UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q


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





For the quarterly period ended June 30, 2011





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





For the transition period from   to





Commission File Number:333-143626


AMERICAN EAGLE ENERGY INC.


(Exact name of registrant as specified in its charter)


Nevada
20-8642477(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)





27 North 27thStreet, Suite 21G, Billings, MT
59101(Address of principal executive offices)
(Zip Code)





(406) 294-9765(Registrant’s telephone number, including area code)




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


Yes x No  ̈





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





(Check one):





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





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


Yes  ̈ No x





Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:


43,374,158 shares of common stock issued and outstanding at August 15, 2011.










AMERICAN EAGLE ENERGY INC.


FORM 10-Q


QUARTERLY PERIOD ENDED JUNE 30, 2011





INDEX




A Note About Forward Looking Statements

1PART I - FINANCIAL INFORMATIONItem 1 – Condensed Consolidated Financial Statements (Unaudited)

2Condensed Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010

F-2Condensed Consolidated Statements of Operations For Each of the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010 (Unaudited)

F-3Condensed Consolidated Statements of Comprehensive Income For Each of the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010 (Unaudited)

F-4Condensed Consolidated Statements of Cash Flows For Each of the Six-Month Periods Ended June 30, 2011 and 2010 (Unaudited)

F-5Notes to the Condensed Consolidated Financial Statements (Unaudited)

F-7Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

3Item 4 - Controls and Procedures

13PART II - OTHER INFORMATIONItem 2 - Unregistered Sales of Equity Securities and Use of Proceeds

14Item 6 – Exhibits

14Signatures

17










A Note About Forward-Looking Statements





This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management’s current expectations. These statements may be identified by their use of words like “plans,” “expect,” “aim,” “believe,” “projects,” “anticipate,” “intend,” “estimate,” “will,” “should,” “could” and other expressions that indicate future events and trends. All statements that address expectations or projections about the future, including statements about our business strategy, expenditures, and financial results, are forward-looking statements. We believe that the expectations reflected in such forward-looking statements are accurate. However, we cannot assure you that such expectations will occur.





Actual results could differ materially from those in the forward looking statements due to a number of uncertainties including, but not limited to, those discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Factors that could cause future results to differ from these expectations include general economic conditions; further changes in our business direction or strategy; competitive factors; market uncertainties; and an inability to attract, develop, or retain consulting or managerial agents or independent contractors. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives requires the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and accordingly, no opinion is expressed on the achievability of those forward-looking statements. No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements. You should not unduly rely on these forward-looking statements, which speak only as of the date of this Quarterly Report. Except as required by law, we are not obligated to release publicly any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.




1




PART I. FINANCIAL INFORMATION





ITEM 1. FINANCIAL STATEMENTS.


American Eagle Energy Inc.
  Condensed Consolidated Financial Statements
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods ended June 30, 2011 and 2010
  2
  American Eagle Energy Inc.
  Index to the Financial Statements
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
 Condensed Consolidated Financial Statements of American Eagle Energy Inc.:Condensed Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010

F-2Condensed Consolidated Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010 (Unaudited)

F-3Condensed Consolidated Statements of Comprehensive Income for the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010

F-4Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2011 and 2010 (Unaudited)

F-5Notes to the Condensed Consolidated Financial Statements (Unaudited)

F-7
  F-1
  American Eagle Energy Inc.
  Condensed Consolidated Balance Sheets
  As of June 30, 2011 and December 31, 2010
 
 June 30,2011


December 31,(Unaudited)


2010Current assets:Cash

$
3,157,630


$
79,768Stock subscription receivable


-



2,666,667Receivables from working interest partners


1,127,387



-Prepaid expenses


12,864



-Total current assets


4,297,881



2,746,435Oil and gas properties – subject to amortization, net of accumulated depletion of $142,079 and $113,596, respectively


1,977,937



965,848Oil and gas properties – not subject to amortization


3,337,761



2,820,301Marketable securities - related party


127,426



197,453Total assets

$
9,741,005


$
6,730,037Current liabilities:Accounts payable and accrued liabilities

$
1,402,239


$
758,032Amounts due to Eternal Energy Corp.


667,333



279,376Due to related parties


14,000



20,000Convertible debenture, net of discount of $496,601


503,399



-Total current liabilities


2,586,971



1,057,408Convertible debenture, net of discount of $926,333


-



73,667Long-term asset retirement obligation, net of discount of $44,090 and $23,647, respectively


16,473



13,853Total liabilities


2,603,444



1,144,928Commitments and contingencies


-



-Stockholders’ equity:Common stock, $.001 par value, 150,000,000 shares authorized, 43,374,158 and 37,540,000 shares outstanding


43,374



37,540Additional paid-in capital


7,224,331



7,230,166Stock subscriptions receivable


-



(833,333
)Accumulated unrealized gains on marketable securities


101,880



172,818Accumulated deficit


(232,024
)


(1,022,082
)Total stockholders’ equity


7,137,561



5,585,109Total liabilities and stockholders’ equity

$
9,741,005


$
6,730,037
 
 The accompanying notes are an integral part of the condensed consolidated financial statements.
  F-2
  American Eagle Energy Inc.
  Condensed Consolidated Statements of Operations (Unaudited)
 
 
  For the Three-Month Period


For the Six-Month PeriodEnded June 30,


Ended June 30,2011


2010


2011


2010Oil and gas revenues

$
10,437


$
-


$
46,477


$
-Gain on sale of oil and gas properties — not subject to amortization, net of costs


2,085,627



-



2,085,627



-Total revenue


2,096,064



-



2,132,104



-Operating expenses:Oil and gas operating expenses


71,042



-



117,676



-General and administrative


167,722



34,708



275,072



40,048Professional fees


148,360



35,888



382,376



59,402Professional fees – related party


38,000



30,000



68,000



75,000Depreciation, amortization, and depletion expense


14,278



-



28,482



-Impairment of oil and gas prospects


-



5,937



-



5,937Total operating costs


439,402



106,533



871,606



180,387Total operating income (loss)


1,656,662



(106,533
)


1,260,498



(180,387
)Interest expense


(20,000
)


(16,667
)


(40,000
)


(16,667
)Accretion of debenture discount


(198,231
)


(11,688
)


(429,733
)


(11,688
)Accretion of discount on asset retirement obligation


(358
)


-



(707
)


-Income (loss before taxes


1,438,073



(134,888
)


790,058



(208,742
)Provision for income taxes


-







-



-Net income (loss)

$
1,438,073


$
(134,888
)

$
790,058


$
(208,742
)Net income (loss) per common share:Basic

$
0.03


$
(0.00
)

$
0.02


$
(0.00
)Diluted

$
0.03


$
(0.00
)

$
0.02


$
(0.00
)Weighted average number of shares outstanding -Basic


43,231,357



44,913,334



41,299,259



44,376,889Diluted


44,575,384



44,913,334



42,675,072



44,376,889
 
 The accompanying notes are an integral part of the condensed consolidated financial statements.
  F-3
  American Eagle Energy Inc.
  Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
 For the Three-Month Period


For the Six-Month PeriodEnded June 30,


Ended June 30,2011


2010


2011


2010Net income (loss)

$
1,438,073


$
(134,888
)

$
790,058


$
(208,742
)Other comprehensive losses, before tax:Unrealized losses on securities


(44,404
)


-



(70,938
)


-Total other comprehensive losses, before tax


(44,404
)


-



(70,938
)


-Comprehensive income (loss)

$
1,393,669


$
(134,888
)

$
719,120


$
(208,742
)
 
 The accompanying notes are an integral part of the condensed consolidated financial statements.
  F-4
  American Eagle Energy Inc.
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)
 For the Six-Month Periods Ended June 30, 2011 and 2010
 
 2011


2010Cash flows provided by (used for) operating activities:Net income (loss)

$
790,058


$
(208,742
)Adjustments to reconcile net loss to net cash provided by (used for) operating activities:Non cash transactions:Depletion


28,482



-Accretion of discount on debenture


429,733



11,688Accretion of discount on asset retirement obligations


707



-Gain on sale of oil and gas properties


(2,085,627
)


-Changes in operating assets and liabilities:Increase in prepaid expense


(12,864
)


-Increase in amounts due from working interest partners


(1,127,387
)


-Increase in amounts due to Eternal Energy Corp.


387,957



-Increase in accounts payable and accrued liabilities


644,206



878,101Increase (decrease) in amounts due to related parties


(6,000
)


30,000Net cash provided by (used for) operating activities


(950,735
)


711,047Cash flows provided by (used for) investing activities:Proceeds from the sale of oil and gas properties


3,914,811



-Additions to oil and gas properties


(3,385,303
)


(1,666,633
)Purchase of marketable securities


(911
)


(24,635
)Net cash provided by (used for) investing activities


528,597



(1,691,268
)Cash flows provided by (used for) financing activities:Proceeds from sale of Debenture


-



1,000,000Proceeds from the issuance of stock


-



805,000Collection of stock subscriptions receivable


3,500,000



-Net cash provided by financing activities


3,500,000



1,805,000Net increase in cash


3,077,862



824,779Cash - beginning of period


79,768



2,239Cash - end of period

$
3,157,630


$
827,018
 
 The accompanying notes are an integral part of the condensed consolidated financial statements.
  F-5
  American Eagle Energy Inc.
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)
 For the Six-Month Periods Ended June 30, 2011 and 2010
 
