UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

FORM 10-Q

 X . QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

      . TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934

For the transition period from ______ to _______

Commission File Number 000-31423

 

FRIENDLY ENERGY EXPLORATION

(Exact name of registrant as specified in its charter)

 

Nevada	91-1832462
(State of incorporation)	(I.R.S. Employer Identification No.)

 

4601 N. Highway 279

Brownwood, TX 76801

(Address of principal executive offices)

 

(325) 752-6222

(Registrant’s telephone number)

with a copy to:

Carrillo Huettel, LLP

3033 Fifth Ave. Suite 400

San Diego, CA 92103

Telephone (619) 546-6100

Facsimile (619) 546-6060

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  X . No      .

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  X . No      .

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

Large accelerated filer	.	Accelerated filer	.
Non-accelerated filer	. (Do not check if a smaller reporting company)	Smaller reporting company	X .

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

Yes      . No  X .

As of August 9, 2011, there were 92,680,790 shares of the registrant’s $0.001 par value common stock issued and outstanding.

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FRIENDLY ENERGY EXPLORATION*

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	14
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	16
ITEM 4.	CONTROLS AND PROCEDURES	17
PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	17
ITEM 1A.	RISK FACTORS	17
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	17
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	17
ITEM 4.	[REMOVED AND RESERVED]	17
ITEM 5.	OTHER INFORMATION	18
ITEM 6.	EXHIBITS	19

Special Note Regarding Forward-Looking Statements

Information included in this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). This information may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Friendly Energy Exploration (the “Company”), to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that these projections included in these forward-looking statements will come to pass. Actual results of the Company could differ materially from those expressed or implied by the forward-looking statements as a result of various factors. Except as required by applicable laws, the Company has no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

*Please note that throughout this Quarterly Report, and unless otherwise noted, the words "we," "our," "us," the "Company," or "FEGR" refers to Friendly Energy Exploration.

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PART I - FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

FRIENDLY ENERGY EXPLORATION

(An Exploration Stage Company)

CONSOLIDATED BALANCE SHEET

				Jun. 30, 2011		Dec. 31, 2010
ASSETS
Current assets
	Cash and cash equivalents		$	38,887	$	-
	Accounts Receivable			31,654		8,729
		Total current assets		70,541		8,729
	Oil and Gas Properties - unproved			137,214		121,017
	Property and equipment			62,831		66,790
	Notes receivable			7,500		7,500
	Other Assets			1,000		1,000
Total Assets			$	279,087	$	205,036
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
Current liabilities
	Accounts Payable		$	62,070	$	59,545
	Bank Indebtedness			-		1,842
	Payroll Tax Liabilities			133,432		124,252
	Judgment payable			193,675		213,250
	Deferred Salaries			1,188,000		1,068,000
	Interest Payable			325,474		272,528
	Loan Payable			876,746		994,546
	Loans Payable-Related Parties			244,474		210,400
		Total current liabilities		3,023,872		2,944,363
STOCKHOLDERS' DEFICIT
	Common stock, $0.001 par value; 100,000,000 shares
		authorized, 92,680,790 and 70,238,790 shares,
		respectively, issued and outstanding		70,239		70,239
	Preferred Stock, $0.001 par value, 10,000,000 shares
		authorized, 3,577,302 and 3,577,302 shares,		3,577		3,577
		respectively, issued and outstanding
	Additional paid-in capital			4,199,283		3,820,863
	Accumulated deficit during the development stage			(2,201,561)		(2,201,561)
	Accumulated deficit during the exploration stage			(4,816,322)		(4,432,444)
		Total stockholders' deficit		(2,744,784)		(2,739,327)
		Total liabilities and stockholders' deficit	$	279,087	$	205,036

