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EX-31.1 - EXHIBIT 31.1 - American Natural Energy Corpexhibit31-1.htm
EX-31.2 - EXHIBIT 31.2 - American Natural Energy Corpexhibit31-2.htm
EX-32.2 - EXHIBIT 32.2 - American Natural Energy Corpexhibit32-2.htm
EX-32.1 - EXHIBIT 32.1 - American Natural Energy Corpexhibit32-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2010; or

[   ] 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 0-18596

American Natural Energy Corporation
(Exact name of small business issuer as specified in its charter)

Oklahoma 73-1605215
(State or other jurisdiction of (I.R.S employer
incorporation of organization) identification no.)
   
One Warren Place, 6100 South Yale, Suite 300, Tulsa, Oklahoma 74136
(Address of principal executive offices) (zip code)

(918) 481-1440
(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 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [   ]  No [X]

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

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [   ] Smaller Reporting Company [X]

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

     As of August 13, 2010 134,306,080 shares of the Registrant's Common Stock, $0.001 par value, were outstanding.

1


AMERICAN NATURAL ENERGY CORPORATION

QUARTERLY REPORT ON FORM 10-Q

INDEX

PART I – FINANCIAL INFORMATION

     Page
Item 1. Financial Statements (unaudited)  
     
Condensed Consolidated Balance Sheets – June 30, 2010 and December 31, 2009 3
     
Condensed Consolidated Statements of Operations Three Months and Six Months Ended June 30, 2010 and June 30, 2009 4
     
Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2010 and June 30, 2009 5
     
  Notes to Condensed Consolidated Financial Statements  7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
     
Item 4. Controls and Procedures 18
     
PART II – OTHER INFORMATION  
   
Item 6. Exhibits 19

2


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN NATURAL ENERGY CORPORATION
Condensed Consolidated Balance Sheets (Unaudited)

    June 30, 2010     December 31, 2009  
  $    $   
             
ASSETS            
Current assets:            
     Cash and cash equivalents   45,837     142,488  
     Accounts receivable – joint interest billing   97,718     88,439  
     Accounts receivable – oil and gas sales   205,502     322,059  
     Prepaid expenses and other   61,980     156,747  
     Oil inventory   21,147     12,815  
                   Total current assets   432,184     722,548  
Proved oil and natural gas properties, full cost method of accounting, net of 
     accumulated depletion, depreciation, amortization and impairment of 
     $21,035,902 and $20,637,643




17,023,694






17,581,389


Unproved oil and natural gas properties   315,960     144,602  
Equipment and other fixed assets, net of accumulated depreciation of 
     $1,089,660 and $1,075,860


88,571



102,371

             
                   Total assets   17,860,409     18,550,910  
             
LIABILITIES AND STOCKHOLDERS' EQUITY            
Current liabilities:            
     Accounts payable and accrued liabilities   1,836,823     1,913,645  
     Revenue payable   3,094,969     3,103,090  
     Accrued interest   11,629     -  
     Insurance note payable   -     55,001  
     Note payable (Note 4)   1,560,661     1,690,060  
     Taxes due on dissolution of subsidiary   85,252     125,252  
                   Total current liabilities   6,589,334     6,887,048  
             
Asset retirement obligation   2,726,791     2,674,003  
                   Total liabilities   9,316,125     9,561,051  
             
Commitments and contingencies            
             
Stockholders' equity :            
     Common stock (Note 6)            
           Authorized – 250,000,000 shares with par value of $0.001            
           – 134,306,080 and 133,981,080 shares issued and outstanding 
           respectively


134,306



133,981

     Additional paid-in capital   22,759,443     22,662,561  
     Accumulated deficit, since January 1, 2002 (in conjunction with the quasi- 
           Reorganization stated capital was reduced by an accumulated deficit of 
           $2,015,495)




(17,813,877


)




(17,260,444


)
     Accumulated other comprehensive income   3,464,412     3,453,761  
                   Total stockholders' equity   8,544,284     8,989,859  
                   Total liabilities and stockholders' equity   17,860,409     18,550,910  

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

3


AMERICAN NATURAL ENERGY CORPORATION
Condensed Consolidated Statements of Operations (Unaudited)
For the thee-month and six-month periods ended June 30, 2010 and 2009

    Three months ended June 30,     Six months ended June 30,  
    2010     2009     2010     2009  
  $   $   $   $  
Revenues:                        
Oil and gas sales   711,825     142,024     1,603,009     223,350  
Operations income   13,878     203,746     27,286     203,746  
    725,703     345,770     1,630,295     427,096  
                         