 Supplemental Disclosure of Cash Flow Information
 
 2011


2010Cash paid during the period for:Interest

$
40,000


$
-Income taxes

$
-


$
-
 
 Supplemental Disclosure of Non-Cash Investing and Financing Activities
 
 2011


2010Change in value of marketable securities

$
70,938


$
-Issuance of stock upon collection of stock subscription

$
5,834


$
-Recording of asset retirement obligation, net of discount of $21,150

$
1,913


$
-Warrants issued with convertible debt, recorded as a discount on the debt

$
-


$
280.511
 
 The accompanying notes are an integral part of the condensed consolidated financial statements.
  F-6
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
 1.
Description of Business
  American Eagle Energy, Inc. (the “Company”) was incorporated in the state of Nevada in March 2007 for the purpose of identifying and pursuing exploratory oil and gas opportunities.  As of June 30, 2011, the Company had acquired working interests in oil and gas prospects located in Montana, North Dakota, Texas, and southeastern Saskatchewan, Canada.
  In December 2010, the Company changed its fiscal year end from April 30 to December 31.  The 2010 figures presented herein are presented for comparative purposes and are based on different fiscal quarters than what was presented in the Company’s previously filed Quarterly Reports on Form 10-Q.
  2.
Summary of Significant Accounting Policies
  Basis of Presentation
  The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned, Canadian subsidiary, AEE Canada Inc.  The subsidiary was created to house the Company’s Canadian oil and gas property holdings and to conduct business activities within Canada.  All material intercompany accounts, transactions, and profits have been eliminated.
  These condensed consolidated financial statements are presented in United States Dollars and have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 8 of SEC Regulation S-X.  The principles for interim financial information do not require the inclusion of all the information and footnotes required by generally accepted accounting principles for complete financial statements.  Therefore, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the eight-month period ended December 31, 2010 and for the year ended April 30, 2010.  The condensed consolidated financial statements included herein are unaudited; however, in the opinion of management, they contain all normal recurring adjustments necessary for a fair statement of the condensed results for the interim periods.  Operating results for the three-month and six-month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.
  F-7
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
  Revenue Recognition
  The Company records the sale of its interests in prospects as a reduction to the cost pool when the terms of the transaction are final and the sales price is determinable.  Working interest, royalty, and net profit interests are recognized as revenue when oil and gas is sold and persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee for the arrangement is fixed or determinable and collectability is reasonably assured.
  Concentration of Credit Risk
  At June 30, 2011, the Company had $2,974,526 on deposit that that exceeded the United States (FDIC) federal insurance limit of $250,000 per bank.  The Company believes that this credit risk is mitigated by the financial strength of the financial institution with which the funds are held.
  Components of Other Comprehensive Income
  Comprehensive income consists of net income and other gains and losses affecting shareholders’ equity that, under generally accepted accounting principles are excluded from net income.  For the Company, such items consist solely of unrealized gains and losses on marketable equity investments.
  Cash and Cash Equivalents
  Cash equivalents consist of time deposits and liquid debt investments with original maturities of three months or less at the time of purchase.  The Company does not have any cash equivalents at June 30, 2011 or December 31, 2010.
  Marketable Securities
  The Company determines the appropriate classification of its investments in equity securities at the time of purchase and reevaluates such determinations at each balance sheet date.  Marketable equity securities not classified as held to maturity or as trading are classified as available for sale, and are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income and reported in stockholders’ equity.
  The fair value of substantially all securities is determined by quoted market prices.  The estimated fair value of securities for which there are no quoted market prices is based on similar types of securities that are traded in the market.  Warrants to purchase common stock are calculated using the Black-Scholes Option Pricing Model.
  F-8
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
  Oil and Gas Properties
  The Company follows the full cost method of accounting for its investments in oil and gas properties.  Under the full cost method, all costs associated with the exploration of properties are capitalized into appropriate cost centers within the full cost pool.  Internal costs that are capitalized are limited to those costs that can be directly identified with acquisition, exploration, and development activities undertaken and do not include any costs related to production, general corporate overhead, or similar activities.  Cost centers are established on a country by country basis.
  Capitalized costs within the cost centers are amortized on the unit of production basis using proved oil and gas reserves.  The cost of investments in unproved properties and major development projects are excluded from capitalized costs to be amortized until it is determined whether or not proved reserves can be assigned to the properties.  Until such a determination is made, the properties are assessed annually to ascertain whether impairment has occurred.  The costs of drilling exploratory dry holes are included in the amortization base immediately upon determination that the well is dry.
  As of the end of each reporting period, the capitalized costs of each cost center are subject to a ceiling test, in which the costs shall not exceed the cost center ceiling.  The cost center ceiling is equal to i) the present value of estimated future net revenues computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions; plus ii) the cost of properties not being amortized; plus iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less iv) income tax effects related to differences between the book and tax basis of the properties.  If unamortized costs capitalized within a cost center, less related deferred income taxes, exceed the cost center ceiling, the excess is charged to expense and separately disclosed during the period in which the excess occurs.
  Proceeds received from disposals are credited against accumulated cost except when the sale represents a significant disposal of reserves, in which case a gain or loss is recognized.  The sum of net capitalized costs and estimated future development and dismantlement costs for each cost center is depleted on the equivalent unit-of-production method, based on proved oil and gas reserves.  Excluded from amounts subject to depletion are costs associated with unevaluated properties.
  F-9
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
  Asset Retirement Obligations
  The Company records asset retirement obligations in the period in which the obligation is incurred and when a reasonable estimate of fair value can be determined.  The initial recording of an asset retirement obligation results in an increase in the carrying amount of the related long-lived asset and the creation of a liability.  The portion of the asset retirement obligation expected to be realized during the next 12-month period is classified as a current liability, while the portion of the asset retirement obligation expected to be realized during subsequent periods is discounted and recorded at its net present value.  The discount factor used to determine the net present value of the Company’s asset retirement obligation is 10%, which is consistent with the discount factor that is applied to oil and gas reserves when performing the periodic ceiling tests.
  Changes in the noncurrent portion of the asset retirement obligation due to the passage of time are measured by applying an interest method of allocation.  The amount of change is recognized as an increase in the liability and an accretion expense in the statement of operations.  Changes in either the current or noncurrent portion of the Company’s asset retirement obligation resulting from revisions to the timing or the amount of the original estimate of undiscounted cash flows are recognized as an increase or a decrease to the carrying amount of the liability and the related long-lived asset
  Fair Value of Financial Instruments
  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  Hierarchy Levels 1, 2 or 3 are terms for the priority of inputs to valuation techniques used to measure fair value.  Hierarchy Level 1 inputs are quoted prices in active markets for identical assets or liabilities.  Hierarchy Level 2 inputs are inputs other than quoted prices included within Level 1 that are directly or indirectly observable for the asset or liability.  Hierarchy Level 3 inputs are inputs that are not observable in the market.  The fair value measurements of the Company’s financial instruments at June 30, 2011 and December 31, 2010 were as follows:
  F-10
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
 Level 1


Level 2


Level 3


TotalJune 30, 2011Cash

$
3,157,630


$
-


$
-


$
3,157,630Marketable securities – related party


-



127,426



-



127,426$
3,157,630


$
127,426


$
-


$
3,285,056December 31, 2010Recurring:Cash

$
79,768


$
-


$
-


$
79,768Marketable securities – related party


-



197,453



-



197,453$
79,768


$
197,453


$
-


$
277,221Nonrecurring:Stock options granted in exchange for intellectual property

$
-


$
1,247,195


$
-


$
1,247,195
  The Company uses level 2 inputs to determine the fair value of its marketable securities - related party, which consists of common stock and warrants in an entity which is traded on the Canadian National Stock Exchange.  The warrants are valued using the Black-Scholes Option Pricing Model which includes a calculation of historical volatility of the stock.  Level 2 inputs were also used to determine the fair value of the Company's stock options which were granted to related parties for intangible oil and gas intellectual property.  Recent market transactions were used to determine the market price of the stock and a comparable company was used to calculate volatility.
  Convertible Debt
  The Company has allocated a portion of the proceeds received from the issuance of convertible debentures to additional paid in capital to recognize the value of the common stock warrants issued in connection with the convertible debentures as well as a beneficial conversion feature that was triggered when the trading value of the Company’s stock first exceeded its conversion price per share.  The amount charged to additional paid in capital has been offset by a charge to debt discount.  Debt discounts are amortized using the straight line method over the life of the corresponding debt instrument.
  F-11
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
  Basic and Diluted Earnings (Loss) Per Common Share
  Basic earnings (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted earnings per common share is computed in the same way as basic earnings per common share except that the denominator is increased to include the number of additional common shares that would be outstanding if all potential common shares had been issued and if the additional common shares were dilutive.  However, diluted loss per common share for the three-month and six-month periods ended June 30, 2010 is computed in the same way as basic loss per common share as the inclusion of additional common shares that would be outstanding if all potential common shares had been issued would be anti-dilutive.  See Note 8 for the calculation of basic and diluted earnings (loss) per share for the three-month and six-month periods ended June 30, 2011 and 2010.
  Income Taxes
  Deferred income tax assets and liabilities are recognized for the future tax benefits and consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax balances.  Deferred income tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to the taxable income in the years in which those differences are expected to be recovered or settled.  The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment.  Net operating loss carry forwards and other deferred tax assets are reviewed annually for recoverability, and if necessary, are recorded net of a valuation allowance.
  Use of Estimates and Assumptions
  The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and disclosure of contingent obligations in the financial statements and accompanying notes.  The Company’s most significant assumptions are the estimates used in the determination of the deferred income tax asset valuation allowance, the valuation of oil and gas reserves to which the Company owns rights, estimates related to the Company’s asset retirement obligations, the valuation of the warrants held by the Company as investments and the estimates used to determine the Black-Scholes fair value of the stock options issued as consideration for oil and gas intangible assets.  The estimation process requires assumptions to be made about future events and conditions, and as such, is inherently subjective and uncertain.  Actual results could differ materially from these estimates.
  New Accounting Pronouncements
  In December 2010, the FASB issued Accounting Standards Update 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations.  The objective of this Update is to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations.
  F-12
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
  The amendments in this Update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.  The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.
  The amendments affect any public entity as defined by Topic 805 that enters into business combinations that are material on an individual or aggregate basis.
  In May 2011, the FASB issued Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.  Many of the amendments in this update change the wording used in the existing guidance to better align U.S. generally accepted accounting principles with International Financial Reporting Standards and to clarify the FASB’s intent on various aspects of the fair value guidance.  This update also requires increased disclosure of quantitative information about unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy.  This update is effective for financial statements for reporting periods beginning after December 15, 2011 and should be applied retrospectively.  Other than requiring additional disclosures, the adoption of this new guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
  In June 2011, the FASB issued Accounting Standards Update 2011-05, Comprehensive Income (Topic 220).  This new guidance requires the components of net income and other comprehensive income to be either presented in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements.  This new guidance eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity.  While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance.  The Company has adopted the new guidance in its financial statements as of and for the three-month and six-month periods ended June 30, 2011.
  F-13
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
  3.
Marketable Securities
  As of June 30, 2011 and December 31, 2010, the Company held the following marketable securities that were classified as available for sale:
  Gains inAccumulatedFair


OtherValue


ComprehensiveJune 30, 2011

Measurement


IncomeNoncurrent assets:Common stock and warrants – related party

$
127,426


$
101,880Total available-for-sale marketable securities

$
127,426


$
101,880December 31, 2010Noncurrent assets:Common stock and warrants – related party

