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EX-32.1 - EXHIBIT 32.1 - AMERICAN EAGLE ENERGY Corpv232667_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - AMERICAN EAGLE ENERGY Corpv232667_ex31-1.htm
EX-10.39 - EXHIBIT 10.39 - AMERICAN EAGLE ENERGY Corpv232667_ex10-39.htm
EX-10.40 - EXHIBIT 10.40 - AMERICAN EAGLE ENERGY Corpv232667_ex10-40.htm
EX-10.40A - EXHIBIT 10.40A - AMERICAN EAGLE ENERGY Corpv232667_ex10-40a.htm
EX-10.40B - EXHIBIT 10.40B - AMERICAN EAGLE ENERGY Corpv232667_ex10-40b.htm

  UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

FORM 10-Q

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

For the quarterly period ended June 30, 2011

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                to                               

Commission File Number:  000-50906
 

ETERNAL ENERGY CORP.
(Exact name of registrant as specified in its charter)

Nevada
 
20-0237026
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

2549 West Main Street, Suite 202, Littleton, Colorado
 
80120
(Address of principal executive offices)
 
(Zip Code)

(303) 798-5235
(Registrant’s telephone number, including area code)

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

(Check one):

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
41,005,822 shares of common stock issued and outstanding at August 15, 2011.

 
 

 

ETERNAL ENERGY CORP.
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 2011

INDEX

A Note About Forward Looking Statements
1
   
PART I - FINANCIAL INFORMATION
 
   
Item 1 – Condensed Consolidated Financial Statements (Unaudited)
2
   
Condensed Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010
F-2
   
Condensed Consolidated Statements of Operations For Each of the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010 (Unaudited)
F-3
   
Condensed Consolidated Statements of Comprehensive Income For Each of the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010 (Unaudited)
F-4
   
Condensed Consolidated Statements of Cash Flows For Each of the Six-Month Periods Ended June 30, 2011 and 2010 (Unaudited)
F-5
   
Notes to the Condensed Consolidated Financial Statements (Unaudited)
F-7
   
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
3
   
Item 4 - Controls and Procedures
10
   
PART II - OTHER INFORMATION
 
   
Item 6 – Exhibits
11
   
Signatures
13

 
 

 
  
A Note About Forward-Looking Statements

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

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

 
1

 
 
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.


Eternal Energy Corp.
 
Condensed Consolidated Financial Statements
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods ended June 30, 2011 and 2010

 
2

 
 
Eternal Energy Corp.
 
Index to the Condensed Consolidated Financial Statements
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010

Condensed Consolidated Financial Statements of Eternal Energy Corp.:
 
   
Condensed Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010
F-2
   
Condensed Consolidated Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010 (Unaudited)
F-3
   
Condensed Consolidated Statements of Comprehensive Income for the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010 (Unaudited)
F-4
   
Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2011 and 2010 (Unaudited)
F-5
   
Notes to the Condensed Consolidated Financial Statements (Unaudited)
F-7

 
F-1

 
 
Eternal Energy Corp.
 
Condensed Consolidated Balance Sheets
 
As of June 30, 2011 and December 31, 2010
 
   
June 30,
       
   
2011
   
December 31,
 
   
(Unaudited)
   
2010
 
Current assets:
           
Cash
  $ 5,423,192     $ 2,400,362  
Trade receivables
    614,021       248,461  
Receivable from American Eagle Energy Inc.
    667,333       279,376  
Prepaid expenses
    6,034       30,106  
                 
Total current assets
    6,710,580       2,958,305  
                 
Equipment and leasehold improvements, net of accumulated depreciation and amortization of $153,547 and $149,142, respectively
    16,598       20,693  
Oil and gas properties – subject to amortization, net of accumulated depletion of $129,062 and $104,350, respectively
    1,835,564       340,321  
Oil and gas properties – not subject to amortization
    460,207       590,368  
Marketable securities
    1,161,199       1,117,716  
Marketable securities - related party
    127,426       197,453  
                 
Deposits
    5,345       5,345  
                 
Total assets
  $ 10,316,919     $ 5,230,201  
                 
Current liabilities:
               
Accounts payable and accrued liabilities
  $ 2,404,230     $ 430,699  
Due to Passport Energy Ltd.
    788,748       -  
                 
Total current liabilities
    3,192,978       430,699  
                 
Long-term asset retirement obligation, net of discount of $44,090 and $23,647, respectively
    16,473       13,853  
Total liabilities
    3,209,451       444,552  
                 
Commitments and contingencies (Note 8)
    -       -  
                 
Stockholders’ equity:
               
Common stock, $.001 par value, 875,000,000 shares authorized, 41,005,822 shares outstanding
    41,006       41,006  
Additional paid-in capital
    9,199,305       9,199,305  
Accumulated unrealized gains on marketable securities
    388,919       415,463  
Accumulated deficit
    (2,521,762 )     (4,870,125 )
                 
Total stockholders’ equity
    7.107.468       4,785,649  
                 
Total liabilities and stockholders’ equity
  $ 10,316,919     $ 5,230,201  

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

 
F-2

 
 
Eternal Energy Corp.
 
Condensed Consolidated Statements of Operations (Unaudited) 


   
For the Three-Month Period
   
For the Six-Month Period
 
   
Ended June 30,
   
Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Oil and gas revenues
  $ 13,702     $ 2,999     $ 52,805     $ 74,485  
Gain on sale of oil and gas properties — subject to amortization, net of costs
    -       509,934       -       509,934  
Gain on sale of oil and gas properties — not subject to amortization, net of costs
    3,402,000       4,735,253       3,402,000       4,735,253  
                                 
Total revenue
    3,415,702       5,248,186       3,454,805       5,319,672  
                                 
Operating expenses:
                               
Oil and gas operating expenses
    67,508       -       115,691       -  
General and administrative
    205,653       218,150       344,906       452,402  
Professional fees
    232,425       84,021       649,154       238,426  
Depreciation, amortization and depletion expense
    13,558       11,801       29,117       28,060  
                                 
Total operating costs
    519,144       313,972       1,138,868       718,888  
                                 
Total operating income
    2,896,558       4,934,214       2,315,937       4,600,784  
                                 
Interest income
    1,662       2,677       3,030       4,372  
Dividend income
    19,476       -       34,532       -  
Accretion of discount on asset retirement obligation
    (358 )     -       (707 )     -  
                                 
Income before taxes
    2,917,338       4,936,891       2,352,792       4,605,156  
                                 
Provision for income taxes
    (4,429 )     (892,112 )     (4,429 )     (892,112 )
                                 
Net income
  $ 2,912,909     $ 4,044,779     $ 2,348,363     $ 3,713,044  
                                 
Net income per common share:
                               
Basic
  $ 0.07     $ 0.09     $ 0.06     $ 0.08  
Diluted
  $ 0.07     $ 0.09     $ 0.05     $ 0.08  
Weighted average number of shares outstanding -
                               
Basic
    41,005,822       43,532,612       41,005,822       44,043,152  
Diluted
    44,192,069       44,424,504       44,085,405       46,168,152  

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

 
F-3

 
 
Eternal Energy Corp.
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited) 


   
For the Three-Month Period
   
For the Six-Month Period
 
   
Ended June 30,
   
Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net income
  $ 2,912,909     $ 4,044,779     $ 2,348,363     $ 3,713,044  
                                 
Other comprehensive income (losses), before tax:
                               
Unrealized gains (losses) on securities
    (100,737 )     4,618       (26,544 )     4,618  
Total other comprehensive income (losses), before tax
    (100,737 )     4,618       (26,544 )     4,618  
                                 
Comprehensive income
  $ 2,812,172     $ 4,049,397     $ 2,321,819     $ 3,717,662  

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

 
F-4

 
 
Eternal Energy Corp.
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
For the Six-Month Periods Ended June 30, 2011 and 2010

   
2011
   
2010
 
Cash flows provided by (used for) operating activities:
           
Net income
  $ 2,348,363     $ 3,713,044  
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
               
Non-cash transactions:
               
Depreciation, depletion and amortization
    29,117       28,060  
Accretion of discount on asset retirement obligations
    707       -  
Gain on sale of oil and gas properties
    (3,402,000 )     (5,245,187 )
Changes in operating assets and liabilities:
               
Decrease in prepaid expense
    24,072       40,369  
Decrease in spud fees receivable
    -       20,000  
Decrease in other receivables
    182,352       77,366  
Increase in amounts due from American Eagle Energy Inc.
    (387,957 )     -  
Increase in accounts payable and accrued liabilities
    1,973,531       (25,226 )
Increase in drilling pre-payments collected
    788,748       -  
Net cash provided by (used for) operating activities
    1,556,933       (1,391,574 )
                 
Cash flows provided by (used for) investing activities:
               
Additions to equipment and leasehold improvements
    (1,010 )     (1,538 )
Proceeds from the sale of equipment
    700       -  
Additions to oil and gas properties
    (1,990,753 )     (35,682 )
Proceeds from the sale of oil and gas properties
    3,456,960       4,125,000  
Purchase of equity investments
    -       (24,733 )
Net cash provided by investing activities
    1,465,897       4,063,047  
                 
Cash flows provided by (used for) financing activities:
               
Repurchase and retirement of shares
    -       (111,535 )
Net cash used for investing activities
    -       (111,535 )
                 
Net increase in cash
    3,022,830       2,559,938  
Cash - beginning of period
    2,400,362       1,508,754  
                 
Cash - end of period
  $ 5,423,192     $ 4,068,692  

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

 
F-5

 
 
Eternal Energy Corp.
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
For the Six-Month Periods Ended June 30, 2011 and 2010

Supplemental Disclosure of Cash Flow Information

   
2011
   
2010
 
             
Cash paid during the period for:
           
Interest
  $ -     $ -  
Income taxes
  $ 4,429     $ 892,112  

Supplemental Disclosure of Non-Cash Investing and Financing Activities

   
2011
   
2010
 
Recording of asset retirement obligation, net of discount of $21,150
  $ 1,913     $ -  
Unrealized gain (loss) on marketable securities
  $ (26,544 )   $ 4,618  

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

 
F-6

 
 
Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
1.
Description of Business
 
Eternal Energy Corp. (the “Company”) was incorporated in the state of Nevada in March 2003.  The Company engages in the acquisition, exploration, development and producing of oil and gas properties.  At June 30, 2011, the Company had entered into participation agreements related to oil and gas exploration projects in the Pebble Beach and Spyglass Prospects, located in Divide County, North Dakota, and Sheridan County, Montana and the Hardy Property, located in southeastern Saskatchewan, Canada.  In addition, the Company owns certain overriding royalty interests in oil and gas leases located in San Juan County, Utah and San Miguel County, Colorado.
 
2.
Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned, Canadian subsidiary, EERG Energy ULC.  The subsidiary was created to house the Company’s Canadian oil and gas property holdings and to conduct business activities within Canada.  All material intercompany accounts, transactions, and profits have been eliminated.
 
These condensed consolidated financial statements are presented in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 8 of SEC Regulation S-X.  The principles for interim financial information do not require the inclusion of all the information and footnotes required by generally accepted accounting principles for complete financial statements.  Therefore, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  The condensed consolidated financial statements included herein are unaudited; however, in the opinion of management, they contain all normal recurring adjustments necessary for a fair statement of the condensed results for the interim periods.  Operating results for the three-month and six-month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.
 
