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EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER, PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - Heavy Earth Resources, Inc.hevi321.htm
EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER, PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - Heavy Earth Resources, Inc.hevi322.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER, PURSUANT TO RULE 13A-14 AND 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934 - Heavy Earth Resources, Inc.hevi312.htm
EXCEL - IDEA: XBRL DOCUMENT - Heavy Earth Resources, Inc.Financial_Report.xls
EX-31.1 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER, PURSUANT TO RULE 13A-14 AND 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934 - Heavy Earth Resources, Inc.hevi311.htm


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, 2012
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________to________
 
Commission File Number: 000-52979
 
Heavy Earth Resources, Inc.
(Exact name of registrant as specified in its charter)
 
Florida
75-3160134
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
625 Second Street, #280, San Francisco, CA 94107
(Address of principal executive offices) (Zip Code)
 
(415) 813-5079
(Registrant’s telephone number, including area code)
 

Indicate by check mark whether the registrant  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes   o 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).   x Yes   o No
 
Indicate by check mark whether the registrant is a large accelerated file, 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
o
Accelerated filer
o
Non-accelerated filer
o   (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).  o Yes    x No
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of November 19, 2012, there were 70,459,331 shares of the issuer's $.001 par value common stock issued and outstanding.
 
 

 
1

 
 
TABLE OF CONTENTS
 

PART I
FINANCIAL INFORMATION

 
 




 

 
2

 
PART I - FINANCIAL INFORMATION
 
Item 1.  Financial Statements.
 
HEAVY EARTH RESOURCES, INC.
(AN EXPLORATION STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED

   
SEPTEMBER 30,
   
DECEMBER 31,
 
   
2012
   
2011
 
ASSETS
             
CURRENT ASSET
           
   Cash and cash equivalents
  $ 2,327       6,608  
   Restricted cash
    583,090       1,177,827  
   Short term investments
    101,360       194,151  
   Inventory
    45,491       42,043  
   Other receivable
    1,332,446       1,659,974  
   Other current assets
    2,997       -  
    Total current assets     2,067,711       3,080,603  
                 
Oil and gas properties (full cost method):
               
Oil and gas properties, evaluated
    10,111,473       9,478,095  
Property, Plant and Equipment
    295,849       108,835  
Less:  accumulated depreciation and amortization
    (24,427 )     (18,390 )
   Net oil and gas properties, plant and equipment
    10,382,895       9,568,540  
                 
TOTAL ASSETS
  $ 12,450,606     $ 12,649,143  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
                 
CURRENT LIABILITIES
               
   Accounts payable and accrued liabilities
    6,220,850       5,522,526  
   Advances payable
    59,204       -  
   Related party payables
    -       2,997,117  
    Total current liabilities     6,280,054       8,519,643  
                 
Convertible notes payable
    1,000,000       -  
                 
STOCKHOLDERS' DEFICIT
               
   Common stock, $0.001 par value, 300,000,000 shares authorized,
      70,459,331 and 69,376,000 shares issued and outstanding
      as of September 30, 2012 and December 31, 2011, respectively
    70,459       69,376  
   Additional paid-in capital
    14,630,421       9,305,998  
   Accumulated other comprehensive loss
    (142,575 )     (2,203,792 )
   Accumulated deficit
    (9,387,753 )     (3,042,082 )
    Total stockholders' deficit     5,170,552       4,129,500  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
  $ 12,450,606     $ 12,649,143  
                 
The accompanying notes are an integral part of these financial statements.

 
 
3

 
HEAVY EARTH RESOURCES, INC.
(AN EXPLORATION STAGE COMPANY)
CONDENSED  CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED

     
FOR THE THREE
MONTHES ENDED
SEPTEMBER 30, 2012
     
FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 2011
     
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, 2012
     
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, 2011
 
                         
REVENUE
                       
   Net revenue
  $ -     $ -     $ -     $ -  
   TOTAL REVENUE
    -       -       -       -  
                                 
OPERATING EXPENSES (INCOME)
                               
   Exploration and lease operating costs
    31,306       23,535       87,541       68,453  
   Depreciation and amortization
    1,660       7,419       4,985       24,038  
   General and administrative expenses
    303,187       294,903       552,495       867,082  
   Legal and professional
    228,190       20,720       535,684       61,934  
   Impairment of oil and gas properties
    4,095,016       -       4,095,016        -  
TOTAL OPERATING EXPENSES
    4,659,359       346,577       5,275,721       1,021,507  
                                 
LOSS FROM OPERATIONS
    (4,659,359 )     (346,577 )     (5,275,721 )     (1,021,507 )
                                 
OTHER INCOME (EXPENSE)
                               
   Interest expense      (5,333      -        (69,950      -  
   Amortization of debt discount, BCF
    (1,000,000 )     -       (1,000,000 )     -  
     TOTAL OTHER INCOME (EXPENSE)
    (1,005,333 )     -       (1,069,950 )     -  
                                 
NET INCOME (LOSS) BEFORE INCOME TAXES      (5,664,692      (346,577      (6,345,671      (1,021,507
                                 
PROVISION FOR INCOME TAX
    -       -       -       -  
                                 
NET LOSS
    (5,664,692 )     (346,577 )     (6,345,671 )     (1,021,507 )
                                 
INCOME (LOSS) PER SHARE - BASIC
    (0.08 )             (0.09 )        
                                 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING      70,423,099                69,787,191          
 
The accompanying notes are an integral part of these financial statements.

 
 
4

 
HEAVY EARTH RESOURCES, INC.
(AN EXPLORATION STAGE COMPANY)
CONDENSED  CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED

   
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, 2012
   
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, 2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
    Net (loss)
  $ (6,345,671 )   $ (1,021,507 )
                 
Adjustments to reconcile net loss
               
  to net cash used in operating activities:
               
    Depreciation expense
    4,985       24,038  
    Impairment of oil and gas properties
    4,095,016       -  
    Amortization of debt discount
    1,000,000       -  
                 
Change in assets and liabilities
               
    (Increase) decrease in restricted cash
    594,737       (1,391,121 )
    (Increase) decrease in inventory
    (3,448 )     (30,758 )
    (Increase) decrease in short term investments
    92,791       99,891  
    (Increase) decrease in other receivable
    327,528       (772,177 )
    (Increase) decrease in deposits
    (2,997 )     -  
     Increase (decrease) in  accounts payable and accrued expenses
    517,189       7,754,140  
          Net cash (used in) operating activities
    280,130       4,662,506  
                 
CASH FLOWS USED IN INVESTING ACTIVITIES:
               
    Acquisition of oil and gas properties
    (7,394,208 )     (4,956,071 )
    Purchase of property plant and equipment
    (187,014 )     -  
          Net cash used in investing activities
    (7,581,222 )     (4,956,071 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
    Cash assumed in reverse merger
    20,594       -  
    Proceeds from the issuance of common stock
    850,000       400,231  
    Proceeds from convertible notes
    4,365,000       -  
          Net cash provided by financing activities
    5,235,594       400,231  
                 
FOREIGN CURRENCY EXCHANGE
    2,061,217       (233,550 )
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    (4,281 )     (126,884 )
 
               
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
    6,608       160,260  
 
               
CASH AND CASH EQUIVALENTS - END OF PERIOD
  $ 2,327     $ 33,376  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
  Cash paid during the period for:
               
      Interest
  $ -     $ -  
         Taxes
  $ -     $ -  
                 
NON CASH TRANSACTIONS:
               
     Discount to additional paid-in capital from relative fair value of warrants
  $ 1,000,000     $ -  
                 
The accompanying notes are an integral part of these financial statements.