$
197,453


$
172,818Total available-for-sale marketable securities

$
197,453


$
172,818
  In June 2010, the Company purchased 500,000 units of Passport Energy Inc. (formerly Covenant Resources Inc.) (“Passport”), a Canadian resources company traded on the Canadian National Stock Exchange, at a purchase price of $0.05 per unit.  Each unit consisted of one share of common stock and a warrant to purchase an additional share of Passport’s common stock at a purchase price of $0.05 per share.  The warrants have a two-year life and expire on June 23, 2012.  Total consideration paid to acquire the common shares and warrants was $24,635 (CDN$25,000).  During 2011, the Company subsequently paid an additional $911 to Passport in connection with the shares.  Management considers the investment in Passport as “available for sale” but has no intention of liquidating the investments during the upcoming twelve-month period.  Accordingly, the marketable securities have been classified as noncurrent assets.  The Passport warrants to purchase common stock are calculated using the Black-Scholes Option Pricing Model, with the following assumptions at June 30, 2011;
  Risk free interest rate


0.23
%Expected volatility of common stock


111
%Dividend yield

$
0.00Expected life of warrants

0.92 years
  A marketability discount was applied to the Passport shares and warrants.
  At Passport's December 2010 Annual General Meeting, Passport increased its number of directors to eight, one of whom is the Company's President and another of whom is the Company’s Vice President of Operations.  As a result, the investment in Passport is classified as a related party asset.  Passport's name change occurred in December 2010.
  F-14
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
  There were no sales of marketable securities during the six-month period ended June 30, 2011.
  4.
Oil and Gas Properties
  As of June 30, 2011 and December 31, 2010, all of the Company's investments in oil and gas properties are divided into two cost pools; one pool that is subject to amortization because drilling activities have commenced and proven reserves have been identified, and one pool that is not subject to amortization because no proven reserves have been assigned to the properties.  The two cost pools are further split into cost centers based on the geographical location of the properties included in the pools.
  As of June 30, 2011 and December 31, 2010, the net costs included in the Company’s cost centers were as follows:
  June 30, 2011


December 31, 2010Amortizable


Non-Amortizable


Amortizable


Non-AmortizableUnited States

$
-


$
3,337,761


$
-


$
2,820,301Canada


1,977,937



-



965,848



-Total

$
1,977,937


$
3,337,761


$
965,848


$
2,820,301
  The Company has entered into participation agreements in a number exploratory oil and gas properties. Unproven exploratory prospects are excluded from its respective amortizable cost pool until such a time when proven reserves are identified.  Each prospect’s costs are transferred into the amortization base on an ongoing (well by well or property by property) basis as the prospect is evaluated and proved reserves are established or impairment is determined.
  Glacier Prospect
  In January 2011, the Company acquired an undivided 66.67% working interest in approximately 47,392 net acres located in Toole Country, Montana (the “Glacier Prospect”) for cash consideration of $1,195,624.  Subsequently, the Company sold one-half of its working interest to FX Energy, Inc. (“FX Energy”) for $597,812, which represents 50% of the original purchase price.  The Company has recorded a receivable from FX for this amount as of June 30, 2011.
  As of June 30, 2011, the Company owns a 33% undivided working interest in approximately 63,630 gross acres (21,210 net acres) that is held by approximately 400 leases, with expiration dates ranging from May 2012 to June 2015, ratably.
  F-15
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
  Because no proven reserves have yet been identified, the Glacier Prospect has been assigned to the full cost pool that is not subject to amortization.  Management is currently in the process of developing its exploration strategy relative to the Glacier Prospect.  The Company is evaluating the results of nearby wells drilled by other companies in order to make a determination on the future of the Glacier Prospect.  The Glacier Prospect is evaluated for impairment during each reporting period.  There were no impairments evident as of June 30, 2011.
  Spyglass Prospect
  During the period from February 1, 2010 through June 18, 2010, the Company acquired oil and gas leases covering approximately 6,239 net acres located in Divide County, North Dakota (the “Spyglass Prospect”).  On June 18, 2010, the Company sold 50% of its interest in these oil and gas leases to Eternal Energy Corp. (“Eternal Energy”) and received, in exchange, a 50% working interest in approximately 4,480 acres located in southeastern Saskatchewan, Canada (the “Hardy Property”).  The Company reclassified 50% of the then carrying value of its investment in the Spyglass Prospect to the Hardy Prospect at the time of the exchange.  During the period from June 19, 2010 through May 27, 2011, the Company, along with its working interest partner, Eternal Energy, continued to acquire additional oil and gas leases within the Spyglass Prospect.
  On May 27, 2011, the Company sold half of its working interest in the Spyglass Prospect to a third party.Because the Company’s interest in the Spyglass Prospect represented a significant portion of the full cost pool, not subject to amortization, the Company has allocated the total cost of the full cost pool, not subject to amortization, among the individual prospects included within the pool, based on their estimated relative fair market values as of the date that the sale occurred.  Net cash consideration received from the sale totaled $3,777,793.The allocated basis attributed to the portion of the Spyglass Prospect that was sold was $1,692,166, resulting in a gain of $2,085,627 on the transaction.
  As of June 30, 2011, the Company still owns an undivided 25% working interest in approximately 68,962 gross acres (8,948 net acres) which is held by approximately 783 leases, with expiration dates ranging from February 2013 to August 2016, ratably.
  Because no proven reserves have yet been identified, the Spyglass Prospect has been assigned to the full cost pool that is not subject to amortization.  Management is currently in the process of developing its exploration strategy relative to the Spyglass Prospect.  The Company is evaluating the results of nearby wells drilled by other companies in order to make a determination on the future of the Spyglass Prospect.  The Spyglass Prospect is evaluated for impairment during each reporting period.  There were no impairments evident as of June 30, 2011.
  F-16
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
  West Spyglass Prospect
  In June, 2011, the Company began acquiring interests in oil and gas leases located in an area adjacent to the existing Spyglass Prospect.  The Company’s management refers to the adjacent acreage as the West Spyglass Prospect.  As of June 30, 2011, the Company owns a 100% working interest in approximately 7,467 gross acres (1,120 net acres) located within the West Spyglass Prospect.  The net acres are held by 21 leases, with expiration dates ranging from April 2014 to April 2016.  The Company’s management is currently evaluating this prospect.  No formal determination of the ultimate viability of this prospect is expected during the next twelve months.  Management has reviewed the carrying value of this property and determined that no impairment exists as of June 30, 2011.
  Musta Prospect
  During December 2009 and January 2010, the Company incurred $10,995 of brokerage costs related to potential lease acquisitions, in Divide County, North Dakota (the “Musta Prospect”).  As of May 27, 2011, the Company has not yet entered into any oil and gas leases within the Musta Prospect.  As part of the reallocation of total costs included in the full cost pool, not subject to amortization, associated with the partial sale of the Company’s interest in the Spyglass Prospect, the estimated fair market value assigned to the Musta Prospect was zero.  Management considers the Musta Prospect to be fully impaired as of June 30, 2011.
  Mississippi and Texas Prospects
  In January 2010, the Company entered into two assignment agreements with Murrayfield Limited, a United Kingdom company, pursuant to which the Company paid $150,000 in cash to acquire a 15% working interest in a contemplated well located in Wilkinson County, Mississippi (the “Mississippi Prospect”) and $137,500 in cash to acquire a 12.5% working interest in an oil and gas lease located in Willacy County, Texas (the “Texas Prospect”).  In June 2010, the Company resold its interest in the Mississippi Prospect to the original seller.  Net proceeds from the sale totaled $144,063, which represent the original purchase price of $150,000, less preliminary drilling costs incurred to date of $5,937.
  To date, no drilling activities have occurred within the Texas Prospect nor are any drilling plans being considered in the near future.  As part of the reallocation of total costs included in the full cost pool, not subject to amortization, associated with the partial sale of the Company’s interest in the Spyglass Prospect, the estimated fair market value assigned to the Texas Prospect was zero.  Management considers the Texas Prospect to be fully impaired as of June 30, 2011.
  F-17
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
  Sidney North Prospect
  In 2010, the Company acquired oil and gas leases on approximately 2,621 gross (624 net acres located in Richland County, Montana (the “Sidney North Prospect”) at an aggregate cost of $215,041. The acreage is held by approximately 24 leases, with expiration dates ranging from July 2013 to October 2015, ratably. The Company’s management is currently evaluating this prospect. No formal determination of the ultimate viability of this prospect is expected during the next twelve months. Management has reviewed the carrying value of this property and determined that no impairment exists as of June 30, 2011.
  Hardy Property
  As noted above, on June 18, 2010, the Company sold 50% of its working interest in the Spyglass Prospect to Eternal Energy in exchange for a 50% working interest in approximately 4,480 net acres located in Southeastern Saskatchewan (the “Hardy Property”), which included related equipment valued at approximately $238,681. At the time, the Hardy Property contained one existing oil well (the Hardy 7-9 well) that, at acquisition, was shut in due to mechanical issues. As a result, the Company reclassified $766,620 (half of the carrying value of its Spyglass Prospect at that time) to the newly acquired Hardy Property, which is part of the full cost pool that is subject to amortization. The Company and Eternal Energy have agreed that Eternal Energy will oversee all future exploration and operational activities associated with their shared acreage. The Company is obligated to pay 50% of the cost of any exploration or development costs incurred for wells in which it elects to participate.
  During August and September 2010, Eternal Energy performed a workover and recompletion of the Hardy 7-9 well at an aggregate cost of $475,274. The Company’s portion of the recompletion cost was $237,637. The well was returned to production in September 2010. In January 2011, the Hardy 7-9 well was taken off of production due to a parted rod string. The well was returned to production in March 2011, after repairs were made to replace the parted rod string. However, the well was again shut in during May and June 2011 due to weather conditions in the area. The Company’s share of the oil and gas sales generated by the Hardy 7-9 well during the three-month and six-month periods ended June 30, 2011 totaled $10,437 and $46,477, respectively.
  On May 2, 2011, the Company and its working interest partner, Eternal Energy, entered into a farm-out agreement with Passport Energy, whereby Passport agreed to fund 38.5% of the drilling, completion and equipping costs of up to two future wells located within the Hardy Property in exchange for a 25% working interest in the each well. The remaining working interest will be shared equally between the Company and Eternal Energy.
  During May and June 2011, the Company, along with its working interest partners, drilled and completed an offset well within the Hardy Property (the “Hardy 4-16” well) at an aggregate cost of approximately $1,538,125. The Company’s share of this cost is $472,973. The well was fracture stimulated in July 2011. The Company is currently evaluating the results of the fracture stimulation.
  F-18
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
  The net capitalized cost of the Hardy Property as of June 30, 2011 and December 31, 2010 is summarized below:
  June 30,


December 31,2011


2010Acquisition costs

$
785,652


$
785,652Development costs


1,334,364



293,4922,120,016



1,079,444Cumulative depletion


(142,079
)


(113,596
)Net capitalized cost

$
1,977,937


$
965,848
  Using the units-of-production method to calculate depletion expense associated with its producing properties, the Company recognized depletion expense totaling $14,278 and $28,482 for the three-month and six-month periods ended June 30, 2011.  The Company did not recognize any depletion expense during the comparable periods in 2010 because it had no producing wells at the time.
  As of June 30, 2011, the Company owns a 50% working interest in approximately 4,680 gross acres (4,280 net acres) held by leases.  The acreage is secured by 6 leases, each of which is scheduled to expire on April 1, 2014.  The Hardy Property represents the only property that is included in the portion of the Company’s full cost pool that is subject to amortization.
  Well Summary
  The following table summarizes the Company’s wells and drilling activity for the three-month periods ended June 30, 2011 and 2010:
  2011


2010Exploratory wells:

U.S.


