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EX-32.2 - AMERICAN EAGLE ENERGY Corpv176842_ex32-2.htm
EX-31.2 - AMERICAN EAGLE ENERGY Corpv176842_ex31-2.htm
EX-32.1 - AMERICAN EAGLE ENERGY Corpv176842_ex32-1.htm
EX-31.1 - AMERICAN EAGLE ENERGY Corpv176842_ex31-1.htm

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

 
FORM 10-Q/A

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

For the quarterly period ended June 30, 2009

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

For the transition period from                                            to                                          

Commission File Number:  000-50906
 

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

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

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

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

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

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

(Check one):

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
44,550,000 shares of common stock issued and outstanding at March 10, 2010.

 
 

 

ETERNAL ENERGY CORP.
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 2009

INDEX

A Note About Forward Looking Statements
1
   
PART I - FINANCIAL INFORMATION
 
   
Item 1 - Condensed Financial Statements (Unaudited)
3
   
Condensed Balance Sheets – June 30, 2009 (Unaudited) and December 31, 2008
F-1
   
Condensed Statements of Operations (Unaudited) - For Each of the Three- and Six-Month Periods Ended June 30, 2009 and 2008
F-2
   
Condensed Statements of Cash Flows (Unaudited) - For Each of the Three- and Six-Month Periods Ended June 30, 2009 and 2008
F-3
   
Notes to the Condensed Unaudited Financial Statements (Unaudited)
F-5
   
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
4
   
Item 4 - Controls and Procedures
10
   
PART II - OTHER INFORMATION
 
   
Item 6 – Exhibits
11
   
Signatures
13

 
 

 

A Note About Forward-Looking Statements

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

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

 
1

 

 
EXPLANATORY NOTE
In 2009, we discovered that certain accounting errors had occurred that affected our financial statements for the years ended December 31, 2008 and 2007.  Specifically:
 
 
·
we had improperly expensed our entire interest in the North Dakota prospect rather than expensing only the interest owned beneficially through our investment in Pebble Petroleum.  We sold our beneficial ownership interest in 2007;
 
 
·
amounts advanced to Rover Resources Inc. in 2007 were improperly recorded as investments in oil and gas properties and subsequently expensed upon the sale of the Company’s investment in Pebble Petroleum;
 
 
·
a gain on the sale of the Company’s interest in Pebble Petroleum Inc. was improperly presented as a sale of an oil and gas prospect rather than as a gain on the sale of an equity investment;
 
 
·
spud fee revenue was not recognized in the same period during which the initial drilling of the wells commenced;
 
 
·
stock-based compensation expense was understated for both 2006, 2007 and 2008 due to an incorrect application of SFAS 123(R), Share-Based Payment; and
 
 
·
we had overstated the gain associated with the sale of our Steamroller Prospect due to an incorrect application of the rules of the full cost method of accounting.
 
Due to the materiality of the errors, we have elected to restate our 2008 and 2007 financial statements to reflect the correction of these errors.  The nature and effect of the corrections of the accounting errors on the financial statements for the year ended December 31, 2008 and for the three-month and six-month periods ended June 30, 2008 are discussed in detail in Part I, Item 7: Management’s Discussion and Analysis or Plan of Operation (page 5) as well as in Part II, Item 8: Financial Statements and Supplementary Data (Footnote 2, page F-5).
 
This Amendment No. 1 on Form 10-Q/A amends our Report on Form 10-Q for the quarter ended June 30, 2009 filed with the Securities and Exchange Commission on August 14, 2009.  This Amendment No. 1 on Form 10-Q/A amends Part I, Item 1: Financial Statements, Part I, Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operation and Part I, Item 4T: Controls or Procedures.  No other Item in our Report on Form 10-Q filed on August 14, 2009 is amended, modified or updated hereby.  Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, new certifications of our principal executive officer and principal financial officer are being filed as exhibits to this Form 10-Q/A.

 
2

 
 
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

 
3

 

Eternal Energy Corp.
 
Condensed Financial Statements (Unaudited)
 
As of June 30, 2009,
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

 
 

 

Eternal Energy Corp.
 
Index to the Condensed Financial Statements (Unaudited)
 
As of June 30, 2009,
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

Condensed Financial Statements of Eternal Energy Corp. (Unaudited):
   
     
Condensed Balance Sheets as of June 30, 2009 (Unaudited) and December 31, 2008
    F-1
       
Condensed Statements of Operations For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008 (Unaudited)
    F-2
       
Condensed Statements of Cash Flows For Each of the Six-Month Periods Ended June 30, 2009 and 2008 (Unaudited)
    F-3
       
Notes to the Condensed Financial Statements (Unaudited)
    F-5
 
 
 

 

Eternal Energy Corp.
 
Condensed Balance Sheets
 
As of June 30, 2009 and December 31, 2008

   
June 30,
       
   
2009
   
December 31,
 
   
(Unaudited)
   
2008
 
   
(Restated)
   
(Restated)
 
ASSETS
           
             
Current assets:
           
Cash
  $ 297,691     $ 727,701  
Accounts receivable
    20,833       -  
Prepaid expenses
    6,054       9,266  
                 
Total current assets
    324,578       736,967  
                 
Receivable
    20,000       750,000  
Equipment and leasehold improvements, net of accumulated depreciation and amortization of $74,721 and $54,667 respectively
    61,692       60,242  
Oil and gas properties – subject to amortization, net of accumulated depletion of $57,667
    2,438,097       2,324,154  
Oil and gas properties – not subject to amortization
    1,324,496       1,324,400  
Assets held for sale
    57,000       38,000  
Deposits
    1,620,366       1,604,366  
Total assets
  $ 5,846,229     $ 6,838,129  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities:
               
                 
Accounts payable and accrued liabilities
  $ 185,870     $ 98,808  
Accrued officer’s compensation
    43,101       43,101  
Accrued oil and gas interests
    -       444,738  
                 
Total liabilities
  $ 228,971     $ 586,647  
                 
Commitments and contingencies
               
                 
Stockholders' equity:
               
Common stock, $.001 par value, 875,000,000 shares authorized, 44,550,000 shares issued and outstanding, respectively
    44,550       44,550  
Additional paid-in capital
    9,238,406       9,039,131  
Accumulated deficit
    (3,665,698 )     (2,832,199 )
                 
Total stockholders' equity
    5,617,258       6,251,482  
                 
Total liabilities and stockholders' equity
  $ 5,846,229     $ 6,838,129  
 
 
F-1

 

Eternal Energy Corp.
 
Condensed Statements of Operations (Unaudited)
 
For Each of the Six-Month Periods Ended June 30, 2009 and 2008

   
For the Three-Month Period Ended
   
For the Six-Month Period Ended
 
         
June 30, 2008
         
June 30, 2008
 
   
June 30, 2009
   
(Restated)
   
June 30, 2009
   
(Restated)
 
Gain on sale of oil and gas property –
excluded from amortizable pool, net of costs
            425,372          
 425,372
 
Oil and gas sales
    4,533       56,816       4,533       137,073  
                                 
Total revenue
    4,533       482,188       4,533       562,445  
                                 
Operating expenses:
                               
Oil and gas operating expenses
    3,326       187,838       33,334       397,226  
Down-hole gas and water license royalties
    -       -       -       51,000  
Impairment of oil and gas properties
    -       (1,194 )     -       1,087  
General and administrative
    167,511       151,594       389,046       317,474  
Stock based compensation
    89,025       101,747       199,275       204,651  
Professional fees
    86,586       132,954       223,339       164,107  
Depreciation, amortization and depletion expense
    10,819       35,812       20,052       64,886  
                                 
Total operating costs
    357,267       608,751       865,046       1,200,431  
                                 
Total operating income (loss)
    352,734       (126,563 )     (860,513 )     (637,986 )
                                 
Interest income
    16,722       705       27,014       3,372  
                                 
Net loss
  $ (336,012 )   $ (125,858 )   $ (833,499 )   $ (634,614 )
Net loss per common share -
                               
Basic and diluted
  $ (0.01 )   $ 0.00     $ (0.02 )   $ 0.01  
Weighted average number of shares outstanding -
                               
Basic and diluted
    44,550,000       44,550,000       44,550,000       44,550,000  
 
 
F-2

 

Eternal Energy Corp.
 
