketable and non-marketable securities and impairs any securities whose value is considered non-recoverable. The Company's determination of whether a security is other than temporarily impaired incorporates both quantitative and qualitative information.  GAAP requires the exercise of judgment in making this assessment for qualitative information, rather than the application of fixed mathematical criteria. The Company considers a number of factors including, but not limited to, the length of time and the extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, the reason for the decline in fair value, changes in fair value subsequent to the balance sheet date, and other factors specific to the individual investment. The Company's assessment involves a high degree of judgment and accordingly, actual results may differ materially from the Company's estimates and judgments.  The Company recorded no impairment charges for securities during the three months ended March 31, 2010.




Oil and Gas Properties and Equipment




The Company uses the successful efforts method of accounting for its oil and gas properties.   Unproved properties are assessed periodically for possible impairment.  Costs incurred by the Company related to the acquisition of proved and unproved oil and gas properties and the cost of drilling only successful wells are capitalized.   Costs to maintain wells and related equipment and lease and well operating costs on proved properties are charged to expense as incurred.   Gains and losses arising from sales of properties are included in other income (expense).  Proved oil and gas properties are depleted using the units-of-production method based on total proved reserves.




The Company’s oil and gas rigs are depreciated over its estimated useful life of ten years, using the straight line method.  Vehicles are depreciated over their estimated useful life of three years, using the straight line method.  Repairs and maintenance are expensed in the year incurred, while renewals and betterments are generally capitalized.  Expenditures less than $1,000, including contract labor, are expensed to operations in the year incurred.




Accounting for the Impairment of Long-Lived Assets




We account for the impairment of long-lived assets in accordance ASC 360-10 “Property, Plant and Equipment”, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable.   Recoverability of the asset is measured by comparison of its carrying amount to the undiscounted cash flow that the asset or asset group is expected to generate.   If such assets or asset groups are considered to be impaired, the loss recognized is the amount by which the carrying amount of the property, if any, exceeds its fair market value.




Asset Retirement Obligations




The Company accounts for asset retirement obligations in accordance with ASC 410“Asset Retirement and Environmental Obligations”.  The asset retirement obligations represent the estimated present value of the amounts expected to be incurred to plug, abandon, and remediate the producing properties at the end of their productive lives, in accordance with state laws, as well as the estimated costs associated with the reclamation of the surrounding property. The Company determines the asset retirement obligations by calculating the present value of estimated cash flows related to the liability. The asset retirement obligations are recorded as a liability at the estimated present value as at the asset’s inception, with an offsetting increase to the producing properties asset. Accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value and is classified as an expense in the consolidated statement of operations.The discount rate utilized by the Company is 4.5% with a range of ten to twenty year estimated life for the properties.


-8-
 American Energy Production, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 March 31, 2010
 (Unaudited)


The estimated liability is determined using significant assumptions, including current estimates of plugging and abandonment costs, annual inflation of these costs, the productive lives of wells, and a risk-adjusted interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligations. Revisions to the asset retirement obligations are recorded with an offsetting change to producing properties, resulting in prospective changes to depletion and depreciation expense and accretion of the discounted liability.  Because of the subjectivity of assumptions and the relatively long lives of most of the wells, the costs to ultimately retire the Company’s wells may vary significantly from prior estimates.




Environmental Matters





Our operations are subject to evolving federal, state and local environmental laws and regulations related to the discharge of materials into the environment.  Our process is not expected to produce harmful levels of emissions or waste by-products.  However, these laws and regulations would require us to remove or mitigate the environmental effects of the disposal or release of substances at our site should they occur.  Compliance with such laws and regulations can be costly.  Additionally, governmental authorities may enforce the laws and regulations with a variety of civil and criminal enforcement measures, including monetary penalties and remediation requirements.  We are not aware of any area of non-compliance with federal, state or local environmental laws and regulations.




Revenue Recognition




The Company sells crude oil and natural gas under short-term agreements at prevailing market prices and revenue is recognized at the point of sale, that is, when the crude oil and natural gas is extracted from the tanks.  Generally, this is at the point where the customer has taken title and has assumed the risks and rewards of ownership, the sales price is fixed or determinable and collectability is reasonable assured.




Gold Mine Operating Agreement




The Company jointly participates in an operating agreement for the exploration, evaluation, development and mining of gold and other minerals with an unrelated third party.  The Company manages the gold mine operation, is responsible for one hundred percent (100%) of all expenses, and will receive fifty percent (50%) of product or revenues after expenses.  The gold mine operation is in the development phase and no revenue or product has been realized from the operation.  As a result, the Company has classified expenditures incurred for the gold mine operations as research and development expense in the consolidated statement of operations.




Fair Value Measurements of Financial Instruments





We measure our financial assets and liabilities in accordance ASC 820 “Fair Value Measurements and Disclosures”.  For certain of our financial instruments, including cash, accounts receivable, due from related party, accounts payable, other current liabilities, due to related parties and accrued liabilities, the carrying amounts approximate fair value due to their short maturities.  Amounts recorded for other assets, notes payable, deferred other income and asset retirement obligations also approximate fair value because current interest rates available to us for debt with similar terms and maturities are substantially the same.





Effective January 1, 2008, we adopted accounting guidance for financial assets and liabilities.  The adoption did not have a material impact on our results of operations, financial position or liquidity.  This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures.  This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.  This guidance does not apply to measurements related to share-based payments.  This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost).  The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.  The following is a brief description of those three levels:





Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.





Level 2: Inputs other than quoted prices that are observable, either directly or indirectly.  These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.





Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.