Canada


U.S.


CanadaBeginning of period


-



-



-



-Purchased / acquired


-



-



-



-Drilled


-



-



-



-Abandoned


-



-



-



-End of period


-



-



-



-
  F-19
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
 2011


2010Development wells:

U.S.


Canada


U.S.


CanadaBeginning of period


-



1



-



-Purchased / acquired


-



-



-



1Drilled


-



1



-



-Abandoned


-



-



-



-End of period


-



2



-



1
  The following table summarizes the Company’s wells and drilling activity for the six-month periods ended June 30, 2011 and 2010:
  2011


2010Exploratory wells:

U.S.


Canada


U.S.


CanadaBeginning of period


-



-



-



-Purchased / acquired


-



-



-



-Drilled


-



-



-



-Abandoned


-



-



-



-End of period


-



-



-



-
 
 2011


2010Development wells:

U.S.


Canada


U.S.


CanadaBeginning of period


-



1



-



-Purchased / acquired


-



-



-



1Drilled


-



1



-



-Abandoned


-



-



-



-End of period


-



2



-



1
  The Company did not drill any dry exploratory or developmental wells during the three-month and six-month periods ended June 30, 2011 and 2010.
  Oil and Gas Concepts Purchased with Stock Options
  On December 30, 2010, the Company granted options to purchase 2,141,842 shares of its common stock to four individuals, two of which are the Company’s officers, in connection with their contribution of certain intellectual property related to exploratory opportunities and transactions to the Company.  The intellectual property was initially assigned a value of $1,247,195, which equaled the value of the options granted as calculated using the Black-Scholes model.  The value of the contributed oil and gas concepts has subsequently been reassessed in connection with the reallocation of total costs included in the full cost pool, not subject to amortization, associated with the partial sale of the Company’s interest in the Spyglass Prospect
  F-20
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
 5.
Convertible Debenture
  On April 15, 2010, the Company entered into a Securities Purchase Agreement, pursuant to which the Company sold a $1 million Secured, Convertible Debenture to a third party investor.  The Debenture bears interest at a rate of 8% per annum.  Interest expense related to the Debenture totaled $20,000 and $40,000 for the three-month and six-month periods ended June 30, 2011, respectively.  Accrued interest payable as of June 30, 2011 and December 31, 2010 totaled $40,000 and $40,000, respectively.  The Debenture’s original maturity date was April 15, 2011.  On February 24, 2011, the lender extended the maturity date to April 15, 2012.  Accordingly, the Convertible Debenture is presented as a current and non-current liability on the Company’s balance sheets as of June 30, 2011 and December 31, 2010, respectively.  Interest is payable on a quarterly basis, either in cash or through the issuance of additional shares of the Company’s common stock at an initial conversion price of $1.125 per share, or a combination thereof.  The Debenture is secured by substantially all of the Company’s existing assets.
  At any time, or from time to time, the holder of the Debenture may elect to convert all or a portion of the Debenture into shares of the Company’s common stock. The initial conversion price was subject to reduction in the event that the Company subsequently sells, or grants any option to purchase, shares of the Company’s common stock at an effective price that is less than the initial conversion price. The initial conversion price was also subject to reduction in the event that the Company pays dividends, declares a stock split, or engages into a merger transaction.
  Attached to the convertible debentures were 416,667 warrants to purchase shares of the Company’s common stock at an initial exercise price of $1.20 per share (Note 9).  The initial exercise price was reduced from $1.20 per share to $0.60 per share as a result of a private placement commitment that was received in December 2010, which also increased the number of exercisable warrants from 416,667 to 833,333.
  The Debenture may not be converted if, immediately after, the conversion would result in the holder of the Debenture possessing a beneficial ownership interest in excess of 4.99% of the Company’s then outstanding common shares.  Upon providing 60 days prior written notice, the holder of the Debenture may increase or decrease such ownership limit, but in no instance can the ownership limit exceed 9.99% of the Company’s outstanding shares.
  Because the initial trading value of the Company’s stock on the date the Debentures were issued was less than the initial conversion price, the Debentures were not deemed to contain a beneficial conversion feature at the time the Debentures were initially sold.
  F-21
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
  A portion of the net proceeds from the issuance of the Debenture was allocated to the warrants and recorded as an increase to additional paid in capital. Accordingly, the Company recorded an initial debt discount in the amount of $280,511.  The initial debt discount is being accreted using the straight line method over the original life of the Debenture.  The Company recognized amortization expense of $35,065 and $105,194 during the three-month and six-month periods ended June 30, 2011 related to the additional debt discount.  Debt discount accretion for the three-month and six-month periods ended June 30, 2010 was $11,688.
  In December 2010, the Company received an irrevocable commitment to purchase 5,833,333 shares of its common stock at a price of $0.60 per share (see Note 9).  Also in December 2010, the Company granted 2,141,842 options to purchase shares of the Company’s common stock to certain consultants and members of the Company’s management, in exchange for the contribution of certain exploratory concepts.  The terms of the option agreements stipulate an exercise price of $0.60 per share.  At that time, the initial conversion price associated with the debenture was reduced.  The adjusted conversion price of the Debenture is $0.60 per share as of June 30, 2011.
  These two events triggered the reduction of the initial conversion price of the Debentures from $1.125 per share to $0.60 per share.  As a result, it was determined that the Debentures included a beneficial conversion feature as of December 31, 2010 and, accordingly, the Company recorded an additional debt discount related to the Debentures in the amount of $875,000.  The Company recognized debt discount accretion expense of $163,166 and $324,539 during the three-month and six-month periods ended June 30, 2011 related to the additional debt discount.
  Because the adjusted conversion price is less than the trading value of the Company’s stock as of June 30, 2011, the amount by which the Debenture’s “if converted value” exceeded its principal amount was $1,250,000 as of June 30, 2011.
  As of June 30, 2011 and December 31, 2010, the Company has reserved 1,666,667 shares of its common stock in the event that the Debenture is converted.
  6.
Asset Retirement Obligations
  The Company has recorded estimated asset retirement obligations for the future plugging and abandonment of the Hardy 7-9 and Hardy 4-16 wells.  As of June 30, 2011, the discounted value of the Hardy asset retirement obligations is $16,473.  The Company recognized accretion expense of $358 and $707 for the three-month and six-month periods ended June 30, 2011 associated with the Hardy asset retirement obligations.  No accretion expense was recognized during the three-month and six-month periods ended June 30, 2010 as the Company had not yet restored the Hardy 7-9 well to production nor recorded an asset retirement obligation associated with the well.  The projected plugging dates for the Hardy 7-9 and Hardy 4-16 wells are December 2020 and June 2036, respectively.
  F-22
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
  7.
Commitments and Contingencies
  Drilling Commitments
  As of June 30, 2011, the Company owned a 50% working interest in the Hardy Property.  Accordingly, the Company may elect to participate in the drilling of exploratory wells on the property.  As discussed in Note 4, the Company and its working interest partner, Eternal Energy, entered into a farm-out agreement with Passport whereby Passport agreed to fund 38.5% of the drilling, completion and abandonment costs of up to two future wells to be located within the Hardy Property, in exchange for a 25% working interest in the completed wells.  The remaining working interest in the wells will be shared equally by the Company and Eternal Energy.  The first well to be drilled under the Participation Agreement was the Hardy 4-16 well.  Plans are in place to commence drilling of the second well within the Hardy Prospect.  The current estimate of drilling and completion costs of the second well is $3,200,000, of which the Company, through its participation election, would be obligated to pay approximately $984,000 should it elect to participate in such well.
  Stock Issuances
  As discussed in Note 5, the Company has reserved 1,666,667 shares of its common stock in the event that the Debenture is converted.
  8.
Earnings (Loss) Per Share
  The following is a reconciliation of the number of shares used in the calculation of basic and diluted earnings (loss) per share for the three-month and six-month periods ended June 30, 2011 and 2010:
 
 For the Three-Month


For the Six-MonthPeriod Ended June 30,


Period Ended June 30,2011


2010


2011


2010Net income (loss)

$
1,438,073


$
(134,888
)

$
790,058


$
(208,742
)Weighted-average number of common shares outstanding


43,231,357



44,913,334



41,299,259



44,376,889Incremental shares from the assumed exercise of dilutive stock options (a)


1,344,027



-



1,375,813



-Diluted common shares outstanding


44,575,384



44,913,334



42,675,072



44,376,889Basic earnings (loss) per share

$
0.03


$
(0.00
)

$
0.02


$
(0.00
)Diluted earnings (loss) per share

$
0.03


$
(0.00
)

$
0.02


$
(0.00
)
  F-23
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
  (a)  In periods where the Company incurs a loss, potentially dilutive securities are not included in the computation of diluted net loss per share as their effect would have been anti-dilutive.  The following securities were not included in the computation of diluted net loss per share as their effect would have been anti-dilutive:
 