 
 
5

 
HEAVY EARTH RESOURCES, INC.
(An Exploration Stage Company)
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
 
1.   NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Operations

On May 3, 2012, Heavy Earth Resources, Inc. entered into and closed a Share Exchange Agreement with Deep Core, Inc., a Cayman Islands exempt company (“Deep Core”).  Pursuant to the Exchange Agreement, the Company issued 250,000 shares of our $0.001 par value common stock in exchange for all outstanding shares of company stock of Deep Core from the Deep Core Holder and 8,574,042 shares of our Common Stock to the holders of outstanding convertible promissory notes of Deep Core in exchange for the conversion of the outstanding principal and accrued interest due on all of the Notes.  As a result of the share exchange and the other transactions contemplated thereunder, Deep Core became a wholly owned subsidiary of the Company. 

Deep Core was incorporated in the Cayman Islands on March 29, 2011.  On January 31, 2012, Deep Core closed a Share Purchase Agreement with Petro Vista Energy Colombia Corp. (a Barbados corporation) (PVE Colombia), a wholly-owned subsidiary of Petro Vista Energy Corp. (a British Columbia, Canada corporation) (PVE) to purchase 99.68% of issued and outstanding common stock of PVE Colombia’s subsidiary, DCX SAS (formerly, Petropuli SAS) (DCX) for $1,750,000, the assumption of certain other liabilities and other terms and conditions.  DCX owns a 50% participating oil and gas interest in the Morichito Block located in the Llanos Basin, Colombia.  

DCX SAS (formerly, Petropuli SAS/Petropuli Ltda) (the Company) is an oil and gas company focused on exploration and production of oil and natural gas in Central and South America, primarily in the country of Colombia.  The Company owns a 50% participating oil and gas interest in the Morichito Block located in the Llanos Basin, Colombia.  The Company was established on May 4, 1999 in Bogotá D.C., Colombia where it maintains its current headquarters.  The term of duration of the company expires May 4, 2049 according to Colombian law.

For accounting purposes, the Merger was treated as a reverse acquisition and a recapitalization of Heavy Earth Resources, Inc. and Deep Core, Inc.  The assets and liabilities of DCX SAS are recorded at their historical cost with the capital structure of Heavy Earth Resources, Inc.   Heavy Earth Resources, Inc. is deemed a continuation of the business of DCX SAS and the historical financial statements of DCX SAS will become the historical financial statements of Heavy Earth Resources, Inc.

On May 15, 2012, Deep Core Inc., a wholly-owned subsidiary of Heavy Earth Resources, Inc. closed the Share Purchase Agreement by and among PVE and PVE Colombia pursuant to which the Deep Core acquired all of the outstanding shares of capital of PVE Colombia, in exchange for: (i) a nominal cash payment of $1.00, (ii) Deep Core’s release of PVE from all its ongoing obligations pursuant to the Share Purchase Agreement closed on January 31, 2012, (iii) Deep Core’s release and payment to PVE of $75,000 and (iv) the assumption of the balance of acquisition costs associated with the 25% participating interest in the La Maye Contract.  PVE Colombia owns a 25% participating interest in the La Maye Block, consisting of approximately 68,302 gross acres located in Colombia’s Lower Magdalena Basin. 

Basis of Presentation

These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim consolidated financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 8 of SEC Regulation S-X. The principles for interim consolidated financial information do not require the inclusion of all the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements on Form 10-K for the years ended December 31, 2011 and 2010. The condensed consolidated financial statements included herein are unaudited; however, in the opinion of management, they contain all normal recurring adjustments necessary for a fair statement of the condensed results for the interim periods. Operating results for the three and nine month period ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. We made certain reclassifications to prior-period amounts to conform to the current presentation.
 
 
6

 
HEAVY EARTH RESOURCES, INC.
(An Exploration Stage Company)
CONDENSED NOTES TO THE FINANCIAL STATEMENTS

1.   NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Functional Currency

The Company’s functional currency is Colombian pesos (COP) which have been converted to USD based on the exchange rates of COP $1,801 and  COP $1,942 to USD $1.00 at September  30, 2012 and December 31, 2011, respectively, for purposes of the Company’s balance sheets and the average rates of COP $1,849 and COP $1,846 to USD $1.00 for the periods ended September  30, 2012 and  December 31, 2011, respectively, for purposes of the Company’s statements of operations in accordance with Accounting Standards Codification 830, Foreign Currency Matters (ASC 830).
 
 Exploration Stage

The Company has not produced revenues from its principal business and is in the exploration stage as defined by ASC 915, Development Stage Entities.  The Company is engaged in the acquisition, exploration, development and producing of oil and gas properties.  The Company owns a 50% participating oil and gas interest in the Morichito Block located in the Llanos Basin, Colombia and a 25% participating interest in the La Maye Block located in the Lower Magdalena Basin, Colombia.

The Company’s success will depend in large part on its ability to obtain and develop oil and gas interests within Colombia and other South or Central American countries. There can be no assurance that oil and gas properties obtained by the Company will contain reserves or that properties with reserves will be profitable to extract. The Company will be subject to local and national laws and regulations which could impact its ability to execute its business plan.

As discussed in Note 2, the accompanying financial statements have been prepared assuming the Company will continue as a going concern.

Use of Estimates

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

Cash and Cash Equivalents

For purposes of the balance sheet and statement of cash flows, the Company considers all highly liquid debt instruments purchased with maturity of three months or less to be cash equivalents.

Fair Value of Financial Instruments

Pursuant to ASC No. 825, Financial Instruments, the Company is required to estimate the fair value of all financial instruments included on its balance sheets.  The carrying value of cash, short term investments, other receivables, inventory, accounts payable and accrued expenses approximate their fair value due to the short period to maturity of these instruments.

Inventory

Inventory consists of approximately 1,500 barrels of oil extracted during the Company’s exploratory testing and are stated at the lower of cost or market.  Cost is determined by the first-in, first-out method.