-9-
 American Energy Production, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 March 31, 2010
 (Unaudited)


Financial Assets and Liabilities





We currently measure and report the fair value liability for asset retirement obligations.  The fair value liability for asset retirement obligations has been recorded as determined by calculating the present value of estimated cash flows related to the liability.  The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2010:





Balance at

March 31,

2010


Quoted priced in active markets for identical assets


Significant other observable inputs


Significant unobservable inputs(Level 1)


(Level 2)


(Level 3)Assets:Trading Securities

$
66,015


$
66,015


$
-


$
-Available-for-sale marketable

equity securities


318,864



318,864



-



-Total Financial Assets

$
384,879


$
384,879


$
-


$
-Liabilities:Asset Retirement Obligations

$
151,660


$
-


$
-


$
151,660Total Financial Liabilities

$
151,660


$
-


$
-


$
151,660





The following reflects activity through March 31, 2010 of the fair value measurements using significant unobservable Level 3 inputs:





Balance at December 31, 2009

$
532,046Accretion of discounted liability


4,548Retirement of liability from sale of PRI


(384,934
)Ending balance at March 31, 2010

$
151,660





Non-Financial Assets and Liabilities





The Company evaluated and determined that there were no non-financial assets and liabilities as of March 31, 2010.





Stock-Based Compensation




The Company adopted ASC 718 “Compensation – Share Based Compensation”, as of January 1, 2006, using the modified prospective application method. This statement requires the recognition of compensation expense measured at fair value when we obtain employee services in stock-based payment transactions.





Concentration of Risk




Our financial instruments that are potentially exposed to credit risk consist primarily of cash and accounts receivable for which the carrying amounts approximate fair value.  No amounts exceeded federally insured limits as of March 31, 2010.  At certain times, our demand deposits held in banks may exceed the federally insured limits.  The Company has not experienced any losses related to these deposits.


-10-
 American Energy Production, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 March 31, 2010
 (Unaudited)


Net Income (Loss) per Common Share




The Company computes earnings (loss) per share in accordance with ASC 260-10 “Earnings per Share.” ASC 260-10 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive.





At March 31, 2010, there were options to purchase 8,800,000 shares of the Company’s common stock at an exercise price of $0.015 per share.  The effect of options  to purchase the Company’s common stock on  diluted  EPS is determined  through  the  application  of the  treasury  stock  method,  whereby proceeds received by the Company based on assumed  exercises are  hypothetically used to repurchase the Company's common stock





Comprehensive Income (Loss)




Comprehensive income (loss) includes net income (loss) as currently reported by the Company adjusted for other comprehensive items.  Other comprehensive items for the Company consists of an unrealized loss related to the Company's equity securities accounted for as available-for-sale with changes in fair value recorded through stockholders’ equity.





Legal Costs and Contingencies





In the normal course of business, the Company incurs costs to hire and retain external legal counsel to advise it on regulatory, litigation and other matters.  The Company expenses these costs as the related services are received. If a loss is considered probable and the amount can be reasonable estimated, the Company recognizes an expense for the estimated loss.  If the Company has the potential to recover a portion of the estimated loss from a third party, the Company makes a separate assessment of recoverability and reduces the estimated loss if recovery is also deemed probable.





Income Taxes




Income taxes are accounted for under the asset and liability method of ASC 740 “Income Taxes”.  Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.




Effective January 1, 2007, the Company adopted provisions of ASC 740, Sections 25 through 60 “Accounting for Uncertainty in Income Taxes".  These sections provide detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements. Tax positions must meet a “more-likely-than-not” recognition threshold at the effective date to be recognized upon the adoption of ASC 740 and in subsequent periods. Upon the adoption of ASC 740, the Company had no unrecognized tax benefits. During the years ended December 31, 2009 and 2008, no adjustments were recognized for uncertain tax benefits. All years from 2006 through 2009 are still subject to audit.





The Company is subject to ongoing tax exposures, examinations and assessments in various jurisdictions.  Accordingly, the Company may incur additional tax expense based upon the outcomes of such matters.  In addition, when applicable, the Company will adjust tax expense to reflect the Company’s ongoing assessments of such matters which require judgment and can materially increase or decrease its effective rate as well as impact operating results.





The number of years with open tax audits varies depending on the tax jurisdiction.  The Company’s major taxing jurisdictions include the United States.





Impact of Recently Issued Accounting Standards





In September 2009, the FASB has published ASU No. 2009-12, “Fair Value Measurements and Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”. This ASU amends Subtopic 820-10, “Fair Value Measurements and Disclosures – Overall”, to permit a reporting entity to measure the fair value of certain investments on the basis of the net asset value per share of the investment (or its equivalent). This ASU also requires new disclosures, by major category of investments including the attributes of investments within the scope of this amendment to the Codification. The guidance in this Update is effective for interim and annual periods ending after December 15, 2009. Early application is permitted.The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.


-11-
 American Energy Production, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 March 31, 2010
 (Unaudited)


In October 2009, the FASB has published ASU 2009-13, “Revenue Recognition (Topic 605)-Multiple Deliverable Revenue Arrangements”, which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Specifically, this guidance amends the criteria in Subtopic 605-25, “Revenue Recognition-Multiple-Element Arrangements”, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and also requires expanded disclosures. The guidance in this update is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of this standard is not expected to have any impact on the Company’s consolidated financial position and results of operations.





In January 2010, the FASB has published ASU 2010-01 “Equity (Topic 505) - Accounting for Distributions to Shareholders with Components of Stock and Cash—a consensus of the FASB Emerging Issues Task Force,”as codified in ASC 505. ASU No. 2010-01 clarifies the treatment of certain distributions to shareholders that have both stock and cash components. The stock portion of such distributions is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. The amendments in this Update are effective for interim and annual periods ending on or after December 15, 2009 and should be applied on a retrospective basis.  Early adoption is permitted.  The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.