 June 30,2010Stock options


-Convertible debentures


-
  9.
Equity Transactions
  Stock Splits
  On January 12, 2011, the Company’s board of directors approved a reverse split of the Company’s common stock on a 1 new share for 1.5 old share basis.  As a result, the Company’s authorized common shares decreased from 150,000,000 to 100,000,000.  Par value remained unchanged.
  Private Placements
  In January 2010, the Company issued an aggregate of 6,666,667 restricted shares of its common stock at a price of $0.0015 to four individuals in a private transaction.  Two of the individuals are our sole officers at June 30, 2011.  Proceeds received from the sale of the stock totaled $10,000.
  Also in January 2010, the Company issued 706,667 restricted shares of the Company’s common stock at a price of $1.125 per share in a private transaction.  Proceeds received from the sale of the stock totaled $795,000.
  On December 14, 2010, the Company received an irrevocable commitment from a third party to purchase 5,833,333 shares of the Company’s common stock at a price of $0.60 per share, resulting in aggregate funds to be received of $3,500,000.  The Company collected $3,166,667 of subscriptions receivable during February and March 2011 and, as a result, issued 5,277,778 shares of its common stock.  As discussed in Note 10, the Company collected the remaining $333,333 of stock subscriptions receivable in April 2011.  As a result, the Company has presented stock subscriptions receivable of $2,666,667 as a current asset on its December 31, 2010 balance sheet, and $833,333 as a reduction of stockholder’s equity in its December 31, 2010 balance sheet.
  F-24
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
  Issuance of Warrants
  In connection with the sale of the Convertible Debenture (Note 5), the Company granted to the purchaser of the Debenture warrants to purchase up to 416,667 shares of the Company’s common stock at an initial exercise price of $1.20 per share.  The warrants had an expiration date of April 15, 2012.
  The initial exercise price of the warrants was subject to reduction in the event that the Company subsequently sold, or granted any option to purchase, shares of the Company’s common stock at an effective price that is less than the initial conversion price. The initial conversion price was also subject to a reduction in the event that the Company should issue dividends, declare a stock split, or engage in a merger transaction.
  As discussed in Note 5, the number of warrants outstanding was increased from 416,667 to 833,333 in December 2010 as a result of the reduction of the initial exercise price of $1.20 per share to an adjusted exercise price of $0.60 per share.  On December 15, 2010, the holder of the warrants fully exercised the warrants and received 833,333 shares of the Company’s common stock.  The Company received gross proceeds of $500,000 from the exercise of the warrants.
  A summary of warrant activity for the six-month period ended June 30, 2011 and the eight-month period ended December 31, 2010 is presented below:
  WeightedWeighted


AverageAverage


Remaining


AggregateExercise


Contract


IntrinsicWarrants


Price


Term


ValueOutstanding at April 30, 2010


-



-



-



-Issued


416,667


$
1.20


2 years



-Increase due to reduction in exercise price


416,666


$
0.60



-



-Exercised


(833,333
)

$
0.60



-



-Outstanding at December 31, 2010


-



-



-



-Issued


-


$
-



-



-Exercised


-


$
-



-



-Outstanding at June 30, 2011


-


$
-



-


$
-
  F-25
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
  The assumptions used in the Black-Scholes Option Pricing Model for the warrants granted during the year ended December 31, 2010 were as follows:
  Risk-free interest rate


1.04
%Expected volatility of common stock


250
%Dividend yield

$
0.00Expected life of warrants

2 yearsWeighted average fair market value of warrants granted

$
0.62
  Issuance of Stock Options
  On December 30, 2010, the Company granted options to purchase 2,141,842 shares of its common stock to four individuals in connection with their contribution of certain intellectual property related to exploratory opportunities and transactions to the Company.  The options have a five-year life, vested immediately and have an exercise price of $0.60 per share.  The options expire on December 30, 2015.  The intellectual property was valued at $1,247,195, which equals the value of the options granted as calculated using the Black-Scholes Option Pricing Model.
  A summary of stock option activity for the six-month period ended June 30, 2011 and the eight-month period ended December 31, 2010 is presented below:
  WeightedWeighted


AverageAverage


Remaining


AggregateStock


Exercise


Contract


IntrinsicOptions


Price


Term


ValueOutstanding at April 30, 2010


-



-



-



-Granted


2,141,842


$
0.60


5.0 years



-Exercised


-



-



-



-Forfeited


-



-



-



-Cancelled


-



-



-



-Outstanding at December 31, 2010


2,141,842


$
0.60


5.0 years



-Granted


-



-



-



-Exercised


-



-



-



-Forfeited


-



-



-



-Cancelled


-



-



-



-Outstanding and Exercisable at June 30, 2011


2,141,842


$
0.60


4.5 years


$
  F-26
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
 The options outstanding as of June 30, 2011 and December 31, 2010 have an intrinsic value of $0.75 and $0.12 per share and an aggregate intrinsic value of $1,606,382 and $257,021, respectively.
  The assumptions used in the Black-Scholes Option Pricing Model for the options granted during the eight-month period ended December 31, 2010 were as follows:
  Market value of the Company's Common Stock

$
0.60Risk free interest rate


2.06
%Expected volatility of common stock


193
%Dividend yield

$
0.00Expected life of warrants

5 years
  Shares Reserved for Future Issuance
  As of June 30, 2011 and December 31, 2010, the Company has reserved 3,808,509 shares of its common stock in the event that the Debenture is converted prior to maturity and the outstanding options are exercised prior to their expiration.
  10.
Related Party Transactions
  In January 2010, the Company engaged Synergy Resources LLC (“Synergy”) to provide geological and engineering consulting services.  The Company’s President and sole Director is also a member of Synergy’s management team.  Geological and engineering consulting service fees provided by Synergy for the three-month and six-month periods ended June 30, 2011 and 2010 totaled $38,000, $68,000, $30,000 and $75,000, respectively.
  As discussed in Note 9, in January 2010, the Company issued an aggregate of 6,666,667 restricted shares of its common stock at a price of $0.0015 to four individuals in a private transaction.  Of the 6,666,667 shares issued, 4,222,222 shares were purchased by two of the individuals who are our sole officers at June 30, 2011.  The proceeds received from the sale of the stock totaled $10,000.  Proceeds from the two related parties totaled $6,333.
  As discussed in Note 3, at Passport's December 2010 Annual General Meeting, Passport increased their number of directors to eight, one of whom is the Company's Vice President of Operations.  As a result, the Company’s investment in Passport’s common stock is classified as a related party asset.  As of June 30, 2011 and December 31, 2010, the fair market value of the Company’s investment in Passport was $127,426 and $197,453, respectively.
  F-27
  American Eagle Energy Inc.
  Notes to the Condensed Consolidated Financial Statements (Unaudited)
  As of June 30, 2011 and December 31, 2010 and
 For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
  11.
Proposed Merger
  On April 8, 2011, the Company entered into a definitive agreement (the “Merger Agreement”) with Eternal Energy to merge the two companies.  Pursuant to the terms of the Merger Agreement, Eternal Energy formed a wholly owned subsidiary which will be merged into the Company, with the Company being the survivor as a wholly-owned subsidiary of Eternal Energy.  The ratio of stockholdings between the two companies at the time of closing is expected to be 80% for American Eagle’s legacy stockholders and 20% for Eternal Energy’s stockholders (exclusive of outstanding options to purchase shares of the Company’s common stock and shares of the Eternal Energy’s common stock).  Despite the fact the Company’s shareholders will hold shares of the combined company’s common stock that will represent approximately 80% of the then-outstanding shares and the stockholders of Eternal Energy will hold shares of the combined company’s common stock that will represent approximately 20% of the then-outstanding shares (in each case without taking into account any outstanding options to purchase shares of either company’s common stock), other factors present in the structure of the proposed business combination result in Eternal Energy being considered the accounting acquirer in the transaction.
  The corresponding purchase price allocation and pro forma financial statements that reflect the proposed merger can be found in the footnotes to the condensed consolidated financial statements of Eternal Energy, as presented in Eternal Energy’s Quarterly Report on Form 10-Q, filed with the Securities Exchange Commission on August 18, 2011.
  12.
Subsequent Events
  In July 2011, the Company, along with its working interest partners, completed the fracture stimulation of the Hardy 4-16 well at an estimated aggregate cost of $725,000.  The Company’s share of these costs is approximately $223,000.  Management is currently evaluating the results of the fracture stimulation project.
  F-28


ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.