 
 
7

 
HEAVY EARTH RESOURCES, INC.
 (An Exploration Stage Company)
CONDENSED NOTES TO THE FINANCIAL STATEMENTS

1.   NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Oil and Gas Properties

The Company follows the full cost method of accounting for its investments in oil and gas properties. Under the full cost method, all costs associated with the exploration of properties are capitalized into appropriate cost centers within the full cost pool. Internal costs that are capitalized are limited to those costs that can be directly identified with acquisition, exploration, and development activities undertaken and do not include any costs related to production, general corporate overhead, or similar activities. Cost centers are established on a country-by-country basis.
 
Capitalized costs within the cost centers are amortized on the unit-of-production basis using proved oil and gas reserves. The cost of investments in unevaluated properties and major development projects are excluded from capitalized costs to be amortized until it is determined whether or not proved reserves can be assigned to the properties. Until such a determination is made, the properties are assessed annually to ascertain whether impairment has occurred. The costs of drilling exploratory dry holes are included in the amortization base immediately upon determination that the well is dry.

For each cost center, capitalized costs are subject to an annual ceiling test, in which the costs shall not exceed the cost center ceiling. The cost center ceiling is equal to i) the present value of estimated future net revenues computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions; plus ii) the cost of properties not being amortized; plus iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less iv) income tax effects related to differences between the book and tax basis of the properties. If unamortized costs capitalized within a cost center, less related deferred income taxes, exceed the cost center ceiling, the excess is charged to expense and separately disclosed during the period in which the excess occurs.
 
Wells and Equipment

Wells and equipment are stated at cost.  Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred.  When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period.  Depreciation of property and equipment is computed using the units of production and straight line methods over the estimated useful lives of the assets.  Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the related lease term.

Impairment of Long-Lived Assets

The Company reviews the carrying values of its long-lived and intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.  In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets.

The factors considered by management in performing this assessment include current operating results, trends, and prospects, as well as the effects of obsolescence, demand, competition, and other economic indicators.

 
 
8

 
HEAVY EARTH RESOURCES, INC.
 (An Exploration Stage Company)
CONDENSED NOTES TO THE FINANCIAL STATEMENTS

1.   NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Asset Retirement Obligation

The Company accounts for its future asset retirement obligations by recording the fair value of the liability during the period in which it was incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The increase in carrying value of a property associated with the capitalization of an asset retirement cost is included in proved oil and gas properties within the Company’s balance sheets. The Company depletes the amount added to proved oil and gas property costs using the units-of-production method and the straight-line basis over the life of the assets.

Revenue Recognition

Working interest, royalty and net profit interests are recognized as revenue when oil and gas are sold.  The Company records the sale of its interests in prospects generally as a reduction to the cost pool without gain or loss recognition unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to a cost center.  A significant alternation would typically involve a sale of 25% or more of the proved reserves related to a single full cost pool.  All terms of the sale are to be finalized and price readily determinable.

Comprehensive Income (Loss)

The Company reports and displays its components of comprehensive income or loss in its financial statements with the same prominence as other financial statement amounts.  At September 30, 2012 and December 31, 2011, the Company’s accumulated other comprehensive loss attributable to the foreign currency translation was $142,575 and $2,203,792, respectively.  For the period ended September 30, 2012 and December 31, 2011, the Company’s comprehensive loss was $9,530,328 and $5,245,874, respectively.

Recent Accounting Pronouncements

There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's financial position, results of operations or cash flows.
 
2.   GOING CONCERN
 
As shown in the accompanying financial statements, the Company has incurred a net loss of ($9,387,753) through September 30, 2012, an accumulated comprehensive loss of ($9,530,328), and has a working capital deficiency of ($4,212,283) at September 30, 2012. The Company is subject to those risks associated with development stage companies.  The Company has sustained losses since inception and additional debt and equity financing will be required by the Company to fund its development activities to monetize economically recoverable oil and gas reserves and to support operations.  However, there is no assurance that the Company will be able to obtain additional financing to further its ongoing exploration activities so that profitable operations can be attained.
 
Management is currently devoting substantially all of its efforts to exploit its existing oil and gas properties and recover as much of the resources available.  The Company also continues to search for additional productive properties.  There can be no assurance that the Company's efforts will be successful, or that those efforts will translate in a beneficial manner to the Company. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
 
 
9

 
HEAVY EARTH RESOURCES, INC.
 (An Exploration Stage Company)
CONDENSED NOTES TO THE FINANCIAL STATEMENTS

3.   CONCENTRATION OF CREDIT RISK
 
The Company collects its receivables on its working interests in oil and gas properties from the other participating interests to cover their portion of the exploration and development costs.  As such, the Company generally has relatively few customers.  These receivables are unsecured and the Company performs ongoing credit evaluations of the participant’s financial condition whenever necessary.  
 
4.   RESTRICTED CASH
 
Cash and claims to cash that are restricted as to withdrawal or use are segregated and shown separately on the Company’s balance sheets.  Restricted cash represents amounts held on account with a fiduciary to guarantee payment to one (1) of the Company’s main suppliers for exploration and development activities.  At September 30, 2012 and December 31, the Company had $583,090 and $1,117,827 in restricted cash, respectively.
 
5.   SHORT TERM INVESTMENTS
 
Short term investments include certificates of deposit to be held in excess of the three (3) months that are used as stand-by letters of credit for the Colombian national hydrocarbon agency (Agencia Nacional de Hidrocarburos, or ANH) for future exploration and development costs.  At September 30, 2012 and December 31, 2011, the Company had $101,360 and $194,151, respectively.
 
6.   OIL AND GAS PROPERTIES
 
On May 31, 2005, the DCX SAS (formerly, Petropuli SAS) (DCX) entered into an Exploration and Production Contract with the ANH for exploration and development of the Morichito Block in the Eastern Llanos Basin, Colombia (the E+P Contract).  Pursuant to the E+P Contract, the Company maintains an approximately 50% working interest in the Morichito Block in exchange for a 4% net production royalty and a 1% overriding total production royalty plus other terms and conditions.  The Company’s Morichito Block located in East Plains, Llanos is comprised of 57,252 gross acres (23,169 gross hectares).

On January 31, 2012, Deep Core closed a Share Purchase Agreement with Petro Vista Energy Colombia Corp. (a Barbados corporation) (PVE Colombia), a wholly-owned subsidiary of Petro Vista Energy Corp. (a British Columbia, Canada corporation) (PVE) to purchase 99.68% of issued and outstanding common stock of PVE Colombia’s subsidiary, DCX SAS (formerly, Petropuli SAS) (DCX) for $1,750,000, the assumption of certain liabilities, and other terms and conditions.  DCX owns a 50% participating oil and gas interest in the Morichito Block located in the Llanos Basin, Colombia.  

