AMERICAN ENERGY PRODUCTION INC - FORM 10-Q

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EX-32.1 - CERTIFICATION - AMERICAN ENERGY PRODUCTION INC	ex321.htm
EX-31.1 - CERTIFICATION - AMERICAN ENERGY PRODUCTION INC	ex311.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 – Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2009

333-52812

(Commission File Number)

American Energy Production, Inc.

(Exact name of registrant as specified in its charter)

Delaware		74-2945581
(State or other jurisdiction of incorporation)		(IRS Employer Identification Number)

6073 Hwy 281 South, Mineral Wells, TX 76067

(Address of principal executive offices including zip code)

(940) 445-0698

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

Large accelerated filer o Accelerated filer o

Non-accelerated filer o Smaller reporting company x

(Do not check if a smaller reporting company)

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

As of November 13, 2009, the Registrant had 59,594,526 shares outstanding and issuable of its $0.0001 par value common stock.

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American Energy Production, Inc. and Subsidiaries

Form 10-Q Index

September 30, 2009

	Page
Part I-Financial Information

Item 1. Financial Statements	3

Consolidated Balance Sheets at September 30, 2009 (Unaudited) and December 31, 2008	3

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008 (Unaudited)	4

Consolidated Statements of Cash Flows for the Three and Nine MonthsEnded September 30, 2009 and 2008 (Unaudited)	5

Notes to Consolidated Financial Statements (Unaudited)	6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	17

Item 4T. Controls and Procedures	22
Item 4T. Controls and Procedures
Part II-Other Information

Item 6. Exhibits	24

Signatures	25

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PART I FINANCIAL INFORMATION

Item 1-Consolidated Financial Statements (Unaudited)

American Energy Production, Inc. and Subsidiaries

Consolidated Balance Sheets

ASSETS
	Unaudited
	9/30/2009			12/31/2008
Current Assets
Cash	$	49,627		$	88,937
Accounts receivable		33,553			-
Due from related party		5,733			-
Other current assets		-			146
Total Current Assets		88,913			89,083

Property and equipment, net		3,643,454			4,011,903

Other Assets
Development programs - related party		142,275			134,092
Other		82			1,188
Total Other Assets		142,357			135,280

Total Assets	$	3,874,722		$	4,236,266

LIABILITIES
Current Liabilities
Accounts payable	$	19,218		$	312,903
Other current liabilities		12,204			11,855
Due to related parties		149,910			3,295,763
Notes payable		125,421			2,115,062
Accrued interest payable		-			946,385
Accrued payroll taxes and penalties		15,665			84,161
Lease payable		-			16,131
Total Current Liabilities		322,418			6,782,260

Long-Term Liabilities
Deferred other income		484,455			-
Asset retirement obligations		526,323			509,155
Total Long-Term Liabilities		1,010,778			509,155

Total Liabilities	$	1,333,196		$	7,291,415

Commitments and Contingencies (Note 9)

STOCKHOLDERS' EQUITY (DEFICIT)
Convertible preferred stock, Series A, $0.0001 par value, 5,000,000
shares authorized, none and 3,500,000 shares outstanding, respectively	$	-		$	350
Common stock, $0.0001 par value, 500,000,000 shares authorized,
36,243,849 and 20,360,349 shares outstanding, respectively		3,624			2,037
Common stock issuable, 23,350,677 shares and none issuable and outstanding, respectively		2,335			-
Additional paid in capital		30,781,018			24,067,655
Accumulated deficit		(27,343,451	)		(26,223,191	)
		3,443,526			(2,153,149	)
Less: Subscription Receivable		(902,000	)		(902,000	)
Total Stockholders' Equity (Deficit)		2,541,526			(3,055,150	)

Total Liabilities and Stockholders' Equity (Deficit)	$	3,874,722		$	4,236,266

See accompanying notes to unaudited consolidated financial statements.

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American Energy Production, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Revenues:
Oil sales, net	$	319,279		$	539,132		$	815,123		$	1,530,796

Operating Expenses
Compensation		62,493			46,243			287,053			138,727
Consulting		-			-			43,496			-
Depreciation, depletion and accretion		121,899			148,760			385,617			441,611
Rent		1,539			22,920			4,939			45,182
General and administrative		39,946			66,452			111,438			185,204
Production		330,544			755,724			921,645			1,813,817
Professional		10,078			15,600			81,690			92,700
Taxes		24,769			13,508			67,362			75,584
Total Operating Expenses		591,268			1,069,208			1,903,240			2,770,476

Operating Loss		(271,989	)		(530,076	)		(1,088,117	)		(1,239,680	)

Other Income (Expense)
Other income (expense)		(28,096	)		2,574			53,785			2,877
Interest expense		(939	)		(42,903	)		(85,930	)		(127,711	)
Payroll tax expense and penalties		-			(1,501	)		-			(4,503	)
Total Other Income (Expense)		(29,035	)		(41,831	)		(32,145	)		(129,337	)

Net Loss	$	(301,024	)	$	(571,907	)	$	(1,120,262	)	$	(1,369,017	)

Net Loss Per Share - Basic and Diluted	$	(0.01	)	$	(0.03	)	$	(0.02	)	$	(0.07	)

Weighted average Shares Outstanding		59,438,651			20,360,389			51,877,025			20,363,377

See accompanying notes to unaudited consolidated financial statements

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American Energy Production, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended
	September 30,
	2009			2008
Cash Flows From Operating Activities:
Net loss	$	(1,120,262	)	$	(1,369,017	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation expense		311,769			364,223
Depletion expense		56,680			59,706
Accretion expense		17,168			17,682
Stock options issued for compensation		104,990			-
Stock options issued for consulting		41,996			-
Write off of payroll taxes and penalties		(69,851	)		-
Common stock issued for oil and gas equipment		1,750			-
Changes in operating assets and liabilities:
Accounts receivable		(33,553	)		-
Due from related party		(5,733	)		-
Other current assets		146			-
Other assets		1,106			(89,387	)
Accounts payable		22,604			(54,000	)
Other current liabilities		349			87,911
Due to related party		484,317			1,023,685
Accrued interest payable		83,677			125,553
Accrued payroll taxes payable		1,356			2,314
Net Cash Provided By (Used In) Operating Activities		(101,491	)		168,670

