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EX-31 - EXHIBIT 31 - Earth Energy Reserves, Inc.earthenergy10q2q11ex31.htm
EX-32 - EXHIBIT 32 - Earth Energy Reserves, Inc.earthenergy10q2q11ex32.htm

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


[x]     Quarterly Report Pursuant to Section 13 or 15(d) Securities Exchange Act of 1934 for Quarterly Period Ended December 31, 2011

-OR-

[ ]     Transition Report Pursuant to Section 13 or 15(d) of the Securities And Exchange Act of 1934 for the transaction period from _________ to________


Commission File Number  000-51489


Earth Energy Reserves, Inc.

 (Exact name of registrant as specified in its charter)


NEVADA

 

75-3000774

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)


621 17th Street, Suite 1640, Denver, CO

 

80293

(Address of principal executive offices)

 

(Zip Code)


(303) 297-0500

 (Registrant's telephone number, including area code)


Indicate by check mark whether the issuer (1) 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 (section 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 [ ]   No [ ]


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerate filer, or a small reporting company as defined by Rule 12b-2 of the Exchange Act):




Large accelerated filer        [  ]

 

Non-accelerated filer             [  ]

Accelerated filer                 [  ]

 

Smaller reporting company   [x]


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


The number of outstanding shares of the registrant's common stock,

February 21, 2012:

Common Stock  -  11,972,282


2



EARTH ENERGY RESERVES, INC.

FORM 10-Q

For the quarterly period ended December 31, 2011

INDEX


PART 1 – FINANCIAL INFORMATION

 

 

Page

Item 1.  Financial Statements (Unaudited)

 

4

Item 2.  Management's Discussion and Analysis of

  Financial Condition and Results of Operations

 

10

Item 3.  Quantitative and Qualitative Disclosure

  About Market Risk

 

12

Item 4.  Controls and Procedures

 

12


PART II – OTHER INFORMATION



Item 1.  Legal Proceedings

 

13

Item 1A.  Risk Factors

 

13

Item 2.  Unregistered Sales of Equity Securities and

  Use of Proceeds

 

13

Item 3.  Defaults upon Senior Securities

 

13

Item 4.  (Removed and Reserved)

 

13

Item 5.  Other Information

 

13

Item 6.  Exhibits

 

13

 

 

 

SIGNATURES

 

14



3



EARTH ENERGY RESERVES, INC.

BALANCE SHEETS

 

 

 December 31,

 

 June 30,

 

 

 2011

 

 2011

 

 

 (Unaudited)

 

 (Audited)

 ASSETS

 CURRENT ASSETS

 

 

 

 

 Cash

 

$       54,686

 

$      220,778

 TOTAL CURRENT ASSETS

 

         54,686

 

        220,778

 Deposit - land

 

         40,000

 

                    -   

 TOTAL ASSETS

 

$       94,686

 

$      220,778

 

 

 

 

 

 LIABILITIES AND STOCKHOLDERS' EQUITY

 CURRENT LIABILITIES

 

 

 

 

 Notes payable - short term

 

 $       30,000

 

 $                 -   

 Accounts payable

 

 100,596

 

 70,054

 Accounts payable - related parties

 

 19,365

 

 -   

 Accrued expenses

 

       124,824

 

                   -   

 TOTAL CURRENT LIABILITIES

 

       274,785

 

         70,054

 

 

 

 

 

 STOCKHOLDERS' EQUITY

 

 

 

 

 Series A preferred stock, $0.0001 par value, authorized

 

 

 

 

 10,000,000 shares, 32,580 and 32,580 shares issued

 

 

 

 

 and outstanding at December 31, 2011 and June 30, 2011,

 

 

 

 

  respectively

 

 3

 

 3

 Common stock, $0.0001 par value, authorized 90,000,000

 

 

 

 

 shares, 11,917,282 and 11,669,782 shares issued

 

 

 

 

 and outstanding at December 31, 2011 and June 30, 2011,

 

 

 

 

  respectively

 

 1,191

 

 1,167

 Additional paid-in capital

 

 4,769,706

 

 3,731,389

 Accumulated (deficit) - since quasi-reorganization, July 1,

  2010

 

 (4,950,999)

 

 (3,344,335)

 

 

 (180,099)

 

 388,224

 Common stock subscriptions receivable

 

                    -   

 

     (237,500)

 TOTAL STOCKHOLDERS' EQUITY

 

      (180,009)

 

        150,724

 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$        94,686

 

$      220,778


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


4



EARTH ENERGY RESERVES, INC.