On May 15, 2012, Deep Core Inc., a wholly-owned subsidiary of Heavy Earth Resources, Inc. closed a Share Purchase Agreement by and among PVE and PVE Colombia pursuant to which the Deep Core acquired all of the outstanding shares of capital of PVE Colombia, in exchange for: (i) a nominal cash payment of $1.00, (ii) Deep Core’s release of PVE from all its ongoing obligations pursuant to the Share Purchase Agreement closed on January 31, 2012, (iii) Deep Core’s release and payment to PVE of $75,000 and (iv) the assumption of the balance of acquisition costs associated with the 25% participating interest in the La Maye Contract.  PVE Colombia owns a 25% participating interest in the La Maye Block, consisting of 68,302 gross acres located in Colombia’s Lower Magdalena Basin. 
 
The acquisition was accounted for as a purchase, with the assets acquired and liabilities assumed recorded at fair value, and the results of the PetroVista Energy Columbia included in our financial statements from the date of acquisition.
 
 
10

 
HEAVY EARTH RESOURCES, INC.
 (An Exploration Stage Company)
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
 
6.   OIL AND GAS PROPERTIES (Continued)
 
The allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values is as follows:
 
 
Oil and gas properties
 
$
121,308
 
 
Prepaid expenses
   
1,047
 
 
Total assets acquired
   
122,355
 
 
Liabilities assumed
   
(47,355)
 
           
 
Total purchase price
 
$
75,000
 
 
For the nine month period ended September 30, 2012, the Company has capitalized $7,394,208, in acquisition, development and exploration costs.

On September 30, 2012, the Company recorded an impairment charge in the amount of $4,095,016, comprising of administrative costs of $585,905, costs of approximately $202,888 associated with smaller ventures that were not completed, costs of approximately $1,233,023 associated with the Sinu San Jacinto North Block SSJN-5, a former joint venture with SK Innovation Co. Ltd., and abandonment costs of approximately $2,073,200 for two wells abandoned from 2009 and 2010.  All costs were associated with PVE, the previous owner.
 
The Company believes that the majority of its evaluated, undeveloped costs will become subject to depletion within the next five years, by completing its exploration and development activities and commencing production, by impairing the acreage that may expire before the Company can explore or develop it further, or by making decisions that further exploration or development of the acreage will not occur.
 
7.   COMMITMENTS AND CONTINGENCIES
 
The Company has a non-cancelable operating lease for the rental of the Company’s office space in Bogota, Colombia.  Pursuant to the lease agreement, the Company’s monthly rent is approximately $7,250.  The lease expires February 2013 and the Company’s remaining amount due under the lease is $36,250.  Rent expense for the period ended September 30, 2012 and 2011 was $65,250, respectively.
 
During the year ended December 31, 2011, DCX SAS was imposed a fine by the Colombian Ministry of Environment, Housing and Territorial Development for site reclamation.  The Company is appealing the fine.  The estimated amount of this contingency, including related penalties and interest is approximately $535,000 and has been included in the Company’s accrued liabilities as of September 30, 2012.  
 
 
11

 
HEAVY EARTH RESOURCES, INC.
 (An Exploration Stage Company)
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
 
8.           CONVERTIBLE NOTES

Prior to the closing of the Share Exchange, Deep Core issued the convertible notes in exchange for an aggregate of $3,365,000 in proceeds.  Pursuant to the agreement, Deep Core was obligated to repay the outstanding principal balance and accrued interest of the convertible notes by June 23, 2012 at an interest rate of 10% per annum, provided, however, that, upon closing of the Share Exchange while the convertible notes principal balance and unpaid accrued interest of the would automatically convert into shares of our common stock at a conversion price of $0.40 per share.
 
Upon closing of the Share Exchange on May 3, 2012, the outstanding principal balance and unpaid accrued interest of the convertible notes were all converted at a conversion price of $0.40 per share.
 
Credit Facility – August 29, 2012 Convertible Notes
 
On August 29, 2012, the Company entered into a securities purchase agreement with two investors providing for the issuance of an aggregate principal value of $1,000,000 of a 6% senior convertible note and common stock purchase warrants to purchase an aggregate of 1,666,667 shares of common stock in exchange for an aggregate of $1,000,000 in proceeds. 
 
The convertible notes will become due and payable three years from August 29, 2012, the date of issuance.  The convertible note may be converted at any time at the option of the investors into shares of the Company’s common stock at a conversion price of $0.60 per share.  The convertible note bears interest at the rate of 6% per annum, increasing to 12% per annum on December 31, 2012 in the event that the Company has not consummated a primary public offering of its securities with gross proceeds of at least $6,000,000 on or before December 31, 2012, further increasing to 15% per annum on January 15, 2013 in the event the Company’s common stock is not listed for trading on the Nasdaq Capital Market or the Nasdaq Global Market by January 15, 2013, and finally increasing to 18% in an event of default.  Interest is payable quarterly in cash and may be payable in shares of the Company’s common stock if certain conditions are met, including but not limited to, the condition that the Company is not in default and the daily trading volume for the Company’s common stock exceeds 25,000 shares per trading day.  The convertible notes also provide the Company with the option to redeem the convertible notes at 115% of the outstanding principal together with any accrued but unpaid interest at any time if certain conditions are met.  The convertible notes are secured by the Company’s oil and gas properties.
 
The warrants grant the each investor the right to purchase up to a number of shares of common stock equal to 100% of the shares underlying the principal amount of the convertible notes issued to each respective investor and have an exercise price of $0.85 per share, are exercisable immediately upon issuance and have a term of exercise of five years from August 29, 2012, the date of issuance. 
 
Pursuant to ASC 470-20 Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, the Company determined that a beneficial conversion feature is present for the convertible notes issued during the period ended September 30, 2012 using the intrinsic value in the convertible notes adjusted for amounts allocated to the warrant valuation. The intrinsic value of the convertible notes amounted to $909,958 based on the fair market value of common stock on the respective dates of issuance.
 

 
12

 
HEAVY EARTH RESOURCES, INC.
 (An Exploration Stage Company)
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
 
8.           CONVERTIBLE NOTES (Continued)

Since the combined value of the warrants ($443,291) plus the intrinsic value of the convertible notes ($909,958) exceeds the fair value of the proceeds received from the issuance of the debt ($1,000,000), the Company is limited to the amount of the proceeds when recording the beneficial conversion feature as debt discount. Using a pro rata contribution, the Company allocated the proceeds first to the warrant valuation in the amount of approximately $443,291 and the remainder to the beneficial conversion feature in the amount of $556,709. The Company immediately amortized the debt discount of $1,000,000 for the period ended September 30, 2012 since the debt was convertible upon issuance.
 