Revenue Recognition
 
The Company records the sale of its interests in prospects when the terms of the transaction are final and the sales price is determinable.  Spud fee revenue is recognized when drilling commences.  Working interest, royalty and net profit interests are recognized as revenue when oil and gas is sold.
 
 
F-7

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

Concentration of Credit Risk
 
At June 30, 2011, the Company had $3,731,523 on deposit that exceeded the United States (FDIC) federally insurance limit of $250,000 per bank.
 
Foreign Currency Adjustments
 
The Company’s functional currency is the US Dollar.  All transactions are translated using historical exchange rates.  Gains and losses resulting from foreign currency transactions are also included in current results of operations.  The Company’s wholly-owned subsidiary, EERG Energy ULC, which holds title to the Company’s Canadian assets and operates the Hardy Property wells, routinely conducts transactions denominated in Canadian Dollars.  The Company recognized exchange losses totaling $21,637 and $28,584 for the three-month and six-month periods ended June 30, 2011.  There were no foreign currency adjustments for the three-month and six-month periods ended June 30, 2010.
 
Cash and Cash Equivalents
 
Cash equivalents consist of time deposits and liquid debt investments with original maturities of three months or less at the time of purchase.
 
Components of Other Comprehensive Income
 
Comprehensive income consists of net income and other gains and losses affecting stockholders’ equity that, under generally accepted accounting principles, are excluded from net income (loss).  For the Company, such items consist solely of unrealized gains (losses) on marketable securities.
 
Receivables
 
Receivables are stated at the amount the Company expects to collect.  The Company considers the following factors when evaluating the collectability of specific receivable balances: credit-worthiness of the debtor, past transaction history with the debtor, current economic industry trends, and changes in debtor payment terms.  If the financial condition of the Company’s debtors were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.
 
The Company maintains an estimated allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments.  Changes to the allowance for doubtful accounts made as a result of management’s determination regarding the ultimate collectability of such accounts are recognized as a charge to the Company’s earnings.  Specific receivable balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to receivable. 
 
 
F-8

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

At June 30, 2011, the Company has determined that all receivable balances are fully collectible and, accordingly, no allowance for doubtful accounts has been recorded.
 
Marketable Securities
 
The Company determines the appropriate classification of its investments in equity securities at the time of purchase and reevaluates such determinations at each balance sheet date.  Marketable equity securities not classified as held-to-maturity or as trading are classified as available-for-sale, and are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income and reported in stockholders’ equity.
 
The fair value of substantially all securities is determined by quoted market prices.  The estimated fair value of securities for which there are no quoted market prices is based on similar types of securities that are traded in the market.  Warrants to purchase common stock are calculated using the Black-Scholes Option Pricing Model.
 
Equipment and Leasehold Improvements
 
Equipment and leasehold improvements are recorded at cost.  Expenditures for major additions and improvements are capitalized and depreciated or amortized over the estimated useful lives of the related assets using the straight-line method for financial reporting purposes.  The Company uses other depreciation or amortization methods (generally accelerated) for tax purposes, where appropriate.  The estimated useful lives for significant property and equipment categories are as follows:
 
Equipment
 
3 years
Leasehold improvements
 
lesser of useful life or lease term

When equipment and improvements are retired or otherwise disposed of, the cost and the related accumulated depreciation are removed from the Company’s accounts and any resulting gain or loss is included in the results of operations for the respective period.
 
Expenditures for minor replacements, maintenance, and repairs are charged to expense as incurred.
 
 
F-9

 
 
Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
Oil and Gas Properties
 
The Company follows the full-cost method of accounting for its investments in oil and gas properties.  Under the full-cost method, all costs associated with the exploration of properties are capitalized into appropriate cost centers within the full-cost pool.  Internal costs that are capitalized are limited to those costs that can be directly identified with acquisition, exploration, and development activities undertaken and do not include any costs related to production, general corporate overhead, or similar activities.  Cost centers are established on a country-by-country basis.
 
Capitalized costs within the cost centers are amortized on the unit-of-production basis using proved oil and gas reserves.  The cost of investments in unproved properties and major development projects are excluded from capitalized costs to be amortized until it is determined whether or not proved reserves can be assigned to the properties. Until such a determination is made, the properties are assessed annually to ascertain whether impairment has occurred.  The costs of drilling exploratory dry holes are included in the amortization base immediately upon determination that the well is dry.   
 
As of the end of each reporting period, the capitalized costs of each cost center are subject to a ceiling test, in which the costs shall not exceed the cost center ceiling.  The cost center ceiling is equal to i) the present value of estimated future net revenues computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions; plus ii) the cost of properties not being amortized; plus iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less iv) income tax effects related to differences between the book and tax basis of the properties.  If unamortized costs capitalized within a cost center, less related deferred income taxes, exceed the cost center ceiling, the excess is charged to expense and separately disclosed during the period in which the excess occurs.
 
Proceeds received from disposals are credited against accumulated cost except when the sale represents a significant disposal of reserves, in which case a gain or loss is recognized.  The sum of net capitalized costs and estimated future development and abandonment costs for each cost center is depleted using the equivalent unit-of-production method, based on proved oil and gas reserves.  Excluded from amounts subject to depletion are costs associated with unevaluated properties or properties for which no proven reserves have been identified.
 
 
F-10

 
 
Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
Asset Retirement Obligations
 
The Company records asset retirement obligations in the period in which the obligation is incurred and when a reasonable estimate of fair value can be determined.  The initial recording of an asset retirement obligation results in an increase in the carrying amount of the related long-lived asset and the creation of a liability.  The portion of the asset retirement obligation expected to be realized during the next 12-month period is classified as a current liability, while the portion of the asset retirement obligation expected to be realized during subsequent periods is discounted and recorded at its net present value.  The discount factor used to determine the net present value of the Company’s asset retirement obligation is 10%, which is consistent with the discount factor that is applied to oil and gas reserves when performing the periodic ceiling tests.
 
Changes in the noncurrent portion of the asset retirement obligation due to the passage of time are measured by applying an interest method of allocation.  The amount of change is recognized as an increase in the liability and an accretion expense in the statement of operations.  Changes in either the current or noncurrent portion of the Company’s asset retirement obligation resulting from revisions to the timing or the amount of the original estimate of undiscounted cash flows are recognized as an increase or a decrease to the carrying amount of the liability and the related long-lived asset.
 
The Company recognized expense totaling $358 and $707 during the three-month and six-month periods ended June 30, 2011, respectively, related to the accretion of the discount associated with its asset retirement obligations.  There were no asset retirement obligations present during the same periods in 2010.
 
Stock Repurchase Program
 
The Company implemented a stock repurchase program during 2010, for which it utilized the cost method to account for shares reacquired under the program.  Under the cost method, common stock was reduced by the par value of the shares repurchased.  The difference between the total consideration given to reacquire the shares, including any broker commissions or other transaction costs, was recorded as a reduction of additional paid in capital.  The Company immediately retired all repurchased shares.  The Company ceased its open market purchases of common stock effective November 1, 2010.
 
Fair Value of Financial Instruments
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  Hierarchy Levels 1, 2 or 3 are terms for the priority of inputs to valuation techniques used to measure fair value.  Hierarchy Level 1 inputs are quoted prices in active markets for identical assets or liabilities.  Hierarchy Level 2 inputs are inputs other than quoted prices included within Level 1 that are directly or indirectly observable for the asset or liability.  Hierarchy Level 3 inputs are inputs that are not observable in the market.
 
 
F-11

 
 
Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
The fair value measurements of the Company’s financial instruments at June 30, 2011 and December 31, 2010 were as follows:
 
 
 
Level 1
   
Level 2
   
Level 3
   
Total
 
June 30, 2011
                               
Cash & equivalents
  $ 5,423,191     $ -     $ -     $ 5,423,191  
Marketable securities - related party
    -       127,426       -       127,426  
Marketable securities
    1,161,199       -       -       1,161,199  
    $ 6,584,390     $ 127,426       -     $ 6,711,816  
December 31, 2010
                               
Cash & equivalents
  $ 2,400,362     $ -     $ -     $ 2,400,362  
Marketable securities - related party
    -       197,453       -       197,453  
Marketable securities
    1,117,716       -       -       1,117,716  
    $ 3,518,078     $ 197,453       -     $ 3,715,531  
 
The Company uses level 2 inputs to determine the fair value of its marketable securities - related party, which consists of common stock and warrants in an entity which is traded on the Canadian National Stock Exchange.  The warrants are valued using the Black-Scholes Option Pricing Model which includes a calculation of historical volatility of the stock.
 
Basic and Diluted Loss Per Share
 
Basic earnings (loss) per common share is computed by dividing net earnings (loss) available to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted earnings (loss) per common share is computed in the same way as basic earnings (loss) per common share except that the denominator is increased to include the number of additional common shares that would be outstanding if all potential common shares had been issued and if the additional common shares were dilutive.  See Note 9 for the calculation of basic and diluted weighted average common shares outstanding for the three-month and six-month periods ended June 30, 2011 and 2010.
 
Income Taxes
 
The Company follows the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax benefits and consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax balances. Deferred income tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to the taxable income in the years in which those differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. U.S. deferred tax liabilities are not recognized on profits that are expected to be permanently reinvested in Canada and, thus, are not considered to be available for distribution to the parent company. Net operating loss carry forwards and other deferred tax assets are reviewed annually for recoverability and, if necessary, are recorded net of a valuation allowance.
 
 
F-12

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

Use of Estimates and Assumptions
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and disclosure of contingent obligations in the financial statements and accompanying notes.  The Company’s most significant assumptions are the estimates used in the determination of the deferred income tax asset valuation allowance, the valuation of oil and gas reserves to which the Company owns rights, estimates related to the Company’s asset retirement obligations and the valuation of the warrants held by the Company as investments.  The estimation process requires assumptions to be made about future events and conditions, and as such, is inherently subjective and uncertain.  Actual results could differ materially from these estimates.
 
New Accounting Pronouncements
 
In December 2010, the FASB issued Accounting Standards Update 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations.  The objective of this Update is to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations.
 
The amendments in this Update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.  The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.
 
The amendments affect any public entity as defined by Topic 805 that enters into business combinations that are material on an individual or aggregate basis.  The Company has adopted FASB 2010-29 and incorporated the required pro forma disclosures in these financial statements.
 
 
F-13

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

In May 2011, the FASB issued Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.  Many of the amendments in this update change the wording used in the existing guidance to better align U.S. generally accepted accounting principles with International Financial Reporting Standards and to clarify the FASB’s intent on various aspects of the fair value guidance.  This update also requires increased disclosure of quantitative information about unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy.  This update is effective for financial periods beginning after December 15, 2011 and should be applied retrospectively.  Other than requiring additional disclosures, the adoption of this new guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
 
In June 2011, the FASB issued Accounting Standards Update 2011-05, Comprehensive Income (Topic 220).  This new guidance requires the components of net income and other comprehensive income to either be presented in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements.  This new guidance eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity.  While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance.  The Company has adopted the new guidance in its financial statements as of and for the three-month and six-month periods ended June 30, 2011.
 