Cash Flows From Investing Activities:
Investment in property and equipment		-			(222,605	)
Payments for development programs - related party		(8,183	)		(22,604	)
Purchase of oil lease		-			-
Net Cash Used In Investing Activities		(8,183	)		(245,208	)

Cash Flows From Financing Activities:
Proceeds from sale of common stock		60,005			103,000
Proceeds from issuance of notes payable		14,505			-
Repayment of note payable		(4,146	)		(12,028	)
Net Cash Provided By Financing Activities		70,364			90,972

Net (Decrease) Increase in Cash		(39,310	)		14,434
Cash at Beginning of Period		88,937			133,220
Cash at End of Period	$	49,627		$	147,654

Supplemental disclosure of cash flow information
Income taxes paid	$	-		$	-
Cash interest paid	$	-		$	-

Supplemental disclosure of non-cash investing and financing activities
Conversion of note payable and accrued interest to common stock	$	535,000		$	-
Conversion of due to related parties and accrued interest to common stock	$	714,260		$	-
Related party gain included in stockholders’ equity from conversion of note payable and accrued interest to common stock	$	1,965,000		$	-
Related party gain included in stockholders’ equity from conversion of due to related parties and accrued interest to common stock	$	2,623,408		$	-
Capital contribution from forgiveness of accrued interest by related party	$	378,027		$	-
Capital contribution from forgiveness of accrued compensation by related party	$	292,500		$	-

See accompanying notes to unaudited consolidated financial statements

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American Energy Production, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2009

(Unaudited)

1. BASIS AND PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q of Regulation S-K. They do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements at December 31, 2008 included in the Company's Form 10-K (“2008 10-K”) filed with the Securities and Exchange Commission (“SEC”) on May 6, 2009. The interim unaudited consolidated financial statements should be read in conjunction with those consolidated financial statements included in the 2008 10-K.

In the opinion of Management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

2. HISTORY AND NATURE OF BUSINESS

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

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

1. Leasing programs.

2. Production acquisitions.

3. Drilling and producing with proven and emerging technologies.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Going Concern

As reflected in the accompanying unaudited consolidated financial statements, the Company had a net loss of $1,120,262 for the nine months ended September 30, 2009 as compared to a net loss of $1,369,017 for the nine months ended September 30, 2008. Additionally, at September 30, 2009, the Company has minimal cash and has a negative working capital balance of $233,505, which could have a material impact on the Company’s financial condition and operations. The negative working capital balance was significantly reduced from a balance of $6,950,142 at March 31, 2009 to the September 30, 2009 balance by the write off of the obligations discussed below along with the conversion of notes payable, accrued interest and due to related parties to common stock during the three months ended June 30, 2009. As a result, the Company has stockholder’s equity of $2,541,526 at September 30, 2009 as compared to a stockholders’ deficit of $3,055,150 at December 31, 2008. However, the ability of the Company to continue as a going concern is dependent on the Company’s ability to raise capital and generate sufficient revenues and cash flow from its business plan as an oil and gas operating company. The financial statements included in this report do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

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American Energy Production, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2009

(Unaudited)

On July 29, 2009, but effective June 30, 2009 (the “Effective Date”), the Company and certain of its wholly-owned subsidiaries (the “Company”) eliminated certain debt obligations by converting them into $0.0001 par value common stock (“Stock”) of the Company. Additionally, the Company successfully negotiated and eliminated a substantial amount of obligations that were incurred from a predecessor company and converted an existing preferred stock agreement to Stock.

As a result of the above restructuring of the Company’s consolidated balance sheet, the Company has eliminated the majority of its debt and will issue or has issued 33,850,678 shares of Stock, 23,350,678 from the conversion of debt obligations and 10,500,000 from the conversion of preferred stock. See Note 5 – Debt and Note 8 – Stockholders’ Equity.

Additionally, on May 11, 2009, the Company granted 9,800,000 non-qualified stock options to purchase the Company’s $0.0001 par value common stock to employees and consultants of the Company. These stock options were previously registered in 2008 by the Company on Form S-8 with the Securities and Exchange Commission. The stock options were issued with an exercise price of $0.015 per share; the closing price of the Company’s traded stock on the date of grant. See Note 8 – Stockholders’ Equity.

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

Accounting Estimates

When preparing financial statements in conformity with U.S. GAAP, management must make estimates based on future events that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates in the accompanying unaudited consolidated financial statements include going concern, oil and gas properties, property and equipment, the evaluation of whether our assets are impaired, asset retirement obligations, fair value of financial instruments and revenue recognition. We also have other key accounting estimates and policies, but we believe that these other policies either do not generally require us to make estimates and judgments that are as difficult or as subjective, or it is less likely that they would have a material impact on our reported results of operations for a given period. The actual amounts could differ materially from such estimates.

Oil and Gas Properties

The Company uses the successful efforts method of accounting for its oil and gas properties. Costs incurred by the Company related to the acquisition of oil and gas properties and the cost of drilling successful wells are capitalized. Costs to maintain wells and related equipment and lease and well operating costs are charged to expense as incurred. Gains and losses arising from sales of properties are included in income. Unproved properties are assessed periodically for possible impairment.

Property and Equipment

The Company’s oil and gas rig is depreciated over its estimated useful life of ten years, using the straight line method. Vehicles are depreciated over their estimated useful life of three years, using the straight line method. Maintenance, repairs and minor replacements are charged to operations in the year incurred.

Asset Retirement Obligations

The Company accounts for asset retirement obligations in accordance with SFAS No. 143, Accounting for Asset Retirement Obligations (ASC 410). The asset retirement obligations represent the estimated present value of the amounts expected to be incurred to plug, abandon, and remediate the producing properties at the end of their productive lives, in accordance with state laws, as well as the estimated costs associated with the reclamation of the property surrounding. The Company determines the asset retirement obligations by calculating the present value of estimated cash flows related to the liability. The asset retirement obligations are recorded as a liability at the estimated present value as of the asset’s inception, with an offsetting increase to producing properties included in property and equipment. Periodic accretion of the discount related to the estimated liability is recorded as an expense in the statement of operations. The discount rate utilized by the Company is 4.5% with a twenty (20) year estimate life for the properties.