The assumptions used in the Black-Scholes option pricing model for the Warrants were as follows:
 
 
Risk-free interest rate
.74%
 
 
Expected volatility of common stock
 103%
 
 
Dividend yield
 0.00%
 
 
Expected life of warrants and conversion feature
5 years
 


9.   COMMON STOCK
 
On April 20, 2012, Heavy Earth Resources, Inc. issued 500,000 shares of common stock at a purchase price of $0.40 per share in exchange for $200,000.

On May 3, 2012, Heavy Earth Resources, Inc. entered into and closed a Share Exchange Agreement with Deep Core, Inc.  Pursuant to the Exchange Agreement, the Company issued 250,000 shares of our common stock in exchange for all outstanding shares of company stock of Deep Core and issued 8,574,042 shares of our common stock to the holders of outstanding convertible promissory notes of Deep Core in exchange for the conversion of the outstanding principal and accrued interest due on all of the Notes at a conversion price of $0.40 per share. 

On May 3, 2012, the Company cancelled 9,324,042 shares of common stock from a director in accordance with the Share Exchange Agreement.
 
On June 12, 2012, Heavy Earth Resources, Inc. issued 416,666 shares  at a purchase price of $0.60 per Share and a common stock purchase warrant to purchase an aggregate of 104,167 shares of common stock in exchange for the for  $250,000.  The warrants have an exercise price of $1.25.
 
On June 20, 2012, Heavy Earth Resources, Inc. issued 333,333 shares  at a purchase price of $0.60 per common share and a common stock purchase warrant to purchase an aggregate of 83,333 shares of common stock in exchange for the for  $200,000.  The warrants have an exercise price of $1.25.

On July 6, 2012, Heavy Earth Resources, Inc. issued 83,333 shares  at a purchase price of $0.60 per common share and a common stock purchase warrant to purchase an aggregate of 20,833 shares of common stock in exchange for the for $50,000.  The warrants have an exercise price of $1.25.
 
On July 10, 2012, Heavy Earth Resources, Inc. issued 166,666 shares  at a purchase price of $0.60 per common share and a common stock purchase warrant to purchase an aggregate of 41,667 shares of common stock in exchange for the for $100,000.  The warrants have an exercise price of $1.25.
 
On July 11, 2012, Heavy Earth Resources, Inc. issued 83,333 shares  at a purchase price of $0.60 per common share and a common stock purchase warrant to purchase an aggregate of 20,833 shares of common stock in exchange for the for $50,000.  The warrants have an exercise price of $1.25.

 
 
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The following discussion relates to a discussion of the financial condition and results of operations of Heavy Earth Resources, Inc., a Florida corporation (the “Company”) herein used in this report, unless otherwise indicated, under the terms “Registrant,” “Heavy Earth,” “we,” “us” and similar terms and its wholly-owned subsidiary Deep Core Inc., a Cayman Island exempt company (“Deep Core”), Deep Core’s  majority-owned Colombian subsidiary, DCX SAS (formerly known as Petropuli SAS) (“DCX”) and Deep Core’s  wholly-owned Barbados subsidiary, Deep Core (Barbados) Inc.
 
Forward Looking Statements
 
This following information specifies certain forward-looking statements of management of the company. Forward-looking statements are statements that estimate the happening of future events are not based on historical fact. Forward-looking statements may be identified by the use of forward-looking terminology, such as “may”, “shall”, “could”, “expect”, “estimate”, “anticipate”, “predict”, “probable”, “possible”, “should”, “continue”, or similar terms, variations of those terms or the negative of those terms. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.
 
The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to:
 
·  
risks associated with drilling and production programs on the Morichito and La Maye Blocks resulting from geological, technical, drilling, seismic and other unforeseen problems;

·  
unexpected results of exploration and development drilling and related activities on the Morichito and La Maye Blocks;

·  
continued availability of capital and financing to fund exploration and development drilling activities;

·  
increases in operating costs;

·  
availability of skilled personnel;

·  
unpredictable weather conditions;

·  
the impact of political and economic instability in Colombia;

·  
the ability to obtain required approvals of regulatory authorities in Colombia;

·  
senior management's general inexperience in oil and gas operations in Colombia;

·  
members of senior management not being based in Colombia; and  

·  
other factors listed from time to time in the Company's filings with the Securities and Exchange Commission.

No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements.
 
 
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Critical Accounting Policy and Estimates.    Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. These accounting policies are described at relevant sections in this discussion and analysis and in the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011 and this Quarterly Report on Form 10-Q for the period ended September 30, 2012.
 
Basis of Presentation and Functional Currency

The financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States of America, and are expressed in United States dollars (USD).  The Company’s functional currency is Colombian Pesos (COP) which have been converted to USD based on the exchange rates of COP $1,801 and  COP $1,942 and to USD $1.00 at September 30, 2012 and December 31, 2011, respectively, for purposes of the Company’s balance sheets and the average rates of COP $1,849 and cop $1,846 to USD $1.00 for the years ended September 30, 2012 and  December 31, 2011, respectively, for purposes of the Company’s statements of operations in accordance with accounting standards codification 830, Foreign Currency Matters (ASC 830).

Use of Estimates

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

For purposes of the balance sheet and statement of cash flows, the Company considers all highly liquid debt instruments purchased with maturity of three months or less to be cash equivalents.

Fair Value of Financial Instruments

Pursuant to ASC No. 825, Financial Instruments, the Company is required to estimate the fair value of all financial instruments included on its balance sheets.  The carrying value of cash, short term investments, other receivables, inventory, accounts payable and accrued expenses approximate their fair value due to the short period to maturity of these instruments.

Oil and Gas Properties

The Company follows the full cost method of accounting for its investments in oil and gas properties. Under the full cost method, all costs associated with the exploration of properties are capitalized into appropriate cost centers within the full cost pool. Internal costs that are capitalized are limited to those costs that can be directly identified with acquisition, exploration, and development activities undertaken and do not include any costs related to production, general corporate overhead, or similar activities. Cost centers are established on a country-by-country basis.

 
15

 
Company Business.   
 
Heavy Earth Resources, Inc., formerly Swinging Pig Productions, Inc., was incorporated in the State of Florida on June 25, 2004. We are an independent exploration stage company engaged in the exploration, development and production of oil and natural gas properties primarily in Central and South America. On October 13, 2011, we changed our name to Heavy Earth Resources, Inc.

Through our subsidiaries, we are actively exploring our oil and gas properties consisting of a 50% participating interest in the Morichito Block of the Los Llanos Basin of Colombia (“Morichito Block”) consisting of 57,252 gross acres and a 25% participating interest in the La Maye Block located in the Lower Magdalena Basin of Colombia (“La Maye Block”) consisting of 68,252 gross acres.   We currently devote a significant portion of our operations to the exploration and development of the Morichito Block.
 