3.
Marketable Securities
 
Available-for-sale marketable securities at June 30, 2011 and December 31, 2010 consist of the following:
 
         
Gains in
   
Losses in
 
         
Accumulated
   
Accumulated
 
   
Estimated
   
Other
   
Other
 
   
Fair
   
Comprehensive
   
Comprehensive
 
   
Value
   
Income
   
Income
 
June 30, 2011
                 
Noncurrent assets:
                 
Common stock
  $ 1,161,199     $ 286,226     $ -  
Common stock and warrants - related party
    127,426       102,693       -  
                         
Total available-for-sale marketable securities
  $ 1,288,625     $ 388,919     $ -  
                         
December 31, 2010:
                       
Noncurrent assets:
                       
Common stock
  $ 1,117,716     $ 242,743     $ -  
Common stock and warrants - related party
    197,453       172,720       -  
                         
Total available-for-sale marketable securities
  $ 1,315,169     $ 415,463     $ -  

 
F-14

 
 
Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
The fair value of substantially all securities is determined by quoted market prices.  The estimated fair value of securities for which there are no quoted market prices is based on similar types of securities that are traded in the market.  Warrants to purchase common stock were calculated using the Black-Scholes Option Pricing Model, with the following assumptions;
 
Risk-free interest rate
    0.23 %
Expected volatility of common stock
    111 %
Dividend yield
  $ 0.00  
Expected life of warrants
 
0.92 years
 
 
A marketability discount was applied to the related party shares and warrants.  There were no sales of marketable securities during the three-month or six-month periods ended June 30, 2011 and 2010.
 
4. 
Sales of Royalty and Property Interests
 
Effective April 1, 2010 the Company sold its gross overriding royalty interest in approximately 264,000 net acres within an area of mutual interest located in southeastern Saskatchewan to Ryland Oil Corporation (“Ryland”).  In addition to cash consideration received of $2.9 million, the Company received 2,145,883 shares of Ryland’s common stock, which were valued at approximately $874,973 as of the date of sale, and an assignment of Ryland’s 100% working interest in approximately 4,480 net acres located in Saskatchewan, and related equipment (the “Hardy Property”).  At the time of the sale, the Hardy Property had an estimated fair market value of $238,681.
 
Also effective April 1, 2010, to Company entered into a Purchase and Sale Agreement with Ryland’s wholly-owned subsidiary, Rover Resources Inc. (“Rover”), in which the Company agreed to sell its ten percent working interest in approximately 700 net acres located in North Dakota to Rover for $1 million cash.  The acreage sold was part of the Company’s Pebble Beach Prospect, which was included in the US cost center of the Company’s full-cost pool that is not subject to amortization.
 
 
F-15

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

In June 2010, the Company sold its 75% working interest in the West Ranch Field for cash consideration totaling $262,500 and the assumption, by the purchaser, of all plugging, abandonment and environmental reclamation liabilities.  As of June 30, 2011, cash proceeds from the sale totaling $37,500 are still outstanding.
 
On May 27, 2011, the Company sold a half of its 50% working interest in the Spyglass Prospect to a third party for cash consideration, net of finder’s fees, totaling $3,777,793.  As of June 30, 2011, $320,833 of the net proceeds was still receivable.  The receivable was subsequently collected in August 2011.  After assigning a portion of the sales proceeds to the full cost pool, not subject to amortization, based on relative fair market values of the remaining prospects, the Company recognized a gain on the sale of $3,402,000.
 
Also on May 27, 2011, the Company sold half of its 10% working interest in certain acreage included in the Pebble Beach Prospect to the same third-party for cash consideration, net of finder’s fees, totaling $227,079.  Because the sale of the Pebble Beach working interest does not represent a significant portion of the full cost pool that is subject to amortization, the net proceeds to be received were recorded as a reduction of the amortizable full cost pool.  The net proceeds from the sale were collected in August 2011.
 
5.
Equipment and Leasehold Improvements
 
The following is a summary of equipment and improvements, at cost, as of June 30, 2011 and December 31, 2010:
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
Office equipment
  $ 122,636     $ 122,325  
Leasehold improvements
    47,509       47,510  
                 
Total equipment and improvements
    170,145       169,835  
Less: accumulated depreciation and amortization
    (153,547 )     (149,142 )
                 
Equipment and improvements, net
    16,598       20,693  
 
Depreciation and amortization expense for the three-month and six-month periods ended June 30, 2011 and 2010 was $1,879, $11,801, $4,405, and $28,060, respectively.
 
During 2008 and 2009, the Company purchased an aggregate of $57,000 of down-hole tools.  Because the Company no longer possesses exclusive rights to utilize the down-hole gas and water separation technology, the Company has no plans to utilize the tools in the foreseeable future.  In September 2010, the Company’s management ceased actively marketing the tools to other exploration and development companies.  Accordingly, the down-hole tools, which were classified as assets held for sale at December 31, 2009, are considered to be fully impaired as of December 31, 2010 and June 30, 2011.
 
 
F-16

 

Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
6.
Oil and Gas Properties
 
As of June 30, 2011 and December 31, 2010, net costs included in the Company’s full cost pool cost centers are as follows:
 
   
June 30, 2011
   
December 31, 2010
 
   
Amortizable
   
Non-Amortizable
   
Amortizable
   
Non-Amortizable
 
United States
  $ 976,867     $ 460,207     $ -     $ 590,368  
Canada
    858,697       -       340,321       -  
Total
  $ 1,835,564     $ 460,207     $ 340,321     $ 590,368  
 
Producing Property
 
As discussed in Note 4, in April 2010, the Company acquired a 100% working interest in approximately 4,480 net acres located Saskatchewan, Canada in connection with the sale of certain gross overriding royalty interest to Ryland.  The Hardy Property contained one existing well with equipment valued at approximately $238,681 at the time of the purchase.  Shortly after the acquisition, the Company sold 50% of its working interest in the Hardy Property to American Eagle Energy Inc. (“AEE”) and received a 50% working interest in acreage located in Divide County, North Dakota (the “Spyglass Prospect”).  As a result, the Company reclassified 50% of the Company’s carrying value of the Hardy Property at the time of the sale to the newly acquired Spyglass Prospect.  As of June 30, 2011, the Company owns a 50% working interest in approximately 4,680 gross acres (4,280 net acres) held by 6 leases, each of which is scheduled to expire on April 1, 2014.
 
In August 2010, the Company, along with AEE, its working interest partner, performed a workover and recompletion of the Hardy 7-9 well at an aggregate cost of $475,274.  The Company’s portion of the recompletion cost was $237,637.  The Hardy 7-9 well was returned to production in September 2010.  The well was taken off of production in January 2011 due to mechanical and weather related issues and was returned to production in March 2011.  Inclement weather caused the well to be taken off production in May 2011.  The well was returned to production in July 2011.
 
On May 2, 2011, the Company entered into a participation agreement with Passport Energy Ltd (“Passport”), pursuant to which Passport agreed to participate in and fund 38.5% of the drilling costs of up to two new wells within the Hardy Property in exchange for a 25% working interest in the wells.  Eternal Energy and AEE will each fund 30.75% of the drilling cost of the two new wells and retain a 37.5% working interest in the new wells.

 
F-17

 

Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
In May 2011, the Company, along with its working interest partners, AEE and Passport,  successfully drilled and completed an offset well located within the Hardy Property (the “Hardy 4-16” well) at an approximate cost of $1,538,125.  The Company’s share of this cost is $472,973.  The well was fracture stimulated in July 2011.  The Company is currently evaluating the results of the fracture stimulation.
 
The net capitalized cost of the Hardy Property as of June 30, 2011 and December 31, 2010 is summarized below:
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
Acquisition costs
  $ 133,774     $ 133,774  
Development costs
    853,985       310,897  
      987,759       444,671  
Cumulative depletion
    (129,062 )     (104,350 )
Impairment
    -       -  
Net capitalized cost
  $ 858,697     $ 340,321  
 
Using the units-of-production method to calculate depletion expense associated with its producing properties, the Company recognized depletion expense totaling $11,679 and $24,712 for the three-month and six-month periods ended June 30, 2011.  The Company did not recognize any depletion expense during the comparable periods in 2010 because it had no producing wells at the time.
 
Exploratory Prospects
 
The Company has entered into participation agreements in a number of exploratory oil and gas properties.  Unproven exploratory prospects are excluded from their respective amortizable cost pools.  Each prospect’s costs is transferred into the amortization base on an ongoing (well-by-well or property-by-property) basis as the prospect is evaluated and proved reserves are established or impairment is determined.  Four of the properties have been abandoned as of June 30, 2011.  The Company has a working interest and/or overriding royalty interest in the wells on the remaining prospects, if they are successful.  The Company paid certain amounts upon execution of the agreements and is obligated to share in the drilling costs of the exploratory wells.  In addition, the Company has agreed to issue shares of its common stock based upon the proven reserves of certain properties.  The capitalized costs of the exploratory prospects are not subject to amortization because no proven reserves have been assigned to the prospects.  The nature of the capitalized costs of the unproven prospects is as follows:

 
F-18

 
 
Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
               
Aggregate
       
   
June 30,
         
Through
       
   
2011
   
2010
   
2009
   
Total
 
United States
                       
Acquisition costs
  $ 444,779     $ 386,687     $ 1,976,054     $ 2,807,520  
Exploration costs
    777,721       69,285       136,918       983,924  
Development costs
    -       -       -       -  
Reclassifications to amortizable pool
    (976,867 )     -       -       (976,867 )
Impairments and sales
    (375,793 )     (277,355 )     (1,701,222 )     (2,354,370 )
United States total
  $ (130,160 )   $ 178,617     $ 411,750     $ 460,207  
                                 
Canada
                               
Acquisition costs
  $ -     $ -     $ 1,443     $ 1,443  
Exploration costs
    -       -       -       -  
Development costs
    -       -       -       -  
Impairments and sales
    -       (1,046 )     (397 )     (1,443 )
Canada total
  $ -     $ 1,046     $ 1,046     $ -  
                                 
The North Sea
                               
Acquisition costs
  $ -     $ -     $ 197,988     $ 197,988  
Exploration costs
    -       -       1,512,205       1,512,205  
Development costs
    -       -       -       -  
Impairments
    -       -       (1,546,683 )     (1,546,683 )
Disposals
    -       -       (163,510 )     (163,510 )
North Sea total
  $ -     $ -     $ -     $ -  
                                 
Total capitalized costs, not subject to amortization
    $ 460,207  
 
United States
 
Pebble Beach Prospect
 
In 2006, the Company entered into a series of agreements that resulted in the acquisition of a ten percent working interest in a joint venture with Rover.  The joint venture was formed to explore and develop certain prospects principally located in Divide County, North Dakota.
 
Exploratory drilling within the Pebble Beach Prospect commenced during the fourth quarter of 2010.  As of June 30, 2011, the Company had elected to participate in the drilling of 17 exploratory wells within the Pebble Beach Prospect.  The Company’s interest in these wells ranges from 0.04% to 4.69%.
 
A summary of the Company’s working interest in the Pebble Beach exploratory wells and the status of each well as of June 30, 2011 is as follows:

 
F-19

 
 
Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
Well Name
 
Operator
 
Working
Interest
 
Current Status
Aarestad 4-34
 
North Plains Energy, LLC
 
0.63%
 
Producing
Aarestad 1-16
 
North Plains Energy, LLC
 
2.51%
 
Waiting to spud
Bagley 4-30
 
SM Energy Company
 
4.69%
 
Producing
Blazer 2-11
 
Samson Resources Company
 
0.94%
 
Waiting to be fractured
CPEC Lancaster 2-1
 
Crescent Point Energy
 
6.21%
 
Drilling
CPEC Ridgeway 25-36
 
Crescent Point Energy
 
1.88%
 
Waiting to spud
Denali 13-21
 
Samson Resources Company
 
0.04%
 
Waiting to be fractured
Gerhardsen 1-10
 
Continental Resources Inc.
 