See Accompanying Notes to Consolidated Financial Statements

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FRIENDLY ENERGY EXPLORATION

(An Exploration Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

								From Inception	From Inception
				For the Three	For the Three	For the Six	For the Six	Development Stage (Jan. 7,	Exploration Stage (Feb. 11,
				Months Ended	Months Ended	Months Ended	Months Ended	1993) through	2005) through
				Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010	Feb. 10, 2005	Jun. 30, 2011
Revenue			$	13,209	$ 21,672	$33,082	$30,573	$ 13,372	$        101,575
Operating expenses
	Bad Debt Expense			-	-	-	-	-	319,000
	Depletion			1,981	-	4,962	-	-	12,828
	Depreciation			2,260	292	4,900	529	35,287	20,742
	Dry Hole Cost			-	-	-	-	-	88,157
	General and administrative			2,426	4,065	4,758	7,117	218,930	93,235
	Intangible Drilling Costs			-	-	-	-	-	333,206
	Officer Wages			60,000	60,000	120,000	120,000	-	1,587,000
	Oil Well Operations Cost			108,815	218,714	170,637	317,853	-	687,627
	Oil & Gas Royalties			289		1,887			3,455
	Payroll Expenses			4,590	4,590	9,180	9,180	213,228	96,164
	Professional Fees			11,690	19,231	12,145	31,899	711,228	330,726
	Rent			3,141	-	4,239	-	282,410	11,870
	Stock Based Compensation			-	1,931	-	3,760	156,825	363,342
	Travel & Entertainment			4,301	11,867	10,880	17,317	128,687	73,757
		Total operating expenses		199,492	320,690	343,588	507,654	1,746,595	4,021,108
		Loss from operations		(186,284)	(299,018)	(310,506)	(477,081)	(1,733,223)	(3,919,533.42)
Other income (expenses):
	Other income			-	-	-	-	120,605	76,118
	Forgiveness of Debt			-	-	-	-	(122,765)	-
	Impairment Loss on Asset			-	-	-	-	(442,800)	(328,970)
	Interest Expense			(42,694)	(46,839)	(73,371)	(61,276)	(23,379)	(533,936)
	Lawsuit Judgment			-	-	-	-	-	(110,000)
		Total other income (expenses)		(42,694)	(46,839)	(73,371)	(61,276)	(468,339)	(896,788)
		Loss before provision for income taxes		(228,978)	(345,857)	(383,877)	(538,357)	(2,201,561)	(4,816,322)
Provision for income taxes				-	-	-	-	-	-
		Net loss	$	(228,978)	$(345,857)	$(383,877)	$(538,357)	$ (2,201,561)	$   (4,816,322)

See Accompanying Notes to Consolidated Financial Statements

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FRIENDLY ENERGY EXPLORATION

(An Exploration Stage Company)

STATEMENTS OF STOCKHOLDER DEFICIT

See Accompanying Notes to Consolidated Financial Statements

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FRIENDLY ENERGY EXPLORATION

(An Exploration Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

									From Inception	From Inception
									Development	Exploration
					For the	For the	For the	For the	Stage	Stage
					Three Months Ended	Three Months Ended	Six Months Ended	Six Months Ended	(Jan. 7, 1993) through	(Feb. 11, 2005) through
					Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010	Feb. 10, 2005	Jun. 30  2010
Cash flows from operating activities:
	Net loss				$  (228,978)	$(345,857)	$ (383,877)	$ (538,357)	$ (2,202,562)	$(4,816,322)
	Adjustments to reconcile net loss to
	net cash used by operating activities:
		Depletion			1,981		4,962		-	12,828
		Depreciation			2,260	325	4,694	562	35,287	20,535
		Stock Based Compensation			-	1,931	-	3,760	(61,635)	581,803
		Impairment Loss			-	-	-	-	442,800	452,090
		Bad Debt Expense			-	-	-	-		319,000
	Changes in operating assets and liabilities:						-			-
		Accounts Receivable			(10,733)	(64,468)	(22,925)	(64,468)	-	(31,654)
		Accounts Payable			4,403	54,159	3,458	46,757	74,857	(11,156)
		Advances			-	-	-	-	-	-
		Judgment payable			(14,909)	6,184	(19,575)	12,216	-	193,675
		Interest Payable			27,603	8,405	52,946	16,810	23,079	302,395
		Payroll Liabilities			4,590	4,590	9,180	9,180	37,268	96,165
		Deferred Salaries			60,000	60,000	120,000	120,000	-	1,188,000
			Net cash used by operating activities		(153,782)	(274,730)	(231,137)	(393,540)	(1,650,906)	(1,692,641)
Cash flows from investing activities:
	Purchase of property and equipment				-	(4,072)	(941)	(4,072)	(41,718)	(77,142)
	Issuance of promissory notes				-	-	-	-	-	(326,500)
	Investment in oil and gas properties				(10,000)	-	(21,160)	(67,500)	-	(602,132)
			Net cash used by investing activities		(10,000)	(4,072)	(22,101)	(71,572)	(41,718)	(1,005,774)
Cash flows from financing activities:
	Proceeds from issuance of notes payable				(208,300)	224,905	(117,800)	728,990	-	1,177,049
	Proceeds from issuance of common stock				84,420	21,500	84,420	21,500	112,970	588,439
	Proceeds from issuance of preferred stock				294,000	-	294,000	(422,000)	1,559,654	657,068
	Proceeds on borrowings from related parties				(1,728)	13,264	34,074	123,566	20,000	315,473
			Net cash provided by financing activities		168,392	259,669	294,694	452,055	1,692,624	2,738,029
Net increase in cash					4,610	(19,133)	40,729	(13,056)	-	38,887
Cash, beginning of period					34,277	21,115	(1,841)	15,038	-	-
Cash, end of period					$       38,887	$ 1,982	$ 38,887	$ 1,982	$ -	$ 38,887