In January 2010, the FASB has published ASU 2010-06 “Fair Value Measurements and Disclosures (Topic 820): - Improving Disclosures about Fair Value Measurements”. ASU No. 2010-06 clarifies improve disclosure requirement related to fair value measurements and disclosures – Overall Subtopic (Subtopic 820-10) of the FASB Accounting Standards Codification. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure about purchase, sales, issuances, and settlement in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The amendments in this Update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis.  The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.





In February 2010, the FASB issued ASU 2010-09 which requires that an SEC filer, as defined, evaluate subsequent events through the date that the financial statements are issued. The update also removed the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. The adoption of this guidance on January 1, 2010 did not have a material effect on the Company’s consolidated financial statements.




5.  SALE OF SUBSIDIARY




Effective March 1, 2010, the Company executed a definitive agreement (the “Transaction”) with Emerald Bay Energy, Inc., a publicly traded Calgary based Energy Company and a private third party (together the “Purchasers”) for the sale of its wholly owned subsidiary Production Resources, Inc. (“PRI”).  The sale price is $850,000 USD comprised of a combination of $425,000 USD value of Emerald Bay Energy (“EBY”) restricted stock and $425,000 USD cash from a private third party.  Additionally, the Company would retain a 1% overriding royalty on any oil or natural gas formation below 1,200 feet deep. The Transaction was subject to the final approval of the TSX Venture Exchange (“TSX”).





The $425,000 USD worth of EBY restricted common stock to be issued to the Company was set at $0.08 per share CDN based upon the exchange rate between Canadian and United States Dollars as of the date of Closing when the TSX gave final approval.  However, the Transaction specified that in the event that the EBY restricted stock amount to be issued resulted in ownership by the Company of ten percent (10%) or more of the outstanding shares of EBY, then the EBY Stock amount would be reduced to an amount of EBY shares which does not exceed 9.97% of the total outstanding common shares of EBY and the resulting shortfall in the $425,000 USD value of the EBY Stock amount of the purchase price would be paid to the Company in cash as consulting services fees under an eighteen (18) month consulting agreement.





Effective March 8, 2010, the TSX approved the Transaction and under the terms of the definitive agreement, 5.0 million shares of EBY restricted common stock were issued to the Company with a transaction date value of $388,200, along with $425,000 USD cash and an eighteen (18) month consulting agreement totaling $36,800 USD for a total sales price of $850,000 USD.  Additionally, the Company will also retain a 1% gross overriding royalty on any oil or natural gas formation below 1,200 feet.  The $36,800 USD consulting agreement has been treated in substance as a part of the sale of PRI and a receivable for the entire consulting agreement has been recorded as of the transaction date.





As a result of the Transaction, the Company has recorded a gain on sale of subsidiary in the amount of $826,907 which is classified as a component of other income (expense) in the accompanying unaudited consolidated financial statements.  If in the future the Company receives royalty payments on formations below 1,200 feet, the Company will classify the payments as a component of other income (expense).





-12-


American Energy Production, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 March 31, 2010
 (Unaudited)





The $826,907 gain on the sale of subsidiary is comprised of the following:





Assets sold (includes $11,614 of cash)

$
(414,493
)Liabilities sold


391,400Consideration received


850,000Gain on sale of subsidiary

$
826,907





Unaudited pro forma financial information has been prepared as if the Transaction had occurred at the beginning of the periods presented.  The pro forma data presented is based on numerous assumptions and is not necessarily indicative of future results of operations.





(Unaudited)Three Months EndedMarch 31,2010


2009Revenues

$
152,157


$
145,976Net Loss

$
(279,511
)

$
(335,115
)Net Loss Per Share - Basic and Diluted

$
(0.00
)

$
(0.02
)




6.
INVESTMENTS




The following represents information about available-for sales securities held with loss positions as of March 31, 2010:




Securities in loss positions less than 12 months:

Cost


Aggregate

Unrealized losses


Aggregate Fair ValueEquity securities

$
388,200


$
69,336


$
318,864




As a result of the sale of PRI discussed previously under Note 5 – Sale of Subsidiary, the Company received 5,000,000 shares of EBY restricted common stock with a cost basis of $388,200 on March 31, 2010.The EBY closing stock price on March 31, 2010 was $0.065 CDN per share and with an exchange rate of .98112, the valuation was $318,864 USD for the 5,000,000 shares owned by the Company.  In accordance with ASC 320 “Investments – Debt and Equity Securities”,the Company has valued the investment at $318,864 which is classified as available for sale equity securities in the accompanying unaudited consolidated financial statements at March 31, 2010.  As a result of the valuation, the Company recorded a $69,336 unrealized loss on available for sale equity securities in the stockholders’ equity section of the unaudited consolidated financial statements as of March 31, 2010.




Using the cash proceeds received from the sale of PRI, the Company opened up a brokerage account in March 2010 and purchased certain equity securities with the principal intent of selling them in the near future.  In accordance with ASC 320, the Company evaluated the investment securities and determined that they meet the criteria to be classified as trading securities.  The original cost basis of these investments was $71,237 and subsequently, the Company sold these equity securities for $67,128 resulting in a $4,109 realized loss.  The Company then utilized the proceeds and purchased $65,982 of new securities and the difference of $1,146 was transferred to a money market account.  As of March 31, 2010, the Company has classified the $1,146 in the money market account as cash in the accompanying unaudited consolidated financial statements.  As of March 31, 2010, the $65,982 cost basis of the equity securities owned by the Company had a market value of $66,015 and is classified as trading securities, a component of current assets in the accompanying unaudited consolidated financial statements.   Additionally, $33 representing the difference between the market value at March 31, 2010 of $66,015 and the historical cost of $65,982 represents an unrealized gain on trading securities. In accordance with ASC 320, gains and losses on trading securities are included in current income and the Company has classified the realized loss on trading securities of $4,109 and unrealized gain of $33 as components of other income (expense) in the accompanying unaudited consolidated financial statements.