1.91%
 
Producing
Legaard 4-25
 
SM Energy Company
 
5.23%
 
Drilling
Mustang 7-6
 
Samson Resources Company
 
0.31%
 
Waiting to be fractured
Nielsen 1-12
 
Continental Resources Inc.
 
0.38%
 
Completed.  Shut in.
Reistad 1-1
 
Murex Petroleum Corporation
 
3.25%
 
Waiting to be completed
Riede 4-14
 
SM Energy Company
 
0.33%
 
Waiting to be fractured
Torgeson 1-15
 
SM Energy Company
 
2.81%
 
Waiting to be fractured
Wolter 1-28
 
SM Energy Company
 
1.30%
 
Producing
Wolter 13-9
 
SM Energy Company
 
7.03%
 
Drilling
Yukon 12-1
  
Samson Resources Company
  
1.25%
  
Waiting to be fractured
 
Exploratory costs associated with these wells totaled $847,005 as of June 30, 2011
 
Proven reserves were identified within the Pebble Beach Prospect during 2011 as a result of the successful drilling of the Aarestad 4-34 and Gerhardsen 1-10 wells.  Accordingly, the Company transferred the cumulative costs associated with the Pebble Beach Prospect from the non-amortizable full cost pool to the full cost pool that is subject to amortization.
 
As noted in Note 4, the Company sold its working interest in approximately 700 net acres located within the Pebble Beach prospect to Rover in April 2010 for cash consideration totaling $1 million.  Because the sale represented a significant reduction of the full cost pool that is not subject to amortization, the Company reallocated the costs of the pool among the properties included within the pool based on relative fair market value at the time of the sale.  The Company recognized a $509,934 gain on the sale of the Pebble Beach acreage during the three-month and six-month periods ended June 30, 2010.

 
F-20

 

Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
In May 2011, the Company sold a portion of its working interest in the Pebble Beach Acreage for net cash consideration totaling $227,079.  The net cash consideration was recorded as a receivable as of June 30, 2011 and collected in August 2011.  Because the sale did not represent the disposal of a significant portion of non-amortizable full cost pool at the time of the sale, the net proceeds received were recorded as a reduction of the full cost pool, not subject to amortization.
 
As of June 30, 2011, the Company owns a 10% working interest in approximately 144,293 gross acres (25,066 net acres) that is held by approximately 783 leases, with expiration dates ranging from July 2011 to October 2013, ratably.
 
The Pebble Beach Prospect is evaluated for impairment during each reporting period.  There were no impairments evident at June 30, 2011.
 
Spyglass Prospect
 
In June 2010, the Company sold half of its 100% working interest in the Hardy Property to AEE in exchange for a 50% working interest in approximately 6,239 net acres located within Divide County, North Dakota (the “Spyglass Prospect”).  The Company reclassified 50% of the then carrying value of its investment in the Hardy Prospect ($126,029) to the Spyglass Prospect at the time of the sale.  Between June 30, 2010 and May 27, 2011, the Company acquired a 50% working interest in an additional 2,486 net acres at an aggregate cost of $625,557.
 
On May 27, 2011, the Company and AEE each sold a 25% working interest in the Spyglass Prospect to a third party for cash consideration, net of finder’s fees, totaling $3,777,793, of which, $320,833 was outstanding as of June 30, 2011.  The remaining amount was collected in August 2011.
 
Because no proven reserves have been identified yet, the Spyglass Prospect has been assigned to the portion of the full-cost pool that is not subject to amortization.  Management is currently in the process of evaluating the results of nearby wells drilled by other companies in order to develop its exploration strategy relative to the Spyglass Prospect.  The Spyglass Prospect is evaluated for impairment during each reporting period.  There were no impairments evident at June 30, 2011.
 
As of June 30, 2011, the Company owns a 25% working interest in approximately 68,962 gross acres (8,948 net acres) which is held by approximately 783 leases, with expiration dates ranging from February 2013 to August 2016, ratably.

 
F-21

 

Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
Steamroller Prospect
 
The Company owns various overriding royalty interests under approximately 20,172 net acres in Utah and Colorado, located within the Steamroller Prospect.  In addition, the Company is entitled to receive an overriding royalty interest on any additional leasehold interest acquired by its former working interest partners in an area of mutual interest (“AMI”) between the parties.  The AMI covers approximately 3,571,200 gross acres.
 
Canada
 
In June 2008, the Company acquired a 5% overriding royalty position in additional prospects located in Saskatchewan, Canada.  The Company fully impaired its investment in the Canada Prospect in June 2010 citing a lack of proven reserves and no definitive exploration plans relative to the Canadian Prospect.
 
The following table summarizes the costs of the Company’s aggregate exploratory activities for all unproven prospects for the six-month period ended June 30, 2011 and the year ended December 31, 2010:
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
                 
Balance at the beginning of the period
  $ 590,368     $ 412,797  
Additions to exploratory costs
    1,222,499       455,972  
Impairments / gain allocations
    (375,793 )     (278,401 )
Reclassifications to the amortizable pool
    (976,867 )     -  
                 
Balance at the end of the period
  $ 460,207     $ 590,368  
 
Well Summary
 
The following table summarizes the Company’s wells and drilling activity for the three-month periods ended June 30, 2011 and 2010:
 
   
June 30, 2011
   
June 30, 2010
 
Exploratory wells:
 
U.S.
   
Canada
   
U.S.
   
Canada
 
                         
Beginning of period
    1       -       -       -  
Purchased / acquired
    -       -       -       -  
Drilled
    1       -       -       -  
Abandoned
    -       -       -       -  
End of period
    2       -       -       -  
 
 
F-22

 
 
Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
   
June 30, 2011
   
June 30, 2010
 
Development wells:
 
U.S.
   
Canada
   
U.S.
   
Canada
 
                         
Beginning of period
    -       1       -       -  
Purchased / acquired
    -       -       -       1  
Drilled
    -       1       -       -  
Abandoned
    -       -       -       -  
End of period
    -       2       -       1  
 
The following table summarizes the Company’s wells and drilling activity for the six-month periods ended June 30, 2011 and 2010:
 
   
June 30, 2011
   
June 30, 2010
 
Exploratory wells:
 
U.S.
   
Canada
   
U.S.
   
Canada
 
                         
Beginning of period
    -       -       -       -  
Purchased / acquired
    -       -       -       -  
Drilled
    2       -       -       -  
Abandoned
    -       -       -       -  
End of period
    2       -       -       -  
 
   
June 30, 2011
   
June 30, 2010
 
Development wells:
 
U.S.
   
Canada
   
U.S.
   
Canada
 
                         
Beginning of period
    -       1       -       -  
Purchased / acquired
    -       -       -       1  
Drilled
    -       1       -       -  
Abandoned
    -       -       -       -  
End of period
    -       2       -       1  
 
The Company did not drill any dry exploratory or developmental wells during the six-month periods ended June 30, 2011 and 2010.
 
7.
Asset Retirement Obligations
 
As discussed in Note 4, the Company sold its interest in the West Ranch Property in June 2010.  Pursuant to the terms of the sale agreement, the purchaser assumed all future plugging, abandonment and environmental reclamation liabilities associated with the West Ranch wells.  Accordingly, the Company removed the asset retirement obligation associated with the West Ranch Property from its books and considered the extinguishment of this debt in calculating the gross gain realized on the sale.

 
F-23

 

Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
The Company has recorded estimated asset retirement obligations for the future plugging and abandonment of wells within the Hardy Property.  As of December 31, 2010, the discounted value of the Hardy 7-9 asset retirement obligation was $13,853.  In June 2011, the Company recorded an asset retirement obligation for the Hardy 4-16 well in the amount of $1,913, which is net of an original discount of $21,150.  As of June 30, 2011, the Company has recorded aggregate asset retirement obligations totaling $16,473, net of discounts totaling $44,090.  The Company recognized accretion expense of $358 and $707 for the three-month and six-month periods ended June 30, 2011 associated with the Hardy Property asset retirement obligations.  No such amortization was recorded during 2010.  The projected plugging date for the Hardy 7-9 and Hardy 4-16 wells are December 2020 and June 2036, respectively.
 
8.
Commitments and Contingencies
 
Drilling Obligations
 
As of June 30, 2011, the Company owned a 50% working interest in the Hardy Property.  Accordingly, the Company may elect to participate in the drilling of exploratory wells on the property.  As discussed in Note 6, the Company and its working interest partner, AEE, entered into a farm-out agreement with Passport related to the drilling of up to two new wells on the Hardy Property.  The first of these wells, the Hardy 4-16 well, was drilled and completed in May 2011.  The Company may be obligated to participate in the drilling of a second new well within the Hardy Property if such well is proposed by either of its working interest partners and if the Company elects to participate in such well.
 
In addition, the Company has the option to participate in the drilling of future exploratory wells related to its 10% working interest in the Pebble Beach prospect should any such wells be proposed by the other working interest owners.  As discussed in Note 6, the Company has elected to participate in the drilling of 17 wells to be located within the Pebble Beach Prospect.  As such, the Company’s is currently obligated to fund its working interest portion of the drilling and future operations costs of these wells.  The Company’s working interests in the Pebble Beach wells ranges from 0.04% to 4.69%.  Additional wells could be proposed in the future, at which time the Company may or may not elect to participate in such additional wells.
 
Employment Agreement
 
The Company’s President and Chief Executive Officer is employed under a two-year employment contract, which provides for annual compensation of $174,000.  The employment contract is scheduled to expire on October 31, 2011.

 
F-24

 

Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
Lease Obligation
 
The Company currently leases office space pursuant to the terms of a three-year lease agreement, which expires on December 31, 2011.  Future lease payments related to the Company’s office and equipment leases as of June 30, 2011 are as follows:
 
   
Amount
 
2011 (remainder of the year)
  $ 32,070  
2012
    -  
2013
    -  
2014
    -  
2015
    -  
         
Total
  $ 32,070  
 
Gross office rent expense for the three-month month periods ended June 30, 2011 and 2010 totaled $19,418 and $17,541, respectively.  Gross office rent expense for the six-month periods ended June 30, 2011 and 2010 totaled $36,960 and $38,837, respectively.
 
In July 2010, the Company began subleasing a portion of its office space to AEE.  The Company received sublease payments from AEE totaling $3,551 and $6,215 for the three-month and six-month periods ended June 30, 2011, respectively.  Sublease payments received are treated as a reduction of gross rent expense.
 
9.
Earnings Per Share
 
The following is a reconciliation of the number of shares used in the calculation of basic earnings per share and diluted earnings per share for the three-month and six-month periods ended June 30, 2011 and 2010:
 
   
For the Three-Month
   
For the Six-Month
 
   
Period Ended June 30,
   
Period Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net income
  $ 2,912,909     $ 4,044,779     $ 2,348,363     $ 3,713,044  
Weighted-average number of common shares outstanding
    41,005,822       43,532,612       41,005,822       44,043,152  
Incremental shares from the assumed exercise of dilutive stock options
    3,186,247       891,892       3,079,583       2,125,000  
Diluted common shares outstanding
    44,192,069       44,424,504       44,085,405       46,168,152  
Basic earnings per share
  $ 0.07     $ 0.09     $ 0.06     $ 0.08  
Diluted earnings per share
  $ 0.07     $ 0.09     $ 0.05     $ 0.08  
 
 
F-25

 

Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
10.
Equity Transactions
 
Stock Repurchases
 
In March 2010, the Company’s Board of Directors authorized implementation of a stock repurchase program, pursuant to which the Company was authorized to repurchase up to $500,000 of its then-outstanding common shares at prevailing market prices.  During the duration of the program, the Company repurchased and retired 4,570,000 shares of its previously issued and outstanding common stock at an aggregate cost of $328,547 (average repurchase price of $0.07 per share).  The Company discontinued the share repurchase program effective November 1, 2010.
 