Expenses:                        
Lease operating expense   219,856     170,196     506,976     298,447  
Production taxes   30,001     5,429     66,243     9,600  
General and administrative   351,484     435,506     661,783     728,705  
Foreign exchange (gain) loss   (342,511 )   811,623     10,652     591,172  
Interest and financing costs   134,036     223,322     383,340     470,804  
Related party interest   -     2,555     -     4,560  
Depletion, depreciation and 
     amortization – oil and gas properties
 
156,967
   
32,943
   
396,834
   
56,538
 
Accretion of asset retirement obligation   77,005     52,434     144,100     65,706  
Depreciation and amortization – other assets   6,900     47,587     13,800     95,938  
Write-down of inventory to market   -     2,643     -     14,012  
                         
     Total expenses   633,738     1,784,238     2,183,728     2,335,482  
                         
Net income (loss)   91,965     (1,438,468 )   (553,433 )   (1,908,386 )
                         
Other comprehensive income– net of tax:                
Foreign exchange translation   (342,511 )   811,623     10,652     591,172  
                         
Other comprehensive income (loss)   (342,511 )   811,623     10,652     591,172  
                         
Comprehensive loss   (250,546 )   (626,845 )   (542,781 )   (1,317,214 )
                         
Basic and diluted loss per share   0.00     (0.03 )   (0.00 )   (0.04 )
                         
Weighted average number of shares outstanding                
Basic   134,306,080     54,057,673     134,298,898     53,565,739  
Diluted   134,306,080     54,057,673     134,298,898     53,565,739  

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

4


AMERICAN NATURAL ENERGY CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the six-month periods ended June 30, 2010 and 2009

    Six months ended June 30,  
    2010     2009  
  $   $  
             
Cash flows from operating activities:            
   Net loss   (553,433 )   (1,908,386 )
   Non cash items:            
         Depreciation, depletion and amortization   410,634     152,476  
         Accretion of asset retirement obligation   144,100     65,706  
         Foreign exchange (gain)/loss   10,651     591,172  
         Noncash compensation expense   75,081     -  
         Amortization of debt discount   299,452     -  
         Write-down of inventory to market   -     14,012  
   Changes in working capital items:            
         Accounts receivable   93,099     (250,888 )
         Oil inventory   (6,908 )   (19,494 )
         Prepaid expenses   95,767     45,447  
         Accounts payable, accrued            
         liabilities and interest   (113,312 )   1,028,280  
             
Net cash provided by (used) in operating activities   455,131     (281,675 )
             
Cash flows from investing activities:            
   Purchase and development of oil 
   and gas properties
 
(296,538
)  
(27,274
)
             
Net cash used in investing activities   (296,538 )   (27,274 )
             
Cash flows from financing activities:            
   Payment of notes payable   (585,864 )   (12,489 )
   Proceeds from issuance of notes payable   330,620     68,000  
   Proceeds from issuance of common stock 
         for private placement
 
-
   
225,000
 
             
Net cash provided by (used) in financing activities   (255,244 )   280,511  
             
Decrease in cash and cash equivalents   (96,651 )   (28,438 )
             
Cash beginning of period   142,488     56,162  
             
Cash end of period   45,837     27,724  

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

5


AMERICAN NATURAL ENERGY CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
For the six-month periods ended June 30, 2010 and 2009

    Six months ended June 30,  
    2010     2009  
  $   $  
             
Supplemental disclosures:            
Interest paid, net of capitalized interest   45,922     4,050  
Taxes paid   40,000     -  
             
Non cash investing and financing activities:            
Discount on notes payable   108,141     -  
Asset retirement obligation revision   91,312     -  
Exchange of non-monetary assets   107,288     -  
Offset of JIB Receivable and Note Payable   13,178    

 
             
Stock issued for purchase of working interest owner’s interest   22,125     -  
Issuance of stock for settlement of debt         10,600  

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

6


American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2010 and 2009

1

Significant accounting policies

   

The accounting policies and methods followed in preparing these unaudited condensed consolidated financial statements are those used by American Natural Energy Corporation (the “Company”) as described in Note 1 of the notes to consolidated financial statements included in the Annual Report on Form 10-K. The unaudited condensed consolidated financial statements for the three- and six- month periods ended June 30, 2010 and 2009 have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission and do not conform in all respects to the disclosure and information that is required for annual consolidated financial statements. The year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These interim condensed consolidated financial statements should be read in conjunction with the most recent annual consolidated financial statements of the Company.