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American Energy Production, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2009

(Unaudited)

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

Accounting for the Impairment of Long-Lived Assets

We account for the impairment of long-lived assets in accordance SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (ASC 360), which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. Recoverability of the asset is measured by comparison of its carrying amount to the undiscounted cash flow that the asset or asset group is expected to generate. If such assets or asset groups are considered to be impaired, the loss recognized is the amount by which the carrying amount of the property, if any, exceeds its fair market value. Based upon the Company’s evaluation, no impairment was determined for the nine months ended September 30, 2009 and 2008.

Revenue Recognition

Revenues from sales of crude oil and natural gas products are recorded when deliveries have occurred and legal ownership of the commodity transfers to the customer. Revenues from the production of oil and natural gas properties in which the Company shares an undivided interest with other producers are recognized based on the actual volumes sold by the Company during the period.

Fair Value of Financial Instruments

We measure our financial assets and liabilities in accordance SFAS 157, Fair Value Measurements and Disclosures (ASC 820). For certain of our financial instruments, including cash, accounts receivable, due from related party, accounts payable, other current liabilities, due to related parties and accrued liabilities, the carrying amounts approximate fair value due to their short maturities. Amounts recorded for other assets, notes payable, deferred other income and asset retirement obligations also approximate fair value because current interest rates available to us for debt with similar terms and maturities are substantially the same.

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

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

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

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

Financial Assets and Liabilities

We currently measure and report the fair value liability for asset retirement obligations. The fair value liability for asset retirement obligations has been recorded as determined by calculating the present value of estimated cash flows related to the liability. The following table summarizes our financial liabilities measured at fair value on a recurring basis as of September 30, 2009 (in thousands):

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American Energy Production, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2009

(Unaudited)

	Balance at September 30, 2009		Quoted priced in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
			(Level 1)		(Level 2)		(Level 3)
Liabilities:
Asset Retirement Obligations	$	526,323	$	-	$	-	$	526,323
Total financial liabilities	$	526,323	$	-	$	-	$	526,323

Following is a roll forward through September 30, 2009 of the fair value measurements using significant unobservable Level 3 inputs:

Balance at December 31, 2008	$	509,155
Accretion of discount		17,168
Ending balance at September 30, 2009	$	526,323

Non-Financial Assets and Liabilities

The Company evaluated and determined that there was no non-financial assets and liabilities as of September 30, 2009.

Stock-Based Compensation

The Company adopted SFAS No. 123R, Share-Based Payment (ASC 718), as of January 1, 2006, using the modified prospective application method. This statement requires the recognition of compensation expense measured at fair value when we obtain employee services in stock-based payment transactions.

Concentration of Risk

Our financial instruments that are potentially exposed to credit risk consist primarily of cash and accounts receivable for which the carrying amounts approximate fair value. At certain times, our demand deposits held in banks may exceed the federally insured limits. The Company has not experienced any losses related to these deposits.

Impact of Recently Issued Accounting Standards

On December 31, 2008, the SEC adopted major revisions to its rules governing oil and gas company reporting requirements. These include provisions that permit the use of new technologies to determine proved reserves and that allow companies to disclose their probable and possible reserves to investors. The current rules limit disclosure to only proved reserves. The new disclosure requirements also require companies to report the independence and qualifications of the person primarily responsible for the preparation or audit of reserve estimates, and to file reports when a third party is relied upon to prepare or audit reserves estimates. The new rules also require that oil and gas reserves be reported and the full-cost ceiling value calculated using an average price based upon the prior 12-month period. The new oil and gas reporting requirements are effective for annual reports on Form 10-K for fiscal years ending on or after December 31, 2009, with early adoption not permitted. We are in the process of assessing the impact of these new requirements on our consolidated financial position, results of operations and financial disclosures.

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American Energy Production, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2009

(Unaudited)

In April 2009, accounting guidance was released with respect to interim disclosures about fair value of financial instruments to require disclosures about the fair value of financial instruments for interim reporting periods, effective for reporting periods ending after June 15, 2009. We have incorporated required disclosures in these unaudited consolidated financial statements with no effect on our financial position, results of operations or cash flows.

In May 2009, accounting guidance was issued regarding subsequent events, which establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, guidance sets forth the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date, and the disclosures that should be made about such events or transactions. This accounting guidance is effective for reporting periods ending after June 15, 2009, and should not result in significant changes in subsequent events that an entity reports, either through recognition or disclosure, in financial statements. Among other things, this guidance requires disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. We have incorporated required disclosures in these unaudited consolidated financial statements.

In June 2009, the Financial Accounting Standards Board (“FASB”) approved the FASB Accounting Standards Codification (“the Codification”) as the single source of authoritative nongovernmental GAAP. All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the SEC, have been superseded by the Codification. All other non-grandfathered, non-SEC accounting literature not included in the Codification has become nonauthoritative. The Codification did not change GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online database. The Codification is effective for interim or annual periods ending after September 15, 2009, and impacts the Company’s financial statements as all future references to authoritative accounting literature will be referenced in accordance with the Codification. There have been no changes to the content of the Company’s financial statements or disclosures as a result of implementing the Codification during the quarter ended September 30, 2009.

As a result of the Company’s implementation of the Codification during the quarter ended September 30, 2009, previous references to new accounting standards and literature are no longer applicable. In the current quarter unaudited consolidated financial statements, the Company will provide reference to the both the old and new guidance to assist in understanding the impacts of recently adopted accounting literature, particularly for guidance adopted since the beginning of the current fiscal year but prior to the Codification. New references will use the term Accounting Standards Codification (“ASC”) followed by the relevant ASC section.

Net Income (Loss) per Common Share

The Company computes earnings (loss) per share in accordance with SFAS No. 128 (ASC 260-10), “Earnings per Share.” ASC 260-10 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive. At September 30, 2009, there were options to purchase 9,800,000 shares of the Company's common stock which may dilute future earnings per share.