THE FOLLOWING PRESENTATION OF OUR MANAGEMENT’S DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS REPORT.
  A Note About Forward-Looking Statements
  This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on current management's expectations. These statements may be identified by their use of words like “plans,” “expect,” “aim,” “believe,” “projects,” “anticipate,” “intend,” “estimate,” “will,” “should,” “could” and other expressions that indicate future events and trends. All statements that address expectations or projections about the future, including statements about our business strategy, expenditures, and financial results are forward-looking statements. We believe that the expectations reflected in such forward-looking statements are accurate. However, we cannot assure you that such expectations will occur.
  Actual results could differ materially from those in the forward looking statements due to a number of uncertainties including, but not limited to, those discussed in this section. Factors that could cause future results to differ from these expectations include general economic conditions, further changes in our business direction or strategy, competitive factors, oil and gas exploration uncertainties, and an inability to attract, develop, or retain technical, consulting, or managerial agents or independent contractors. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives requires the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and accordingly, no opinion is expressed on the achievability of those forward-looking statements. No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements. You should not unduly rely on these forward-looking statements, which speak only as of the date of this Quarterly Report, except as required by law; we are not obligated to release publicly any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.
  Industry Overview
  The petroleum industry is highly competitive and subject to significant volatility due to numerous market forces. Crude oil and natural gas prices are affected by market fundamentals such as weather, inventory levels, competing fuel prices, overall demand, and the availability of supply.
  Worldwide oil prices reached historical highs during the last half of 2008, before tumbling amid worldwide economic crisis.  Oil prices stabilized during 2009 and remained stable throughout 2010.  Since December 31, 2010, oil prices have increased rapidly, topping $100 per barrel in mid-March 2011 and then retreating to the mid-$80’s per barrel in mid-August.
  3
  Oil prices cannot be predicted with any certainty and have significantly affected profitability and returns for upstream producers. Historically, crude oil prices have averaged approximately $77 per barrel over the past five years, per the New York Mercantile Exchange (“NYMEX”). However, during that time, oil prices have experienced wide fluctuations in prices, ranging from $37 per barrel to $145 per barrel, with the median price of $78 per barrel.  Oil prices averaged approximately $99 during the six-month period ended June 30, 2011.
  While local supply/demand fundamentals are a decisive factor affecting domestic natural gas prices over the long term, day-to-day prices may be more volatile in the futures markets, such as on the NYMEX and other exchanges, making it difficult to forecast prices with any degree of confidence.
  Company Overview
  The address of our principal executive office is 27 North 27th Street, Suite 21G, Billings, Montana 59101.  Our telephone number is 406-294-9765.
  Our common stock is quoted on the OTC Bulletin Board under the symbol “AMZG.”
  Our Company was incorporated in the State of Nevada under the name “Yellow Hill Energy Inc.” on March 14, 2007 and is engaged in the acquisition, exploration and development of natural resource properties of merit.  On October 5, 2009, we filed documents with the Nevada Secretary of State to affect a change of our name from “Yellow Hill Energy Inc.” to “American Eagle Energy Inc.” by way of a merger with our wholly-owned subsidiary, American Eagle Energy Inc., which was formed solely to facilitate the name change.
  On June 18, 2010, we formed a wholly-owned subsidiary named “AEE Canada Inc.” for the purpose of conducting operations and holding title to certain assets located within Canada.
  We have not been involved in any bankruptcy, receivership or similar proceedings, nor have we been a party to any material reclassifications, merger, consolidation or purchase or sale of a significant amount of assets not in the ordinary course of our business.
  On October 9, 2008, Scott Lindsay resigned as our President, Chief Financial Officer and Director and Sean Mitchell resigned as our Secretary, Treasurer and Director.  As a result, on October 9, 2008, Jay Jhaveri was appointed to serve in these roles.  On December 14, 2009, Mr. Jhaveri resigned and was replaced by Richard Findley.  Mr. Findley currently serves as our President, Chief Financial Officer, Secretary, Treasurer and Director.  In performing his duties, Mr. Findley currently devotes approximately 10 hours per week, for which he receives no direct monetary or stock-based compensation.
  On June 7, 2010, we hired Thomas Lantz to serve as our Vice President of Operations.  On June 1, 2011, we hired Richard Pershall to serve as our Operations Manager.  Currently, Mr. Lantz and Mr. Pershall are our only paid employees.
  4
  Current Business
  We are engaged in the exploration and production of oil and gas properties in the northern United States and south central Canada.
  On October 14, 2009, our board of directors approved a forward split of our common stock on a one old for two new basis and, in connection with that forward split, our authorized capital increased from 75,000,000 shares with a par value of $0.001 to 150,000,000 shares with the same par value.  As a result, the number of our issued and outstanding shares of common stock increased from 30,000,000 shares to 60,000,000 shares.  The effective date of the forward split was October 26, 2009.
  On January 13, 2010, we issued 10,000,000 shares of our common stock at par value to a group of four individuals in connection with a change in our business operations following Mr. Findley’s joining us.  Gross proceeds received from the issuance totaled $10,000.  The shares were contractually restricted from trading for periods ranging from six-months to one year from the date of issuance and were subject to certain performance standards that have now been met.
  On January 14, 2010, we issued 1,060,000 shares of our common stock at a price of $0.75 per share in a private transaction.  Gross proceeds from the issuance totaled $795,000.  The shares were contractually restricted from trading for one year from the date of issuance.
  On January 15, 2010, we entered into an assignment agreement with Murrayfield Limited (“Murrayfield”), a United Kingdom company, pursuant to which we acquired a 15% working interest in an anticipated oil and gas well in Wilkinson County, Mississippi for $150,000 in cash.
  On January 21, 2010, we entered into a second assignment agreement with Murrayfield, pursuant to which we acquired a 12.5% working interest in an oil and gas lease covering 908 net acres located in Willacy County, Texas for $137,500 in cash.
  In February 2010, we began to acquire oil and gas leases in Divide County, North Dakota (the “Spyglass Prospect”), a region known for its Bakken and Three Forks zone oil production.  On June 18, 2010, we sold a 50% working interest in the Spyglass Prospect to Eternal Energy Corp. (“Eternal Energy”) and acquired a 50% working interest in approximately 4,480 acres located in the Hardy Property.  As of June 30, 2011, we owned working interests in oil and gas leases covering approximately 8,948 net acres within the Spyglass Prospect.
  On April 15, 2010, we entered into a Securities Purchase Agreement, whereby we sold a one-year 8% Convertible Debenture with an initial principal amount of $1,000,000, convertible at $1.125 per share, and a two-year warrant for the purchase of 416,667 shares of our common stock, exercisable at $1.20 per share, to an otherwise unaffiliated third-party investor.
  During 2010, we began recognizing regular, recurring revenue from oil sales from properties in which we own working interests.  Accordingly, we are no longer considered a development stage company.
  5
  On December 1, 2010, we received an irrevocable commitment for the purchase of $3.5 million of our common stock at a per-share price of $.60, or 5,833,333 shares.  In December 2010, pursuant to the terms of the Convertible Debenture and the warrant, the conversion price and the exercise price of those instruments were reduced to $.60 per share, which resulted in our recording of an additional debt discount of $875,000.
  On January 12, 2011, our board of directors approved a reverse split of our Company’s common stock on a one new for one and one-half old basis and, in connection with that reverse split, our authorized capital decreased from 150,000,000 shares with a par value of $0.001 to 100,000,000 shares with the same par value.  As a result, the number of our issued and outstanding shares of common stock decreased from 56,310,000 shares to 37,540,000 shares.  The effective date of the reverse split was January 24, 2011.
  On December 3, 2010, the warrant was exercised in full and we issued 833,333 (post-split) shares of our common stock.  On February 2, 2011, we received $666,666 of such committed funding and issued 1,111,111 shares of our common stock.  On March 2, 2011, we received an additional $2 million of such committed funding and issued 3,333,333 shares of our common stock.  On March 31, 2011, we collected an additional $500,000 of the committed funding and issued 833,333 shares of our common stock.  The remaining $333,333 of the committed funding was collected in April 2011.
  In December 2010, we changed our fiscal year end from April 30 to December 31.  Accordingly, the financial statements accompanying this narrative are for the three-month and six-month periods ended June 30, 2011 and 2010.
  In January 2011, we acquired an undivided 66.67% working interest in approximately 47,392 net acres located in Toole Country, Montana (the “Glacier Prospect”) for cash consideration of $1,195,624.  Subsequently, we sold one half of our working interest to FX Energy, Inc. (“FX Energy”) for $597,812, which represents 50% of the original purchase price.
  On February 24, 2011, the term of the Debenture was extended through April 15, 2012.
  On April 8, 2011, we entered into a definitive agreement (the “Merger Agreement”) with Eternal Energy to merge the two companies.  Pursuant to the terms of the Merger Agreement, Eternal Energy formed a wholly owned subsidiary into which our company will be merged, with our company being the survivor as a wholly-owned subsidiary of Eternal Energy.
  On May 9, 2011, we entered into a Participation Agreement with Big Sky Operating LLC (“Big Sky”) and FX Energy, Inc. (“FX Energy”) whereby the three companies created an area of mutual interest (“AMI”) located in the Southern Alberta Basin.  Pursuant to the agreement, we agreed to pool our leasehold positions within the AMI with the other two companies and to equalize our respective working interests in the play.
  Results of Operations for the Three-Month Period Ended June 30, 2011 vs.  2010
  We recognized net income of $1,438,073 for the three-month period ended June 30, 2011 versus a net loss of $134,888 for the three-month period ended June 30, 2010.  A discussion of the key components of the results of our operations is provided below.
  6
  In June 2010, we acquired a 50% working interest in approximately 4,480 net acres located in southeastern Saskatchewan, Canada (the “Hardy Property”).  The acquired acreage contained one existing oil well (the “Hardy 7-9 well”) that was shut in due to mechanical issues.  During August 2010, we, along with our working interest partner, Eternal Energy, completed a workover and recompletion of the Hardy 7-9 well.  The well was returned to production in September 2010.  The well produced oil during the early part of April, before incurring further mechanical issues.  The Hardy 7-9 well was repaired in May 2011 but remained shut-in through June 30, 2010, primarily due to weather conditions.  Our portion of revenues from the sale of oil produced by the Hardy 7-9 well totaled $10,437 for the three-month period ended June 30, 2011.  We did not own any working interests in any producing wells prior to June 2010.  Accordingly, we recognized no revenue from oil and gas sales for the three-month period ended June 30, 2010.
  In May 2011, we sold half of our working interest in our Spyglass Prospect to a third party.  Net proceeds from the sale totaled $3,777,793, of which $320,833 was receivable as of June 30, 2011.  The receivable was collected in August 2011.  Because our working interest in the Spyglass Prospect represented a significant portion of our full cost pool that is not subject to amortization, we reallocated the aggregate cost of the full cost pool, not subject to amortization, among the various properties included within the pool, based on their estimated relative fair market values at the time the sale occurred, and recognized a gain in the amount of $2,085,627.
  We began incurring lease operating expenses in September 2010, concurrent with the return of the Hardy 7-9 well to production.  Oil and gas operating expenses totaled $71,042 for the three-month period ended June 30, 2011, which included trucking costs of $26,391, repairs and maintenance costs of $19,961 and well operator costs of $7,394, in addition to equipment rental, fuel, water disposal and miscellaneous other production costs.  Because we did not own any working interests in any producing wells prior to June 2010, we did not recognize any oil and gas operating expense for the three-month period ended June 30, 2010.
  General and administrative expenses totaled $167,722 for the three-month period ended June 30, 2011, compared to $34,708 for the three-month period ended June 30, 2010.  The increase is primarily due to the following:
  ·
In June 2010, we hired Tom Lantz to serve as our Vice President of Operations.  We hired Richard Pershall to serve as our Operations Manager in June 2011.  Payroll related expenses for the three-month period ended June 30, 2011 totaled $67,281, compared to $10,385 for the three-month period ended June 30, 2010.  We currently offer no company-paid employee benefits to our employees.
  ·
In June 2010, we began utilizing a third-party landman to provide land management services related to the administration and filing of oil and gas leases located within the Hardy Property, as well as within other geographic areas that we have targeted for acquisition.  Land management expenses for the three-month period ended June 30, 2011 totaled $43,453.  We incurred no land management expenses for the three-month period ended June 30, 2010, as we were just beginning to acquire significant interests in oil and gas leases at that time.
  7
  ·
We subscribe to various well data services, for which we incurred fees totaling $24,492 for the three-month period ended June 30, 2011.  We incurred no such fees in the comparable period in 2010.
  ·
Other general and administrative costs incurred during the three-month period ended June 30, 2011 included travel costs totaling $15,599, investor relations costs of $8,170 related to press releases and other investor communications, and office rent expense of $3,551.  We currently utilize office space located within the corporate offices of Eternal Energy Corp.
  Professional fees, including those paid to related parties, totaled $186,360 for the three-month period ended June 30, 2011 compared to $65,888 for the three-month period ended June 30, 2010.  The increase is primarily due to the following:
  ·
We incurred legal fees totaling $130,280 during the three-month period ended June 30, 2011, primarily related to our proposed merger with Eternal Energy as well as with certain oil and gas lease acquisitions and our participation agreement with FX Energy and Big Sky Operating.  Legal fees for the three-month period ended June 30, 2010 totaled $28,205 and related primarily to general corporate affairs.
  ·
In January 2011, we engaged a third-party individual to perform all of our accounting and financial reporting activities.  As a result, we incurred accounting totaling $19,099 during the three-month period ended June 30, 2011, compared to $2,405 for the three-month period ended June 30, 2010.
  ·
In January 2010, we engaged Synergy Resources LLC (“Synergy”) to provide us with geological and engineering consulting services related to the research and pursuit of potential, prospective oil and gas properties.  Our President, Richard Findley, and our Vice President of Operations, Tom Lantz, currently serve as members of Synergy’s senior management team.  Accordingly, we have presented the fees billed to us by Synergy as professional fees from a related party.  Professional fees from related parties totaled $38,000 and $30,000 for the three-month periods ended June 30, 2011 and 2010, respectively.
  We began amortizing our investment in the Hardy Property in September 30, 2010, concurrent with the return of the Hardy 7-9 well to production.  Depletion expense totaled $14,278 for the three-month period ended June 30, 2011.  Because we did not own any working interests in any producing properties prior to June 2010, we did not record any depletion expense for the three-month period ended June 30, 2010.
  In January 2010, we purchased an interest in a contemplated well located in Wilkinson County, Mississippi (the “Mississippi Prospect”) for $150,000 in cash.  In June 2010, we resold our interest in the Mississippi Prospect to the original seller.  Net proceeds from the sale totaled $144,063, which represent the original purchase price of $150,000, less preliminary drilling costs incurred to date of $5,937.  We recognized impairment expense related to the Mississippi Prospect of $5,937 in the results of our operations for the three-month period ended June 30, 2010.
  8
  On April 15, 2010, we borrowed $1,000,000 through the sale of a one year, 8% Secured, Convertible Debenture (the “Debenture”).  On February 24, 2011, the term of the Debenture was extended through April 15, 2012.  Interest expense related to the Debenture totaled $20,000 for the three-month period ended June 30, 2011, versus $16,667 for the comparable period in 2010.
  Attached to the Debenture were warrants to purchase additional shares of the Company’s stock.  A portion of the net proceeds from the issuance of the Debenture was allocated to the warrants and recorded as an increase to additional paid-in capital, resulting in a “debt discount” of $280,511 at the time that the Debentures were sold.  We are amortizing the debt discount over the original life of the Debenture.
 