   

In the opinion of management, all adjustments, all of which are of a normal recurring nature, considered necessary for fair statement have been included in these interim condensed consolidated financial statements. Operating results for the six-month period ended June 30, 2010 are not indicative of the results that may be expected for the full year ending December 31, 2010.

   

Reclassification of Prior Period Statements

   

Certain reclassifications of prior period consolidated financial statements balances have been made to conform to current reporting practices.

   

Stock-based compensation

   

As discussed below in Note 7, the Company has a stock-based compensation plan, and effective January 1, 2006, accounts for stock options granted to employees under this plan in accordance with the provisions of Statement on Financial Accounting Standards ASC 718 (Revised 2004), Share- Based Payment ("ASC 718"). Under the provisions of ASC 718, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the grantee’s requisite service period (generally the vesting period of the equity grant).

   
2

Earnings (loss) per share

   

Basic earnings (loss) per share is computed by dividing net income or loss (the numerator) by the weighted average number of shares outstanding during the period (the denominator). The diluted earnings (loss) per share is determined using the treasury method of shares outstanding as of June 30, 2010. This includes the net of new shares potentially created by unexercised in-the-money warrants and options. The method assumes that the proceeds that a company receives from an in-the-money warrants and options exercised are used to repurchase common shares in the market. As the Company’s unexercised warrants and options (5,380,000 and 4,650,000 respectively) were out-of-the-money as of June 30, 2010, the outstanding warrants and options were excluded from the calculation of diluted earnings per share as they were anti-dilutive.

7


American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2010 and 2009

3

Going Concern, Liquidity and Capital Resources

   

The Company currently has a severe shortage of working capital and funds to pay its liabilities. The Company has no current borrowing capacity with any lender. The Company incurred a net loss of $553,000 for the six months ended June 30, 2010. As the result of a $27,994,000 gain on extinguishment of debt related to the re-purchase of the Company’s 8% Secured Debentures and a settlement on debt owed to Dune Energy, the Company recorded income of $23,953,000 for the year ended December 31, 2009. However, the Company has a working capital deficit of $6,157,150 and an accumulated deficit of $17,813,877 at June 30, 2010 which leads to substantial doubt concerning the ability of the Company to meet its obligations as they come due. The Company also has a need for substantial funds to develop its oil and gas properties and repay borrowings as well as to meet its other current liabilities.

   

The accompanying consolidated financial statements have been prepared on a going concern basis which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. As a result of the losses incurred and current negative working capital, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. The ability of the Company to continue as a going concern is dependent upon adequate sources of capital and the Company’s ability to sustain positive results of operations and cash flows sufficient to continue to explore for and develop its oil and gas reserves and pay its obligations.

   

Management’s strategy has been to obtain additional financing or industry partners. It is management’s intention to raise additional debt or equity financing to fund its operations and capital expenditures or to enter into another transaction in order to maximize shareholder value. Failure to obtain additional financing can be expected to adversely affect the Company’s ability to pay its obligations, further the development of its properties, grow revenues, oil and gas reserves and achieve and maintain a significant level of revenues, cash flows, and profitability. There can be no assurance that the Company will obtain this additional financing at the time required, at rates that are favorable to the Company, or at all. Further, any additional equity financing that is obtained may result in material dilution to the current holders of common stock.

   
4

Notes Payable

   

Notes payable and long-term debt as of June 30, 2010 and December 31, 2009 consisted of the following:

8


American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2010 and 2009

      June 30, 2010     December 31, 2009  
    $   $  
  Accounts payable refinanced as notes payable   50,647     75,217  
  Note payable – Citizens Bank of Oklahoma   500,000     500,000  
  Note payable – Bank of Oklahoma   250,000     250,000  
  Note payable – Dune Energy (Note 5)   142,712     300,000  
  Note payable – Leede Financial   373,045     373,045  
  Note payable – TPC Energy   269,420     430,000  
  Note payable - Other   21,728     -  
  Discount on Leede note   (14,094 )   (42,585 )
  Discount on TPC note   (32,797 )   (195,617 )
               
  Total notes payable and long-term debt   1,560,661     1,690,060  
  Less: Current portion   (1,560,661 )   (1,690,060 )
               