4.	PROPERTY AND EQUIPMENT

Property and equipment is comprised of the following:

	Sep. 30,		Dec. 31,
	2009		2008
Oil and gas properties, successful efforts method	$	4,283,365	$	4,283,365
Other property and equipment		1,744,067		1,744,067
		6,027,432		6,027,431
Less: Accumulated depreciation and depletion		2,283,978		2,015,528
Property and equipment, net	$	3,643,454	$	4,011,903

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American Energy Production, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2009

(Unaudited)

DEBT

On July 29, 2009, but effective June 30, 2009 (the “Effective Date”), the Company and certain of its wholly-owned subsidiaries eliminated certain debt obligations by converting them into $0.0001 par value common stock as follows:

Bend Arch Petroleum, Inc. (“Bend Arch”), a wholly-owned subsidiary of the Company, had a $2,000,000 Promissory Note (Note”) that was due and payable on December 31, 2009. The Note was issued to Proco Operating Co., Inc. (“Proco”), a company controlled by the brother of the Company’s Chief Executive Officer and a director. The purpose of the Note was to secure payment for oil and gas leases and wells located in Comanche and Eastland counties in the State of Texas sold to Bend Arch by Proco on June 15, 2004. The Note replaced a $2,000,000 convertible debenture dated January 5, 2004. As of the Effective Date, the Note has been converted into 8,000,000 shares of Stock based upon a conversion price of $0.25 per share, a significant premium to the market price of the Stock. Additionally, the Note accrued interest at a rate of eight percent (8%) per annum and as of the Effective Date, accrued interest was $878,027. An agreement was reached whereby Proco forgave $378,027 of the accrued interest and the remaining $500,000 has been converted into 2,000,000 shares of Stock based upon a conversion price of $0.25 per share, a significant premium to the market price of the Stock.

The Company evaluated the conversion of the Note and the accrued interest in accordance with paragraph 20 of APB 26 (ASC 470-50-40) and recorded a $1,965,000 gain representing the difference between the reacquisition price and the net carrying amount of the extinguished debt and since the gain was from a transaction with a related party, the $1,965,000 was recorded to additional paid in capital as a component of Stockholders’ Equity.

As a result of the conversions discussed above, the Company will issue 10,000,000 shares of Stock and as of September 30, 2009, these have been recorded as issuable in the unaudited consolidated financial statements.

However, as of the Effective Date, the transaction has not been finalized as the lessor had not formerly executed the settlement agreement. The Company has researched the matter and believes that consideration was provided by the Company and accepted by the Lessor for the settlement and that no further consideration or action is required by the Company. Accordingly, the $16,131 debt obligation and $25,029 of accrued interest have been reclassified to Deferred Other Income, a component of Long-Term Liabilities in the unaudited consolidated financial statements. (See Note 7 – Deferred Other Income).

On October 28, 2005, Bend Arch entered into a $25,000 line of credit facility with a financial institution for working capital purposes. The line of credit is secured by a company unrestricted certificate of deposit held by the financial institution and bears simple interest per annum at a variable rate which is 3.25% as of September 30, 2009. As of September 30, 2009, the outstanding balance is $23,073 and is included in the Note Payable balance in the accompanying unaudited consolidated financial statements.

In March 2008, the Company purchased oilfield property and equipment for a price of $150,000. The terms included a cash payment of $47,000 and a note payable for the balance of $103,000. During the nine months ended September 30, 2008, the Company paid down $12,000 of principal and the balance is $91,000 as of June 30, 2009 and classified as a component of Note Payable in the accompanying unaudited consolidated financial statements. As of September 30, 2009, no formal agreement of the terms of the note payable had been finalized and the Company has a verbal agreement to pay the principal back at a rate of $10,000 monthly. It is anticipated that a formal agreement will be negotiated and finalized in the future.

In July 2009, the Company received $10,000 of proceeds from a short-term note from an unrelated third party. As of September 30, 2009, no formal agreement of the terms of the note payable had been finalized and the Company. It is anticipated that a more formal agreement will be negotiated and finalized in the future.

-11-

American Energy Production, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2009

(Unaudited)

As a result of these transactions, the Company has the following remaining debt outstanding as of September 30, 2009:

$25,000 Line of Credit, dated October 28, 2005, bearing simple variable interest at 3.25% per annum and due on February 28, 2008.	$	24,421
$10,000 Note, dated July of 2009, not formalized and not bearing interest		10,000
$103,000 Note, dated March of 2008, not formalized and not bearing interest		91,000
	$	125,421

6. ASSET RETIREMENT OBLIGATIONS

The following represents a reconciliation of the asset retirement obligations for the nine months ended September 30, 2009:

Asset retirement obligations at December 31, 2008	$	509,155
Revision to estimate and additions		-
Other adjustments		-
Liabilities settled during the period		-
Accretion of discount		17,168
Asset retirement obligation at end of period	$	526,323

7. DEFERRED OTHER INCOME

On April 16, 2001, the Company leased computer equipment under a 36-month lease that was accounted for as a capital lease in the amount of $21,238. The lease was secured by the computer equipment and perfected by a financing statement; however, the Company liquidated the equipment in 2006 (with the lessor approval) and paid the resulting $4,000 of proceeds to the lessor. As a result of the computer liquidation and other payments, the remaining unpaid balance of principal has been $16,131 since March 31, 2006. The payable is personally guaranteed by the Chief Executive Officer of the Company. In November 2003, a settlement was negotiated with the lessor discussed above to forgive the outstanding principal and accrued interest on the lease payable once the transfer of 4,000 shares (100,000 shares prior to the one-for-twenty five reverse stock split) of the Company’s common stock personally held by the Company’s Chief Executive office occurs. The Chief Executive Officer of the Company transferred these shares on September 15, 2003. However, as of the Effective Date, the transaction has not been finalized as the lessor had not formerly executed the settlement agreement. The Company has researched the matter and believes that consideration was provided by the Company and accepted by the Lessor for the settlement and that no further consideration or action is required by the Company. Accordingly, the $16,131 debt obligation and $25,029 of accrued interest have been reclassified to Deferred Other Income, a component of Long-Term Liabilities in the unaudited consolidated financial statements. Currently, the Company intends to write this amount off by December 31, 2009 (See Note 5 – Debt).

As of the Effective Date, the Company has recorded $122,671 of accrued interest for previously issued convertible debentures. Several convertible debenture holders previously elected to convert all or a portion of the convertible debentures into common stock. However, the conversion did not include accrued interest that was specified in the convertible debenture documentation. The Company has researched the matter and believes that no further common stock will be issued for these conversions. Accordingly, the $122,671 of accrued interest has been reclassified to Deferred Other Income, a component of Long-Term Liabilities in the unaudited consolidated financial statements. Currently, the Company intends to write this amount off by December 31, 2009.