 In December 2010, the conversion price of the Debenture was reduced from $1.125 to $0.60 as a result of receiving an irrevocable commitment to purchase 5,833,333shares of our common stock.  Accordingly, we recorded an additional debt discount in the amount of $875,000.  We recognized aggregate accretion expense related to the debt discounts of $198,231 for the three-month period ended June 30, 2011, compared to $11,688 for the three-month period ended June 30, 2010.
 
 Results of Operations for the Six-Month Period Ended June 30, 2011 vs. 2010
  We recognized net income of $790,058 for the six-month period ended June 30, 2011 versus a net loss of $208,742 for the six-month period ended June 30, 2010.  A discussion of the key components of the results of our operations is provided below.
  In June 2010, we acquired a 50% working interest in approximately 4,480 net acres located in southeastern Saskatchewan, Canada (the “Hardy Property”).  The acquired acreage contained one existing oil well (the “Hardy 7-9 well”) that was shut in due to mechanical issues.  During August 2010, we, along with our working interest partner, Eternal Energy, completed a workover and recompletion of the Hardy 7-9 well.  The well was returned to production in September 2010.  From September 1, 2010 through December 31, 2010, the Hardy 7-9 well produced oil volumes ranging from 40 to 58 barrels per day.  In January 2011, the well was taken off of production due to a parted rod string.  Repairs were made to the well during January and February 2011, and the well was returned to production in March 2011.  In mid-April, 2011, the well was again taken off of production to perform repairs.  Once repaired, the well remained shut-in through June 30, 2011 due to inclement weather.  Our portion of revenues from the sale of oil produced by the Hardy 7-9 well totaled $46,477 for the six-month period ended June 30, 2011.  We did not own any working interests in any producing wells prior to June 2010.  Accordingly, we recognized no revenue from oil and gas sales for the three-month period ended June 30, 2010.
 
 In May 2011, we sold half of our working interest in our Spyglass Prospect to a third party.  Net proceeds from the sale totaled $3,777,793, of which $320,833 was receivable as of June 30, 2011.  The receivable was collected in August 2011.  Because our working interest in the Spyglass Prospect represented a significant portion of our full cost pool that is not subject to amortization, we reallocated the aggregate cost of the full cost pool, not subject to amortization, among the various properties included within the pool, based on their estimated relative fair market values at the time the sale occurred, and recognized a gain in the amount of $2,085,627.
  9
  We began incurring lease operating expenses in September 2010, concurrent with the return of the Hardy 7-9 well to production.  Oil and gas operating expenses totaled $117,676 for the six-month period ended June 30, 2011, which included trucking costs of $36,738, repairs and maintenance costs of $30,083 and well operator costs of $17,438, in addition to equipment rental, fuel, water disposal and miscellaneous other production costs.  Because we did not own any working interests in any producing wells prior to June 2010, we did not recognize any oil and gas operating expense for the six-month period ended June 30, 2010.
  General and administrative expenses totaled $275,072 for the six-month period ended June 30, 2011, compared to $40,048 for the six-month period ended June 30, 2010.  The increase is primarily due to the following:
  ·
In June 2010, we hired Tom Lantz to serve as our Vice President of Operations.  We hired Richard Pershall to serve as our Operations Manager in June 2011.  Payroll related expenses for the six-month period ended June 30, 2011 totaled $108,350, compared to $10,385 for the six-month period ended June 30, 2010.
  ·
In June 2010, we began utilizing a third-party landman to provide land management services related to the administration and filing of oil and gas leases located within the Hardy Property, as well as within other geographic areas that we have targeted for acquisition.  Land management expenses for the six-month period ended June 30, 2011 totaled $80,860.  We incurred no land management expenses for the six-month period ended June 30, 2010, as we were just beginning to acquire significant interests in oil and gas leases at that time.
  ·
We subscribe to various well data services, for which we incurred fees totaling $28,849 for the six-month period ended June 30, 2011.  We incurred no such fees in the comparable period in 2010.
  ·
Other general and administrative costs incurred during the six-month period ended June 30, 2011 included travel costs totaling $25,257, investor relations costs of $11,615 related to press releases and other investor communications, filing fees of $6,672 and office rent expense of $6,215.
  Professional fees, including those paid to related parties, totaled $450,376 for the six-month period ended June 30, 2011 compared to $134,402 for the six-month period ended June 30, 2010.  The increase is primarily due to the following:
  ·
We incurred legal fees totaling $293,083 during the six-month period ended June 30, 2011, primarily related to our proposed merger with Eternal Energy as well as with certain oil and gas lease acquisitions and our participation agreement with FX Energy and Big Sky Operating.  Legal fees for the six-month period ended June 30, 2010 totaled $49,470 and related primarily to general corporate affairs.
  10
  ·
We incurred accounting fees totaling $73,295 during the six-month period ended June 30, 2011, primarily as a result of changing our fiscal year end from April 30 to December 31, which necessitated the filing of audited financial statements during the first quarter of 2011.  Fees related to the audit of our December 31, 2010 financial statements totaled $28,250.  In addition, we engaged a third-party individual to perform all of our accounting and financial reporting activities beginning in January 2011.  Accounting fees for the six-month period ended June 30, 2010 related to reviews of our quarterly financial statements and totaled $4,655.
  ·
During the six-month period ended June 30, 2011, we incurred engineering consulting and business valuation service fees related to potential acquisitions totaling $15,998, compared to $5,278 for the comparable period in 2010.
  ·
In January 2010, we engaged Synergy Resources LLC (“Synergy”) to provide us with geological and engineering consulting services related to the research and pursuit of potential, prospective oil and gas properties.  Our President, Richard Findley, and our Vice President of Operations, Tom Lantz, currently serve as members of Synergy’s senior management team.  Accordingly, we have presented the fees billed to us by Synergy as professional fees from a related party.  Professional fees from related parties totaled $68,000 and $75,000 for the six-month periods ended June 30, 2011 and 2010, respectively.
  We began amortizing our investment in the Hardy Property in September 30, 2010, concurrent with the return of the Hardy 7-9 well to production.  Depletion expense totaled $28,482 for the six-month period ended June 30, 2011.  Because we did not own any working interests in any producing properties prior to June 2010, we did not record any depletion expense for the three-month period ended June 30, 2010.
  In January 2010, we purchased an interest in a contemplated well located in Wilkinson County, Mississippi (the “Mississippi Prospect”) for $150,000 in cash.  In June 2010, we resold our interest in the Mississippi Prospect to the original seller.  Net proceeds from the sale totaled $144,063, which represent the original purchase price of $150,000, less preliminary drilling costs incurred to date of $5,937.  We recognized impairment expense related to the Mississippi Prospect of $5,937 in the results of our operations for the six-month period ended June 30, 2010.
  On April 15, 2010, we borrowed $1,000,000 through the sale of a one year, 8% Secured, Convertible Debenture (the “Debenture”).  In February 2011, our lender extended the maturity date of the Debenture to April 15, 2012.  Interest expense related to the Debenture totaled $40,000 for the six-month period ended June 30, 2011, versus $16,667 for the comparable period in 2010.
 
 Attached to the Debenture were warrants to purchase additional shares of the Company’s stock.  A portion of the net proceeds from the issuance of the Debenture was allocated to the warrants and recorded as an increase to additional paid-in capital, resulting in a “debt discount” of $280,511 at the time that the Debentures were sold.  We are amortizing the debt discount over the original life of the Debenture.
  11
  In December 2010, the conversion price of the Debenture was reduced from $1.125 to $0.60 as a result of receiving an irrevocable commitment to purchase 5,833,333shares of our common stock.  Accordingly, we recorded an additional debt discount in the amount of $875,000.  We recognized aggregate accretion expense related to the debt discounts of $429,733 for the six-month period ended June 30, 2011, compared to $11,688 for the six-month period ended June 30, 2010.
 