  Total notes payable and long-term debt, net of current portion   -     -  

On January 20, 2010, the Company and TPC Energy entered into a note payable whereas TPC Energy agreed to advance up to $210,000 in addition to the $450,000 note issued during fiscal year 2009. Interest on the note accrues at 10% per annum and is payable monthly. Principal payments are to be paid monthly commencing March 31, 2010 at a rate of 75% of the net cash flow received from production of the recompleted DSCI 111 well. The Company agreed it will not encumber or sell its interest in this well as long as the principal balance is unpaid. Upon payout of the principal and interest, the Company shall assign 25% interest in this well to TPC Energy. The Company borrowed an additional $100,000 on June 7, 2010 which is due on December 31, 2010 along with interest at 10%. During the six months ended June 30, 2010, the Company borrowed a total of $308,892. Based on the relative fair value of the well, a discount on the note of $108,141 was recorded. The discount will be amortized over the life of the loan using the effective interest rate method. During the six months ended June 30, 2010, the Company paid a total of $469,472 to TPC Energy.

   

On June 30, 2010, the Company entered into an amendment with Leede Financial to extend the due date on the December 23, 2009 note from June 30, 2010 to September 30, 2010. The Company evaluated the application of ASC 470-50 and ASC 470-60 and concluded that the revised terms constituted a debt modification, rather than a debt extinguishment or a troubled debt restructuring.

   
5

Convertible Debentures

   

On August 4, 2009 the Company re-purchased and retired $7.895 million, plus $2.1 million accrued and unpaid interest, of its 8% Secured Debentures held by Dune (including release of collateral rights), acquired Dune’s interest in producing wells and certain leasehold rights in the Bayou Couba field, resumed operations of the Bayou Couba field, and settled outstanding issues between the companies, which net to $2.1 million payable to Dune. In exchange, the Company assigned a portion of certain deep rights held by the Company valued at $107,000 and paid Dune $1 million at the closing and issued a note payable of $300,000 payable in six consecutive quarterly payments of $50,000 each, with the first installment due and payable 90 days after resuming operations of the field. The first installment has been paid at the time of the Form 10-Q filing. The Company also completed the purchase of various miscellaneous working interests in the Bayou Couba field in January 2010 for a total of $160,750. The agreement with Dune requires either party acquiring an interest in the Bayou Couba field to assign sufficient interests in the acquired deep rights to the other party to maintain the respective interests as resulted from the settlement with the receiving party to pay their proportionate share of such assigned rights. The value of the deep rights assigned to Dune decreased the note payable. As of June 30, 2010 the balance of the note payable to Dune was $143,000.

9


American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2010 and 2009

6

Common Stock

   

During the first quarter of 2010, 325,000 common shares were issued for a total value of $22,125 for the acquisition of various working interests.

   
7

Stock-based compensation

   

On January 1, 2006, the Company adopted ASC 718 which requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. The Company has elected to use the modified prospective application method such that ASC 718 applies to new awards, the unvested portion of existing awards and to awards modified, repurchased or canceled after the effective date. The Company has equity incentive plans that provide for the issuance of stock options. These plans are discussed more fully in the Company’s Form 10-K for the year ended December 31, 2009. All options expire five years from the date of grant. Generally, stock options granted to employees and directors vest 25% upon approval of the grant by the TSX Venture Exchange and 12.5% per quarter thereafter. The Company recognizes stock-based compensation expense over the vesting period of the individual grants.

   

For the six months ended June 30, 2010, the Company recognized compensation costs of $75,000 related to stock options issued September 8, 2009. At June 30, 2010, there was $111,000 of total unrecognized compensation costs related to non-vested stock options granted on September 8, 2009.

   

The fair value of stock options granted was estimated on the date of the grant using a Black-Scholes valuation model that uses the following weighted average assumptions:


  Expected term, in years 3.25
  Risk-Free interest rate 2.38%
  Expected volatility 352.71%
  Expected Dividend Rate None

10


American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2010 and 2009

The Company utilizes authorized but unissued shares when a stock option is exercised.

   

At June 30, 2010 there were 4,650,000 options outstanding and 2,906,250 options were exercisable with a weighted average exercise price of $0.09. The weighted average remaining contractual term for these options at June 30, 2010 was 4.25 years. These options had no intrinsic value at June 30, 2010.