As of the Effective Date, the Company had recorded approximately $262,000 of accounts payable from the predecessor company, Communicate Now.com, Inc. Since these trade accounts payable have been outstanding for an extended period of time with no communication between the Company and any of the vendors, the Company commenced the process of eliminating the liabilities from its records. As of the Effective Date, these accounts payable have been removed from the Company’s unaudited consolidated financial statements. Additionally, the Company determined additional accounts payable in the amount of approximately $54,000 were not valid and should be eliminated. Accordingly, as of the Effective Date, accounts payable has been reduced by $316,289 and has been reclassified to Deferred Other Income, a component of Long-Term Liabilities in the unaudited consolidated financial statements. Currently, the Company intends to write this amount off by December 31, 2009.

-12-

American Energy Production, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2009

(Unaudited)

8. STOCKHOLDERS’ EQUITY

Capital Structure

The Company is authorized to issue up to 500,000,000 shares of common stock, $0.0001 par value per share, of which 36,243,849 were issued and outstanding as of September 30, 2009. Additionally, the Company has 23,350,677 shares issuable as of September 30, 2009 as discussed below. In total, the Company has 59,594,526 shares outstanding and issuable at September 30, 2009.

The Company is authorized to issue up to 5,000,000 shares of preferred stock, $0.0001 par value per share, of which none were issued and outstanding as of September 30, 2009.

The Company is authorized to issue up to 10,000,000 shares of common stock under the 2008 Non-Qualified Stock Option Plan (the “Plan”). The Plan is to assist the Company in securing and retaining Key Participants of outstanding ability by making it possible to offer them an increased incentive to join or continue in the service of the Company and to increase their efforts for its welfare through participation in the ownership and growth of the Company. As of September 30, 2009, 9,800,000 stock options have been granted under the Plan and issued by the Company.

Common Stock:

Effective April 1, 2009, the Company issued 50,000 shares of Stock to an unrelated third party for oil and gas related equipment. The Stock was valued at $1,750 or $0.035 per share, the closing trading price of the Stock on April 1, 2009.

Effective May 11, 2009, the Company received $50,000 of proceeds from the sale of 5,000,000 shares of Stock at $0.01 per share. The $0.01 per share price was determined based upon a 33% discount to the closing market price of $0.015 per share on the sale date of May 11, 2009.

Effective June 30, 2009, the Chief Executive Officer elected to convert 3,500,000 shares of $0.0001 par value preferred stock into 10,500,000 shares of Stock per the terms of the preferred stock.

Effective September 6, 2009, the Company received $10,005 from the sale of 333,500 shares of stock at $0.03 per share. The $0.03 per share price was determined based upon a 33% discount to the closing market price of $.0105 per share on the sale date of September 6, 2009.

As a result of the above, the Company has 36,243,849 outstanding shares at September 30, 2009.

Common Stock Issuable:

On the Effective Date, the Company and certain of its wholly-owned subsidiaries eliminated certain debt obligations by converting them into Stock of the Company.

Bend Arch had a $2,000,000 Note that was due and payable on December 31, 2009. The Note was issued to Proco, a company controlled by the brother of the Company’s Chief Executive Officer and a director. The purpose of the Note was to secure payment for oil and gas leases and wells located in Comanche and Eastland counties in the State of Texas sold to Bend Arch by Proco on June 15, 2004. The Note replaced a $2,000,000 convertible debenture dated January 5, 2004. As of the Effective Date, the Note has been converted into 8,000,000 shares of Stock based upon a conversion price of $0.25 per share, a significant premium to the market price of the Stock. These shares are recorded as issuable at September 30, 2009. Additionally, the Note accrued interest at a rate of eight percent (8%) per annum and as of the Effective Date, accrued interest was $878,027. An agreement was reached whereby Proco forgave $378,027 of the accrued interest and the remaining $500,000 has been converted into 2,000,000 shares of Stock based upon a conversion price of $0.25 per share, a significant premium to the market price of the Stock. These shares have been recorded as issuable at September 30, 2009.

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American Energy Production, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2009

(Unaudited)

Effective July 1, 2003, the Company entered into a salary and equipment rental agreement with its Chief Executive Officer. As of January 1, 2005, the $3,500 per month equipment rental agreement with the Chief Executive Officer was terminated. As of the Effective Date, the Company owed the Chief Executive Officer $593,735 for unpaid amounts under the salary and equipment rental agreement and has been converted into 2,374,940 shares of Stock based upon a conversion price of $0.25 per share, a significant premium to the market price of the Stock. These shares have been recorded as issuable at September 30, 2009.

As of the Effective Date, Bend Arch, the Company’s wholly-owned subsidiary, owed the Chief Executive Officer $1,007,715 for previous advances and equipment rental charges at $4,500 per month. This amount has been converted into 4,030,860 shares of Stock based upon a conversion price of $0.25 per share, a significant premium to the market price of the Stock. These shares have been recorded as issuable at September 30, 2009.

As of the Effective Date, the operator of the Company’s oil and gas properties was owed $1,736,219 for services as the operator of the Company’s oil and gas production activities. The operator is Proco and is a related party as Proco is controlled by the brother of the Company’s Chief Executive Officer. This amount has been converted into 6,944,877 shares of Stock based upon a conversion price of $0.25 per share, a significant premium to the market price of the Stock. These shares have been recorded as issuable at September 30, 2009.

As a result of the above, the Company has 23,350,677 shares classified as issuable at September 30, 2009.

Preferred Stock:

The Company is authorized to issue up to 5,000,000 shares of preferred stock, $0.0001 par value per share, of which 3,500,000 were issued and outstanding as of the Effective Date. All of the preferred stock outstanding was held by the Chief Executive Officer of the Company. Under the terms of the designation, these Series A shares are not entitled to dividends and are convertible, at the option of the holder into three times as many common shares as Series A preferred that are held. There are no liquidation rights or preferences to Series A preferred stock holders as compared to any other class of stock. These shares are non-voting, however, the holders, as a class may elect two directors.

As of the Effective Date, the holder elected to convert the preferred stock and the Company issued 10,500,000 shares of Stock.

Stock Options:

On May 11, 2009, the Company granted 9,800,000 non-qualified stock options to employees and consultants under the Plan as described above. Of the 9,800,000 stock options granted, 7,000,000 were issued to employees and 2,800,000 were issued to consultants. All of the options were vested 100% upon the grant date of May 11, 2009.

The Company evaluated the stock options in accordance with SFAS 123R (ASC 718) and utilized the Black Scholes method to determine valuation. As a result of our analysis, the total value for the stock option issuance was $146,986 recorded as $104,990 of compensation expense and $41,996 as consulting expense.