STATEMENT OF OPERATIONS

(UNAUDITED)


 

 

 Three Months Ended

 Six Months Ended

 

 

 December 31,

 December 31,  

 

 

 2011

 

 2010

 

 2011

 

 2010

EXPENSES

 

 

 

 

 

 

 

 

 Salaries

 

$   185,699

 

$    179,766

 

$     357,567

 

$     393,529

 Stock-based compensation

 

 390,018

 

 476,705

 

 780,036

 

 1,144,239

 General and administrative

 

     220,211

 

        81,809

 

       466,168

 

       352,216

TOTAL OPERATING

   EXPENSES

 

     795,928

 

      738,280

 

    1,603,771

 

    1,889,984

 NET OPERATING (LOSS)

 

 (795,928)

 

 (738,280)

 

 (1,603,771)

 

 (1,889,984)

 

 

 

 

 

 

 

 

 

OTHER INCOME/

   (EXPENSE)

 

 

 

 

 

 

 

 

 Interest income

 

 1

 

 523

 

 2

 

 523

 Interest expense

 

      (2,896)

 

                  -   

 

        (2,896)

 

                  -   

TOTAL OTHER

   INCOME/(EXPENSE)

 

      (2,895)

 

             523

 

        (2,894)

 

              523

(LOSS) BEFORE INCOME

   TAXES

 

 (798,823)

 

 (737,757)

 

 (1,606,665)

 

 (1,889,461)

 INCOME TAXES

 

                -   

 

                  -   

 

                   -   

 

                   -   

 NET (LOSS)

 

$(798,823)

 

$  (737,757)

 

 $(1,606,665)

 

 $(1,889,461)

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED

   (LOSS) PER SHARE

 

$      (0.07)

 

$        (0.07)

 

$        (0.14)

 

$         (0.17)

WEIGHTED AVERAGE

   NUMBER OF COMMON

   SHARES OUTSTANDING

   - BASIC AND DILUTED

 

11,789,782

 

11,210,800

 

  11,760,497

 

  11,188,900


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


5




EARTH ENERGY RESERVES, INC.

STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 Six Months Ended

 

 

 December 31,

 

 

 2011

 

 2010

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 Net (loss) for the period

 

 $(1,606,665)

 

 $(1,889,461)

 Adjustment to reconcile net (loss) to net cash

 

 

 

 

 (used) by operating activities:

 

 

 

 

 Employee share-based compensation

 

 780,036

 

 1,144,239

 Contributed services fees

 

 410

 

 -   

 Warrants issued for interest

 

 2,896

 

 -   

 Changes in operating assets and liabilities:

 

 

 

 

 Accounts payable and accrued expenses

 

 155,366

 

 (29,228)

 Accounts payable - related parties

 

          19,365

 

                    -   

NET CASH (USED) BY OPERATING ACTIVITIES

 

     (648,592)

 

      (774,450)


CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 Deposit on purchase of oil and gas property

 

        (40,000)

 

      (100,000)

 NET CASH (USED) BY INVESTING ACTIVITIES

 

        (40,000)

 

      (100,000)

 

 

 

 

 

 CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 Proceeds from short term note payable

 

 30,000

 

 -   

 Sale of common stock

 

 255,000

 

 62,000

 Proceeds from subscription receivable

 

 237,500

 

 965,000

 Re-purchase and retirement of Series A preferred stock

 

                     -   

 

        (79,095)

 NET CASH PROVIDED BY FINANCING ACTIVITIES

 

         522,500

 

         947,905

 NET INCREASE (DECREASE) IN CASH

 

 (166,092)

 

 73,455

 CASH AT BEGINNING OF PERIOD

 

         220,778

 

         329,773

 CASH AT END OF PERIOD

 

$         54,686

 

$       403,228

 SUPPLEMENTAL CASH FLOWS DISCLOSURES

 

 

 

 

 Cash paid during the period for:

 

 

 

 

 Income taxes

 

$                   -   

 

$                   -   

 Interest

 

$                   -   

 

$                   -   


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


6




EARTH ENERGY RESERVES, INC.

NOTES TO FINANCIAL STATEMENTS


December 31, 2011

(Unaudited)


NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Organization


Earth Energy Reserves, Inc. (formerly Asian American Business Development Company) (“Company”) was incorporated in the State of Nevada on February 12, 2002 as Wiltex First, Inc.  On March 10, 2005, the Company filed a certificate of amendment with the State of Nevada changing its name to Asian American Business Development Company and, on March 13, 2006 the Company’s name was changed to Earth Energy Reserves, Inc.  


Basis of Presentation


The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  All such adjustments are of a normal and recurring nature.  These financial statements should be read in conjunction with the audited financial statements at June 30, 2011.  Operating results for the six months ended December 31, 2011 are not necessarily indicative of the results that may be expected for the year ending June 30, 2012.