   
8

Asset Retirement Obligation

   

The Company’s asset retirement obligations relate to the plugging and abandonment of oil and gas properties. The components of the change in the Company’s asset retirement obligations for the six months ended June 30, 2010 is shown below:


      For the six months ended  
      June 30, 2010  
  Asset retirement obligations, January 1,   2,674,003  
  Additions and revisions   (91,312 )
  Settlement and disposals   -  
  Accretions Expense   144,100  
  Asset retirement obligation, June 30,   2,726,791  

9

Subsequent Events

   

The Company announced that its Board of Directors has authorized its management to proceed to obtain the required stockholder and other approvals and to prepare and file the necessary corporate and other documents to effect a one-for-ten reverse split of its outstanding shares of common stock. If completed as proposed, the Company’s outstanding shares of common stock will be reduced to approximately 13,430,600 from 134,306,080 shares. Completion of the reverse split is subject to obtaining all required stockholder, TSX Venture Exchange and other required approvals.

11


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

General

     We currently are experiencing a severe shortage of working capital and funds to pay our liabilities. We have no current borrowing capacity with any lender. We incurred a net loss of $553,000 for the six months ended June 30, 2010. As the result of a $27,994,000 gain on extinguishment of debt related to the re-purchase of our 8% Secured Debentures and a settlement on debt owed to Dune Energy, we recorded income of $23,953,000 for the year ended December 31, 2009. We have sustained substantial losses during the years ended December 31, 2008 and December 31, 2007, totaling approximately $61,000 and $3.2 million, respectively, and have a working capital deficiency and an accumulated deficit at June 30, 2010 which leads to substantial doubt concerning our ability to meet our obligations as they come due. We also have a need for substantial funds to develop our oil and gas properties and repay borrowings as well as to meet our other current liabilities.

     The accompanying consolidated financial statements in this Report have been prepared on a going concern basis which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. The independent registered public accounting firm’s report on our consolidated financial statements as of and for the year ended December 31, 2009 includes an explanatory paragraph which states that we have substantial cash used from operating activities during 2009 and 2008, have a working capital deficiency and an accumulated deficit at December 31, 2009. These matters raise substantial doubt about our ability to continue as a going concern. As a result of our losses incurred and current negative working capital, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. Our ability to continue as a going concern is dependent upon adequate sources of capital and our ability to sustain positive results of operations and cash flows sufficient to continue to explore for and develop our oil and gas reserves and pay our obligations.

     On August 4, 2009 we re-purchased and retired $7.8 million, plus accrued and unpaid interest, of our 8% Secured Debentures held by Dune Energy (including release of collateral rights), acquired Dune’s interest in producing wells and certain leasehold rights in the Bayou Couba field, resumed operations of the Bayou Couba field and settled outstanding issues between the companies. In exchange, we agreed to assign a portion of certain deep rights held by us and pay Dune a total of $1.3 million dollars with $1 million due at closing and an additional $300,000 due in quarterly payments commencing 90 days after resuming operations of the field. We also completed the purchase of various miscellaneous working interests in the Bayou Couba field in January 2010 for a total of $160,750. The agreement with Dune requires either party acquiring an interest in the Bayou Couba field to assign sufficient interests in the acquired deep rights to the other party to maintain our respective interests as resulted from the settlement with the receiving party to pay their proportionate share of such assigned rights. The deep rights assigned to Dune were valued at $107,000 and were recorded as a reduction to the note payable. As of June 30, 2010 the balance of the note payable to Dune was $143,000.

12


     We re-purchased the remaining outstanding 8% Secured Debenture debt totaling $2.9 million and an additional $821,000 of accrued interest from various holders with the payment of $256,000 and the issuance of 11.7 million shares of our common stock at a deemed price of US$0.03 per share. The issuance of the shares occurred during the third quarter of 2009.

A Comparison of Operating Results For The Three Months Ended June 30, 2010 and June 30, 2009

     We recorded income of $92,000 during the three months ended June 30, 2010 compared to a net loss of $1,438,000 for the three months ended June 30, 2009. During the three months ended June 30, 2010, our revenues were comprised of oil and gas sales totaling $726,000 compared with oil sales of $346,000 during the same period of 2009. Our oil and gas sales for the three months ended June 30, 2010 were higher as a result of higher oil prices and an increase in volumes and an increase in our net revenue interest. Our net average daily production for the three month period ended June 30, 2010 increased by 260% over the same period of the prior year, from 27 net barrels of oil equivalent per day to 97 net barrels of oil equivalent per day. Oil prices increased by 39% for the three month period ended June 30, 2010 over the same period of the prior year. The weighted average price increased from $58.25 per barrel of oil equivalent to $81.06 per barrel of oil equivalent. Production from our existing wells is subject to fluctuation based upon which zones of wells are in production.