Stock Options
 
During December 2010, 2,308,000 stock options were exercised by former members of the Company’s management.  The transactions were completed as net exercises, resulting in 1,025,822 shares of the Company’s stock being issued.
 
The Company did not grant any stock options during 2010 or during the six-month period ended June 30, 2011.  Accordingly, the Company did not recognize any stock-based compensation expense for the three-month and six-month periods ended June 30, 2011 or 2010.
 
A summary of stock option activity for the six-month period ended June 30, 2011 and the year ended December 31, 2010 is presented below:
 
               
Weighted
 
         
Weighted
   
Average
 
         
Average
   
Remaining
 
         
Exercise
   
Contract
 
   
Options
   
Price
   
Term
 
                   
Outstanding at December 31, 2009
    6,000,000     $ 0.05    
3.4 years
 
                       
Options granted
    -       -     -  
Options exercised
    (2,308,000 )     0.05     -  
Options expired
    -       -     -  
Options forfeited
    -       -     -  
                       
Outstanding at December 31, 2010
    3,692,000     $ 0.05    
2.4 years
 
                       
Options granted
    -       -     -  
Options exercised
    -       -     -  
Options expired
    -       -     -  
Options forfeited
    -       -     -  
                       
Outstanding at June 30, 2011
    3,692,000     $ 0.05    
2.0 years
 
Exercisable at June 30, 2011
    3,692,000     $ 0.05    
2.0 years
 

 
F-26

 

Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
The options outstanding as of June 30, 2011 and December 31, 2010 have an intrinsic value of $0.27 and $0.05 per share and an aggregate intrinsic value of $996,840 and $184,600, respectively.
 
Shares Reserved for Future Issuance
 
As of June 30, 2011 and December 31, 2010, the Company has reserved 3,692,000 shares for future issuance upon exercise of outstanding options.
 
11.
Related Party Transactions
 
In June 2010, the Company purchased 500,000 shares of common stock, with attached warrants, of Covenant Resources Ltd., an entity related by virtue of a common director.  The aggregate cost of stock and warrants was $24,733.  Each share of common stock purchased included a warrant that enables the Company to purchase an additional share of common stock at a price of $0.05 per share.  Covenant Resources changed its name to Passport in December 2010.  As of June 30, 2011 and December 31, 2010, the fair market value of the Company’s investment in Passport was $127,426 and $197,453, respectively.
 
13.
Proposed Merger
 
Merger Agreement and Pro Forma Financial Information
 
On April 8, 2011, the Company entered into a definitive agreement with AEE (the “Merger Agreement”) to merge the two companies.  Pursuant to the terms of the Merger Agreement, the Company formed a wholly-owned subsidiary which will be merged into AEE, with the Company emerging as the surviving entity.  The ratio of stockholdings between the two companies at the time of closing is expected to be 80% for AEE’s legacy stockholders and 20% for Eternal Energy stockholders (exclusive of outstanding options to purchase shares of the Company’s common stock and shares of AEE’s common stock).  The Company anticipates issuing approximately 164,023,288 shares of its common stock to acquire 100% of the outstanding common stock of AEE.  Despite the fact the American Eagle’s shareholders will hold shares of the combined company’s common stock that will represent approximately 80% of the then-outstanding shares and the stockholders of Eternal Energy will hold shares of the combined company’s common stock that will represent approximately 20% of the then-outstanding shares (in each case without taking into account any outstanding options to purchase shares of either company’s common stock), other factors present in the structure of the proposed business combination result in Eternal Energy being considered the accounting acquirer in the transaction.

 
F-27

 

Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
The estimated value of the stock consideration to be given by the Company is based on the estimated fair market values of the assets and liabilities being acquired.  The following table summarizes the amounts of assets to be acquired and liabilities to be assumed as of June 30, 2011:
 
Financial assets acquired
  $ 4,425,307  
Oil and gas properties, subject to amortization
    1,939,053  
Oil and gas properties, not subject to amortization
    8,836,945  
Financial liabilities assumed
    (2,100,045 )
Purchase price
  $ 13,101,260  
 
The amounts presented above are subject to change as additional information becomes available.  There have been no significant changes to the outcomes or assumptions used to develop the estimates above.
 
The financial assets acquired include cash and cash equivalents of approximately $3,157,630, trade and other receivables totaling $1,127,387, prepaid expenses totaling $12,864 and marketable securities of a related party totaling $127,426.
 
The financial liabilities assumed consist of trade payables totaling $1,376,239, accrued interest and other payables totaling $40,000, amounts due to Eternal Energy totaling $667,333 and long-term asset retirement obligations totaling $16,473.
 
The following pro forma information is not prepared in accordance with generally accepted accounting principles (“GAAP”) and should not be considered a substitute for the historical financial information prepared in accordance with GAAP, as presented in other portions of this document.
 
The following assumptions were used to prepare the supplemental pro forma financial information:
 
 
·
An effective date of January 1, 2010 was used to present what the combined entities’ financial position may have been as of June 30, 2011 and December 31, 2010 and what its results of operations may have been for the six-month period ended June 30, 2011.
 
 
·
No adjustments were made to reflect economies of scale or other potential cost savings that may have been achieved had the merger occurred on January 1, 2010.
 
 
·
No adjustments were made relative to alternative financing strategies that may have been implemented on a combined entity basis.
 
 
F-28

 

Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
 
·
The estimated fair market value of AEE’s oil and gas properties, subject to amortization, is based on the net present value of future cash flows from proven reserves as of December 31, 2010, as calculated by an independent, third-party engineering firm.
 
 
·
The estimated fair market values of AEE’s oil and gas properties, not subject to amortization, were determined by management based on management’s knowledge of prevailing leasing costs associated with acreage located in close proximity to AEE’s properties and/or recent acreage purchase transactions as of or near to June 30, 2011.
 
 
·
All purchase accounting adjustments and allocations were determined assuming that the business combination occurred on June 30, 2011.
 
 
·
As discussed in Note 5, the Company and AEE each sold half of their respective working interests in the Spyglass Prospect in May 2011.  This transaction was considered in determining the purchase accounting entries that were used to prepare the June 30, 2011 pro forma balance sheet.  The sale of the Spyglass working interests was not considered in determining the purchase accounting entries that were used to prepare the December 31, 2010 balance sheet as the sale had not yet occurred at that time.
 
 
F-29

 

Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
Pro Forma Condensed Combined Balance Sheets (Unaudited)
As of June 30, 2011
 
         
American
   
Pro
       
   
Eternal
   
Eagle
   
Forma
   
Pro
 
   
Energy
   
Energy
   
Adjustments
   
Forma
 
                         
Cash & equivalents
  $ 5,423,192     $ 3,157,630     $ 56,939 (f)   $ 8,637,761  
Trade receivables
    614,021       1,127,387       -       1,741,408  
Intercompany receivables
    667,333              
(667,333
)(a)     -  
Stock subscriptions receivable
    -               -          
Prepaid expenses
    6,034       12,864       -       18,898  
Total current assets
    6,710,580       4,297,881       (610,394 )     10,398,067  
                                 
Equipment and leasehold improvements, net of accumulated depreciation of $151,668
    16,598       -       -       16,598  
Oil and gas properties, subject to amortization, net of accumulated depletion of $271,141
    1,835,564       1,977,937       (75,310 )(d)     3,738,191  
Oil and gas properties, not subject to amortization
    460,207       3,337,761       5,499,184 (d)     9,297,152  
Marketable securities
    1,161,199       -       -       1,161,199  
Marketable securities - related party
    127,426       127,426       -       254,852  
Deposits
    5,345       -       -       5,345  
                                 
Total assets
  $ 10,316,919     $ 9,741,005     $ 4,813,480     $ 24,871,404  
                                 
Accounts payable and accrued liabilities
  $ 2,404,230     $ 1,402,239     $ (40,000 )(f)   $ 3,766,469  
Intercompany payables
    -       667,333       (667,333 )(a)     -  
Due to Passport Energy
    788,748       -               788,748  
Amounts due to related parties
            14,000        -       14,000  
Convertible debenture, net of debt discount of $496,601
    -       503,399       (503,399 )(c)     -  
Total current liabilities
    3,192,978       2,586,971       (1,210,732 )     4,569,217  
                                 
Long-term asset retirement obligation, net of discount of $88,180
    16,473       16,473       -       32,946  
                                 
Total liabilities
    3,209,451       2,603,444       (1,210,732 )     4,602,163  
                                 
Common stock
    41,006       43,374       120,649 (c,d)     205,029  
Additional paid in capital
    9,199,305       7,224,331       5,053,995 (c,d)     21,477,631  
Unrealized gains on marketable securities
    388,919       101,880       (101,880 )(d)     388,919  
Accumulated deficit
    (2,521,762 )     (232,024 )     951,448 (c,d)     (1,802,338 )
                                 
Total stockholders’ equity
    7,107,468       7,137,561       6,024,212       20,269,241  
                                 
Total stockholders’ equity and liabilities
  $ 10,316,919     $ 9,741,005     $ 4,813,480     $ 24,871,404  
 
 
F-30

 
 
Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
Pro Forma Condensed Combined Balance Sheets (Unaudited)
As of December 31, 2010
 
         
American
   
Pro
       
   
Eternal
   
Eagle
   
Forma
   
Pro
 
   
Energy
   
Energy
   
Adjustments
   
Forma
 
                         
Cash & equivalents
  $ 2,400,362     $ 79,768     $ 16,939 (f)   $ 2,497,069  
Trade receivables
    248,461       -       -       248,461  
Intercompany receivables
    279,376       -       (279,376 )(a)     -  
Stock subscriptions receivable
    -       2,666,667       833,333 (b)     3,500,000  
Prepaid expenses
    30,106       -       -       30,106  
Total current assets
    2,958,305       2,746,435       570,896       6,275,636  
                                 
Equipment and leasehold improvements, net of accumulated depreciation of $149,142
    20,693       -       -       20,693  
Oil and gas properties, subject to amortization, net of accumulated depletion of $298,767
    340,321       965,848       822,195 (d)     2,128,364  
Oil and gas properties, not subject to amortization
    590,368       2,820,301       7,430,664 (d)     10,841,333  
Marketable securities
    1,117,716       -       -       1,117,716  
Marketable securities of related party
    197,453       197,453       -       394,906  
Deposits
    5,345       -       -       5,345  
                                 
Total assets
  $ 5,230,201     $ 6,730,037     $ 8,823,755     $ 20,783,993  
                                 
Accounts payable and accrued liabilities
  $ 430,699     $ 758,032     $ (40,000 )(f)   $ 1,148,731  
Intercompany payables
    -       279,376       (279,376 )(a)     -  
Amounts due to related parties
    -       20,000       -       20,000  
Total current liabilities
    430,699       1,057,408       (319,376 )     1,168,731  
                                 
Convertible debenture, net of debt discount of $926,333
    -       73,667       (73,667 )(c)    
-
 
Long-term asset retirement obligation, net of discount of $47,294
    13,853       13,853       -       27,706  
                                 