Condensed Statements of Cash Flows (Unaudited)
 
For Each of the Six-Month Periods Ended June 30, 2009 and 2008

         
2008
 
   
2009
   
(Restated)
 
Cash flows provided by (used for) operating activities:
           
Net income (loss)
  $ (833,499 )   $ (634,614 )
Adjustments to reconcile net loss to net cash used by operating activities:
               
Non cash transactions:
               
Stock-based compensation
    199,275       204,651  
Depreciation, depletion and amortization
    20,054       64,886  
Gain on the sale of oil and gas property, excluded from amortization
    -       (425,372 )
Changes in operating assets and liabilities:
               
(Increase) decrease in receivables
    709,167       148,681  
Decrease in prepaid expense
    3,212       14,242  
Increase in deposits
    (16,000 )     -  
Increase (decrease) in accounts payable and accrued liabilities
    87,062       (68,739 )
Net cash provided by (used for) operating activities
    169,271       (696,265 )
                 
Cash flows provided by (used for) investing activities:
               
Return of drilling deposits
    -       121,452  
Proceeds from the sale of oil and gas property, excluded from amortization
    -       1,190,135  
Additions to oil and gas properties
    (558,777 )     (319,974 )
Additions to equipment and leasehold improvements
    (40,504 )     (22,479 )
Net cash provided by (used for) investing activities
    (599,281 )     969,134  
                 
Net increase (decrease) in cash
    (430,010 )     272,869  
                 
Cash - beginning of period
    727,701       791,891  
                 
Cash - end of period
  $ 297,691     $ 1,064,760  

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

 
F-3

 

Eternal Energy Corp.
 
Condensed Statements of Cash Flows (Unaudited)
 
For Each of the Six-Month Periods Ended June 30, 2009 and 2008

Supplemental Disclosure of Cash Flow Information

         
2008
 
   
2009
   
(Restated)
 
Cash paid during the three-month and six-month period for:
           
Interest
  $ -     $ -  
Income taxes
  $ -     $ -  

The accompanying notes are an integral part of the financial statements.
 
 
F-4

 
 
Eternal Energy Corp.
 
Notes to the Condensed Financial Statements
 
As of June 30, 2009, and
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

1.
Description of Business
 
Eternal Energy Corp. (the "Company") was incorporated in the state of Nevada in March 2003. The Company engages in the acquisition, exploration, development and producing of oil and gas properties. At June 30, 2009, the Company has entered into participation agreements related to oil and gas exploration projects in the Big Sand Spring Valley Prospect located in Nye County, Nevada, and the Pebble Beach Prospect, located in Divide County, North Dakota, and Sheridan County, Montana and Saskatchewan, Canada.  The Company also owns a 75% working interest in certain leases located within the Southwest Extension of the West Ranch Field, located in Jackson County, Texas. In addition, the Company owns certain overriding royalty interests in oil and gas leases located in San Juan County, Utah and San Miguel County, Colorado.
 
2.
Correction of an Error and Reclassifications
 
In 2009, the Company discovered that certain transactions reported in its 2006, 2007 and 2008 financial statements were recorded incorrectly.  Specifically:
 
 
·
stock-based compensation expense for 2006, 2007 and 2008 was understated due to an incorrect application of SFAS No. 123(R), Share-Based Payment ("SFAS 123(R)") (Note 3).  The impact of this correction includes an increase to the Company’s beginning accumulated deficit balance as of January 1, 2008 in the amount of $193,482.  The effect of this correction results in an increase in additional paid in capital and accumulated deficit balances as of December 31, 2008 of $269,762 and increases in stock-based compensation expense for the three- and six-month periods ended June 30, 2008 of 22,875 and $48,914, respectively.  The correction of this error did not impact the Company’s statements of cash flows for the six-month period ended June 30, 2008;
 
 
·
the Company had incorrectly recognized the gross proceeds from the sale of its Steamroller Prospect (June 2008) as revenues and written off the specific costs associated with the Steamroller Prospect as costs of prospects sold.  The Company has subsequently changed its accounting treatment for the sale of its Steamroller Prospect to allocate a portion of the sales proceeds to the portion of the Company’s full cost pool that is not subject to amortization, based on the relative estimated fair market values of the prospects included in the pool as of the date of the Steamroller Prospect sale.  The impact of this correction is a decrease in oil and gas properties not subject to amortization, and an increase in accumulated deficit of $502,416 as of December 31, 2008, a decrease in revenues associated with the sale of prospects of $1,353,645, a decrease in cost of prospects sold in the amount of $253,506, an increase in the gain associated with sale of prospects of $425,372 and a decrease in general and administrative expenses of $7,340 for the three- and six-month periods ended June 30, 2008.  In addition, the impact of the correction of this error was a decrease in the amount of cash provided by operations and an increase in decrease in the amount of cash used for investing activities, respectively, in the amount of $927,789 for the six-month period ended June 30, 2008;
 
 
F-5

 

Eternal Energy Corp.
 
Notes to the Condensed Financial Statements
 
As of June 30, 2009, and
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

 
·
spud fee revenue was improperly recognized in June 2008 although initial drilling of the corresponding well did not commence until July 2008.   The Company has corrected this error by recording the spud fee revenue in the three-month period ended September 30, 2009.  The impact of this correction is a decrease in spud fees revenue of $250,000 for the three- and six-month period ended June 30, 2008.   The correction of this error did not impact the Company’s statement of cash flows for the six-month period ended June 30, 2008.
 
Given the materiality of the affected transactions and related account balances, the Company has elected to restate its 2007 and 2008 financial statements in order to correct the errors.  The correction of these errors had the following effects on the Company’s balance sheet as of December 31, 2008:
 
         
December 31,
       
   
December 31,
   
2008
       
   
2008
   
as Previously
       
   
Restated
   
Reported
   
Change
 
                   
Oil and gas properties (net)
  $ 3,648,554     $ 4,150,970     $ (502,416 )
Additional paid in capital
    9,039,131       8,769,369       269,762  
Accumulated deficit
    (2,832,199 )     (2,060,020 )     (772,179 )

The correction of these errors had the following effects on the Company’s results of operations for the three- and six-month periods ended June 30, 2008:

         
For The
       
   
For The
   
Three-Month
       
   
Three-Month
   
Period Ended
       
   
Period Ended
   
June 30, 2008
       
   
June 30, 2008
   
as Previously
       
   
Restated
   
Reported
   
Change
 
                   
Sale of prospects
  $ -     $ 1,353,645     $ (1,353,645 )
Cost of prospects sold
    -       253,506       (253,506 )
Gain on sale of oil and gas property
    425,372       -       425,372  
General and administrative
    151,594       158,934       (7,340 )
Stock-based compensation
    101,747       78,871       22,876  
Net earnings (loss)
    (125,858 )     564,445       (690,303 )
Basic and diluted loss per share
  $ (0.00 )   $ 0.01     $ (0.01 )
 
 
F-6

 

Eternal Energy Corp.
 
Notes to the Condensed Financial Statements
 
As of June 30, 2009, and
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

         
For The
       
   
For The
   
Six-Month
       
   
Six-Month
   
Period Ended
       
   
Period Ended
   
June 30, 2008
       
   
June 30, 2008
   
as Previously
       
   
Restated
   
Reported
   
Change
 
                   
Sale of prospects
  $ -     $ 1,353,645     $ (1,353,645 )
Cost of prospects sold
    -       253,506       (253,506 )
Gain on sale of oil and gas property
    425,372       -       425,372  
Spud fee revenue
    -       250,000       (250,000 )
General and administrative
    317,474       288,016       29,458  
Stock-based compensation
    204,651       155,737       48,914  
Net earnings (loss)
    (634,614 )     331,717       (966,331 )
Basic and diluted loss per share
  $ (0.01 )   $ 0.01     $ (0.02 )
 
Certain amounts from the previous year have been reclassified to conform to the current period presentation.
 
3.
Summary of Significant Accounting Policies
 
Basis of Presentation
 
These financial statements are presented in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States.
 
The Company has evaluated subsequent events through August 13, 2009, the date that the financial statements were issued and included in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2009.
 
Revenue Recognition
 
The Company records the sale of its interests in prospects as a reduction to the cost pool when the terms of the transaction are final and the sales price is determinable. Spud fee revenue is recognized when drilling commences.  Working interest, royalty and net profit interests are recognized as revenue when oil and gas is sold.
 
Concentration of Credit Risk
 
At June 30, 2009, the Company had $47,691 on deposit in excess of the United States (FDIC) federal insurance limit of $250,000 per bank. The Company believes this credit risk is mitigated by the financial strength of the financial institution.

 
F-7

 

Eternal Energy Corp.
 