-13-
 American Energy Production, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 March 31, 2010
 (Unaudited)


7.
OIL AND GAS PROPERTIES AND EQUIPMENT




Oil and gas properties and equipment is comprised of the following:





Mar. 31,


Dec. 31,2010


2009Oil and gas properties, successful efforts method

$
3,245,199


$
4,283,365Other property and equipment


1,804,746



1,776,9055,049,945



6,060,270Less: Accumulated depreciation and depletion


1,659,142



2,287,199Oil and gas properties and equipment, net

$
3,390,803


$
3,773,071




8.  DEBT




Notes Payable


Mar. 31,


Dec. 31,2010


2009$25,000 Line of Credit, dated October 28, 2005, bearing simple

variable interest at 6.75% per annum and due on January 25, 2010.

$
-


$
23,684$124,487 Note, dated March 27, 2008, not formalized and not bearing interest


75,487



100,487$10,000 Note, dated June 30, 2009, bearing interest at 18% per annum and due December 31, 2009.


-



10,000$
75,487


$
134,171





On October 28, 2005, Bend Arch entered into a $25,000 line of credit facility with a financial institution for working capital purposes. The line of credit was secured by a certificate of deposit held by the financial institution and was bearing simple interest per annum at a variable rate which was 3.25% as of December 31, 2009. In January 2010, the Company paid the outstanding balance in full and is no longer outstanding as of March 31, 2010.




On March 27, 2008, the Company purchased oilfield property and equipment for a price of $159,487.  The terms included a cash payment of $35,000 and a note payable for the balance of $124,487.  In 2008, the Company paid down $24,000 of principal and the balance was $100,487 as of December 31, 2009.  In January 2010, the Company paid down $25,000 of principal and the balance is $75,487 as of March 31, 2010 and classified as a component of Note Payable in the accompanying unaudited consolidated financial statements.  As of March 31, 2010, no formal agreement of the terms of the note payable had been finalized and the Company has a verbal agreement to pay the principal back at a rate of $10,000 monthly when sufficient cash flow is available.




On June 30, 2009, the Company received $10,000 of proceeds from a short-term note from an unrelated third party.  The terms included interest at a rate of 18% per annum, a December 31, 2009 maturity date, and a late payment charge equal to 5% of the unpaid balance and interest at the lesser of a) 18% or b) as permitted by law.  As of December 31, 2009, the Company had accrued $900 of accrued interest related to the note payable and the note payable had not been repaid and was considered in default.  In March 2010, the Company repaid the entire principal balance of $10,000 and accrued interest of $900 and the short-term note is no longer outstanding as of March 31, 2010.




9.  ASSET RETIREMENT OBLIGATIONS




The Company records an asset retirement obligation (“ARO”) associated with the retirement of its proved oil and gas properties as a liability in the period in which a legal obligation is incurred and becomes determinable, with an offsetting increase in the carrying amount of the associated proved properties asset. The ARO is recorded at fair value, excluding salvage values, and accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value. The fair value of the ARO is measured using expected future cash outflows discounted at the Company’s credit-adjusted risk-free interest rate. 
 -14-
 American Energy Production, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 March 31, 2010
 (Unaudited)





The following represents a reconciliation of the asset retirement obligations for the three months ended March 31, 2010:





Asset retirement obligations at December 31, 2009

$
532,046Retirement of liability for sale of PRI


(384,934
)Accretion of discount


4,548Asset retirement obligation at end of period

$
151,660




10.  STOCKHOLDERS’ EQUITY




Capital Structure




The Company is authorized to issue up to 5,000,000 shares of preferred stock, at $0.0001 par value per share, of which none were issued and outstanding as of March 31, 2010.




The Company is authorized to issue up to 500,000,000 shares of common stock, at $0.0001 par value per share, of which 39,266,071 shares were issued and outstanding at March 31, 2010.  Additionally, the Company has 23,350,677 shares issuable at March 31, 2010.  In total, the Company has 62,616,748 shares outstanding and issuable at March 31, 2010.




The Company is authorized to issue up to 10,000,000 shares of common stock under the 2008 Non-Qualified Stock Option Plan (the “Plan”).  The Plan is to assist the Company in securing and retaining key participants of outstanding ability by making it possible to offer them an increased incentive to join or continue in the service of the Company and to increase their efforts for its welfare through participation in the ownership and growth of the Company.  As of March 31, 2010, 9,800,000 stock options have been granted under the Plan and issued by the Company and 8,800,000 stock options are outstanding.




There were no changes in the preferred stock, common stock, common stock issuable and subscription receivable outstanding balances during the three months ended March 31, 2010.




Stock Options:




There was no activity for stock options during the three month period ending March 31, 2010 and the terms of options to purchase our common stock are summarized below:





Options Outstanding
Options ExercisableRange of Exercise Prices
Number

Outstanding at

March 31, 2010
Weighted Average Remaining Contractual Life
Weighted Average Exercise Price
Number Exercisable at March 31, 2010
Weighted Average Exercise Price$0.015
8,800,000
9.11 Years
$0.015
8,800,000
$0.015




11.     COMMITMENTS AND CONTINGENCIES





From time to time we may become subject to proceedings, lawsuits and other claims in the ordinary course of business including proceedings related to environmental and other matters.  Such matters are subject to many uncertainties, and outcomes are not predictable with assurance.





The Company and certain of its wholly-owned subsidiaries are delinquent in the filing of franchise tax reports with the State of Texas and the State of Delaware and as a result, the Company and certain of its wholly-owned subsidiaries are not in good standing.  As a result, the Company and certain of its wholly-owned subsidiaries may face certain penalties and interest due to the delinquent status of the reports and not being in good standing.