See Accompanying Notes to Consolidated Financial Statements

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FRIENDLY ENERGY EXPLORATION

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

These unaudited interim financial statements as of and for the three months ended June 30, 2011 reflect all adjustments which, in the opinion of management, are necessary to fairly state the Company’s financial position and the results of its operations for the periods presented, in accordance with the accounting principles generally accepted in the United States of America. All adjustments are of a normal recurring nature.

 

These unaudited interim financial statements should be read in conjunction with the Company’s financial statements and notes thereto included in the Company’s fiscal year end December 31, 2010 report. The Company assumes that the users of the interim financial information herein have read, or have access to, the audited financial statements for the preceding period, and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. The results of operations for the three month period ended June 30, 2011 are not necessarily indicative of results for the entire year ending December 31, 2011

1.

DESCRIPTION OF BUSINESS AND HISTORY

Friendly Energy Corp., a Nevada corporation, (hereinafter referred to as the “Company” or “Friendly Energy”) was incorporated in the State of Nevada on January 7, 1993 under the name Eco-Systems Marketing.  The company was originally in the business of selling electric power and related services to small and medium sized businesses in a newly deregulated California market.  The Company is now in the business of oil and gas exploration and operations.  In 2009, the Company acquired four oil and gas leases in central Texas totaling 1,036 acres with twenty-five wells.  In the first quarter of 2010, the Company acquired a fifth oil and gas lease in Central Texas totally 1,000 acres with twenty-four wells  

The Company is considered an exploration stage company in accordance with by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 915, Development Stage Entities.  The Company entered the oil and gas exploration business in February 2005, so the cumulative columns in the financial statements include activities for the development stage prior to February 2005 and for the exploration stage beginning February 2005.

On March 9, 2000, the Company formed a wholly owned subsidiary named Friendly Energy Services, Inc.  All oil and gas activities are conducted through this subsidiary except for work over and drilling operations.  On March 3, 2010, the Company formed a wholly owned subsidiary named Friendly Energy Drilling, Inc.  All work over and drilling operations are conducted through this subsidiary.

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Going concern – The Company incurred net losses of $4,816,322 from the period of February 11, 2005 (date of entering the oil and gas exploration business) through June 30, 2010 and has commenced its operations on a limited basis. The Company is still in the exploration stage, raising substantial doubt about the Company’s ability to continue as a going concern.  The Company may seek additional sources of capital through the issuance of debt or equity financing, but there can be no assurance the Company will be successful in accomplishing its objectives.

The ability of the Company to continue as a going concern is dependent on additional sources of capital and the success of the Company’s plan.  The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Year end – The Company’s yearend is December 31.

Principles of consolidation – The consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany transactions and balances have been eliminated.

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

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Oil and Gas Properties – The Company utilizes the full-cost method of accounting for petroleum and natural gas properties. Under this method, the Company capitalizes all costs associated with acquisition, exploration and development of oil and natural gas reserves, including leasehold acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and costs of drilling of productive and non-productive wells into the full cost pool on a country by country basis. When the Company obtains proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves proved and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. The costs of unproved properties are not amortized until it is determined whether or not proved reserves can be assigned to the properties. Until such determination is made the Company assesses annually whether impairment has occurred, and includes in the amortization base drilling exploratory dry holes associated with unproved properties.

The Company applies a ceiling test to the capitalized cost in the full cost pool. The ceiling test limits such cost to the estimated present value, using a ten percent discount rate, of the future net revenue from proved reserves, based on current economic and operating conditions. Specifically, the Company computes the ceiling test so that capitalized cost, less accumulated depletion and related deferred income tax, do not exceed an amount (the ceiling) equal to the sum of: (A) The present value of estimated future net revenue 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 cost) 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 (B) the cost of property not being amortized; plus (C) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less (D) income tax effects related to differences between the book and tax basis of the property.