 Liquidity and Capital Resources
  Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis.  At June 30, 2011, our liquid assets consisted of cash totaling $3,157,630, receivables from working interest partners totaling $1,127,387 and marketable securities valued at $127,426.  Our intention is to hold the marketable securities indefinitely and, accordingly, the marketable securities have been classified as noncurrent assets.  Notwithstanding this classification, our working capital as of June 30, 2011 was $1,710,910, compared to $1,689,027 as of December 31, 2010.
  It may be necessary for the Company to seek additional funding, either through the capital markets, some form of debt financing or through the sale of certain assets to fund our future operations.  The Company owns interests in oil and gas properties having an aggregate cost basis of $5,315,698 as of June 30, 2011, the partial or complete monetization of which could provide significant working capital for future operations.  Our management team is currently evaluating the available funding options and developing an ongoing funding strategy for meeting our future working capital needs.
  Proposed Merger
  On February 22, 2011, we announced our intention to pursue a merger with Eternal Energy.  On April 8, 2011, we entered into a definitive merger agreement (the “Merger Agreement”) pursuant to which we will merge into a subsidiary of Eternal Energy and will survive as a wholly-owned subsidiary of Eternal Energy.
 
 The closing of the proposed merger is subject to, among other items, (i) the registration of the common stock currently contemplated to be issued by Eternal to our stockholders, and (ii) the approval of the transaction by the boards of directors of both companies and by our stockholders.  The ratio of stockholdings between the companies at the closing of the possible merger, exclusive of any presently outstanding options, is currently anticipated to be 80% to our legacy stockholders and 20% to the legacy stockholders of Eternal Energy.
  Litigation
 
 As of June 30, 2011, we are not subject to any known or threatened litigation.
 
 Off-Balance Sheet Arrangements
  We have no off-balance sheet arrangements.
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ITEM 4. CONTROLS AND PROCEDURES.





The Company, under the supervision and with the participation of its management, including the Chief Executive Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2011.  There has been no change in the Company’s internal control over financial reporting during the quarter ended June 30, 2011, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


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PART II - OTHER INFORMATION





ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





On December 14, 2010, we received an irrevocable commitment for the purchase of 5,833,333 shares of our common stock at a price of $0.60 per share, resulting in aggregate funds to be received of $3,500,000.  We received $2,666,667 of such funds during February and March 2011 and issued an aggregate of 4,444,445 shares of our common stock.  We received the remaining $833,333 of such funds during April 2011 and issued an additional 1,388,888 shares of our common stock.





We believe that, pursuant to Section 4(2) of the Securities Act of 1933, as amended, the issuance of these shares of common stock is exempt from the registration requirements of Section 5 the Act.  We believe that such exemption was available because (i) no advertising or general solicitation was employed in the offering and granting of the options, (ii) the offers and sales were made to four persons, all of whom were accredited investors, and (iii) transfers of the shares are restricted in accordance with the requirements of the Act.





ITEM 6. EXHIBITS.





Exhibit

Description of Exhibit2.1*

Agreement and Plan of Merger, dated April 8, 2011, by and among Eternal Energy Corp., Eternal Sub Corp., and the Company.3.1

Articles of Incorporation, as filed with the Secretary of State of the State of Nevada, effective March 14, 2007 (incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form SB-2, filed June 8, 2007).3.2

Bylaws (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form SB-2, filed June 8, 2007).3.3

Articles of Merger, as filed with the Secretary of State of the State of Nevada, effective October 5, 2009 (incorporated by reference to Exhibit 3.01 of the Company’s Current Report on Form 8-K, filed October 5, 2009).3.4

Certificate of Change, as filed with the Secretary of State of the State of Nevada, effective October 15, 2009 (incorporated by reference to Exhibit 3.01 of the Company’s Current Report on Form 8-K, filed October 14, 2009).10.1

Form of Private Placement Subscription Agreement for an aggregate amount of 10,000,000 shares, dated December 21, 2009 (incorporated by reference to Exhibit 10.1 of the Company’s Annual Report on Form 10-K, filed August 12, 2010).10.2

Escrow Agreement among American Eagle Energy Inc, Golden Vista Energy, LLC, Thomas G. Lantz, Steven Swanson and Baker & Hostetler, LLP, dated December 21, 2009 (incorporated by reference to Exhibit 10.2 of the Company’s Annual Report on Form 10-K, filed August 12, 2010).10.3

Assignment Agreement between the Company and Murrayfield Limited, effective January 15, 2010 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed January 20, 2010).10.4

Assignment Agreement between the Company and Murrayfield Limited, effective January 21, 2010 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed January 22, 2010).10.5

Termination Agreement (of the US Pebble Acquisition Agreement) among Eternal Energy Corp., Fairway Exploration LLC, Prospector Oil, Inc., Pebble Petroleum Inc., and Rover Resources Inc., dated April 29, 2010 (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K, filed May 19, 2010).10.6

Termination Agreement (of the Canadian Pebble Acquisition Agreement) among Eternal Energy Corp., Fairway Exploration LLC, Prospector Oil, Inc., and Pebble Petroleum Inc., dated April 29, 2010 (incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K, filed May 19, 2010).10.7

Termination Agreement (of the US Prospect Acquisition Agreement) among Eternal Energy Corp., Fairway Exploration LLC, Prospector Oil, Inc., Pebble Petroleum Inc., Rover Resources Inc., Steven Swanson, Richard L. Findley, Thomas G. Lantz, and Ryland Oil Corporation, dated May 11, 2010 (incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K, filed May 19, 2010).




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10.8

Termination Agreement (of the Canadian Prospect Acquisition Agreement) among Eternal Energy Corp., Fairway Exploration LLC, Prospector Oil, Inc., Pebble Petroleum Inc., Steven Swanson, Richard L. Findley, Thomas G. Lantz, and Ryland Oil Corporation, dated May 11, 2010 (incorporated by reference to Exhibit 10.7 of the Company’s Current Report on Form 8-K, filed May 19, 2010).10.9

Securities Purchase Agreement between the Company and Cat Brokerage AG, dated April 15, 2010 (incorporated by reference to Exhibit 10.9 of the Company’s Annual Report on Form 10-K, filed August 12, 2010).10.10

Debenture of American Eagle Energy Corp. in favor of Cat Brokerage AG, dated April 15, 2010 (incorporated by reference to Exhibit 10.10 of the Company’s Annual Report on Form 10-K, filed August 12, 2010).10.11

Security Agreement between the Company and Cat Brokerage AG, dated April 15, 2010 (incorporated by reference to Exhibit 10.11 of the Company’s Annual Report on Form 10-K, filed August 12, 2010).10.12

Common Stock Purchase Warrant agreement between the Company and Cat Brokerage AG, dated April 15, 2010 (incorporated by reference to Exhibit 10.12 of the Company’s Annual Report on Form 10-K, filed August 12, 2010).10.13

Registration Rights Agreement between the Company and Cat Brokerage AG, dated April 15, 2010 (incorporated by reference to Exhibit 10.13 of the Company’s Annual Report on Form 10-K, filed August 12, 2010).10.14

Assignment Settlement Agreement between the Company and Lexaria Corp., dated June 16, 2010 (incorporated by reference to Exhibit 10.14 of the Company’s Annual Report on Form 10-K, filed August 12, 2010).10.15

Letter Agreement between the Company and Eternal Energy Corp., dated June 18, 2010 (incorporated by reference to Exhibit 10.15 of the Company’s Annual Report on Form 10-K, filed August 12, 2010).10.16

Form of Private Placement Subscription Agreement between American Eagle Energy Inc. and Finter Bank Zurich, dated December 16, 2009 (incorporated by reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K, filed August 12, 2010).10.17

Letter of Intent between American Eagle Energy Inc. and Eternal Energy Corp., dated February 22, 2011 (incorporated by reference to Exhibit 10.17 of the Company’s Annual Report on Form 10-K, filed March 23, 2011).10.18

Contribution Agreement among American Eagle Energy Inc., Synergy Resources LLC, Bradley Colby, Thomas Lantz, Steve Swanson and Richard Findley, dated December 14, 2010 (incorporated by reference to Exhibit 10.18 of the Company’s Annual Report on Form 10-K, filed March 23, 2011).10.19

Non-Qualified Stock Option Agreement between American Eagle Energy Inc. and Bradley Colby, dated December 30, 2010 (incorporated by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K, filed March 23, 2011).10.20

Non-Qualified Stock Option Agreement between American Eagle Energy Inc. and Thomas Lantz, dated December 30, 2010 (incorporated by reference to Exhibit 10.20 of the Company’s Annual Report on Form 10-K, filed March 23, 2011).10.21

Non-Qualified Stock Option Agreement between American Eagle Energy Inc. and Steven Swanson, dated December 30, 2010 (incorporated by reference to Exhibit 10.21 of the Company’s Annual Report on Form 10-K, filed March 23, 2011).10.22

Non-Qualified Stock Option Agreement between American Eagle Energy Inc. and Dick Findley, dated December 30, 2010 (incorporated by reference to Exhibit 10.22 of the Company’s Annual Report on Form 10-K, filed March 23, 2011).10.23

Lease Acquisition Agreement among American Eagle Energy Inc., Americana Exploration LLC and Big Sky Operating LLC, dated January 31, 2011 (incorporated by reference to Exhibit 10.23 of the Company’s Annual Report on Form 10-K, filed March 23, 2011).10.24

Participation and Operating Agreement by and among Eternal Energy Corp., AEE Canada Inc., and Passport Energy Inc. dated April 15, 2011.10.25

Participation Agreement among the Company, Big Sky Operating LLC, and FX Producing Company, Inc., dated effective February 1, 2011.




15




10.26*^

Purchase and Sale Agreement by and between American Eagle Energy Inc., Eternal Energy Corp. and NextEra Energy Gas Producing, LLC, dated May 17, 2011.10.27*^

Purchase and Sale Agreement by and between American Eagle Energy Inc., Eternal Energy Corp. and NextEra Energy Gas Producing, LLC, dated May 17, 2011.10.27a*

First Amendment to the Purchase and Sale Agreement by and between American Eagle Energy Inc., Eternal Energy Corp. and NextEra Energy Gas Producing, LLC, (dated May 17, 2011), dated June 14, 2011.10.27b*

Second Amendment to the Purchase and Sale Agreement by and between American Eagle Energy Inc., Eternal Energy Corp. and NextEra Energy Gas Producing, LLC (dated May 17, 2011), dated July 25, 2011.31.1*

Certification of President and Treasurer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*

Certification of President and Treasurer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*       Filed herewith.


^       Portions omitted pursuant to a request for confidential treatment.




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SIGNATURES




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





AMERICAN EAGLE ENERGY INC.(Registrant)August 18,2011
/s/ Richard FindleyRichard FindleyPresident, Secretary, Treasurer and Director(Chief Executive Officer, Chief Financial Officer andChief Accounting Officer)




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