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 September 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

(Name of small business issuer in its charter)

 

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

 

6005 N. Highway 279

Brownwood, TX 76801

(Address of principal executive offices)

(702) 953-0411

(Registrant’s telephone number)

4601 N. Highway 279

Brownwood, TX 76801

(Former name or former address,

if changed since last report)

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      . No (Not required)

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 November 10, 2011, there were 107,180,790 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	15
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	17
ITEM 4.	CONTROLS AND PROCEDURES	18
PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	18
ITEM 1A.	RISK FACTORS	18
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	18
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	18
ITEM 4.	[REMOVED AND RESERVED]	18
ITEM 5.	OTHER INFORMATION	19
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

Financial Statements

September 30, 2011

 

Index

Balance Sheet

4

Statement of Operations

5

Statement of Cash Flows

6

Statement of Stockholders’ Equity

7

Notes to the Financial Statements

8

3

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FRIENDLY ENERGY EXPLORATION

(An Exploration Stage Company)

Balance Sheet

(Expressed in U.S. Dollars)

(unaudited)

				Sep. 30, 2011		Dec. 31, 2010
ASSETS
Current assets
	Cash and cash equivalents		$	3,118	$	-
	Accounts Receivable			56,635		8,729
		Total current assets		59,753		8,729
	Oil and Gas Properties - unproved			135,055		121,017
	Property and equipment			60,366		66,790
	Notes receivable			7,500		7,500
	Other Assets			1,000		1,000
Total Assets			$	263,674	$	205,036
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
Current liabilities
	Accounts Payable		$	59,189	$	59,545
	Bank Indebtedness			-		1,842
	Payroll Tax Liabilities			136,162		124,252
	Interest Payable			349,684		272,528
	Loan Payable			518,561		994,546
	Loans Payable-Related Parties			245,993		210,400
		Total current liabilities		1,309,590		1,663,114
Long-term Liabilities
	Loan Payable			320,000		-
	Judgment payable			158,098		213,250
	Deferred Salaries			1,248,000		1,068,000
		Total long-term liabilities		1,726,098		1,281,250
Total Liabilities				3,035,688		2,944,364
STOCKHOLDERS' DEFICIT
	Common stock, $0.001 par value; 290,000,000 shares authorized, 107,180,790 and 70,238,790 shares, respectively, issued and outstanding			107,181		70,239
	Preferred Stock, $0.001 par value, 20,000,000 shares authorized, 3,777,302 and 3,577,302 shares, respectively, issued and outstanding			3,777		3,577
	Additional paid-in capital			4,357,141		3,820,863
	Accumulated deficit during the development stage			(2,201,561)		(2,201,561)
	Accumulated deficit during the exploration stage			(5,038,552)		(4,432,444)
		Total stockholders' deficit		(2,772,014)		(2,739,327)
		Total liabilities and stockholders' deficit	$	263,674	$	205,036

(The accompanying notes are an integral part of these consolidated financial statements)

4

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FRIENDLY ENERGY EXPLORATION

(An Exploration Stage Company)

Statement of Operations

(Expressed in U.S. Dollars)

(unaudited)

(The accompanying notes are an integral part of these consolidated financial statements)

5

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FRIENDLY ENERGY EXPLORATION

(An Exploration Stage Company)

Statement of Cash Flows

(Expressed in U.S. Dollars)

(unaudited)

(The accompanying notes are an integral part of these consolidated financial statements)

6

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FRIENDLY ENERGY EXPLORATION

(An Exploration Stage Company)

Statement of Stockholders’ Equity

(Expressed in U.S. Dollars)

(unaudited)

(The accompanying notes are an integral part of these consolidated financial statements)

7

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FRIENDLY ENERGY EXPLORATION

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

These unaudited interim financial statements as of and for the nine months ended September 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 nine month period ended September 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 major work over and drilling operations are conducted through this subsidiary.

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Going concern – The Company incurred net losses of $5,038,552 from the period of February 11, 2005 (date of entering the oil and gas exploration business) through September 30, 2011 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 year end 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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2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

9

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2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

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2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

 

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.

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3.

OIL & GAS PROPERTIES

				September 30, 2011 $		December 31, 2010 $
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			57,639		62,115
	Red Oak Project			242,000		242,000
	Talpa Project			50,000		50,000
	West Peach Project			36,970		36,970
				464,025		449,987
	Impairment			(328,970)		(328,970)
		Total oil & gas properties		135,55		121,017

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 September 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 September 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.  In 2011 there were additional lease costs of $11,160.  The property totals 355 acres.  Upon production, the Company will remit a 22% royalty payment.  As at September 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 September 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 $57,639.  The property totals 1,000 acres.  The Company remits approximately a 22% royalty payment (the royalty payment varies for the wells).  As at September 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 September 30, 2011 and 2010:

		September 30, 2011		September 30, 2010
Furniture and Fixtures	$	21,980	$	21,980
Computers and Equipment	$	9,488	$	28,548
Oil Field Equipment	$	67,392	$	0
	$	18,860	$	50,528
Less: accumulated depreciation		(58,494)	$	(45,960)
Net Furniture, fixtures, computers & equipment		60,366	$	4,568

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5.