Total liabilities
    444,552       1,144,928       (393,043 )     1,196,437  
                                 
Common stock
    41,006       37,540       126,483 (c,d)     205,029  
Additional paid in capital
    9,199,305       7,230,166       7,202,422 (c,d)     23,631,893  
Stock subscriptions receivable
    -       (833,333 )     833,333 (b)     -  
Unrealized gains on marketable securities
    415,463       172,818       (172,818 )(d)     415,463  
Accumulated deficit
    (4,870,125 )     (1,022,082 )     1,227,378 (c,d)     (4,664,829 )
                                 
Total stockholders’ equity
    4,785,649       5,585,109       9,216,798       19,587,556  
                                 
Total stockholders’ equity and liabilities
  $ 5,230,201     $ 6,730,037     $ 8,823,755     $ 20,783,993  

 
F-31

 
 
Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
Eternal Energy Corp.
Pro Forma Condensed Combined Statements of Operations (Unaudited)
For the Six-Month Period Ended June 30, 2011
 
         
American
   
Pro
       
   
Eternal
   
Eagle
   
Forma
   
Pro
 
   
Energy
   
Energy
   
Adjustments
   
Forma
 
                         
Oil and gas sales
  $ 52,805     $ 46,477     $ -     $ 99,282  
Gain on sale of oil and gas prospects
    3,402,000       2,085,627       -       5,487,627  
Total revenues
    3,454,805       2,132,104       -       5,586,909  
                                 
Oil and gas operating expenses
    115,691       117,676       -       233,367  
General and administrative expenses
    344,906       275,072       -       619,978  
Professional fees
    649,154       382,376       -       1,031,530  
Professional fees – related party
    -       68,000       -       68,000  
Depreciation, depletion and amortization
    29,117       28,482       -       57,599  
Total operating expenses
    1,138,868       871,606       -       2,010,474  
                                 
Operating loss
    2,315,937       1,260,498       -       3,576,435  
                                 
Interest income
    3,030       -       -       3,030  
Dividend income
    34,532       -       -       34,532  
Interest expense
    -       (40,000 )     40,000 (f)     -  
Accretion of discount on asset retirement obligation
    (707 )     (707 )     -       (1,414 )
Accretion of discount on convertible debenture
    -       (429,733 )     429,733 (c)     -  
                                 
Loss before taxes
    2,352,792       790,058       469,733       3,612,583  
                                 
Provision for income taxes
    (4,429 )     -       -       (4,429 )
                                 
Net income
  $ 2,348,363     $ 790,058     $ 469,733     $ 3,608,154  
                                 
Basic and diluted loss per share
                          $ 0.02  
                                 
Basic and diluted weighted average shares outstanding:
                            206,486,818  
 
 
F-32

 
 
Eternal Energy Corp.
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
As of June 30, 2011 and December 31, 2010 and
For the Three-Month and Six-Month Periods Ended June 30, 2011 and 2010
 
Description of pro forma adjustments:
 
 
(a)
Elimination of intercompany amounts owed to/from the Company and AEE.
 
 
(b)
Business combination adjustment to record $833,333 of stock subscriptions collected by AEE prior to the business combination.
 
 
(c)
Adjustment to record the conversion of the debenture as a condition precedent to the completion of the business combination, which results in a $1,000,000 increase to equity, a reduction of accretion expense of $429,733 for the six-months ended June 30, 2011 and a reduction of accumulated deficit of $496,601 as of June 30, 2011 and $66,868 as of December 31, 2010.
 
 
(d)
Purchase accounting entry to record the issuance of 164,023,288 shares of the Company’s common stock, to eliminate the historical equity accounts of AEE, and to adjust the value of oil and gas properties acquired.
 
 
(e)
Adjustment to reflect depletion expense as if the business combination (and purchase accounting adjustments) had occurred on January 1, 2010.
 
 
(f)
Adjustment to reverse interest expense associated with the convertible debenture as if the conversion had occurred on January 1, 2010.
 
14.
Subsequent Events
 
In July 2011, the Company, along with its working interest partners, completed the fracture stimulation of the Hardy 4-16 well at an estimated aggregate cost of $725,000.  The Company’s share of these costs is approximately $223,000.  Management is currently evaluating the results of the fracture stimulation project.

 
F-33

 

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
THE FOLLOWING PRESENTATION OF OUR MANAGEMENT'S DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS REPORT.
 
A Note About Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on current management's expectations.  These statements may be identified by their use of words like “plans,” “expect,” “aim,” “believe,” “projects,” “anticipate,” “intend,” “estimate,” “will,” “should,” “could,” and other expressions that indicate future events and trends.  All statements that address expectations or projections about the future, including statements about our business strategy, expenditures, and financial results are forward-looking statements.  We believe that the expectations reflected in such forward-looking statements are accurate.  However, we cannot assure you that such expectations will occur.
 
Actual results could differ materially from those in the forward looking statements due to a number of uncertainties including, but not limited to, those discussed in this section.  Factors that could cause future results to differ from these expectations include general economic conditions, further changes in our business direction or strategy, competitive factors, oil and gas exploration uncertainties, and an inability to attract, develop, or retain technical, consulting, or managerial agents or independent contractors.  As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives requires the exercise of judgment.  To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and accordingly, no opinion is expressed on the achievability of those forward-looking statements.  No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements.  You should not unduly rely on these forward-looking statements, which speak only as of the date of this Quarterly Report, except as required by law; we are not obligated to release publicly any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.
 
Industry Outlook
 
The petroleum industry is highly competitive and subject to significant volatility due to numerous market forces.  Crude oil and natural gas prices are affected by market fundamentals such as weather, inventory levels, competing fuel prices, overall demand, and the availability of supply.
 
Worldwide oil prices reached historical highs during the last half of 2008, before tumbling amid worldwide economic crisis.  Oil prices stabilized during 2009 and remained stable throughout 2010.  Since December 31, 2010, oil prices have increased rapidly, topping $100 per barrel in mid-March 2011 and then retreating to the mid-$80’s per barrel in mid-August.

 
3

 
 
Oil prices cannot be predicted with any certainty and have significantly affected profitability and returns for upstream producers.  Historically, crude oil prices have averaged approximately $77 per barrel over the past five years, per the New York Mercantile Exchange (“NYMEX”).  However, during that time, oil prices have experienced wide fluctuations in prices, ranging from $37 per barrel to $145 per barrel, with the median price of $78 per barrel.  Oil prices averaged approximately $99 during the six-month period ended June 30, 2011.
 
While local supply/demand fundamentals are a decisive factor affecting domestic natural gas prices over the long term, day-to-day prices may be more volatile in the futures markets, such as on the NYMEX and other exchanges, making it difficult to forecast prices with any degree of confidence.
 
Company Overview
 
The address of our principal executive office is 2549 W. Main Street, Suite 202, Littleton, Colorado, 80120.  Our telephone number is 303-798-5235.
 
Our common stock is quoted on the OTC Bulletin Board under the symbol “EERG”.
 
Our Company was incorporated in the State of Nevada under the name “Golden Hope Resources Corp.” on July 25, 2003 and is engaged in the acquisition, exploration, and development of natural resource properties of merit.  On November 7, 2005, we filed documents with the Nevada Secretary of State to affect a change of our name from “Golden Hope Resources Corp.” to “Eternal Energy Corp.” by way of a merger with our wholly-owned subsidiary, Eternal Energy Corp., which was formed solely to facilitate the name change.
 
Since our inception, we have entered into participation agreements related to oil and gas exploration projects throughout the continental United States, including Colorado, Montana, Nevada, North Dakota, Texas, and Utah, as well as in the Saskatchewan, province of Canada, and areas located in the North Sea.  As of June 30, 2011, we are actively engaged in exploration activities within the Pebble Beach and Spyglass Prospects, located in Divide County, North Dakota, and Sheridan County, Montana, as well as within the Hardy Property, located in southeastern Saskatchewan, Canada.  In addition, the Company owns certain overriding royalty interests in oil and gas leases located in San Juan County, Utah and San Miguel County, Colorado.
 
Our current operations consist of two full-time employees and several paid consultants, who provide accounting and land management services on a contract basis.
 
Results of Operations for the Three-Month Period Ended June 30, 2011 vs. 2010
 
We recognized net income of $2,912,909 for the three-month period ended June 30, 2011, compared to $4,044,779 for the three-month period ended June 30, 2010.  A discussion of the key components of our statements of operations and material fluctuations for the three-month periods ended June 30, 2011 and 2010 is provided below.

 
4

 
 
Revenues associated with the sale of oil and gas totaled $13,702 for the three-month period ended June 30, 2011, compared to $2,999 for the three-month period ended June 30, 2010.  A comparison of the 2011 and 2010 oil sales is as follows:
 
 
·
The 2011 sales relate to our 50% working interest in the Hardy 7-9 well, which was acquired in June 2010 and placed on production in September 2010.  The well operated during a portion of April 2011 before being shut in for mechanical and weather-related issues.  The well remained shut-in through June 30, 2011.  The well has since been returned to production.
 
 
·
The 2010 sales relate to revenues received from our 5% overriding royalty interests in certain properties located in Saskatchewan, Canada.  We sold our overriding royalty interests to Ryland Oil Corporation (“Ryland”) in June 2010.
 
In April 2010, we sold our gross overriding royalty interest in approximately 264,000 net acres within an area of mutual interest located in southeastern Saskatchewan to Ryland.  In addition to cash consideration totaling $2.9 million, we received 2,145,883 shares of Ryland’s common stock, which were valued at approximately $874,973 as of the date of sale, and an assignment of Ryland’s 100% working interest in approximately 4,480 net acres located in Saskatchewan, and related equipment (the “Hardy Property”).  At the time of the sale, the Hardy Property had an estimated fair market value of $238,681.  We recognized a gain in the amount of $4,735,253 during the three-month period ended June 30, 2010 related to the sale.
 
Also in April 2010, we sold our working interest in approximately 700 net acres located within the Pebble Beach prospect to Rover Resources Inc. for cash consideration totaling $1 million.  Because the sale represented a significant reduction of the full-cost pool that is not subject to amortization, we reallocated the costs of the pool among the properties included within the pool based on relative fair market value at the time of the sale.  We recognized a $509,934 gain on the sale of the Pebble Beach acreage during the three-month period ended June 30, 2010.
 
In May 2011, we sold half of our working interest in our Spyglass Prospect to a third party.  Net proceeds from the sale totaled $3,777,793, of which $320,833 was receivable as of June 30, 2011.  The receivable was collected in August 2011.  Because our working interest in the Spyglass Prospect represented a significant portion of our full-cost pool that is not subject to amortization, we reallocated the aggregate cost of the full-cost pool, not subject to amortization, among the various properties included within the pool, based on their estimated relative fair market values at the time the sale occurred, and recognized a gain in the amount of $3,402,000.
 
Also in May 2011, we sold a portion of our working interest in the Pebble Beach Prospect for net cash consideration totaling $227,079.  The net cash consideration was recorded as a receivable as of June 30, 2011 and collected in August 2011.  Because the sale did not represent the disposal of a significant portion of non-amortizable full-cost pool at the time of the sale, the net proceeds received were recorded as a reduction of the full-cost pool, not subject to amortization.

 
5

 

Lease operating expenses associated with the Hardy 7-9 well totaled $67,508 for the three-month period ended June 30, 2011.  We did not recognize any lease operating expenses during the three-month period ended June 30, 2010, as the well was acquired in April 2010 but had not yet been re-worked or returned to production during that time.
 
