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U.S. SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
Mark One
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2011
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
 
For the transition period from ______ to _______
 
COMMISSION FILE NO. 333-141060
 
AMERICAN EXPLORATION CORPORATION
(Name of small business issuer in its charter)
 
NEVADA    90-0335743
(State or other jurisdiction of incorporation or organization)    (I.R.S. Employer Identification No.)
 
520 5th AVENUE SW, SUITE 2600
CALGARY, ALBERTA
CANADA T2P 3R7
(Address of principal executive offices)
 
(403) 233-8484
 (Issuer's telephone number)
 
Securities registered pursuant to Section 12(b) of the Act:   Name of each exchange on which registered:
NONE    
 
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001
(Title of Class)
 
Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. o
 
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 403 of the Securities Act.   Yes o No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes x No o
 
Indicate by check mark whether the registrant has (i) 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 (ii) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No x
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated file, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filed o Accelerated filer o
       
Non-accelerated filer o Smaller reporting company x
 
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the average bid and asked price of the common equity, as of the last business of the registrant’s most recently completed second fiscal quarter: June 30, 2011 is $4,851,233.
 
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.
 
Class Outstanding as of May 15, 2012 Common Stock, $0.001, 60,273,333 shares
 
DOCUMENTS INCORPORATED BY REFERENCE
 
If the following documents are incorporated by reference, briefly describe them and identify the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (i) any annual report to security holders; (ii) any proxy or information statement; and (iii) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 (the "Securities Act"). The listed documents should be clearly described for identification purposes (e.g. annual reports to security holders for fiscal year ended December 24, 1990).
 
N/A
 


 
 

 
 
AMERICAN EXPLORATION CORPORATION
FORM 10-K
 
INDEX      
       
   
Page
 
       
Item  1. Business     5  
           
Item  1A.
Risk Factors
    16  
           
Item  1B.
Unresolved Staff Comments
       
 
 
       
Item  2.
Properties
    26  
 
 
       
Item  3.
Legal Proceedings
    26  
           
Item  4.
Mining Safety Regulations
    26  
           
Item  5.
Market for Registrant's Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities
    27  
           
Item  6.
Selected Financial Data
    30  
           
Item  7.
Management's Discussion and Analysis of Financial Condition and Results of Operation
    30  
           
Item  7A.
Quantity and Qualitative Disclosure About Market Risks
       
           
Item  8.
Financial Statements and Supplemental Data
    37  
           
Item  9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure     40  
           
Item  9A.
Controls and Procedures
    40  
           
Item  9B.
Other Information
    42  
           
Item  10. Directors, Executive Officers and Corporate Governance     42  
           
Item  11.
Executive Compensation
    44  
           
Item  12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    47  
           
Item  13.
Certain Relationships and Related Transactions and Director Independence
    49  
           
Item  14.
Principal Accountant Fees and Services
    50  
           
Item  15.
Exhibits and Financial Statement Schedules
    51  
 
 
3

 
 
Statements made in this Form 10-K that are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 (the "Act") and Section 21E of the Securities Exchange Act of 1934. These statements often can be identified by the use of terms such as "may," "will," "expect," "believe," "anticipate," "estimate," "approximate" or "continue," or the negative thereof. We intend that such forward-looking statements be subject to the safe harbors for such statements. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management's best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond our control that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.
 
AVAILABLE INFORMATION
 
American Exploration Corporation files annual, quarterly, current reports, proxy statements, and other information with the Securities and Exchange Commission (the "Commission"). You may read and copy documents referred to in this Annual Report on Form 10-K that have been filed with the Commission at the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. You can also obtain copies of our Commission filings by going to the Commission's website at http://www.sec.gov.
 
 
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PART I
 
ITEM 1. BUSINESS
 
BUSINESS DEVELOPMENT
 
American Exploration Corporation was incorporated under the laws of the State of Nevada on May 11, 2006 under the name of Minhas Energy Consultants, Inc. Previously, we were engaged in the business of providing professional engineering consulting services to the oil and gas industry, including clients such as petroleum and natural gas companies, oil service companies, utilities and manufacturing companies with petroleum and/or natural gas interests and government agencies. After the effective date of March 14, 2007 of our registration statement filed with the Securities and Exchange Commission, we commenced trading on the Over-the-Counter Bulletin Board.

On August 6, 2008, with the approval of our Board of Directors, we merged with our subsidiary, American Exploration Corporation, and amended our Articles of Incorporation to change our name to "American Exploration Corporation". We are an exploration stage, natural resource exploration and production company currently engaged in the exploration, acquisition and development of oil and gas properties in the United States and within North America. Effective at the opening for trading on August 19, 2008, our trading symbol for our shares that trade on the Over-the-Counter Bulletin Board changed to "AEXP.OB".

Please note that throughout this Annual Report, and unless otherwise noted, the words "we," "our," "us," the "Company," or "American Exploration," refers to American Exploration Corporation.
 
RECENT DEVELOPMENTS
 
TRANSFER AGENT
 
Our transfer agent is Routh Stock Transfer Inc., 6860 N Dallas Parkway, Suite 200, Plano, Texas 75024. Effective November 1, 2011, Routh Stock Transfer merged with Securities Transfer Corporation, 2591 Dallas Parkway, Suite 102, Frisco, Texas 75034, with whom we continue to work.
 
BUSINESS OPERATIONS
 
We are an exploration stage company engaged in the acquisition, exploration and development of oil and gas properties in North America, primarily in the United States. Our primary focus has been the acquisition of mineral leases located in Mississippi previously owned by Westrock Land Corp, a private Texas corporation ("Westrock"). We identified a prospect with an over-thickened Bossier/Haynesville shale gas reservoir situated below the properties covered by these leases.
 
Merger Agreement
 
Our Board of Directors previously authorized and approved the execution of a definitive merger agreement and plan of merger (the “Merger Agreement”) dated March 22, 2010 (the “Execution Date”) with Mainland Resources, Inc., a Nevada corporation (“Mainland Resources”). The Merger Agreement provided for a stock-for-stock merger to be effected under the laws of the State of Nevada whereby it was contemplated that our shareholders would receive one share of common stock of Mainland Resources for every four shares of our common stock held of record. The specific share exchange ratio was to be negotiated upon the completion of “fairness opinions” conducted by independent financial advisors and technical due diligence by both Mainland and American. In the event the Merger Agreement was consummated and the merger was completed: (i) Mainland Resources would have been the surviving corporation; (ii) Mainland Resources would have been vested with all of our assets and property (as discussed below); and (iii) our shareholders would have held approximately twenty percent (20%) of the total issued and outstanding shares of common stock of Mainland Resources.
 
 
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The Merger Agreement was subject to various conditions precedent including, but not limited to, the following: (i) approval by our shareholders and the shareholders of Mainland Resources of the Merger Agreement; (ii) completion of satisfactory due diligence by both us and Mainland Resources within thirty (30) days of the Execution Date of the business and affairs of each respective company to determine the general and economic feasibility of the merger; (iii) the number of Mainland Resources’ shareholders exercising dissenter rights available to them under Nevada law, which shall not exceed 5% of the total issued and outstanding shares of Mainland Resources common stock; (iv) receipt by us and Mainland Resources of a draft fairness opinion (each a “Fairness Opinion”) of its own independent financial advisor to the effect that, as of the Execution Date, the merger is fair from a financial point of view to the shareholders of each respective company (subject to the assumptions, qualifications and limitations relating to such opinion); (v) the acceptance and approval of the Fairness Opinion by our Board of Directors and the board of directors of Mainland Resources, respectively; and (vi) confirmation of the accuracy and material compliance of our representations, warranties and covenants and those representations, warranties and covenants of Mainland Resources.
 
On May 5, 2010, we issued a press release announcing that we and Mainland Resources had each completed, to our satisfaction, respective due diligence investigations of the other party's business and affairs within the thirty day due diligence period contemplated by the Merger Agreement.  In addition, each party had received a fairness opinion (each, a "Fairness Opinion") of its own independent financial advisor to the effect that, as of the date of the Merger Agreement, the merger was fair from a financial point of view to holders of such party's shares (subject to the assumptions, qualifications and limitations relating to such opinion). Each Fairness Opinion set forth the procedures followed, the assumptions made, qualifications and limitations on the review undertaken, and various other matters, and was annexed as an exhibit to the Registration Statement on Form S-4 that Mainland Resources filed with the Securities and Exchange Commission to register the securities of Mainland Resources to be issued in exchange for securities of American Exploration. If the merger was completed, Mainland Resources would have been the surviving corporation, and would become vested with all of the Company’s assets and property. Each Fairness Opinion did not constitute a recommendation as to how any stockholder should vote on the merger or any matter relevant to the Merger Agreement.
 
Our Board of Directors had adopted a resolution approving the merger on the terms and subject to the conditions of the Merger Agreement, and recommending the merger to the stockholders of the Company. Furthermore, our Special Committee of the Board of Directors had also adopted a resolution approving the merger on the terms and subject to the conditions of the Merger Agreement, and recommending the merger to our stockholders.
 
Together with Mainland Resources, we filed a registration statement with the Securities and Exchange Commission on Form S-4 on July 27, 2011 relating to the Merger Agreement. Numerous rounds of comments were received from the Securities and Exchange Commission necessitating filing of amendments. During the review process by the Securities and Exchange Commission, the lease extension we requested from Westrock Land Corp. (“Westrock”) was not granted requiring the 5,000 acre lease that we previously held to be relinquished to Westrock. Mainland Resources subsequently ceased all efforts to continue the merger process with the Securities and Exchange Commission following our loss of the lease thus resulting in cancellation of the merger. See  “-Termination of Merger” and “-  Westrock Option Agreement”.
 
 
6

 
 
Amending Agreements
 
Effective July 28, 2010, we entered into that certain letter agreement dated July 28, 2010 (the “Letter Agreement”) with Mainland Resources in regards to the Merger Agreement. The Merger Agreement is subject to termination by either us or Mainland Resources if certain conditions specified in the Merger Agreement are not satisfied at or before September 30, 2010 or such later date as may be mutually agreed upon (the “Termination Date”). In accordance with the terms and provisions of the Letter Agreement, the Termination Date was extended to September 30, 2010.

Effective on September 7, 2010, we entered into an amending agreement (the “September 2010 Amending Agreement”) with Mainland Resources in regards to the Merger Agreement. In accordance with the terms and provisions of the September 2010 Amending Agreement, the Termination Date was extended to December 31, 2010.

Effective on December 23, 2010, we entered into an amending agreement (the “December 2010 Amending Agreement”) with Mainland Resources in regards to the Merger Agreement. In accordance with the terms and provisions of the December 2010 Amending Agreement, the Termination Date was extended to April 5, 2011.

Effective on March 14, 2011, we entered into an amending agreement (the “March 2011 Amending Agreement”) with Mainland Resources in regards to the Merger Agreement.  In accordance with the terms and provisions of the March 2011 Amending Agreement, the Termination Date was extended to May 31, 2011.

Effective May 17, 2011, we entered into an amending agreement (the “May 2011 Amending Agreement) with Mainland Resources in regards to the Merger Agreement. In accordance with the terms and provisions of the May 2011 Amending Agreement, the Termination Date was extended to August 31, 2011.

Effective August 18, 2011, we entered into an amending agreement (the “August 2011 Amending Agreement) with Mainland Resources in regards to the Merger Agreement. In accordance with the terms and provisions of the August 2011 Amending Agreement, the Termination Date was extended to October 31, 2011.

Effective October 31, 2011, we entered into an amending agreement (the “October 2011 Amending Agreement) with Mainland Resources in regards to the Merger Agreement. In accordance with the terms and provisions of the October 2011 Amending Agreement, the Termination Date was extended to January 31, 2012.
 
 
7

 

Termination of Merger

Under Section 7.3 of the Merger Agreement: (i) either we or Mainland Resources may terminate the Merger Agreement if certain conditions specified in the Merger Agreement were not satisfied at or before the “Termination Date”, which is defined in Section 1.1 of the Merger Agreement to mean January 31, 2012, or such later date as may be mutually agreed; or (ii) we and Mainland Resources may mutually agree to terminate the Merger Agreement (without further action on the part of the shareholders of the Corporation) anytime prior to the filing of the Articles of Merger.

Our Board of Directors determined that it was in the best interests of us and our shareholders to mutually agree with Mainland Resources to terminate the Merger Agreement. The Board of Directors based its decision upon considerable analysis of certain factors including, but not limited to: (i) our default of the Option Purchase Agreement whereby a well needed to be drilled and completed by the 31st of December 2011 and based upon the Transfer of Leases concluded on December 12th 2011,  we no longer had the asset base, including the Leases, previously held to contribute now making such a merger undesirable; (ii) our retention of a twenty percent (20%) working interest in the 8,225 acres based upon the joint venture with Mainland Resources; (iii) the potential legal fees and costs, time and energy associated with any protracted litigation with Mainland Resources associated with termination of the merger; and (iv) our ability to pursue new business operations and asset base.

Therefore, effective December 21, 2011 (the “Effective Date”), we entered into that certain termination and release agreement with Mainland Resources (the “Termination and Release Agreement”), pursuant to and in accordance with Section 7.3 of the Merger Agreement, the Corporation and Mainland Resources mutually agreed to the termination of the Merger Agreement as of the Effective Date. In further accordance with the terms and provisions of the Termination and Release Agreement, we agreed with Mainland Resources to release one another from any further liability as to the performance of the respective party’s duties and obligations under the Merger Agreement and that Mainland Resources shall have no further obligations to issue any shares of common stock of Mainland Resources or grant any options or warrants of Mainland Resources to our shareholders.
 
Fairness Opinion
 
We had retained Working Capital Corporation (“WCC”) as our financial advisor pursuant to an engagement agreement (the "Engagement Agreement") dated March 18, 2010, to provide an opinion as to the fairness, from a financial point of view, of the Merger Agreement exchange ratio to our shareholders. WCC did not determine the Merger Agreement exchange ratio, however, they were asked to evaluate its fairness. WCC provided their opinion to our Board of Directors on or about April 22, 2010 in the form of a fairness opinion letter dated April 22, 2010.
 
 
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In preparing the fairness opinion, WCC reviewed and where appropriate, relied upon (without attempting to verify independently the completeness or accuracy of) certain financial and operational information and documents, including but not limited to the following: (i) the Merger Agreement; (ii) certain historical publicly available business and financial information concerning us and Mainland Resources; (iii) certain internal financial statements and other financial and operating data concerning us and Mainland Resources; (iv) historical market prices and trading volumes of our common stock and Mainland Resources common stock; (v) the terms of recent merger and acquisition transactions, to the extent publicly available, involving oil & gas companies that WCC considered relevant; (vi) corporate presentations on both us and Mainland Resources; (vii) technical reports and well log data on gas projects held by us and Mainland Resources; (viii) publicly available information on our financial partners and those of Mainland Resources; (ix) press releases of both us and Mainland Resources; and (x) performed such other analyses and considered such other factors as WCC has deemed appropriate.
 
In addition, WCC held discussions with members of our senior management and of Mainland Resources for the purpose of reviewing our future prospects and those of Mainland Resources, including exploration plans related to the respective businesses, earnings, assets, liabilities and the amount and timing of cost savings (the "Synergies") expected to be achieved as a result of the Merger Agreement. WCC also took into account the assessment of general economic, market and financial conditions and WCC's experience in other transactions, as well as WCC's knowledge of oil and gas companies, and WCC's general experience in securities valuations.
 
Subject to the assumptions and limitations set forth in their fairness opinion, WCC advised that it was of the opinion that, as of the date of their fairness opinion letter, the merger consideration (being the shares of Mainland to be received by our shareholders) as a result of the Merger Agreement was fair, from a financial point of view.
 
Westrock Option Agreement

Effective on November 3, 2008, our Board of Directors authorized the execution of an option agreement (the “Option Agreement”) with Westrock Land Corp., a private corporation (“Westrock”). Westrock owns all right, title and interest in and to approximately 5,000 net acres of oil and gas leases located in Mississippi (collectively, the ”Leases”). We had an option to acquire 100% of the working interest and 75% of the net revenue interest in the Leases at $625 per net acre for a total purchase price of $3,125,000. The contiguous acreage involved several landowners, with mineral lease expiry extending beyond 2011. The original terms of the Option Agreement required spudding a well on or before October 1, 2009. The effective date of the conveyance of the revenue interest in the Leases to us was to be no later than May 15, 2009 upon final payment of the remaining balance of $2,018,750.

Extensions

Effective on January 8, 2009, we entered into an amendment to the Option Agreement (the “Amended Option Agreement”) with Westrock. Pursuant to the Amended Option Agreement, Westrock granted to us until February 2, 2009 to complete our due diligence. Effective on March 18, 2009, we entered into a further amendment to the Option Agreement (“the “Second Amended Option Agreement”) with Westrock. Pursuant to the Second Amended Option Agreement: (i) Westrock granted to us until May 15, 2009 to complete our due diligence; (ii) we paid to Westrock an additional non-refundable amount of $325,000 as consideration for the extension; and (iii) the effective date of the conveyance of the working and revenue interest in the Leases to us would be no later than May 15, 2009. Effective on August 17, 2009, we entered into a further amendment to the Option Agreement (the “Third Amended Option Agreement”) with Westrock. Pursuant to the Third Amended Option Agreement: (i) we agreed to issue an aggregate of 4,037,500 shares, valued at $2,664,750, of our restricted common stock to Westrock as satisfaction for an aggregate amount of $2,108,750, which remained due and owing from the aggregate purchase price of $3,125,000 (the “Purchase Price”); and (ii) we agreed to drill and complete a minimum of at least one well on the properties in the Bossier/Haynesville geological zone no later than December 31, 2010. The 4,037,500 shares of restricted common stock were issued to Westrock and the transfer of title to the Leases was finalized. On November 2, 2010, we executed a letter amendment to the Option Purchase Agreement with Westrock. In the November 2, 2010 letter agreement, we agreed to drill and complete at least one well on the Leases in the Bossier/Haynesville geological zone no later than December 31, 2011.
 