Notes to the Condensed Financial Statements
 
As of June 30, 2009, and
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

Equipment and Leasehold Improvements
 
Equipment and leasehold improvements are recorded at cost. Expenditures for major additions and improvements are capitalized and depreciated over the estimated useful lives of the related assets using the straight-line method for financial reporting purposes. The Company uses other depreciation methods (generally accelerated) for tax purposes, where appropriate. The estimated useful lives for significant property and equipment categories are as follows:
 
Equipment
 
3 years
 
Leasehold improvements
 
lesser of useful life or lease term
 
 
When equipment and improvements are retired or otherwise disposed of, the cost and the related accumulated depreciation are removed from the Company's accounts and any resulting gain or loss is included in the results of operations for the respective period.
 
Expenditures for minor replacements, maintenance and repairs are charged to expense as incurred.
 
Oil and Gas Properties
 
The Company follows the full cost method of accounting for its investments in oil and gas properties.  Under the full cost method, all costs associated with the exploration of properties are capitalized into appropriate cost centers within the full cost pool.  Internal costs that are capitalized are limited to those costs that can be directly identified with acquisition, exploration, and development activities undertaken and do not include any costs related to production, general corporate overhead, or similar activities.  Cost centers are established on a country-by-country basis.
 
 
At the end of each reporting period, capitalized costs are subject to a ceiling test, in which the costs shall not exceed the cost center ceiling.  The cost center ceiling is equal to i) the present value of estimated future net revenues computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions;  plus ii) the cost of properties not being amortized; plus iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less iv) income tax effects related to differences between the book and tax basis of the properties.  If unamortized costs capitalized within a cost center, less related deferred income taxes, exceed the cost center ceiling, the excess is charged to expense and separately disclosed during the period in which the excess occurs.
 
 
F-8

 

Eternal Energy Corp.
 
Notes to the Condensed Financial Statements
 
As of June 30, 2009, and
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

Fair Value of Financial Instruments
 
In accordance with the requirements of Financial Accounting Standards Board's (“FASB”) Statement of Financial Accounting Standards ("SFAS") No. 107, Disclosures about Fair Value of Financial  Instruments, the Company has determined the estimated fair value of its financial instruments using available market information and appropriate valuation methodologies. Due to their short-term maturity, the fair value of financial instruments classified as current assets and current liabilities approximates their carrying values.
 
Accounting for Share-Based Compensation
 
In December 2004, the FASB issued SFAS No. 123(R) ("SFAS 123(R)"), Share-Based Payment. This pronouncement amends SFAS No. 123, Accounting for Stock-Based Compensation, and ("SFAS 123") and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). SFAS 123(R) requires that companies account for awards of equity instruments issued to employees under the fair value method of accounting and recognize such amounts in their statements of operations. The Company adopted SFAS 123(R) on January 1, 2006, using the modified prospective method and, accordingly, has not restated the consolidated statements of operations for periods prior to January 1, 2006. Under SFAS 123(R), the Company is required to measure compensation cost for all stock-based awards at fair value on the date of grant and recognize compensation expense in its statements of operations over the service period that the awards are expected to vest. As permitted under SFAS 123(R), the Company has elected to recognize compensation cost for all options with graded vesting on a straight-line basis over the vesting period of the entire option.
 
Basic and Diluted Earnings (Loss) Per Share
 
Basic earnings (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share is computed in the same way as basic earnings (loss) per common share except that the denominator is increased to include the number of additional common shares that would be outstanding if all potential common shares had been issued and if the additional common shares were dilutive. Diluted earnings (loss) per common share for the three-month and six month periods ended June 30, 2009 and 2008 is computed in the same way as basic earnings (loss) per common share, as the inclusion of additional common shares that would be outstanding if all potential common shares had been issued would be anti-dilutive.  See Note 7 for the calculation of basic and diluted weighted average common shares outstanding for the three-month and six month periods ended June 30, 2009 and 2008.
 
 
F-9

 

Eternal Energy Corp.
 
Notes to the Condensed Financial Statements
 
As of June 30, 2009, and
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

Income Taxes
 
The Company follows the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax benefits and consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax balances. Deferred income tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to the taxable income in the years in which those differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment.
 
Use of Estimates and Assumptions
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent obligations in the financial statements and accompanying notes. The Company's most significant assumptions are the estimates used in the determination of the deferred income tax asset valuation allowance, the valuation of oil and gas reserves to which the Company owns mineral rights and the valuation of the Company’s common shares that were issued for obligations. The estimation process requires assumptions to be made about future events and conditions, and as such, is inherently subjective and uncertain. Actual results could differ materially from these estimates.
 
New Accounting Pronouncements
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 establishes a single definition of fair value and a framework for measuring fair value, sets out a fair value hierarchy to be used to classify the source of information used in fair value measurements and requires new disclosures of assets and liabilities measured at fair value based on their level in the hierarchy. SFAS 157 is effective for the Company’s year beginning January 1, 2008 and has been applied prospectively. The adoption of SFAS 157 has not had a material impact on the Company’s financial position or reported results of operations.
 
 
F-10

 

Eternal Energy Corp.
 
Notes to the Condensed Financial Statements
 
As of June 30, 2009, and
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS 159").  SFAS 159 permits an entity to choose, at specified election dates, to measure eligible financial instruments and certain other items at fair value that are not currently required to be measured at fair value. An entity is required to report unrealized gains and losses on items for which the fair value option has been elected in its results of operations at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 (January 1, 2008 for the Company) and interim periods within those fiscal years. At the effective date, an entity may elect the fair value option for eligible items that exist at that date. The entity shall report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. The Company has not elected to measure its financial instruments and/or other eligible assets at their fair market values.  Consequently, the adoption of SFAS 159 has not had a material impact on the Company’s financial position or reported results of operations.
 
In December 2007, the FASB ratified the final consensuses in Emerging Issues Task Force, or EITF, Issue No. 07-1, "Accounting for Collaborative Arrangements," (“Issue 07-1”), which requires certain income statement presentation of transactions with third parties and of payments between parties to the collaborative arrangement, along with disclosure about the nature and purpose of the arrangement.  Issue 07-1 is effective for the Company’s year beginning January 1, 2009.  The Company does not expect Issue 07-1 to have a significant impact on our financial statements.
 
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”), which replaces SFAS No. 141, “Business Combinations.” SFAS 141(R) requires an acquiring company to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquired entity at the acquisition date, measured at their fair values as of that date, with limited exceptions.  This Statement also requires the acquiring company in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquired company, at the full amounts of their fair values.  SFAS 141(R) makes various other amendments to authoritative literature intended to provide additional guidance or to confirm the guidance in that literature to that provided in this Statement.  This Statement is effective for the Company’s financial statements beginning January 1, 2009.  The Company does not expect the adoption of this accounting pronouncement to have a significant impact on our financial statements.
 
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”), which amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements.  SFAS 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries not held by the parent to be clearly identified, labeled and presented in the consolidated statement of financial position within equity, but separate from the parent's equity.  This statement also requires the amount of consolidated net income attributable to the parent and to the non-controlling interest to be clearly identified and presented on the face of the consolidated statement of income.  Changes in a parent's ownership interest while the parent retains its controlling financial interest must be accounted for consistently, and when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary must be initially measured at fair value.  The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any non-controlling equity investment.  The Statement also requires entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. This Statement applies prospectively to all entities that prepare consolidated financial statements and applies prospectively for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  The Company does not expect the adoption of this accounting pronouncement to have a significant impact on our financial statements.
 
 
F-11

 

Eternal Energy Corp.
 
Notes to the Condensed Financial Statements
 
As of June 30, 2009, and
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

In May 2008, the FASB issued SFAS No. 162 "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"), which is effective 90 days following the SEC's approval of the Public Company Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”.  SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States.  The Company does not expect the adoption of SFAS 162 to have a significant impact on our financial statements.
 
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events.” This standard incorporates into authoritative accounting literature certain guidance that already existed within generally accepted auditing standards, with the requirements concerning recognition and disclosure of subsequent events remaining essentially unchanged. This guidance addresses events which occur after the balance sheet date but before the issuance of financial statements. Under SFAS No.165, as under previous practice, an entity must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about conditions that did not exist at the balance sheet date. This standard added an additional required disclosure relative to the date through which subsequent events have been evaluated and whether that is the date on which the financial statements were issued. As it relates to the Company, this standard was effective beginning April 1, 2009. The additional disclosures required by this standard are included in Note 3.
 
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162,” and approved the FASB Accounting Standards CodificationTM (Codification) as the single source of authoritative nongovernmental US GAAP. The Codification does not change current US GAAP, but is intended to simplify user access to all authoritative US GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be considered non-authoritative. As it relates to the Company, the Codification is effective July 1, 2009 and will require future references to authoritative US GAAP to coincide with the appropriate section of the Codification. Accordingly, this standard will not have an impact on the Company’s results of operations or financial condition.
 