-15-
 American Energy Production, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 March 31, 2010
 (Unaudited)


As of December 31, 2009, the Company had recorded $12,191 of unpaid federal payroll taxes and employee withholdings and related penalties and interest.  These unpaid federal taxes are entirely from CommunicateNow.com (Communicate”), the predecessor company.  The previous Chief Executive Officer of Communicate structured a settlement payment agreement with the Internal Revenue Service and has personally paid the balance of the obligation.  As of March 31, 2010, the balance has been paid down to $11,495 and the difference of $596 has been recorded to Other Income in the accompanying unaudited consolidated financial statements at March 31, 2010.  Since the previous Chief Executive Officer is no longer affiliated with the Company in any way and is not a related party, the Company determined that this was not a capital transaction and should be recorded to Other Income.  The remaining balance of $11,495 is included as accrued payroll taxes and penalties in the Company’s accompanying unaudited consolidated financial statements because of potential federal tax liens against the Company until the balance is paid in full.




In December 2005 and January 2006, the Company determined that certain issuances of common stock had not been properly disclosed in reports made by the Company’s transfer agent. The Company discussed these items with the transfer agent and the transactions have been reconciled and recorded properly in the Company records. However, the Company believes that two of these transactions, an unauthorized issuance by the transfer agent of 600,000 shares (15,000,000 shares prior to the one-for-twenty five reverse stock split) and an additional unauthorized issuance of 100,000 shares (2,500,000 shares prior to the one-for-twenty five reverse stock split), should be reimbursed to the Company by either the third party who received the shares or the transfer agent. The Company has recorded the fair market valuation of the two transactions in the amount of $875,000 as a subscription receivable as of March 31, 2010 and is in discussions with both the third party and the transfer agent to resolve the issue. As of the date of these unaudited consolidated financial statements, no resolution of the matter has been completed.




12.  RELATED PARTY TRANSACTIONS




We currently do not have a lease and we are not paying rent on our space. It is being provided to the Company by the Chief Executive Officer free of charge.  The value of such office is considered de minimus.




The balance outstanding for Due from Related Party is as follows:




Due from Related Party:Mar. 31,


Dec. 31,2010


2009Due from Operator of oil and gas properties

$
37,755


$
-Total Due From Related Party

$
37,755


$
-




The Company was owed by the operator of its oil and gas properties $37,755 as of March 31, 2010 for services related to the Company’s oil and gas production activities.  The operator is Proco Operating Co., Inc. (“Proco”) and is a related party as Proco is controlled by the brother of the Company’s Chief Executive Officer.  As of March 31, 2010, the amount is recorded as a component of Due from Related Party in the accompanying unaudited consolidated financial statements.




Since November 1, 2003, the Company and Proco have had an operating agreement for Proco to operate the Company’s oil and natural gas production activities.  The term of the operating agreement is equal to the term of the oil and gas leases held by the Company.  In general, Proco incurs costs which are billed to the Company and Proco markets and sells oil and natural gas and collects payments from customers.  Such payments are then remitted to the Company.  Proco has a First and preferred lien on the leasehold interests of the Company against any amounts due to Proco by the Company.




The balance outstanding for Due to Related Parties  is as follows.




Due to Related Parties:Mar. 31,


Dec. 31,2010


2009Due to CEO for advances and salary agreement with Company

$
96,130


$
93,150Due to CEO for advances and rental agreement with subsidiary Bend Arch


137,060



131,060Due to CEO for advances to subsidiary OAG


12,700



12,700Due to President of subsidiary OAG for advances and salary agreement with Company


62,256



46,700Due to Operator of oil and gas properties


-



4,995Total Due To Related Parties

$
308,146


$
288,605


-16-
 American Energy Production, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 March 31, 2010
 (Unaudited)


For the period from January 1, 2010 to March 31, 2010, the following transactions occurred related to Due To Related Parties:




Effective July 1, 2003, the Company entered into a salary and equipment rental agreement with its Chief Executive Officer for a salary of $120,000 annually and a $3,500 per month equipment rental agreement.  As of January 1, 2005, the $3,500 per month equipment rental agreement with the Chief Executive Officer was terminated. As of December 31, 2009, the Company owed the Chief Executive Officer $93,150 for unpaid amounts under the agreement.  For the three month period ending March 31, 2010, the Company accrued $30,000 for salary obligation, the Chief Executive Officer advanced $8,065 to the Company and the Company repaid $35,085 of the amount advanced to the Chief Executive Officer.  As of March 31, 2010, the amount outstanding is $96,130 and is recorded as a component of Due to Related Parties in the accompanying unaudited consolidated financial statements.




Under the previous $4,500 per month equipment rental agreement between the Company and Bend Arch, Bend Arch owed the Chief Executive Officer $131,060 as of December 31, 2009.  For the three month period ending March 31, 2010, Bend Arch accrued $13,500 per the agreement, the Chief Executive Officer advanced $15,700 to Bend Arch and Bend Arch repaid $23,200 to the Chief Executive Officer.  As of March 31, 2010, the amount outstanding is $137,060 and is recorded as a component of Due to Related Parties in the accompanying unaudited consolidated financial statements.




Effective January 1, 2005, Oil America Group, Inc. (“OAG”) entered into a salary agreement with its President for a salary of 65,000 annually.  As of December 31, 2009, the OAG owed the President $49,544 comprised of $32,500 of accrued salary, $14,200 for advances made by the President to OAG $2,844 for expenses the President paid on behalf of OAG.  For the three month period ending March 31, 2010, OAG accrued $16,250 for salary due to the President and repaid the President $5,000 for previous advances.  Additionally, the President sold OAG a vehicle for a purchase price of $2,500 and OAG paid the President $2,000 of the purchase price with the remaining $500 accrued as of March 31, 2010.  As a result of the transactions discussed above, OAG owes the President $62,256 as of March 31, 2010 and this amount is recorded as a component of Due to Related Parties in the accompanying unaudited consolidated financial statements.