For unproven properties, the Company excludes from capitalized costs subject to depletion, all costs directly associated with the acquisition and evaluation of the unproved property until it is determined whether or not proved reserves can be assigned to the property. Until such a determination is made, the Company assesses the property at least annually to ascertain whether impairment has occurred. In assessing impairment the Company considers factors such as historical experience and other data such as primary lease terms of the property, average holding periods of unproved property, and geographic and geologic data. The Company adds the amount of impairment assessed to the cost to be amortized subject to the ceiling test.

Asset Retirement Obligations – The Company follows the provisions of ASC 410, Asset Retirement and Environmental Obligations, which establishes standards for the initial measurement and subsequent accounting for obligations associated with the sale, abandonment or other disposal of long-lived tangible assets arising from the acquisition, construction or development and for normal operations of such assets.

Property and equipment – Property and equipment are stated at cost less accumulated depreciation.  Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which are generally 3 to 27 years.  The amounts of depreciation provided are sufficient to charge the cost of the related assets to operations over their estimated useful lives.  

The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful life of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.

Income taxes – Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has adopted ASC 740, Accounting for Income Taxes, as of its inception. Pursuant to ASC 740, the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefits of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.

Net loss per common share – The Company computes net income (loss) per share in accordance with ASC 260, Earning per Share.  ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti dilutive.

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Stock-Based Compensation -- The Company records stock-based compensation in accordance with ASC 718, Share-Based Payments, using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued.

Concentration of risk – A significant amount of the Company’s assets and resources are currently dependent on the financial support of Douglas Tallant and Donald Trapp.  Should they determine to no longer finance the operations of the company before new capital is raised, it may be unlikely for the company to continue.

Revenue recognition – The Company has had revenues of $68,734 to date from its operations.  Revenue is recognized as it is received.

Financial Instruments - Pursuant to ASC 820, Fair Value Measurements and Disclosures and ASC 825, Financial Instruments, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 and 825 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 and 825 prioritizes the inputs into three levels that may be used to measure fair value:

Level 1

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The Company’s financial instruments consist principally of cash, notes receivable, investment, accounts payable, payroll tax liabilities, judgment payable, deferred salaries, interest payable, loans payables, and amounts due to related parties.   Pursuant to ASC 820 and 825, the fair value of cash is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.

Recent accounting pronouncements – In February 2010, the FASB issued ASU No. 2010-09, “Subsequent Events ( ASC Topic 855), Amendments to Certain Recognition and Disclosure Requirements.” This Standard update requires a SEC Filer to (1) evaluate subsequent events through the date that the financial statements are issued or available to be issued, (2) defines “SEC Filer” as an entity that is required to file or furnish its financial statements with either the SEC or, with respect to an entity subject to Section 12(i) of the Securities Exchange Act of 1934, as amended, the appropriate agency under that Section, (3) not be bound to disclosing the date through which subsequent events have been evaluated, (4) note the definition of public entity is no longer defined nor necessary for Topic 855, (5) note the scope of the reissuance disclosure requirements is refined to include revised financial statements only. These Updates are effective for interim or annual periods ending after June 15, 2010. ASU No. 2010-09 has no effect on the Company’s financial position, statements of operations, or cash flows at this time.

In January 2010, the FASB issued an amendment to ASC 820, Fair Value Measurements and Disclosure, to require reporting entities to separately disclose the amounts and business rationale for significant transfers in and out of Level 1 and Level 2 fair value measurements and separately present information regarding purchase, sale, issuance, and settlement of Level 3 fair value measures on a gross basis.  This standard, for which the Company is currently assessing the impact, is effective for interim and annual reporting periods beginning after December 15, 2009 with the exception of disclosures regarding the purchase, sale, issuance, and settlement of Level 3 fair value measures which are effective for fiscal years beginning after December 15, 2010.

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In January 2010, the FASB issued an amendment to ASC 505, Equity, where entities that declare dividends to shareholders that may be paid in cash or shares at the election of the shareholders are considered to be a share issuance that is reflected prospectively in EPS, and is not accounted for as a stock dividend.  This standard is effective for interim and annual periods ending on or after December 15, 2009 and is to be applied on a retrospective basis.  The adoption of this standard is not expected to have a significant impact on the Company’s financial statements.

  

In October 2009, the FASB issued an amendment to the accounting standards related to certain revenue arrangements that include software elements. This standard clarifies the existing accounting guidance such that tangible products that contain both software and non-software components that function together to deliver the product’s essential functionality, shall be excluded from the scope of the software revenue recognition accounting standards. Accordingly, sales of these products may fall within the scope of other revenue recognition standards or may now be within the scope of this standard and may require an allocation of the arrangement consideration for each element of the arrangement. This standard, for which the Company is currently assessing the impact, will become effective on January 1, 2011.