General and administrative expenses decreased from $218,150 for the three-month period ended June 30, 2010 to $205,653 for the three-month period ended June 30, 2011.  The net decrease is primarily due to the following:
 
 
·
Payroll and employee benefit related costs declined by $67,525, as a result of a staff reduction that occurred in November 2011.
 
 
·
We recognized foreign exchange losses totaling $21,637 relating to currency fluctuations between the US Dollar and the Canadian Dollar.  The majority of our transactions related to our Hardy Property are transacted in Canadian Dollars.  No such losses were incurred during the comparable period in 2010.
 
 
·
In May 2011, we paid fees totaling $17,595 to a certain director as compensation for serving on the Special Committee that was formed to review the proposed merger transaction with American Eagle Energy Inc. (“AEE”).  This is the only time that we have ever compensated any of our directors through a cash payment.
 
 
·
Insurance expense increased by $16,120 related to the operation of the Hardy 7-9 well.  We incurred no such cost during the three-month period ended June 30, 2010, as the well had not yet been returned to production.
 
Professional fees increased from $84,021 for the three-month period ended June 30, 2010 to $232,425 for the three-month period ended June 30, 2011.  Professional fees increased due to the following reasons:
 
 
·
We incurred legal fees totaling $153,449 during the three-month period ended June 30, 2011, primarily related to our proposed merger with AEE.  Legal fees for the three-month period ended June 30, 2010 totaled $77,221.
 
 
·
We also incurred consulting fees totaling $19,282 during the second quarter of 2011, primarily related to business valuation services obtained in connection with our proposed merger with AEE.  We incurred no such costs during the comparable period in 2010.
 
 
·
Accounting fees for the three-month period ended June 30, 2011 increased by $52,894 from the same period in 2010 due to services received in connection with the proposed merger with AEE, and related SEC filings, as well as engaging a third-party individual to perform all accounting functions.  These functions were previously performed by our former Chief Financial Officer.
 
 
6

 

As a result of the acquisition and recompletion of the Hardy 7-9 well during the second half of 2010, we recognized depletion expense of $11,679 for the three-month period ended June 30, 2011.  No such depletion was recognized during the second quarter of 2010, as the Hardy 7-9 well had not yet been returned to production.  We recorded depreciation expense of $1,879 for the three-month period ended June 30, 2011 related to our office equipment, furniture, and leasehold improvements, compared to depreciation expense of $11,801 for the three-month period ended June 30, 2010.  Much of our office equipment and furniture became fully depreciated in December 2011, which explains the decrease in depreciation expense from 2010 to 2011.
 
Shortly after acquiring shares of Ryland’s common stock in connection with the sale of our gross overriding royalties to Ryland during April 2010, Ryland was acquired by Crescent Point Energy Corp. (“Crescent Point”), at which time our shares of Ryland common stock were converted into 25,107 shares of Crescent Point’s common stock.  In August 2010, we began receiving monthly dividend payments related to our holdings of those shares.  As a result, we recognized dividend income totaling $19,476 for the three-month period ended June 30, 2011.  No such dividend income was recognized for the comparable period in 2010.
 
Results of Operations for the Six-Month Period Ended June 30, 2011 vs. 2010
 
We recognized net income of $2,348,363 for the six-month period ended June 30, 2011, compared to $3,713,044 for the six-month period ended June 30, 2010.  A discussion of the key components of our statements of operations and material fluctuations for the six-month periods ended June 30, 2011 and 2010 is provided below.
 
Revenues associated with the sale of oil and gas totaled $52,805 for the six-month period ended June 30, 2011, compared to $74,485 for the six-month period ended June 30, 2010.  A comparison of the 2011 and 2010 oil sales is as follows:
 
 
·
The 2011 sales relate primarily to our 50% working interest in the Hardy 7-9 well, which was acquired in June 2010 and placed on production in September 2010.  In January 2011, the well encountered mechanical problems and was taken off of production due to a parted rod string.  The well was repaired and returned to production in March 2011.  The well was once again taken off of production in mid-April due to mechanical issues.  The well bore was repaired in May 2011, but the well remained shut-in through June 30, 2011 due to inclement weather conditions.
 
 
·
In January 2011, we began recognizing revenue associated with our small, working interest position in the Aarestad 4-34 well, which was completed in December 2010.
 
 
·
The 2010 sales relate to revenues received from our 5% overriding royalty interests in certain properties located in Saskatchewan, Canada.  We sold our overriding royalty interests to Ryland in June 2010.
 
In April 2010, we sold our gross overriding royalty interest in approximately 264,000 net acres within an area of mutual interest located in southeastern Saskatchewan to Ryland.  In addition to cash consideration totaling $2.9 million, we received 2,145,883 shares of Ryland’s common stock, which were valued at approximately $874,973 as of the date of sale, and an assignment of Ryland’s 100% working interest in the Hardy Property (approximately 4,480 net acres located in Saskatchewan and related equipment).  At the time of the sale, the Hardy Property had an estimated fair market value of $238,681.  We recognized a gain in the amount of $4,735,253 during the six-month period ended June 30, 2010 related to the sale.

 
7

 
 
Also in April 2010, we sold our working interest in approximately 700 net acres located within the Pebble Beach prospect to Rover Resources Inc. for cash consideration totaling $1 million.  Because the sale represented a significant reduction of the full-cost pool that is not subject to amortization, the Company reallocated the costs of the pool among the properties included within the pool based on relative fair market value at the time of the sale.  The Company recognized a $509,934 gain on the sale of the Pebble Beach acreage during the six-month period ended June 30, 2010.
 
In May 2011, we sold half of our working interest in our Spyglass Prospect to a third party.  Net proceeds from the sale totaled $3,777,793, of which $320,833 was receivable as of June 30, 2011.  The receivable was collected in August 2011.  Because our working interest in the Spyglass Prospect represented a significant portion of our full-cost pool that is not subject to amortization, we reallocated the aggregate cost of the full-cost pool, not subject to amortization, among the various properties included within the pool, based on their estimated relative fair market values at the time the sale occurred, and recognized a gain in the amount of $3,402,000.
 
Also in May 2011, we sold a portion of our working interest in the Pebble Beach Prospect for net cash consideration totaling $227,079.  The net cash consideration was recorded as a receivable as of June 30, 2011 and collected in August 2011.  Because the sale did not represent the disposal of a significant portion of non-amortizable full-cost pool at the time of the sale, the net proceeds received were recorded as a reduction of the full-cost pool, not subject to amortization.
 
Lease operating expenses associated with the Hardy 7-9 well totaled $115,691for the six-month period ended June 30, 2011.  We did not recognize any lease operating expenses during the six-month period ended June 30, 2010 as the Hardy 7-9 well had not yet been re-worked and returned to production.
 
General and administrative expenses decreased from $452,402 for the six-month period ended June 30, 2010 to $344,906 for the six-month period ended June 30, 2011.  The net decrease is primarily due to the following:
 
 
·
Payroll and benefits related expenses decreased by $156,359, as a result of staff reductions that occurred in November 2010.
 
 
·
Land management fees for the six-month period ended June 30, 2011 declined by $23,910 from the same period in 2010, as a result of switching from a full-time resource to a shared we share with AEE.
 
 
·
We recognized foreign exchange losses totaling $28,584 relating to currency fluctuations between the US Dollar and the Canadian Dollar.  The majority of our transactions related to our Hardy Property are transacted in Canadian Dollars.  No such losses were incurred during the comparable period in 2010.
 
 
8

 
 
 
·
In May 2011, we paid fees totaling $17,595 to a certain director as compensation for serving on the Special Committee that was formed to review the proposed merger transaction with AEE.  This is the only time that we have ever compensated any of our directors through a cash payment.
 
 
·
Insurance expense increased by $16,120 related to the operation of the Hardy 7-9 well.  We incurred no such cost during the six-month period ended June 30, 2010 as the well had not yet been returned to production.
 
 
·
Travel related expenses increased by 10,403 from 2010 to 2011 in connection with our proposed merger with AEE and related activities.
 
Professional fees increased from $238,426 for the six-month period ended June 30, 2010 to $649,154 for the six-month period ended June 30, 2011.  Professional fees increased due to the following reasons:
 
 
·
We incurred legal fees totaling $390,266 during the six-month period ended June 30, 2011, primarily related to our proposed merger with AEE.  Legal fees for the six-month period ended June 30, 2010 totaled $153,875.  The 2010 fees related to a proposed merger with Ryland.  The merger with Ryland was never completed.
 
 
·
We also incurred consulting fees totaling $153,192 during the six-month period ended June 30, 2011, the majority of which related to business valuation services obtained in connection with our proposed merger with AEE.  Consulting fees for the six-month period ended June 30, 2010 totaled $52,550 and consisted of fees associated with the obtaining of a fairness opinion related to our contemplated merger with Ryland in March 2010.  The Ryland merger transaction was never completed.
 
 
·
Accounting fees for the six-month period ended June 30, 2011 totaled $105,696, compared to $32,000 for the six-month period ended June 30, 2010.  The increase is primarily due to additional auditing services obtained in connection with our proposed merger with AEE, and related SEC filings, as well as fees incurred as a result of outsourcing of all accounting related activities beginning in November 2010.
 
Depreciation, depletion, and amortization expense for the six-month period ended June 30, 2011 consisted almost entirely of depletion expense related to the Hardy 7-9 well, which was returned to production in September 2010.  No such depletion expense was recognized during the six-month period ended June 30, 2010.  Depreciation expense decreased from $23,580 for the six-month period ended June 30, 2010 to $4,406 for the same period in 2011, primarily due to the fact that the majority of our office equipment, furniture, and leasehold improvements became fully depreciated in December 2010.
 
We recognized dividend income totaling $34,532 related to our holdings of Crescent Point common stock, which were acquired in June 2010.  No such dividend income was recognized for the comparable period in 2010, as we had not yet acquired the Crescent Point stock.

 
9

 
 
We recognized Canadian income taxes totaling $892,112 in connection with the sale of certain gross overriding royalties to Ryland in June 2010.
 
Liquidity and Capital Resources
 
As of June 30, 2011, our assets totaled $10,316,919, which included, among other items, cash balances totaling $5,423,192, receivables totaling $614,021, amounts due from our working interest partner, AEE, totaling $667,333, and marketable securities valued at $1,288,625.  Our intention is to hold the marketable securities indefinitely and, accordingly, the marketable securities have been classified as noncurrent assets.  Notwithstanding this classification, our working capital as of June 30, 2011 was $3,517,602, compared to $2,527,606 as of December 31, 2010.
 
Historically, we have successfully raised additional operating capital through private equity funding sources and from the sale of various oil and gas prospects.  However, no assurances can be given that we will be able to obtain sufficient working capital through the sale of common stock and/or borrowing or that the development and implementation of our business plan will generate sufficient future revenues to sustain ongoing operations.
 
Proposed Merger
 
On February 22, 2011, we announced our intention to pursue a merger with AEE.  On April 8, 2011, we entered into a definitive merger agreement (the “Merger Agreement”), pursuant to which we formed a wholly-owned subsidiary into which AEE will be merged.  We will be the surviving entity of the possible merger.
 
The closing of the proposed merger is subject to, among other items, (i) the registration of the common stock currently contemplated to be issued by us to the stockholders of AEE and (ii) the approval of the transaction by the boards of directors of both companies and by the stockholders of AEE.  The ratio of stockholdings between the companies at the closing of the possible merger, exclusive of any presently outstanding options, is currently anticipated to be 80% to the legacy stockholders of AEE and 20% to our legacy stockholders.
 