13.  SUBSEQUENT EVENTS




Management evaluated all activity of the Company through the issue date of the Company’s unaudited consolidated financial statements and concluded no subsequent events have occurred that would require recognition in the unaudited consolidated financial statements.


-17-


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.





The following analysis of our financial condition and results of operations contained in this section should be read in conjunction with our financial statements and related notes and schedules thereto appearing elsewhere in this Quarterly Report, as well as the sections entitled "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes and schedules thereto included in our annual report on Form 10-K for the year ended December 31, 2009 filed with the SEC on May 14, 2010.





This Quarterly Report, including the Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs, and our assumptions. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", and "estimates" and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:




•
economic downturns or recessions may impair our portfolio companies' performance;





•
a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities;





•
the risks associated with the possible disruption in the Company's operations due to terrorism;





•
future changes in laws or regulations and conditions in our operating areas; and•
the risks, uncertainties and other factors we identify from time to time in our filings with the Securities and Exchange Commission, including our Form 10-Ks, Form 10-Qs and Form 8-Ks.





Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report should not be regarded as a representation by us that our plans and objectives will be achieved. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report. We undertake no obligation to update such statements to reflect subsequent events.





OVERVIEW





American Energy Production, Inc. (“American Energy”, “the Company”, “we”, “us”, “our” “its”) is a publicly traded energy company that is engaged primarily in the acquiring, developing, producing, exploring and selling of oil and natural gas. Additionally, the Company is a joint venture partner in the exploration, evaluation, development and mining of gold and other minerals.  The Company traditionally has acquired oil and gas companies that have the potential for increased oil and natural gas production utilizing new technologies, well workovers and fracture stimulation systems. Additionally, the Company has expanded its scope of business to include the drilling of new wells with its own equipment through its wholly-owned subsidiary companies.   The Company website is www.americanenergyproduction.com.




The Company’s wholly-owned subsidiaries are primarily involved in three areas of oil and gas operations.




1.
Leasing programs.




2.
Production acquisitions




3.
Drilling and producing with proven and emerging technologies.




The Company believes that for the foreseeable future, the world will be highly dependent on oil and natural gas. Currently, alternative fuels are far more expensive than fossil fuels and because of the politically unstable conditions of many of the energy producing regions of the world, the Company believes that oil and natural gas will remain a key yet volatile component of the world’s future energy requirements.  Additionally, with the ever increasing world demand for energy, the domestic production of oil and gas will play an even greater role in America’s future then it already has to date. 
 -18-






The Company determined in 2009 to diversify from only its oil and gas operations into a working gold mine operation.  On August 6, 2009, the Company announced that it has executed a non-binding Letter of Intent (“LOI”) for the acquisition of Dorado Gold, LLC and Master Petroleum, LLC, both California limited liability companies (together “Dorado”).  Dorado owns 100% of certain placer gold mining claims, land and equipment (the “Joint Properties”) 25 miles north of Weaverville, California.  Additionally, AENP and Dorado executed a 120 day Operating Agreement to jointly participate in the exploration, evaluation, development and mining of gold and other minerals within the Joint Properties (“Gold Venture”).  AENP will bear 100% of all expenses during operations of the Gold Venture and AENP and Dorado will each receive fifty percent (50%) of product or revenues after expenses and AENP will manage the Gold Venture.  The acquisition of Dorado by AENP is subject to AENP’s sole evaluation of the results after the 120 day Gold Venture period is completed.  As of the date of this report, no decision has been made by the Company in relation to the acquisition.  In December 2009, the Gold Venture was extended through December 31, 2010 as the Company believes this working gold mining operation will be a hedge against inflation and will also help offset the depressed price of oil and natural gas until these commodities recover in the near future.





The time required for us to become profitable is highly uncertain, and we cannot assure you that we will achieve or sustain profitability or generate sufficient cash flow from operations to meet our planned capital expenditures, working capital and debt service requirements. If required, our ability to obtain additional financing from other sources also depends on many factors beyond our control, including the state of the capital markets and the prospects for our business. The necessary additional financing may not be available to us or may be available only on terms that would result in further dilution to the current owners of our common stock.





RESULTS OF OPERATIONS





The following discussion of the results of operations should be read in conjunction with our unaudited consolidated financial statements and notes thereto for the periods presented included in this Form 10-Q.




Three Months EndedMarch 31,2010


2009Revenues:Oil and natural gas sales, net

$
254,286


$
230,936Operating ExpensesCompensation


62,493



57,078Consulting


20,965



1,500Depreciation, depletion and accretion


84,821



134,415Rent


1,000



1,740General and administrative


29,312



27,445Production


272,367



290,656Professional


33,401



29,290Research and development


5,997Business taxes


23,903



30,057Total Operating Expenses


534,259



572,181Operating Loss


(279,973
)


(341,245
)Other Income (Expense)Other income


664



100Interest expense


(639
)


(42,161
)Payroll tax expense and penalties


-



(1,501
)Loss on trading securities


(4,076
)


-Gain on sale of subsidiary


826,907



-Total Other Income (Expense)


822,856



(43,562
)Net Income (Loss)

$
542,883


$
(384,807
)Comprehensive Income (Loss)Unrealized loss on available for sale securities - net


(69,336
)


-Total Comprehensive Income (Loss)

$
473,547


$
(384,807
)


-19-


Comparison of the Three Months ended March 31, 2010 with the three months ended March 31, 2009.