 
F-12

 

Eternal Energy Corp.
 
Notes to the Condensed Financial Statements
 
As of June 30, 2009, and
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

4.
Equipment and Leasehold Improvements
 
The following is a summary of equipment and improvements, at cost, as of June 30, 2009:
 
Office equipment
  $ 88,904  
Leasehold improvements
    47,509  
         
Total equipment and improvements
    136,413  
         
Less: accumulated depreciation
    (74,721 )
         
Equipment and improvements, net
  $ 61,692  

Depreciation expense for the six-month periods ended June 30, 2009 and 2008 was $20,052 and $17,591, respectively.
 
During 2008, the Company purchased $38,000 of Down-Hole Gas/Water Separation (“DGWS”) tools.  An additional $19,000 of DGWS tools was purchased during the six-month period ended June 30, 2009.  Due to the fact that the Company was subsequently unable to exercise its option to acquire 100% of the DGWS opportunity, as discussed in Note 9, the Company has no plans to utilize the tools in the near future.  The Company’s management does not believe that the value of the tools has been impaired and plans to market the tools to other exploration and development companies.  Accordingly, the down-hole tools have been classified as Assets Held for Sale on the Company’s balance sheet as of June 30, 2009 and December 31, 2008.
 
5.
Oil and Gas Properties
 
As of June 30, 2009 and 2008, the Company’s cost centers are as follows:
 
   
June 30, 2009
   
December 31, 2008
 
   
Amortizable
   
Non-Amortizable
   
Amortizable
   
Non-Amortizable
 
                         
United States
  $ 2,438,097     $ 1,323,053     $ 2,324,154     $ 1,322,957  
                                 
Canada
    -       1,443       -       1,443  
The North Sea
    -       -       -       -  
                                 
Total
  $ 2,438,097     $ 1,324,496     $ 2,324,154     $ 1,324,400  
 
 
F-13

 

Eternal Energy Corp.
 
Notes to the Condensed Financial Statements
 
As of June 30, 2009, and
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

Producing Properties
 
The Company owns a 75% working interest in certain leases located within the Southwest Extension of the West Ranch Field, located in Jackson County, Texas.
 
The net capitalized cost of this property is summarized below:
 
Acquisition cost
  $ 1,906,764  
Development costs
    589,000  
      2,495,764  
Depletion
    (57,667 )
Balance at June 30, 2009
  $ 2,438,097  
 
Exploratory Prospects
 
The Company has entered into participation agreements in five exploratory oil and gas properties. Each of the five exploratory projects is excluded from its respective amortizable cost pool.  Each prospect’s costs will be transferred into the amortization base on an ongoing (well-by-well or property-by-property) basis as the prospect is evaluated and proved reserves established or impairment determined. Two of the five properties have been abandoned. The Company has a working interest and/or overriding royalty interest in the wells on the remaining properties, if they are successful. The Company paid certain amounts upon execution of the agreements and is obligated to share in the drilling costs of the exploratory wells. In addition, the Company has agreed to issue shares of its common stock based upon the proven reserves of the property.
 
United States
 
Big Sand Spring Valley Prospect
 
In 2005, The Company acquired a 50% working interest in the Big Sand Spring Valley Prospect (the “BSSV Prospect”) and an option to acquire a 50% working interest in an additional prospect, for an initial payment of $667,000 and the obligation for a future payment of $2,000,000, which represented 50% of the estimated initial drilling costs in the BSSV Prospect. In 2006, the Company acquired the other 50% working interest in the BSSV Prospect in exchange for cash payments totaling $300,000 and the transfer of the Company’s option on the additional prospect.  Under the terms of the participation agreement, the Company is obligated to issue one million shares of its common stock for each ten million equivalent barrels of net proven oil reserves developed on the BSSV Prospect. As of June 30, 2009, the Company’s investment in the BSSV Prospect totals $1,292,229.  No exploratory wells have been drilled in BSSV Prospect to date.  Unless annual rentals are renewed, the oil and gas leases relating to the BSSV Prospect will expire in August 2009.  As of June 30, 2009, the Company’s management has not yet determined if the annual rentals will be renewed.  This property is evaluated for impairment annually.  There were no impairments evident at June 30, 2009.
 
 
F-14

 

Eternal Energy Corp.
 
Notes to the Condensed Financial Statements
 
As of June 30, 2009, and
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

Steamroller Prospect
 
In December 2007, the Company purchased a 50% interest in a 640-acre mineral lease from the State of Utah. In the first quarter of 2008, the Company purchased a 50% interest in an additional 10,860 acre lease from the State of Utah.   This property is evaluated for impairment annually.
 
In June 2008, the Company sold its 50% working interest in the Steamroller prospect.  Because the Steamroller prospect represented a significant portion of the full cost pool, not subject to amortization and because full cost accounting rules do not allow for the use of specific identification with respect to calculating gains on the partial disposal of the pool, the Company has allocated the total cost of the full cost pool, not subject to amortization, among the individual prospects included within the pool, based on their relative fair market value as of the date of the Steamroller disposition.  The allocated basis attributed to the Steamroller prospect as of the date of sale was $764,763.  Gross proceeds from the sale totaled $1,190,135, resulting in a $425,372 gain on the sale of the Steamroller prospect.
 
Under the terms of the sale, the Company retained an overriding royalty interest on all future production from the property sold, as well as an overriding royalty interest on production from properties of mutual interest which the purchaser may develop in the future.  The Company currently owns various overriding royalty interests under approximately 20,172 net acres in Utah and Colorado, located within the Steamroller Prospect.  In addition, the Company is entitled to receive an overriding royalty interest on any additional leasehold interest acquired by its working interest partners in an area of mutual interest (“AMI”) between the parties.  The AMI covers approximately 3,571,200 gross acres.
 
Pebble Beach Prospect
 
In 2006, the Company entered into a series of agreements that resulted in the acquisition of five percent (5%) of the capital stock of Pebble Petroleum, Inc. (“Pebble”), as well as the following rights and interest in the Pebble Beach Prospect:
 
 
·
A $250,000 spud fee for each of the first eight wells drilled by Pebble;
 
 
·
A five percent (5%) gross overriding royalty from each well drilled on certain acreage that Pebble holds rights to in SE Saskatchewan, Canada (no capital outlay or other expenses to be required by the Company); and
 
 
·
A ten percent (10%) working interest in a joint venture with Rover Resources, Inc., (“Rover”), a subsidiary of Pebble; the joint venture will explore and develop certain prospects principally located in Divide County, North Dakota (the Company will pay 10% of all costs incurred).
 
 
F-15

 

Eternal Energy Corp.
 
Notes to the Condensed Financial Statements
 
As of June 30, 2009, and
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

As of March 31, 2009, Pebble owns approximately 324,590 gross and net acres in the Pebble Beach Prospect in SE Saskatchewan, Canada in which the Company owns a five percent (5%) gross overriding royalty.  In addition, Rover has acquired approximately 61,572 gross and 35,264 net acres principally located in Divide County, North Dakota, within the Pebble Peach Prospect.  The Company owns a ten percent (10%) working interest in these properties. As of June 30, 2009, the Company’s working interest expenditures in the North Dakota property total $533,242.
 
This property is evaluated for impairment annually.  There were no impairments evident at June 30, 2009.  The property is currently in an evaluation phase.  The Company does not expect that a determination will be made on the viability of the property within the next twelve months.
 
North Sea Quad 14 and Quad 41/42 Prospects
 
In 2005 and 2006, the Company acquired working interests in the Quad 14 and Quad 41/42 Prospects with the obligation to fund 12.5% and 15% of the drilling costs of two exploratory wells, respectively. The Company placed $1.5 million on deposit for each prospect to cover its share of the drilling costs. The exploratory wells on both of these prospects were completed in 2007.  No economically viable reserves were discovered.
 
Once no viable reserves were discovered, the Company’s investment in the North Sea was included in the amortizable cost pool and the entire capitalized cost was charged to expense in 2007 because the costs exceeded the cost center ceiling due to lack of future revenue or any fair value of the property. A portion of the monies that were held on deposit relating to the Company’s working interest in the Quad 14 Project and released to the operator in 2007were subsequently returned to the Company in 2008 and has been recognized as revenue during the current year.
 
The Company is disputing its obligation to participate in the drilling of the Quad 41/42 exploratory well.  As a result, no amounts held on deposit have been released to the operator for the Quad 41/42 Prospect.  The Company’s management is attempting to determine what amount, if any, it is obligated to pay related to the drilling of the Quad 41/42 exploratory well and what amount of deposited funds, if any, could be returned to the Company.
 