Litigation
 
As of June 30, 2011, we are not subject to any known or threatened litigation.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements.

ITEM 4. CONTROLS AND PROCEDURES.

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

 
10

 

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS.
  
Exhibit
 
Description of Exhibit
     
2.1
 
Agreement and Plan of Merger, dated April 8, 2011, by and among Eternal Energy Corp., Eternal Sub Corp., and American Eagle Energy Inc. (Incorporated by reference to Exhibit 2.1 of our Registration Statement on form S-4 filed May 4, 2011, and attached as Annex A to the prospectus that is part of such Registration Statement.)
     
3(i).1
 
Articles of Incorporation filed with the Nevada Secretary of State on July 25, 2003. (Incorporated by reference to Exhibit 3.1 of our Form 10-SB filed August 18, 2004.)
3(i).2
 
Certificate of Change filed with the Nevada Secretary of State effective November 7, 2005. (Incorporated by reference to Exhibit 3(i).2 of our Current Report on Form 8-K filed November 9, 2005.)
3(i).3
 
Articles of Merger filed with the Nevada Secretary of State effective November 7, 2005. (Incorporated by reference to Exhibit 3(i).3 of our Current Report on Form 8-K filed November 9, 2005.)
3(ii).1
 
Bylaws, adopted July 18, 2003. (Incorporated by reference to Exhibit 3.2 of our Form 10-SB filed August 18, 2004.)
3(ii).2
 
Amendment No. 1 to Bylaws, adopted November 4, 2005. (Incorporated by reference to Exhibit 3(ii) of our Current Report on Form 8-K filed November 9, 2005.)
10.1
 
Agreement and Plan of Merger between Golden Hope Resources Corp. (renamed Eternal Energy Corp.) and Eternal Energy Corp., filed with the Nevada Secretary of State effective November 7, 2005. (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed November 9, 2005.)
10.2
 
Purchase and Sale Agreement by and between Eternal Energy Corp., PNP Petroleum I, LP, Cibolo Energy Operating, Inc. and Century Assets Corporation, dated June 25, 2010.  (Incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q filed August 16, 2010.)
10.3
 
Purchase and Sale Agreement between Eternal Energy Corp. and American Eagle Energy Inc. dated June 18, 2010.  (Incorporated by reference to Exhibit 10.3 of our Quarterly Report on Form 10-Q filed August 16, 2010.)
10.4
 
Reserved for future use.
10.5
 
Reserved for future use.
10.6
 
Letter Agreement by and between Eternal Energy Corp. and International Frontier Resources Corporation. (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed December 5, 2005.)
10.7
 
Reserved for future use.
10.8
 
Reserved for future use.
10.9
 
Letter Agreement by and between Eternal Energy Corp. and International Frontier Resources Corporation Relating to Quad 41 and Quad 42 dated January 30, 2006. (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed February 3, 2006.)
10.10
 
Amended and Restated Letter Agreement by and between Eternal Energy Corp. and International Frontier Resources Corporation Relating to Quad 14 dated January 30, 2006. (Incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed February 3, 2006.)
10.11
 
Reserved for future use.
10.12
 
Reserved for future use.
10.13
 
Reserved for future use.
10.14
 
Reserved for future use.
10.15
 
Reserved for future use.
10.16
 
Letter Agreement effective as of May 19, 2006, by and among Eternal Energy Corp., International Frontier Resources Corporation, Palace Exploration Company Limited, Oilexco Incorporated, and Challenger Minerals (North Sea) Limited (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed May 23, 2006).
10.17
 
Letter Agreement dated October 15, 2006, by and among Eternal Energy Corp., Fairway Exploration, LLC, Prospector Oil, Inc., and 0770890 B.C. Ltd. (Incorporated by reference to Exhibit 10.17 of our Annual Report on Form 10-KSB filed April 16, 2007).
10.18
 
Letter Agreement dated October 26, 2006, by and among Eternal Energy Corp., Fairway Exploration, LLC, Prospector Oil, Inc., 0770890 B.C. Ltd., and Rover Resources Inc. (Incorporated by reference to Exhibit 10.18 of our Annual Report on Form 10-KSB filed April 16, 2007).
10.19
 
Letter Agreement dated February 28, 2007, by and among Eternal Energy Corp., Pebble Petroleum Inc., Emerald Bay Holdings Ltd., and Heartland Resources Inc. (Incorporated by reference to Exhibit 10.19 of our Annual Report on Form 10-KSB filed April 16, 2007).
10.20
 
Agreement To Terminate DGWS Option (Incorporated by reference to Exhibit 10.20 of our Quarterly Report on Form 10-Q filed May 15, 2009.
10.21
 
Employment Agreement by and between Eternal Energy Corp. and Craig Phelps dated August 1, 2007 (Incorporated by reference to Exhibit 10.21 of our Quarterly Report on Form 10-Q filed May 15, 2009).

 
11

 

10.22
 
Employment Agreement by and between Eternal Energy Corp. and Kirk A. Stingley dated June 2, 2008 (Incorporated by reference to Exhibit 10.22 of our Quarterly Report on Form 10-Q filed May 15, 2009).
10.23
 
Amended and Restated Employment Agreement by and between Eternal Energy Corp. and Bradley M. Colby dated November 1, 2009 (Incorporated by reference to Exhibit 10.23 of our Quarterly Report on form 10-Q filed November 23, 2009).
10.24
 
First Amendment to the Amended and Restated Employment Agreement by and between Eternal Energy Corp. and Craig H. Phelps dated August 1, 2009 (Incorporated by reference to Exhibit 10.24 of our Quarterly Report on form 10-Q filed November 23, 2009).
10.25
 
First Amendment to the Employment Agreement by and between Eternal Energy Corp. and Kirk A. Stingley dated October 30, 2009 (Incorporated by reference to Exhibit 10.25 of our Quarterly Report on form 10-Q filed November 23, 2009).
10.26
 
Reserved for future use.
10.27
 
Lease Agreement dated January 1, 2009 by and between Eternal Energy Corp. and Oakley Ventures, LLC.  (Incorporated by reference to Exhibit 10.27 of our Annual Report on Form 10-K filed March 23, 2010.)
10.28
 
Purchase and Sale Agreement by and between Eternal Energy Corp. and Ryland Oil Corporation dated March 26, 2010.  (Incorporated by reference to Exhibit 10.28 of our Current Report on Form 8-K filed March 29, 2010.)
10.29
 
Purchase of Royalty Agreement by and between Eternal energy corp. and Ryland Oil Corporation dated March 26, 2010.  (Incorporated by reference to Exhibit 10.29 of our Current Report on Form 8-K filed March 29, 2010.)
10.29a
 
Amending Agreement to the Ryland / Eternal Royalty Purchase Agreement by and between Eternal Energy Corp. and Ryland Oil Corporation dated April 20, 2010.  (Incorporated by reference to Exhibit 10.29a of our Current Report on Form 8-K filed March 29, 2010.)
10.30
 
Termination Agreement (of the US Pebble Acquisition Agreement) by and between Eternal Energy Corp., Fairway Exploration LLC, Prospector Oil, Inc. Pebble Petroleum Inc. and Rover Resources Inc. dated April 29, 2010.  (Incorporated by reference to Exhibit 10.30 of our Quarterly Report on form 10-Q filed May 17, 2010.)
10.31
 
Termination Agreement (of the Canadian Pebble Acquisition Agreement) by and between Eternal Energy Corp., Fairway Exploration LLC, Prospector Oil, Inc. and Pebble Petroleum Inc. dated April 29, 2010.  (Incorporated by reference to Exhibit 10.31 of our Quarterly Report on form 10-Q filed May 17, 2010.)
10.32
 
Termination Agreement (of the US Prospect Acquisition Agreement) by and between Eternal Energy Corp., Fairway Exploration LLC, Prospector Oil, Inc., Pebble Petroleum Inc., Rover Resources Inc., Steven Swanson, Richard L. Findley, Thomas G. Lantz and Ryland Oil Corporation dated May 11, 2010.  (Incorporated by reference to Exhibit 10.31 of our Quarterly Report on form 10-Q filed May 17, 2010.)
10.33
 
Termination Agreement (of the Canadian Prospect Acquisition Agreement) by and between Eternal Energy Corp., Fairway Exploration LLC, Prospector Oil, Inc., Pebble Petroleum Inc., Rover Resources Inc., Steven Swanson, Richard L. Findley, Thomas G. Lantz and Ryland Oil Corporation dated May 11, 2010.  (Incorporated by reference to Exhibit 10.33 of our Quarterly Report on form 10-Q filed May 17, 2010.)
10.34
 
Termination of Management Services Agreement by and between Eternal Energy Corp., Ryland Oil Corporation and Brad Colby dated December 1, 2009.  (Incorporated by reference to Exhibit 10.34 of our Quarterly Report on form 10-Q filed May 17, 2010.)
10.35
 
Amendment to the consulting Agreement by and between Eternal Energy Corp., Rover Resources Inc, and Brad Colby dated April 1, 2010.  (Incorporated by reference to Exhibit 10.35 of our Quarterly Report on form 10-Q filed May 17, 2010.)
10.36
 
Letter of Intent between Eternal Energy Corp. and American Eagle Energy Inc. dated February 22, 2011. (Incorporated by reference to Exhibit 10.36 of our Annual Report on form 10-K filed March 23, 2011.)
10.37
 
Engagement Letter for Professional Services between Eternal Energy Corp. and C.K. Cooper & Company, dated February 25, 2011.  (Incorporated by reference to Exhibit 10.37 of our Annual Report on form 10-K filed March 23, 2011.)
10.38
 
Participation and Operating Agreement by and among Eternal Energy Corp., AEE Canada Inc., and Passport Energy Inc. dated April 15, 2011.  (Incorporated by reference to Exhibit 10.38 of our Registration Statement on Form S-4 filed May 4, 2011.)
10.39* ^
 
Purchase and Sale Agreement by and among Eternal Energy Corp., American Eagle Energy Inc. and NextEra Energy Gas Producing, LLC, dated May 17, 2011.
10.40* ^
 
Purchase and Sale Agreement by and among Eternal Energy Corp., American Eagle Energy Inc. and NextEra Energy Gas Producing, LLC, dated May 17, 2011.
10.40a*
 
First Amendment to the Purchase and Sale Agreement by and among Eternal Energy Corp., American Eagle Energy Inc. and NextEra Energy Gas Producing, LLC, (dated May 17, 2011) dated June 14, 2011.
10.40b*
 
Second Amendment to the Purchase and Sale Agreement by and among Eternal Energy Corp., American Eagle Energy Inc. and NextEra Energy Gas Producing, LLC, (dated May 17, 2011) dated July 25, 2011.
21.1
 
List of Subsidiaries (incorporated by reference to Exhibit 21.1 of our Annual report on Form 10-K filed April 8, 2008.)
31.1*
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
 
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


 
*       Filed herewith.
^      Portions omitted pursuant to a request for confidential treatment.

 
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SIGNATURES

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

ETERNAL ENERGY CORP.
   
     
(Registrant)
   
     
August 18, 2011
/s/ Bradley M. Colby
 
 
Bradley M. Colby
 
 
President and Chief Executive Officer
 
 
(Principal Executive, Financial and Accounting Officer)
 

 
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