Revenues:





Revenues increased $23,350 or approximately 10%, to $254,286 for 2010 from $230,936 for 2009.  Revenues for 2010 were comprised of $176,279 of oil sales (2,509 barrels of oil at an average price of $70.26 per barrel) and $77,906 of natural gas sales (19,136 MCF at an average price of $4.07 per MCF) and royalties, net of $101.  Revenues for 2009 were comprised of $140,780 of oil sales (4,131 barrels of oil at an average price of $34.08 per barrel), $86,656 of natural gas sales (20,994 MCF at an average price of $4.13 per MCF) and $3,500 of royalties.  Although oil production volume decreased significantly by 39% for 2010 from 2009, revenues increased due to significantly increased market pricing for oil (average price increase from $34.08 to $70.26 per barrel).  Additionally, the revenue amounts only include two months of Production Resource, Inc. (“PRI”) as a result of the sale of effective March 8, 2010.





Operating Expenses:





Operating expenses decreased $37,922, or 7%, to $534,259 for 2010 from $572,181 for 2009.  The decrease was primarily related to a reduction in depreciation, depletion and accretion as a result of the sale of PRI effective March 8, 2010.





Other Income (Expense):





Other income (expense) increased $866,418 of income, or 1,989% to $822,856 of income for 2010 from $43,562 of expense for 2009.  The increase in income was primarily from one-time $826,907 non-cash gain on sale of subsidiary from the sale of PRI effective March 8, 2010.





Comprehensive Income (Loss):





Comprehensive Income (Loss) increased to $69,336 of expense for 2010 from zero in 2009.  The entire increase represents an unrealized loss on available-for-sale equity securities acquired in 2010 with no comparable amount in 2009.





Liquidity and Capital Resources




Cash was $24,053 at March 31, 2010 as compared to $47,284 at December 31, 2009, and working capital deficit was $10,154 at March 31, 2010 as compared to a working capital deficit of $481,566 at December 31, 2009.   The decrease in the working capital deficit was primarily from investments in trading securities and available-for-sale marketable equity securities as a result of the sale of PRI.





Operating Activities





Cash used in operating activities was $388,782 for the three months ended March 31, 2010 compared to cash used of $19,612 for the three months ended March 31, 2009.  The increase in cash used in operations from 2009 to 2010 was primarily from a decrease in the change for due to related parties and accrued interest payable for 2010 as compared to an increase in 2009.





Investing Activities





Cash provided by investing activities was $424,235 for the three months ended March 31, 2010 compared to cash used of $6,037 for the three months ended March 31, 2009.  The increase in cash provided resulted primarily from cash proceeds from the sale of PRI, offset by investments in oil and gas properties and equipment and available-for-sale securities.





Financing Activities





Cash used in financing activities was $58,684 for the three months ended March 31, 2010 compared to $286 cash provided by financing activities for the three months ended March 31, 2009. The change was almost entirely from the repayment of notes payable in 2010.


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Our principal uses of cash to date have been for operating activities and we have funded our operations previously primarily by incurring indebtedness in the form of convertible debentures, notes payable and issuing common stock.


Debt




Notes Payable


Mar.31,


Dec. 31,2010


2009$25,000 Line of Credit, dated October 28, 2005, bearing simple variable interest at 6.75% per annum and due on January 25, 2010.

$
-


$
23,684$124,487 Note, dated March 27, 2008, not formalized and not bearing interest


75,487



100,487$10,000 Note, dated June 30, 2009, bearing interest at 18% per annum and due December 31, 2009.


-



10,000$
75,487


$
134,171





On October 28, 2005, Bend Arch entered into a $25,000 line of credit facility with a financial institution for working capital purposes. The line of credit was secured by a certificate of deposit held by the financial institution and was bearing simple interest per annum at a variable rate which was 3.25% as of December 31, 2009. In January 2010, the Company paid the outstanding balance in full and is no longer outstanding as of March 31, 2010.




On March 27, 2008, the Company purchased oilfield property and equipment for a price of $159,487.  The terms included a cash payment of $35,000 and a note payable for the balance of $124,487.  In 2008, the Company paid down $24,000 of principal and the balance was $100,487 as of December 31, 2009.  In January 2010, the Company paid down $25,000 of principal and the balance is $75,487 as of March 31, 2010 and classified as a component of Note Payable in the accompanying unaudited consolidated financial statements.  As of March 31, 2010, no formal agreement of the terms of the note payable had been finalized and the Company has a verbal agreement to pay the principal back at a rate of $10,000 monthly when sufficient cash flow is available.




On June 30, 2009, the Company received $10,000 of proceeds from a short-term note from an unrelated third party.  The terms included interest at a rate of 18% per annum, a December 31, 2009 maturity date, and a late payment charge equal to 5% of the unpaid balance and interest at the lesser of a) 18% or b) as permitted by law.  As of December 31, 2009, the Company had accrued $900 of accrued interest related to the note payable and the note payable had not been repaid and was considered in default.  In March 2010, the Company repaid the entire principal balance of $10,000 and accrued interest of $900 and the short-term note is no longer outstanding as of March 31, 2010.




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Equity Financing





There was no equity financing during the three months ended March 31, 2010.





Liquidity





Our ability to have a successful oil and gas company is heavily dependent on securing additional capital to supplement the anticipated timeframe required for the oil and gas revenues and cash flows to be sufficient to cover our operating expenses.  As a result, we are searching for an alternative means of securing additional capital, which may include the sale of additional shares of our common stock or the issuance of additional debt securities.  Additionally, we require additional funds for working capital and for growth opportunities.  However, there is no assurance that additional equity or debt financing will be available on terms acceptable to our management or that the additional financing will be available when we require the funds.