The Company recorded impairments related to the North Sea projects as follows:
 
         
Restated
 
   
2009
   
2008
 
             
Quad 14
  $ -     $ 1,087  
Quad 41/42
    -       -  
Totals
  $ -     $ 1,087  

 
F-16

 

Eternal Energy Corp.
 
Notes to the Condensed Financial Statements
 
As of June 30, 2009, and
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

Canada
 
In June 2008, the Company acquired a 5% overriding royalty position in additional prospects located in Saskatchewan, Canada.
 
6.
Commitments and Contingencies
 
Financial Results, Liquidity and Management's Plan
 
The Company has incurred net losses since inception.  This factor raises substantial doubt about the Company's ability to continue as a going concern.  Historically, the Company has been successful in generating additional operating capital through the disposition of oil and gas prospects.  However, the disposition of properties is not a viable strategy for funding the Company’s long-term operations.  Accordingly, the Company’s management is developing and implementing plans to sustain the Company’s cash flow from operating activities and/or acquire additional capital funding.
 
No assurances can be given that the Company will obtain sufficient working capital through the sale of oil and gas properties, the issuance of common stock or by leveraging the Company's current assets, or that the implementation of its business plan will generate sufficient revenues in the future to sustain ongoing operations. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
 
Litigation
 
The Company's policy is to recognize amounts related to legal matters as a charge to operations if it is probable that a liability has been incurred and the amount of loss can be reasonably estimated, as required by SFAS 5.
 
On November 20, 2007, the Company was served with a complaint alleging breach of contract, misappropriation of confidential and proprietary information and of trade secrets and claims under the Colorado Uniform Trade Secrets Act, fraud, declaratory relief declaring any agreements of release to be void and unenforceable as they were obtained by fraudulent inducement, declaration of accounting and constructive trust for all proceeds and profits from the alleged misappropriation, injunctive relief for return of all allegedly misappropriated information and cessation of use, civil theft of business values, and tortuous interference with contract. Plaintiffs seek compensatory damages in an unspecified amount, prejudgment interest, declaratory relief, injunctive relief, accounting, and attorneys’ fees. The Company believes that the causes of action are without merit and intends to defend this case vigorously.  The Company has filed a countersuit claiming abuse of process, intentional interference with an existing business and contractual relations, commercial disparagement and conspiracy.  The lawsuit has continued to negatively impact the Company's ability to pursue additional opportunities or acquire additional oil and gas prospects, as discussed in Note 5.  A further result of the lawsuit has been the sale of certain assets in order to fund the Company’s ongoing operations, as discussed on Note 5.
 
 
F-17

 

Eternal Energy Corp.
 
Notes to the Condensed Financial Statements
 
As of June 30, 2009, and
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

As discussed in Note 10, the litigation was favorably settled in July 2009.
 
Employment Agreements
 
In August 2007, the Company entered into a two-year employment agreement with its Vice President of Engineering.  Unless extended, the employment agreement will expire on July 31, 2009.  The Company amended its employment agreement with its Vice President of Engineering effective October 1, 2008.  The amended agreement provides for annual compensation of $144,000 and a signing bonus of $30,000.  In addition, the Company granted to this employee options to purchase 1 million shares of the Company’s common stock.  The options have a five-year life, vest over a two-year period and have an exercise price of $0.24 per share, which represents the estimated market value of the shares on the date of grant.
 
In June 2008, the Company entered into a two-year employment agreement with its Chief Financial Officer.  The agreement provides for annual compensation of $138,000.  In addition, the Company granted to this employee options to purchase 1 million shares of the Company’s common stock.  The options have a five-year life, vest over a two-year period and have an exercise price of $0.18 per share, which represents the estimated market value of the shares on the date of grant.
 
Lease Obligation
 
In December 2008, the Company renegotiated its lease for its corporate offices. The new lease has a term of 36 months and expires on December 31, 2011. Rents remaining as of June 30, 2009 under this lease are as follows:
 
   
Amount
 
2009 (remaining)
  $ 31,268  
2010
    62,537  
2011
    64,140  
2012
    -  
2013
    -  
         
Total
  $ 157,945  

Gross rent expense for the three-month periods ended June 30, 2009 and 2008 was $19,418 and $16,158, respectively.  Gross rent expense for the six-month periods ended June 30, 2009 and 2008 was $38,837 and $32,049, respectively.

 
F-18

 

Eternal Energy Corp.
 
Notes to the Condensed Financial Statements
 
As of June 30, 2009, and
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

7.
Earnings (Loss) Per Share
 
The following is a reconciliation of the number of shares used in the calculation of basic earnings (loss) per share and diluted earnings (loss) per share for the three-month and six-month periods ended June 30, 2009 and 2008:
 
   
For the Three-Month
   
For the Six-Month
 
   
Period Ended June 30,
   
Period Ended June 30,
 
         
2008
         
2008
 
   
2009
   
(Restated)
   
2009
   
(Restated)
 
Net income (loss)
  $ (336,012 )   $ (125,858 )   $ (833,499 )   $ (634,614 )
Weighted-average number of common shares outstanding
    44,550,000       44,550,000       44,550,000       44,550,000  
Incremental shares from the assumed exercise of dilutive stock options
    -       -       -       -  
Diluted common shares outstanding
    44,550,000       44,550,000       44,550,000       44,550,000  
Diluted earnings (loss) per share
  $ (0.01 )   $ 0.00     $ (0.02 )   $ 0.01  

The following securities were not included in the computation of diluted net earnings (loss) per share as their effect would have been anti-dilutive:
 
   
June 30,
   
June 30,
 
   
2009
   
2008
 
             
Stock Options
    5,543,800       4,543,800  
Warrants
    -       12,924,000  

8.
Equity Transactions
 
Issuance of Stock Options
 
In March 2008, the Board of Directors ratified the grant of options to purchase 100,000 of its common shares a consultant. The stock options were originally approved by management on August 1, 2007.  These options vest over 1 year, have a life of 5 years and have an exercise price of $0.20 per share, the market price on the effective date of grant.  Under the corresponding stock option agreement, 33,333 options vested at the time the agreement was executed with an additional 33,333 options vesting at the end of each six-month period from the grant date.  As of June 30, 2009, all 100,000 stock options are exercisable.
 
In June 2008, the Company granted options to purchase 1,000,000 shares of its common stock to its Chief Financial Officer.  These options vest over 2 years, have a life of 5 years and have an exercise price of $0.18 per share, the market price on the effective date of grant.  The options vest at the rate of 250,000 shares at the end of each six-month period from the effective date of grant, and all will be exercisable on December 2, 2010.
 
 
F-19

 

Eternal Energy Corp.
 
Notes to the Condensed Financial Statements
 
As of June 30, 2009, and
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

In October 2008, the Company granted options to purchase 1,000,000 shares of its common stock to its President.  These options vest over 2 years, have a life of 5 years and have an exercise price of $0.17 per share, the market price on the effective date of grant.  Fifty percent of the options vested immediately, with the remaining 50% vesting one year from the effective date of the grant.
 
A summary of stock option activity for the six-month period ended June 30, 2009 and the year ended December 31, 2008 is presented below:
 
               
Weighted
 
         
Weighted
   
Average
 
         
Average
   
Remaining
 
         
Exercise
   
Contract
 
   
Options
   
Price
   
Term
 
                   
Outstanding at December 31, 2007
    3,393,800     $ 0.67    
3.5 years
 
Options granted
    2,150,000     $ 0.19    
4.5 years
 
Options exercised
    -       -       -  
Options expired
    -       -       -  
Options forfeited
    -       -       -  
Outstanding at December 31, 2008
    5,543,800     $ 0.46    
3.4 years
 
Options granted
    -       -       -  
Options exercised
    -       -       -  
Options expired
    -       -       -  
Options forfeited
    -       -       -  
Outstanding at June 30, 2009
    5,543,800     $ 0.46    
2.9 years
 
Exercisable at June 30, 2009
    4,093,800     $ 0.55    
2.5 years
 
 
The assumptions used in the Black-Scholes option pricing model for the stock options granted during the year ended December 31, 2008 were as follows:
 
Risk-free interest rate
    2.77-3.25 %
Expected volatility of common stock
    101 %
Dividend yield
  $ 0.00  
Expected life of options
 
5 years
 
Weighted average fair market value of options granted
  $ 0.18  

Warrants
 
A summary of warrant activity for the six-month period ended June 30, 2009 and the year ended December 31, 2008 is presented below:
 
 
F-20

 

Eternal Energy Corp.
 