The Company used the following in the calculation:

Stock Price (grant date)	$	0.015
Exercise Price	$	0.015
Expected Life (between vesting period and term of warrants)		5.00
Volatility		348	%
Annual Rate of Quarterly Dividends		0.00	%
Risk Free Interest Rate (10 year T-bill rate)		3.17	%

-14-

American Energy Production, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2009

(Unaudited)

9. COMMITMENTS AND CONTINGENCIES

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

Prior to December 31, 2007, the Company and certain of its wholly-owned subsidiaries were delinquent in the filing of franchise tax reports with the State of Texas and the State of Delaware and as a result, the Company and certain of its wholly-owned subsidiaries were not in good standing. The Company and its wholly-owned subsidiaries have filed the required reports for both 12-31-07 and 12-31-08 and as a result, management anticipates that the Company and all of its wholly-owned subsidiaries will be declared in good standing in the near future. However, the Company has not received notice that all of the filings have been accepted and as a result, may face certain penalties and interest due to the delinquent status of the reports before they were filed.

As of the Effective Date, the Company had recorded $83,812 of unpaid federal payroll taxes and employee withholdings and related penalties and interest. These unpaid federal taxes are entirely from CommunicateNow.com (Communicate”), the predecessor company. The previous Chief Executive Officer of Communicate structured a settlement payment agreement with the Internal Revenue Service and has personally paid the balance of the obligation down to $13,961 as of the Effective Date. Accordingly, the Company has reduced the balance recorded to $13,961 as of the Effective Date and the difference of $69,851 has been recorded to Other Income in the unaudited consolidated financial statements at September 30, 2009. Since the previous Chief Executive Officer is no longer affiliated with the Company in any way and is not a related party, the Company determined that this was not a capital transaction and should be recorded to Other Income. The remaining balance of $13,961 is included as accrued payroll taxes and penalties in the Company’s unaudited consolidated financial statements because of potential federal tax liens against the Company until the balance is paid in full.

From May 2004 to March 2005, the Company issued 108,000 shares of common stock (2,700,000 shares prior to the one-for-twenty five reverse stock split) in exchange for a $27,000 subscription receivable. As of September 30, 2009, the subscription receivable is still outstanding and no resolution of this matter has been completed.

In December 2005 and January 2006, the Company determined that certain issuances of common stock had not been properly disclosed in reports made by the Company’s transfer agent. The Company discussed these items with the transfer agent and the transactions have been reconciled and recorded properly in the Company records. However, the Company believes that two of these transactions, an unauthorized issuance by the transfer agent of 600,000 shares (15,000,000 shares prior to the one-for-twenty five reverse stock split) and an additional unauthorized issuance of 100,000 shares (2,500,000 shares prior to the one-for-twenty five reverse stock split), should be reimbursed to the Company by either the third party who received the shares or the transfer agent. The Company has recorded the fair market valuation of the two transactions in the amount of $875,000 as a subscription receivable as of September 30, 2009 and is in discussions with both the third party and the transfer agent to resolve the issue. As of the date of these financial statements, no resolution of the matter has been completed.

10. RELATED PARTY TRANSACTIONS

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

Effective July 1, 2003, the Company entered into a salary and equipment rental agreement with its Chief Executive Officer. As of January 1, 2005, the $3,500 per month equipment rental agreement with the Chief Executive Officer was terminated. As of the Effective Date, the Company owed the Chief Executive Officer $593,735 for unpaid amounts under the agreement which has been converted into 2,374,940 shares of Stock based upon a conversion price of $0.25 per share, a significant premium to the market price of the Stock.

As of the Effective Date, we owed the operator of the Company’s oil and gas properties $1,736,219 for services as the operator of the Company’s oil and gas production activities. The operator is Proco and is a related party as Proco is controlled by the brother of the Company’s Chief Executive Officer. This amount has been converted into 6,944,877 shares of Stock based upon a conversion price of $0.25 per share, a significant premium to the market price of the Stock.

The Company evaluated the conversion of each of the above due to related party and the accrued interest in accordance with paragraph 20 of APB 26 (ASC 470-50-40) and recorded an aggregate $2,623,408 gain representing the difference between the reacquisition price and the net carrying amount of the extinguished debt. Since the gain was from transactions with related parties, the $2,623,408 was recorded to additional paid in capital as a component of Stockholders’ Equity.

As of the Effective Date, the President of Oil America Group, Inc. (“OAG”) was owed $292,500 for unpaid salary per an agreement effective January 1, 2005. The agreement is for annual compensation of $65,000 and none of this amount has been paid since the inception of the agreement. The unpaid salary of $292,500 has been forgiven by the President of OAG as of the Effective Date. As a result of the transaction and since the President of OAG is an officer of the Company and is a related party, the $292,500 of accrued compensation forgiven was classified as a capital transaction and recorded to additional paid in capital.

-15-

American Energy Production, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2009

(Unaudited)

The balance outstanding for Due from and to Related Parties at September 30, 2009 is as follows.

Due from Related Party:
	Sep. 30,		Dec. 31,
	2009		2008
Due from Operator of oil and gas properties	$	5,733	$	-
Total Due From Related Party	$	5,733	$	-

The operator of the Company’s oil and gas properties owed Bend Arch $5,733 for services related to the Company’s oil and gas production activities. The operator is Proco and is a related party as Proco is controlled by the brother of the Company’s Chief Executive Officer. As of September 30, 2009, the amount is recorded as a component of Due from Related Party in the accompanying unaudited consolidated financial statements.

Due to Related Parties:
	Sep. 30,		Dec. 31,
	2009		2008
Due to Chief Executive Officer from advances and salary agreement with Company.	$	37,300	$	555,125
Due to Chief Executive Officer from advances and rental agreement with Bend Arch		89,860		932,561
Due to Chief Executive officer from advances to Oil America Group, Inc.		1,500		-
Due to President of Oil America Group, Inc. from advances and salary agreement with Company		21,500		276,250
Total Due To Related Parties	$	149,910	$	3,483,236

As a result of the previously discussed conversion to Stock (see Note 5- Debt), the balance of the Due to related parties was zero as of June 30, 2009. For the three months ended September 30, 2009, the following transactions occurred related to Due To Related Parties:

Under the July 1, 2003 salary and equipment rental agreement with the Chief Executive Officer, the Company accrued $30,000 for salary obligation, the Chief Executive Officer advanced $11,500 to the Company and the Company repaid $4,500 of the amount advanced to the Chief Executive Officer. As of September 30, 2009, the amount outstanding is $37,300 and is recorded as a component of Due to Related Parties in the accompanying unaudited consolidated financial statements.