In October 2009, FASB issued an amendment to the accounting standards related to the accounting for revenue in arrangements with multiple deliverables including how the arrangement consideration is allocated among delivered and undelivered items of the arrangement. Among the amendments, this standard eliminated the use of the residual method for allocating arrangement considerations and requires an entity to allocate the overall consideration to each deliverable based on an estimated selling price of each individual deliverable in the arrangement in the absence of having vendor-specific objective evidence or other third party evidence of fair value of the undelivered items. This standard also provides further guidance on how to determine a separate unit of accounting in a multiple-deliverable revenue arrangement and expands the disclosure requirements about the judgments made in applying the estimated selling price method and how those judgments affect the timing or amount of revenue recognition. This standard, for which the Company is currently assessing the impact, will become effective on January 1, 2011.

In August 2009, FASB issued an amendment to the accounting standards related to the measurement of liabilities that are recognized or disclosed at fair value on a recurring basis. This standard clarifies how a company should measure the fair value of liabilities and that restrictions preventing the transfer of a liability should not be considered as a factor in the measurement of liabilities within the scope of this standard. This standard is effective for the Company on October 1, 2009. The adoption of this amendment did not have a material effect on the Company’s financial statements.

In June 2009, the FASB issued guidance now codified as ASC 105, Generally Accepted Accounting Principles as the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP, aside from those issued by the SEC. ASC 105 does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all authoritative literature related to a particular topic in one place.  The adoption of ASC 105 did not have a material impact on the Company’s financial statements, but did eliminate all references to pre-codification standards.

The Company has implemented all new accounting pronouncements that are in effect.  These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements.

3.

OIL & GAS PROPERTIES

		December 31, 2010		June 30, 2011
		$		$
Oil & Gas Properties - Unproved
Panther Lease		9,873		12,519
Byler Lease		45,143		33,983
Mud Creek Lease		20,000		10,000
Hutchins Lease		2,400		2,400
South Thrifty Lease		59,799		62,115
Red Oak Project		242,000		242,000
Talpa Project		50,000		50,000
West Peach Project		36,970		36,970
		458,166		449,987
Impairment		(328,970)		(328,970)
Total oil & gas properties		137,214		121,017

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Byler Lease – In 2009, the Company purchased, through its wholly-owned subsidiary, a 100% interest in oil and gas properties in central Texas for $33,650.  In 2010, there were additional lease costs of $333, and in 2011 there were additional lease costs of $11,160.  The property totals 372 acres and consists of 17 wells.  The Company remits a 22% royalty payment.  As at June 30, 2011, there was production on the property from six wells.  We are planning to rework additional wells.

Hutchins Lease - In 2009, the Company purchased, through its wholly-owned subsidiary, a 100% interest in oil and gas properties in central Texas for $2,400.  The property totals 194 acres.  Upon production, the Company will remit a 15.125% royalty payment.  As at June 30, 2011, there was no production on the property.  

Mud Creek Lease - In 2009, the Company purchased, through its wholly-owned subsidiary, a 100% interest in oil and gas properties in central Texas for $10,000.  The property totals 355 acres.  Upon production, the Company will remit a 22% royalty payment.  As at June 30, 2011, there was no production on the property.    

Panther Creek Lease - In 2009, the Company purchased, through its wholly-owned subsidiary, a 100% interest in oil and gas properties in central Texas for $15,000.  After the depletion allowance, the balance is $9,873.  The property totals 155 acres.  The Company remits a 22% royalty payment.  As at June 30, 2011, there was production on the property from three wells.  We are planning to rework additional wells.

South Thrifty Lease - In the first quarter of 2010, the Company purchased, through its wholly-owned subsidiary, a 50% interest in oil and gas properties in central Texas for $67,500.  After the depletion allowance, the balance is $62,070.  The property totals 1,000 acres.  The Company remits approximately a 22% royalty payment (the royalty payment varies for the wells).  As at June 30, 2011, there was production on the property from sixteen wells.  We are planning to rework additional wells.

 

4.

PROPERTY & EQUIPMENT

Property and equipment consist of the following as of December 31, 2010 and 2009:

		June 30, 2011		June 30, 2010
Furniture and Fixtures	$	23,858	$	20,102
Computers and Equipment		28,548		26,353
Oil Field Equipment		67,392		0
		119,798		46,455
Less: accumulated depreciation		(56,967)		(45,274)
Net Furniture, fixtures, computers & equipment	$	62,831	$	1,181

5.

RELATED PARTY TRANSACTIONS

In the second quarter of 2011, the officers agreed with the Company to defer their salaries totaling $60,000, see note 7.