     We had expenses of $634,000 for the three months ended June 30, 2010 compared to total expenses of $1,784,000 for the three months ended June 30, 2009. Our general and administrative expenses decreased by $84,000 from $436,000 for the three months ended June 30, 2009 to $352,000 for the same period in 2010.

     Interest and financing costs decreased for the three months ended June 30, 2010 compared to the same period in 2009 at $134,000 and $226,000 respectively. Interest and financing costs decreased as a result of repurchasing our debentures during the third quarter of 2009.

     Lease operating expenses of $220,000, production taxes of $30,000 and depletion, depreciation and amortization of $241,000 during the three months ended June 30, 2010 changed from $170,000, $5,000, and $133,000, respectively, during the three months ended June 30, 2009. Lease operating expenses increased as a result of increased production and activity level of the operator of the field and our increased working interest. Production taxes increased primarily as a result of increased production. The increase in depletion, depreciation and amortization is due to a higher amortization rate and increased production.

     We incurred a charge of $3,000 in the second quarter of 2009 to write-down our inventory to lower of cost or market. There was no such charge in the same period of 2010.

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A Comparison of Operating Results For The Six Months Ended June 30, 2010 and June 30, 2009

     We recorded a net loss of $553,000 during the six months ended June 30, 2010 compared to a net loss of $1,908,000 for the six months ended June 30, 2009. During the six months ended June 30, 2010, our revenues were comprised of oil and gas sales totaling $1,603,000 compared with oil sales of $223,000 during the same period of 2009. Our oil and gas sales for the six months ended June 30, 2010 were higher as a result of higher oil prices and an increase in volumes and an increase in our net revenue interest. Our net average daily production for the six month period ended June 30, 2010 increased by 385% over the same period of the prior year, from 24 net barrels of oil equivalent per day to 118 net barrels of oil equivalent per day. Oil prices increased by 48% for the six month period ended June 30, 2010 over the same period of the prior year. The weighted average price increased from $50.79 per barrel of oil equivalent to $75.17 per barrel of oil equivalent. Production from our existing wells is subject to fluctuation based upon which zones of wells are in production.

     We had expenses of $2,184,000 for the six months ended June 30, 2010 compared to total expenses of $2,335,000 for the six months ended June 30, 2009. Our general and administrative expenses were substantially consistent for the six months ended June 30, 2010 compared to the same period in 2009 at $662,000 and $729,000 respectively.

     Interest and financing costs decreased for the six months ended June 30, 2010 compared to the same period in 2009 at $383,000 and $475,000 respectively. Interest and financing costs decreased as a result of repurchasing our debentures during the third quarter of 2009.

     Lease operating expenses of $507,000, production taxes of $66,000 and depletion, depreciation and amortization of $555,000 during the six months ended June 30, 2010 changed from $298,000, $10,000, and $218,000, respectively, during the six months ended June 30, 2009. Lease operating expenses increased as a result of increased production and activity level of the operator of the field and our increased working interest. Production taxes increased primarily as a result of increased production. The increase in depletion, depreciation and amortization is due to a higher amortization rate and increased production.

     We incurred a charge of $14,000 in the first two quarters of 2009 to write-down our inventory to lower of cost or market. There was no such charge in the same period of 2010.

Liquidity and Capital Resources

General

     To date, our production has not been sufficient to fund our operations and drilling program. At June 30, 2010, we do not have any available borrowing capacity and have negative working capital of approximately $6.2 million.

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     We have substantial need for capital to develop our oil and gas prospects. Since 2001, we have funded our capital expenditures and operating activities through a series of debt and equity capital-raising transactions, drilling participations and through an increase in vendor payables and notes payable. We expect any future capital expenditures for drilling and development to be funded from the sale of drilling participations and equity capital. It is management's plan to raise additional capital through the sale of interests in our drilling activities or other strategic transaction; however, we currently have no firm commitment from any potential investors and such additional capital may not be available to us in the future.

A Comparison of Cash Flow For The Six Months Ended June 30, 2010 and June 30, 2009

     Our net cash provided by operating activities was $455,000 for the six months ended June 30, 2010 as compared to net cash used in operating activities of $282,000 for the six months ended June 30, 2009, an increase of $737,000. The increase in net cash provided by operating activities for the six months ended June 30, 2010 was primarily due to a loss from non-cash. Changes in working capital items had the effect of increasing cash flows from operating activities by $69,000 during the six months ended June 30, 2010 due to a decrease in accounts receivable and prepaids. Changes in working capital items had the effect of increasing cash flows from operating activities by $803,000 during the six months ended June 30, 2009 due to an increase in accounts payable of $1,028,000, partially offset by an increase in accounts receivable.