Under the previous $4,500 per month equipment rental agreement between the Company and Bend Arch, Bend Arch accrued $13,500 per the agreement, the Chief Executive officer advanced $96,500 to Bend Arch and Bend Arch repaid $19,240 to the Chief Executive Officer. As of September 30, 2009, the amount outstanding is $89,860 and is recorded as a component of Due to Related Parties in the accompanying unaudited consolidated financial statements.

The Chief Executive Office advanced $1,500 to OAG and as of September 30, 2009, the amount is recorded as a component of Due to Related Parties in the accompanying unaudited consolidated financial statements.

Under a salary agreement with the President of OAG, $16,500 was accrued for salary by OAG. Additionally, the President advanced OAG $5,000. As of September 30, 2009, the amount outstanding is $21,500 and is recorded as a component of Due to Related Parties in the accompanying unaudited consolidated financial statements.

-16-

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

The following analysis of our financial condition and results of operations contained in this section should be read in conjunction with our financial statements and related notes and schedules thereto appearing elsewhere in this Quarterly Report, as well as the sections entitled "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes and schedules thereto included in our annual report on Form 10-K for the year ended December 31, 2008 filed with the SEC on May 6, 2009.

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


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

•

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

•

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

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

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

OVERVIEW

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

Our subsidiaries are primarily involved in three areas of oil and gas operations.

1. Leasing Programs.

2. Production Acquisitions.

3. Drilling and Producing with Proven and Emerging Technologies.

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

As reflected in the accompanying unaudited consolidated financial statements, the Company had a net loss of $1,120,262 for the nine months ended September 30, 2009 as compared to a net loss of $1,369,017 for the nine months ended September 30, 2008. Additionally, at September 30, 2009, the Company has minimal cash and has a negative working capital balance of $233,505, which could have a material impact on the Company’s financial condition and operations. The negative working capital balance was significantly reduced from a balance of $6,950,142 at March 31, 2009 to the September 30, 2009 balance by the write off of the obligations discussed below along with the conversion of notes payable, accrued interest and due to related parties to common stock during the three months ended June 30, 2009. As a result, the Company has stockholder’s equity of $2,541,526 at September 30, 2009 as compared to a stockholders’ deficit of $3,055,150 at December 31, 2009. However, the ability of the Company to continue as a going concern is dependent on the Company’s ability to raise capital and generate sufficient revenues and cash flow from its business plan as an oil and gas operating company. The financial statements included in this report do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

-17-

RESULTS OF OPERATIONS

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

American Energy Production, Inc. and Subsidiaries
Statements of Operations
(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Revenues:
Oil sales, net	$	319,279		$	539,132		$	815,123		$	1,530,796

Operating Expenses
Compensation		62,493			46,243			287,053			138,727
Consulting		-			-			43,496			-
Depreciation, depletion and accretion		121,899			148,760			385,617			441,611
Rent		1,539			22,920			4,939			45,182
General and administrative		39,946			66,452			111,438			185,204
Production		330,544			755,724			921,645			1,791,468
Professional		10,078			15,600			81,690			92,700
Taxes		24,769			13,508			67,362			75,584
Total Operating Expenses		591,268			1,069,208			1,903,240			2,770,477

Operating Loss		(271,989	)		(530,076	)		(1,088,117	)		(1,239,680	)

Other Income (Expense)
Other income (expens)		(28,096	)		2,574			53,785			2,877
Interest expense		(939	)		(42,903	)		(85,930	)		(127,711	)
Payroll tax expense and penalties		-			(1,501	)		-			(4,503	)
Total Other Income (Expense)		(29,035	)		(41,831	)		(32,145	)		(129,337	)

Net Loss	$	(301,024	)	$	(571,907	)	$	(1,120,262	)	$	(1,369,017	)

Weighted average Shares Outstanding		59,438,651			20,360,386			51,877,025			20,363,377

-18-

Three Months ended September 30, 2009 compared to 2008.

Revenues:

Revenues decreased $219,853 or 41%, to $319,279 for 2009 from $539,132 for 2008. Revenues for 2009 were comprised of $226,072 of oil sales (3,745 barrels of oil at an average price of $60.37 per barrel), $89,594 of natural gas sales (18,085 MCF at an average price of $4.95 per MCF), $113 of royalties and $3,500 of management fees. Revenues for 2008 were comprised of $274,343 of oil sales (2,416 barrels of oil at an average price of $113.57 per barrel), $263,934 of natural gas sales (25,258 MCF at an average price of $10.58 per MCF) and $854 of royalties. Although oil production volume increased significantly by 44% for 2009 from 2008, revenues decreased due to significantly reduced market pricing for oil and gas products.

Operating Expenses:

Operating expenses decreased $477,940, or 45%, to $591,268 for 2009 from $1,069,208 for 2008. The decrease was primarily related to a reduction in production expense related to the downturn in the oil and gas market as well as the entire economy. Additionally, the Company made a concerted effort to reduce expenses everywhere and this resulted in a significant decrease in general and administrative expense.

Other Income (Expense):

Other income (expense) decreased $12,795 of expense, or 31% to $29,035 of expense for 2009 from $41,831 of expense for 2008. The decrease in expense was primarily from $41,964 reduction in interest expense due to the conversion of debt to stock, offset by a $30,670 increase in other income.

Nine Months ended September 30, 2009 compared to 2008.

Revenues:

Revenues decreased $715,673 or 47%, to $815,123 for 2009 from $1,530,796 for 2008. Revenues for 2009 were comprised of $531,412 of oil sales (11,152 barrels of oil at an average price of $47.65 per barrel), $267,310 of natural gas sales (59,667 MCF at an average price of $4.48 per MCF), $620 of royalties and $15,782 of management fees. Revenues for 2008 were comprised of $895,957 of oil sales (8,553 barrels of oil at an average price of $104.75 per barrel), $633,323 of natural gas sales (61,067 MCF at an average price of $10.37 per MCF) and $1,517 of royalties. Although oil production volume increased significantly by 30% for 2009 from 2008, revenues decreased due to significantly reduced market pricing for oil and gas products.