NOTE 2: GOING CONCERN


The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplates continuation of the Company as a going concern.  Since inception, the Company has incurred net operating losses.  The future success of the Company will depend on its ability to attain additional capital, or to find an acquisition to add value to its present shareholders and ultimately, upon its ability to attain future profitable operations.  


7



EARTH ENERGY RESERVES, INC.

NOTES TO FINANCIAL STATEMENTS


December 31, 2011

(Unaudited)


NOTE 3: EQUITY TRANSACTIONS


During the six month period ended  December 31, 2011, the company had the following stock transactions:


The Company received $237,500 in Subscriptions Receivable from sale of common stock which had occurred during the fourth quarter of the previous fiscal year.


As of June 30, 2011, the Company had completed its Private Placement Memorandum involving Series 2 Units. Subsequently, a new Private Placement Memorandum offering Series 3 Units was initiated in July 2011, with the intent to raise $15 million in equity capital, by selling Units at $1.50 each. Each of the Series 3 Units consists of one common share and two three-year warrants. During December 2011, 170,000 Series 3 Units were sold to three new shareholders for a total capital infusion of $255,000. Significant additional Unit sales are expected next quarter.


Also during the six months, the Company issued 100,000 common shares to a corporate officer upon meeting the required vesting schedule. The Company had also cancelled 22,500 common shares to correct an apparent discrepancy between the tabulated list of shares earned for services provided to the Company, dating back to 2007, and to the ledger of shares actually issued. The Company recorded $780,036 in share-based compensation consisting of both common shares and options.  As of December 31, 2011, the resulting number of common shares issued and outstanding is 11,917,282.


NOTE 4: QUASI RE-ORGANIZATION


Effective July 1, 2010 and with shareholder approval, the Company entered into a quasi-reorganization (also referred to as a corporate adjustment). As a result of the quasi-reorganization all prior period losses charged to accumulated deficit were eliminated against additional paid-in capital. A quasi-reorganization requires that retained earnings be dated for ten years after the quasi-reorganization takes place.



NOTE 5: SUBSEQUENT EVENTS


The Company has evaluated subsequent events through the date which the financial statements were available to be issued.


8



EARTH ENERGY RESERVES, INC.

NOTES TO FINANCIAL STATEMENTS


December 31, 2011

(Unaudited)


NOTE 5: SUBSEQUENT EVENTS (continued)


On February 3, 2012, the Company executed the definitive Purchase and Sale Agreement for our previously announced acquisition of our “NOLA-A” property, with $50,000 good faith deposit placed with the seller. The NOLA-A property consists of various interests in producing oil and gas leases located in the state of Louisiana, on an established 14,400 acre leasehold with 19 existing gas wells.  The purchase price is $1,050,000, subject to customary closing settlement adjustments. The Company anticipates closing the transaction on February 29, 2012.


On December 9, 2011, the Company signed an extension to the previously announced letter of intent with a large mineral owner to enter an oil and gas lease of 71,900 acres in northern Louisiana for exploration and production of coal bed methane reservoirs, known internally as the “NOLA-B” Project. The Company anticipates consummating the lease by February 29, 2012, with drilling to be initiated as soon as practical, but no later than one year from the lease date. An initial lease bonus payment of $719,000 will be paid by the Company upon signing of the lease.


On December 2, 2011, the Company engaged the services of an investment banking firm to pursue raising up to $30 million additional capital for operations in the form of mezzanine debt financing. The company has executed the preliminary term sheet, and is currently awaiting final approval of this debt facility, with final interest rate and other terms as yet not finalized. The Company expects to close on this mezzanine debt financing on February 29, 2012, concurrent with closing on the NOLA-A and NOLA-B properties and leases.


9



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Trends and Uncertainties.  The Company intends to be an independent oil and natural gas company engaged in the acquisition, drilling, and production of oil and natural gas in the United States.  The Company’s future operations may be adversely affected by its competitors, fluctuating oil prices, changing foreign political environments, and any prolonged recessionary periods.


Capital and Source of Liquidity.  The Company is evaluating and pursuing several acquisitions in conventional oil and gas reservoirs, with the intent to maintain diversification in its asset portfolio.  The Company believes that there will be sufficient capital from recent equity financing and the proposed equity and debt financing to conduct operations for the next twelve months.


Presently, proceeds of the Company’s equity financing and cash comprise all of the total cash necessary to conduct operations.  Any proposed acquisitions will determine the amount of additional financing necessary to continue operations.


The Company is currently pursuing equity financing.  The board of directors shall determine the amount and type of any additional financing necessary as our financial situation dictates.


Investing Activities.  For the six months ended December 31, 2011, the Company made a $40,000 good-faith deposit on the purchase of oil and gas properties.  As a result, the Company had net cash used by investing activities of $40,000.  Likewise, for the six months ended December 31, 2010, the Company had made a $100,000 good-faith deposit on the purchase of oil and gas properties, resulting in net cash used by investing activities of $100,000.