 
9

 

In 2010, a well operated by Mainland Resources was drilled on the leases reaching a depth of 22,000 feet. We worked with Mainland Resources to design a completion program with the intent that the well would be properly tested and evaluated during 2011. We nor Mainland Resources were able to secure sufficient funding during fiscal year 2011 to complete the testing of the well.

Termination of Westrock Option Purchase Agreement and Transfer of Leases

On November 11, 2011, we received a letter from Westrock advising that Westrock was willing to grant an extension to the December 31, 2011 deadline for us to meet our drilling and completions obligations under the terms and provisions of the Option Agreement if we proposed reasonable financial consideration acceptable to Westrock by December 15, 2011. In the event we were unable to provide reasonable financial consideration acceptable to Westrock, we would have been deemed in default of the provisions of the Option Agreement and automatically forfeited and transferred to Westrock all rights under the Option Agreement including, but not limited to, the acquired properties, and Westrock retained all payments made by us under the Option Agreement and all improvements made to the acquired properties. Management approached numerous potential investors and certain of our larger shareholders and sought to identify other sources of financial consideration to offer to Westrock. We were unable to acquire sufficient funding by the December 15, 2011 deadline to extend the Option Agreement.

Therefore, we were deemed to be in default of the Option Agreement. In accordance with the terms and provisions of the Option Agreement, and in the event of a default, we were to automatically forfeit and transfer back to Westrock the Leases. Legal opinions were received from Westrock’s counsel and Mainland Resources’ counsel, both of which advised that we would have no legal grounds to retain the Leases. We engaged our own legal counsel to provide advice on this matter. Our legal counsel concurred with the two other legal opinions. On December 12, 2011, we entered into a transfer of oil, gas and mineral leases with Westrock (the “Transfer of Leases”), pursuant to which we transferred, delivered and assigned to Westrock all of our interests in and to those certain Leases.

Notwithstanding the Transfer of Leases, we still retain a twenty percent (20%) working interest in the 8,225 adjoining acres in Mississippi that Mainland Resources Inc. first contributed to the joint venture.
 
Mainland Resources Letter Agreement
 
Effective on September 17, 2009, our Board of Directors authorized the execution of a letter agreement (the “Letter Agreement”) with Mainland Resources to jointly develop contiguous acreage known as the Buena Vista Area located in Mississippi (the “Joint Development Project”). In accordance with the terms and provisions of the Letter Agreement: (i) we agreed to commit approximately 5,000 net acres and Mainland Resources agreed to commit approximately 8,225 net acres to the Joint Development Project (the Acreage”); (ii) Mainland Resources would be the operator pursuant to the Joint Operating Agreement; (iii) Mainland Resources agreed to pay 80% of the initial well drilling and completion costs to earn a 51% working interest in the well and the total Joint Operating Area; and (iv) we agreed to pay 20% of the initial well drilling and completion costs to earn a 49% working interest in the well and the total Joint Operating Area. In further accordance with the terms and provisions of the Joint Operating Agreement, future costs, including drilling and completion, for oil and gas activities on the net acreage in the Joint Operating Area would have been split on a 51%/49% basis between Mainland Resources and us, respectively.

On March 25, 2010, Mainland Resources issued an authorization for expenditure (“AFE”) for the Burkley-Phillips No. 1 well, which contemplated drilling to a depth of 22,000 feet or a depth sufficient to evaluate the Bossier/Haynesville formations. The total completed well cost was estimated at $13,550,000. In accordance with the terms and provisions of the Letter Agreement, we had thirty days to contribute our 20% share of the total completed well cost or $2,710,000.

On April 27, 2010, we failed to fund our 20% share of the estimated total well costs ($2,710,000) of the Burkley-Phillips No. 1 well within the thirty-day period provided for in the joint development agreement, (the 30 day period expired on April 23, 2010). As a result, we forfeited 29% (of the total 49% held by American) working interest in the Burkley-Phillips No. 1 well and the prospect in favor of Mainland Resources, leaving the Company with a 20% working interest in the acreage and prospect. Currently American Exploration holds only a 20% working interest in 8225 acres of the Buena Vista prospect and does not have an interest in the Burkley Phillips well.
 
 
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DRILLING ACTIVITY
 
As of the date of this Annual Report, we do not own an interest in any wells. We along with our partners, Mainland Resources and Guggenheim Energy Partners, had drilled one well into the Buena Vista project  on lands within Jefferson County, Mississippi where we had a twenty percent (20%) carried interest. The well although drilled, was evaluated with wireline logs, but not tested and is currently suspended awaiting completion. This well along with the 5000 acre block it penetrated, was forfeited back to Westrock as of December 12, 2011. The well could not be completed by December 31, 2011, which had been a requirement in the agreement with Westrock who had originally owned these leases.
 
GROSS WELLS     NET WELLS  
                                 
Total     Producing     Dry     Total     Producing     Dry  
  0       -0-       -0-       0       -0-       -0-  
 
PRODUCTION INFORMATION
 
During fiscal year ended December 31, 2011 and previous, we had no oil and gas production.
 
GROSS AND NET PRODUCTIVE GAS WELLS, DEVELOPED ACREAGE
 
PRODUCTIVE WELLS AND DEVELOPED ACRES
 
As of the date of this Annual Report, the tables below set forth our leasehold interest in productive and shut-in gas wells, and in developed acres:
 
PROSPECT    GROSS (1)     NET (2)  
             
Buena Vista      0       0  
Total       0       0  
 
(1) A gross well is a well in which a working interest is owned. The number of gross wells is the total number of wells in which a working interest is owned.
 
(2) A net well is deemed to exist when the sum of fractional ownership working interest in gross wells equals one. The number of net wells is the sum of the fractional working interests owned in gross wells expressed as whole numbers and fractions thereof.
 
 
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As of the date of this Annual Report, no wells were drilled on acreage adjoining our lands in Jefferson County, Mississippi acreage, which is unevaluated and subject to completion as of December 31, 2011 and the date of this filing.
 
DEVELOPED ACREAGE TABLE (1)
 
PROSPECT    GROSS (2)     NET (3)  
                 
Bossier      0       0  
Buena Vista     0       0  
Total      0       0  
 
(1) Consists of acres spaced or assignable to productive wells.
 
(2) A gross acre is an acre in which a working interest is owned. The number of gross acres is the total number of acres in which a working interest is owned.
 
(3) A net acre is deemed to exist when the sum of fractional ownership working interests in gross acres equals one. The number of net acres is the sum of the fractional working interests owned in gross acres expressed as whole numbers and fractions thereof.
 
COMPETITION

We operate in a highly competitive industry, competing with major oil and gas companies, independent producers and institutional and individual investors, which are actively seeking oil and gas properties throughout the world together with the equipment, labor and materials required to operate properties. Most of our competitors have financial resources, staffs and facilities substantially greater than ours. The principal area of competition is encountered in the financial ability to acquire good acreage positions and drill wells to explore for oil and gas, then, if warranted, drill production wells and install production equipment. Competition for the acquisition of oil and gas wells is intense, with many oil and gas properties and/or leases or concessions available in a competitive bidding process in which we may lack the financial resources or technological information or expertise available to other bidders. Therefore, we may not be successful in acquiring and developing profitable properties in the face of this competition. No assurance can be given that a sufficient number of suitable oil and gas wells will be available for acquisition and development.
 
 
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GOVERNMENT REGULATION

The production and sale of oil and gas are subject to various federal, state and local governmental regulations, which may be changed from time to time in response to economic or political conditions and can have a significant impact upon overall operations. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties, taxation, abandonment and restoration and environmental protection. These laws and regulations are under constant review for amendment or expansion. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas. Changes in these regulations could require us to expend significant resources to comply with new laws or regulations or changes to current requirements and could have a material adverse effect on our future business operations.

Regulation of Oil and Natural Gas Production

Our future oil and natural gas exploration, production and related operations will be subject to extensive rules and regulations promulgated by federal, state and local authorities and agencies. Failure to comply with such rules and regulations can result in substantial penalties. The regulatory burden on the oil and natural gas industry increases our cost of doing business and affects our profitability. Although we believe we are in substantial compliance with all applicable laws and regulations, because such rules and regulations are frequently amended or reinterpreted, we are unable to predict the future cost or impact of complying with such laws.

Many states require permits for drilling operations, drilling bonds and reports concerning operations and impose other requirements relating to the exploration and production of oil and natural gas. Such states also have statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum rates of production from wells, and the regulation of spacing, plugging and abandonment of such wells.

Federal Regulation of Natural Gas

The Federal Energy Regulatory Commission ("FERC") regulates interstate natural gas transportation rates and service conditions, which affect the marketing of natural gas produced by us, as well as the revenues received by us for sales of such production. Since the mid-1980's, FERC has issued a series of orders that have significantly altered the marketing and transportation of natural gas. These orders mandated a fundamental restructuring of interstate pipeline sales and transportation service, including the unbundling by interstate pipelines of the sale, transportation, storage and other components of the city-gate sales services such pipelines previously performed. One of FERC's purposes in issuing the orders was to increase competition within all phases of the natural gas industry. Certain aspects of these orders may be modified as a result of various appeals and related proceedings and it is difficult to predict the ultimate impact of the orders on us and others. Generally, the orders eliminated or substantially reduced the interstate pipelines' traditional role as wholesalers of natural gas in favor of providing only storage and transportation service, and have substantially increased competition and volatility in natural gas markets.
 
 
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The price, which we may receive for the sale of oil, natural gas and natural gas liquids, would be affected by the cost of transporting products to markets. FERC has implemented regulations establishing an indexing system for transportation rates for oil pipelines, which, generally, would index such rates to inflation, subject to certain conditions and limitations. We are not able to predict with certainty the effect, if any, of these regulations on any future operations. However, the regulations may increase transportation costs or reduce wellhead prices for oil and natural gas liquids.

Environmental Matters

Our operations and properties will be subject to extensive and changing federal, state and local laws and regulations relating to environmental protection, including the generation, storage, handling, emission, transportation  and discharge of materials into the environment, and relating to safety and health. The recent trend in environmental legislation and regulation generally is toward stricter standards, and this trend will likely continue. These laws and regulations may (i) require the acquisition of a permit or other authorization before construction or drilling commences and for certain other activities; (ii) limit or prohibit construction, drilling and other activities on certain lands lying within wilderness and other protected areas; and (iii) impose substantial liabilities for pollution resulting from our operations. The permits required for several of our operations are subject to revocation, modification and renewal by issuing authorities. Governmental authorities have the power to enforce their regulations, and violations are subject to fines or injunctions, or both. In the opinion of management, we are in substantial compliance with current applicable environmental law and regulations, and we have no material commitments for capital expenditures to comply with existing environmental requirements. Nevertheless, changes in existing environmental laws and regulations or in interpretations thereof could have a significant impact on our business operations, as well as the oil and natural gas industry in general.

The Comprehensive Environmental, Response, Compensation, and Liability Act ("CERCLA ") and comparable state statutes impose strict, joint and several liability on owners and operators of sites and on persons who disposed of or arranged for the disposal of "hazardous substances" found at such sites. It is not uncommon for the neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. The Federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes govern the disposal of "solid waste" and "hazardous waste" and authorize the imposition of substantial fines and penalties for noncompliance. Although CERCLA currently excludes petroleum from its definition of "hazardous substance," state laws affecting our operations impose clean-up liability relating to petroleum and petroleum related products. In addition, although RCRA classifies certain oil field wastes as "non-hazardous," such exploration and production wastes could be reclassified as hazardous wastes, thereby making such wastes subject to more stringent handling and disposal requirements.
 
 
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We intend to acquire leasehold interests in properties that for many years have produced oil and natural gas. Although the previous owners of these interests may have used operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed of or released on or under the properties. In addition, some of our properties may be operated in the future by third parties over which we have no control. Notwithstanding our lack of control over properties operated by others, the failure of the operator to comply with applicable environmental regulations may, in certain circumstances, adversely impact our business operations.

The National Environmental Policy Act ("NEPA") is applicable to many of our planned activities and operations. NEPA is a broad procedural statute intended to ensure that federal agencies consider the environmental impact of their actions by requiring such agencies to prepare environmental impact statements ("EIS") in connection with all federal activities that significantly affect the environment. Although NEPA is a procedural statute only applicable to the federal government, a portion of our properties may be acreage located on federal land. The Bureau of Land Management's issuance of drilling permits and the Secretary of the Interior's approval of plans of operation and lease agreements all constitute federal action within the scope of NEPA. Consequently, unless the responsible agency determines that our drilling activities will not materially impact the environment, the responsible agency will be required to prepare an EIS in conjunction with the issuance of any permit or approval.

The Endangered Species Act ("ESA") seeks to ensure that activities do not jeopardize endangered or threatened animals, fish and plant species, nor destroy or modify the critical habitat of such species. Under ESA, exploration and production operation, as well as actions by federal agencies, may not significantly impair or jeopardize the species or their habitat. ESA provides for criminal penalties for willful violations of the Act. Other statutes that provide protection to animal and plant species and that may apply to our operations include, but are not necessarily limited to, the Fish and Wildlife Coordination Act, the Fishery Conservation and Management Act, the Migratory Bird Treaty Act and the National Historic Preservation Act. Although we believe that our operations are in substantial compliance with such statutes, any change in these statutes or any reclassification of a species as endangered could subject us to significant expense to modify our operations or could force us to discontinue certain operations altogether.

Management believes that we are in substantial compliance with current applicable environmental laws and regulations.

RESEARCH AND DEVELOPMENT ACTIVITIES

No research and development expenditures have been incurred, either on our account or sponsored by customers, from the date of our inception.

EMPLOYEES

We do not employ any persons on a full-time or on a part-time basis. We have two contract employees, Steve Harding is our President/Chief Executive Officer and Brian Manko is our Chief Financial Officer/Corporate Secretary. These individuals are primarily responsible for all of our day-to-day operations. Other services are provided by outsourcing and consultant and special purpose contracts.
 
 
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ITEM 1A. RISK FACTORS
 
An investment in our common stock involves a number of very significant risks. You should carefully consider the following risks and uncertainties in addition to other information in evaluating us and our business before purchasing shares of our common stock. Our business, operating results and financial condition could be seriously harmed due to any of the following risks. The risks described below are all of the material risks that we are currently aware of that we are facing. Additional risks not presently known to us may also impair our business operations. You could lose all or part of your investment due to any of these risks.
 
RISKS RELATED TO OUR BUSINESS
 
We will Need to Raise Additional Financing to Complete Further Exploration and Production Activities.
 
Since the Merger Agreement was not consummated, we will require significant additional financing in order to commence and continue our developmental activities and our production activities and our assessment of our acquired lease and the commercial viability of future oil and gas properties. Furthermore, if the cost of our planned exploration, development and production programs are greater than anticipated, we may have to seek additional funds through public or private share offerings or arrangements with corporate partners. There can be no assurance that we will be successful in our efforts to raise these required funds, or on terms satisfactory to us. Since the Merger Agreement was not consummated, the continued exploration and development and production of our oil and gas properties and the development of our business will depend upon our ability to establish the commercial viability of our oil and gas properties and to ultimately develop cash flow from operations and reach profitable operations. We currently are in the exploration stage. We are experiencing significant negative cash flow. Accordingly, the sources of funds presently available to us are through the sale of equity. We presently believe that significant debt financing will not be an alternative to us as we are in the exploration stage. Since the Merger Agreement was not consummated, we may finance our business by offering an interest in future oil and gas properties to be earned by another party or parties carrying out further exploration and development thereof or to obtain project or operating financing from financial institutions, neither of which is presently intended. If we are unable to obtain this additional financing, we will not be able to continue our exploration activities and our assessment of the commercial viability of our oil and gas property. Further, if we are able to establish that development of future oil and gas properties is commercially viable, our inability to raise additional financing at this stage would result in our inability to place our future oil and gas properties into production and recover our investment and potentially dilute our interest in the property with the drilling of future wells.
 
If our future oil and gas properties do not contain any proved reserves, we may not discover commercially exploitable quantities of oil or gas on our future properties that would enable us to enter into commercial production, achieve revenues and recover the money we spend on exploration.
 
We are in the exploration stage as opposed to the development stage and have no known body of reserves. No reserves have yet been determined to be economic and may never be determined to be economic. Since the Merger Agreement was not consummated, we plan to conduct further exploration activities on future oil and gas properties, which future exploration may include the completion of feasibility studies necessary to evaluate whether commercial reserves exist on any of our oil and gas leases. There is a substantial risk that these exploration activities will not result in discoveries of commercially recoverable reserves of oil or gas. Any determination that a future property contains commercially recoverable quantities of oil or gas may not be reached until such time that final comprehensive feasibility studies have been concluded that establish that a potential reserve is likely to be economic. There is a substantial risk that any preliminary or final feasibility studies carried out by us will not result in a positive determination that our future oil and gas property can be commercially developed.
 
 
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Based Upon Results of Management’s Analysis of Certain Capitalized Costs and Exploration Activities, We Have Impaired the Carrying Value of Our Oil and Gas Properties.
 