Notes to the Condensed Financial Statements
 
As of June 30, 2009, and
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

         
Weighted
 
         
Average
 
   
Number of
   
Exercise
 
   
Warrants
   
Price
 
Outstanding, December 31, 2007
    12,924,000     $ 1.16  
Issued
    -       -  
Exercised
    -       -  
Expired
    (12,924,000 )   $ (1.16 )
Forfeited
    -       -  
Outstanding, December 31, 2008
    -     $ -  
Issued
    -       -  
Exercised
    -       -  
Expired
    -       -  
Forfeited
    -       -  
Outstanding, June 30, 2009
    -     $      
                 
Exercisable, June 30, 2009
    -     $ -  
 
Warrants to purchase 11,676,000 expired in March 2008.  Warrants to purchase 1,248,000 shares expired in May 2008.
 
Shares Reserved for Future Issuance
 
As of June 30, 2009, the Company has reserved shares for future issuance upon exercise of outstanding options and warrants as follows:
 
Options
    5.543.800  
Warrants
    -  
         
Total
    5,543,800  
 
These amounts do not include any shares that may have to be issued upon the discovery of net proved reserves in the Nevada oil and gas property.
 
 
F-21

 

Eternal Energy Corp.
 
Notes to the Condensed Financial Statements
 
As of June 30, 2009, and
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

9.
Related Party Transaction
 
In October 2007, the Company acquired certain exploratory oil and gas leases and an option (“Option”) to acquire 100% of a natural gas production opportunity which employs specialty down-hole gas/water separation equipment from entities partially-owned by our President and Chief Executive Officer.  Under the Option agreement, the Company can, after meeting certain obligations, purchase all of the outstanding shares of such related entity in exchange for 25 million shares of its common stock.

The Company made the following payments to acquire the Option:

 
1)
$125,000 to the related entity for certain the oil and gas leases located in Alberta, Canada.

 
2)
$20,000 to the related entity as reimbursement for amounts paid to Zavanna Canada Corp in connection with licenses to the DGWS equipment.

The Company had the following periodic obligations in order to retain the Option, which expires on December 31, 2010:

 
1)
Payments of $20,000 to the related entity each six months commencing on June 30, 2008 through June 30, 2010.

 
2)
Payments to the related entity of $250,000 on each of December 31, 2008 and December 31, 2009.  These amounts may be paid in either cash or with shares of our common stock.

 
3)
Drill and equip two wells with DGWS equipment; one before June 30, 2008 and the other before January 15, 2009.

 
4)
Pay to one DGWS manufacturer (Kudu Industries) $25,000 in September 2007 and further agree to purchase ten DGWS devices each year, beginning in 2008, at a cost of $3,800 per device in order to maintain exclusive rights to equipment supply. In addition, the grantor of the license will receive a 1% royalty on each well which utilizes the device.  The license expires in January 2012 and can be extended for an additional 5 years at a cost of $300,000.

 
5)
Payments to a second DGWS manufacturer (Down-Hole Injections, Inc.) of $35,000 on March 30, 2008 and future annual payments of $10,000. The Company is required to pay $500 for each device used and assign to the manufacturer a carried 5% working interest in each well using the device.  The Company is required to purchase and install 20 devices in Canada by March 31, 2008.
 
 
F-22

 

Eternal Energy Corp.
 
Notes to the Condensed Financial Statements
 
As of June 30, 2009, and
For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

 
6)
Payments to the second DGWS manufacturer of $6,000 by March 31 of each year and give to the manufacturer a 5% working interest in each well located in the state of Utah that utilizes the device.
 
As a result of the on-going litigation with Zavanna LLC, et al, and its associated negative impact on the Company’s working capital position, the Company was unable to meet all of the obligations under the Option agreement.  Consequently, in December 2008, the Company received a notification from one of the related entities of its desire to attempt to re-market the DGWS natural gas opportunity to third parties.  As a result, the original Option agreement between the Company and the related entity was amended.  The amended agreement relieves the Company of its obligation to make the $250,000 payments to the related entity, originally scheduled for December 2008 and 2009, and enables the related entity to attempt to freely market the technology and opportunity.  Furthermore, the related entity has agreed to work in good faith to reimburse the Company for its investment in the original technology and to secure the granting of a 1% overriding royalty interest in favor of the Company for any wells in which the technology is used to generate production.  As a result of the amended agreement, the Company has been relieved of its liability to the related entities and has reduced the carrying value of the licenses by $500,000.  In addition, the Company has removed the licenses from its balance sheet and reclassified $57,000 of DGWS tools as Assets Held for Sale as of June 30, 2009.
 
10.
Subsequent Event
 
In July 2009, the Company favorably settled its litigation with Zavanna LLC, et al.  Under the terms of the settlement agreement, the plaintiffs agreed to pay the Company $255,000 and to dismiss with prejudice all claims against the Company and its President, Brad Colby, in exchange for the Company’s dismissal with prejudice of all counterclaims made by the Company.  The Company anticipates that the full amount of the settlement proceeds will be received during the third quarter of 2009.
 
 
F-23

 

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

THE FOLLOWING PRESENTATION OF OUR MANAGEMENT'S DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS REPORT.

A Note About Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on current management's expectations. These statements may be identified by their use of words like “plans,” “expect,” “aim,” “believe,” “projects,” “anticipate,” “intend,” “estimate,” “will,” “should,” “could” and other expressions that indicate future events and trends. All statements that address expectations or projections about the future, including statements about our business strategy, expenditures, and financial results are forward-looking statements. We believe that the expectations reflected in such forward-looking statements are accurate. However, we cannot assure you that such expectations will occur.
 
Actual results could differ materially from those in the forward looking statements due to a number of uncertainties including, but not limited to, those discussed in this section. Factors that could cause future results to differ from these expectations include general economic conditions, further changes in our business direction or strategy, competitive factors, oil and gas exploration uncertainties, and an inability to attract, develop, or retain technical, consulting or managerial agents or independent contractors. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives requires the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and accordingly, no opinion is expressed on the achievability of those forward-looking statements. No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements. You should not unduly rely on these forward-looking statements, which speak only as of the date of this Annual Report, except as required by law; we are not obligated to release publicly any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.

Industry Outlook

The petroleum industry is highly competitive and subject to significant volatility due to numerous market forces. Crude oil and natural gas prices are affected by market fundamentals such as weather, inventory levels, competing fuel prices, overall demand and the availability of supply.

 
4

 
 
Worldwide oil prices rose throughout 2007 and reached historical highs during the last half of 2008, before tumbling amid worldwide economic crisis.  Continued economic instability could impact demand, thus adversely affecting crude oil prices.

Oil prices cannot be predicted with any certainty and have significantly affected profitability and returns for upstream producers. Historically, the WTI price has averaged approximately $47 per barrel over the past ten years. However, during that time, the industry has experienced wide fluctuations in prices. While local supply/demand fundamentals are a decisive factor affecting domestic natural gas prices over the long term, day-to-day prices may be more volatile in the futures markets, such as on the NYMEX and other exchanges, making it difficult to forecast prices with any degree of confidence. Over the last ten years, the NYMEX gas price has averaged approximately $5.67 per mcf.

Restatement of the 2008 Financial Statements

In 2009, we discovered that that certain transactions reported in our 2008 and 2007 financial statements were reported incorrectly.  Given the materiality of the affected transactions and related account balances, we have elected to restate our 2008 and 2007 financial statements in order to correct the error.  The nature and effect of the corrections of the accounting errors on the financial statements for the years ended December 31, 2008 and 2007 are discussed in detail in Part II, Item 8: Financial Statements and Supplementary Data (Footnote 2, page F-__). As a result, we have revised our discussion of the results of operations for the three-month and six-month periods ended June 30, 2009 vs. 2008.

Results of Operations for the Three-Month Period Ended June 30, 2009 vs. 2008

Our business plan includes the acquisition of interests in oil and gas exploratory prospects, and in some cases, such as the Steamroller Prospect, we may sell all or part of our working interest and retain an overriding royalty interest in the properties. The nature of these transactions is that they occur irregularly and, therefore, our operating results may fluctuate significantly from period to period.