Financing Activities.  For the six months ended December 31, 2011, the Company received $30,000 in proceeds from a short-term note payable.  In addition to the cash received, the Company attached 15,000 Class B Warrants to purchase common shares of the Company’s common stock, par value $0.001, for a strike price of $1.75.  These warrants will expire three years from the date of the note issued.  The Company also received $255,000 in proceeds for the sale of 170,000 shares of common stock.  These 170,000 shares, as part of the Company’s Series 3 Private Placement Units, were also accompanied by 340,000 three-year warrants.  Finally, the Company received $237,500 in proceeds from stock subscriptions receivable from the sale of common stock, which had occurred during the fourth quarter of the previous fiscal year.  As a result, the Company’s net cash flows from financing activities for the six months ended December 31, 2011 was $522,500.


10



For the six months ended December 31, 2010, the Company sold common stock for cash in the amount of $62,000, as well as received proceeds from stock subscription receivable of $965,000.  Additionally, the Company re-purchased and subsequently retired Series A preferred stock of $79,095, resulting in net cash flows from investing activities for the six months ended December 31, 2010 of $947,905.


Result of Operations.  The Company has had only minimal revenue since inception, with all recent activities funded through the sale of its common stock.  For the six months ended December 31, 2011 and December 31, 2010, the Company received no revenues.


For the six months ended December 31, 2011, the Company recorded general and administrative expenses of $1,603,771, compared to $1,889,984 for the six months ended December 31, 2010.  The expenses for the six months ended December 31, 2011 and 2010 consisted of salaries, stock-based compensation, and the expense of engineering and geological consultants, as well as customary legal, accounting, auditing, and general office overhead expenses.


Plan of Operation.  The Company has developed an operating strategy that is based on acquiring underdeveloped oil and gas properties that include, or are adjacent to, existing active production; consequently, these properties are lower risk with attractive rates of return on the development potential.  The Company has elected directors and appointed and hired officers and consultants with substantial experience in unconventional gas production, including coal bed methane reservoirs, plus the expertise in horizontal wellbore drilling, and the Company has correspondingly pursued several acquisitions in this arena.  The Company is also evaluating and pursuing several acquisitions in conventional oil and gas reservoirs, with the intent to maintain diversification in its asset portfolio.  The Company has a bias towards desiring to be the operator of the properties it is acquiring but are not exclusively against acquiring non-operated positions in oil and gas assets.


Earth Energy may experience problems, delays, expenses, and difficulties sometimes encountered by an enterprise in a similar stage, many of which are beyond the Company’s control.  These include, but are not limited to, unanticipated problems relating to additional costs and expenses that may exceed current estimates and competition.


Earth Energy is not delinquent in any of its obligations even though the Company has generated no operating revenues.  The Company intends to pursue its business plan utilizing cash made available from the private sale of its securities and future operations.  The Company’s management is of the opinion that the proceeds of the sales of its securities and future revenues will be sufficient to pay its expenses for the next twelve months.


11



Earth Energy is pursuing financing for its operations and seeking additional private investments.  In addition, the Company is seeking to expand its revenue base.  Failure to secure such financing or to raise additional equity capital and to expand its revenue base may result in the Company not being able to pay its obligations.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  


We do not consider the effects of interest rate movements to be a material risk to our financial condition.  We do not hold any derivative instruments and do not engage in any hedging activities.   


ITEM 4.  CONTROLS AND PROCEDURES  


During the period ended December 31, 2011, there were no changes in our internal controls over financial reporting (as defined in Rule 13a- 15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  


Evaluation of Disclosure Controls and Procedures  


Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of December 31, 2011.  Based on this evaluation, our chief executive officer and chief principal financial officer have concluded such controls and procedures to be effective as of December 31, 2011 to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms and to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

12




PART II - OTHER INFORMATION


Item 1.   Legal Proceedings

          None


Item 1A.  Risk Factors  

          Not applicable for smaller reporting companies


Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

          None


Item 3.   Defaults Upon Senior Securities.

          None


Item 4.   (Removed and Reserved)



Item 5.   Other Information

          None


Item 6.   Exhibits


Exhibit 31* - Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of

2002

Exhibit 32* - Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of

2002

101.INS**   XBRL Instance Document

101.SCH**   XBRL Taxonomy Extension Schema Document

101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB**   XBRL Taxonomy Extension Label Linkbase Document

101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document

*  Filed herewith

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


13



SIGNATURES


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


Dated: February 21, 2011


EARTH ENERGY RESERVES, INC.


By:

/s/Steven A. Kranker

Steven A. Kranker

Principal Executive Officer


By:

/s/Doyle Pennington

Doyle Pennington

Interim Principal Financial Officer


14