Management has assessed certain capitalized costs including, but not limited to, results of exploration activities resulting in an impairment charge to the carrying value of our property and thus may negatively impact the trading value of our securities. We account for our crude oil and natural gas exploration and development activities using the full cost method of accounting whereby all costs related to the acquisition of oil and gas interests are capitalized. Such costs include land and lease acquisition costs, annual carrying charges of non-producing properties, geological and geophysical costs, costs of drilling and equipping productive and non-productive wells, and direct exploration salaries and related benefits. Certain of these costs require managerial judgment for impairment. The analysis of these factors regarding our oil and gas property and operations can take considerable time to analyze and the determination for impairment requires both judgment and industry experience. Wells may be completed that are assumed to be productive but may actually deliver oil and gas in quantities insufficient to be economic, which may result in the abandonment of the wells at a later date. Future wells are drilled that target geological structures that are both developmental and exploratory in nature. A subsequent allocation of costs is then required to properly account for the results. The evaluation of certain of these capitalized costs requires judgment to estimate the fair value of these costs with reference to drilling activity in a given area.
 
We incurred impairment charges related to our property. Impairment of unproved oil and gas properties was calculated on a field by field basis under the full cost method of accounting. We review our oil and gas property for impairment annually or whenever events and circumstances indicate a decline in the recoverability of their carrying value. Once incurred, a write-down of oil and gas properties is not reversible at a later date. Given the complexities associated with oil and gas exploration and development, events may arise that will require us to record further impairments of the book values associated with our oil and gas properties.
 
Exploration Activities on Future Oil and Gas Properties and Potential Lease Acquisitions May Not Be Commercially Successful, Which Could Lead Us to Abandon Our Plans to Develop the Property and Our Investments in Exploration.
 
Since the Merger Agreement was not consummated, our long-term success now depends on our ability to establish commercially recoverable quantities of oil and natural gas on future oil and gas properties that can then be developed into commercially viable operations. Oil and gas exploration is highly speculative in nature, involves many risks and is frequently non-productive. These risks include unusual or unexpected geologic formations, and the inability to obtain suitable or adequate machinery, equipment or labor. The success of oil and gas exploration is determined in part by the following factors:
 
 
identification of potential oil and natural gas reserves based on technical analyses;
 
availability of government-granted exploration permits;
 
the quality of management and geological and technical expertise; and
 
the capital available for exploration.
 
Substantial expenditures are required to establish proven and probable reserves through drilling and analysis, to develop processes to extract oil and gas, and to develop the drilling and processing facilities and infrastructure at any chosen site. Whether an oil and gas reserve will be commercially viable depends on a number of factors, which include, without limitation, the particular attributes of the reserve; oil and natural gas prices, which fluctuate widely; and government regulations, including, without limitation, regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of oil and gas and environmental protection. We may invest significant capital and resources in exploration activities and abandon such investments if we are unable to identify commercially exploitable reserves. The decision to abandon a project may reduce the trading price of our common stock and impair our ability to raise future financing. We cannot provide any assurance to investors that we will discover or acquire any oil or gas reserves in sufficient quantities on our property to justify commercial operations. Further, we will not be able to recover the funds that we spend on exploration if we are not able to establish commercially recoverable reserves of oil or natural gas on our property.
 
 
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Our Business is Difficult to Evaluate Because We Have a Limited Operating History.

In considering whether to invest in our common stock, you should consider that there is only limited historical financial and operating information available on which to base your evaluation of our performance and, considering the termination of the Merger Agreement, our prospects of locating suitable oil and gas properties. Our inception was May 11, 2006 and, as a result, we have a limited operating history and are still in the exploration stage.

We Have a History of Operating Losses and There Can Be No Assurance We Will Be Profitable in the Future.

We have a history of operating losses, expect to continue to incur losses, and may never be profitable, and we must be considered to be in the exploration stage. Further, we have been dependent on sales of our equity securities and debt financing to meet our cash requirements. We have incurred losses from operations totaling $7,115,677 from May 11, 2006 (inception) to December 31, 2011. As of December 31, 2011, we had an accumulated deficit of $7,115,677 and had incurred losses of $4,507,531 during fiscal year ended December 31, 2011. Further, we do not expect positive cash flow from operations in the near term. There is no assurance that actual cash requirements will not exceed our estimates. In particular, additional capital may be required in the event that: (i) the costs to acquire additional leases are more than we currently anticipate; (ii) drilling and completion costs for additional wells increase beyond our expectations; or (iii) we encounter greater costs associated with general and administrative expenses or offering costs.

Our development of and participation in what could evolve into an increasing number of oil and gas prospects may require substantial capital expenditures. The uncertainty and factors described throughout this section may impede our ability to economically find, develop, produce, and acquire natural gas and oil reserves. As a result, we may not be able to achieve or sustain profitability or positive cash flows from operating activities in the future.

We Have Received a Going Concern Opinion In the Report of our Independent Registered Public Accounting Firm Accompanying Our December 31, 2011 and December 31, 2010 Financial Statements.

The independent registered public accounting firm’s report accompanying our December 31, 2011 and 2010 audited financial statements contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The financial statements have been prepared "assuming that the Company will continue as a going concern." Our ability to continue as a going concern is dependent on raising additional capital to fund our operations and ultimately on generating future profitable operations. There can be no assurance that we will be able to raise sufficient additional capital or eventually have positive cash flow from operations to address all of our cash flow needs. If we are not able to find alternative sources of cash or generate positive cash flow from operations, our business and shareholders will be materially and adversely affected.

We Will Require Additional Funding in the Future.

Based upon our historical losses from operations and that the Merger Agreement was not consummated, we will require additional funding in the future. If we cannot obtain capital through financings or otherwise, our ability to execute future exploration plans and achieve production levels will be greatly limited. Our future exploration plans will require us to make capital expenditures for the drilling and completion of our oil and natural gas property. Historically, we have funded our operations through the issuance of equity. We may not be able to obtain additional financing on favorable terms, if at all. Our future cash flows and the availability of financing will be subject to a number of variables, including potential production and the market prices of oil and natural gas. Further, debt financing, if utilized, could lead to a diversion of cash flow to satisfy debt-servicing obligations and create restrictions on business operations. Since the Merger Agreement was not consummated and if we are unable to raise additional funds, it would have a material adverse effect upon our operations.
 
 
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Since the Merger Agreement was Not Consummated and Our Remaining Asset is the 20% Interest in the Acreage, as Part of Our Potential Growth Strategy, We Will Need to Acquire Additional Oil and Gas Properties.

Since the Merger Agreement is not consummated and our remaining asset is the 20% interest in the Acreage, as part of our growth strategy, we will need to acquire additional oil and gas production properties. Current and subsequent acquisitions may pose substantial risks to our business, financial condition, and results of operations. In pursuing potential acquisitions, we will compete with other companies, many of which have greater financial and other resources to acquire attractive properties. Even if we are successful in acquiring additional properties, some of the properties may not produce revenues at  anticipated levels, or failure to conduct drilling on prospects within specified time periods may cause the forfeiture of the lease in that prospect. There can be no assurance that we will be able to successfully integrate acquired properties, which could result in substantial costs and delays or other operational, technical, or financial problems. Further, acquisitions could disrupt ongoing business operations. If any of these events occur, it would have a material adverse effect upon our operations and results from operations.

We Are a New Entrant Into the Oil and Gas Exploration and Production Industry Without Profitable Operating History.

Since inception, our activities have been limited to organizational efforts, obtaining working capital, acquiring the Westrock Lease, consummating the Joint Development Project and participating as a merger candidate in the Merger Agreement. As a result, there is limited information regarding property related production potential or revenue generation potential.

The business of oil and gas exploration and production is subject to many risks and if oil and natural gas is found in economic production quantities, the potential profitability of future possible oil and gas ventures depends upon factors beyond our control. The potential profitability of oil and natural gas properties, if economic quantities are found, is dependent upon many factors and risks beyond our control, including, but not limited to: (i) unanticipated ground conditions; (ii) geological problems; (iii) drilling and other processing problems; (iv) the occurrence of unusual weather or operating conditions and other force majeure events; (v) lower than expected reserve quantities; (vi) accidents; (vii) delays in the receipt of or failure to receive necessary government permits; (viii) delays in transportation; (ix) labor disputes; (x) government permit restrictions and regulation restrictions; (xi) unavailability of materials and equipment; and (xii) the failure of equipment or drilling to operate in accordance with specifications or expectations.

Future Potential Drilling Operations May Not Be Successful.

Since the Merger Agreement was not consummated, we intend to seek additional oil and gas properties, technically evaluate certain zones on future properties and, if results are positive and capital is available, drill wells and begin production operations. There can be no assurance that our future activities or future drilling activities would be successful, and we cannot be sure that our overall future drilling success rate or any production operations within a particular area would ever come to fruition, and if it does, not decline over time. We may not recover all or any portion of our capital investment in our 20% interest in the Acreage or in any other future wells or the underlying leaseholds. Unsuccessful drilling activities would have a material adverse effect upon our results of operations and financial condition. The cost of drilling, completing, and operating wells is often uncertain, and a number of factors can delay or prevent drilling operations including: (i) unexpected drilling conditions; (ii) down hole pressure or irregularities in geological formations; (iii) equipment failures or accidents; (iv) adverse weather conditions; (iv) shortages or delays in availability of drilling rigs and delivery of equipment; and (vi) low commodity prices that negate project commerciality.
 
 
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Future Production Initiatives May Not Prove Successful.

There is no guarantee that our 20% interest in the Acreage or future acquisition activities or potential drilling locations will prove successful and we may never acquire or produce natural gas or oil on future properties, which could have a material adverse effect upon our results of operations.

Future Prospects That We Decide to Drill May Not Yield Natural Gas or Oil in Commercially Viable Quantities.

We describe our current 20% interest in the Acreage in this Annual Report. We are in a stage of preliminary evaluation and assessment and have not reached the point where we have committed to drill on the prospect. However, the use of seismic data, historical drilling logs, offsetting well information, and other technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling and testing whether natural gas or oil will be present in sufficient quantities or quality to recover drilling or completion costs or to be economically viable. In sum, the cost of drilling, completing and operating any wells is often uncertain and new wells may not be productive.

We May Be Unable to Identify Liabilities Associated With Future Properties or Obtain Protection From Sellers Against Them.

Since the Merger Agreement was not consummated, one of our growth strategies is to capitalize on opportunistic acquisitions of oil and natural gas reserves. However, our reviews of future acquired properties will be inherently incomplete because it generally is not feasible to review in depth every individual property involved in each acquisition. A detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to assess fully their deficiencies and potential. Further, environmental problems, such as ground water contamination, are not necessarily observable even when an inspection is undertaken. We may not be able to obtain indemnification or other protections from the sellers against such potential liabilities, which would have a material adverse effect upon our results of operations.

The Potential Profitability of Oil and Gas Ventures Depends Upon Global Political and Market Related Factors Beyond Our Control.

World prices and markets for oil and gas are unpredictable, highly volatile, potentially subject to governmental fixing, pegging, controls, or any combination of these and other factors, and respond to changes in domestic, international, political, social, and economic environments. Additionally, due to worldwide economic uncertainty, the availability and cost of funds for production and other expenses have become increasingly difficult, if not impossible, to project. These and other changes and events may materially affect our financial performance. The potential profitability of oil and gas properties is dependent on these and other factors beyond our control.
 
 
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Production of Oil and Gas Resources if Found Are Dependent on Numerous Operational Uncertainties Specific to the Area of the Resource That Affects its Profitability.

Production area specifics affect profitability. Adverse weather conditions can hinder drilling operations and ongoing production work. A productive well may become uneconomic in the event water or other deleterious substances are encountered which impair or prevent the production of oil and/or gas from the well. Production and treatments on other wells in the area can have either a positive or negative effect on our production and wells. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. The marketability of oil and gas from any specific reserve which may be acquired or discovered will be affected by numerous factors beyond our control. These factors include, but are not limited to, the proximity and capacity of oil and gas pipelines, availability of capacity in the pipelines to accommodate additional production, processing and production equipment operating costs and equipment efficiency, market fluctuations of prices and oil and gas marketing relationships, local and state taxes, mineral owner and other royalties, land tenure, lease bonus costs and lease damage costs, allowable production, and environmental protection. These factors cannot be accurately predicted and the combination of these factors may result in us not receiving an adequate return on our invested capital.

If Production Results From Operations, We are Dependent Upon Transportation and Storage Services Provided by Third Parties.

We will be dependent on the transportation and storage services offered by various interstate and intrastate pipeline companies for the delivery and sale of our gas supplies. Both the performance of transportation and storage services by interstate pipelines and the rates charged for such services are subject to the jurisdiction of the Federal Energy Regulatory Commission or state regulatory agencies. An inability to obtain transportation and/or storage services at competitive rates could hinder our processing and marketing operations and/or affect our sales margins.

Our Results of Operations are Dependent Upon Market Prices for Oil and Gas, Which Fluctuate Widely and are Beyond Our Control.

If and when production from future oil and gas properties is reached, our revenue, profitability, and cash flow depend upon the prices and demand for oil and natural gas. The markets for these commodities are very volatile and even relatively modest drops in prices can significantly affect our financial results and impede our growth. Prices received also will affect the amount of future cash flow available for capital expenditures and may affect our ability to raise additional capital. Lower prices may also affect the amount of natural gas and oil that can be economically produced from reserves either discovered or acquired. Factors that can cause price fluctuations include: (i) the level of consumer product demand; (ii) domestic and foreign governmental regulations; (iii) the price and availability of alternative fuels; (iv) technical advances affecting energy consumption; (v) proximity and capacity of oil and gas pipelines and other transportation facilities; (vi) political conditions in natural gas and oil producing regions; (vii) the domestic and foreign supply of natural gas and oil; (viii) the ability of members of Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; (ix) the price of foreign imports; and (x) overall domestic and global economic conditions.

The availability of a ready market for our future oil and gas depends upon numerous factors beyond our control, including the extent of domestic production and importation of oil and gas, the relative status of the domestic and international economies, the proximity of our properties to gas gathering systems, the capacity of those systems, the marketing of other competitive fuels, fluctuations in seasonal demand and governmental regulation of production, refining, transportation and pricing of oil, natural gas and other fuels.
 
 
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The Oil and Gas Industry in Which We Operate Involves Many Industry Related Operating and Implementation Risks That Can Cause Substantial Losses Including, but not Limited to, Unproductive Wells, Natural Disasters, Facility and Equipment Problems and Environmental Hazards.

Our future drilling activities will be subject to many risks, including the risk that we will not discover commercially productive reservoirs. Drilling for oil and natural gas can be unprofitable, not only from dry holes, but from productive wells that do not produce sufficient revenues to return a profit. In addition, our drilling and producing operations may be curtailed, delayed or canceled as a result of other drilling and production, weather and natural disaster, equipment and service failure, environmental and regulatory, and site specific related factors, including but not limited to: (i) fires; (ii) explosions; (iii) blow-outs and surface cratering; (iv) uncontrollable flows of underground natural gas, oil, or formation water; (v) natural disasters; (vi) facility and equipment failures; (vii) title problems; (viii) shortages or delivery delays of equipment and services; (ix) abnormal pressure formations; and (x) environmental hazards such as natural gas leaks, oil spills, pipeline ruptures and discharges of toxic gases.

If any of these events occur, we could incur substantial losses as a result of: (i) injury or loss of life; (ii) severe damage to and destruction of property, natural resources or equipment; (iii) pollution and other environmental damage; (iv) clean-up responsibilities; (v) regulatory investigation and penalties; (vi) suspension of our operations; or (vii) repairs necessary to resume operations.

If we were to experience any of these problems, it could affect well bores, gathering systems and processing facilities, any one of which could adversely affect our ability to conduct operations. We may be affected by any of these events more than larger companies, since we have limited working capital.

The Oil and Gas Industry is Highly Competitive and There is No Assurance That We Will Be Successful in Acquiring Leases.

The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis. These companies may be able to pay more for productive oil and natural gas properties and exploratory prospects or define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. In addition, these companies may have a greater ability to continue exploration activities during periods of low oil and natural gas market prices. Our larger competitors may be able to absorb the burden of present and future federal, state, local and other laws and regulations more easily than we can, which would adversely affect our competitive position. Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. In addition, because we have fewer financial and human resources than many companies in our industry, we may be at a disadvantage in bidding for exploratory prospects and producing oil and natural gas properties.

The Marketability of Natural Resources Will be Affected by Numerous Factors Beyond Our Control, Which May Result in Us not Receiving an Adequate Return on Invested Capital to be Profitable or Viable.

The marketability of natural resources which may be acquired or discovered by us will be affected by numerous factors beyond our control. These factors include market fluctuations in oil and gas pricing and demand, the proximity and capacity of natural resource markets and processing equipment, governmental regulations, land tenure, land use, regulation concerning the importing and exporting of oil and gas and environmental protection regulations. The exact effect of these factors cannot be accurately predicted, but the combination of these factors may result in us not receiving an adequate return on invested capital to be profitable or viable.
 
 
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Oil and Gas Operations are Subject to Comprehensive Regulation Which May Cause Substantial Delays or Require Capital Outlays in Excess of Those Anticipated, Causing an Adverse Effect on Our Business Operations.

Oil and gas operations are subject to federal, state, and local laws relating to the protection of the environment, including laws regulating removal of natural resources from the ground and the discharge of materials into the environment. Oil and gas operations are also subject to federal, state, and local laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Various permits from government bodies are required for drilling operations to be conducted; no assurance can be given that such permits will be received. Environmental standards imposed by federal, state, or local authorities may be changed and any such changes may have material adverse effects on our activities. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages which we may elect not to insure against due to prohibitive premium costs and other reasons. To date we have not been required to spend material amounts on compliance with environmental regulations. However, we may be required to do so in future and this may affect our ability to expand or maintain our operations.