Operating Expenses:

Operating expenses decreased $867,236, or 31%, to $1,903,240 for 2009 from $2,770,476 for 2008. The decrease was primarily related to a reduction in production expense related to the downturn in the oil and gas market as well as the entire economy. Additionally, the Company made a concerted effort to reduce expenses everywhere and this resulted in a significant decrease in general and administrative expense. These were offset by an increase in compensation and consulting expense primarily related to a non-cash expense from a Black-Scholes calculation for the issuance of non-qualified stock options in 2009 with no comparable amount in 2008.

Other Income (Expense):

Other income (expense) decreased $97,192 of expense, or 75% to $32,145 of expense for 2009 from $129,337 of expense for 2008. The decrease in expense was primarily from the write off of payroll taxes and penalties from a predecessor company determined to not be payable by the Company and a reduction in interest expense due to the conversion of debt to stock.

Liquidity and Capital Resources

Cash was $49,627 at September 30, 2009 as compared to $88,937 at December 31, 2008, and working capital deficit was $233,505 at September 30, 2009 as compared to a working capital deficit of $6,693,177 at December 31, 2008. The decrease in the working capital deficit was primarily from the conversion of debt to stock.

-19-

Operating Activities

Cash used in operating activities was $101,491 for the nine months ended September 30, 2009 compared to cash provided of $168,670 for the nine months ended September 30, 2008. The decrease in cash provided by operations to cash used in operations from 2008 to 2009 was primarily from a decrease in the change for due to related parties and a decrease in other assets for 2009 as compared to an increase in 2008.

Investing Activities

Cash used in investing activities was $8,183 for the nine months ended September 30, 2009 compared to cash used of $245,208 for the nine months ended September 30, 2008. The decrease in cash used resulted primarily from a decrease in the investment in property and equipment in 2008 to zero in 2009.

Financing Activities

Cash provided by financing activities was $70,364 for the nine months ended September 30, 2009 compared to $90,972 cash provided by financing activities for the nine months ended September 30, 2008. The reduction from 2008 to 2009 is primarily from the sale of common stock.

Our principal uses of cash to date have been for operating activities and we have funded our operations previously primarily by incurring indebtedness in the form of convertible debentures, notes payable and issuing common stock. During the nine months ended September 30, 2009, the Company significantly reduced its debt obligations through the conversion to common stock and or the write off of balances not determined to be payable.

Debt

The Company evaluated the conversion of the Note and the accrued interest in accordance with paragraph 20 of APB 26 (ASC 470-50-40) and recorded a $1,965,000 gain representing the difference between the reacquisition price and the net carrying amount of the extinguished debt. Since the gain was from a transaction with a related party, the $1,965,000 was recorded to additional paid in capital as a component of Stockholders’ Equity.

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However, as of the Effective Date, the transaction has not been finalized as the lessor had not formerly executed the settlement agreement. The Company has researched the matter and believes that consideration was provided by the Company and accepted by the Lessor for the settlement and that no further consideration or action is required by the Company. Accordingly, the $16,131 debt obligation and $25,029 of accrued interest have been re-classed to Deferred Other Income, a component of Long-Term Liabilities in the unaudited consolidated financial statements.

On October 28, 2005, Bend Arch entered into a $25,000 line of credit facility with a financial institution for working capital purposes. The line of credit is secured by a Company unrestricted certificate of deposit held by the financial institution and bears simple interest per annum at a variable rate which is 3.25% as of September 30, 2009. As of September 30, 2009, the outstanding balance is $23,073 and is included in the Note Payable balance in the accompanying unaudited consolidated financial statements.

As a result of these transactions, the Company has the following remaining debt as of September 30, 2009:

$25,000 Line of Credit, dated October 28, 2005, bearing simple variable interest at 3.25% per annum and due on February 28, 2008.	$	24,421
$10,000 Note, dated July of 2009, not formalized and not bearing interest		10,000
$103,000 Note, dated March of 2008, not formalized and not bearing interest		91,000
	$	125,421

Equity Financing

Effective June 30, 2009, the Chief Executive Officer elected to convert 3,500,000 shares of $0.0001 par value preferred stock into 10,500,000 shares of Stock per the terms of the preferred stock.

Effective September 6, 2009, the Company received $10,005 from the sale of 333,500 shares of stock at $0.03 per share. The $0.03 per share price was determined based upon a 33% discount to the closing market price of $0.105 per share on the sale date of September 6, 2009.

Additionally, the Company will issue 23,350,677 shares of Stock from the conversion of debt obligations.

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Liquidity

To continue with our business plan, we will require additional working capital as we have not been generating sufficient cash from operations to fund our operating activities through the end of fiscal 2009. The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise capital and generate revenues and cash flow from its business plan as an oil and gas operating company.

Our ability to obtain additional financing depends on many factors beyond our control, including the state of the capital markets, the market price of our common stock and the prospects for our business. Additionally, any necessary additional financing may not be available to us or may be available only on terms that would result in further dilution to the current owners of our common stock. Failure to obtain commitments for interim financing and subsequent project financing would have a material adverse effect on our business, results of operations and financial condition. If the financing we require to sustain our working capital needs is unavailable or insufficient or we do not receive the necessary financing, we may be unable to continue as a going concern.

Management believes that as a result of restructuring of the balance sheet as discussed above, the Company will have several options available to obtain financing from third parties in order to carry out the business plan of the Company.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Item 4T. Controls and Procedures

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

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

The material weakness(s) identified are:

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

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

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

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

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

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

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

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

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

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

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PART II - Other Information

Item 6. Exhibits

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

Exhibit No.

Description of Exhibit

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

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

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

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

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

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

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

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

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

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

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

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

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

14.1		Code of Ethics (1)

20.1		Oil and Gas property valuation by Blue Ridge Enterprises as of December 31, 2007 (1)

20.2		Oil and Gas property valuation by Blue Ridge Enterprises as of December 31, 2008 (1)

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

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

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

* Filed herewith

(1)

Incorporated by reference.

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SIGNATURES

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

Signature	Title	Date

/s/ Charles Bitters Charles Bitters	Chief Executive Officer, Principal Executive and Financial Officer, Director	November 16, 2009

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AMERICAN ENERGY PRODUCTION INC - FORM 10-Q - November 16, 2009

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