On May 3, 2012, we entered into and closed a Share Exchange Agreement (the “Exchange Agreement”) with Deep Core and the sole shareholder of Deep Core (“Deep Core Holder”). Pursuant to the Exchange Agreement, we issued (i) 250,000 shares of our $0.001 par value common stock (the “Common Stock”) (the “Exchange Shares”) in exchange for all outstanding shares of company stock of Deep Core from the Deep Core Holder and (ii) 8,574,042 shares of our Common Stock to the holders (“Holders”) of outstanding convertible promissory notes of Deep Core (the “Notes”) in exchange for the conversion of the outstanding principal and accrued interest due on all of the Notes at a conversion price of $0.40 per Conversion Share (the “Conversion Shares”). The issuance of the Exchange Shares and Conversion Shares shall be referred to as the “Share Exchange.”
 
Prior to the acquisition by the Company and on January 31, 2012, Deep Core closed a Share Purchase Agreement (the “Petropuli SPA”) with Petro Vista Energy Colombia (Barbados) Corp., a Barbados corporation, (“PV Colombia”), a wholly-owned subsidiary of Petro Vista Energy Corp., a British Columbia, Canada corporation (“PVE”) to purchase 99.68% of issued and outstanding common stock of PV Colombia’s subsidiary, DCX SAS (formerly known as Petropuli SAS) (“DCX”) for $1,750,000, the assumption of current and contingent liabilities and certain other terms and conditions.  Through its Exploration and Production (“E&P”) Contract with the Colombian National Hydrocarbons Agency (“ANH”), DCX is a Colombian E&P operator and owns a 50% participating oil and gas interest in the Morichito Block located in the Llanos Basin, Colombia.

On May 15, 2012, Deep Core closed a Share Purchase Agreement with PVE and Petro Vista Energy Holdings Corp., a Barbados corporation (“PVE Holdings”), pursuant to which Deep Core acquired all of the outstanding shares of PV Colombia, a wholly-owned subsidiary of PVE Holdings, in exchange for: (i) a nominal cash payment of $1.00, (ii) Deep Core’s release of PVE from all its ongoing obligations pursuant to the Petropuli SPA (iii) Deep Core’s release and payment to PVE of $75,000 as final payment of Deep Core’s payment obligations pursuant to the Petropuli SPA and (iv) the assumption of the balance of acquisition costs associated with the 25% participating interest in the La Maye Block.  PV Colombia owns a 25% participation interest in the La Maye Block located in the Lower Magdalena Basin of Colombia. PV Colombia changed its name to Deep Core (Barbados) Inc. on July 20, 2012.
 
The Share Exchange between us and Deep Core is deemed to be a reverse acquisition. The transaction between Deep Core and DCX is also deemed to be a reverse acquisition, where Deep Core (the legal acquirer) is deemed to be the accounting acquiree and DCX (the legal acquire) is considered the accounting acquirer.  The assets and liabilities were transferred at their historical cost with our capital structure. We are deemed a continuation of the business of Deep Core and its subsidiary, DCX, and the historical financial statements of DCX have become our historical financial statements. 

With the acquisition of DCX by Deep Core and the subsequent Share Exchange with Heavy Earth in May 2012, our focus has been on the pre-development and exploitation stage of the E&P Contract in the Morichito Block and our balance sheet and statement of operations have undergone significant changes.
 
Third Quarter Highlights.
 
Morichito Block. We completed an advanced 94 square kilometers 3D seismic survey over the northern portion of the Morichito Block, that defined and identified high-impact exploration drilling targets. The 3D seismic survey was completed ahead of schedule and on budget. Subsequent to the survey's completion, we received a new engineering and economic evaluation report of the resources in the Morichito Block as of August 31,2012, from Petrotech Engineering Ltd., an independent petroleum engineering firm. 
 

 
16

 
A copy of the new economic evaluation report is attached to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 5, 2012 as Exhibit 99.1 (the “Evaluation Report”).  In the economic evaluation report, Petrotech evaluated six exploration prospects – Norte 1, Norte 2, Morichito-8, Bototo-1, and Morichito-5 and Morichito-5B (deeper formations).  According to the report, our net share (50%) of prospective resources using a P10 case of 37.42 MMBO, discounted at 0 and 10% before deduction of income tax is $1,078,768,000 and $584,962,000, respectively, and our net share of prospective resources using a P50 case of 7.89 MMBO, discounted at 0 and 10% before deduction of income tax is  $127,910,000 and $80,147,000, respectively.
 
Social Responsibility. During the third quarter, we established guidelines to ensure that sustainable development is one of our priorities. The municipality of Mani, in the Casanare province of Colombia, recognized DCX for its commitment to socially responsible development.
 
Impairment Charges. In September 2012, DCX recorded an impairment charge in the amount of $4,095,016, comprising of administrative costs of $585,905, costs of approximately $202,888 associated with smaller ventures that were not completed, costs of approximately $1,233,023 associated with the Sinu San Jacinto North Block SSJN-5, a former joint venture with SK Innovation Co. Ltd., and abandonment costs of approximately $2,073,200 for two wells abandoned from 2009 and 2010.  All costs were associated with PVE, the previous owner.
 
Accounts Payable. Upon closing of the Petropuli SPA, certain liabilities and contingent liabilities totaling approximately US$2.2 million were assumed by DCX. Presently, there are past vendor obligations included in accounts payable on the consolidated balance sheet in addition to an environmental fine to be levied by the environmental ministry of Colombia related to various activities performed by Petropuli prior to the acquisition by Deep Core. We are investigating these past obligations and the issues associated with the environmental agency, and we are negotiating the resolution of those obligations, if any.
 
Additional information related to the Company and its subsidiaries’ operations is available on our website at www.heavyearthresources.com.
 
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements for the period ended September 30, 2012, together with notes thereto, which reflect the operations of our subsidiaries Deep Core and DCX.  

Results of Operations.

For the three months ended September 30, 2012, as compared to the three months ended September 30, 2011.
 
Revenues.   We had no revenues for the three months ended September 30, 2012 and 2011.
 
Operating Expenses.  For the three months ended September 30, 2012, our total operating expenses were $4,481,266  which consisted of exploration and lease operating costs of $31,306, depreciation and amortization expense of $1,660, general and administrative expenses of $303,187, legal and professional fees of $228,190, and impairment of oil and gas properties of $4,095,016.  The impairment of $4,095,016 consisted of administrative costs of $585,905, costs of approximately $202,888 associated with smaller ventures that were not completed, costs of approximately $1,233,023 associated with the Sinu San Jacinto North Block SSJN-5, a former joint venture with SK Innovation Co. Ltd., and abandonment costs of approximately $2,073,200 for two wells abandoned from 2009 and 2010, with  all costs associated with PVE, the previous owner.  By comparison, for the three months ended September 30, 2011, our total operating expenses were $346,577 which consisted of exploration and lease operating costs of $23,535, depreciation and amortization expense of $7,419, general and administrative expenses of $294,903, and legal and professional fees of $20,720.
 