In general, our future exploration and production activities will be subject to certain federal, state and local laws and regulations relating to environmental quality and pollution control. Such laws and regulations increase the costs of these activities and may prevent or delay the commencement or continuance of a given operation. Compliance with these laws and regulations has not had a material effect on our operations or financial condition to date. Specifically, we are subject to legislation regarding emissions into the environment, water discharges and storage and disposition of hazardous wastes. In addition, legislation has been enacted which requires well and facility sites to be abandoned and reclaimed to the satisfaction of state authorities. However, such laws and regulations are frequently changed and we are unable to predict the ultimate cost of compliance. Generally, environmental requirements do not appear to affect us any differently or to any greater or lesser extent than other companies in the industry.

We believe that our operations comply, in all material respects, with all applicable environmental regulations. We need insurance to protect us against risks associated with the leases obtained. The leases allow for entry onto the properties for the purposes of oil and gas exploration. The insurance we require relates solely to developments on the properties for the purposes of oil and gas exploration.

Any Change to Government Regulation/Administrative Practices May Have a Negative Impact on Our Ability to Operate and Our Profitability.

The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in the United States or any other jurisdiction, may be changed, applied or interpreted in a manner which will fundamentally alter our ability to carry on business. The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate and/or our profitability.

We May be Unable to Retain Key Employees or Consultants or Recruit Additional Qualified Personnel.

Our extremely limited personnel means that we would be required to spend significant sums of money to locate and train new employees in the event any of our employees resign or terminate their employment with us for any reason. Due to our limited operating history and financial resources, we are entirely dependent on the continued service of Steve Harding, our Chief Executive Officer, and Brian Manko, our Chief Financial Officer. Further, we do not have key man life insurance on either of these individuals. We may not have the financial resources to hire a replacement if one or both of our officers were to die. The loss of service of either of these employees could therefore significantly and adversely affect our operations.
 
 
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Our Officers and Directors May be Subject to Conflicts of Interest.

Some of our officers and directors serve only part time and can become subject to conflicts of interest. Some devote part of their working time to other business endeavors, including consulting relationships with other entities, and have responsibilities to these other entities. Such conflicts include deciding how much time to devote to our affairs, as well as what business opportunities should be presented to us. Because of these relationships, our officers and directors could be subject to conflicts of interest. Currently, we have no policy in place to address such conflicts of interest.

Nevada Law and Our Articles of Incorporation May Protect our Directors From Certain Types of Lawsuits.

Nevada law provides that our officers and directors will not be liable to us or our stockholders for monetary damages for all but certain types of conduct as officers and directors. Our Bylaws permit us broad indemnification powers to all persons against all damages incurred in connection with our business to the fullest extent provided or allowed by law. The exculpation provisions may have the effect of preventing stockholders from recovering damages against our officers and directors caused by their negligence, poor judgment or other circumstances. The indemnification provisions may require us to use our limited assets to defend our officers and directors against claims, including claims arising out of their negligence, poor judgment, or other circumstances.

Our Directors and Officers Are Nationals and/or Residents of Canada.

Currently, all of our directors and officers reside in Canada. Therefore, it may be difficult for investors to enforce within the United States any judgments obtained against us or any of our directors or officers. All or a substantial portion of such persons' assets may be located outside the United States. As a result, it may be difficult for investors to effect service of process on our directors or officers, or enforce within the United States or Canada any judgments obtained against us or our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. Consequently, you may be effectively prevented from pursuing remedies under U.S. federal securities laws against them. In addition, investors may not be able to commence an action in a Canadian court predicated upon the civil liability provisions of the securities laws of the United States. We have been advised by our Canadian counsel that there is doubt as to the enforceability, in original actions in Canadian courts, of liability based upon the U.S. federal securities laws and as to the enforceability in Canadian courts of judgments of U.S. courts obtained in actions based upon the civil liability provisions of the U.S. federal securities laws. Therefore, it may not be possible to enforce those actions against us or any of our directors or officers.

RISKS RELATED TO OUR COMMON STOCK

Sales of a Substantial Number of Shares of Our Common Stock Into the Public Market by Certain Stockholders May Result in Significant Downward Pressure on the Price of Our Common Stock and Could Affect Your Ability to Realize the Current Trading Price of Our Common Stock.

Sales of a substantial number of shares of our common stock in the public market by certain stockholders could cause a reduction in the market price of our common stock.  As of the date of this Annual Report, we have 60,273,333 shares of common stock issued and outstanding. Of the total number of issued and outstanding shares of common stock, certain stockholders are able to resell up to 41,475,000 shares of our common stock pursuant to the Registration Statement declared effective on March 17, 2007. As a result of the Registration Statement, 44,437,500 shares of our common stock were issued and are available for immediate resale which could have an adverse effect on the price of our common stock.
 
 
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As of the date of this Annual Report, there are 60,273,333 outstanding shares of our common stock that are restricted securities as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Although the Securities Act and Rule 144 place certain prohibitions on the sale of restricted securities, restricted securities may be sold into the public market under certain conditions. Further, as of the date of this Annual Report, there are an aggregate of 3,900,000 stock options outstanding. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

Any significant downward pressure on the price of our common stock as the selling stockholders sell their shares of our common stock could encourage short sales by the selling stockholders or others. Any such short sales could place further downward pressure on the price of our common stock.

The Trading Price of Our Common Stock on the OTC Bulletin Board Will Fluctuate Significantly and Stockholders May Have Difficulty Reselling Their Shares.

As of the date of this Annual Report, our common stock trades on the Over-the-Counter Bulletin Board. There is a volatility associated with Bulletin Board securities in general and the value of your investment could decline due to the impact of any of the following factors upon the market price of our common stock: (i) disappointing results from our exploration or development efforts; (ii) failure to meet our revenue or profit goals or operating budget; (iii) decline in demand for our common stock; (iv) downward revisions in securities analysts' estimates or changes in general market conditions; (v) technological innovations by competitors or in competing technologies; (vi) lack of funding generated for operations; (vii) investor perception of our industry or our prospects; (viii) general economic trends; and ix) Commodity price fluctuation

In addition, stock markets have experienced price and volume fluctuations and the market prices of securities have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock. As a result, investors may be unable to sell their shares at a fair price and you may lose all or part of your investment.

Additional Issuance of Equity Securities May Result in Dilution to Our Existing Stockholders.

Our Articles of Incorporation, as amended, authorize the issuance of 2,100,000,000 shares of common stock. The Board of Directors has the authority to issue additional shares of our capital stock to provide additional financing in the future and the issuance of any such shares may result in a reduction of the book value or market price of the then outstanding shares of our common stock. If we do issue any such additional shares, such issuance also will cause a reduction in the proportionate ownership and voting power of all other stockholders. As a result of such dilution, your proportionate ownership interest and voting power will be decreased accordingly. Further, any such issuance could result in a change of control.

Our Common Stock is Classified as a “Penny Stock” Under SEC Rules Which Limits the Market for Our Common Stock.

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks." Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. A broker-dealer must also provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer, and sales person in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for stock that becomes subject to those penny stock rules. If a trading market for our common stock develops, our common stock will probably become subject to the penny stock rules, and shareholders may have difficulty in selling their shares.
 
 
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All of Our Directors and Officers are Outside the United States With the Result That it May Be Difficult for Investors to Enforce Within the United States Any Judgments Obtained Against Us or Any of Our Directors or Officers.

All of our directors and officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons' assets are located outside the United States. As a result, it may be difficult for investors to effect service of process on our directors or officers, or enforce within the United States or Canada any judgments obtained against us or our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. Consequently, you may be effectively prevented from pursuing remedies under U.S. federal securities laws against them. In addition, investors may not be able to commence an action in a Canadian court predicated upon the civil liability provisions of the securities laws of the United States.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
No report is required.
 
ITEM 2. PROPERTY

Our principal office space is located at Suite 2600, 520 5th Avenue SW, Calgary, Alberta, Canada T2P 3R7. The office space is for corporate identification, mailing, and courier purposes only and is provided to American Exploration at no cost, relating to a previous business relationship between us and our President/Chief Executive Officer. The office and services related thereto may be cancelled at any time.

ITEM 3. LEGAL PROCEEDINGS

Management is not aware of any legal proceedings contemplated by any governmental authority or any other party involving us or our properties. As of the date of this Annual Report, no director, officer or affiliate is (i) a party adverse to us in any legal proceeding, or (ii) has an adverse interest to us in any legal proceedings. Management is not aware of any other legal proceedings pending or that have been threatened against us or our properties.

ITEM 4. MINING SAFETY REGULATIONS

Not applicable

 
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PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET FOR COMMON EQUITY

Shares of our common stock commenced trading on the OTC Bulletin Board under the symbol “AEXP:OB” in December 2008. The market for our common stock is limited, and can be volatile. The following table sets forth the high and low bid prices relating to our common stock on a quarterly basis for the periods indicated as quoted by the NASDAQ OTC:BB stock market. These quotations reflect inter-dealer prices without retail mark-up, mark-down, or commissions, and may not reflect actual transactions.
 
Quarter Ended
 
High Bid
   
Low Bid
 
March 31, 2011
  $ 0.22     $ 0.10  
June 30, 2011
  $ 0.13     $ 0.05  
September 30, 2011
  $ 0.12     $ 0.02  
December 31, 2011
  $ 0.08     $ 0.02  
March 31, 2010
  $ 0.90     $ 0.25  
June 30, 2010
  $ 0.32     $ 0.05  
September 30, 2010
  $ 0.11     $ 0.05  
December 31, 2010
  $ 0.12     $ 0.05  

All amounts have been adjusted for stock splits.

As of May 14, 2012, we had 33 shareholders of record, which does not include shareholders whose shares are held in street or nominee names.

DIVIDEND POLICY

No dividends have ever been declared by the Board of Directors on our common stock. Our losses do not currently indicate the ability to pay any cash dividends, and we do not have the intention of paying cash dividends on our common stock in the foreseeable future.
 
 
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SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS

We have one equity compensation plan, the American Exploration Corporation 2009 Stock Option Plan (the “2009 Plan”). The table set forth below presents information relating to our equity compensation plans as of the date of this Annual Report:

Plan Category
 
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
(a)
   
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
(b)
   
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding column (a))
 
Equity Compensation Plans Approved by Security Holders
2009 Stock Option Plan
    2,700,000 1,200,000     $ 0.80 0.10       3,100,000  
Equity Compensation   Plans Not Approved by Security Holders
Warrants
    -0-       n/a       n/a  
Total
    2,700,000                  

2009 Stock Option Plan

On September 14, 2009, our Board of Directors authorized and approved the adoption of the 2009 Plan effective September 14, 2009, under which an aggregate of 7,000,000 of our shares may be issued.

During fiscal year ended December 31, 2009, we granted an aggregate 2,700,000 Stock Options. Of the 2,700,000 Stock Options, 2,150,000 were granted to our directors, 150,000 were granted to our Chief Financial Officer, and 400,000 were granted to consultants. The 2,150,000 Stock Options granted to our directors, the 150,000 Stock Options granted to our Chief Financial Officer and 350,000 of the Stock Options granted to consultants, vest in increments of one third (883,333 Stock Options) during September 2009, one-third (883,333 Stock Options) during September 2012 and one-third (883,334 Stock Options) during September 2015, at an exercise price of $0.80 per share with a life of ten years commencing on September 14, 2009. The remaining 50,000 Stock Options granted to consultants vested immediately, are exercisable at $0.80 per share for a period of ten years from the date of grant.

We did not grant any Stock Options during fiscal year ended December 31, 2010.

On March 14, 2011, we granted 100,000 Stock Options each to two of our directors for services rendered in their capacity as members of our Board of Directors. These Stock Options are exercisable for a ten year period at $0.13 per share and vested immediately. On April 20, 2011, we granted a further 800,000 Stock Options to two directors, 150,000 Stock Options to our Chief Financial Officer and 150,000 Stock Options to our legal counsel. The Stock Options granted April 20, 2011 had an exercise price of $0.09 per share and vested immediately.
 
 
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The purpose of the 2009 Plan is to enhance our long-term stockholder value by offering opportunities to our directors, officers, employees and eligible consultants to acquire and maintain stock ownership in order to give these persons the opportunity to participate in our growth and success, and to encourage them to remain in our service.

The 2009 Plan is to be administered by our Board of Directors or a committee appointed by and consisting of one or more members of the Board of Directors, which shall determine (i) the persons to be granted Stock Options under the 2009 Plan; (ii) the number of shares subject to each option, the exercise price of each Stock Option; and (iii) whether the Stock Option shall be exercisable at any time during the option period up to ten (10) years or whether the Stock Option shall be exercisable in installments or by vesting only. The 2009 Plan provides authorization to the Board of Directors to grant Stock Options to purchase a total number of shares of Common Stock of the Company, not to exceed 7,000,000 shares as at the date of adoption by the Board of Directors of the 2009 Plan. At the time a Stock Option is granted under the 2009 Plan, the Board of Directors shall fix and determine the exercise price at which shares of our common stock may be acquired.
 
In the event an optionee ceases to be employed by or to provide services to us for reasons other than cause, retirement, disability or death, any Stock Option that is vested and held by such optionee generally may be exercisable within up to ninety (90) calendar days after the effective date that his position ceases, and after such 90-day period any unexercised Stock Option shall expire. In the event an optionee ceases to be employed by or to provide services to us for reasons of retirement, disability or death, any Stock Option that is vested and held by such optionee generally may be exercisable within up to one-year after the effective date that his position ceases, and after such one-year period, any unexercised Stock Option shall expire.

No Stock Options granted under the Stock Option Plan will be transferable by the optionee, and each Stock Option will be exercisable during the lifetime of the optionee subject to the option period up to ten (10) years or the limitations described above. Any Stock Option held by an optionee at the time of his death may be exercised by his estate within one (1) year of his death or such longer period as the Board of Directors may determine.

The exercise price of a Stock Option granted pursuant to the 2009 Plan shall be paid in full to us by delivery of consideration equal to the product of the Stock Option in accordance with the requirements of the Nevada Revised Statutes. Any Stock Option settlement, including payment deferrals or payments deemed made by way of settlement of pre-existing indebtedness, may be subject to such conditions, restrictions and contingencies as may be determined.

 Incentive Stock Options

The 2009 Plan further provides that, subject to the provisions of the Stock Option Plan and prior shareholder approval, the Board of Directors may grant to any key individuals who are our employees eligible to receive options, one or more incentive stock options to purchase the number of shares of common stock allotted by the Board of Directors (the "Incentive Stock Options"). The option price per share of common stock deliverable upon the exercise of an Incentive Stock Option shall be at least 100% of the fair market value of our common shares, and in the case of an Incentive Stock Option granted to an optionee who owns more than 10% of the total combined voting power of all classes of our stock, shall not be less than 100% of the fair market value of our common shares. The option term of each Incentive Stock Option shall be determined by the Board of Directors, which shall not commence sooner than from the date of grant and shall terminate no later than ten (10) years from the date of grant of the Incentive Stock Option, subject to possible early termination as described above.

As of the date of this Annual Report, no Stock Options have been exercised.
 
 
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Common Stock Purchase Warrants

An aggregate of 250,000 common stock whole purchase warrants expired during fiscal year ended December 31, 2011.

RECENT SALES OF UNREGISTERED SECURITIES

As of the date of this Annual Report and during fiscal year ended December 31, 2011, we did not issue any shares of our common stock.

ITEM 6. SELECTED FINANCIAL DATA

Not required for smaller reporting companies.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATION

The following discussion should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and elsewhere in this Annual Report, particularly in the section entitled "Risk Factors." Our audited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.

We are an exploration stage company and have not generated any revenue to date. We have incurred recurring losses to date. Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation.
 
We expect we will require additional capital to meet our long term operating requirements. We expect to raise additional capital through, among other things, the sale of equity or debt securities.
 
 
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RESULTS OF OPERATION

Fiscal Year Ended December 31, 2011 Compared to Fiscal Year Ended December 31, 2010.

Our net loss for fiscal year ended December 31, 2011 was $4,507,531 compared to a net loss of $536,685 during fiscal year ended December 31, 2010, an increase of $3,970,846. During fiscal years ended December 31, 2011 and 2010, we did not generate any revenue.

During fiscal year ended December 31, 2011, we incurred operating expenses of $4,480,589 compared to $694,619 incurred during fiscal year ended December 31, 2010, an increase of $3,785,970. The increase in operating expenses was primarily attributable to the following items:
 
the impairment of the unevaluated oil and gas properties of $3,771,001.
   
Operating expenses increased generally due to the increase in legal fees associated with the Merger Agreement. General and administrative expenses generally include corporate overhead, financial and administrative contracted services, marketing, and consulting costs. Of the $706,564 incurred as operating expenses during fiscal year ended December 31, 2011, we incurred management fees of $245,000 to our officers and directors. See "Item 11. Executive Compensation”.
 
We incurred interest expense of $26,942 during the year ended December 31, 2011 compared to $15,866 incurred during the year ended December 31, 2010. The increase was related in interest expense was related to the additional borrowing needed to fund our operating activities.

We recorded other income of $0 in the year ended December 31, 2011 compared to $173,800 in the year ended December 31, 2010. Other income for the year ended December 31, 2010, consisted of (i) a non-refundable deposit of $75,000 and a break fee of $75,000, paid to us after Avere Energy cancelled their Farm-In Agreement; and (ii) $23,800 associated with a one-time technical services consulting agreement related to the Burkley-Phillips No. 1 well.

Therefore, our net loss and loss per share during fiscal year ended December 31, 2011 was $4,507,531 or $0.07 per share compared to a net loss and loss per share of $536,685 or $0.01 per share during fiscal year ended December 31, 2010.