     We used $297,000 of net cash in investing activities during the six months ended June 30, 2010 compared to net cash used of $27,000 in 2009. The cash used in investing in 2010 and 2009 was for the purchase and development of oil and gas properties.

      We used $255,000 of net cash in financing activities for the six months ended June 30, 2010 compared to $281,000 of net cash provided by financing activities for the same period in 2009. For the six months ended June 30, 2010, net cash outflows from financing activities were a result of payments against outstanding notes of $586,000 offset by the issuance of notes of $331,000. For the six months ended June 30, 2009, net cash outflows from financing activities were a result of payments against outstanding notes of $12,000 offset by the issuance of notes of $68,000.

     We have no other commitments to expend additional funds for drilling activities for the rest of 2010.

How We Have Financed Our Activities

     On July 29, 2009 we closed the final tranche of a Private Placement of 66.7 million shares of our common stock at $0.03 per share for total proceeds of $2.0 million. In conjunction with this placement, finders’ fees were paid to two firms in Vancouver, BC in the amount of $96,840 and finders’ warrants were issued for the purchase of 5.38 million shares of common stock exercisable through July 29, 2010 at $0.05 per share. The net proceeds of the private placement were used to close the Dune Transaction and for working capital purposes.

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     On August 4, 2009 we re-purchased and retired $7.8 million, plus accrued and unpaid interest, of its 8% Secured Debentures held by Dune (including release of collateral rights), acquired Dune’s interest in producing wells and certain leasehold rights in the Bayou Couba field, resumed operations of the Bayou Couba field and settled outstanding issues between the companies. In exchange, we agreed to assign a portion of certain deep rights held by us and pay Dune a total of $1.3 million dollars with $1 million due at closing and an additional $300,000 due in quarterly payments commencing 90 days after resuming operations of the field. As of March 31, 2010 additional deep rights were assigned to Dune valued at $107,000 and were recorded as a reduction to the note payable. As of June 30, 2010 the balance of the note payable to Dune was $143,000.

     We re-purchased our remaining outstanding 8% Secured Debenture debt totaling $2.9 million and an additional $821,000 of accrued interest from various holders with the payment of $256,000 and the issuance of 11.7 million shares of our common stock at a deemed price of US$0.03 per share. The issuance of the shares occurred during the third quarter of 2009.

Future Capital Requirements and Resources

     At June 30, 2010, we do not have any available borrowing capacity under existing credit facilities and our current assets are $432,000 compared with current liabilities of $6.59 million. Our current liabilities include accounts payable, revenues payable, notes payable (a portion of which is past due), and other current obligations. We have substantial needs for funds to pay our outstanding payables and debt due during 2010. In addition, we have substantial need for capital to develop our oil and gas prospects. At June 30, 2010, we have no commitments for additional capital to fund drilling activities in 2010.

     Since 2001, we have funded our capital expenditures and operating activities through a series of debt and equity capital-raising transactions, drilling participations and, during the last two quarters of 2004 and all of 2005 and 2006, through an increase in vendor payables and notes payable. It is our intention to raise additional capital through the sale of interests in our drilling activities or other strategic transaction; however, we currently have no firm commitment from any potential investors and such additional capital may not be available to us in the future. Any capital expenditures for drilling purposes during 2010, we expect will be funded from the sale of drilling participations and equity capital.

     Our business strategy requires us to obtain additional financing and our failure to do so can be expected to adversely affect our ability to grow our revenues, oil and gas reserves and achieve and maintain a significant level of revenues and profitability. There can be no assurance we will obtain this additional funding. Such funding may be obtained through the sale of drilling participations, joint ventures, equity securities or by incurring additional indebtedness. Without such funding, our revenues will continue to be limited and it can be expected that our operations will not be profitable. In addition, any additional equity funding that we obtain may result in material dilution to the current holders of our common stock.