The Company acquired a 75% working interest in the West Ranch property through a series of transactions occurring in 2007 and began recognizing oil and gas revenues and operating expenses relating to the West Ranch property in the fourth quarter of 2007.  Falling oil prices led us to temporarily shut-in the producing wells on the West Ranch property during the latter part of 2008.  We also elected to temporarily delay further development of the West Ranch wells to divert working capital to fund our legal defense in the Zavanna LLC, et al (“Zavanna”) litigation. As of June 30, 2009, the West Ranch wells continue to be shut in.  Accordingly, the Company has not recognized any revenue from oil and gas sales from the West Ranch property during the three-month period ended June 30, 2009, compared to oil and gas revenue of $56,816 for the three-month period ended June 30, 2008.  Oil and gas operating expenses totaled $3,326 for the three-month period ended June 30, 2009, which represents costs necessary to maintain the wells during the shut-in period.  Oil and gas operating expenses totaled $187,838 for the three-month period ended June 30, 2008.

 
5

 
 
As of June 30, 2009, we had $1,615,021 on deposit relating to the drilling of the Quad 41/ 42 Prospect.  We are currently disputing our obligation to participate in the drilling of the Quad 41/42 exploratory well.  As a result, no amounts held on deposit have been released to the project’s operator.  Our management is attempting to determine what amount, if any, we are obligated to pay related to the drilling of the Quad 41/42 exploratory well and what amount of deposited funds, if any, could be returned to the Company.

General and administrative expenses increased from $151,594 for the three-month period ended June 30, 2008 to $167,511 for the three-month period ended June 30, 2009 primarily due to the following:

 
·
As a result of the hiring our Chief Financial Officer in June 2008, the Company's payroll and related expenses for the three-month period ended June 30, 2009 increased by $24,753 from the same period in 2008.

 
·
Prior to October 1, 2008, we engaged a third-party consultant to provide us with investor relations services.  Investor relations expenses totaled $12,034 for the three-months ended June 30, 2008 compared to $0 for the three-month period ended June 30, 2009.  All investor relations activities are currently performed by our Chief Financial Officer.

 
·
Consulting fees for the three-month period ended June 30, 2009 related to land management declined by $16,688 from the same period in 2008.  We reduced our lease acquisition activity in 2009 in order to fund our defense of the Zavanna litigation, as discussed below.

Stock-based compensation expense for the three-month periods ended June 30, 2009 and 2008 was $89,025 and $101,747, respectively.  The decrease is due to the normal vesting of stock options which became fully vested in the fourth quarter of 2008.

Professional fees for the three-month period ended June 30, 2009 decreased by $46,368 from the same period in 2008 primarily as a result lower audit fees as well as lower legal fees incurred in connection with our defense of the litigation brought forth by Zavanna.  As discussed below, the litigation with Zavanna LLC, et al was favorably settled in July 2009.  Legal fees for May and June 2009 declined as settlement talks neared their conclusion.

Depreciation, depletion and amortization expense for the three-month period ended June 30, 2009 decreased by $24,993 from the same period in 2008, primarily due to the fact that we wrote off our payments made under the licenses to use specialty down-hole gas/water separation (“DGWS”) equipment in December 2008.  Amortization related to the down-hole licenses totaled $0 and $17,100 for the three months ended June 30, 2009 and 2008, respectively.  In addition, we did not recognize any depletion expense related to the West Ranch property as there was no production during the current quarter.

We recognized $16,722 of interest income for the three-month period ended June 30, 2009, primarily related to our North Sea deposit.  Interest income related to the North Sea deposit was not accrued in the first half of 2008, but rather, was recognized in the fourth quarter.

 
6

 
 
Results of Operations for the Six-Month Period Ended June 30, 2009 vs. 2008

As noted above, our West Ranch wells have been temporarily shut in since late 2008.  Accordingly, we have not recognized any oil and gas sales revenue related to the West Ranch property in 2009.  We are currently refining our strategy to waterflood the wells in order to stimulate production from these wells.  We anticipate reinstating our waterflood activities during the second half of 2009.  The Company has incurred $33,334 of oil and gas operating expenses related to the West Ranch property during the six-month period ended June 30, 2009.  The incurrence of these costs was required in order to maintain the wells during the shut-in period.

In April 2009, we began receiving royalty payments associated with our 5% gross overriding royalty interest in certain properties located in Saskatchewan, Canada.  We recognized $4,533 of oil and gas sales revenue associated with these overrides during the six-month period ended June 30, 2009.

General and administrative expenses increased from $317,474 for the six-month period ended June 30, 2008 to $389,046 for the six-month period ended June 30, 2009 primarily due to the following:

 
·
Payroll and related expenses for the six-month period ended June 30, 2009 increased by $74,817 from that of the prior year primarily as a result of the hiring our Chief Financial Officer in June 2008 as well granting a salary increase to our Vice President of Engineering in October 2008.

 
·
Prior to October 1, 2008, we engaged a third-party consultant to provide us with investor relations services.  Investor relations expenses totaled $30,374 for the six-months ended June 30, 2008 compared to $0 for the six-month period ended June 30, 2009.  All investor relations activities are currently performed by our Chief Financial Officer.

 
·
Office rent expense increased by $7,388 for the six-month period ended June 30, 2009 compared to the same period in the prior year as a result of entering into to a new office lease in January 2009.

 
·
Travel and entertainment expenses for the six-month period ended June 30, 2009 and 2008 were $5,372 and $16,085, respectively.  The decrease is primarily due to management’s decision to reduce business development activities until the Company’s cash position can be strengthened.

Stock-based compensation expense for the six-month periods ended June 30, 2009 and 2008 was $199,275 and $204,651, respectively.  The decrease is due to the normal vesting of stock options which became fully vested in the fourth quarter of 2008.

 
7

 
 
Professional fees for the six-month period ended June 30, 2009 increased by $59,232 from the same period in 2008 primarily as a result of legal fees incurred in connection with our defense of the litigation brought forth by Zavanna.

Depreciation, depletion and amortization expense for the six-month period ended June 30, 2009 decreased by $44,834 from the same period in 2008, primarily due to the fact that we wrote off our payments made under the licenses to use specialty down-hole gas/water separation (“DGWS”) equipment in December 2008.  Amortization related to the down-hole licenses totaled $0 and $34,200 for the six months ended June 30, 2009 and 2008, respectively.  In addition, we have not recognized any depletion expense in 2009 related to our West Ranch wells due to the fact that the wells remain shut-in.  Depletion expense related to our West Ranch wells totaled $13,095 for the six-month period ended June 30, 2008.

We recognized $27,014 of interest income for the six-month period ended June 30, 2009, an increase of $23,642 from the same period in 2008.  The increase is due to interest earned on our North Sea deposit as well as on spud fees which were being held in escrow pending the outcome of the Zavanna litigation.  Interest income related to the North Sea deposit was not recognized in 2008 until the fourth quarter.

 Liquidity and Capital Resources

As of June 30, 2009, our assets totaled $5,846,229, which included cash balances of $297,691 and investments in oil and gas properties of $3,762,593, net of accumulated depletion.  In addition, we have recorded a $20,000 receivable for spud fees earned in 2008 and have $1,615,021 on deposit related to our interest in the Quad 41/42 prospect.  In May 2009, we collected $730,000 of the spud fees owed to us that were previously held in escrow.  A portion of these funds was used to settle amounts owed to Rover Resources Inc. in connection with our working interest in the Pebble Beach Prospect, totaling $444,835.

We anticipate spending $2,245,000 for improvement to our West Ranch property over the next several years.  Since the Company has historically generated net losses and negative cash flows, it is likely that we will need to obtain additional working capital in order to fund these expenditures.  Historically, we have successfully raised additional operating capital through private equity funding sources.  With that in mind, our management is refining its business plan regarding various funding options.  However, no assurances can be given that the Company will be able to obtain sufficient working capital through the sale of its common stock and/or borrowing or that the development and implementation of the Company’s business plan will generate sufficient future revenues to sustain ongoing operations. In addition, we continue to dispute our participation of the drilling of the Quad 41/42 exploratory well and are pursuing the release funds held on deposit associated with this prospect.  As of June 30, 2009, it is uncertain how much, if any, of the funds held on deposit will ultimately be returned to the Company.  The combination of these factors raises substantial doubt with our auditor about the Company’s ability to continue as a going concern.

 
8

 
 
On November 2007, we were served with a complaint alleging breach of contract, misappropriation of confidential and proprietary information and of trade secret and claims under the Colorado Uniform Trade Secrets Act, fraud, declaratory relief declaring any agreements of release to be void and unenforceable as they were obtained by fraudulent inducement, declaration of accounting and constructive trust for all proceeds and profits from the alleged misappropriation, injunctive relief for return of all allegedly misappropriated information and cessation of use, civil theft of business values, and tortuous interference with contract. The Plaintiffs sought compensatory and punitive damages in an unspecified amount, prejudgment interest, declaratory relief, injunctive relief, accounting, and attorneys’ fees. From the onset, Management believed that the causes of action were without merit and defended its rights vigorously. In January 2008, we filed a countersuit claiming abuse of process, intentional interference with an existing business and contractual relations, commercial disparagement and conspiracy.  The lawsuit continued to negatively impact our ability to pursue additional opportunities and/or acquire additional oil and gas prospects during 2008 and 2009.  A further result of the lawsuit was the sale of certain assets in order to fund our ongoing operations.  The litigation was favorably settled in July 2009.  As part of the settlement agreement, we will receive $255,000 in settlement proceeds as partial reimbursement of legal fees incurred in connection with the litigation.  The entire amount of the settlement proceeds is expected to be received during the third quarter of 2009.
 