LIQUIDITY AND CAPITAL RESOURCES
 
As of December 31, 2011, our current assets were $16,513 and our current liabilities were $702,032, which resulted in a working capital deficit of $685,519. As of December 31, 2011, current assets were comprised of $16,513 in cash and cash equivalents. As of December 31, 2011, current liabilities were comprised of: (i) $19,944 in accounts payable and accrued liabilities; (ii) $284,052 in accounts payable– related parties; (iii) $155,000 in short-term note payable; (iv) $147,809 in short-term notes payable – related parties; and (v) $95,227 in convertible notes – related party.
 
 
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As of December 31, 2011, our total assets were $16,513 comprised of $16,513 in cash and cash equivalents. The decrease in total assets during fiscal year ended December 31, 2011 from fiscal year ended December 31, 2010 was primarily due to the impairment of our oil and gas property.
 
As of December 31, 2011, our total liabilities were $702,032, comprised entirely of current liabilities. The increase in liabilities during fiscal year ended December 31, 2011 from fiscal year ended December 31, 2010 was primarily due to the increase in accounts payable – related parties of $239,942 and short-term notes payable – related parties of $105,000.
 
Stockholders’ equity decreased from $3,431,082 for fiscal year ended December 31, 2010 to $685,519 for fiscal year ended December 31, 2011 due to impairment of oil and gas properties.
 
Cash Flows from Operating Activities

We have not generated positive cash flows from operating activities. For fiscal year ended December 31, 2011, net cash flows used in operating activities was $99,220 compared to $233,827 for fiscal year ended December 31, 2010. Net cash flows used in operating activities consisted primarily of a net loss of $4,507,531 (2010: $536,685), which was partially offset by $3,024 (2010: $3,368) in depreciation and amortization expense, $3,771,001 (2010: $0) for impairment of oil and gas properties and $390,930 (2010: $276,772) in share-based compensation. Net cash flows used in operating activities was further changed by $3,414 (2010: $15,970) of accounts payable and accrued liabilities and (ii) $239,942 (2010: $38,688) in accounts payable - related parties.

Cash Flows from Investing Activities

For fiscal years ended December 31, 2011 and December 31, 2010, net cash flows used in investing activities was $-0-.

Cash Flows from Financing Activities

We have financed our operations primarily from debt or the issuance of equity instruments. For the fiscal year ended December 31, 2011, net cash flows provided from financing activities was $105,000 compared to $235,000 for fiscal year ended December 31, 2010. Cash flows from financing activities for the fiscal year ended December 31, 2011 consisted of $105,000 in proceeds from notes payable. Cash flows from financing activities for the fiscal year ended December 31, 2010 consisted of $125,000 in proceeds from sale of common stock and warrants, $50,000 in proceeds from notes payable and $60,000 in proceeds from notes payable – related parties.

Since the Merger Agreement was not consummated, we anticipate that working capital requirements will continue to be funded through a combination of debt and further issuances of securities. Thus, our working capital requirements will be expected to increase in line with the growth of our business.
 
 
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PLAN OF OPERATION AND FUNDING

A substantial portion of the fiscal years ended December 31, 2011 and 2010 was dedicated to consummation of the Merger Agreement and identification of potential drilling partners. Financing partners were sought with the intent of conducting a private placement to raise funds to finalize the mineral lease acquisition in Mississippi and for the participation in the drilling of a well on those lands. Since the Merger Agreement was not consummated, possible further advances from related parties and the sale of securities will be required to fund our operations over the next six months. We have no lines of credit or other bank financing arrangements. Generally, we have financed operations to date through the proceeds of the private placement of equity and debt instruments. Since the Merger Agreement was not consummated and in connection with our future business plan, management anticipates additional increases in operating expenses and capital expenditures relating to: (i) possible drilling initiatives on current Lease and future properties; and (ii) future property acquisitions. We would finance these expenses with further issuances of equity securities and debt issuances. We expect we would need to raise additional capital and generate revenues to meet long-term operating requirements. Should the initial Burkley Phillips well be frac’d and tested at rates that were deemed commercial and a second well proposed on lands that the Company holds an interest (the 8225 acres), American Exploration would be required to fund its 20% interest representing a capital requirement of $3 to $4 million dollars. Should a new property be identified, funding requirements would be asset specific, anticipated to be less than $5 million dollars.

Additional issuances of equity or convertible debt securities could result in dilution to our current shareholders. Further, such securities may have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all.

Since the Merger Agreement was not consummated and if adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of prospective new business endeavors or opportunities or develop our unevaluated oil and gas assets, which could significantly and materially restrict our business operations.

MATERIAL COMMITMENTS

Promissory Notes

A future material commitment during fiscal year 2012 relates to those certain unsecured promissory notes entered into by us as follows (i) December 5, 2011 in the amount of $20,000 with a related party bearing interest at the rate of 10% per annum with principal and interest due on demand; (ii) August 11, 2011 in the amount of $20,000 with a related party bearing interest at the rate of 10% per annum with principal and interest due on demand; (iii) May 3, 2011 in the amount of $35,000 with a related party bearing interest at the rate of 5% per annum with principal and interest due on demand; (iv) February 4, 2011 in the amount of $30,000 with a related party bearing interest at the rate of 5% per annum with principal and interest due on demand; and (v) June 2, 2010 in the amount of $50,000 with an unrelated third party.
 
 
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Mainland Resources Note

In connection with the Merger Agreement, we previously entered into that certain promissory note dated September 27, 2010 with Mainland Resources, which was amended by amendment no. 1 dated December 23, 2010, amendment no. 2 dated March 30, 2011, amendment no. 3 thereto dated May 17, 2011, amendment no. 4 dated August 18, 2011 and amendment no. 5 dated October 31, 2011, (as amended being collectively, the “Original Promissory Note”). The Original Promissory Note evidenced monies advanced by Mainland Resources to us in order to assist us with various costs associated with the completion of the proposed merger between us and Mainland Resources pursuant to the terms and provisions of the Merger Agreement.

In accordance with the terms and conditions of the Termination and Release Agreement, we entered into a new promissory note dated December 31, 2011 with Mainland Resources (the “New Promissory Note”), which superseded and replaced the Original Promissory Note. The New Promissory Note evidenced our current obligation to pay to Mainland Resources $67,002.73, comprised of $60,000 in principal and $7,002.73 in accrued interest. The New Promissory Note is due on demand and bears interest at 12% per year.
 
Debenture
 
Effective on October 13, 2009, our Board of Directors authorized the execution of a 5% convertible debenture in the principal amount of $95,227 (the “Debenture”) with DMS Ltd. (“DMS”).  In accordance with the terms and provisions of the Debenture: (i) accrues interest at the rate of 5% per annum; (ii) the maturity date for repayment is the earlier of: (a) that date when we are able to meet the insolvency test (i.e., when we have sufficient funds in our cash account to meet our obligations as they arise on a daily basis, which shall be determined by management in good faith); or (b) January 13, 2010; and (iii) DMS has the right at any time to convert the unpaid principal amount of the Debenture into shares of our common stock at the price of $0.50 per share. The conditions above were not met and the note is in default.

Director Loans

As of December 31, 2011, our directors had outstanding loans to us in the aggregate amount of $87,809, which amounts were used to pay our operating costs. Average interest of 10% per annum has been accrued to the lenders and the loans are due upon demand. All of the loans are unsecured and no interest has been paid to date.
 
PURCHASE OF SIGNIFICANT EQUIPMENT

We do not intend to purchase any significant equipment during the next twelve months.
 
 
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OFF-BALANCE SHEET ARRANGEMENTS
 
As of the date of this Annual Report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

GOING CONCERN

The independent auditors' report accompanying our December 31, 2011 and December 31, 2010 financial statements contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The financial statements have been prepared "assuming that we will continue as a going concern," which contemplates that we will realize our assets and satisfy our liabilities and commitments in the ordinary course of business. We have suffered recurring losses from operations, have a working capital deficit and are currently in default of the payment terms of certain note agreements. These factors raise substantial doubt about our ability to continue as a going concern.
 
CRITICAL ACCOUNTING POLICIES
 
The following describes the critical accounting policies used in reporting our financial condition and results of operations. In some cases, accounting standards allow more than one alternative accounting method for reporting. Such is the case with accounting for oil and gas activities described below. In those cases, our reported results of operations would be different should we employ an alternative accounting method.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Oil and Gas Properties, Full Cost Method

The Company has elected to use the full cost method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells used to find proved reserves, and to drill and equip development wells, including directly related overhead costs and related asset retirement costs, are capitalized.
 
 
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Under this method, all costs, including internal costs directly related to acquisition, exploration and development activities are capitalized as oil and gas property costs on a county by county basis. Properties not subject to amortization consist of exploration and development costs which are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved or their values become impaired. The Company assesses the realizability of unproved properties, if any, on at least an annual basis or when there has been an indication that impairment in value may have occurred. Impairment of unproved properties is assessed based on management's intention with regard to future exploration and development of individually significant properties and the ability of the Company to obtain funds to finance such exploration and development. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized.

In applying the full cost method, the Company performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of property and equipment is compared to the “estimated present value” of its proved reserves.  The estimated present value of proved reserves is based upon future net revenues (after consideration of current economic and operating conditions at the end of the period) discounted at a 10 percent interest rate, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties. If capitalized costs exceed this limit, the excess is charged as an impairment expense.

As of December 31, 2010 the Company had no proved properties and no impairment of unevaluated oil and gas properties was indicated.

Stock-Based Compensation
 
The Company measures the cost of employee services received in exchange for stock and stock options based on the grant date fair value of the awards under FASB ASC Topic 718, Compensation – Stock Compensation (“ASC 718”). The Company determines the fair value of stock option grants using the Black-Scholes option pricing model. The Company determines the fair value of shares of nonvested stock (also commonly referred to as restricted stock) based on the last quoted price of our stock on the date of the share grant. The fair value determined represents the cost for the award and is recognized over the vesting period during which an employee is required to provide service in exchange for the award. As share-based compensation expense is recognized based on awards ultimately expected to vest, the Company reduces the expense for estimated forfeitures based on historical forfeiture rates. Previously recognized compensation costs may be adjusted to reflect the actual forfeiture rate for the entire award at the end of the vesting period. Excess tax benefits, as defined in ASC 718, if any, are recognized as an addition to paid-in capital.
 
 
36

 
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    F-1  
         
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 2011 AND 2010.
    F-2  
         
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 AND FOR THE PERIOD FROM INCEPTION (MAY 11, 2006) TO DECEMBER 31, 2011.
    F-3  
         
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD FROM INCEPTION (MAY 11, 2006) TO DECEMBER 31, 2011.
    F-4 to F-5  
         
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 AND FOR THE PERIOD FROM INCEPTION (MAY 11, 2006) TO DECEMBER 31, 2011.
    F-6  
         
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
    F-7  
 
 
37

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors
American Exploration Corporation
(an Exploration Stage Company)
Calgary, Alberta, Canada

We have audited the accompanying consolidated balance sheets of American Exploration Corporation (an Exploration Stage Company) as of December 31, 2011 and 2010 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years ended December 31, 2011 and 2010, and for the period from inception (May 11, 2006) to December 31, 2011. These consolidated financial statements are the responsibility of American Exploration Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements for the period from inception (May 11, 2006) to December 31, 2007 were audited by other auditors and our opinion, insofar as it relates to cumulative amounts included for such periods, is based solely on the reports of other auditors.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. American Exploration Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of American Exploration Corporation's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Exploration Corporation as of December 31, 2011 and 2010 and the results of their operations and their cash flows for the years then ended and for the period from inception (May 11, 2006) to December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that American Exploration Corporation will continue as a going concern. As discussed in Note 2 to the financial statements, American Exploration Corporation suffered recurring losses from continuing operations, has a working capital deficit and is in default of certain debt agreements which raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 2. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
 
/s/GBH CPAs, PC  
   
GBH CPAs, PC  
www.gbhcpas.com  
Houston, Texas
 
   
May 15, 2012  
 
 
F-1

 
 
AMERICAN EXPLORATION CORPORATION
(An Exploration Stage Company)
CONSOLIDATED BALANCE SHEETS

   
December 31,
2011
   
December 31,
2010
 
             
ASSETS
           
             
Current Assets
           
Cash and cash equivalents
  $ 16,513     $ 10,733  
Total Current Assets
    16,513       10,733  
                 
Oil and gas properties – unevaluated, not subject to amortization
    -       3,771,001  
Website, net of amortization of $10,000 and $6,976, respectively
    -       3,024  
Total Assets
  $ 16,513     $ 3,784,758  
                 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Current Liabilities
               
Accounts payable and accrued liabilities
  $ 19,944     $ 16,530  
Accounts payable – related parties
    284,052       44,110  
Short-term note payable
    155,000       50,000  
Short-term notes payable – related parties
    147,809       147,809  
Convertible notes – related party
    95,227       95,227  
Total Current Liabilities
    702,032       353,676  
                 
Commitments and contingencies
    -       -  
                 
Stockholders’ Equity
               
Common stock, $0.001 par value, 2,100,000,000 shares authorized:
               
60,273,333 shares issued and outstanding, respectively
    60,273       60,273  
Additional paid-in capital
    6,369,885       5,978,955  
Accumulated deficit during exploration stage
    (7,115,677 )     (2,608,146 )
Total Stockholders’ Equity
    685,519       3,431,082  
                 
Total Liabilities and Stockholders’ Equity
  $ 16,513     $ 3,784,758  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-2

 
 
AMERICAN EXPLORATION CORPORATION
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2011 and 2010
 and For the Period from Inception (May 11, 2006) to December 31, 2011
 
   
For the Year Ended December 31,
   
Period from
Inception
(May 11, 2006) to December 31,
 
   
2011
   
2010
   
2011
 
                   
Revenue
  $ -     $ -     $ -  
                         
Operating  Expenses
                       
General and administrative
    706,564       691,251       3,401,578  
Amortization
    3,024       3,368       11,277  
Impairment of oil and gas properties
    3,771,001       -       3,771,001  
Total Operating Expenses
    4,480,589       694,619       7,183,856  
                         
Loss from Operations
    (4,480,589 )     (694,619 )     (7,183,856 )
                         
Other Income (Expense)
                       
Interest expense
    (26,942 )     (15,866 )     (104,460 )
Loss on sale of assets
    -       -       (1,161 )
Other income
    -       173,800       173,800  
                         
Total other income (expense)
    (26,942 )     157,934       (68,179 )
                         
Net loss
  $ (4,507,531 )   $ (536,685 )   $ (7,115,677 )
                         
Net loss per common share – basic and diluted
  $ (0.07 )   $ (0.01 )        
                         
Weighted average shares -  basic and diluted
    60,273,333       60,177,991          

The accompanying notes are an integral part of these consolidated financial statements
 
 
F-3

 

AMERICAN EXPLORATION CORPORATION
 (An Exploration Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Period from Inception (May 11, 2006) to December 31, 2011

                     
Deficit
       
                     
Accumulated
       
               
Additional
   
During the
   
Total
 
   
Common Stock
   
Paid-in
   
Exploration
   
Stockholders’
 
   
Shares
   
Amount
   
Capital
   
Stage
   
Equity
 
Balance at inception on May 11, 2006
    -     $ -     $ -     $ -     $ -  
                                         
Initial capitalization, sale of
                                       
of common stock to directors on
                                       
May 11,2006 $0.00005/share
    94,500,000       94,500       (90,000 )     -       4,500  
                                         
Private Placement - September 30,
                                       
 at 0.0024/share
    41,475,000       41,475       57,275       -       98,750  
                                         
Net loss
    -       -       -       (9,055 )     (9,055 )
Balance, December 31, 2006
    135,975,000       135,975       (32,725 )     (9,055 )     94,195  
                                         
Net loss
    -       -       -       (60,078 )     (60,078 )
Balance, December 31, 2007
    135,975,000       135,975       (32,725 )     (69,133 )     34,117  
                                         
Private Placement- November 19,
                                       
2008 at $0.692/share
    1,350,000       1,350       898,650       -       900,000  
                                         
Private Placement - November 24,
                                       
2008 at $0.689/share
    150,000       150       99,850       -       100,000  
                                         
Net loss
    -       -       -       (106,170 )     (106,170 )
Balance December 31, 2008
    137,475,000       137,475       965,775       (175,303 )     927,947  
                                         
Private Placement - February 2009
                                       
 at $0.667/share
    487,500       488       324,512       -       325,000  
                                         
Forgiven loan from director
    -       -       5,000       -       5,000  
                                         
Cancellation of shares
    (83,100,000 )     (83,100 )     83,100       -       -  
                                         
Shares issued for oil and  gas lease -
                                       
August 2009 at $0.66/share
    4,037,500       4,037       2,660,713       -       2,664,750  
                                         
Private Placements – August 2009
                                       
at $0.50/share
    660,000       660       329,340       -       330,000  
                                         
Private Placements – September 2009
                                       
at $0.75 and $1.00/share
    158,333       158       124,842       -       125,000  
                                         
Private Placement - October 2009
                                       
at $1.00/share
    55,000       55       54,945       -       55,000  
                                         
Amortization of share-based compensation
    -       -       968,511       -       968,511  
                                         
Discount on convertible debt
    -       -       60,945       -       60,945  
                                         
Net  loss
    -       -       -       (1,896,158 )     (1,896,158 )
Balance, December 31, 2009
    59,773,333     $ 59,773     $ 5,577,683     $ (2,071,461 )   $ 3,565,995  
 
 

 
F-4

 