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Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

     With the exception of historical matters, the matters we discussed below and elsewhere in this Report are “forward-looking statements” as defined under the Securities Exchange Act of 1934, as amended that involve risks and uncertainties. The forward-looking statements appear in various places including under the headings Item 1. Financial Statements and Item 2. Management’s Discussion and Analysis or Plan of Operation. These risks and uncertainties relate to

our ability to raise capital and fund our oil and gas well drilling and development plans,
our ability to fund the repayment of our current liabilities, and
our ability to negotiate and enter into any agreement relating to a merger or sale of all or substantially all our assets.

     These risks and uncertainties also relate to our ability to attain and maintain profitability and cash flow and continue as a going concern, our ability to increase our reserves of oil and gas through successful drilling activities and acquisitions, our ability to enhance and maintain production from existing wells and successfully develop additional producing wells, our access to debt and equity capital and the availability of joint venture development arrangements, our ability to remain in compliance with the terms of any agreements pursuant to which we borrow money and to repay the principal and interest when due, our estimates as to our needs for additional capital and the times at which additional capital will be required, our expectations as to our sources for this capital and funds, our ability to successfully implement our business strategy, our ability to maintain compliance with covenants of our loan documents and other agreements pursuant to which we issue securities or borrow funds and to obtain waivers and amendments when and as required, our ability to borrow funds or maintain levels of borrowing availability under our borrowing arrangements, our ability to meet our intended capital expenditures, our statements and estimates about quantities of production of oil and gas as it implies continuing production rates at those levels, proved reserves or borrowing availability based on proved reserves and our future net cash flows and their present value.

     Readers are cautioned that the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2009 and other reports filed with the Commission, as well as those described elsewhere in this Report, in some cases have affected, and in the future could affect, our business plans and actual results of operations and could cause our actual consolidated results during 2010 and beyond, to differ materially from those expressed in any forward-looking statements made by or on our behalf.

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     Our common shares have no trading market in the United States, and there can be no assurance as to the liquidity of any markets that may develop for our common shares, the ability of the holders of common shares to sell their common shares in the United States or the price at which holders would be able to sell their common shares. Any future trading prices of the common shares will depend on many factors, including, among others, our operating results and the market for similar securities.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     As of the end of the period covered by this report on Form 10-Q, our Chief Executive Officer and our Chief Financial Officer performed an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

      Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of the end of the period covered by this report on Form 10-Q that our disclosure controls and procedures are not effective to provide reasonable assurance that: (i) information required to be disclosed by us in reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure by us; and (ii) information required to be disclosed by us in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. In our evaluation of disclosure controls and procedures as of December 31, 2009, we concluded there were material weaknesses in our internal controls over financial reporting which we viewed as an integral part of our disclosure controls and procedures. The material weaknesses as noted below have not been remediated as of June 30, 2010.

Changes in Internal Control Over Financial Reporting

     As of December 31, 2009 we identified material weaknesses in our internal controls over financial reporting. The material weaknesses relate to:

  1. Deficiencies in segregation of duties due to:

  a.

the CEO and CFO’s active involvement in the preparation of the financial statements resulting in an inability to provide an independent review and quality assurance function; and

     
  b.

a limited number of qualified accounting personnel resulting in management and accounting personnel having wide-spread access to create and post accounting entries into the accounting system and an inability to independently review and approve accounting entries.

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  2.

The failure to identify during the year end financial statement closing process all the journal entries required for certain complex and non-routine transactions. These entries were identified by our independent registered public accounting firm.

     In order to mitigate these material weaknesses to the fullest extent possible, all financial reports are reviewed by the CEO and CFO. 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. As soon as our finances allow, we will hire sufficient staff and implement appropriate procedures to address the segregation of duties and improve the closing process.

     There were no significant changes in our internal control over financial reporting identified in connection with the evaluation that occurred during the last fiscal quarter that have materially affected or that are reasonably likely to materially affect our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 6. Exhibits

31.1 Certification of President and Chief Executive Officer Pursuant to Rule 13a-14(a)(1)
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a- 14(a)(1)
32.1 Certification of President and Chief Executive Officer Pursuant to Section 1350 (furnished, not filed)(1)
32.2 Certification of Chief Financial Officer Pursuant to Section 1350 (furnished, not filed)(1)

____________________________
(1) Filed or furnished herewith.

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SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934 the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

  AMERICAN NATURAL ENERGY CORPORATION
  (Registrant)
   
   
Date: August 13, 2010 /S/ Michael K. Paulk
  Michael K. Paulk
  President and Chief Executive Officer
   
   
  /S/ Steven P. Ensz
  Steven P. Ensz
  Principal Financial and Accounting Officer

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