 

As of June 30, 2011 and 2010, loans payable from related parties consists of the following:

		June 30 2011		June 30, 2010
Notes payable  from officers of the Company bearing interest at 8% unsecured and due on demand	$	244,474	$	147,443

6.

OTHER CURRENT LIABILITIES

The company has accrued for unpaid federal payroll taxes in the amounts of $133,432 and $119,611 for the quarters ended June 30, 2011 and 2010, respectively.  $37,268 is owed from 2000 and 2001 unpaid federal payroll taxes; the Company has filed the payroll taxes with the Internal Revenue Service.  $96,164 is owed for accrued payroll taxes on deferred salaries; the Company has yet to file the payroll tax forms with the Internal Revenue Service or related state taxing authorities.

The company has accrued deferred salaries owed to three officers in the amount of $1,188,000 and 948,000 for the quarters ended June 30, 2011 and 2010, respectively.  

The company has accrued interest in the amount of $325,474 and $206,176 for the quarters ended June 30, 2011 and 2010, respectively.  The accrued interest includes interest on unpaid payroll taxes and related party loans.

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7.

STOCKHOLDERS’ DEFICIT

Common Shares:  As of June 30, 2011 and 2010, there were 92,680,790 and 52,568,790 shares of common stock outstanding.  During the quarter ended June 30, 2011, the Company issued 8,442,000 common shares.   

Preferred Shares:   Each share of preferred stock is convertible into ten shares of common stock and has voting rights equal to ten shares of common stock.  Holders of preferred stock are entitled to twenty votes for each share of record on all matters to be voted on by shareholders.  During the quarter ended June 30, 2011, the Company issued 1,400,000 preferred shares.  As of June 30, 2011 and 2010 there were 3,577,302 and 4,742,302 shares of preferred stock outstanding.  

8.

STOCK OPTIONS

The Company granted no options under the Company’s Stock Option Plan in the second quarter of 2011 and had no stock-based compensation expense.

The following table summarizes stock option plan activities:

	Number of Options	Weighted Average Exercise Price $	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value $
Balance – December 31, 2007 and 2008	400,000	0.55
Granted in 2009	1,500,000	0.005
Balance – June 30, 2011	1,900,000	0.12	7.80	–

Additional information regarding stock options as of June 30, 2011, is as follows:

Number of Options	Exercise Price $	Expiry Date
40,000	1.25	April 20, 2015
60,000	1.56	September 28, 2016
300,000	0.25	December 27, 2017
1,500,000	0.005	July 23, 2019
1,900,000

There are no non-vested stock options and the Company had no unrecognized compensation expense relating to unvested options as of June 30, 2011

9.

COMMITMENTS AND CONTINGENCIES

Employment contracts –

Douglas Tallant - The Company entered into an employment agreement with Douglas Tallant effective January 1, 2007.  Pursuant to the terms of the agreement, Mr. Tallant is to be paid an annual salary of $180,000 in consideration of which Mr. Tallant agreed to act as the Company’s  President.  The term of the agreement is for an indefinite period, unless otherwise terminated pursuant to the terms of the agreement.

Donald Trapp - The Company entered into an employment agreement with Donald Trapp effective February 1, 2005.  Pursuant to the terms of the agreement, Mr. Trapp is to be paid an annual salary of $60,000 in consideration of which Mr. Trapp agreed to act as the Company’s Corporate Secretary and Treasurer.  The term of the agreement is for an indefinite period, unless otherwise terminated pursuant to the terms of the agreement.  

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10.

LITIGATION

In 2005, an employee received a defaulted judgment against the Company concerning the case Bowers v. Friendly Energy Corporation, San Diego Superior Court Case No. 775084.  The default judgment in the principle sum of $434,211.50 was reduced to a principal amount of $110,000, with interest from October 13, 2000.  With accrued interest and less principal paid of $80,000, the balance at December 31, 2010 is $193,675, as reported in the liability section of the balance sheet.

12.

SUBSEQUENT EVENTS

In accordance with ASC 855, we have evaluated subsequent events through our audit issuance date, and did not have any material recognizable subsequent events.