AMERICAN EXPLORATION CORPORATION
 (An Exploration Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Period from Inception (May 11, 2006) to December 31, 2011
 (Continued)

                     
Deficit
       
                     
Accumulated
       
               
Additional
   
During the
   
Total
 
    Common Stock    
Paid-in
   
Exploration
   
Shareholders’
 
   
Shares
   
Amount
   
Capital
   
Stage
   
Equity
 
                               
Balance, December 31, 2009
    59,773,333     $ 59,773     $ 5,577,683     $ (2,071,461 )   $ 3,565,995  
                                         
Private Placement – Feb 22, 2010
                                       
at $0.25 per share
    300,000       300       74,700       -       75,000  
                                         
Private Placement – April 5, 2010
                                       
at $0.25 per share
    200,000       200       49,800       -       50,000  
                                         
Amortization of share-based compensation
    -       -       276,772       -       276,772  
                                         
Net loss
    -       -       -       (536,685 )     (536,685 )
Balance December 31, 2010
    60,273,333       60,273       5,978,955       (2,608,146 )     3,431,082  
                                         
Amortization of share-based compensation
    -       -       390,930       -       390,930  
                                         
Net loss
    -       -       -       (4,507,531 )     (4,507,531 )
Balance December 31, 2011
    60,273,333     $ 60,273     $ 6,369,885     $ (7,115,677 )   $ 685,519  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-5

 

AMERICAN EXPLORATION CORPORATION
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2011 and 2010
and For the Period from Inception (May 11, 2006) to December 31, 2011
 
   
For the Year Ended December 31,
   
Inception (May 11, 2006) to
December 31,
 
   
2011
   
2010
   
2011
 
                   
CASH FLOWS FROM OPERATING ACTIVITIES
                 
Net loss
  $ (4,507,531 )   $ (536,685 )   $ (7,115,677 )
Adjustments to reconcile net loss to cash used by operating activities:
                       
Depreciation and amortization expense
    3,024       3,368       11,277  
Amortization of debt discount
    -       -       60,945  
Share-based compensation
    390,930       276,772       1,636,213  
Loss on sale of assets
    -       -       1,161  
Impairment of oil and gas properties
    3,771,001       -       3,771,001  
Changes in operating assets and liabilities:
                       
Accounts payable and accrued liabilities
    3,414       (15,970 )     19,806  
Accounts payable - related parties
    239,942       38,688       284,052  
Net cash used in operating activities
    (99,220 )     (233,827 )     (1,3331,222 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Website
    -       -       (10,000 )
Acquisition of unproved oil and gas properties
    -       -       (1,108,551 )
Net cash used in investing activities
    -       -       (1,118,551 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Proceeds from issuance of common stock and warrants
    -       125,000       2,063,250  
Proceeds from notes payable
    105,000       50,000       155,000  
Proceeds from notes payable - related parties
    -       60,000       152,809  
Proceeds from issuance of convertible debt - related parties
    -       -       95,227  
Net cash provided by financing activities
    105,000       235,000       2,446,286  
                         
Increase in cash during the period
    5,780       1,173       16,513  
                         
Cash, beginning of the period
    10,733       9,560       -  
                         
Cash, end of the period
  $ 16,513     $ 10,733     $ 16,513  
                         
Supplemental cash flow information:
                       
Taxes paid
  $ -     $ -     $ -  
Interest paid
  $ -     $ -     $ -  
                         
NON-CASH TRANSACTIONS
                       
   Common stock issued for oil and gas properties
  $ -     $ -     $ 2,664,750  
   Cancellation of loan from director
  $ -     $ -     $ 5,000  
   Cancellation of shares
  $ -     $ -     $ 83,100  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-6

 

AMERICAN EXPLORATION CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS


NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

American Exploration Corporation (the “Company”) was incorporated under the laws of the State of Nevada on May 11, 2006 under the name of Minhas Energy Consultants, Inc. Previously, the Company was engaged in the business of providing professional engineering consulting services to the oil and gas industry, including clients such as petroleum and natural gas companies, oil service companies, utilities and manufacturing companies with petroleum and/or natural gas interests and government agencies.

On August 6, 2008, with the approval of our Board of Directors, the Company merged with our subsidiary, American Exploration Corporation, and amended our Articles of Incorporation to change our name to "American Exploration Corporation". The Company is an exploration stage, natural resource exploration and production company currently engaged in the exploration, acquisition and development of oil and gas properties in the United States and within North America.

On August 18, 2008, the Company effected a 14 for 1 forward stock split of its issued and outstanding par value $0.001 common shares. On April 13, 2009, a 1.5 for 1 forward stock split took effect. All share and per share amounts have been retroactively adjusted to reflect the effect of these forward stock splits.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include those regarding the valuation of option and warrant transactions.

Reclassification

Certain amounts for prior periods have been reclassified to conform to the current year presentation.

Principles of Consolidation

The consolidated financial statements include the Company’s accounts, including those of the Company’s wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Loss per Share

Pursuant to FASB ASC Topic 260, Earnings Per Share, basic net loss per share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income attributable to common shareholders by the weighted-average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants or the assumed conversion of convertible debt instruments, using the treasury stock and “if converted” method. For periods in which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect.

For the years ended December 31, 2011 and 2010, the dilutive effect of options to purchase 3,900,000 and 2,700,000 shares of common stock, and warrants to purchase 0 and 250,000 shares of common stock, respectively, were excluded from the diluted earnings per share calculation because their effect would have been anti-dilutive.
 
 
F-7

 

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents.

Concentrations of Risks - Cash Balances

The Company maintains its cash in institutions insured by the Canada Deposit Insurance Corporation ("CDIC") and the Federal Deposit Insurance Corporation ("FDIC"). As of December 31, 2011, the FDIC insured all amounts in non-interest bearing accounts and the CDIC had insured limits of up to $100,000 per depositor.

Oil and Gas Properties, Full Cost Method

The Company has elected to use the full cost method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells used to find proved reserves, and to drill and equip development wells, including directly related overhead costs and related asset retirement costs, are capitalized.

Under this method, all costs, including internal costs directly related to acquisition, exploration and development activities, are capitalized as oil and gas property costs on a country by country basis. Properties not subject to amortization consist of exploration and development costs which are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved or their values become impaired. The Company assesses the realizability of unproved properties on at least an annual basis or when there has been an indication that impairment in value may have occurred. Impairment of unproved properties is assessed based on management's intention with regard to future exploration and development of individually significant properties and the ability of the Company to obtain funds to finance such exploration and development. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized.

In applying the full cost method, the Company performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of property and equipment is compared to the “estimated present value” of its proved reserves. The estimated present value of proved reserves is based upon future net revenues (after consideration of current economic and operating conditions at the end of the period) discounted at a 10 percent interest rate, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties. If capitalized costs exceed this limit, the excess is charged as an impairment expense.

As of December 31, 2011 and 2010, the Company had no proved properties.  During the year ended December 31, 2011, the Company recorded an impairment of $3,771,001 related to the unevaluated properties held by an option agreement with Westrock Land Corp. (“Westrock”).  As of December 31, 2011, the option agreement expired and all rights to the property reverted back to Westrock.

Foreign exchange and currency translation

For the periods presented, the Company maintained cash accounts in Canadian and U.S. dollars, and incurred certain expenses denominated in Canadian dollars. The Company's functional and reporting currency is the U.S. dollar. Transactions denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect on the date of the transactions. Assets and liabilities are translated using exchange rates at the end of each period. Exchange gains or losses on transactions are included in earnings. Adjustments resulting from the translation process are reported in a separate component of other comprehensive income and are not included in the determination of the results of operations. For all periods presented, any exchange gains or losses or translation adjustments resulting from foreign currency transactions were immaterial.

 
F-8

 

Stock-Based Compensation

The Company measures the cost of employee services received in exchange for stock and stock options based on the grant date fair value of the awards. The Company determines the fair value of stock option grants using the Black-Scholes option pricing model. The Company determines the fair value of shares of nonvested stock (also commonly referred to as restricted stock) based on the last quoted price of our stock on the date of the share grant. The fair value determined represents the cost for the award and is recognized over the vesting period during which an employee is required to provide service in exchange for the award. As share-based compensation expense is recognized based on awards ultimately expected to vest, the Company reduces the expense for estimated forfeitures based on historical forfeiture rates, if historical forfeiture rates are available. Previously recognized compensation costs may be adjusted to reflect the actual forfeiture rate for the entire award at the end of the vesting period. Excess tax benefits, if any, are recognized as an addition to paid-in capital.

The Company’s management reviewed all material events from December 31, 2011 through the issuance date of this report and there are no material subsequent events to report.
 
Recent Accounting Pronouncements

There were various accounting standards and interpretations issued recently, none of which are expected to have a material effect on the Company’s operations, financial position or cash flows.

NOTE 2. GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred net losses for the period from inception to December 31, 2011 of $7,115,677, has negative working capital of $685,519 at December 31, 2011 and is currently in default on certain outstanding debt obligations. The Company intends to fund initial operations through equity financing or debt arrangements.

The ability of the Company to emerge from the exploration stage is dependent upon the Company’s successful efforts to raise sufficient capital and then attain profitable operations. There can be no assurances, however, that management’s expectations of future revenues will be realized.

Mainland Resources, Inc. Merger Agreement

In 2010, our Board of Directors authorized and approved the execution of a definitive merger agreement and plan of merger (the “Merger Agreement”) dated March 22, 2010 with Mainland Resources, Inc., a Nevada corporation (“Mainland Resources”). The Merger Agreement provides for a stock-for-stock merger to be effected under the laws of the State of Nevada whereby it is contemplated that our shareholders will receive one share of common stock of Mainland Resources for every four shares of our common stock held of record. The Merger Agreement is subject to various conditions precedent including, but not limited to, approval by our shareholders and the shareholders of Mainland Resources of the Merger Agreement, and the number of Mainland Resources’ shareholders exercising dissenter rights available to them under Nevada law cannot exceed 5% of the total issued and outstanding shares of Mainland Resources common stock. The Merger Agreement, as amended, is subject to termination by either us or Mainland Resources if certain conditions specified in the Merger Agreement are not satisfied at or before January 31, 2012, or such later date as may be mutually agreed upon.
 
The lease extension the Company applied for with Westrock was not granted, requiring the 5,000 acre lease that American initially held, to be relinquished to Westrock. Mainland ceased all efforts to continue the merger process following loss of these leases, officially cancelling the merger.
 
 
F-9

 

NOTE 3. STOCKHOLDERS’ EQUITY

Common Stock - Issued and Outstanding

On May 11, 2006 (inception), the Company issued 94,500,000 shares of its common stock to its Directors for cash of $4,500. On September 30, 2006, the Company closed a private placement for 41,475,000 common shares for cash of $98,750.

On November 19th and 24th of 2008, the Company closed two private placements for 1,350,000 and 150,000 shares respectively, at a price of $0.67 per share, for cash of $1,000,000. Included with each share in these private placements was one-half non-transferable share purchase warrant, for a total of 750,000 warrants with a fair value on the date of grant of $26,012. Each warrant had a term of 12 months and entitled the subscriber to purchase one additional share of the company at an exercise price of $1.33 per share. These warrants expired without exercise during 2009.

In February 2009, the Company completed two private placements for 487,500 shares for cash of $325,000, or $0.67 per share. Included with each share in these private placements was one-half non-transferable share purchase warrant, for a total of 243,750 warrants with a fair value on the date of grant of $48,716. Each warrant had a term of 12 months and entitled the subscriber to purchase one additional share of the Company’s stock at an exercise price of $1.33 per share. These warrants expired without exercise during 2010.

On March 21, 2009, our prior executive officers and founders agreed to return an aggregate 83,100,000 shares of our common stock to the Company. They did not receive any compensation for the return to and cancellation of these shares by the Company.

On August 19, 2009, 4,037,500 shares were issued to Westrock to acquire the balance of an oil and gas lease (see Note 6). These shares were valued at $0.66 per share for a total of $2,664,750, based upon the Company’s share price on the date of agreement.

On August 17, 2009, a private placement closed for 400,000 shares at $0.50 per share or $200,000. On August 31, 2009, a private placement closed for 260,000 shares at $0.50 per share or $130,000. On September 21, 2009, a private placement closed for 133,333 shares at $0.75 per share, or $100,000. On September 25, 2009, a private placement closed for 25,000 shares at $1.00 per share, or $25,000. Included with each share in these private placements was one-half non-transferable share purchase warrant for a total of 409,166 warrants with an exercise term of 12 months and a fair value on the grant date of $356,761. The warrants had exercise prices ranging from $0.50 to $1.50 and expired without exercise during 2010.

On October 8, 2009, a private placement closed for 55,000 shares at $1.00 per share, or a total of $55,000, with no warrants attached.

On February 24, 2010, a private placement closed for 300,000 shares at $0.25 per share or $75,000. The investor also received 150,000 warrants with an exercise price of $0.50 per share with a one year term. These warrants had a grant date fair value of $20,495 and expired without exercise in February 2011.

On April 5, 2010, a private placement closed for 200,000 shares at $0.25 per share or $50,000. The investor also received 100,000 warrants with an exercise price of $0.50 per share with a one year term. These warrants had a grant date fair value of $17,403 and expired without exercise in April 2011.
 
 
F-10

 

Stock Options

In September 2009, the Company adopted the 2009 Stock Option Plan (“2009 Plan”). The 2009 Plan allows the Company to issue options to officers, directors and employees, as well as consultants, to purchase up to 7,000,000 shares of common stock.

During September 2009, the following options were granted:

·
1,000,000 options to the Company’s Chief Executive Officer, who is also a director of the Company.
·
1,150,000 options to three Directors of the Company
·
150,000 options to the Company’s Chief Financial Officer
·
400,000 options to three consultants to the Company

All the options granted have an exercise price of $0.80 per share and a 10-year life. With the exception of 50,000 options granted to a consultant that vested immediately, one third of the options granted vested at the date of grant, with the remainder vesting in equal parts in September 2012 and September 2015.

Fair value of the options granted was $2,559,954, or $0.95 per share, and was calculated in accordance with the Black-Sholes valuation model based on the following assumptions: (a) risk free interest rate 3.47%, (b) expected volatility of 192.35% (c) expected life of 5.75 years, and (d) zero expected future dividends. The options qualify as ‘plain vanilla’ under the accounting literature and therefore, the expected life has been calculated pursuant to the provisions of Staff Accounting Bulletin No. 107. The Company recognized stock-based compensation expense of $276,771 and $276,772, respectively, related to these options during the year ended December 31, 2011 and 2010.

On March 14, 2011, 100,000 options with an exercise price of $0.13 per share, a ten year life and immediate vesting were granted to two directors of the Company. The fair value of the options granted was $14,928, or $0.15 per share, and was calculated in accordance with the Black-Sholes valuation model based on the following assumptions: (a) risk free interest rate 3.36%, (b) expected volatility of 173.17% (c) expected life of 5 years, and (d) zero expected future dividends. The options qualify as ‘plain vanilla’ under the accounting literature and therefore, the expected life has been calculated pursuant to the provisions of Staff Accounting Bulletin No. 107.  The Company recognized stock-based compensation of $14,928 related to these options during the year ended December 31, 2011.
 
 
F-11

 

On April 20, 2011, 800,000 options were granted to two directors, 150,000 options were granted to the Chief Financial Officer, and 150,000 options were granted to legal counsel of the Company. These options had an exercise price of $0.09 per share, a ten year life and vested immediately. The fair value of the options granted was $99,231, or $0.01 per share, and was calculated in accordance with the Black-Sholes valuation model based on the following assumptions: (a) risk free interest rate 3.43%, (b) expected volatility of 171.00% (c) expected life of 5 years, and (d) zero expected future dividends. The options qualify as ‘plain vanilla’ under the accounting literature and therefore, the expected life has been calculated pursuant to the provisions of Staff Accounting Bulletin No. 107. The Company recognized stock-based compensation of $99,231 related to these options during the year ended December 31, 2011.
 
A summary of stock option activity for the years ended December 31, 2011 and 2010 are presented below:

   
Options
   
Weighted-Average Exercise Price
   
Aggregate Intrinsic Value
 
Outstanding at January 1, 2010
   
2,700,000
   
$
0.80
   
$
-
 
Granted
   
-
             
-
 
Exercised
   
-
             
-
 
Forfeited
   
-
             
-
 
Outstanding at December 31, 2010
   
2,700,000
     
0.80
     
-
 
Granted
   
1,200,000
     
0.10
     
-
 
Exercised
   
-
     
-
     
-
 
Expired
   
-
     
-
     
-
 
Outstanding December  31, 2011
   
3,900,000
   
$
0.58
   
$
-
 
Exercisable December 31, 2011
   
2,133,333
   
$
0.40
   
$
-
 

The Company recognized total stock-based compensation expense of $390,930 and $276,772 related to these options during the years ended December 31, 2011 and 2010, respectively. As of December 31, 2011 and 2010, the total unrecognized stock-based compensation expense related to non-vested stock options was $1,037,901 and $1,314,671, respectively. The unrecognized stock-based compensation at December 31, 2011 is expected to be ratably amortized to expense over a weighted average period of 3.71 years. The weighted average remaining contractual term of the outstanding options and exercisable options at December 31, 2011 is 8.21 years.  Options outstanding and exercisable as of December 31, 21011 had no intrinsic value.
 