If we are unable to obtain additional capital or successfully implement our business strategy, this will have a significant impact on our ability to continue as a going concern.




Off-Balance Sheet Arrangements





We have no off-balance sheet arrangements.





Item 4T.  Controls and Procedures




Under the supervision and with the participation of our senior management, consisting of our chief executive officer and our chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report (the "Evaluation Date").  Based on that evaluation, the Company’s management, including our chief executive officer and chief financial officer, concluded that as of the Evaluation Date our disclosure controls and procedures are not effective to ensure that the information relating to us required to be disclosed in our Securities and Exchange Commission ("SEC") reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.





Management's Quarterly Report on Internal Control Over Financial Reporting. (a) The Company's management is responsible for establishing and maintaining an adequate system of internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)).  Our management, including our principal executive officer and principal accounting officer, conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.  Based on its evaluation, our management concluded that there is a material weakness in our internal control over financial reporting and that our financial reporting controls were not effective.  A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.





The material weakness(s) identified are:





1.
The Company does not have a full time Accounting Controller or Chief Financial Officer and utilizes part time consultants to perform these critical responsibilities.  This lack of full time accounting staff results in a lack of segregation of duties and accounting technical expertise necessary for an effective system of internal control.





Additionally, management determined during its internal control assessment the following weakness(s), while not considered material, are items that should be considered by the Board of Directors for resolution in the near future:





1.
The management of oil and gas leases including a schedule of oil and gas lease agreements and related documents to ensure that the Company has rights to Oil and Gas, expiration and renewal dates, contractual payments regarding royalties, taxes, improvements, etc.   This ensures correct oil and gas capital accounts, revenues and related expenses are calculated correctly by Accounting.  Additionally, the CFO should review all Oil and gas lease agreements.


2.
The Company should take steps to require that oil and gas expenditures are properly classified into the proper categories such as acquisition costs and intangible and tangible drilling costs.  Without this, the Company cannot properly determine the proper recording and disclosure of oil and gas expenditures.


3.
The Company should take steps to enhance the security for bank wire transfers.  Currently, the Subsidiary President’s and CEO provide instruction to the bookkeepers to initiate a wire transfer.  As a security enhancement, the Bank should be required to obtain approval from the CEO or CFO to make the wire transfer.


4.
The Company IT process should be strengthened as there is no disaster recovery plan, no server, and the company accounting records are maintained through a consultant accountant.  The Company should consider the purchase and implementation of a server and proper backups off site to ensure that accounting information is safeguarded.


5.
The Company should take steps to implement a policies and procedures manual.


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In order to mitigate all of the above weaknesses(s), to the fullest extent possible, all financial reports are reviewed by the Chief Executive Officer as well as the Board of Directors for reasonableness. All unexpected results are investigated. At any time, if it appears that any control can be implemented to continue to mitigate such weaknesses, it is immediately implemented. The Company has retained a third-party accounting and financial consulting firm to assist with the complex technical oil and gas issues and as soon as our finances allow, we will hire sufficient accounting staff and implement appropriate procedures as described above.





This quarterly report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this quarterly report.





(b)  Changes in Internal Control over Financial Reporting.  There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting




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PART II - Other Information




Item 6.  Exhibits





The following exhibits are filed with this report or are incorporated herein by reference to a prior filing, in accordance with Rule 12b-32 under the Securities Exchange Act of 1934.


Exhibit No.

Description of Exhibit2.1

Certificate of Amendment to Articles of Incorporation of American Energy Production, Inc. filed with the Delaware Secretary of State  (1)3.1

Form S-8 Registration Statement under the Securities Act of 1933 filed January 31, 2003. (1)3.2

Form 8-A12G for Registration of Certain Classes of Securities Pursuant to Section 12 (b) or (g) of the Securities Act of 1934 filed October 10, 2003. (1)3.3

Definitive Proxy Statement Pursuant to Section 14(a) of the Securities Act of 1934 filed November 19, 2003. (1)3.4

Form N-54 Notification of Election as a Business Development Company dated January 12, 2004. (1)3.5

Form 1-E Notification under Regulation E dated January 14, 2004. (1)3.6

Form 1-E/A Notification under Regulation E dated June 24, 2005. (1)3.7

Form 2-E Notification under Regulation E dated June 27, 2006. (1)3.8

Form 2-E Notification under Regulation E dated December 11, 2006. (1)3.9

Definitive Proxy Statement Pursuant to Section 14(a) of the Securities Act of 1934 filed February 8, 2007. (1)3.10

Form N-54C Notification of Withdrawal of Business Development Companies dated April 23, 2007. (1)3.11

Definitive Proxy Statement Pursuant to Section 14(a) of the Securities Act of 1934 filed July 5, 2007. (1)3.12

Form S-8 Registration Statement under the Securities Act of 1933 filed September 25, 2008. (1)14.1

Code of Ethics (1)20.1

Oil and Gas property valuation by Cullen Thomas Consulting Geologist as of December 31, 2009 (1)20.2

Consent letter from Cullen Thomas Consulting Geologist for Oil and Gas property valuation as of December 31, 2009 (1)21.1

Subsidiaries of American Energy Production, Inc. (1)31.1

Certification of the Chief Executive and Chief Financial Officer of American Energy production, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1

Certification of the Chief Executive and Chief Financial Officer of American Energy Production, Inc. pursuant to Section 906 of the Sarbanes- Act of 2002.*





*           Filed herewith





(1)
Incorporated by reference.


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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of American Energy Production, Inc., in the capacities and on the dates indicated.







Signature
Title

Date/s/ Charles Bitters

Charles Bitters
Chief Executive Officer, Principal Executive and Financial Officer, Director

June 25, 2010





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