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ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION

FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements that involve known and unknown risks, significant uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, or implied, by those forward-looking statements.  You can identify forward-looking statements by the use of the words may, will, should, could, expects, plans, anticipates, believes, estimates, predicts, intends, potential, proposed, or continue or the negative of those terms.  These statements are only predictions. In evaluating these statements, you should consider various factors which may cause our actual results to differ materially from any forward-looking statements.  Although we believe that the exceptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.  We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

RESULTS OF OPERATIONS

Working Capital

	June 30,	June 30,
	2011	2010
Current Assets	$279,087	$ 207,656
Current Liabilities	$3,023,872	$2,645,799
Working Capital (Deficit)	$(2,744,784)	$(2,438,143)

Cash Flows  

		June 30, 2011		June 30, 2010
Cash Flows from (used in) Operating Activities		$(1353,782)		$(274,730)
Cash Flows from (used in) Investing Activities		$(10,000)		$(4,072)
Cash Flows from (used in) Financing Activities		$168,392		$259,669
Net Increase (decrease) in Cash During Period		$4,610		$(19,133)

Operating Revenues

Operating revenues for the period ended June 30, 2011 was $13,209 and is comprised of oil and gas revenues.

Operating revenues for the period ended June 30, 2010 was $21,672 and is comprised of oil and gas revenues.

Operating Expenses and Net Loss

Operating expenses for the period ended June 30, 2011 was $199,492 and is comprised mostly of oil well operations costs and deferred salaries.

Operating expenses for the period ended June 30, 2010 was $320,690 and is comprised mostly of oil well operations costs and deferred salaries.

Net loss for the period ended June 30, 2011 was $228,978 and is comprised of operating expenses and interest expenses less oil and gas revenues.  

Net loss for the period ended June 30, 2010 was $345,857 and is comprised of operating expenses and interest expenses less oil and gas revenues.

Liquidity and Capital Resources

As at June 30, 2011, the Company’s cash and total asset balance was $279,087 compared to $207,656 as at June 30, 2010. The increase in total assets is attributed to oil and gas property purchased and increased cash balances.  

As at June 30, 2011, the Company had total liabilities of $3,023,872 compared with total liabilities of $2,645,799 as at June 30, 2010. The increase in total liabilities was attributed primarily to an increase of loans payable and of deferred salaries.

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As at June 30, 2011, the Company had a working capital deficit of $2,744,784 compared with a working capital deficit of $2,438,143 as at June 30, 2010.  The increase in working capital deficit was attributed to net loss over the past twelve months.

Cashflow from Operating Activities

During the period ended June 30, 2011, the Company used $153,782 of cash for operating activities compared to the use of $274,730 of cash for operating activities during the period ended June 30, 2010. The change in net cash used in operating activities is attributed to a smaller net loss and a reduction in accounts receivable. 

Cashflow from Investing Activities

During the period ended June 30, 2011, the Company used $10,000 of cash from investing activities compared to $67,500 for the period ended March 31, 2010.  The change in cash flows from investing activities is attributed to an additional investment in one of the leases.

Cashflow from Financing Activities

During the period ended June 30, 2011, the Company received $168,392 of cash from financing activities compared to $259,669 for the period ended June 30, 2010.  The change in cash flows from financing activities is attributed to a reduction in notes payable.

 

Going Concern

We have not attained profitable operations and are dependent upon obtaining financing to pursue any extensive acquisitions and activities. For these reasons, our auditors stated in their report on our audited financial statements that they have substantial doubt that we will be able to continue as a going concern without further financing.

Off-Balance Sheet Arrangements

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.

Future Financings

We will continue to rely on equity sales of our common shares and borrowings in order to continue to fund our business operations.  Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of the equity securities or arrange for debt or other financing to fund our operations and other activities.

Critical Accounting Policies

Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

 

We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

Recently Issued Accounting Pronouncements

In March 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-11 (“ASU No. 2010-11”), “Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives.” The amendments in this Update are effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each entity’s first fiscal quarter beginning after issuance of this Update. The Company’s adoption of provisions of ASU No. 2010-11 did not have a material effect on the financial position, results of operations or cash flows of the Company.

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In February 2010, the FASB issued ASU 2010-10 (“ASU No. 2010-10”), “Consolidation (Topic 810): Amendments for Certain Investment Funds.” The amendments in this Update are effective as of the beginning of a reporting entity’s first annual period that begins after November 15, 2009 and for interim periods within that first reporting period. Early application is not permitted. The Company’s adoption of provisions of ASU No. 2010-10 did not have a material effect on the financial position, results of operations or cash flows of the Company.

In February 2010, the FASB issued ASU 2010-09 (“ASU No. 2010-09”), “Subsequent Events (ASC Topic 855): Amendments to Certain Recognition and Disclosure Requirements.”  ASU No. 2010-09 requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement for an SEC filer to disclose a date, in both issued and revised financial statements, through which the filer had evaluated subsequent events. The Company’s adoption of provisions of ASU No. 2010-09 did not have a material effect on the financial position, results of operations or cash flows of the Company.