 
F-12

 

Warrants

A summary of warrant activity and related information for the years ended December 31, 2011 and 2010 are presented below:

   
Warrants
   
Weighted-Average Exercise Price
   
Aggregate Intrinsic Value
 
Outstanding at January 1, 2010
   
652,916
   
$
1.01
   
$
-
 
Granted
   
250,000
     
0.50
     
-
 
Exercised
   
-
     
-
     
-
 
Forfeited or expired
   
(652,916
 )    
1.01
     
-
 
Outstanding at December 31, 2010
   
250,000
     
0.50
     
-
 
Granted
   
-
     
-
     
-
 
Exercised
   
-
     
-
     
-
 
Expired
   
(250,000
)
 
$
0.50
   
$
-
 
Outstanding and exercisable at December 31, 2011
   
-
   
$
-
   
$
-
 

As of December 31, 2010, the Company had 250,000 warrants outstanding with a remaining weighted average contractual life of 2.1 months. The weighted average exercise price for all remaining outstanding warrants was $0.50 per share. Outstanding warrants had an aggregate fair market value of $37,898 at the date of grant, which was calculated in accordance with the Black-Sholes valuation model based on the following assumptions: (a) risk free interest rate 3.5%, (b) expected volatility of 192.35% (c) expected life of 1 year, and (d) zero expected future dividends.

Other Capital Transactions

On January 1, 2009, a $5,000 advance payable to a director of the Company and outstanding as of December 31, 2008, was forgiven and recorded as a contribution to capital.

NOTE 4. RELATED PARTY TRANSACTIONS

As of December 31, 2011, directors of the Company had outstanding loans to the Company of $87,809  that were used to pay operating expenses of the Company. Average interest of 10% per annum has been accrued to the lenders and the loans are due upon demand. All of these loans are unsecured and no interest has been paid to date. As of December 31, 2011, the Company had not received a demand from any of the lenders for payment on these short term notes payable.

A 5% unsecured convertible debenture, due January 13, 2010, was issued by the Company to a related party on October 13, 2009 for CDN $100,000 (USD $95,227). The unpaid principal amount can be converted into common stock at the price of $0.50 per share. The convertible note was not redeemed or converted at the maturity date, is currently in default and is still accruing interest. The principal balance outstanding of the convertible debenture as of December 31, 2011 and 2010, was $95,227.

As of December 31, 2011 and 2010, the Company owed $284,052 and $44,110, respectively, to related parties, which consisted of $235,750 and $20,750, respectively, of professional fees owed to entities owned by the Company’s CEO and CFO, and $48,302 and $23,360, respectively, of accrued interest on related party notes.

As of December 31, 2011 through the date of this filing, the Company has not received a demand notice from any of the related party lenders for payment on these notes payable.
 
 
F-13

 

Mainland Resources Note Payable

In September 2010, the Company borrowed $60,000 from Mainland Resources to pay operating costs during the merger period. The note bears interest at 12% and was originally due on December 31, 2010. The Company entered into multiple extensions of the note during the period the Company was contemplating its merger with Mainland. On December 21, 2011, the Company and Mainland Resources entered into a new promissory note (the “New Promissory Note”), which shall supersede and replace the Original Promissory Note. The New Promissory Note evidenced the Corporation’s current obligation to pay to Mainland Resources $67,003, comprised of $60,000 in principal and $7,003 in accrued interest.  The New Promissory Note is due on demand and bears interest at 12% per annum.

NOTE 5. NOTES PAYABLE

In June 2010, the Company borrowed $50,000 pursuant to a note payable agreement with an unrelated third party. The note bears interest at 5% per annum, is unsecured and matured on June 2, 2011. Interest together with principal was due at the maturity date. The note was not paid at the maturity date, is currently in default and is still accruing interest.

On February 4, 2011, the Company borrowed an additional $30,000 from the same party noted above pursuant to a note payable agreement. The note bears interest at 5% per annum, is unsecured and is due on demand.

On May 3, 2011, the Company borrowed $35,000 from the same party noted above pursuant to a note payable agreement. The note bears interest at 5% per annum, is unsecured and interest together with principal is due on demand.

On August 11, 2011, the Company borrowed $20,000 from the same party noted above pursuant to a note payable agreement. The note bears interest at 10% per annum, is unsecured and interest together with principal is due on demand.

On December 5, 2011, the Company borrowed $20,000 from the same party noted above pursuant to a note payable agreement. The note bears interest at 10% per annum, is unsecured and interest together with principal is due on demand.

As of December 31, 2011, and through the date of this filing, the Company has not received a demand notice from the lender noted above for payment of principal or interest on these notes payable.

NOTE 6. UNEVALUATED OIL AND GAS PROPERTIES

In November 2008, the Company executed an option agreement (the "Option Agreement") with Westrock to purchase a 75% net revenue interest (100% working interest) in approximately 5,000 net acres of oil and gas leases (“Leases”) located in Mississippi in the onshore region of the Gulf Coast of the United States. The purchase price was $625 per net acre, or a total of $3,125,000. The Option Agreement required that a well be spud no later than May 31, 2009 and provided the Company until November 17, 2008 to complete its due diligence (the "Option Period"). The Company made a payment of $781,250 upon execution of the Option Agreement.

The Option Agreement was amended a number of times to extend the Option Period and through August 2009, the Company made additional cash payments totaling $325,001 to the counterparty.
 
 
F-14

 

On August 19, 2009, the Company entered into a final amendment to the Option Agreement whereby the Company (i) agreed to issue 4,037,500 shares of its restricted common stock as satisfaction for the remaining balance due under the Option Agreement, and (ii) agreed to drill and complete a minimum of at least one well on the properties in the Bossier/Haynesville geological zone no later than December 31, 2010. On November 2, 2010, an agreement was signed between the counterparty and the Company which extended the deadline for drilling and completing a well in the Haynesville Formation to December 31, 2011.

On November 11, 2011, the Company received a letter from Westrock advising the Company that Westrock was willing to grant an extension to the December 31, 2011 deadline for the Company to meet its drilling obligations under the terms and provisions of the Option Agreement if the Company proposed reasonable financial consideration acceptable to Westrock by December 15, 2011. In the event the Company was unable to provide reasonable financial consideration acceptable to Westrock, the Company would be deemed in default of the provisions of the Option Agreement and would automatically forfeit and transfer to Westrock all rights under the Option Agreement including, but not limited to, the acquired properties and Westrock would retain all payments made by the Company under the Option Agreement and all improvements made to the acquired properties. The Company was unable to acquire sufficient funds by the December 15, 2011 deadline to extend the Option Agreement.

As such, the Company was deemed to be in default of the Option Purchase Agreement. On December 12, 2011, the Company entered into a transfer of oil, gas and mineral leases with Westrock, pursuant to which the Company transferred, delivered and assigned to Westrock all of its interests in those Leases.
 
The 4,037,500 shares issued to satisfy the remaining purchase price were valued at $2,664,750, based upon the Company’s share price on the date of agreement, bringing the total acquisition price to $3,771,001. The properties acquired had no proved reserves and therefore, had been classified as unevaluated in the accompanying financial statements. During the year ended December 31, 2011, the entire $3,771,001 was recorded to impairment expense.

Mainland Resources, Inc. Joint Development Project

On September 17, 2009, the Company executed a letter agreement (the “Letter Agreement”) with Mainland Resources to jointly develop contiguous acreage known as the Buena Vista Area located in Mississippi (the “Joint Development Project”). In accordance with the terms and provisions of the Letter Agreement: (i) the Company agreed to commit approximately 5,000 net acres (the Leases) and Mainland Resources agreed to commit approximately 8,225 net acres to the Joint Development Project; (ii) Mainland Resources would be the operator pursuant to the Joint Operating Agreement; (iii) Mainland Resources agreed to pay 80% of the initial well drilling and completion costs to earn a 51% working interest in the well and the total Joint Operating Area; and (iv) the Company agreed to pay 20% of the initial well drilling and completion costs to earn a 49% working interest in the well and the total Joint Operating Area. Future costs, including drilling and completion, for oil and gas activities of the net acreage in the Joint Operating Area would have been split on a 51%/49% basis between Mainland Resources and the Company, respectively.

On March 25, 2010, Mainland Resources issued an authorization for expenditure (“AFE”) for the Burkley-Phillips No. 1 Well which contemplated drilling to a depth of 22,000 feet, or a depth sufficient to evaluate the Haynesville Shale formation. The total completed well cost was estimated at $13,550,000. In accordance with the terms and provisions of the Letter Agreement, the Company had thirty days to contribute its 20% share of the total completed well cost, or $2,710,000.

On April 27, 2010, the Company failed to fund its 20% of the estimated total well costs of the Burkley-Phillips No. 1 well on the Buena Vista prospect. As a result, the Company forfeited its right to a 29% working interest in the well and in the Buena Vista prospect in favor of Mainland Resources. The Company continued to be entitled to receive a 20% working interest in the well and the prospect after completion (subject to compliance by the Company with all other terms and conditions of the Letter Agreement and the related Joint Operating Agreement).
 
 
F-15

 
 
In July 2010, the Burkley-Phillips No. 1 well commenced drilling on the Buena Vista prospect in Mississippi. The Burkley-Phillips No. 1 well reached the projected total depth of 22,000 feet on December 27, 2010. The Company  worked with Mainland Resources to best design a completion program for the Burkley-Phillips No. 1 well, with the intent that the well would be properly tested and evaluated within 2011. The Company and Mainland Resources were unable to secure sufficient funds in 2011 to complete the testing of the well.
 
As a result of not completing the Burkley-Phillips #1 well prior to December 31, 2011, the Company forfeited it’s 20% working interest in the 5,000 acre parcel that the Company had originally secured from Westrock. Effective December 12, 2011, the Leases were returned to Westrock.
 
Notwithstanding the Transfer of Leases, the Company still retains a twenty percent (20%) working interest in the 8,225 adjoining acres in Mississippi that Mainland Resources Inc. first contributed to the joint venture.

Avere Energy Inc. Farm-In Agreement

Effective on January 15, 2010, the Company executed a letter of intent with Avere Energy Inc., a Canadian corporation (“Avere Energy”), regarding its Mississippi project. On March 1, 2010, the letter of intent with Avere Energy was amended (the “Amended Letter of Intent”).

Pursuant to the Amended Letter of Intent, Avere Energy was to enter into a definitive farm-in agreement with us whereby Avere Energy would farm-in on our interest in the Mississippi Project by paying 20% of the total well costs (which was 100% of our capital commitment under the Mainland Letter Agreement) to earn a 20% net interest in the Mississippi Project, which was 40.81% of our working interest. On January 27, 2010, pursuant to the Amended Letter of Intent, Avere Energy paid to us a $75,000 non-refundable deposit, which was recognized as other income for the year ended December 31, 2010 in the accompanying income statement.

Effective on April 20, 2010, the Company received notice from Avere Energy they were terminating the Amended Letter of Intent. Avere Energy was unable to raise the required funds and obtain the approval of the TSX Venture Exchange to the definitive farm-in agreement. Therefore, in accordance with the notice of termination from Avere Energy to us, the Company did not enter into a definitive farm-in agreement with Avere Energy. An additional negotiated break fee of $75,000 was paid to us by Avere Energy on June 9, 2010. The fees paid by Avere Energy have been recognized as other income for the year ended December 31, 2010 in the accompanying income statement.

NOTE 7. INCOME TAXES

Deferred income taxes are provided on a liability method whereby deferred tax assets and liabilities are established for the difference between the financial reporting and income tax basis of assets and liabilities as well as operating loss and tax credit carry forwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 
F-16

 
 
Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carry-forwards are expected to be available to reduce taxable income.

At December 31, 2011 and 2010 the Company’s deferred tax assets consist primarily of net operating loss carry forwards. For December 31, 2011 and 2010, the material reconciling items between the tax benefit computed at the statutory rate and the actual benefit recognized in the financial statements consisted of expenses related to share-based compensation and the change in the valuation allowance during the applicable period. At December 31, 2011 and 2010, the Company has recorded a 100% valuation allowance as management believes it is likely that any deferred tax assets will not be realized.

As of December 31, 2011 and 2010, the Company has a net operating loss carry forward of approximately $5.4 million and $1.3 million, respectively, which will expire between years 2026 and 2031. Due to the change in ownership provisions of the Tax Reform Act of 1986, our net operating loss carry forwards could be subject to annual limitations should a change in ownership occur.
 
 
F-17

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
There are no disagreements with our current accountants on any matters related to accounting and financial disclosure issues. Our principal independent registered public accounting firm is GBH, CPAs, PC. Their address is 6002 Rogerdale, Suite 500, Houston TX, 77072 and telephone number is 713.482.0000.
 
ITEM 9A. CONTROLS AND PROCEDURES
 
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
 
We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures, (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were not effective as of December 31, 2011 to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including our CEO and CFO, we evaluated the effectiveness of our internal control over financial reporting as of December 31, 2011, and concluded that our internal control over financial reporting was not effective at December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. We identified a material weakness in our internal control over financial reporting primarily attributable to limited accounting and SEC reporting expertise within the Company. Due to our exploration stage, we have limited financial ability to remedy this staffing deficiency at this time; however, we will add additional accounting and SEC reporting expertise in the future as funds permit.

An internal control material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements would not be prevented or detected on a timely basis by employees in the normal course of their work. Our management’s assessment is that the Company did not maintain effective internal control over financial reporting as of December 31, 2010 within the context of the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our internal control over financial reporting as designed, documented and tested, we identified multiple material weaknesses primarily related to maintaining an adequate control environment. The material weaknesses in our internal controls related to inadequate staffing within our accounting department and upper management, lack of controls regarding the assignment of authority and responsibility, lack of consistent policies and procedures, inadequate monitoring of controls and inadequate disclosure controls.
 
 
40

 

The Company does not anticipate substantial changes in the development of internal controls over the next twelve months unless it can obtain the financial and personnel resources to further develop its internal controls to mitigate the identified weaknesses.

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.

INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
 
We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our CEO and our CFO have concluded that these controls and procedures are not effective at the “reasonable assurance” level.

CHANGES IN INTERNAL CONTROLS

No significant changes were implemented in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

AUDIT COMMITTEE

Our Board of Directors has not established an audit committee. The respective role of an audit committee has been conducted by our Board of Directors. Since the Merger Agreement was not consummated, we intend to establish an audit committee during fiscal year 2012. When established, the audit committee's primary function will be to provide advice with respect to our financial matters and to assist our Board of Directors in fulfilling its oversight responsibilities regarding finance, accounting, and legal compliance. The audit committee's primary duties and responsibilities will be to: (i) serve as an independent and objective party to monitor our financial reporting process and internal control system; (ii) review and appraise the audit efforts of our independent accountants; (iii) evaluate our quarterly financial performance as well as its compliance with laws and regulations; (iv) oversee management's establishment and enforcement of financial policies and business practices; and (v) provide an open avenue of communication among the independent accountants, management and our Board of Directors.
 
 
41

 
 
ITEM 9B. OTHER INFORMATION
 
Not applicable.
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
 
All of our directors hold office until the next annual general meeting of the shareholders or until their successors are elected and qualified. Our officers are appointed by our board of directors and hold office until their earlier death, retirement, resignation or removal.
 
Our directors and executive officers, their ages and positions held are as follows:
 
Name
 
Age
 
Position with the Company
Steven Harding
  52  
President, Chief Executive Officer/Principal Executive Officer and a Director
Brian Manko
  45  
Chief Financial Officer

Business Experience

The following is a brief account of the education and business experience of each director, executive officer and key employee during at least the past five years, indicating each person's principal occupation during the period, and the name and principal business of the organization by which he or she was employed, and including other directorships held in reporting companies.
 
Steve Harding. Mr. Harding has been our President/Chief Executive Officer and a member of our board of directors since October 29, 2008.  Mr. Harding has twenty-nine years of experience in the oil and gas exploration industry within numerous geological basins both within and outside of North America.  He has occupied various senior positions within EnCana Corp., and its predecessors Alberta Energy and Husky Energy. From October 2003 to December 2004 he was the vice president, Northern Canada and the vice president Alaska/MacKenzie Delta from 2002 to September 2003. From 1998 to 2002 he was an exploration manager for Alberta Energy in their New Ventures Group and the chief geologist/geoscientist at Husky Energy from 1994 to 1998.  Since March 2005 he has acted as a self employed consultant, responsible for evaluating oil and gas assets for a number of  private  and  public  companies  from a  technical  and  business  viability perspective. In the latter half of the 1980's, he was responsible for developing the geological model, which lead to the discovery of the White Rose field in offshore Newfoundland. The White Rose field is believed to hold estimated reserves of 450 - 500 Million barrels of oil and 3-4 trillion cubic feet of gas, and currently produces approximately 110,000 barrels per day. While at EnCana, he also negotiated and secured the largest exploration position in the US and Canadian Arctic, leading to the discovery of the Umiak field 2004 and receiving a Department of Minerals Management Service corporate citizen award in 2003 for outstanding cultural and environmental efforts in Alaska.
 
 
42

 
 
Mr. Harding received his Honours Bachelor of Science degree in Geology from McMaster University in 1982 and his Masters degree in Geology from the University of Alberta in 1985.

Brian Manko. Mr. Manko has been our Chief Financial Officer since February 1, 2009. During the past eighteen years, Mr. Manko has been involved with private and public companies involving a wide range of industries. From approximately 2000 to present, Mr. Manko has been directly involved with private money management as an institutional investor and private investor specializing in both the capital and currency markets. From approximately 2003 to present, Mr. Manko has been a director for Morbank Mortgage Investment Company. From approximately 1996 to 2000 to 2003, Mr. Manko worked as an equity broker with Levesque Securities and Research Capital. From approximately 1992 to 1996, Mr. Manko was employed by Johnson & Johnson is its pharmaceuticals divisions. Mr. Manko is also currently working in an executive financial position with a chapter of a national volunteer group.