Net Loss.   For the three months ended September 30, 2012, we had a net loss of $5,664,692. By comparison, for the three months ended September 30, 2011, we had a net loss of $346,577. We expect to incur net losses for the foreseeable future.
 
For the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011.
  
Revenues.   We had no revenues for the nine months ended September 30, 2012 and 2011.

Operating Expenses.  For the nine months ended September 30, 2012, our total operating expenses were $5,275,721  which consisted of exploration and lease operating costs of $87,541, depreciation and amortization expense of $4,985, general and administrative expenses of $552,495, legal and professional fees of $535,684 and impairment of oil and gas properties of $4,095,016.  The impairment of $4,095,016 consisted of administrative costs of $585,905, costs of approximately $202,888 associated with smaller ventures that were not completed, costs of approximately $1,233,023 associated with the Sinu San Jacinto North Block SSJN-5, a former joint venture with SK Innovation Co. Ltd., and abandonment costs of approximately $2,073,200 for two wells abandoned from 2009 and 2010, with all costs associated with PVE, the previous owner.  By comparison, for the nine months ended September 30, 2011, our total operating expenses were $1,021,507 which consisted of exploration and lease operating costs of $68,453, depreciation and amortization expense of $24,038, general and administrative expenses of $867,082, and legal and professional fees of $61,934.

 
17

 
Net Loss.   For the nine months ended September 30, 2012, we had a net loss of $6,345,671.  By comparison, for the nine months ended September 30, 2011, we had a net loss of $1,021,507. We expect to incur net losses for the foreseeable future.
 
Liquidity and Capital Resources.

As of September 30, 2012, our total assets were $12,450,606. Our total current assets consist of cash and cash equivalents of $2,327, restricted cash of $583,090, short term investments of $101,360, inventory of $45,491, other receivables of $1,332,446 and deposits of $2,997. Restricted cash of $583,090  represents amounts held on account with a fiduciary to guarantee payment to one of DCX’s main suppliers for exploration and development activities.  Short term investments of $101,360  include amounts on deposit to be held in excess of the three months that are used as stand-by letters of credit for the Colombian ANH for future exploration and development costs.  Inventory of $45,491 consists of barrels of oil extracted during our exploratory testing on the Morichito Block and are stated at the lower of cost or market.  Our other receivable of $1,332,446 consists primarily of amounts due from working interest partners in the Morichito Block for the seismic exploration costs and deposits of $2,997 consist of funds held in a bank account to guarantee the participation in the Morichito Block.
 
As of September 30, 2012, our oil and gas properties of $10,111,473 and property, plant and equipment of $295,849  less accumulated depreciation and amortization of $24,427. Our oil and gas properties of $10,111,473  consist of the net costs incurred for evaluated properties and in exploration and development activities as of September 30, 2012 for our interest in the Morichito Block which includes approximately 57,252 gross acres and our interest in the La Maye Block which includes approximately 68,252 gross acres. Property plant and equipment of $295,8491 less accumulated depreciation and amortization of $24,427.

Our total current liabilities of $6,280,054 consist of accounts payable and accrued expenses of $6,220,850, and advances payable of $59,204, as of September 30, 2012. A significant portion of the accounts payable on our consolidated balance sheet as of September 30, 2012, includes amounts owed to vendors that provided services to DCX when it was owned by PVE and prior to the acquisition by Deep Core.  DCX is also subject to an environmental fine to be levied by the environmental ministry of Colombia related to various activities that occurred prior to the acquisition by Deep Core. We are negotiating payment of these past obligations and the issues associated with the environmental agency, and we are hopeful that we will be able to obtain favorable resolution of those obligations.
 
We also have long-term convertible notes payable of $1,000,000, as of September 30, 2012. Those convertible notes payable were issued pursuant to the securities purchase agreement dated August 29, 2012, as described below.
 
Over the last nine months, we have been financing our operations through the sale of our securities. Prior to the closing of the Share Exchange, Deep Core issued promissory notes to nine holders in exchange for an aggregate of $3,365,000 in proceeds. On the closing of the Share Exchange, the outstanding principal balance and unpaid accrued interest of those notes converted into shares of our common stock at a conversion price of $0.40 per share.
 
On May 3, 2012 and concurrent with the closing of the Share Exchange, we sold 500,000 shares of our common stock to a non-U.S. investor in exchange for $200,000, or $0.40 per share. 
 
On June 12, 2012, we issued 416,666 shares at a purchase price of $0.60 per share and a common stock purchase warrant to purchase an aggregate of 104,167 shares of common stock in exchange for $250,000.  The warrants have an exercise price of $1.25, are exercisable immediately upon issuance and have a term of exercise of five years from the date of issuance. 
 
On June 20, 2012, we issued 333,333 shares at a purchase price of $0.60 per share and a common stock purchase warrant to purchase an aggregate of 83,333 shares of common stock in exchange for $200,000.  The warrants have an exercise price of $1.25, are exercisable immediately upon issuance and have a term of exercise of five years from the date of issuance. 
 
On July 11, 2012, we issued an aggregate of 333,332 shares of our common stock to three investors at a purchase price of $0.60 per share and common stock purchase warrants to purchase an aggregate of 83,333 shares of our common stock in exchange for $200,000.  The warrants have an exercise price of $1.25, are exercisable immediately upon issuance and have a term of exercise of five years from the date of issuance. 
 
 
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On August 29, 2012, we entered into a securities purchase agreement with two investors pursuant to which we issued to the investors (i) an aggregate principal value of $1,000,000 of 6% senior convertible debentures and (ii) common stock purchase warrants granting the right to purchase an aggregate of 1,666,667 shares of our common stock at an exercise price of $0.85 per share in exchange for $1,000,000 in proceeds.  The convertible notes are due and payable three years from August 29, 2012, the date of issuance and may be converted at any time at the option of the investors into shares of our common stock at a conversion price of $0.60 per share.  The convertible note bears interest at the rate of 6% per annum increasing to 12% per annum on December 31, 2012 in the event that we have not consummated a primary public offering of our securities with gross proceeds of at least $6,000,000 on or before December 31, 2012, further increasing to 15% per annum on January 15, 2013 in the event our common stock is not listed for trading on the Nasdaq Capital Market or the Nasdaq Global Market by January 15, 2013, and finally increasing to 18% in an event of default.  Accrued interest due on the convertible notes is payable quarterly in cash and may be payable in shares of our common stock if certain conditions are met, including but not limited to, the condition that we are not in default and the daily trading volume for our common stock exceeds 25,000 shares per trading day.  The convertible notes also provide us with the option to redeem the convertible notes at 115% of the outstanding principal together with any accrued but unpaid interest at any time if certain conditions are met.  The convertible notes are secured by our oil and gas properties and also contain certain negative covenants which may restrict our ability to obtain future financing.  The warrants grant each investor the right to purchase up to a number of shares of common stock equal to 100% of the shares underlying the principal amount of the convertible notes issued to each respective investor and have an exercise price of $0.85 per share, are exercisable immediately upon issuance and have a term of exercise of five years from August 29, 2012, the date of issuance.  