RELATED PARTY TRANSACTIONS

In the third quarter of 2011, the officers agreed with the Company to defer their salaries totaling $60,000, see note 6.

 

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

	September 30, 2011		September 30, 2010
Notes payable  from officers of
the Company bearing interest at 8%
unsecured and due on demand	$ 245,993		$162,823

6.

OTHER CURRENT LIABILITIES

The company has accrued for unpaid federal payroll taxes in the amounts of $136,162 and $122,341 for the quarters ended September 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.  $98,894 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 $1,248,000 and 1,008,000 for the quarters ended September 30, 2011 and 2010, respectively.  

The company has accrued interest in the amount of $349,684 and $214,581 for the quarters ended September 30, 2011 and 2010, respectively.  The accrued interest includes interest on unpaid payroll taxes and related party loans.

7.

STOCKHOLDERS’ DEFICIT

Common Shares:  As of September 30, 2011 and 2010, there were 107,180,790 and 68,238,790 shares of common stock outstanding.  During the quarter ended September 30, 2011, the Company issued 14,500,000 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 September 30, 2011, the Company issued 200,000 preferred shares.  As of September 30, 2011 and 2010 there were 3,777,302 and 3,502,302 shares of preferred stock outstanding.  

8.

STOCK OPTIONS & WARRANTS

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 – September 30, 2011	1,900,000	0.12	7.80	–

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8.

STOCK OPTIONS & WARRANTS (CONTINUED)

Additional information regarding stock options as of September 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 September 30, 2011.

The Company granted warrants under a non-brokered subscription agreement on July 15, 2011.  12,000,000 warrants were granted with each warrant entitling the holder to purchase one additional share of common stock of the Corporation at $0.015 per share until July 15, 2013.

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.  

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 $120,000, the balance at December 31, 2010 is $158,098, as reported in the liability section of the balance sheet.

11.

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

	September 30, 2011	September 30, 2010
Current Assets	$263,674	$205,036
Current Liabilities	$3,035,688	$2,944,364
Working Capital (Deficit)	$(2,772,014)	$(2,739,327)

Cash Flows

	September 30, 2011	September 30, 2010
Cash Flows from (used in) Operating Activities	$(194,103)	$(118,903)
Cash Flows from (used in) Investing Activities	$-	$-
Cash Flows from (used in) Financing Activities	$158,334	$148,983
Net Increase (decrease) in Cash During Period	$(35,769)	$30,080

Operating Revenues

Operating revenues for the period ended September 30, 2011 was $14,397 and is comprised of oil and gas revenues.

Operating revenues for the period ended September 30, 2010 was $15,109 and is comprised of oil and gas revenues.

Operating Expenses and Net Loss

Operating expenses for the period ended September 30, 2011 was $172,970 and is comprised mostly of oil well operations costs and deferred salaries.

Operating expenses for the period ended September 30, 2010 was $215,952 and is comprised mostly of oil well operations costs and deferred salaries.

Net loss for the period ended September 30, 2011 was $223,205 and is comprised of operating expenses and interest expenses less oil and gas revenues.  

Net loss for the period ended September 30, 2010 was $215,382 and is comprised of operating expenses and interest expenses less oil and gas revenues.

Liquidity and Capital Resources

As at September 30, 2011, the Company’s cash and total asset balance was $263,674 compared to $205,036 as at September 30, 2010. The increase in total assets is attributed mainly to an increase in accounts receivable due for working interest operating expenses.  

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As at September 30, 2011, the Company had total liabilities of $3,035,688 compared with total liabilities of $2,944,364 as at September 30, 2010. The increase in total liabilities was attributed to primarily to an increase of interest payable and of deferred salaries.  Loans payable were reduced.

As at September 30, 2011, the Company had a working capital deficit of $2,772,014 compared with a working capital deficit of $2,739,327 as at September 30, 2010.  There was very little change in working capital deficit.

Cashflow from Operating Activities

During the period ended September 30, 2011, the Company used $194,103 of cash for operating activities compared to the use of $118,903 of cash for operating activities during the period ended September 30, 2010. The change in net cash used in operating activities is attributed to a larger net loss and an increase in accounts receivable and judgment payable.

Cashflow from Investing Activities

During the period ended June 30, 2011and the period ended March 31, 2010, there were no changes in cash flows from investing activities.

Cashflow from Financing Activities

During the period ended September 30, 2011, the Company received $158,334 of cash from financing activities compared to $148,983 for the period ended September 30, 2010.  The change in cash flows from financing activities is attributed to an increase in proceeds from issuance of stock which was partially offset by 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 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.

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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 (ASC 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.

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 September 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

None.

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

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		FRIENDLY ENERGY EXPLORATION
Dated: November 10, 2011		/s/ Douglas Tallant
		By: DOUGLAS TALLANT
Dated: November 10 , 2011		Its:  President and Chief Executive Officer /s/ Donald Trapp                             By: DONALD TRAPP Its:  Chief Financial Officer & Principal Accounting Officer

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

  

Dated: November 10, 2011	/s/ Douglas Tallant
	By: DOUGLAS TALLANT Its:  Director

Dated: November 10, 2011

        /s/ Donald Trapp                            

By: DONALD TRAPP

Its:  Director

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