Mr. Manko earned a Bachelor of Commerce degree in 1992 from the University of Calgary. In addition, he completed his CMA accounting designation in June 2010.

COMMITTEES OF THE BOARD OF DIRECTORS

As of the date of this Annual Report, we have not established an audit committee, a compensation committee nor a nominating committee. Since the Merger Agreement was not consummated, we intend within the next fiscal quarter to establish such committees and adopt and authorize certain corporate governance policies and documentation.
 
FAMILY RELATIONSHIPS
 
There are no family relationships among our directors or officers.
 
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
 
During the past five years, none of our directors, executive officers or persons that may be deemed promoters is or have been involved in any legal proceeding concerning: (i) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (ii) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (iii) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction permanently or temporarily enjoining, barring, suspending or otherwise limiting involvement in any type of business, securities or banking activity; or (iv) being found by a court, the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law (and the judgment has not been reversed, suspended or vacated).
 
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
 
Section 16(a) of the Exchange Act requires our directors and officers, and the persons who beneficially own more than ten percent of our common stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Copies of all filed reports are required to be furnished to us pursuant to Rule 16a-3 promulgated under the Exchange Act. Based solely on the reports received by us and on the representations of the reporting persons, we believe that these persons have complied with all applicable filing requirements during the fiscal year ended December 31, 2011.
 
 
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ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the compensation paid to our Chief Executive Officer and those executive officers that earned in excess of $100,000 during fiscal years ended December 31, 2011 and 2010 (collectively, the “Named Executive Officers”):

SUMMARY COMPENSATION TABLE
 
Name and
Principal Position
 
Year
   
Salary
($)
   
Bonus
($)
   
Stock Awards
($)
   
Option Awards ($)
   
Non-Equity Incentive Plan Compensation
($)
   
Non-Qualified Deferred Compensation Earnings
($)
   
All Other Compensation
($)
   
Total
($) (2)(3)
 
Steve Harding  President and CEO
 
2010
2011
        180,000 180,000      
-0-
-0-
     
-0-
-0-
     
(1)883,812
 -0-
     
-0-
-0-
     
-0-
-0-
     
-0-
-0-
      441,666 180,000  
Brian Manko, Chief Financial Officer
 
2010
2011
     
33,000
33,000
     
-0-
-0-
     
-0-
-0-
     
(1)132,572
(1) 13,892
     
-0-
-0-
     
-0-
-0-
     
-0-
 -0-
     
175,500
46,892
 

(1)  
This amount represents the fair value of these Stock Options at the date of grant which was estimated using the Black-Scholes option pricing model.

STOCK OPTIONS/SAW GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2010

The following table sets forth information as at December 31, 2011 relating to Stock Options that have been granted to the Named Executive Officers:

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
 
OPTION AWARDS
   
STOCK AWARDS
 
Name
 
Number of Securities Underlying Unexercised Options
Exercisable
 (#)
   
Number of Securities Underlying Unexercised Options
Unexercisable
 (#)
   
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
 (#)
   
Option Exercise Price
 ($)
   
Option Expiration Date
 
   
Number of Shares or Units of Stock That Have Not Vested
 (#)
   
Market Value of Shares or Units of Stock That Have Not Vested
 ($)
   
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested
 (#)
   
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
 (#)
 
Steve Harding, President/CEO
    -0-       -0-       -0-       n/a       n/a       n/a       -n/a       -n/a       -n/a  
Brian Manko
CFO
    150,000 (1)     -0-       150,000       0.09    
4/20/21
      -0-       -0-       -0-       -0-  

 (1) Mr. Manko was granted 150,000 Stock Options on April 20, 2011. The 150,000 Stock Options are exercisable into 150,000 shares of common stock at $0.09 per share with a Black Scholes valuation of $13,892. See "Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."
 
 
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The following table sets forth information relating to compensation paid to our directors during fiscal year ended December 31, 2011 and 2010:

DIRECTOR COMPENSATION TABLE
 
Name
 
 
 
 
Fees
Earned or
Paid in
Cash
 ($)
 
Stock
Awards
 ($)
   
Option
Awards
 ($)
 
Non-Equity
Incentive
Plan
Compensation
 ($)
   
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
 ($)
   
All
 Other
Compensation
 ($)
   
Total
 ($)
 
Manmohan Minhas
2010
2011
   
-0-
-0-
   
-0-
-0-
     
(1)
31,666
43,187
   
-0-
-0-
     
-0-
-0-
     
-0-
-0-
     
  31,666
 43,187
 
                                                     
Steve Harding
2010
2011
   
(2)
-0-
-0-
   
-0-
-0-
     
-0-
-0-
   
-0-
-0-
     
-0-
-0-
     
-0-
-0-
     
-0-
-0-
 
                                                     
Herb Dhaliwal
2010
2011
   
-0-
-0-
   
-0-
-0-
     
(3)
95,000
43,187
   
-0-
-0-
     
-0-
-0-
     
-0-
-0-
     
95,000
43,187
 
 
(1)  
Mr. Minhas was granted 100,000 Stock Options on September 14, 2009 of which 33,333 Stock Options vested immediately, 33,333 Stock Options shall vest September 14, 2012 and the remaining 33,334 Stock Options shall vest September 14, 2015. The 33,333 Stock Options are exercisable into 33,333 shares of common stock at $0.80 per share with a Black Scholes valuation of $31,666.
 
Mr. Minhas was granted 50,000 Stock Options on March 14, 2011, which all vested immediately. The 50,000 Stock Options are exercisable into 50,000 shares of common stock at $0.13 per share with a Black Sholes valuation of $7,464. Mr. Minhas was granted a further 400,000 Stock Options on April 20, 2011, which all vested immediately. The 400,000 Stock Options are exercisable into 400,000 shares of common stock at $0.09 per share with a Black Sholes valuation of $35,723.
 
Mr. Minhas resigned from the Board of Directors effective November 24, 2011.
 
(2)  
Mr. Harding’s compensation has been disclosed above in the “Summary Compensation Table” as compensation related to his executive position as President/Chief Executive Officer.
 
 
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(3)  
Mr. Dhaliwal was granted 300,000 Stock Options on September 25, 2009 of which 100,000 Stock Options vested immediately, 100,000 Stock Options shall vest September 14, 2012 and the remaining 100,000 Stock Options shall vest September 14, 2015. The 100,000 Stock Options are exercisable into 100,000 shares of common stock at $0.80 per share with a Black Scholes valuation of $95,000.00
 
Mr. Dhaliwal was granted 50,000 Stock Options on March 14, 2011, which all vested immediately. The 50,000 Stock Options are exercisable into 50,000 shares of common stock at $0.13 per share with a Black Sholes valuation of $7,464. Mr. Dhaliwal was granted a further 400,000 Stock Options on April 20, 2011, which all vested immediately. The 400,000 Stock Options are exercisable into 400,000 shares of common stock at $0.09 per share with a Black Sholes valuation of $35,723.
 
Mr. Dhaliwal resigned from the Board of Directors effective November 24, 2011.
 
EMPLOYMENT AND CONSULTING AGREEMENTS

As of the date of this Annual Report, we have entered into verbal month-to-month contractual relationships with certain of our executive officers and directors as follows. See “Item 13. Certain Relationships and Related Transactions and Director Independence.”

President/Chief Executive Officer

As of November 1, 2008, we entered into a contractual relationship with Perfect Ocean Investments Inc. (“POI”) regarding the engagement and compensation of Steve Harding, our President/Chief Executive Officer (the “Harding Arrangement”). In accordance with the terms and provisions of the Harding Arrangement, we will pay a monthly salary of $10,000 to POI as compensation for Mr. Harding.  A Board Resolution was passed on November 24, 2009, by Board members excluding Mr. Harding, that his monthly salary would be increased to $15,000, to better align with professional compensation recognized from salary surveys conducted by the Association of Engineers, Geologists and Geophysicists of Alberta (A.P.E.G.G.A.).

Chief Financial Officer

As of February 1, 2009, we entered into a contractual relationship with Manko Business Consulting Corp. (“MBCC”) regarding the engagement and compensation of Brian Manko, our Chief Financial Officer (the “Manko Arrangement”). In accordance with the terms and provisions of the Manko Arrangement, we will pay a monthly salary of $2,750 to MBCC as compensation for Mr. Manko.
 
 
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
As of the date of this Annual Report, the following table sets forth certain information with respect to the beneficial ownership of our common stock by each stockholder known by us to be the beneficial owner of more than 5% of our common stock and by each of our current directors and executive officers. Each person has sole voting and investment power with respect to the shares of common stock, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated. As of the date of this Annual Report, there are 60,273,333 shares of common stock issued and outstanding.

Name and Address of Beneficial Owner(1)
 
Amount and Nature of Beneficial Ownership (1)
 
Percentage of Beneficial Ownership
 
Directors and Officers:
         
Steve Harding 
407 2nd Street SW
Calgary, Alberta
Canada T2P 2Y3
   
(2)
2,483,333
    3.10 %
               
Brian Manko 
407 2nd Street SW
Calgary, Alberta
Canada T2P 2Y3
   
(3)
500,000
   
Nil
 
               
All executive officers and directors as a group (2 persons)
   
(4)
2,983,333
    5.59 %
               
5% or Greater Beneficial Owners:
             
               
Westrock Land Corp.
Address
    5,812,416     6.73 %
               
Devinder Randhawa
407 2nd Street SW
Calgary, Alberta                                    
Canada T2P 2Y3
   
(5)
3,450,000
    5.73 %
 
*
Less than one percent.
 
 
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(1)  
Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of common stock actually outstanding as of the date of this Annual Report. As of the date of this Annual Report, there are 80,273,333 shares issued and outstanding. Beneficial ownership amounts reflect the 2009 Forward Stock Split.
 
(2)  
This figure consists of: (i) 2,150,000 shares of common stock; and (ii) 333,333 vested Stock Options which are exercisable by Mr. Harding to purchase 333,333 shares of our common stock at an exercise price of $0.80 per share expiring on September 14, 2019.
 
(3)  
 This figure consists of: (i) 300,000 shares of common stock; (ii) 50,000 vested Stock Options which are exercisable by Mr. Manko to purchase 50,000 shares of our common stock at an exercise price of $0.80 per share expiring on September 14, 2019; and (iii) 150,000 Stock Options which are exercisable by Mr. Manko to purchase 150,000 shares of our common stock at an exercise price of $0.09 per share expiring on April 20, 2021.
 
(4)  
This figure consists of: (i) 2,450,000 shares of common stock; (ii) 383,333 vested Stock Options to purchase 383,333 shares of our common stock at an exercise price of $0.80; and (iii) 150,000 Stock Options to purchase 150,000 shares of our common stock at an exercise price of $0.09 per share.
 
(5)  
This figure consists of: (i) 3,200,000 shares of common stock; and (ii) 250,000 vested Stock Options exercisable by Mr. Randhawa to purchase 250,000 shares of our common stock at an exercise price of $0.80 per share expiring on September 14, 2019. Due to Mr. Randhawa’s resignation effective November 25, 2009, the Stock Options were to expire within ninety days from the date of resignation. The Board of Directors has authorized the retention of the Stock Options based upon Mr. Randhawa’s continuing service to us as a consultant.
 
CHANGES IN CONTROL

We are unaware of any contract, or other arrangement or provision, the operation of which may at a subsequent date result in a change of control of our company.
 
 
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

As of the date of this Annual Report, other than as disclosed below, none of our directors, officers or principal stockholders, nor any associate or affiliate of the foregoing, have any interest, direct or indirect, in any transaction or in any proposed transactions, which has materially affected or will materially affect us during fiscal year ended December 31, 2011.
 
EMPLOYMENT ARRANGEMENTS
 
As of the date of this Annual Report, we have verbally agreed to pay certain of our executive officers and directors compensation for services rendered as follows:

President/Chief Executive Officer

As of November 1, 2008, we entered into a contractual relationship with POI regarding the engagement and compensation of Steve Harding, our President/Chief Executive Officer (the “Harding Arrangement”). In accordance with the terms and provisions of the Harding Arrangement, we will pay a monthly salary of $10,000 to POI as compensation for Mr. Harding. A Board Resolution was passed on November 24th 2009,by Board members excluding Mr. Harding, that his monthly salary would be increased to $15,000, to better align with professional compensation recognized from salary surveys conducted by the Association of Engineers, Geologists and Geophysicists of Alberta (A.P.E.G.G.A.).

Chief Financial Officer

As of February 1, 2009, we entered into a contractual relationship with MBCC regarding the engagement and compensation of Brian Manko, our Chief Financial Officer (the “Manko Arrangement”). In accordance with the terms and provisions of the Manko Arrangement, we will pay a monthly salary of $2,750 to MBCC as compensation for Mr. Manko.
 
DIRECTOR LOANS
 
During fiscal year ended December 31, 2011, our directors had outstanding loans to us in the aggregate of $87,809, which amounts were used to pay our operating expenses. Interest of 10% per annum has been accrued to the lenders and the loans are due upon demand. All of these loans are unsecured and no interest has been paid to date.
 
 
49

 
 
Except for the transactions described above, none of our directors, officers or principal stockholders, nor any associate or affiliate of the foregoing, have any interest, direct or indirect, in any transaction or in any proposed transactions, which has materially affected or will materially affect us during fiscal year ended December 31, 2011.
 
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
 
During the year ended December 31, 2011, we incurred $41,850 in fees to our principal independent accountant for professional services rendered in connection with the audit of our financial statements for fiscal year ended December 31, 2011 and for the review of our financial statements for the quarters ended March 31, 2011, June 30, 2011 and August 31, 2011.
 
During the year ended December 31, 2011, we incurred $7,650 in fees to our principal independent accountant for audit-related matters.
 
During the year ended December 31, 2011, we did not incur any other fees for professional services rendered by our principal independent accountant for all other non-audit services which may include, but is not limited to, tax-related services, actuarial services or valuation services.
 
During the year ended December 31, 2010, we incurred approximately $44,000 in fees to our principal independent accountant for professional services rendered in connection with the audit of our financial statements for fiscal year ended December 31, 2010 and for the review of our financial statements for the quarters ended March 31, 2010, June 30, 2010 and August 31, 2010.
 
During the year ended December 31, 2010, we also incurred $950 in fees to our principal independent accountant for preparation of our 2009 income tax return.  
 
We did not incur any other fees for professional services rendered by our principal independent accountant for all other non-audit services which may include, but is not limited to, tax-related services, actuarial services or valuation services.
 
 
50

 
 
ITEM 15. EXHIBITS AND FINANCIAL SCHEDULES
 
The following exhibits are filed as part of this Annual Report.
 
EXHIBIT NO.  
DOCUMENT
     
3.1   
Articles of Incorporation (1)
     
3.1.2  
Articles of Incorporation as amended.
     
3.1.3  
Articles of Merger between Minhas Energy Consultants and American Energy Corp. (2)
   
 
3.2   
Bylaws (1)
     
10.1  
Option Agreement between American Energy Corporation  and Westrock Land Corporation dated October 2008. (3)
     
10.2  
5% Convertible Debenture dated October 13, 2009 between American Exploration Corporation and DMS Ltd. (4)
     
10.3   
Stock Option Plan of American Exploration Corporation dated September 14, 2009. (5)
     
10.4  
Merger Agreement and Plan of Merger dated March __, 2010 between American Exploration Corporation and Mainland Resources Inc.
     
10.5   
                                                                                          
     
16. 1  
Letter from Moore & Associates dated August 11, 2009. (6)
     
16. 2  
Letter from Seale & Beers, CPAs dated November 2, 2009. (7)
   
 
31.1  
Certification  of  Chief  Executive   Officer  Pursuant  to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act.
     
31.2   
Certification of Chief Financial Officer Pursuant  to  Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act.
     
32.1  
Certification  of Chief  Executive  Officer  and Chief Financial Officer Under Section 1350 as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act.
 
101.INS **
 
XBRL Instance Document
     
101.SCH **
 
XBRL Taxonomy Extension Schema Document
     
101.CAL **
 
XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF **
 
XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB **
 
XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE **
 
XBRL Taxonomy Extension Presentation Linkbase Document

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 
 
51

 

(1)  Incorporated by reference from our Registration Statement on Form SB-2 filed with the Commission on March 5, 2006.

(2)  Incorporated by reference from our Current Report on Form 8-K filed with the Commission on August 8, 2008.

(3)  Incorporated by reference from our Current Report on Form 8-K filed with the Commission on November 6, 2008 and our Amendment No. 1 to Current Report filed with the Commission on January 25, 2009.

(4)  Incorporated by reference from Form Current Report on Form 8-K filed with the Commission on October 19, 2009.

(5)  Incorporated by reference from Quarterly Report on Form 10-Q filed with the Commission on November 20, 2009.

(6)  Incorporated by reference from Current Report on Form 8-K filed with the Commission on August 17, 2009.

(7)  Incorporation by referenced from Current Report on Form 8-K filed with the Commission November 4, 2009.
 
 
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AMERICAN EXPLORATION CORPORATION
 
SIGNATURES
 
Pursuant to the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
AMERICAN EXPLORATION CORPORATION
 
       
Dated: May 15, 2012 
By:
/s/ STEVE HARDING
 
   
Steve Harding, President/Chief
 
   
Executive Officer
 
       
Dated: May 15, 2012
By:
/s/ BRIAN MANKO
 
   
Brian Manko, Chief Financial Officer
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
 
     
       
Dated: May 15, 2012
By:
/s/ STEVE HARDING  
    Director  
       
Dated: May 15, 2012 By: /s/ HERB DHALIWAL  
   
Director
 
       
Dated: May 15, 2012 By: /s/ MANMOHAN MINHAS  
    Director  
 
 
 
53