Off-Balance Sheet Arrangements

The Company had no off-balance sheet arrangements at June 30, 2009.

 
9

 

ITEM 4T. CONTROLS AND PROCEDURES.

We carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.  Based on the foregoing, our Principal Executive Officer and our Principal Financial Officer initially concluded that our disclosure controls and procedures were effective at the reasonable assurance level.  Based on these evaluations, our certifying Officers initially concluded, subject to the limitations noted below, that, as of the end of the period covered by this Quarterly Report on Form 10-Q:

(a)           Our disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 was recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; and

(b)           Our disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act was accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure.

However, during 2009, we discovered that we had inadvertently omitted certain disclosures regarding our controls and procedures and that certain 2008 transactions were not accounted for properly, as discussed in the Explanatory section located on page 2 of this Quarterly Report.  The discovery of these omissions and errors is an indication that our disclosure controls and procedures were, in fact, not effective at the time of our original filing.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and our Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent or detect all error and all fraud.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.  The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.  Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls.  The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Projections of any evaluation of controls effectiveness to future periods are subject to risks.  Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Changes in Internal Control over Financial Reporting

There were no changes made to our internal controls over financial reporting during the quarter ended June 30, 2009.  During the fourth quarter of 2009, we implemented processes to strengthen the review of our accounting policies and the applicability of these policies to individual transactions and disclosures included in our financial statements.

 
10

 

Part II - OTHER INFORMATION

ITEM 6. EXHIBITS.

Exhibit
 
Description of Exhibit
     
 3(i).1
 
Articles of Incorporation filed with the Nevada Secretary of State on July 25, 2003. (Incorporated by reference to Exhibit 3.1 of our Form 10-SB filed August 18, 2004.)
     
3(i).2
 
Certificate of Change filed with the Nevada Secretary of State effective November 7, 2005. (Incorporated by reference to Exhibit 3(i).2 of our Current Report on Form 8-K filed November 9, 2005.)
     
3(i).3
 
Articles of Merger filed with the Nevada Secretary of State effective November 7, 2005. (Incorporated by reference to Exhibit 3(i).3 of our Current Report on Form 8-K filed November 9, 2005.)
     
3(ii).1
 
Bylaws, adopted July 18, 2003. (Incorporated by reference to Exhibit 3.2 of our Form 10-SB filed August 18, 2004.)
     
3(ii).2
 
Amendment No. 1 to Bylaws, adopted November 4, 2005. (Incorporated by reference to Exhibit 3(ii) of our Current Report on Form 8-K filed November 9, 2005.)
     
10.1
 
Agreement and Plan of Merger between Golden Hope Resources Corp. (renamed Eternal Energy Corp.) and Eternal Energy Corp., filed with the Nevada Secretary of State effective November 7, 2005. (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed November 9, 2005.)
     
10.2
 
Purchase and Sale Agreement between Eternal Energy Corp. and Merganser Limited, dated November 7, 2005. (Incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed November 9, 2005.)
     
10.3
 
Form of Subscription Agreement for November 2005 private placement. (Incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed November 9, 2005.)
     
10.4
 
Form of Common Stock Purchase Warrant for November 2005 private placement. (Incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K filed November 9, 2005.)
     
10.5
 
Registration Rights Agreement for November 2005 private placement. (Incorporated by reference to Exhibit 10.5 of our Current Report on Form 8-K filed November 9, 2005.)
     
10.6
 
Letter Agreement by and between Eternal Energy Corp. and International Frontier Resources Corporation. (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed December 5, 2005.)
     
10.7
 
Employment Agreement by and between Eternal Energy Corp. and Bradley M. Colby. (Incorporated by reference to Exhibit 10.1 of our Amended Current Report on Form 8-K/A filed June 29, 2006).
     
10.7(b)
 
Excerpt from the minutes of the Board of Directors meeting on July 26, 2007, setting forth the terms of the Second Amendment to Employment Agreement by and between Eternal Energy Corp. and Bradley M. Colby. (Incorporated by reference to Exhibit 10.1b of our Current Report on Form 8-K filed September 27, 2007.)
     
10.8
 
First Amendment to Employment Agreement by and between Eternal Energy Corp. and Bradley M. Colby (Incorporated by reference to Exhibit 10.1(a) of our Current Report on Form 8-K filed December 8, 2006).
     
10.9
 
Letter Agreement by and between Eternal Energy Corp. and International Frontier Resources Corporation Relating to Quad 41 and Quad 42 dated January 30, 2006. (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed February 3, 2006.)
     
10.10
 
Amended and Restated Letter Agreement by and between Eternal Energy Corp. and International Frontier Resources Corporation Relating to Quad 14 dated January 30, 2006. (Incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed February 3, 2006.)
     
10.11
 
Finder’s Fee Agreement by and between Eternal Energy Corp. and Taverham Company Ltd. dated January 30, 2006. (Incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed February 3, 2006.)
     
10.12
 
Form of Subscription Agreement for March 2006 private placement. (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed March 8, 2006.)
     
10.13
 
Form of Common Stock Purchase Warrant for March 2006 private placement. (Incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed March 8, 2006.)
     

 
11

 

10.14
 
Form of Registration Rights Agreement for March 2006 private placement. (Incorporated by reference to Exhibit 10.1 of our Amended Current Report on Form 8-K/A filed March 29, 2006.)
     
10.15
 
Letter Agreement between us and Eden Energy Corp. dated April 14, 2006 (Incorporated by reference to Exhibit 10.1 our Current Report on Form 8-K filed April 21, 2006).
     
10.16
 
Letter Agreement effective as of May 19, 2006, by and among Eternal Energy Corp., International Frontier Resources Corporation, Palace Exploration Company Limited, Oilexco Incorporated, and Challenger Minerals (North Sea) Limited (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed May 23, 2006).
     
10.17**
 
Letter Agreement dated October 15, 2006, by and among Eternal Energy Corp., Fairway Exploration, LLC, Prospector Oil, Inc., and 0770890 B.C. Ltd. (Incorporated by reference to Exhibit 10.17 of our Registration Statement on Form 10-KSB filed April 16, 2007).
     
10.18**
 
Letter Agreement dated October 26, 2006, by and among Eternal Energy Corp., Fairway Exploration, LLC, Prospector Oil, Inc., 0770890 B.C. Ltd., and Rover Resources Inc. (Incorporated by reference to Exhibit 10.18 of our Registration Statement on Form 10-KSB filed April 16, 2007).
     
10.19
 
Letter Agreement dated February 28, 2007, by and among Eternal Energy Corp., Pebble Petroleum Inc., Emerald Bay Holdings Ltd., and Heartland Resources Inc. (Incorporated by reference to Exhibit 10.19 of our Registration Statement on Form 10-KSB filed April 16, 2007).
     
10.20
 
Agreement To Terminate DGWS Option (Incorporated by reference to Exhibit 10.20 of our Quarterly Report on Form 10-Q filed May 15, 2009).
     
10.21
 
Amended and Restated Employment Agreement by and between Eternal Energy Corp. and Craig Phelps dated August 1, 2007 (Incorporated by reference to Exhibit 10.21 of our Quarterly Report on Form 10-Q filed May 15, 2009).
     
10.22
 
Employment Agreement by and between Eternal Energy Corp. and Kirk A. Stingley dated June 2, 2008 (Incorporated by reference to Exhibit 10.22 of our Quarterly Report on Form 10-Q filed May 15, 2009).
     
31.1*
 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act
     
31.2*
 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act
     
32.1*
 
Certification pursuant to Section 906 of the Sarbanes-Oxley Act
     
32.2*
 
Certification pursuant to Section 906 of the Sarbanes-Oxley Act


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

 
12

 

SIGNATURES

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

ETERNAL ENERGY CORP.
   
     
(Registrant)
   
     
March 10, 2010
/s/ Bradley M. Colby
 
 
Bradley M. Colby
 
 
President and Chief Executive Officer
 

 
13