We had no other liabilities and no other long term commitments or contingencies as of September 30, 2012.

As of September 30, 2012, we have cash and cash equivalents of $2,327.  In the opinion of management, available funds will not satisfy our working capital requirements to operate for the next twelve months.  We expect that our future available capital resources will consist primarily of cash on hand, cash generated from our business, if any, and future debt and/or equity financings, if any.

During 2012, we expect that our subsidiaries will continue to incur significant exploration and development costs as we exploit our interests in the Morichito Block, La Maye Block and other interests we may acquire. Our exploration and lease operating costs in the Morichito Block and La Maye Block will be significant and will continue to impact our liquidity. We may also incur additional costs related to any potential acquisition of oil and gas properties or interests in Colombia and other areas of Central and South America. We also expect to incur significant professional fees associated with being a public company as well as significant general and administrative expenses. Those fees will be higher as our business volume and activity increases and will continue to impact our liquidity. Other than the exploration and development costs for the Morichito Block and the La Maye Block, any potential acquisitions costs and anticipated increases in legal and accounting costs and general and administrative expenses, we are not aware of any other known trends, events or uncertainties, which may affect our future liquidity.
 
We need additional funds to satisfy our working capital requirements to operate at our current level of activity.  Our forecast for the period for which our financial resources will be inadequate to support our operations involves risks and uncertainties and actual results could fail as a result of a number of factors. We must raise additional capital to continue and expand our operations. We cannot guarantee that additional funding will be available on favorable terms, if at all.  Any debt financing or other financing of securities senior to common stock that we are able to obtain will likely include financial and other covenants that will restrict our flexibility. Any failure to comply with these covenants would have a negative impact on our business, prospects, financial condition, results of operations and cash flows. Additionally, these alternatives could be highly dilutive to our existing shareholders, and may not provide us with sufficient funds to meet our long-term capital requirements. We have and may continue to incur substantial costs in the future in connection with raising capital to fund our business, including investment banking fees, professional fees and other costs.  If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is insufficient to satisfy our capital needs, we will be required to reduce operating costs, which could hinder our future development of the Morichito Block and the La Maye Block. Moreover, if we are unable to raise additional capital, we may be required to delay, scale back or eliminate portions of our operations and/or relinquish rights to part or all of our assets. Accordingly, the inability to obtain such financing could result in a significant loss of ownership of our assets and could also adversely affect our ability to fund our continued operations. 
 
We are not currently conducting any research and development activities.  We do not anticipate conducting such activities in the near future. We intend to use independent contractors for certain services related to the Morichito Block and the La Maye Block. We anticipate that we may need to purchase or lease additional equipment in order to conduct certain of our operations, although we do not have any specific plans to purchase or lease additional equipment at this time.
 
 
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Off-Balance Sheet Arrangements.  We have no off-balance sheet arrangements.
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk.  
 
Not applicable.
 
 
Evaluation of disclosure controls and procedures. We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) that such information is accumulated and communicated to our principal executive and principal financial officers to allow timely decisions regarding required disclosure. Based upon their evaluation of those controls and procedures performed as of September 30, 2012, the date of this report, our Principal Executive Officer and the Principal Financial Officer concluded that our disclosure controls and procedures were not effective.

Changes in internal controls over financial reporting.  There was no change in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.  
  
PART II — OTHER INFORMATION
 
Item 1. Legal Proceedings.  
 
From time to time, we may become party to various legal proceedings. A significant portion of the accounts payable on our consolidated balance sheet includes amounts owed to vendors that provided services to DCX when it was owned by PVE and prior to the acquisition by Deep Core. DCX has received demands for payment on each of the following payables and we expect that formal litigation may result if we cannot negotiate or settle the claims in the near future:

·  
Claim by Marino Sanchez Rolfer for payment of road maintenance and moving of equipment in the amount of US$300,000;

·  
Claim by PC World Oil Company for payment of drilling services in the amount of US $300,000;

·  
Claim by Direccion de Impuestos y Aduanas Nacionales (Colombia National Directorate of Taxes and Customs) for payment of outstanding tax liabilities of $237,986;

·  
Claim by Falck Services Ltda. for payment of food services in the amount of US$106,000;

DCX is also subject to an environmental fine to be levied by the environmental ministry of Colombia related to various activities that occurred prior to the acquisition by Deep Core. We are negotiating payment of these past obligations and the issues associated with the environmental agency, and we are hopeful that we will be able to obtain favorable resolution of those obligations. We do not expect that any pending claims or potential legal proceedings will have a material adverse effect on our business, results of operations or financial condition.
 
Item 1A. Risk Factors.  
 
Not applicable.
   
 
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.  
 
On July 11, 2012, we entered into subscription agreements with three investors pursuant to which we issued to the investors (i) an aggregate of 333,332 shares of our common stock at a purchase price of $0.60 per share and (ii) common stock purchase warrants granting the right to purchase an aggregate of 83,333 shares of our common stock at an exercise price of $1.25 per share in exchange for $200,000 in proceeds. The shares and warrants were issued in a transaction which we believe satisfies the requirements of that exemption from the registration and prospectus delivery requirements of the Securities Act, which exemption is specified by the provisions of Section 4(2) of that act and Rule 506 of Regulation D promulgated pursuant to that act by the SEC.
 
Item 3.  Defaults Upon Senior Securities.    
 
None.
 
Item 4.  Mine Safety Disclosures.

Not applicable.
   
Item 5.  Other Information.  
 
Not applicable.
 
Item 6.  Exhibits.  
 
101.ins
XBRL Instance Document
101.def
XBRL Taxonomy Definition Linkbase Document
101.sch
XBRL Taxonomy Schema Document
101.cal
XBRL Taxonomy Calculation Linkbase Document
101.lab
XBRL Taxonomy Label Linkbase Document
101.pre
XBRL Taxonomy Presentation Linkbase Document

 

 
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 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.

 
 
Heavy Earth Resources, Inc.,
a Florida corporation
 
 
November 19, 2012
By:
/s/ Grant Draper
 
   
Grant Draper
 
 
Its: 
President, Chief Executive Officer and a Director
 
   
(Principal Executive Officer)
 
 
 
     
November 19, 2012
By:
/s/ Anthony Ives
 
   
Anthony Ives
 
 
Its: 
Chief Financial Officer and a Director
 
   
(Principal Financial and Accounting Officer)
 
 
 
 
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