In January 2010, the FASB issued ASU 2010-06 (“ASU No. 2010-06”), “Improving Disclosures about Fair Value Measurements.” ASU No. 2010-06 amends FASB Accounting Standards Codification (“ASC”) 820 and clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements and employers’ disclosures about postretirement benefit plan assets. This ASU is effective for interim and annual reporting periods beginning after December 15, 2009. The Company’s adoption of provisions of ASU No. 2010-06 did not have a material effect on the financial position, results of operations or cash flows of the Company.

In January 2010, the FASB issued an amendment to ASC Topic 505, “Equity”, where entities that declare dividends to shareholders that may be paid in cash or shares at the election of the shareholders are considered to be a share issuance that is reflected prospectively in EPS, and is not accounted for as a stock dividend. This standard is effective for interim and annual periods ending on or after December 15, 2009 and is to be applied on a retrospective basis. The Company’s adoption of the amendment to ASC Topic 505 did not have a material effect on the financial position, results of operations or cash flows of the Company.

In January 2010, the FASB issued an amendment to ASC Topic 820, “Fair Value Measurements and Disclosure”, to require reporting entities to separately disclose the amounts and business rationale for significant transfers in and out of Level 1 and Level 2 fair value measurements and separately present information regarding purchase, sale, issuance, and settlement of Level 3 fair value measures on a gross basis. This standard, for which the Company is currently assessing the impact, is effective for interim and annual reporting periods beginning after December 15, 2009 with the exception of disclosures regarding the purchase, sale, issuance, and settlement of Level 3 fair value measures which are effective for fiscal years beginning after December 15, 2010. The Company’s adoption of the amendment to ASC Topic 820 did not have a material effect on the financial position, results of operations or cash flows of the Company.

The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

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ITEM 4. 

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act"). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective as of June 30, 2011, due to the material weaknesses resulting from the Board of Directors not currently having any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K, and controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Please refer to our Annual Report on Form 10-K as filed with the SEC on April 6, 2011, for a complete discussion relating to the foregoing evaluation of Disclosures and Procedures.

 

Changes in Internal Control over Financial Reporting

 

Our management has also evaluated our internal control over financial reporting, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of our last evaluation.

 

The Company is not required by current SEC rules to include, and does not include, an auditor's attestation report. The Company's registered public accounting firm has not attested to Management's reports on the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. 

LEGAL PROCEEDINGS

We know of no material, existing or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which our director, officer or any affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

ITEM 1A.

RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 2. 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

1. 

Quarterly Issuances:

During the quarter, we did not issue any unregistered securities other than as previously disclosed.

2.  

Subsequent Issuances:

Subsequent to the quarter, we did not issue any unregistered securities other than as previously disclosed.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  

[REMOVED AND RESERVED]

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ITEM 5.

OTHER INFORMATION

On April 7, 2011, the Board of Directors appointed Rick Hutchins (“Mr. Hutchins”) to serve as the Company’s Chief Operating Officer.  On April 7, 2011, Mr. Hutchins accepted the appointment.  

The biography for Mr. Hutchins is set forth below:

Rick Hutchins has been involved in the oil and gas business in Texas and Oklahoma for over forty years and is from a family whose involvement in the business began in 1926.  He was largely responsible for the discovery of one of the largest Mississippian Age reefs in Texas and one of the largest gas fields ever discovered in Brown County, Texas, because of his geologic evaluations in the early 1980's.  Mr. Hutchins has provided geological and mapping consulting services for several oil and gas companies.  He was also one of the founders of a risk management/insurance company which specialized in oil and gas risks and lease evaluations.   Mr. Hutchins has a Bachelor of Science degree in psychology and a Ph.D. degree in psychology with a minor in geology from the University of North Texas.  After earning his Ph.D., he audited a number of courses in geology at the University of Texas at Arlington.

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ITEM 6.

EXHIBITS

* Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FRIENDLY ENERGY EXPLORATION

Dated: August 11, 2011

/s/ Douglas Tallant           

By: Douglas Tallant

Its: President & Chief Executive Officer

Dated: August 11, 2011

/s/ Donald Trapp               

By: Donald Trapp

Its:  Chief Financial Officer, Secretary & Treasurer

Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

Dated: August 11, 2011

/s/ Douglas Tallant           

By:  Douglas Tallant

Its:  Director

Dated: August 11, 2011

/s/ Donald Trapp               

By:  Donald Trapp

Its:  Director

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